-----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, Ly7tg5ZK4a4HMA17ruk+lkDmALNWyJrM1SIfojzgvQUIyzhf4mUGFhiIsNSGi0Iz 0VxFmdQImyhNhI8bWA1ZZg== /in/edgar/work/20000814/0001068800-00-000319/0001068800-00-000319.txt : 20000921 0001068800-00-000319.hdr.sgml : 20000921 ACCESSION NUMBER: 0001068800-00-000319 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFIED FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0001033926 STANDARD INDUSTRIAL CLASSIFICATION: [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: 697042 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 0001.txt 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 JUNE 30, 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) 917-7001 - ------------------------------------------------------------------------- (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 August 10, 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 - June 30, 2000 (Unaudited) and December 31, 1999 1 Consolidated Statements of Operations (Unaudited) - Six and Three Months Ended June 30, 2000 and 1999 3 Consolidated Statements of Comprehensive Income (Unaudited) - Six and Three Months Ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flow (Unaudited) - Six Months Ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Cautionary Statement Regarding Forward-Looking Statements 15 General 15 Comparison of Results for the Six Months Ended June 30, 2000 and 1999 17 Comparison of Results for the Three Months Ended June 30, 2000 and 1999 19 Liquidity and Capital Resources 20 Risk Factors 21 Item 3. Quantitative and Qualitative Disclosure About Market Risk 25 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 30 Item 4. Submission of Matters to a Vote of Securityholders 30 Item 5. Other Matters 30 Item 6. Exhibits and Reports on Form 8-K 31 SIGNATURES 32 EXHIBIT INDEX 33
- i - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS ------
JUNE 30, 2000 DECEMBER 31, (UNAUDITED) 1999 ----------- ---- Current Assets Cash and cash equivalents $ 5,288,196 $ 5,709,082 Due from banks 611,014 314,815 Federal funds sold 1,975,000 4,922,000 Bond investments -- 5,515,156 Investment in affiliated mutual funds 438,408 326,271 Investment in securities and non-affiliated mutual funds 12,068,246 424,547 Loans (net of allowance for loan losses of $160,000 for 2000 and $33,000 for 1999) 12,652,932 2,810,876 Accounts receivable (net of allowance for doubtful accounts of $412,119 for 2000 and $38,326 for 1999) 10,108,909 9,604,833 Prepaid assets and deposits 860,304 899,867 Deferred tax asset -- 5,707 ----------- ----------- Total current assets 44,003,009 30,533,154 ----------- ----------- Fixed Assets, at cost Equipment and furniture (net of accumulated depreciation of $3,839,954 for 2000 and $3,512,135 for 1999) 2,904,884 2,944,610 ----------- ----------- Total fixed assets 2,904,884 2,944,610 ----------- ----------- Non-Current Assets Investment in affiliate 10 -- Investment in debt securities 882,764 1,073,621 Organization cost (net of accumulated amortization of $97,509 for 2000 and $32,019 for 1999) 575,306 641,688 Goodwill (net of accumulated amortization of $191,253 for 2000 and $139,093 for 1999) 1,162,541 1,214,701 Other non-current assets 220,233 341,220 ----------- ----------- Total non-current assets 2,840,854 3,271,230 ----------- ----------- TOTAL ASSETS $49,748,747 $36,748,994 =========== =========== (Continued on next page) See accompanying notes. - 1 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ JUNE 30, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) Current Liabilities: Current portion of capital lease obligations $ 12,750 $ 30,073 Current portion of bank borrowings 1,944,133 2,343,965 Lines of credit 2,289,498 1,727,003 Deposits 21,151,467 7,331,853 Accounts payable and accrued expenses 1,941,640 2,731,970 Accrued compensation and benefits 431,804 549,093 Payable to insurance companies 6,445,771 5,670,974 Payable to broker-dealers 301,725 255,158 Income taxes payable, current 21,024 136,630 Income taxes payable, deferred 77,208 83,157 Other liabilities 1,072,095 597,646 ----------- ----------- Total current liabilities 35,689,115 21,457,522 ----------- ----------- Long-Term Liabilities Long-term portion of capital lease obligations 2,393 8,933 Long-term portion of borrowings 428,549 514,031 Other long-term liabilities 56,012 104,742 Deferred income taxes 22,551 85,779 ----------- ----------- Total long-term liabilities 509,505 713,485 ----------- ----------- Total liabilities 36,198,620 22,171,007 ----------- ----------- Commitments and Contingencies -- -- ----------- ----------- Stockholders' Equity Common stock, par value $.01 per share 33,297 33,294 Additional paid-in capital 16,241,446 16,050,189 Retained deficit (2,657,528) (1,292,794) Accumulated other comprehensive income (67,088) (35,463) ----------- ----------- 13,550,127 14,755,226 Treasury stock, at cost -- (177,239) ----------- ----------- Total stockholders' equity 13,550,127 14,577,987 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $49,748,747 $36,748,994 =========== =========== See accompanying notes.
- 2 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ---------- ---------- REVENUE: Gross revenue (see note 12) $14,251,067 $12,665,565 $7,312,561 $6,031,662 ----------- ----------- ---------- ---------- Total gross revenue 14,251,067 12,665,565 7,312,561 6,031,662 ----------- ----------- ---------- ---------- COST OF SALES: Cost of sales 4,662,041 4,076,175 2,199,758 2,220,553 ----------- ----------- ---------- ---------- Total cost of sales 4,662,041 4,076,175 2,199,758 2,220,553 ----------- ----------- ---------- ---------- Gross profit (see note 12) 9,589,026 8,589,390 5,112,803 3,811,109 ----------- ----------- ---------- ---------- EXPENSES: Employee compensation and benefits 6,226,120 4,598,745 3,049,495 2,181,105 Mail and courier 292,520 124,913 137,460 2,796 Telephone 306,302 190,630 159,103 116,816 Equipment rental and maintenance 309,622 268,671 179,333 157,820 Occupancy 476,759 445,163 231,274 234,284 Depreciation and amortization 482,716 430,951 247,218 207,957 Professional fees 961,864 780,093 357,910 239,561 Interest 230,382 237,464 102,818 112,411 Provision for loan losses and bad debt 537,324 3,250 512,433 3,250 Business development 154,005 296,872 154,005 133,696 Other operating expenses 941,744 1,236,428 56,123 656,761 ----------- ----------- ---------- ---------- Total expenses 10,919,358 8,613,180 5,187,172 4,046,457 ----------- ----------- ---------- ---------- Loss from operations (1,330,332) (23,790) (74,369) (235,348) ----------- ----------- ---------- ---------- OTHER INCOME (LOSS) Unrealized gain (loss) on securities 10,231 9,701 (15,190) 39,827 Realized gain (loss) on securities (10,491) 2,921 (4,347) 3,734 Loss on sale/disposal of fixed assets (99,480) -- (99,044) -- Equity in results of affiliates -- 54,284 -- 47,443 All other 89,862 -- 76,431 -- ----------- ----------- ---------- ---------- Total other income (loss) (9,878) 66,906 (42,150) 91,004 ----------- ----------- ---------- ---------- Income (loss) before income taxes (1,340,210) 43,116 (116,519) (144,344) ----------- ----------- ---------- ---------- Income taxes 24,524 44,000 11,915 39,438 ----------- ----------- ---------- ---------- Net loss $(1,364,734) $ (884) $ (128,434) $ (183,782) =========== =========== ========== ========== Per share earnings Basic common shares outstanding 2,879,712 2,585,042 2,879,712 2,585,042 Net loss-basic $ (0.47) $ -- $ (0.04) $ (0.07) Fully diluted common shares outstanding 3,049,559 2,843,958 3,049,559 2,843,958 Net loss-fully diluted $ (0.45) $ -- $ (0.04) $ (0.06) See accompanying notes.
- 3 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------------ 2000 1999 2000 1999 ----------- ----- --------- --------- Net loss $(1,364,734) $(884) $(128,434) $(183,782) Other comprehensive income, (loss), net of tax Unrealized gain (loss) on securities, net of reclassification adjustment (31,625) -- 17,572 -- ----------- ----- --------- --------- Comprehensive loss $(1,396,359) $(884) $(110,861) $(183,782) =========== ===== ========= ========= See accompanying notes.
- 4 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 2000 1999 ------------ ----------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (1,364,734) $ (884) Adjustments to reconcile net income to cash provided by (used in) operating activities: Income taxes payable (121,555) (1,857) Deferred income taxes (57,521) (120,939) Provision for depreciation and amortization 482,716 430,951 Provision for loan losses and bad debt 537,324 -- Unrealized loss on investments (10,231) (9,701) Loss on disposal of discontinued operations 99,100 -- Loss on disposal of investment of debt securities 9,791 -- Adjustment to goodwill re: purchase of Fiduciary Counsel, Inc. -- 211,007 Results of affiliate/minority interest -- (54,284) Deferred start-up costs -- (405,005) (Increase) decrease in operating assets Receivables (914,400) (1,510,296) Loans made to customers, net of repayments (9,969,056) -- Prepaid and sundry assets 39,563 15,713 Other non-current assets 120,987 261,763 Bond investments 5,515,156 -- Federal funds sold 2,947,000 -- Due from banks (296,199) -- Increase (decrease) in operating liabilities Deposits 13,819,614 -- Accounts payable and accrued expenses (802,475) 660,816 Accrued compensation and benefits (117,289) 239,999 Payable to broker/dealers 46,567 (310,296) Payable to insurance companies 774,797 120,607 Other long-term liabilities (48,730) (71,704) Other liabilities 474,449 (68,657) ------------ ----------- Net cash provided by (used in) operating activities 11,164,874 (612,767) ------------ ----------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of equipment (411,483) (1,450,941) Proceeds from sale of fixed assets 80 -- Investment in affiliated mutual funds (112,137) -- Investments in securities and mutual funds (11,665,093) 74,770 Investment in affiliate (10) (43,235) Proceeds from sale of debt securities 181,066 -- ------------ ----------- Net cash used in investing activities (12,007,577) (1,419,406) ------------ ----------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 6,400 5,800,667 Proceeds from reissuance of treasury stock 362,099 -- Proceeds from issuance of Series C preferred stock -- 93,000 Proceeds from lines of credit 562,495 700,000 Dividends to Unified Investment Services, Inc. and Fully Armed Productions, Inc. shareholders -- (18,624) Treasury stock -- (635,301) Repayment of borrowings (485,314) (1,485,046) Repayment of capital lease obligations (23,863) (27,964) Purchase of Archer Trading, Inc. -- (73,500) ------------ ----------- Net cash provided by financing activities 421,817 4,353,232 ------------ ----------- - 5 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (CONTINUED) SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH (420,886) 2,321,059 EQUIVALENTS CASH AND CASH EQUIVALENTS - Beginning of year 5,709,082 10,342,501 ---------- ----------- CASH AND CASH EQUIVALENTS - End of period $5,288,196 $12,663,560 ========== =========== See accompanying notes.
- 6 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 AND 1999 ---------------------- Note 1 - NATURE OF OPERATIONS Unified Financial Services, Inc., a Delaware holding company for various financial services companies, was organized on December 7, 1989. We distribute a vertically integrated financial services platform via the traditional industry channels of our subsidiaries and via the Internet. Through our subsidiaries, all of which are wholly owned, we provide services primarily in six lines of business: trust and retirement services; mutual fund administration services; banking; insurance; brokerage; and investment advisory services. Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation --------------------- The consolidated financial statements include the accounts of Unified Financial Services, Inc. and our subsidiaries after elimination of all material intercompany accounts and transactions. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 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. - 7 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 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 - UNIFIED TRUST COMPANY, NATIONAL ASSOCIATION On June 26, 2000, First Lexington Trust Company, a subsidiary of our company, converted to a limited purpose national banking association with the corporate name "Unified Trust Company, National Association." Unified Trust Company, National Association is required by the Office of the Comptroller of the Currency to maintain minimum capital of $2.0 million. As of June 30, 2000, Unified Trust Company, National Association had $2.2 million total capital. 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 June 30, 2000, our board of directors had granted options to acquire 169,847 shares of our common stock to certain of our employees, directors and advisers pursuant to our stock incentive plan. In addition, as of such date, our board had granted options to acquire 66,666 shares of our common stock outside of such plan. Such options have exercise prices as follows: 6,400 shares at $25.00 per share 19,231 shares at $27.50 per share 500 shares at $30.25 per share 76,050 shares at $40.00 per share 1,000 shares at $44.00 per share 66,666 shares at $45.00 per share As of June 30, 2000, 85,881 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 March 31, 2000 101,406 Options issued during period at exercise price of $40.00 per share 2,500 Options issued during period at exercise price of $44.00 per share 500 Options issued during period at exercise price of $45.00 per share 66,666 Options exercised during period -- Forfeitures at $40.00 per share 1,225 Options outstanding at June 30, 2000 169,847 - 8 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 AND 1999 ---------------------- Note 5 - DEBT AND RELATED MATTERS Debt at June 30, 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 $ 108,058 Payable in monthly installments including interest at 8.5%, final payment due January 2, 2001, secured by assignment of receivables 1,893,750 Payable in monthly installments including interest at 8.25%, final payment due March 31, 2014, collateralized by equipment 357,983 Payable in monthly installments including interest at 10.4%, final payment due April 26, 2002, collateralized by equipment 12,891 ---------- Total notes 2,372,682 ---------- Less current maturities 1,944,133 ---------- Long-term portion $ 428,549 ========== Lines of credit: ---------------- Payable at maturity, June 30, 2001, interest at prime, secured by assignment of receivables $2,040,000 Payable at maturity, December 31, 2000, interest at 10.25% 9,973 Securities purchased under agreements to repurchase 239,525 ---------- $2,289,498 ========== The maturities of notes payable and lines of credit for each of the succeeding five years subsequent to June 30, 2000, were as follows: 2001--$4,233,631; 2002--$52,804; 2003--$48,005; 2004--$49,486; 2005 and beyond--$278,254.
- 9 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 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 June 30, 2000: YEAR ENDED JUNE 30, AMOUNT ------------------- ------- 2000 $13,806 2001 1,814 2002 724 2003 60 ------- 16,404 Less: amount representing interest 1,261 ------- Total $15,143 ======= Note 7 - RENTAL AND LEASE INFORMATION We lease certain office facilities and equipment. Rental expense for the six months ended June 30, 2000 and 1999 were $476,759 and $445,163, respectively. At June 30, 2000, we were committed to minimal rental payments under certain noncancellable operating leases. Generally, these leases include cancellation clauses. As of June 30, 2000, the minimum future rental commitments for each of the succeeding five years subsequent to June 30, 2000 were as follows: 2001--$1,037,874; 2002--$937,016; 2003--$362,242; 2004--$287,375; and 2005 and thereafter--$742,842. 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, $5,000 for Unified Investment Services and $25,000 for AmeriPrime Financial Securities, whichever is greater, and a ratio of aggregate indebtedness to net capital of not more than 15 to 1. At June 30, 2000, the net capital and ratio of aggregate indebtedness for each of these entities were as follows: - 10 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 AND 1999 ---------------------- Note 9 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL REQUIREMENTS (continued) JUNE 30, 2000 -------- Net capital: Unified Management Corporation $465,519 Unified Investment Services 6,910 AmeriPrime Financial Securities 268,817 Ratio of aggregate indebtedness: Unified Management Corporation .92 to 1 Unified Investment Services .09 to 1 AmeriPrime Financial Securities .04 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 June 30, 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 six months ended June 30, 2000 and 1999, we issued 9,850 (including 9,565 shares from treasury) and 161,080 shares, respectively, of our common stock. For the six months ended June 30, 2000 and 1999, aggregate brokerage fees of $25,000 and $593,000, respectively, were paid to Unified Management Corporation and Unified Investment Services in connection with this private placement offering, which amount is inclusive of $23,000 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. - 11 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 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 June 30, 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.
JUNE 30, ------------------------------------------- 2000 1999 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------- ------- ------- ------- (IN THOUSANDS) Financial assets: Cash and cash equivalents $ 5,288 $ 5,288 $12,664 $12,664 Investment in: Debt securities 883 883 1,037 1,037 Securities and mutual funds 12,506 12,506 661 661 Loans 12,653 12,653 -- -- Receivables (trade) 10,109 10,109 10,384 10,384 Prepaid and sundry 860 860 214 214 Financial liabilities: Current liabilities 35,677 35,677 14,009 14,009 Capital lease obligation 15 15 64 64 Long-term debt 429 429 277 277
Note 12 - DISCLOSURES ABOUT REPORTING SEGMENTS We have six reportable operating segments: trust and retirement services; mutual fund administration services; banking; insurance; brokerage; and investment advisory services. In addition, we also report corporate and discontinued operations as a separate segment. 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 and gross margin were as follows for the six and three months ended June 30, 2000 and 1999 and total assets, capital expenditures and depreciation and amortization were as follows as of and for the six months ended June 30, 2000 and 1999: - 12 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 AND 1999 ---------------------- Note 12 - DISCLOSURES ABOUT REPORTING SEGMENTS (continued)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ----------- ---------- ---------- (IN THOUSANDS) Revenues: Trust and retirement $ 1,021,091 $ 776,975 $ 511,064 $ 429,104 Mutual fund administration 2,161,353 1,095,117 1,098,878 539,785 Banking 1,074,974 229,253 655,021 119,967 Insurance 5,577,925 5,425,708 3,015,368 2,769,846 Brokerage 1,696,487 2,278,897 695,713 1,391,248 Investment advisory 2,360,612 2,485,395 1,205,305 1,203,052 Corporate and discontinued operations 358,625 374,220 131,212 (521,340) ----------- ----------- ---------- ---------- Total $14,251,067 $12,665,565 $7,312,561 $6,031,662 =========== =========== ========== ========== Gross profit: Trust and retirement $ 911,082 $ 627,398 $ 459,587 $410,733 Mutual fund administration 1,748,642 873,232 892,132 436,946 Banking 650,925 229,253 454,265 119,967 Insurance 3,152,782 3,047,313 1,724,893 1,426,304 Brokerage 661,088 1,102,132 300,787 822,873 Investment advisory 2,240,504 2,335,841 1,143,357 1,110,245 Corporate and discontinued operations 224,003 374,221 137,782 (515,959) ----------- ----------- ---------- ---------- Total $ 9,589,026 $ 8,589,390 $5,112,803 $3,811,109 =========== =========== ========== ========== Total assets Trust and retirement $ 2,990,510 $ 1,958,621 Mutual fund administration 2,070,651 1,044,947 Banking 30,585,593 2,274,160 Insurance 9,401,231 7,104,105 Brokerage 1,415,375 1,155,001 Investment advisory 3,283,288 4,301,650 Corporate and discontinued operations 2,099 13,779,099 ----------- ----------- Total $49,748,747 $31,617,583 =========== =========== Depreciation and amortization: Trust and retirement $ 15,010 $ 11,237 Mutual fund administration 38,405 31,415 Banking 83,458 31,155 Insurance 66,693 111,441 Brokerage 16,901 18,312 Investment advisory 92,191 130,094 Corporate and discontinued operations 170,058 97,297 ----------- ----------- Total $ 482,716 $ 430,951 =========== =========== Capital expenditures: Trust and retirement $ 76,474 $ 30,654 Mutual fund administration 22,132 43,484 Banking 99,938 734,354 Insurance 62,135 56,782 Brokerage 3,165 15,921 Investment advisory 3,164 26,824 Corporate and discontinued operations 144,475 542,922 ----------- ----------- Total $ 411,483 $ 1,450,941 =========== ===========
- 13 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 AND 1999 ---------------------- Note 13 - UNIFIED BANKING COMPANY ASSETS AND LIABILITIES Unified Banking Company commenced operations on November 1, 1999. Included in our consolidated financial statements at June 30, 2000 were the bank's total assets of $28,061,299 and total liabilities of $21,442,816 as of such date. As of such date, certain components of such assets and liabilities were as follows: Due from banks $ 611,014 Federal funds sold 1,975,000 Investments in securities: US agency securities 11,552,054 FHLB stock 100,000 Loans: Real estate loans 8,256,693 Commercial loans 2,841,773 Installment loans 1,760,660 Other loans 3,806 Allowance for loan losses (160,000) Bank deposits: Demand deposits 2,342,547 NOW accounts 340,642 Money market accounts 11,819,920 Savings accounts 57,143 Time deposits 6,152,620 Other interest-bearing deposits 438,595 Federal and borrowed funds 239,525 Note 14 - INVESTMENT IN AFFILIATE On May 23, 2000, we subscribed for 10 shares of VSX Holdings, LLC, a Delaware limited liability company, in exchange for $10 and certain intangible property rights. We currently own approximately 0.5% of the outstanding shares of VSX Holdings, but have the right to purchase up to an additional 1,990 shares at a price of $1 per share, upon the occurrence of certain specified events. Our investment in VSX Holdings is accounted for on the equity method of accounting. VSX Holdings is involved in the development of an alternative trading system to be known as VSX.com, which, upon and subject to organization and regulatory approval, will serve as a virtual, real-time private financial market place. In connection with the organization of VSX Holdings, a third party investor made a $3.0 million loan to VSX Holdings. We also have entered into a management arrangement with VSX Holdings whereby we will provide consulting and development services to VSX Holdings. - 14 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q are or may constitute forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Such forward-looking statements are based on current expectations, estimates and projections about Unified Financial Services' industries, management's beliefs and assumptions made by management. For example, a downturn in economic conditions generally and in particular those affecting bond and securities markets could lead to an exit of investors from mutual funds. Similarly, an increase in Federal and state regulations of the mutual fund, insurance or banking industries or the imposition of regulatory penalties could have an effect on our operating results. In addition, by accepting deposits at fixed rates, at different times and for different terms, and lending funds at fixed rates for fixed periods, a bank accepts the risk that the cost of funds may rise and interest on loans and investment securities may be at a fixed rate. Similarly, the cost of funds may fall, but a bank may have committed by virtue of the term of a deposit to pay what becomes an above-market rate. Investments may decline in value in a rising interest rate environment. Loans have the risk that the borrower will not repay all funds in a timely manner as well as the risk of total loss. Collateral may or may not have the value attributed to it. The loan loss reserve, while believed adequate, may prove inadequate if one or more large borrowers, or numerous smaller borrowers, or a combination of both, experience financial difficulty for individual, national or international reasons. Because the financial services industry is highly regulated, decisions of governmental authorities, can have a major effect on operating results. These uncertainties, as well as others, are present in the financial services industry and 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. In addition, our current expectations with respect to our six business lines, our mission with respect to market leading positions of our trust and retirement services and mutual fund administration services business lines, our ability to generate supplemental revenues for our other business lines and our ability to provide superior returns to our stockholders may prove to be other than expected. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those 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 that was organized on December 7, 1989, is a vertically integrated provider of financial products and services, distributing these through six lines of business: trust and retirement services; mutual fund administration services; banking; insurance; brokerage; and investment advisory services. Unified bases its foundation upon two of its lines of business which seek to be market leaders in their respective fields - trust and retirement services and mutual fund administration services. It is the mission of our company to capture market leading positions in these two business lines, generate supplemental revenue for each line to the others and, by our ability to distribute our products/services through electronic delivery channels with strategic third-party relationships, to provide superior returns to our stockholders. - 15 - The current organizational structure and the refinement of our business strategy is the culmination of the work over the last two and one-half years towards the creation of today's Unified Financial Services, Inc. Our foundation, Unified Management Corporation, dates back to 1952. Unified Management Corporation began as Unified Underwriters, Inc. and today is a regional discount brokerage firm with a link to mutual fund assets via its brokerage account services. It is our broker-dealer subsidiary. In 1990, Unified Fund Services, Inc. was formed. Unified Fund Services is a highly automated, registered stock transfer agent that provides transfer agency, fund accounting, administrative and/or compliance services to mutual fund families. Beginning in 1997 with our acquisition of First Lexington Trust Company and Health Financial, Inc., our fundamental business model was born. The business model was intent on creating a vertically integrated financial services platform from which all essential products and support systems necessary to compete in the financial services industry would be built or acquired. The guiding principle was to provide one- stop shopping for consumers and to create an infrastructure whereby all support systems and related costs are confined within the company. Thus, we were to become a low-cost provider of all such services. In 1998, seven new affiliates joined our company and in 1999, six more were either started or acquired. The organization has been streamlined through consolidation of like-business affiliates. Thus, over the course of two and one-half years, thirteen affiliates and four start-ups have been restructured into the six core businesses. Over the first half of 2000, as the consolidation process was proceeding, it became obvious that two of our business lines have a tremendous opportunity to become market leaders in their respective disciplines. A market leader commands a national lead position in a segment of an industry as opposed to a lead position in the entire industry. Our two potential market leaders, we believe, are trust and retirement services (Unified Trust Company, National Association) and mutual fund administration services (Unified Funds Services). Going forward, the vertically integrated platform will be refined and managed with these two businesses forming the foundation and being the main drivers of our income. While we expect the other core lines to be profitable in their own discipline, each should be significantly enhanced by the supplemental income each will receive through their affiliation with the two main driver businesses. Additionally, we intend to develop the VSX project, a virtual real-time private financial marketplace. It will be funded by independent investment and we will retain an equity position and management contract for services rendered. Other e-commerce plans include relationships with Copernic Technologies Inc., a metasearch technology company in Quebec, further development of our financial services-in-a-box product for private label sale to third parties and the further development of marketing relationships with independent business-to-business companies. All of these initiatives are designed as additional outlets for our core products and services. 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 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; 36 West 44th Street, The Bar Association - 16 - 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. The following presents management's discussion and analysis of our consolidated financial condition and results of operations as of the dates and for the periods indicated. This discussion should be read in conjunction with the other information set forth in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the accompanying notes thereto. COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Revenues for the six months ended June 30, 2000 compared to the six months ended June 30, 1999 increased $1,585,502, or 12.5%, from $12,665,565 to $14,251,067. For such periods, trust and retirement services revenues increased $244,116, or 31.4%, primarily as a result of additional fees received in connection with a $72.0 million increase in assets under management. For such periods, fund administration services revenues increased $1,066,236, or 97.4%, due to an increase in the number of mutual fund clients services and a growth in the amount of assets under service. As of June 30, 2000, we provided fund administrative services to 27 mutual fund families consisting of approximately $3.8 billion in mutual fund assets as compared to 21 mutual fund families and $3.5 billion in mutual fund assets as of June 30, 1999. Banking revenues increased $845,721, or 368.9%, for the six months ended June 30, 2000 compared to the same period of 1999 due to the inclusion of the results of operations of Unified Banking Company, which commenced operations on November 1, 1999, in the 2000 revenues (without any revenues for 1999), and a 28.7% increase in the number of insurance policies financed by our premium finance operations. For the six months ended June 30, 2000 compared to the same period of 1999, insurance revenues increased $152,217, or 2.8%. The results for 1999 included revenues derived from our Chicago insurance operations, which were discontinued at year-end 1999. Excluding the revenues of the Chicago operations from the 1999 revenues, insurance revenues increased $706,770, or 14.5%, for the six months ended June 30, 2000 compared to the same period of 1999 due to a $2,500,299, or 14.2%, increase in total insurance premiums written. We experienced increases in both our personal and commercial business lines. For such periods, brokerage revenues declined $582,410, or 25.6%, principally due to a $568,000 decline in private placement commissions received by our broker-dealer subsidiaries in connection with our recently completed private placements. We also experienced a $138,416 decline in trading revenues due to the loss of one client relationship, which was partially offset by the inclusion in 2000 of revenues associated with our recently operational Internet trading website and an increase in brokerage revenues due to our relationship with certified public accountants. In addition, the volume of our non-Internet trades increased approximately 11.4% for the six months ended June 30, 2000 compared to the same period of 1999, while the revenues per trade declined approximately 11.0% for such periods. Investment advisory services revenues declined $124,783, or 5.0%, for the six months ended June 30, 2000 compared to the same period of 1999 primarily due to a shifting of assets from our investment advisory operations to our trust and retirement services operations and a decline in advisory revenues due to the recent volatility in the securities markets. For such periods, corporate and discontinued operations revenues declined $15,595, or 4.2%, which represented a $26,095 increase in revenues at certain discontinued operations offset by a reduction in interest income earned on the proceeds of our private placement and a decline in revenues at certain start-up entities. - 17 - Gross profit for the six months ended June 30, 2000 as compared to same period of 1999 increased $999,637, or 11.6%, from $8,589,389 to $9,589,026. For such periods, gross profit as a percentage of revenue declined to 67.3% from 67.8%. Trust and retirement services gross profit increased $283,684, or 45.2%, for the six months ended June 30, 2000 compared to the corresponding period of 1999 due to the $72.0 million increase in assets under management discussed above. For such periods, mutual fund administration services gross profit increased $875,410, or 100.2%, due to the increase in the number of mutual fund clients served and assets under service. Banking gross profit increased $421,672, or 183.9%, for the six months ended June 30, 2000 compared to the same period of 1999 due to the inclusion of the results of Unified Banking Company in banking gross profit for 2000 (without any amount included in the 1999 period), which accounted for 86.0% of the increase, and due to increased financing activity at our premium finance operations. For the six months ended June 30, 2000 compared to the same period of 1999, insurance gross profit increased $105,469, or 3.5%. Excluding the gross profits attributable to our Chicago insurance operations, which were discontinued at year-end 1999, insurance gross profits increased $377,867 for such periods due to an increase in total insurance premiums written. Brokerage gross profit declined $441,044, or 40.0%, for the six months ended June 30, 2000 compared to the same period of 1999 due to the $568,000 decline in commissions received on our private placements, partially offset by a $100,000 recovery from our insurance carrier with respect to an employee theft loss which occurred during the third quarter of 1999. For such periods, investment advisory gross profit declined $95,337, or 4.1%, due to an increase in costs of outside service providers and higher administrative fees associated with the Unified family of mutual funds. Corporate and discontinued operations gross profit declined $150,216, or 40.1%, for such periods due to declines at certain start-up and discontinued operations and a decline in interest income earned on our private placement proceeds. Results from operations for the six months ended June 30, 2000 was a loss of $1,330,332 compared to a loss from operations of $23,790 for the same period last year. Total expenses for the six months ended June 30, 2000 were $10,919,358, or 76.6% of total revenue, as compared to $8,613,180, or 68.0% of total revenue for same period of 1999. Employee compensation and benefits expense increased $1,627,375, or 35.4%, for the six months ended June 30, 2000 compared to the same period of 1999 due to (i) new personnel hired in connection with the expansion of our trust and retirement services and mutual fund administration services operations, which accounted for $389,000 of such increase, (ii) the expansion of our senior management team and the hiring of additional accounting and information services personnel, which accounted for $731,000 of such increase, and (iii) the commencement of operations of Unified Banking Company in November 1999, which accounted for $383,000 of such increase. For such period, mail and courier expense increased $167,607, or 134.2%, due to increased marketing efforts at our insurance operations, Unified Banking Company and certain other companies. Telephone expense increased $115,672, or 60.7%, for the six months ended June 30, 2000 compared to the same period of 1999 due to telephone costs associated with the increased marketing efforts at our insurance and mutual fund administration operations. For such periods, professional fees increased $181,771, or 23.3%, due to consulting services utilized in connection with various operations. Our provision for loan loss for the six months ended June 30, 2000 was $127,000 (without a corresponding expense for the same period of 1999). Other operating expenses declined $294,684, or 23.8%, due to a $640,000 benefit received by us in connection with the construction and development of the VSX marketplace and its corresponding products. - 18 - Net loss for the six months ended June 30, 2000 was $1,364,734 compared with a net loss of $884 for the same period of 1999. For the six months ended June 30, 2000, the 12.5% increase in revenues compared to the same period of 1999 was offset by the 26.8% increase in expenses for such periods, as described above. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 Revenues for the quarter ended June 30, 2000 compared to the same quarter of 1999 increased $1,280,899, or 21.2%, from $6,031,662 to $7,312,561. For such quarters, trust and retirement services revenues increased $81,960, or 19.1%, mutual fund administration revenues increased $559,093, or 103.6%, banking revenues increased $535,054, or 446.0%, insurance revenue increased $245,522, or 8.9%, brokerage revenues declined $695,535, or 50.0%, investment advisory revenues increased $2,253, or 0.2%, and corporate and discontinued operations revenues increased $652,552. The reasons underlying the variations in revenue by segment discussed above for the year-to-date periods also were applicable to the three-month periods. Additionally, with respect to insurance revenues for such quarters, excluding our Chicago insurance operations from the revenues for the second quarter of 1999, our insurance revenues increased $441,118, or 17.1%, for the second quarter of 2000 compared to the second quarter of 1999. With respect to corporate and discontinued operations revenues, the increase for the second quarter of 2000 compared to the second quarter of 1999 primarily was due to the non- recurrence of a $593,000 expense, which was treated as an offset to revenues in the second quarter of 1999 and was related to our private placement. Gross profit increased $1,301,694, or 34.2%, from $3,811,109 for the second quarter of 1999 to $5,112,803 for the second quarter of 2000. For such periods, gross profit as a percentage of revenue increased to 69.9% from 63.2%. For the quarter ended June 30, 2000 compared to the same quarter of 1999, trust and retirement services gross profit increased $48,854, or 11.42%, mutual fund administration services gross profit increased $455,186, or 104.2%, banking gross profit increased $334,298, or 278.7%, insurance gross profit increased $298,589, or 20.9%, brokerage gross profit declined to $522,086, or 63.4%, investment advisory gross profit declined $33,112, or 3.0%, and corporate and discontinued operations gross profit increased $653,741. The reasons underlying the variations in gross profit by segment discussed above for the year-to-date periods also were applicable to the three-month periods. Additionally, with respect to insurance gross profit for such quarters, excluding our Chicago insurance operations from the gross profit for the second quarter of 1999, our insurance gross profit increased $396,629, or 29.9%, for the second quarter of 2000 compared to the second quarter of 1999. Results from operations for the quarter ended June 30, 2000 was a loss of $74,369 compared to a loss from operations of $235,348 for the same quarter last year. Total expenses for the quarter ended June 30, 2000 were $5,187,172, or 70.9%, of total revenue, as compared to $4,046,458, or 67.1% of total revenue, for the second quarter of 1999. The reasons underlying the variations in expense items discussed above for the year-to-date periods also were applicable to the three- month periods. Other operating expenses for the second quarter of 2000 includes a $640,000 benefit received by us in connection with the construction and development of the VSX marketplace and its corresponding products. - 19 - Total other income was a loss of $42,150 for the quarter ended June 30, 2000, a decline of $133,154 from the $91,004 income reported for the second quarter of 1999. Unrealized loss on securities of $15,190 for the second quarter of 2000 compared to a $39,827 gain during the second quarter of 1999. Equity in results of affiliates reflected a benefit of $47,443 during the second quarter of 1999 and $0 for the same quarter of 2000. The loss on disposal of fixed assets during the second quarter of 2000 was principally related to Archer Trading, Inc. ceasing business. Net loss was $128,434 for the second quarter of 2000 compared with net loss of $183,782 for the second quarter of 1999. For the quarter ended June 30, 2000, the 21.2% increase in revenues was offset by the 28.2% increase in expenses, as described above. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. 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 June 30, 2000 from December 31, 1999 was $420,886. The net decrease reflected the repayment of borrowings, the purchase of fixed assets and a decline in accounts payable. We received $50,000 from the issuance of 1,250 shares of common stock in our private placement during the three months ended June 30, 2000. With respect to our banking operations, long-term liquidity is a function of the core deposit base and an adequate capital base. We are committed to growth of our core deposit base and maintenance of our capital base. The growth of the deposit base is internally generated through product pricing and product development. During its first three years of operations, Unified Banking Company is required to maintain a Tier 1 capital to total assets ratio of at least 8%. As of June 30, 2000, Unified Banking Company had a ratio of Tier 1 capital to total assets equal to 23.8%. Short-term liquidity needs arise from continuous fluctuations in the flow of funds on both sides of the balance sheet resulting from growth and seasonal and cyclical customer demands. The securities portfolio provides stable long-term earnings as well as being a primary source of liquidity. The designation of securities as available-for- sale and held-to-maturity does not impact the portfolio as a source of liquidity due to the ability to enter into repurchase agreements using those securities. We anticipate continued loan demand in our market areas. We have utilized, and expect to continue to utilize, Federal Home Loan Bank borrowings to fund a portion of future loan growth. Unified Banking Company experienced net growth in assets of 95.1% during the first six months of 2000, while deposits increased 192.6% during the same period. We continue to emphasize growth in stable core deposits while utilizing the Federal Home Loan Bank and Federal funds purchased as necessary to balance liquidity and cost effectiveness. We closely monitor our level of liquidity to meet expected future needs. CAPITAL RESOURCES. Total stockholders' equity was $13,550,127 at June 30, 2000 compared to $14,577,987 at year-end 1999. The decline in total equity was due to the issuance of 9,850 shares of our common stock offset by the loss from operations for the six-month period. The growth of Unified Banking Company will have an effect on our working capital. It currently is anticipated that as Unified Banking Company grows, that our working capital ratio will become more in line with ratios traditionally associated with bank holding companies. - 20 - 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 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 the expansion of our business 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. 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 - 21 - 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. We also have completed various acquisitions in the past few years that have significantly enhanced our rate of growth. We cannot provide you assurances that we will continue to sustain this rate of growth or grow at all. CHANGES IN THE LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT UNIFIED BANKING COMPANY'S LOAN PORTFOLIO. Unified Banking Company's success depends to a great extent upon the general economic conditions of Fayette County, Kentucky. Unlike larger banks that are more geographically diversified, we primarily provide banking and financial services to customers in Fayette County, Kentucky. Our commercial, real estate and construction loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans are impacted by our local economic conditions. We cannot assure you that favorable economic conditions will exist in our market. ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN LOSSES. As a lender, Unified Banking Company is exposed to the risk that its customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the lending business and could have a material adverse effect on our consolidated operating results. Unified Banking Company's credit risk with respect to its real estate and construction loan portfolio relates principally to the general creditworthiness of individuals and the value of real estate serving as security for the repayment of loans. Our credit risk with respect to Unified Banking Company's commercial and consumer installment loan portfolio relates principally to the general creditworthiness of businesses and individuals within its local market. We make various assumptions and judgments about the collectibility of Unified Banking Company's loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions are wrong, the allowance for loan losses may not be sufficient to cover loan losses. We may have to increase the allowance in the future. Additions to our allowance for loan losses would decrease our net income. UNIFIED BANKING COMPANY MAY BE UNABLE TO MANAGE INTEREST RATE RISKS THAT COULD REDUCE OUR NET INTEREST INCOME. Like other financial institutions, Unified Banking Company's results of operations are affected principally by net interest income, which is the difference between interest earned on loans and investments and interest expense paid on deposits and other borrowings. We cannot predict or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, affect interest income and interest expense. While Unified Banking Company continually takes measures intended to manage the risks from changes in market interest rates, changes in interest rates can still have a material adverse effect on our profitability. In addition, certain assets and liabilities may react in different degrees to changes in market interest rates. For example, interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. Further, some of Unified Banking Company's assets, such as adjustable rate mortgages, have features, including rate caps, which restrict changes in their interest rates. Factors such as inflation, recession, unemployment, money supply, international disorders, instability in domestic and foreign financial markets, and other factors beyond our control may affect interest rates. Changes in market interest rates also will affect the level of voluntary prepayments on loans and the receipt of payments on mortgage-backed securities resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. Although - 22 - Unified Banking Company pursues an asset-liability management strategy designed to control our risk from changes in market interest rates, changes in interest rates can still have a material adverse effect on our profitability. INSIDERS MAY CONTROL OUR FUTURE OPERATIONS AS A RESULT OF THE CONCENTRATION OF CONTROL OF OUR COMMON STOCK. Our executive officers and directors beneficially own approximately 36% of our outstanding common stock. As a result, these insiders may be able to control the election of our board of directors and thus our direction and future operations, and our stockholders may lack an effective vote with respect to such matters. WE ARE SUBJECT TO EXTENSIVE REGULATION. The banking, trust and securities industries are heavily regulated under both Federal and state law. These regulations are primarily intended to protect depositors and the Federal Deposit Insurance Corporation, with respect to banks, and customers, with respect to trust companies, broker-dealers and investment advisors, not our creditors or stock. We and our subsidiaries also are subject to the supervision of the Securities and Exchange Commission, the Office of Thrift Supervision and the Office of the Comptroller of the Currency, in addition to other regulatory and self-regulatory organizations. Regulations affecting banks, trust companies and other financial services companies undergo continuous change, and the ultimate effect of such changes cannot be predicted. Regulations and laws may be modified at any time, and new legislation may be enacted that affects us or our subsidiaries. We cannot assure you that such modifications or new laws will not adversely affect us or our subsidiaries. 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 - 23 - 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 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 - 24 - that any such claims will not be upheld, which could have a material adverse effect on our business, financial condition and results of operation. 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 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. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The business activities of our company expose it to a variety of risks. Management of these risks is necessary for the long-term profitability of Unified. 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 of both. We are exposed to market risk since we, through our subsidiaries, maintain positions in fixed-income and equity securities. We primarily manage our risk through the establishment of trading policies and guidelines and through the implementation of control and review procedures. Our asset/liability strategy is to minimize the sensitivity of earnings to changes in interest rates while maintaining an acceptable net interest margin. Unified Banking Company's asset/liability committee monitors the interest rate sensitivity of the bank's balance sheet on a monthly basis. The committee reviews asset and liability repricing in the context of current and future interest rate scenarios affecting the economic climate in our market areas. Our pricing policy is that all earning assets and interest bearing liabilities be either based on floating rates or have a fixed rate not exceeding five years. Real estate mortgage loans held by us, while having long final maturities, are comprised of one-, two- or three-year adjustable rate loans. The adjustable basis of these loans significantly reduces interest rate risk. - 25 - The following table illustrates our estimated static gap with prepayments calculated as of June 30, 2000:
TIME TO MATURITY OR REPRICING --------------------------------------------------------------------------------------------------- 0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 48 TO 54 > 54 (DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS --------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS Federal funds sold $ 1,975 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 1,975 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Securities U. S. agencies -- 184 181 179 522 501 481 4,452 547 4,606 11,653 FHLB stock 100 -- -- -- -- -- -- -- -- -- 100 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total securities 100 184 181 179 522 501 481 4,452 547 4,606 11,753 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Loans Commercial Fixed -- 12 12 12 38 38 188 501 227 76 1,106 Variable 1,736 -- -- -- -- -- -- -- -- -- 1,736 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total commercial 1,736 12 12 12 38 38 188 501 227 76 2,842 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Real Estate Commercial -- 6 6 6 18 93 1,995 590 909 838 4,460 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Residential Fixed -- 9 9 9 27 25 24 275 25 356 759 Variable -- 174 -- -- -- -- 849 -- -- -- 1,023 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total residential -- 183 9 9 27 25 873 275 25 356 1,782 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total real estate -- 189 15 15 45 118 2,868 865 934 1,194 6,242 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Personal Home equity loans 1,925 -- -- -- -- -- -- -- -- -- 1,925 Installment loans -- 243 14 5 74 24 289 156 68 4 876 Personal open end letters of credit -- -- -- -- 300 557 28 -- -- -- 885 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total personal 1,925 243 14 5 374 581 317 156 68 4 3,686 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Other loans 89 -- -- -- -- -- -- -- -- -- 89 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total loans 3,750 444 41 32 457 737 3,373 1,522 1,229 1,274 12,859 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- TOTAL RATE SENSITIVE ASSETS $ 5,825 $ 628 $222 $211 $978 $1,238 $3,853 $5,974 $1,776 $5,881 $26,587 ======= ====== ==== ==== ==== ====== ====== ====== ====== ====== ======= RATE SENSITIVE LIABILITIES Interest bearing deposits NOW accounts $ 344 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 344 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Money market accounts Market rate accounts 2,720 -- -- -- -- -- -- -- -- -- 2,720 Business market rate accounts 3,116 -- -- -- -- -- -- -- -- -- 3,116 Special personal MMDA 516 -- -- -- -- -- -- -- -- -- 516 Special business MMDA 5,468 -- -- -- -- -- -- -- -- -- 5,468 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total money market accounts 11,820 -- -- -- -- -- -- -- -- -- 11,820 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Savings 57 -- -- -- -- -- -- -- -- -- 57 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Time deposits CD's > 100K -- 3,068 -- -- 500 667 677 152 -- -- 5,064 CD's < 100K -- 20 -- 2 447 243 212 165 -- -- 1,089 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total time deposits -- 3,088 -- 2 947 910 889 317 -- -- 6,153 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Other interest bearing deposits -- -- -- -- -- 8 12 37 223 159 439 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Total interest bearing deposits 12,221 3,088 -- 2 947 918 901 354 223 159 18,813 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- Borrowed funds (repurchase agreements) 240 -- -- -- -- -- -- -- -- -- 240 ------- ------ ---- ---- ---- ------ ------ ------ ------ ------ ------- TOTAL RATE SENSITIVE LIABILITIES $12,461 $3,088 $ -- $ 2 $947 $ 918 $ 901 $ 354 $ 223 $ 159 $19,052 ======= ====== ==== ==== ==== ====== ====== ====== ====== ====== ======= - 26 - TIME TO MATURITY OR REPRICING ------------------------------------------------------------------------------------------ 0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 48 TO 54 > 54 (DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS ------------------------------------------------------------------------------------------ CUMULATIVE INFORMATION Total rate sensitive assets $ 5,825 $ 6,453 $ 6,675 $ 6,886 $ 7,865 $ 9,103 $12,956 $18,930 $20,706 $26,587 Total rate sensitive liabilities 12,461 15,549 15,549 15,551 16,498 17,416 18,317 18,670 18,893 19,052 Gap (6,636) (9,096) (8,874) (8,665) (8,633) (8,313) (5,361) 259 1,813 7,534 RSA/RSL 0.47% 0.41% 0.43% 0.44% 0.48% 0.52% 0.71% 1.01% 1.10% 1.40% RSA/assets 0.21 0.23 0.24 0.25 0.28 0.32 0.46 0.67 0.74 0.95 RSL/assets 0.44 0.55 0.55 0.55 0.59 0.62 0.65 0.67 0.67 0.68 Gap/assets -23.65 -32.41 -31.62 -30.88 -30.76 -29.62 -19.10 0.92 6.46 26.85 Gap/RSA -113.92 140.97 132.94 125.83 109.77 -91.32 -41.38 1.37 8.75 28.34
- 27 - We measure the impact of interest rate changes on our income statement through the use of gap analysis. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. During any given time period, if the amount of rate- sensitive liabilities exceeds the amount of rate-sensitive assets, a company would generally be considered negatively gapped and would benefit from falling rates over that period of time. Conversely, a positively gapped company would generally benefit from rising rates. We have structured our assets and liabilities to mitigate the risk of either a rising or falling interest rate environment. Depending upon our assessment of economic factors such as the magnitude and direction of projected interest rates over the short and long term, we generally operate within guidelines set by our asset/liability policy and attempt to maximize our returns within an acceptable degree of risk. Interest rate changes do not affect all categories of assets and liabilities equally or simultaneously. There are other factors that are difficult to measure and predict that would influence the effect of interest rate fluctuations on our income statement. For example, a rapid drop in interest rates might cause our borrowers to repay their loans at a more rapid pace and certain mortgage-related investments to be prepaid more quickly than projected. This could mitigate some of the benefits of falling rates as are expected when negatively gapped. Conversely, a rapid rise in rates could give us an opportunity to increase our margins and stifle the rate of repayment on our mortgage- related loans which would increase our returns. The following table shows the "rate shock" results of a simulation model that attempts to measure the effect of rising and falling interest rates over a two-year horizon in a rapidly changing rate environment.
PERCENTAGE CHANGE IN BASIS POINT -------------------------------------------------------- CHANGE IN NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY INTEREST RATES PROJECTED CHANGE PROJECTED CHANGE -------------- ------------------- -------------------------------- -400 27.65 23.69 -300 22.43 20.43 -200 15.77 14.95 -100 8.08 7.85 0 0.00 0.00 100 -8.60 -8.01 200 -16.29 -15.91 300 -24.54 -23.50 400 -32.72 -30.46
We use a sensitivity model that simulated these interest rate changes on our earning assets and interest-bearing liabilities. This process allows us to explore the complex relationships among the financial instruments in various interest rate environments. The preceding sensitivity analysis is based on numerous assumptions including: the nature and timing of interest rate levels including the shape of the yield curve; prepayments on loans and securities; changes in deposit levels; pricing decisions on loans and deposits; reinvestment/replacement of asset and liability cas flows; and others. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how client preferences or competitor influences might change. Interest rate exposure is measured by the potential impact on our income statement of changes in interest rates. We use information from our gap analysis and rate shock calculations as input to help manage our exposure to changing interest rates. - 28 - We use our rate shock information to tell us how much exposure we have to rapidly changing rates. Based on historical information and our assessment of future interest rate trends, we do not believe it is likely that rapidly rising rates would have a significant positive impact on our results of operations. Conversely, we also believe there is minimal likelihood that rapidly falling rates would have a significant negative impact on our results of operations. We believe that more likely scenarios include gradual changes in interest rate levels. We continue to monitor our gap and rate shock analyses to detect changes to our exposure to fluctuating rates. We have the ability to shorten or lengthen maturities on newly acquired assets, sell investment securities, or seek funding sources with different maturities in order to change our asset and liability structure for the purpose of mitigating the effect of interest rate risk. - 29 - PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS For the three months ended June 30, 2000, the only sale of our securities was 1,250 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS Our 2000 annual meeting of stockholders was held on May 17, 2000. Of 2,869,862 shares issued, outstanding and eligible to be voted at the meeting, 1,835,331 shares, constituting a quorum, were represented in person or by proxy at the meeting. Two matters were submitted to a vote of the stockholders at the meeting. 1. ELECTION OF CLASS III DIRECTORS. The first matter submitted was the election of three Class III director nominees to our board of directors, each to continue in office until the year 2003. There is no cumulative voting in the election of directors. Upon tabulation of the votes cast, it was determined that each director nominee had been elected. The voting results are set forth below: NAME FOR AGAINST WITHHELD ---- --- ------- -------- Weaver H. Gaines 1,832,693 -- 2,638 Jack R. Orben 1,793,798 -- 41,533 John S. Penn 1,832,693 -- 2,638 Because we have a staggered board, the term of office of the following named Class I and Class II directors, who were not up for election at the 2000 annual meeting, continued after the meeting: Class I (to continue in office until 2001) Timothy L. Ashburn Dr. Gregory W. Kasten Class II (to continue in office until 2002) Thomas G. Napurano 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. The second matter, a proposal to ratify the appointment of Larry E. Nunn & Associates, LLC as our independent auditors for the year ending December 31, 2000, was approved by an affirmative vote of a majority of the votes cast on such proposal at the meeting. The voting results on this matter were as follows: FOR AGAINST ABSTAIN --- ------- ------- 1,616,379 1,000 217,952 ITEM 5. OTHER MATTERS. At its May and July meetings, our board of directors elected each of Philip L. Conover and Richard A. Walker, respectively, as a member of our board of directors and as a member of the audit, nominating and compensation committee of the board. - 30 - Mr. Conover currently serves as a private investor and financial consultant, a member of the board of trustees of the Firstar Reit Fund and a member of the board of directors and as the chairman of the compensation committee for Praedictus Corporation, a computer software company headquartered in Indianapolis, Indiana. Prior thereto, Mr. Conover served as an Adjunct Professor of Finance, University of South Florida (1994-96) and Managing Director, Federal Housing Finance Board, an independent federal regulatory agency (1990-94). From 1972 to 1990, Mr. Conover served in various capacities in the commercial banking industry, including President and Chief Executive Officer of Trustcorp Bank of Indianapolis, Vice President and Manager of Bank One Indiana's Capital Markets Division and a member of the Board of Directors of Bank One Securities, Inc. Mr. Walker currently is a management consultant with Walker Associates, which specializes in strategic planning, continuous improvement, shareholder relations and corporate governance. Prior to forming his own firm, Mr. Walker was Executive Vice President, Chief Administrative Officer, General Counsel and Secretary of Kuhlman Corporation, a diversified industrial manufacturing company headquartered in Savannah, Georgia. Kuhlman Corporation, founded in 1894, had annual sales of approximately $800 million and was listed on the New York Stock Exchange, prior to its sale to Borg-Warner Automotive, Inc. in 1999. Prior to joining Kuhlman, Mr. Walker was a partner at the law firm of Harness, Dickey & Pierce, where he specialized primarily in litigation and licensing. Prior thereto, Mr. Walker was a Technical Standards Engineer in the Materials Engineering Department at Ford Motor Company at its Research and Development Center in Dearborn, Michigan. Mr. Walker earned a Bachelor of Chemical Engineering, a Master of Engineering and a Juris Doctorate from the University of Detroit. He also is a graduate of the University of Michigan Executive Program. He is a member of various professional organizations and a Director of the Savannah Symphony Orchestra. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index attached hereto. (b) Reports on Form 8-K. We did not file any Current Reports on Form 8-K during the quarter ended June 30, 2000. - 31 - 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: August 10, 2000 By: /s/ Timothy L. Ashburn ------------------------------------------------ Timothy L. Ashburn, Chairman and Chief Executive Officer Dated: August 10, 2000 By: /s/ Thomas G. Napurano ------------------------------------------------ Thomas G. Napurano, Executive Vice President and Chief Financial Officer - 32 - EXHIBIT INDEX Ex. No. Description - ------- ----------- 11.1 Computations of Earnings per Share. 27.1 Financial Data Schedule (June 30, 2000). - 33 - EX-11.1 2 0002.txt COMPUTATIONS OF EARNINGS PER SHARE EXHIBIT 11.1 UNIFIED FINANCIAL SERVICES, INC. EARNINGS PER SHARE CALCULATION
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ---------- ---------- ---------- INCOME AVAILABLE TO COMMON STOCKHOLDERS Net loss $(1,364,734) $ (884) $ (128,434) $ (183,782) Preferred dividends -- -- -- -- ----------- ---------- ---------- ---------- Income available to common stockholders $(1,364,734) $ (884) $ (128,434) $ (183,782) =========== ========== ========== ========== CALCULATION OF COMMON STOCK Common shares outstanding at beginning of period 2,869,862 2,267,449 2,878,462 2,275,580 Shares issues re: acquisition of M. Wilson and Associates -- 3,636 -- -- Shares issued re: acquisition of Fully Armed Production -- 18,182 -- 18,182 Shares issued re: acquisition of Commonwealth Investment Services -- 27,500 -- 27,500 Shares issued in private placement during period 9,850 161,080 1,250 156,585 Shares issued upon conversion of Series C preferred stock -- 154,305 -- 154,305 Repurchase of common stock -- 47,110 -- 47,110 ----------- ---------- ---------- ---------- Common shares used in basic calculation 2,879,712 2,585,042 2,879,712 2,585,042 ----------- ---------- ---------- ---------- Common stock equivalent of options 169,847 61,951 169,847 61,951 Preferred stock Series C conversion in common stock -- 196,965 -- 196,965 ----------- ---------- ---------- ---------- Common shares used in fully diluted calculation 3,049,559 2,843,958 3,049,599 2,843,958 ----------- ---------- ---------- ---------- EARNINGS PER SHARE Basic $ (.47) $ -- $ (.04) $ (.07) =========== ========== ========== ========== Fully diluted $ (.45) $ -- $ (.04) $ (.06) =========== ========== ========== ==========
- 34 - EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE
9 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 June 30, 2000 and is qualified in its entirety by reference to such report. 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 611,014 5,288,196 1,975,000 12,506,654 0 882,774 840,000 12,812,932 160,000 49,748,747 21,151,467 4,246,381 10,369,830 430,942 0 0 33,297 13,516,830 49,748,747 438,940 435,578 0 874,518 375,591 375,591 498,927 127,000 (31,625) 15,078,808 (1,340,210) 0 0 0 (1,364,734) (.47) (.45) 0 0 0 0 0 0 0 0 0 0 0 0
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