10-Q 1 eouni.txt UNIFIED FORM 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 SEPTEMBER 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 November 1, 2000 --------------------------------------- ------------------------------------ Common stock, $0.01 par value 2,880,028 UNIFIED FINANCIAL SERVICES, INC. FORM 10-Q INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition - September 30, 2000 (Unaudited) and December 31, 1999........................................................................................1 Consolidated Statements of Operations (Unaudited) - Nine and Three Months Ended September 30, 2000 and 1999...............................................................................3 Consolidated Statements of Comprehensive Income (Unaudited) - Nine and Three Months Ended September 30, 2000 and 1999.....................................................................4 Consolidated Statements of Cash Flow (Unaudited) - Nine Months Ended September 30, 2000 and 1999............................................................................................5 Notes to Consolidated Financial Statements (Unaudited)..........................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........14 Cautionary Statement Regarding Forward-Looking Statements......................................14 General........................................................................................14 Comparison of Results for the Nine Months Ended September 30, 2000 and 1999....................16 Comparison of Results for the Three Months Ended September 30, 2000 and 1999...................18 Liquidity and Capital Resources................................................................19 Risk Factors...................................................................................20 Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................24 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds......................................................30 Item 6. Exhibits and Reports on Form 8-K...............................................................30 SIGNATURES.......................................................................................................31 EXHIBIT INDEX....................................................................................................32
- i - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS ------ SEPTEMBER 30, 2000 DECEMBER 31, (UNAUDITED) 1999 ----------- ---- Current Assets Cash and cash equivalents ............................... $ 5,504,650 $ 5,714,345 Due from banks .......................................... 1,248,263 314,815 Federal funds sold ...................................... -- 4,922,000 Bond investments ........................................ 11,088,095 5,515,156 Investment in affiliated mutual funds ................... 37,250 326,271 Investment in securities and non-affiliated mutual funds .......................................... 527,128 419,284 Loans (net of allowance for loan losses of $230,000 for 2000 and $33,000 for 1999) ............... 18,101,198 2,810,876 Accounts receivable (net of allowance for doubtful accounts of $557,251 for 2000 and $38,326 for 1999) ..................................... 11,096,598 9,604,833 Prepaid assets and deposits ............................. 817,454 899,867 Deferred tax asset ...................................... -- 5,707 ----------- ----------- Total current assets ................................ 48,420,636 30,533,154 ----------- ----------- Fixed Assets, at cost Equipment and furniture (net of accumulated depreciation of $4,053,106 for 2000 and $3,512,135 for 1999) .................................. 2,966,582 2,944,610 ----------- ----------- Total fixed assets .................................. 2,966,582 2,944,610 ----------- ----------- Non-Current Assets Investment in affiliate ................................. 10 -- Investment in debt securities ........................... 882,748 1,073,621 Organization cost (net of accumulated amortization of $131,036 for 2000 and $32,019 for 1999) 542,115 641,688 Goodwill (net of accumulated amortization of $217,334 for 2000 and $139,093 for 1999)............... 1,136,461 1,214,701 Other non-current assets ................................ 62,283 341,220 ----------- ----------- Total non-current assets ............................ 2,623,617 3,271,230 ----------- ----------- TOTAL ASSETS ................................... $54,010,835 $36,748,994 =========== =========== (Continued on next page) See accompanying notes. - 1 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) Current Liabilities: Current portion of capital lease obligations . $ 10,895 $ 30,073 Current portion of bank borrowings ........... 1,944,133 2,343,965 Federal funds ................................ 1,477,000 -- Borrowed funds ............................... 900,525 -- Bank line of credit .......................... 1,898,451 1,727,003 Deposits ..................................... 23,076,271 7,331,853 Accounts payable and accrued expenses ........ 1,676,678 2,731,970 Accrued compensation and benefits ............ 533,808 549,093 Payable to insurance companies ............... 7,179,534 5,670,974 Payable to broker-dealers .................... 218,638 255,158 Income taxes payable, current ................ 3,229 136,630 Income taxes payable, deferred ............... 16,884 83,157 Other liabilities ............................ 940,854 597,646 ------------ ------------ Total current liabilities ................ 39,876,900 21,457,522 ------------ ------------ Long-Term Liabilities Long-term portion of capital lease obligations 1,183 8,933 Long-term portion of borrowings .............. 386,934 514,031 Other long-term liabilities .................. 81,873 104,742 Deferred income taxes ........................ 13,359 85,779 ------------ ------------ Total long-term liabilities .............. 483,349 713,485 ------------ ------------ Total liabilities ................... 40,360,249 22,171,007 ------------ ------------ Commitments and Contingencies ..................... -- -- ------------ ------------ Stockholders' Equity Common stock, par value $.01 per share ....... 33,300 33,294 Additional paid-in capital ................... 16,259,091 16,050,189 Retained deficit ............................. (2,657,350) (1,292,794) Accumulated other comprehensive income (loss) 15,545 (35,463) ------------ ------------ 13,650,586 14,755,226 Treasury stock, at cost ........................... -- (177,239) ------------ ------------ Total stockholders' equity .......... 13,650,586 14,577,987 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $ 54,010,835 $ 36,748,994 ============ ============ See accompanying notes.
- 2 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------ ----------- ----------- REVENUE: Gross revenue (see note 12) ........... $ 22,002,928 $ 19,546,583 $ 7,751,861 $ 6,881,018 ------------ ------------ ----------- ----------- Total gross revenue ............. 22,002,928 19,546,583 7,751,861 6,881,018 ------------ ------------ ----------- ----------- COST OF SALES: Cost of sales ......................... 7,142,171 6,019,091 2,480,130 1,942,916 ------------ ------------ ----------- ----------- Total cost of sales ............. 7,142,171 6,019,091 2,480,130 1,942,916 ------------ ------------ ----------- ----------- Gross profit (see note 12) ...... 14,860,757 13,527,492 5,271,731 4,938,102 ------------ ------------ ----------- ----------- EXPENSES: Employee compensation and benefits .... 9,611,877 7,577,373 3,385,758 2,978,628 Mail and courier ...................... 361,794 363,586 69,274 118,673 Telephone ............................. 467,892 354,590 161,591 163,960 Equipment rental and maintenance ...... 594,301 463,121 284,679 194,450 Occupancy ............................. 708,261 701,708 231,502 256,545 Depreciation and amortization ......... 742,353 626,129 259,636 195,178 Professional fees ..................... 994,322 1,048,164 32,458 268,071 Interest .............................. 360,504 387,651 130,122 150,187 Provision for bad debt ................ 569,346 14,050 159,022 10,800 Provision for loan losses ............. 197,000 -- 70,000 -- Business development costs ............ 194,584 56,036 40,580 23,689 Other operating expenses .............. 1,294,324 2,331,549 352,579 950,596 ------------ ------------ ----------- ----------- Total expenses .................. 16,096,558 13,923,957 5,177,201 5,310,777 ------------ ------------ ----------- ----------- Income (loss) from operations .............. (1,235,801) (396,465) 94,530 (372,675) ------------ ------------ ----------- ----------- OTHER INCOME (LOSS) Unrealized gain (loss) on securities .. 6,478 (23,450) (3,752) (33,151) Realized gain (loss) on securities .... (1,145) 2,252 9,346 (669) Equity in results of affiliates ....... -- -- -- (54,284) Loss on sale/disposal of fixed assets . (109,088) -- (9,608) -- All other ............................. -- -- (89,863) -- ------------ ------------ ----------- ----------- Total other loss ................ (103,755) (21,198) (93,877) (88,104) ------------ ------------ ----------- ----------- Income (loss) before income taxes .......... (1,339,556) (417,663) 653 (460,779) ------------ ------------ ----------- ----------- Income taxes ............................... 25,000 66,387 476 22,387 ------------ ------------ ----------- ----------- Net income (loss) .......................... $ (1,364,556) $ (484,050) $ 177 $ (483,166) ============ ============ =========== =========== Per share earnings Basic common shares outstanding ....... 2,880,028 2,773,727 2,880,028 2,773,727 Net income (loss) - basic ............. $ (0.47) $ (0.17) $ -- $ (0.17) Fully diluted common shares outstanding 3,050,825 2,945,855 3,050,825 2,945,855 Net income (loss) - fully diluted ..... $ (0.45) $ (0.16) $ -- $ (0.16) See accompanying notes.
- 3 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2000 1999 2000 1999 ------------ ----------- ----------- ----------- Net income (loss).................................. $ (1,364,556) $ (484,050) $ 177 $ (483,166) Other comprehensive income (loss), net of tax Unrealized gain on securities, net of reclassification adjustment............. 51,008 -- 82,633 -- ------------ ----------- ----------- ----------- Comprehensive income (loss)........................ $ (1,313,548) $ (484,050) $ 82,810 $ (483,166) ============ =========== =========== =========== See accompanying notes.
- 4 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2000 1999 ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES Net loss ............................................... $ (1,364,556) $ (484,050) Adjustments to reconcile net income to cash provided by (used in) operating activities: Income taxes payable .............................. (133,401) -- Deferred income taxes ............................. (132,986) (118,444) Provision for depreciation and amortization ....... 742,353 626,129 Provision for loan losses ......................... 197,000 -- Provision for bad debt ............................ 569,346 -- Change in market value of securities .............. (6,166) -- Loss on disposal of discontinued operations ....... 100,513 -- Loss on sale of securities ........................ 21,026 -- Results of affiliate/minority interest ............ -- (71,620) Adjustment to goodwill re: purchase of Fiduciary Counsel, Inc. ........................ -- 211,007 Deferred start-up costs ........................... -- (549,695) (Increase) decrease in operating assets Receivables .................................... (2,061,110) (18,231) Loans made to customers, net of repayments ..... (15,487,322) -- Prepaid and sundry assets ...................... 82,413 (133,457) Other non-current assets ....................... 278,937 158,116 Increase (decrease) in operating liabilities Deposits ....................................... 15,744,418 -- Accounts payable and accrued expenses .......... 416,748 (708,380) Accrued compensation and benefits .............. (15,285) 247,538 Accrued income taxes ........................... -- (1,857) Other liabilities .............................. 320,338 (814,431) ------------ ------------ Net cash used in operating activities ................ (727,734) (1,657,375) ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES Purchase of equipment .................................. (689,993) (1,742,985) Adjustment re acquisition of Fully Armed Productions ... -- (93,440) Investment in affiliated mutual funds .................. (36,753) -- Due from banks ......................................... (933,448) -- Federal funds sold ..................................... 4,922,000 -- Bond investments ....................................... (5,572,939) -- Proceeds from sale of fixed assets ..................... 2,968 -- Proceeds from sale of debt securities .................. 181,066 -- Proceeds from sale of securities ....................... 580,875 -- Investments in securities and mutual funds ............. (316,990) 99,983 Investment in debt securities .......................... -- (79,984) Investment in affiliate ................................ (10) -- ------------ ------------ Net cash used in investing activities ................ (1,863,224) (1,816,426) ------------ ------------ CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of common stock ................. 3,540 7,445,584 Proceeds from issuance of Series C preferred stock ..... -- 100,900 Borrowings on bank line of credit ...................... 760,000 -- Repayments on bank line of credit ...................... (588,552) -- Dividends to Unified Investment Services, Inc. and Fully Armed Productions, Inc. shareholders ................. -- (18,624) Proceeds from issuance of treasury stock ............... 437,158 -- Federal funds purchased ................................ 1,477,000 -- Securities sold under agreement to repurchase .......... 900,525 -- Repayment of borrowings ................................ (526,929) (986,134) Repayment of capital lease obligations ................. (26,928) (39,169) Purchase of Archer Trading, Inc. ....................... -- (73,500) Purchase of treasury shares ............................ (54,551) (635,301) ------------ ------------ Net cash provided by financing activities ............ 2,381,263 5,793,756 ------------ ------------ Net increase (decrease) in cash and cash equivalents ...... (209,695) 2,319,955 Cash and cash equivalents - beginning of year ............. 5,714,345 10,342,501 ------------ ------------ Cash and cash equivalents - end of period ................. $ 5,504,650 $ 12,662,456 ============ ============ See accompanying notes.
- 5 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 nine-month periods ended September 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. On January 31, 2000, Unified Management Company acquired all of the assets of Commonwealth Investment Services, Inc. Effective September 29, 2000, Unified Management Company was renamed Unified Financial Securities, Inc. Effective October 12, 2000, Unified Fund Services, Inc. was merged with and into AmeriPrime Financial Services, Inc. Immediately following, AmeriPrime Financial Services, Inc. was renamed Unified Fund Services, Inc. Each of Unified Financial Services, Inc., Commonwealth Investment Services, Inc., Unified Fund Services, Inc. and AmeriPrime Financial Services, Inc. is/was a wholly owned subsidiary of our company. - 6 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 September 30, 2000, Unified Trust Company, National Association had $2.1 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 September 30, 2000, our board of directors had granted options to acquire 104,131 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: 6,350 shares at $25.00 per share 19,231 shares at $27.50 per share 500 shares at $30.25 per share 77,050 shares at $40.00 per share 1,000 shares at $44.00 per share 66,666 shares at $45.00 per share As of September 30, 2000, 85,831 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 June 30, 2000 169,847 Options issued during period at exercise price of $40.00 per share 2,000 Options exercised during period -- Forfeitures at $25.00 per share 50 Forfeitures at $40.00 per share 1,000 Options outstanding at September 30, 2000 170,797 - 7 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2000 AND 1999 --------------------------- Note 5 - DEBT AND RELATED MATTERS Debt at September 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 $ 70,379 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 354,582 Payable in monthly installments including interest at 10.4%, final payment due April 26, 2002, collateralized by equipment 12,356 ------------- Total notes 2,331,067 ------------- Less current maturities of bank debt 1,944,133 ------------- Long-term portion $ 386,934 =============
The maturities of notes payable and lines of credit for each of the succeeding five years subsequent to September 30, 2000, were as follows: 2001--$53,134; 2002--$48,364; 2003--$49,876; 2004--$51,518; 2005 and beyond--$184,042. Lines of credit: --------------- Payable at maturity, June 30, 2001, interest at prime, secured by assignment of receivables $ 1,890,000 Loan payable at maturity, December 31, 2000, interest at 10.25% 8,451 ------------- $ 1,898,451 =============
- 8 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 September 30, 2000:
YEAR ENDED SEPTEMBER 30, AMOUNT ------------------------ ------ 2000 $ 11,626 2001 724 2002 601 -------- 12,951 Less: amount representing interest 873 -------- Total $ 12,078 ========
Note 7 - RENTAL AND LEASE INFORMATION We lease certain office facilities and equipment. Rental expense for the nine months ended September 30, 2000 and 1999 were $708,261 and $701,708, respectively. At September 30, 2000, we were committed to minimal rental payments under certain noncancellable operating leases. Generally, these leases include cancellation clauses. As of September 30, 2000, the minimum future rental commitments for each of the succeeding five years subsequent to September 30, 2000 were as follows: 2001--$1,036,432; 2002--$780,637; 2003--$345,290; 2004--$265,237; and 2005 and thereafter--$679,924. 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 Financial Securities, 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 Financial Securities, $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 September 30, 2000, the net capital and ratio of aggregate indebtedness for each of these entities were as follows: - 9 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2000 AND 1999 --------------------------- Note 9 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL REQUIREMENTS (continued)
SEPTEMBER 30, 2000 ------------- Net capital: Unified Financial Securities $ 304,558 Unified Investment Services 6,845 AmeriPrime Financial Securities 294,349 Ratio of aggregate indebtedness: Unified Financial Securities 1.473 to 1 Unified Investment Services 0 to 1 AmeriPrime Financial Securities .05 to 1
Pursuant to Rule 15c3-3 as promulgated by the Securities and Exchange Commission, Unified Financial Securities, 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 Financial Securities, Unified Investment Services and AmeriPrime Financial Securities was $0 at September 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 nine months ended September 30, 2000 and 1999, we issued 11,530 (including 10,929 shares from treasury) and 213,550 shares, respectively, of our common stock. For the nine months ended September 30, 2000 and 1999, aggregate brokerage fees of $20,500 and $802,000, respectively, were paid to Unified Financial Securities and Unified Investment Services in connection with this private placement offering, which amount is inclusive of $18,300 and $0, respectively, paid to external brokerage firms. In our private placement, all shares of our common stock were offered on a best efforts basis. There is no public market for any of our securities and there can be no assurance that a market will develop in the future. The securities offered and sold by us in our private placement will not be and have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. - 10 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 September 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.
SEPTEMBER 30, -------------------------------------------------------- 2000 1999 ------------------------- ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- ---------- ---------- (IN THOUSANDS) Financial assets: Cash and cash equivalents $ 5,504.6 $ 5,504.6 $ 12,663.0 $ 12,663.0 Investment in: Debt securities 882.7 882.7 1,074.0 1,074.0 Securities and mutual funds 564.4 564.4 626.0 626.0 Loans 18,101.1 18,101.1 -- -- Receivables (trade) 11,096.6 11,096.6 8,892.0 8,892.0 Prepaid and sundry 817.5 817.5 363.0 363.0 Financial liabilities: Current liabilities 37,921.9 37,921.9 9,294.0 9,294.0 Capital lease obligation 12.1 12.1 50.7 50.7 Long-term debt 2,331.1 2,331.1 4,925.1 4,925.1
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 nine and three months ended September 30, 2000 and 1999 and total assets, capital expenditures and depreciation and amortization were as follows as of and for the nine months ended September 30, 2000 and 1999: - 11 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2000 AND 1999 --------------------------- Note 12 - DISCLOSURES ABOUT REPORTING SEGMENTS (continued)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (IN THOUSANDS) Revenues: Trust and retirement............................. $ 1,503,926 $ 1,293,385 $ 482,835 $ 516,410 Mutual fund administration....................... 3,418,777 1,830,667 1,257,424 735,550 Banking.......................................... 1,853,821 356,561 778,847 127,308 Insurance........................................ 9,151,679 8,187,965 3,573,753 2,762,257 Brokerage........................................ 2,127,776 3,219,361 431,289 940,464 Investment advisory.............................. 3,528,770 3,921,560 1,168,157 1,436,165 Corporate and discontinued operations............ 418,179 737,084 59,556 362,864 ----------- ----------- ----------- ----------- Total....................................... $22,002,928 $19,546,583 $ 7,751,861 $ 6,881,018 =========== =========== =========== =========== Gross profit: Trust and retirement............................. $ 1,340,416 $ 1,047,247 $ 429,334 $ 419,850 Mutual fund administration....................... 2,701,239 1,493,533 952,597 620,300 Banking.......................................... 1,150,166 356,561 499,241 127,308 Insurance........................................ 5,290,136 4,659,941 2,137,353 1,612,628 Brokerage........................................ 783,460 1,623,313 122,373 521,181 Investment advisory.............................. 3,351,105 3,700,134 1,110,601 1,364,293 Corporate and discontinued operations............ 244,235 646,763 20,232 272,542 ----------- ----------- ----------- ----------- Total....................................... $14,860,757 $13,527,492 $ 5,271,731 $ 4,938,102 =========== =========== =========== =========== Total assets Trust and retirement............................. $ 3,170,793 $ 1,972,690 Mutual fund administration....................... 1,656,956 1,210,062 Banking.......................................... 34,056,493 2,231,946 Insurance........................................ 9,124,816 7,547,802 Brokerage........................................ 1,255,162 1,401,142 Investment advisory.............................. 3,190,378 4,751,621 Corporate and discontinued operations............ 1,556,237 10,790,966 ----------- ----------- Total....................................... $54,010,835 $29,906,229 =========== =========== Depreciation and amortization: Trust and retirement............................. $ 27,316 $ 17,090 Mutual fund administration....................... 59,840 48,514 Banking.......................................... 126,129 43,993 Insurance........................................ 98,561 160,732 Brokerage........................................ 25,849 27,747 Investment advisory.............................. 139,177 195,603 Corporate and discontinued operations............ 265,481 132,450 ----------- ----------- Total....................................... $ 742,353 $ 626,129 =========== =========== Capital expenditures: Trust and retirement............................. $ 140,648 $ 38,699 Mutual fund administration....................... 63,160 90,940 Banking.......................................... 112,832 753,807 Insurance........................................ 155,501 83,510 Brokerage........................................ 4,275 27,555 Investment advisory.............................. 27,740 40,585 Corporate and discontinued operations............ 185,837 707,889 ----------- ----------- Total....................................... $ 689,993 $ 1,742,985 =========== ===========
- 12 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 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 September 30, 2000 were the bank's total assets of $31,685,065 and total liabilities of $25,054,869 as of such date. As of such date, certain components of such assets and liabilities were as follows: Due from banks $ 1,248,263 Investments in securities: US agency securities -- FHLB stock 100,000 Loans: Real estate loans 11,741,941 Commercial loans 3,874,399 Installment loans 2,759,805 Other loans 53 Allowance for loan losses 230,000 Bank deposits: Demand deposits 2,426,678 NOW accounts 695,012 Money market accounts 10,756,640 Savings accounts 51,928 Time deposits 8,661,323 Other interest-bearing deposits 86,332 Federal and borrowed funds 2,377,525 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 provide consulting and development services to VSX Holdings. - 13 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q are or may constitute forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Such forward-looking statements are based on current expectations, estimates and projections about Unified Financial Services' industries, management's beliefs and assumptions made by management. For example, a 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, our ability to provide superior returns to our stockholders and the development of VSX Holdings as an alternative trading system may prove to be other than expected. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those 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. - 14 - 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 Financial Securities, Inc., dates back to 1952. Unified Financial Securities, Inc. 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 for 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 - 15 - 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 Revenues for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999 increased $2,456,000, or 12.6%, from $19,547,000 to $22,003,000. For such periods, trust and retirement services revenues increased $211,000, or 16.3%, primarily as a result of additional fees received in connection with a $61,600,000 increase in assets under management. For such periods, fund administration services revenues increased $1,588,000, or 86.8%, due to an increase in the number of mutual fund clients services and a growth in the amount of assets under service. As of September 30, 2000, we provided fund administrative services to 28 mutual fund families consisting of 121 portfolios and approximately $4.3 billion in mutual fund assets as compared to 23 mutual fund families consisting of 110 portfolios and approximately $3.7 billion in mutual fund assets as of September 30, 1999. Banking revenues increased $1,497,000, or 419.9%, for the nine months ended September 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), which accounted for 93.7% of the increase, and due to increased financing activity at our premium finance operations. For the nine months ended September 30, 2000 compared to the same period of 1999, insurance revenues increased $964,000, or 11.8%, due to a $6,123,000, or 22.5%, increase in total insurance premiums written. 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 $1,831,000, or 25.0%, for the nine months ended September 30, 2000 compared to the same period of 1999. We experienced increases in both our personal and commercial business lines. Additionally, insurance revenues for the nine months ended September 30, 2000 included a $379,000 contingency payment our claims services operations received during the third quarter for lower than anticipated claims losses. For such periods, brokerage revenues declined $1,092,000, or 33.9%, principally due to a $782,000 decline in private placement commissions received by our broker-dealer subsidiaries in connection with our recently completed private placements. We also experienced a $277,000 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 1999 revenues include a one-time commission of fund sales of approximately $100,000. Investment advisory services revenues declined $393,000, or 10.0%, for the nine months ended September 30, 2000 compared to the same period of 1999 primarily due to a shifting of approximately $16,000,000 of assets from our investment advisory operations to our trust and retirement services operations and a loss of two broker-dealer clients with approximately $8,000,000 of assets under management, partially offset by additional revenues earned on assets under management pursuant to new fee arrangements. - 16 - For such periods, corporate and discontinued operations revenues declined $319,000, or 43.3%, which represented a reduction in interest income earned on the proceeds of our private placement and a decline in revenues at certain start-up entities and discontinued operations. Gross profit for the nine months ended September 30, 2000 as compared to same period of 1999 increased $1,334,000, or 9.9%, from $13,527,000 to $14,861,000. For such periods, gross profit as a percentage of revenue declined to 67.5% from 69.2%. Trust and retirement services gross profit increased $293,000, or 27.8%, for the nine months ended September 30, 2000 compared to the corresponding period of 1999 due to the $61,600,000 increase in assets under management discussed above. For such periods, mutual fund administration services gross profit increased $1,208,000, or 80.9%, due to the increase in the number of mutual fund clients served and assets under service. Banking gross profit increased $794,000, or 222.6%, for the nine months ended September 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 88.1% of the increase, and due to increased financing activity at our premium finance operations. For the nine months ended September 30, 2000 compared to the same period of 1999, insurance gross profit increased $630,000, or 13.5%. Excluding the gross profits attributable to our Chicago insurance operations, which were discontinued at year-end 1999, insurance gross profits increased $1,053,000 for such periods due to an increase in total insurance premiums written and the contingency payment we received due to lower than anticipated claims losses. Brokerage gross profit declined $840,000, or 51.7%, for the nine months ended September 30, 2000 compared to the same period of 1999 principally due to the $782,000 decline in commissions received on our private placements and a $173,000 decline in gross profits due to the loss of one client relationship, which declines were partially offset by a $100,000 recovery in 2000 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 $349,000, or 9.4%, due to an increase in the costs of outside service providers and higher administrative fees associated with the Unified family of mutual funds. Corporate and discontinued operations gross profit declined $403,000, or 62.2%, 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 nine months ended September 30, 2000 was a loss of $1,236,000 compared to a loss from operations of $396,000 for the same period last year. Total expenses for the nine months ended September 30, 2000 were $16,097,000, or 73.2% of total revenue, as compared to $13,924,000, or 71.2% of total revenue for same period of 1999. Employee compensation and benefits expense increased $2,035,000, or 26.8%, for the nine months ended September 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 $1,180,000 of such increase, (ii) the expansion of our senior management team and the hiring of additional accounting and information services personnel, which accounted for $1,076,000 of such increase, and (iii) the commencement of operations of Unified Banking Company in November 1999, which accounted for $583,000 of such increase. These increases in compensation and benefits expenses were partially offset by a $337,000 decline in such expenses at our insurance operations. For such periods, telephone expense increased $113,000, or 32.0%, for the nine months ended September 30, 2000 compared to the same period of 1999 due to telephone costs associated - 17 - with the increased marketing efforts at our insurance and mutual fund administration operations and the roll-out of our wide-area network. Equipment rental and maintenance expense increased $131,000, or 28.3%, for such periods due to the start-up of Unified Banking Company and expansion of activities at Unified Trust Company, National Association. For such periods, depreciation and amortization expense increased $116,000, or 18.6%, due to the depreciation and amortization expense associated with equipment purchased by Unified Banking Company in connection with its commencement of business. Our provision for bad debt increased $555,000, or 3,952.3%, between such periods due to a reserve made for doubtful receivables generated by our fund administration services operations. Our provision for loan loss for the nine months ended September 30, 2000 was $197,000 (without a corresponding expense for the same period of 1999). Other operating expenses declined $1,037,000, or 44.5%, due to a $1,118,000 benefit received by us during the nine months ended September 30, 2000 in connection with the construction and development of the VSX marketplace and its corresponding products, with no corresponding benefit included for the same period of 1999. Net loss for the nine months ended September 30, 2000 was $1,365,000 compared with a net loss of $484,000 for the same period of 1999. For the nine months ended September 30, 2000, the 12.6% increase in revenues compared to the same period of 1999 was offset by the 15.6% increase in expenses for such periods, as described above. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 Revenues for the quarter ended September 30, 2000 compared to the same quarter of 1999 increased $871,000, or 12.7%, from $6,881,000 to $7,752,000. For such quarters, trust and retirement services revenues declined $34,000, or 6.5%, mutual fund administration revenues increased $522,000, or 71.0%, banking revenues increased $652,000, or 511.8%, insurance revenues increased $811,000, or 29.4%, brokerage revenues declined $509,000, or 54.1%, investment advisory revenues declined $268,000, or 18.7%, and corporate and discontinued operations revenues declined $303,000, or 83.6%. The reasons underlying the variations in revenues 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 third quarter of 1999, our insurance revenues increased $1,124,000, or 45.9%, for the third quarter of 2000 compared to the third quarter of 1999. Gross profit increased $334,000, or 6.8%, from $4,938,000 for the third quarter of 1999 to $5,272,000 for the third quarter of 2000. For such periods, gross profit as a percentage of revenue declined to 68.0% from 71.8%. For the quarter ended September 30, 2000 compared to the same quarter of 1999, trust and retirement services gross profit increased $9,000, or 2.3%, mutual fund administration services gross profit increased $332,000, or 53.6%, banking gross profit increased $372,000, or 292.2%, insurance gross profit increased $525,000, or 32.5%, brokerage gross profit declined $399,000, or 76.5%, investment advisory gross profit declined $254,000, or 18.6%, and corporate and discontinued operations gross profit declined $252,000, or 92.6%. 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 third quarter of 1999, our insurance gross profit increased $675,000, or 46.2%, for the third quarter of 2000 compared to the third quarter of 1999. - 18 - Income from operations for the quarter ended September 30, 2000 was $95,000 compared to a loss from operations of $373,000 for the same quarter last year. Total expenses for the quarter ended September 30, 2000 were $5,177,000, or 66.8%, of total revenue, as compared to $5,311,000, or 77.2% of total revenue, for the third 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. In addition, mail and courier service declined $49,000, or 41.6%, for the third quarter of 2000 compared to the corresponding quarter of 1999 due to a reduction in mailings from our insurance operations from three times to once a year and greater use of bulk mail. Professional fees declined $236,000, or 87.9%, for such quarters principally due to our hiring of internal legal counsel. Other operating expenses for the third quarter of 2000 included a $1,118,000 benefit received by us in connection with the construction and development of the VSX marketplace and its corresponding products with no corresponding benefit included in the third quarter of 1999. Total other income was a loss of $94,000 for the quarter ended September 30, 2000 compared to a loss of $88,000 for the third quarter of 1999. Unrealized loss on securities of $4,000 for the third quarter of 2000 compared to an unrealized loss of $33,000 during the third quarter of 1999. Equity in results of affiliates reflected a loss of $54,000 during the third quarter of 1999 and $0 for the same quarter of 2000. Net income was $177 for the third quarter of 2000 compared with a net loss of $483,000 for the third quarter of 1999. The improvement in income for the quarter ended September 30, 2000 compared to the same quarter of 1999 was a result of the 12.7% increase in revenues coupled with the minor reduction 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 September 30, 2000 from December 31, 1999 was $209,695. The net decrease reflected the repayment of borrowings, the purchase of fixed assets and a decline in accounts payable. We received $67,200 from the issuance of 1,680 shares of common stock in our private placement during the three months ended September 30, 2000. We also received $1,118,000 from VSX Holdings, LLC during the nine months ended September 30, 2000 in connection with services we provided relating to the construction and development of the VSX marketplace and its corresponding products. 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 8.0%. As of September 30, 2000, Unified Banking Company had a ratio of Tier 1 capital to total assets equal to 20.7%. 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 area. We have utilized, and expect to continue to utilize, Federal Home Loan Bank borrowings to fund a portion of future loan growth. - 19 - Unified Banking Company experienced net growth in assets of 120.31% during the first nine months of 2000, while deposits increased 213.7% 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 $13,650,586 at September 30, 2000 compared to $14,577,987 at year-end 1999. The decline in total equity was due to our loss from operations for the nine-months ended September 30, 2000, partially offset by the issuance of 11,530 shares of our common stock in our recently completed private placement. The growth of Unified Banking Company will have an effect on our working capital. It currently is anticipated that as Unified Banking Company grows, our working capital ratio will become more in line with ratios traditionally associated with bank holding companies. Certain outstanding bank loans of our company are due in the first quarter of 2001. Currently, we believe that we will be able to refinance such loans on terms favorable to us. However, in the event we are unable to refinance such loans, we would be required to seek other sources of funding to satisfy such obligations. There can be no assurance that such other sources of funding will be available or available on terms favorable to our company. 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 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. - 20 - 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 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. - 21 - 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 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 stockholders. 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. - 22 - Continued growth also will require us to hire more personnel, and expand management information systems. Recruiting qualified personnel is an intensely competitive and time-consuming process. There can be no assurance that we will be able to attract and retain the necessary personnel to accomplish our growth strategies or that we will not experience constraints that will adversely affect our ability to support satisfactorily our clients and operations. There can be no assurance that we will be able to attract, manage and retain additional personnel to support any future growth, if any, or will not experience significant problems with respect to any infrastructure expansion or the attempted implementation of systems, procedures and controls. If our management is unable to manage growth effectively, our business, financial condition and results of operations could be materially adversely affected. DEPENDENCE UPON TECHNOLOGY; PROPRIETARY RIGHTS. Our success and ability to compete is dependent in part upon our technology, although we believe that our success is more dependent upon our technical expertise than our proprietary rights. We principally rely upon a combination of copyright, trademark and trade secret laws and contractual restrictions to protect our proprietary technology. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization or to develop similar technology independently, and there can be no assurance that such measures have been, or will be, adequate to protect our proprietary technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. We propose to operate a substantial portion of our business over the Internet, which is subject to a variety of risks. Such risks include, but are not limited to, the substantial uncertainties that exist regarding the system for assigning domain names and the status of private rules for resolution of disputes regarding rights to domain names. There can be no assurance that we will continue to be able to employ our current domain names in the future or that the loss of rights to one or more domain names will not have a material adverse effect on our business and results of operations. Although we do not believe that we infringe the proprietary rights of any third parties, there can be no assurance that third parties will not assert such claims against us in the future or that such claims will not be successful. We could incur substantial costs and diversion of management resources with respect to the defense of any claims relating to proprietary rights, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we may become obligated under certain agreements to indemnify another party in connection with infringement by us of the proprietary rights of third parties. In the event we are required to indemnify parties under these agreements, it could have a material adverse effect on our business, financial condition and results of operations. In the event a claim relating to proprietary technology or information is asserted against us, we may seek licenses to such intellectual property. There can be no assurance, however, that licenses could be obtained on commercially reasonable terms, if at all, or that the terms of any offered licenses 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. - 23 - Our failure to adequately manage service disruptions resulting from physical damage to our network or breaches of the network's integrity, could have a material adverse effect on our business, financial condition and results of operations. SECURITY RISKS. Despite the implementation of network security measures by us, such as limiting physical and network access to our routers, our Internet access systems and information services are vulnerable to computer viruses, break-ins and similar disruptive problems caused by our customers or other Internet users. Such problems caused by third parties could lead to interruption, delays or cessation in service to our customers. Furthermore, such inappropriate use of the Internet by third parties also could potentially jeopardize the security of confidential information stored in the computer systems of our customers and other parties connected to the Internet, which may deter potential subscribers. Persistent security problems continue to plague public and private data networks. Recent break-ins reported in the press and otherwise have reached computers connected to the Internet at major corporations and Internet access providers and have involved the theft of information, including incidents in which hackers bypassed firewalls by posing as trusted computers. Alleviating problems caused by computer viruses, break-ins or other problems caused by third parties may require significant expenditures of capital and resources by us, which could have a material adverse effect on us. Until more comprehensive security technologies are developed, the security and privacy concerns of existing and potential customers may inhibit the growth of the Internet service industry in general and our customer base and revenues in particular. Moreover, if we experience a breach of network security or privacy, there can be no assurance that our customers will not assert or threaten claims against us based on or arising out of such breach, or that any such claims will not be upheld, which could have a material adverse effect on our business, financial condition and results of operation. 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 our company. We manage these risks through the establishment of numerous policies, procedures and controls. The most significant risks that affect us are market risk and credit risk. Market risk is the risk of loss to us resulting from changes in interest rates, equity prices or both. We are exposed to market risk since we, through our subsidiaries, maintain positions in fixed-income and equity securities. We primarily manage our risk through the establishment of trading policies and guidelines and through the implementation of control and review procedures. - 24 - 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 September 30, 2000:
TIME TO MATURITY OR REPRICING 0 TO 1 1 TO 2 2 TO 3 3 TO 6 (DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS --------- ------ ------ ------ ------ RATE SENSITIVE ASSETS Securities U. S. agencies ........................ $ -- $186 $ 184 $181 $ 527 FHLB stock ............................ 100 -- -- -- -- ------- ---- ------ ---- ------ Total securities .................... 100 186 184 181 527 ------- ---- ------ ---- ------ Loans Commercial Fixed ............................... -- 14 14 14 42 Variable ............................ 2,700 -- -- -- -- ------- ---- ------ ---- ------ Total commercial .................. 2,700 14 14 14 42 ------- ---- ------ ---- ------ Real Estate Commercial .......................... -- 11 11 11 34 ------- ---- ------ ---- ------ Residential Fixed ............................. -- 11 11 11 33 Variable .......................... -- -- -- -- 50 ------- ---- ------ ---- ------ Total residential ............... -- 11 11 11 83 ------- ---- ------ ---- ------ Total real estate ............ -- 22 22 22 117 ------- ---- ------ ---- ------ Personal Home equity loans ................... 2,785 -- -- -- -- Installment loans ................... -- 7 817 46 230 Personal open end letters of credit . -- -- -- 293 557 ------- ---- ------ ---- ------ Total personal .................... 2,785 7 817 339 787 ------- ---- ------ ---- ------ Other loans ........................... 425 -- -- -- -- ------- ---- ------ ---- ------ Total loans ............................. 5,910 43 853 375 946 ------- ---- ------ ---- ------ TOTAL RATE SENSITIVE ASSETS ........... $ 6,010 $229 $1,036 $556 $1,473 ======= ==== ====== ==== ====== RATE SENSITIVE LIABILITIES Interest bearing deposits NOW accounts .......................... $ 695 $ -- $ -- $ -- $ -- ------- ---- ------ ---- ------ Money market accounts Market rate accounts ................ 1,950 -- -- -- -- Business market rate accounts ....... 2,632 -- -- -- -- Special personal MMDA ............... 628 -- -- -- -- Special business MMDA ............... 5,547 -- -- -- -- ------- ---- ------ ---- ------ Total money market accounts ....... 10,757 -- -- -- -- ------- ---- ------ ---- ------ Savings ............................... 52 -- -- -- -- ------- ---- ------ ---- ------ Time deposits CD's greater than 100K .............. -- -- -- 508 3,938 CD's less than 100K ................. -- -- 271 179 246 ------- ---- ------ ---- ------ Total time deposits ............... -- -- 271 687 4,184 ------- ---- ------ ---- ------ Individual retirement accounts ...... -- -- -- -- 8 ------- ---- ------ ---- ------ Total interest bearing deposits ... 11,504 -- 271 687 4,192 ------- ---- ------ ---- ------ Borrowed funds (repurchase agreements) .. -- 901 -- -- -- ------- ---- ------ ---- ------ TOTAL RATE SENSITIVE LIABILITIES ...... $12,981 $901 $ 271 $687 $4,192 ======= ==== ====== ==== ====== TIME TO MATURITY OR REPRICING 6 TO 9 9 TO 12 12 TO 48 48 TO 54 GREATER THAN (DOLLARS IN THOUSANDS) MONTHS MONTHS MONTHS MONTHS 54 MONTHS TOTALS ------ ------ ------ ------ --------- ------ RATE SENSITIVE ASSETS Securities U. S. agencies ........................ $ 506 $ 484 $4,391 $270 $4,335 $11,064 FHLB stock ............................ -- -- -- -- -- 100 ------ ------ ------ ---- ------ ------- Total securities .................... 506 484 4,391 270 4,335 11,164 ------ ------ ------ ---- ------ ------- Loans Commercial Fixed ............................... 213 42 562 153 120 1,174 Variable ............................ -- -- -- -- -- 2,700 ------ ------ ------ ---- ------ ------- Total commercial .................. 213 42 562 153 120 3,874 ------ ------ ------ ---- ------ ------- Real Estate Commercial .......................... 2,012 94 1,458 136 1,777 5,544 ------ ------ ------ ---- ------ ------- Residential Fixed ............................. 30 271 310 232 426 1,335 Variable .......................... 890 712 -- -- -- 1,652 ------ ------ ------ ---- ------ ------- Total residential ............... 920 983 310 232 426 2,987 ------ ------ ------ ---- ------ ------- Total real estate ............ 2,932 1,077 1,768 368 2,203 8,531 ------ ------ ------ ---- ------ ------- Personal Home equity loans ................... -- -- -- -- -- 2,785 Installment loans ................... 191 97 191 17 10 1,605 Personal open end letters of credit . 13 292 -- -- -- 1,155 ------ ------ ------ ---- ------ ------- Total personal .................... 204 389 191 17 10 5,545 ------ ------ ------ ---- ------ ------- Other loans ........................... -- -- -- -- -- 425 ------ ------ ------ ---- ------ ------- Total loans ............................. 3,349 1,508 2,521 538 2,333 18,375 ------ ------ ------ ---- ------ ------- TOTAL RATE SENSITIVE ASSETS ........... $3,856 $1,992 $6,913 $807 $6,668 $29,539 ====== ====== ====== ==== ====== ======= RATE SENSITIVE LIABILITIES Interest bearing deposits NOW accounts .......................... $ -- $ -- $ -- $ -- $ -- $ 695 ------ ------ ------ ---- ------ ------- Money market accounts Market rate accounts ................ -- -- -- -- -- 1,950 Business market rate accounts ....... -- -- -- -- -- 2,632 Special personal MMDA ............... -- -- -- -- -- 628 Special business MMDA ............... -- -- -- -- -- 5,547 ------ ------ ------ ---- ------ ------- Total money market accounts ....... -- -- -- -- -- 10,757 ------ ------ ------ ---- ------ ------- Savings ............................... -- -- -- -- -- 52 ------ ------ ------ ---- ------ ------- Time deposits CD's greater than 100K .............. 684 300 356 -- 100 5,885 CD's less than 100K ................. 214 379 632 -- 122 2,042 ------ ------ ------ ---- ------ ------- Total time deposits ............... 898 679 988 -- 222 7,927 ------ ------ ------ ---- ------ ------- Individual retirement accounts ...... 12 233 35 223 223 734 ------ ------ ------ ---- ------ ------- Total interest bearing deposits ... 910 912 1,023 223 445 20,165 ------ ------ ------ ---- ------ ------- Borrowed funds (repurchase agreements) .. -- -- -- -- -- 901 ------ ------ ------ ---- ------ ------- TOTAL RATE SENSITIVE LIABILITIES ...... $ 910 $ 912 $1,023 $223 $ 445 $22,543 ====== ====== ====== ==== ====== ======= - 26 - TIME TO MATURITY OR REPRICING 0 TO 1 1 TO 2 2 TO 3 3 TO 6 (DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS --------- ------ ------ ------ ------ INCREMENTAL GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $ 6,010 $ 229 $ 1,036 $ 556 $ 1,473 Total rate sensitive liabilities ...... 12,981 901 271 687 4,192 Gap ................................... (6,971) (672) 765 (131) (2,720) RSA/RSL ............................... 0.46% 0.25% 3.83% 0.81% 0.35% RSA/assets ............................ 0.19 0.01 0.03 0.02 0.05 RSL/assets ............................ 0.41 0.03 0.01 0.02 0.13 Gap/assets ............................ -22.00 -2.12 2.42 -0.41 -8.58 Gap/RSA ............................... -115.99 293.55 73.86 -23.63 -184.67 CUMULATIVE GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $ 6,010 $ 6,239 $ 7,275 $ 7,831 $ 9,303 Total rate sensitive liabilities ...... 12,981 13,882 14,153 14,840 19,032 Gap ................................... (6,971) (7,643) (6,878) (7,009) (9,728) RSA/RSL ............................... 0.46% 0.45% 0.51% 0.53% 0.49% RSA/assets ............................ 0.19 0.20 0.23 0.25 0.29 RSL/assets ............................ 0.41 0.44 0.45 0.47 0.60 Gap/assets ............................ -22.00 -24.12 -21.71 -22.12 -30.70 Gap/RSA ............................... -115.99 -122.51 -94.54 -89.51 -104.57 TIME TO MATURITY OR REPRICING 6 TO 9 9 TO 12 12 TO 48 48 TO 54 GREATER THAN (DOLLARS IN THOUSANDS) MONTHS MONTHS MONTHS MONTHS 54 MONTHS ------ ------ ------ ------ --------- INCREMENTAL GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $ 3,856 $ 1,992 $ 6,913 $ 807 $ 6,668 Total rate sensitive liabilities ...... 910 912 1,023 223 445 Gap ................................... 2,946 1,080 5,890 585 6,223 RSA/RSL ............................... 4.24% 2.18% 6.76% 3.63% 14.98% RSA/assets ............................ 0.12 0.06 0.22 0.03 0.21 RSL/assets ............................ 0.03 0.03 0.03 0.01 0.01 Gap/assets ............................ 9.30 3.41 18.59 1.85 19.64 Gap/RSA ............................... 76.41 54.22 85.21 72.44 93.33 CUMULATIVE GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $ 13,159 $ 15,151 $ 22,064 $ 22,872 $ 29,539 Total rate sensitive liabilities ...... 19,941 20,853 21,876 22,098 22,543 Gap ................................... (6,782) (5,702) 188 773 6,996 RSA/RSL ............................... 0.66% 0.73% 1.01% 1.03% 1.31% RSA/assets ............................ 0.42 0.48 0.70 0.72 0.93 RSL/assets ............................ 0.63 0.66 0.69 0.70 0.71 Gap/assets ............................ -21.41 -18.00 0.59 2.44 22.08 Gap/RSA ............................... -51.54 -37.64 0.85 3.38 23.68
- 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 14.63% 20.76% -300 10.89 17.42 -200 7.47 14.00 -100 3.78 7.74 0 0.00 0.00 100 -3.91 -7.96 200 -7.53 -15.61 300 -11.27 -23.17 400 -15.07 -30.12
We use a sensitivity model that simulated these interest rate changes on our earning assets and interest-bearing liabilities. This process allows us to explore the complex relationships among the financial instruments in various interest rate environments. The preceding sensitivity analysis is based on numerous assumptions including: the nature and timing of interest rate levels including the shape of the yield curve; prepayments on loans and securities; changes in deposit levels; pricing decisions on loans and deposits; reinvestment/replacement of asset and liability cash flows; and others. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how client preferences or competitor influences might change. Interest rate exposure is measured by the potential impact on our income statement of changes in interest rates. We use information from our gap analysis and rate shock calculations as input to help manage our exposure to changing interest rates. - 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 September 30, 2000, the only sale of our securities was 1,680 shares of our common stock issued by us in connection with our private placement at a price of $40.00 per share. All shares of stock issued by us during such period were issued pursuant to the exemption provided by Rule 506, as promulgated by the Securities and Exchange Commission. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index attached hereto. (b) Reports on Form 8-K. We did not file any Current Reports on Form 8-K during the quarter ended September 30, 2000. - 30 - SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIFIED FINANCIAL SERVICES, INC. (Registrant) Dated: November 1, 2000 By: /s/ Timothy L. Ashburn ------------------------------------------ Timothy L. Ashburn, Chairman and Chief Executive Officer Dated: November 1, 2000 By: /s/ Thomas G. Napurano ------------------------------------------ Thomas G. Napurano, Executive Vice President and Chief Financial Officer - 31 - EXHIBIT INDEX Ex. No. Description ------- ----------- 11.1 Computations of Earnings per Share. 27.1 Financial Data Schedule (September 30, 2000). - 32 -