-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NyN2QnhKFb6HCc6CXxjq9RjQYlrhXSOqjdJpT9bhCaTBQed5LU+GFaYqOlHLmE0B OIwUW9kowQu34Y3SRR2VoQ== 0001068800-01-500206.txt : 20010810 0001068800-01-500206.hdr.sgml : 20010810 ACCESSION NUMBER: 0001068800-01-500206 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFIED FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0001033926 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 351797759 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22629 FILM NUMBER: 1701850 BUSINESS ADDRESS: STREET 1: 431 N PENNSYLVANIA ST. CITY: INDIANAPOLIS STATE: IN ZIP: 46204-1873 BUSINESS PHONE: 3179177001 MAIL ADDRESS: STREET 1: 431 N PENNSYLVANIA ST CITY: INDIANAPOLIS STATE: IN ZIP: 46204-1873 FORMER COMPANY: FORMER CONFORMED NAME: UNIFIED HOLDINGS INC DATE OF NAME CHANGE: 19970218 10-Q 1 uni10q.txt UNIFIED FINANCIAL SERVICES, INC. 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 JUNE 30, 2001 ------------------------------------------------- Commission file number 0-22629 --------------------------------------------------------- UNIFIED FINANCIAL SERVICES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 35-1797759 - ---------------------------------- ------------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2424 HARRODSBURG ROAD LEXINGTON, KENTUCKY 40503 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (859) 296-2016 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes | | No Number of shares Title of class outstanding as of August 8, 2001 - -------------------------------------- ------------------------------------ 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 - June 30, 2001 (Unaudited) and December 31, 2000...............................................................................1 Consolidated Statements of Operations (Unaudited) - Six and Three Months Ended June 30, 2001 and 2000..........................................................................3 Consolidated Statements of Comprehensive Income (Unaudited) - Six and Three Months Ended June 30, 2001 and 2000....................................................................4 Consolidated Statements of Cash Flow (Unaudited) - Six Months Ended June 30, 2001 and 2000............................................................................................5 Notes to Consolidated Financial Statements......................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................................................13 Cautionary Statement Regarding Forward-Looking Statements......................................13 General........................................................................................13 Comparison of Results for the Six Months Ended June 30, 2001 and 2000..........................14 Comparison of Results for the Three Months Ended June 30, 2001 and 2000........................16 Liquidity and Capital Resources................................................................18 Risk Factors...................................................................................19 Item 3. Quantitative and Qualitative Disclosure About Market Risk......................................23 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...............................................................28 SIGNATURES.......................................................................................................29 EXHIBIT INDEX....................................................................................................30
- i - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS ------ JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Current Assets Cash and cash equivalents ........................ $ 4,337,444 $ 5,582,098 Due from banks ................................... 803,885 1,162,639 Federal funds sold ............................... 1,217,000 7,667,000 Bond investments ................................. 29,024,536 10,841,435 Investments in affiliated mutual funds ........... 104 -- Investments in securities and non-affiliated mutual funds ................................... 591,344 573,272 Loans (net of allowance for loan losses of $360,000 for 2001 and $305,000 for 2000) ....... 33,221,368 20,834,674 Accounts receivable (net of allowance for doubtful accounts of $695,817 for 2001 and $500,042 for 2000) ............................. 14,106,384 13,086,031 Prepaid assets and deposits ...................... 290,336 297,270 Deferred tax asset ............................... -- 80,037 ----------- ----------- Total current assets ......................... 83,592,401 60,124,456 ----------- ----------- Fixed Assets, at cost Equipment and furniture (net of accumulated depreciation of $4,648,556 for 2001 and $4,250,692 for 2000) ........................... 3,551,129 3,500,020 ----------- ----------- Total fixed assets ........................... 3,551,129 3,500,020 ----------- ----------- Non-Current Assets Investment in affiliates ......................... 1,010 10 Organization cost (net of accumulated amortization of $230,609 for 2001 and $164,227 for 2000) .... 442,543 508,925 Goodwill (net of accumulated amortization of $295,573 for 2001 and $243,414 for 2000) ...... 1,058,221 1,110,380 Other non-current assets ......................... 510,131 391,136 ----------- ----------- Total non-current assets ..................... 2,011,905 2,010,451 ----------- ----------- TOTAL ASSETS ............................ $89,155,435 $65,634,927 =========== =========== (Continued on next page) See accompanying notes. - 1 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Current Liabilities: Current portion of capital lease obligations . $ 1,622 $ 7,884 Current portion of bank borrowings ........... 1,719,270 1,944,662 Borrowed funds ............................... 2,000 1,143,000 Bank line of credit .......................... 1,164,912 1,668,626 Deposits ..................................... 59,449,456 34,620,338 Accounts payable and accrued expenses ........ 1,477,235 2,508,776 Accrued compensation and benefits ............ 393,428 440,472 Payable to insurance companies ............... 9,224,430 8,016,752 Payable to broker-dealers .................... 249,996 172,374 Income taxes payable, current ................ 95,935 -- Deferred income taxes ........................ -- 14,308 Other liabilities ............................ 1,110,046 827,328 ----------- ----------- Total current liabilities ................ 74,888,330 51,364,520 ----------- ----------- Long-Term Liabilities Long-term portion of capital lease obligations 813 1,049 Long-term portion of borrowings .............. 330,331 342,339 Other long-term liabilities .................. 126,579 92,553 ----------- ----------- Total long-term liabilities .............. 457,723 435,941 ----------- ----------- Total liabilities ................... 75,346,053 51,800,461 ----------- ----------- Commitments and Contingencies ..................... -- -- ----------- ----------- Stockholders' Equity Common stock, par value $.01 per share ....... 33,300 33,300 Additional paid-in capital ................... 16,259,091 16,259,091 Retained deficit ............................. (2,732,262) (2,628,248) Accumulated other comprehensive income ....... 249,253 170,323 ----------- ----------- Total stockholders' equity .......... 13,809,382 13,834,466 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $89,155,435 $65,634,927 =========== =========== See accompanying notes.
- 2 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ -------------------------- 2001 2000 2001 2000 ------------ ------------ ----------- ----------- REVENUE: Gross revenue (see note 12)................. $ 16,198,044 $ 13,868,557 $ 8,043,201 $ 7,092,406 ------------ ------------ ------------ ----------- Total gross revenue................... 16,198,044 13,868,557 8,043,201 7,092,406 ------------ ------------ ------------ ----------- COST OF SALES: Cost of sales (see note 12)................. 4,193,054 4,104,785 2,070,934 1,989,564 ------------ ------------ ------------ ----------- Total cost of sales................... 4,193,054 4,104,785 2,070,934 1,989,564 ------------ ------------ ------------ ----------- Gross profit (see note 12)............ 12,004,990 9,763,772 5,972,267 5,102,842 ------------ ------------ ------------ ----------- EXPENSES: Employee compensation and benefits.......... 7,539,712 5,919,254 4,056,185 2,861,607 Mail and courier............................ 243,607 291,794 126,155 137,122 Telephone................................... 346,372 292,354 154,934 154,889 Equipment rental and maintenance............ 340,951 282,014 183,805 152,119 Occupancy................................... 620,720 462,003 311,573 225,492 Depreciation and amortization............... 572,891 471,093 292,566 241,653 Professional fees........................... 669,270 800,342 260,534 208,140 Interest.................................... 152,144 230,382 77,071 102,818 Provision for bad debt...................... 224,539 381,899 117,805 357,008 Provision for loan losses................... 55,000 127,000 15,000 65,000 Business development costs.................. 50,669 28,132 40,237 13,896 Other operating expenses (see note 14)...... 1,275,808 1,399,317 671,233 534,598 ------------ ------------ ------------ ----------- Total expenses........................ 12,091,683 10,685,584 6,307,098 5,054,342 ------------ ------------ ------------ ----------- Income (loss) from operations.................... (86,693) (921,812) (334,831) 48,500 ------------ ------------ ------------ ----------- OTHER INCOME (LOSS) Unrealized gain (loss) on securities........ 2,184 (10,231) 34,708 (15,191) Realized gain (loss) on securities.......... (10,470) 10,491 (10,447) (4,347) Gain on sale/disposal of fixed assets....... 15,965 2,316 15,965 2,752 ------------ ------------ ------------ ----------- Total other income (loss)............. 7,679 2,576 40,226 (16,786) ------------ ------------ ------------ ----------- Income (loss) before discontinued operations..... (79,014) (924,388) (294,605) 31,714 Loss from discontinued operations................ -- (415,821) -- (162,835) Income taxes..................................... (25,000) (24,525) (12,065) (11,915) ------------ ------------ ------------ ----------- Net loss......................................... $ (104,014) $ (1,364,734) $ (306,670) $ (143,036) ============ ============ ============ =========== Per share earnings Basic common shares outstanding............. 2,880,028 2,879,712 2,880,028 2,879,712 Net income (loss) before discontinued operations - basic......... $ (0.04) $ (0.32) $ (0.11) $ 0.01 Net loss - basic............................ (0.04) (0.47) (0.11) (0.05) Fully diluted common shares outstanding..... 3,042,864 3,049,559 3,042,864 3,049,559 Net income (loss) before discontinued operations - fully diluted. $ (0.03) $ (0.30) $ (0.10) $ 0.01 Net loss - fully diluted.................... (0.03) (0.45) (0.10) (0.05) See accompanying notes.
- 3 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ --------------------------- 2001 2000 2001 2000 ------------ ----------- ----------- ------------ Net loss........................................ $ (104,014) $ (1,364,734) $ (306,670) $ (143,036) Other comprehensive income, net of tax Unrealized gain on securities, net of reclassification adjustment............ 78,929 31,625 23,793 80,822 ----------- ------------- ----------- ----------- Comprehensive loss.............................. $ (25,085) $ (1,333,109) $ (282,877) $ (62,214) =========== ============= =========== =========== See accompanying notes.
- 4 - UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------------- 2001 2000 ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES Net loss ................................................ $ (104,014) $ (1,364,734) Adjustments to reconcile net income to cash provided by operating activities: Income taxes payable ............................... 95,935 (121,555) Deferred income taxes .............................. 65,729 (57,521) Provision for depreciation and amortization ........ 572,891 482,716 Provision for loan losses .......................... 55,000 127,000 Provision for bad debt ............................. 224,539 410,324 Write-off of bad debt .............................. (28,764) -- Amortization of bond discount ...................... (11,910) -- Change in market value of securities ............... 117,404 (10,231) Comprehensive income ............................... 78,930 -- Loss on disposal of fixed assets ................... 15,965 99,100 Loss on sale of securities ......................... 10,470 9,791 (Increase) decrease in operating assets Receivables ..................................... (1,216,128) (914,400) Loans made to customers, net of repayments ...... (12,441,694) (9,969,056) Prepaid and sundry assets ....................... 6,934 39,563 Other non-current assets ........................ (118,995) 120,987 Increase (decrease) in operating liabilities Deposits ........................................ 24,829,118 13,819,614 Accounts payable and accrued expenses ........... 253,759 18,889 Accrued compensation and benefits ............... (47,044) (117,289) Other liabilities ............................... 316,745 425,719 ------------ ------------ Net cash provided by operating activities ............. 12,674,870 2,998,917 ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES Purchase of equipment ................................... (521,424) (411,483) Due from banks .......................................... 358,754 (296,199) Federal funds sold/purchased ............................ 6,450,000 2,947,000 Bond investments ........................................ (18,290,780) 5,515,156 Borrowed funds sold under agreement to repurchase ....... (1,141,000) -- Proceeds from sale of fixed assets ...................... -- 80 Proceeds from sale of debt securities ................... 65,862 181,066 Investment in affiliated mutual funds ................... (100) (112,137) Investment in affiliate ................................. (1,000) (10) Investments in securities and non-affiliated mutual funds (92,224) (11,665,093) ------------ ------------ Net cash used in investing activities ................. (13,171,912) (3,841,620) ------------ ------------ CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of common stock .................. -- 6,400 Proceeds from issuance of treasury stock ................ -- 362,099 Proceeds from borrowings ................................ -- 239,525 Proceeds from bank line of credit ....................... 905,000 322,970 Repayment of borrowings ................................. (1,646,113) (485,314) Repayment of capital lease obligations .................. (6,499) (23,863) ------------ ------------ Net cash provided by (used in) financing activities ... (747,612) 421,817 ------------ ------------ Net decrease in cash and cash equivalents .................. (1,244,654) (420,866) Cash and cash equivalents - beginning of year .............. 5,582,098 5,709,082 ------------ ------------ Cash and cash equivalents - end of period .................. $ 4,337,444 $ 5,288,216 ============ ============ See accompanying notes.
- 5 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 AND 2000 ---------------------- 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 six-month and three-month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2000. 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. Financial Statement Presentation -------------------------------- Certain amounts in the 2000 financial statements have been reclassified to conform to the 2001 presentation. - 6 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 AND 2000 ---------------------- 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." On April 30, 2001, all of the outstanding capital stock of Health Financial, Inc., a subsidiary of our company, was contributed to Unified Trust Company. Unified Trust Company, National Association is required by the Office of the Comptroller of the Currency to maintain minimum capital of $2.0 million. As of June 30, 2001, Unified Trust Company, National Association reported, on a consolidated basis, approximately $2.7 million of total capital. Note 4 - OPTIONS Under the terms of our stock incentive plan, employees, directors, advisers and consultants of our company and its subsidiaries are eligible to receive the following: (a) incentive stock options; (b) nonqualified stock options; (c) stock appreciation rights; (d) restricted stock; (e) restricted stock units; and (f) performance awards. As of June 30, 2001, options to acquire 102,836 shares of our common stock were outstanding and issued to certain of our employees, directors and advisers pursuant to our stock incentive plan. In addition, as of such date, our board had granted options to acquire 60,000 shares of our common stock outside of such plan. Such options have exercise prices as follows: 6,350 shares at $25.00 per share 19,186 shares at $27.50 per share 500 shares at $30.25 per share 75,800 shares at $40.00 per share 1,000 shares at $44.00 per share 60,000 shares at $50.00 per share As of June 30, 2001, 84,536 of such options were intended to qualify as incentive stock options pursuant to Section 422 of the Internal Revenue Code of 1986, as amended. Options outstanding at December 31, 2000 170,752 Options issued during period -- Options exercised during period -- Option to acquire 66,666 shares at $45.00 per share converted into option to acquire 60,000 shares at $50.00 per share (6,666) Forfeitures at $40.00 per share (1,250) -------- Options outstanding at June 30, 2001 162,836 ========
- 7 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 AND 2000 ---------------------- Note 5 - BANK BORROWINGS Bank borrowings at June 30, 2001 consisted of the following: Payable in quarterly principal installments of $100,000, beginning July 1, 2001, with final payment due April 30, 2002, secured by assignment of receivables, interest paid monthly at prime bank rate $1,700,000 Payable in monthly installments including interest at 8.25%, final payment due March 31, 2014, collateralized by equipment 343,439 Payable in monthly installments including interest at 10.4%, final payment due April 26, 2002, collateralized by equipment 6,162 ---------- Total 2,049,601 ---------- Less current maturities 1,719,270 ---------- Long-term portion $ 330,331 ==========
The $1,700,000 bank borrowing listed above represents our refinancing of existing bank indebtedness in February 2001, and was treated as a non-cash transaction. Consequently, the refinancing is not reflected in our Consolidated Statements of Cash Flow. The maturities of bank borrowings for each of the succeeding five years subsequent to June 30, 2001, were as follows: 2002 $1,722,455 2003 17,669 2004 19,162 2005 20,781 2006 22,536 Thereafter 246,998 ---------- Total $2,049,601 ==========
Note 6 - BANK LINE OF CREDIT Bank line of credit at June 30, 2001 consisted of the following:
MAXIMUM LINE LINE OF CREDIT AT OF CREDIT JUNE 30, 2001 ------------ ----------------- Secured by assignment of receivables, bears interest at prime $ 2,000,000 $ 1,120,000 Secured by other collateralized assets 50,000 44,912 ------------ ------------- Total $ 2,050,000 $ 1,164,912 ============ =============
- 8 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 AND 2000 ---------------------- Note 7 - CAPITAL LEASE OBLIGATIONS We lease both computer and office equipment under two capital leases. The first lease is due to be paid off during July 2001 and the second lease has a remaining term of approximately 24 months. The following is a summary of future minimum lease payments under capitalized lease obligations as of June 30, 2001:
YEAR ENDING JUNE 30, AMOUNT -------------------- ------ 2002 $ 1,805 2003 864 ------- 2,669 Less: amount representing interest (234) ------- Total $ 2,435 =======
Note 8 - RENTAL AND LEASE INFORMATION We lease certain office facilities and equipment. Rental expense for the six months ended June 30, 2001 and 2000 were $620,720 and $462,003, respectively. At June 30, 2001, we were committed to minimal rental payments under certain noncancellable operating leases. As of June 30, 2001, the minimum future rental commitments for each of the succeeding five years subsequent to June 30, 2001 were as follows: 2002 $1,223,923 2003 556,806 2004 482,855 2005 430,043 2006 418,721 Thereafter 1,171,433 ---------- Total $4,283,781 ==========
Note 9 - COMMITMENTS AND CONTINGENCIES We are a party to various lawsuits, claims and other legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, all such matters are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on our financial position or results of operations. Note 10 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL REQUIREMENTS Unified Financial Securities is subject to the Securities and Exchange Commission's Uniform Net Capital Rule, which requires the maintenance of minimum net capital, as defined, of the greater of (i) 6-2/3% of aggregate indebtedness or (ii) $50,000, and a ratio of aggregate indebtedness to net capital of not more than 15 to 1. At June 30, 2001, the net capital and ratio of aggregate indebtedness for Unified Financial Securities were $151,983 and 1.76 to 1, respectively. - 9 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 AND 2000 ---------------------- Note 10 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL REQUIREMENTS (continued) Pursuant to Rule 15c3-3 as promulgated by the Securities and Exchange Commission, Unified Financial Securities calculates its reserve requirement and segregates cash and/or securities for the exclusive benefit of its customers on a periodic basis. The reserve requirement for Unified Financial Securities was $0 at June 30, 2001. Balances segregated in excess of reserve requirements are not restricted. Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair value of our financial instruments at June 30, 2001 and 2000. Financial Accounting Standards Board Statement No. 107, "Disclosures About Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
JUNE 30, ------------------------------------------------------- 2001 2000 ------------------------- ----------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (IN THOUSANDS) Financial assets: Cash and cash equivalents $ 4,337 $ 4,337 $ 5,288 $ 5,288 Due from banks 804 804 611 611 Federal funds sold 1,217 1,217 1,975 1,975 Bond investments 29,025 29,025 -- -- Securities and mutual funds 591 591 12,506 12,506 Loans 33,221 33,221 12,653 12,653 Receivables (trade) 14,106 14,106 10,109 10,109 Prepaid and sundry 290 290 860 860 Financial liabilities: Current liabilities 73,167 73,167 33,732 33,732 Capital lease obligation 2 2 15 15 Long-term debt 2,049 2,049 2,373 2,373
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 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 revenue, gross profit, total assets, depreciation and amortization and capital expenditures were as follows as of or for the six or three months ended June 30, 2001 and 2000: - 10 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 AND 2000 ---------------------- Note 12 - DISCLOSURES ABOUT REPORTING SEGMENTS (continued)
AS OF OR FOR THE FOR THE SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenue: Trust and retirement.......................... $ 2,403,771 $ 2,213,911 $ 1,299,058 $ 1,120,347 Mutual fund administration.................... 2,667,299 2,161,353 1,260,875 1,098,878 Banking....................................... 921,645 699,379 488,002 394,670 Insurance..................................... 7,417,373 5,667,788 3,616,829 3,092,513 Brokerage..................................... 1,448,162 1,913,626 722,114 797,500 Investment advisory........................... 1,006,091 950,654 538,158 494,236 Corporate..................................... 333,703 261,846 118,165 94,262 ----------- ----------- ----------- ----------- Total.................................... $16,198,044 $13,868,557 $ 8,043,201 $ 7,092,406 =========== =========== =========== =========== Gross profit: Trust and retirement.......................... $ 2,402,721 $ 2,068,343 $ 1,298,008 $ 1,052,805 Mutual fund administration.................... 2,189,890 1,748,642 1,036,667 892,132 Banking....................................... 921,645 699,379 488,002 394,670 Insurance..................................... 4,713,748 3,242,645 2,282,326 1,803,820 Brokerage..................................... 559,780 816,073 289,745 377,360 Investment advisory........................... 915,559 928,257 474,044 473,566 Corporate..................................... 301,647 260,433 103,475 108,489 ----------- ----------- ----------- ----------- Total.................................... $12,004,990 $ 9,763,772 $ 5,972,267 $ 5,102,842 =========== =========== =========== =========== Total assets: Trust and retirement.......................... $ 3,315,092 $ 3,956,408 Mutual fund administration.................... 1,960,115 2,049,077 Banking....................................... 68,429,844 30,501,032 Insurance..................................... 11,147,150 7,589,525 Brokerage..................................... 642,818 1,615,309 Investment advisory........................... 1,651,364 1,947,723 Corporate..................................... 2,009,052 2,089,673 ----------- ----------- Total.................................... $89,155,435 $49,748,747 =========== =========== Depreciation and amortization: Trust and retirement.......................... $ 66,831 $ 37,452 Mutual fund administration.................... 49,007 38,405 Banking....................................... 75,020 83,458 Insurance..................................... 112,373 66,694 Brokerage..................................... 15,381 17,059 Investment advisory........................... 68,036 69,749 Corporate..................................... 186,243 158,276 ----------- ----------- Total.................................... $ 572,891 $ 471,093 =========== =========== Capital expenditures: Trust and retirement.......................... $ 131,329 $ 79,637 Mutual fund administration.................... 14,562 22,132 Banking....................................... 51,481 99,938 Insurance..................................... 191,395 62,135 Brokerage..................................... 8,216 3,165 Investment advisory........................... 2,710 -- Corporate..................................... 121,731 144,476 ----------- ----------- Total.................................... $ 521,424 $ 411,483 =========== ===========
- 11 - UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 AND 2000 ---------------------- Note 13 - UNIFIED BANKING COMPANY ASSETS AND LIABILITIES Unified Banking Company commenced operations on November 1, 1999. Included in our consolidated financial statements at June 30, 2001 and 2000 were the bank's total assets of $65,896,893 and $28,061,299, respectively, and total liabilities of $59,781,675 and $21,368,430, respectively. As of such dates, certain components of such assets and liabilities were as follows:
JUNE 30, ---------------------------- 2001 2000 ----------- ----------- Due from banks $ 803,885 $ 611,014 Investments in securities: US agency securities 29,024,536 11,552,054 FHLB stock 189,600 100,000 Loans: Real estate loans 20,410,356 8,256,693 Commercial loans 8,019,113 2,841,773 Installment loans 5,184,654 1,760,660 Other loans 62,742 3,807 Allowance for loan losses 360,000 160,000 Bank deposits: Demand deposits 6,557,078 2,239,355 Official checks 141,183 103,192 NOW accounts 1,005,774 340,643 Money market accounts 7,930,178 11,819,920 Savings accounts 43,838 57,143 Time deposits 39,056,370 6,152,620 Other interest-bearing deposits 4,715,035 438,594 Federal and borrowed funds 2,000 239,525
Note 14 - INVESTMENT IN AFFILIATE On May 23, 2000, we subscribed for 10 shares of VSX Holdings, LLC, a Delaware limited liability company, in exchange for $10 and certain intangible property rights. We currently own approximately 0.5% of the outstanding shares of VSX Holdings, but have the right to purchase up to an additional 1,990 shares at a price of $1 per share, upon the occurrence of certain specified events. Our investment in VSX Holdings is accounted for on the equity method of accounting. VSX Holdings is involved in the development of an alternative trading system to be known as VSX.com, which, upon and subject to organization and regulatory approval, will serve as a virtual, real-time private financial marketplace. 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 agreement with VSX Holdings whereby we provide consulting and development services to VSX Holdings. For the six months ended June 30, 2001 and 2000 and the three months ended June 30, 2001 and 2000, we received payments totaling $819,977 and $640,000, respectively, and $433,333 and $640,000, respectively from VSX Holdings for such consulting and development services, which amount is recorded as a reduction of "Other operating expenses" on our Consolidated Statements of Operations for the six- and three-month periods ended June 30, 2001 and 2000. - 12 - 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 due in a timely manner as well as the risk of total loss. Collateral may or may not have the value attributed to it. Although we believe our loan loss reserve is adequate, it 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 we caution stockholders that management's view of the future on which we price and distribute our products and estimate costs of operations and regulations may prove to be other than as anticipated. In addition, our current expectations with respect to our 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 revenue 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. - 13 - 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 should receive through its 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. Our principal executive offices are located at 2424 Harrodsburg Road, Lexington, Kentucky 40503, telephone number (859) 296-2016. We and our subsidiaries also maintain offices at 431 North Pennsylvania Street, Indianapolis, Indiana, telephone number (317) 917-7001; 2353 Alexandria Drive, Lexington, Kentucky 40504, telephone number (859) 296-4407; 100 Browenton Place, Louisville, Kentucky 40222, (502) 326-5016; 220 Lexington Green Circle, Suite 600, Lexington, Kentucky 40512, telephone number (859) 245-2500; 1725 Southlake Boulevard, Southlake, Texas 76092, telephone number (817) 431-2197; 36 West 44th Street, The Bar Association Building, Suite 1310, New York, New York 10036, telephone number (212) 852-8852; and One Firstar Plaza, Suite 2605, St. Louis, Missouri 63101, telephone number (314) 552-6440. The following presents management's discussion and analysis of our consolidated financial condition and results of operations as of the dates and for the periods indicated. This discussion should be read in conjunction with the other information set forth in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the accompanying notes thereto. COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 Revenue for the six months ended June 30, 2001 compared to the six months ended June 30, 2000 increased $2,329,000, or 16.8%, from $13,869,000 to $16,198,000. For such periods, trust and retirement services revenue increased $190,000, or 8.6%, due to an increase in trustee fees earned. Mutual fund administration services revenue increased $506,000, or 23.4%, due to an increase in assets under service. As of June 30, 2001, we provided fund administrative services to 26 mutual fund families consisting of 118 portfolios and approximately $4.2 billion in mutual fund assets as compared to 27 mutual fund families consisting of 126 portfolios and approximately $3.8 billion in mutual fund assets as of June 30, 2000. During the six months ended June 30, 2001, our mutual fund administration services operation added several new clients; however, as a result of the recent decline in the financial markets, several clients discontinued operations, one client moved its operations in-house and others closed a total of 12 unprofitable portfolios. Banking revenue increased $222,000, or 31.8%, for the six months ended June 30, 2001 compared to the same period of 2000, primarily due to a $178,000 increase in net interest income as a result of a $20,614,000, or 162.3%, increase in loans outstanding. Also contributing to the increase in banking revenue was a $37,000 gain recorded in connection with the sale of mortgage loans into the secondary market. For the six months ended June 30, 2001 compared to the same period of 2000, insurance revenue increased $1,750,000, or 30.9%, primarily due to a $5,493,000, or 25.7%, increase in total insurance premiums written. The increase in total insurance premiums written reflected a continued hardening of the insurance market whereby the overall volume of specialty lines business has increased due to price increases imposed by specialty insurance carriers and additional business flowing into the specialty lines from standard line carriers. Additionally, insurance revenue for the six months ended June 30, 2001 included a $235,000 revenue sharing payment received by our insurance operation based upon lower than anticipated claims losses, compared to $37,000 received during the first half of 2000. For such periods, brokerage revenue declined $465,000, or 24.3%, primarily due to a $400,000 decline in trading revenue due to the loss of two introducing broker relationships and a decline in business from the - 14 - remaining introducing firms. Additionally, brokerage revenue declined due to the termination of our Internet brokerage trading web site at the end of 2000. Management believes that the decline in brokerage revenues from our introducing firms was attributable to the overall decline in the financial markets, which resulted in fewer customer trades. Trading volume for such periods declined approximately 34.5%. Brokerage revenue for the six months ended June 30, 2000 also included $20,500 that we received in connection with our recently completed private placement, without any corresponding amount in 2001. For such periods, investment advisory revenue increased $55,000, or 5.8%, due to several new client relationships and a shifting of existing investment advisory clients to bundled fee relationships, which include other wealth management services and typically yield higher fees. This increase in fees was partially offset by a decline in fees received based upon asset values due to the recent decline in the market value of many investment portfolios. Assets under management at our investment advisory operation declined by $69,890,000, or 15.6%, from June 30, 2000 to June 30, 2001. For such periods, corporate revenue increased $72,000, or 27.4%, primarily due to a $135,000 payment that we received in connection with the settlement of a trademark dispute, partially offset by a $58,000 decline in interest income received on the proceeds of our recently completed private placement. Additionally, corporate revenue for the six months ended June 30, 2000 included $46,000 of gross revenue related to discontinued operations, without any corresponding amount for 2001. Gross profit for the six months ended June 30, 2001 compared to the same period of 2000 increased $2,241,000, or 23.0%, from $9,764,000 to $12,005,000. For such periods, gross profit as a percentage of revenue increased to 74.1% from 70.4%. Trust and retirement services gross profit increased $334,000, or 16.2%, for the six months ended June 30, 2001 compared to the corresponding period of 2000 due to an increase in trustee fees earned. For such periods, mutual fund administration services gross profit increased $441,000, or 25.2%, primarily due to the increase in the amount of assets under service. However, as discussed above, the closing of several funds offset some of the gain. Banking gross profit increased $222,000, or 31.8%, for the six months ended June 30, 2001 compared to the first half of 2000. For the six months ended June 30, 2001 compared to the same period of 2000, insurance gross profit increased $1,471,000, or 45.4%, due to the increase in total insurance premiums written and our receipt of revenue sharing payments based upon claims experience. For the six months ended June 30, 2001, we experienced increases in both our personal and commercial business lines. For such periods, brokerage gross profit declined $256,000, or 31.4%, principally due to a $214,000 decline in trading gross profit due to the loss of two introducing broker client relationships. Additionally, gross profit declined due to decreased trading activity due to overall market conditions and due to the termination of our Internet brokerage trading web site at the end of 2000. Investment advisory gross profit declined $13,000, or 1.4%, primarily due to a reclassification of certain expenses to cost of sales and increased labor expenses. For such periods, corporate gross profit increased $41,000, or 15.8%, due to the reasons previously discussed. Total expenses for the six months ended June 30, 2001 were $12,092,000, or 74.7% of total revenue, compared to $10,686,000, or 77.0% of total revenues, for the first half of 2000. Employee compensation and benefits expense increased $1,620,000, or 27.4%, for the six months ended June 30, 2001 compared to the first half of 2000 due to: (i) new personnel hired in connection with the expansion of and merit increases for existing personnel at our mutual fund administration services and trust and retirement services operations, which accounted for $433,000 and $435,000, respectively, of such increase; (ii) additional staffing due to increased volume of business in and merit increases for existing personnel at our banking, insurance and investment advisory operations, which accounted for $115,000, $466,000 and $149,000, respectively, of such increase; and (iii) the hiring of additional information technology services personnel, which accounted for $373,000 of such increase. Partially, offsetting these increases was a $115,000 decline in employee compensation and benefit expense at our brokerage operation. Telephone expense increased $54,000, or 18.5%, for the six months ended June 30, 2001 compared to the first half of 2000 primarily due to the roll-out of our wide-area network in March 2000, - 15 - which accounted for $25,000 of the increase. Additionally, for such periods, telephone expense at our trust operation increased $24,000. Equipment rental and maintenance expense increased by $59,000, or 20.9%, due to expenses associated with furnishing new office space and an increase in personnel. For such periods, occupancy expense increased $159,000, or 34.4%, primarily due to additional space leased by our trust and retirement services operation, office space leased for our executive offices in Lexington, Kentucky and the relocation of our mutual fund administration offices in Texas. Depreciation and amortization expense increased $102,000, or 21.6%, for the first half of 2001 compared to the first half of 2000 due to the expansion of our trust and retirement services operation into new office space as well as equipment purchased for new personnel at our insurance and mutual fund administration services operations. For such periods, professional fees declined $131,000, or 16.4%, due to a $311,000 decline in legal fees partially offset by a $211,000 increase in outside adjuster and appraiser fees at our insurance operations and a $113,000 and $77,000 system consulting fee paid by our insurance and trust and retirement services operations, respectively, during the first six months of 2001. Additionally, during the six months ended June 30, 2000, we recorded a $165,000 consulting fee without any comparable expense in 2001. For such periods, our provision for bad debt declined $157,000, or 40.3%, due to a larger reserve taken in 2000 for doubtful receivables generated by our mutual fund administration services operation. Our provision for loan losses declined by $72,000 for the six months ended June 30, 2001 compared to the corresponding period of 2000 due to management's estimation of the quality of our bank's loan portfolio. For such periods, interest expense declined by $78,000, or 34.0%, due to our reduction of certain indebtedness. We recorded a net loss of $104,000 for the six months ended June 30, 2001 compared to a net loss of $1,365,000 for the first half of 2000. For such periods, gross revenue increased by $2,329,000 with a corresponding increase in gross profit of $2,241,000. Partially offsetting improved profits were increased expenses of $1,406,000, resulting primarily from higher employee compensation and benefits expense of $1,620,000. A $131,000 decline in professional fees partially offset such increase. The first six months of 2000 also included a $416,000 loss from discontinued operations. Net loss for the first six months of 2001 was a basic and fully diluted loss per share of $0.04 and $0.03, respectively. This compares to a basic and fully diluted loss per share of $0.47 and $0.45, respectively, for the six months ended June 30, 2000. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 Revenue for the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000 increased $951,000, or 13.4%, from $7,092,000 to $8,043,000. For such periods, trust and retirement services revenue increased $179,000, or 16.0%, primarily due to an increase in trustee fees earned. Mutual fund administration services revenue increased $162,000, or 14.7%, due primarily to an increase in assets under service, partially offset by the closing or relocation of several funds. As discussed above, as of June 30, 2001, we provided mutual fund administrative services to 26 mutual fund families consisting of 118 portfolios and approximately $4.2 billion in mutual fund assets as compared to 27 mutual fund families consisting of 126 portfolios and approximately $3.8 billion in mutual fund assets as of June 30, 2000. Banking revenue increased $93,000, or 23.6%, for the quarter ended June 30, 2001 compared to the corresponding quarter of 2000, primarily due to a $72,000 increase in net interest income as a result of increased loan volume. Also contributing to the increase in banking revenues was a $23,000 gain realized on the sale of mortgage loans into the secondary market. For the quarter ended June 30, 2001 compared to the same quarter of 2000, insurance revenue increased $524,000, or 17.0%, primarily due to a $1,969,000, or 17.4%, increase in total insurance premiums written. For such quarters, brokerage revenue declined $75,000, or 9.5%, primarily due to a decline in the number of trades processed. The second quarter of 2000 also included $21,000 in private placement commissions received by us in connection with our recently completed private placement, without any corresponding commissions in 2001. For the second quarter of 2001 compared to the same quarter of 2000, investment advisory revenue - 16 - increased $44,000, or 8.9%, due to several new client relationships and a shifting of existing investment advisory clients to bundled fee relationships, which include other wealth management services and typically yield higher fees. This increase in fees was partially offset by a decline in fees received based upon asset values due to the recent decline in the market value of many investment portfolios. For such quarters, corporate revenue increased $24,000, or 25.4%. Gross profit for the quarter ended June 30, 2001 compared to the corresponding quarter of 2000 increased $869,000, or 17.0%, from $5,103,000 to $5,972,000. For such quarters, gross profit as a percentage of revenue increased to 74.3% from 71.9%. Trust and retirement services gross profit increased $245,000, or 23.3%, for the quarter ended June 30, 2001 compared to the corresponding quarter of 2000 due to an increase in trustee fees earned. For such quarters, mutual fund administration services gross profit increased $145,000, or 16.2%, primarily due to the increase in assets under service. Banking gross profit increased $93,000, or 23.6%, for the quarter ended June 30, 2001 compared to the second quarter of 2000 as a result of a 162.3% in outstanding loans. For the quarter ended June 30, 2001 compared to the same quarter of 2000, insurance gross profit increased $479,000, or 26.5%, due to the increase in total insurance premiums written and revenue sharing payments. We experienced increases in both our personal and commercial business lines. For such quarters, brokerage gross profit declined $88,000, or 23.2%, primarily due to overall market conditions which resulted in less trading volume and due to the absence of private placement commissions in 2001. Investment advisory gross profit and corporate gross profit were relatively flat between the quarter ended June 30, 2001 and the second quarter of 2000. Total expenses for the quarter ended June 30, 2001 were $6,307,000, compared to $5,054,000 for the quarter ended June 30, 2000. Employee compensation and benefits expense increased $1,195,000, or 41.7%, for the quarter ended June 30, 2001 compared to the same quarter of 2000 due to: (i) new personnel hired in connection with the expansion of and merit increases for existing personnel at our mutual fund administration services and trust and retirement services operations, which accounted for $209,000 and $400,000, respectively, of such increase; (ii) additional staffing due to increased volume of business in and merit increases for existing personnel at our banking, insurance and investment advisory operations, which accounted for $250,000, $357,000 and $100,000, respectively, of such increase; and (iii) the hiring of additional information technology services personnel, which accounted for $137,000 of such increase. Such increases were partially offset by a $67,000 decrease in compensation and benefit expense at our brokerage operation. Equipment rental and maintenance expense increased by $31,700, or 20.8%, due to expenses associated with furnishing new office space and an increase in personnel. For such quarters, occupancy expense increased $86,000, or 38.2%, primarily due to additional space leased by our trust and retirement services and insurance operations, the relocation of our banking operation and office space leased for our executive offices in Lexington, Kentucky. Depreciation and amortization expense increased $51,000, or 21.1%, for the second quarter of 2001 compared to the second quarter of 2000 due to the expansion of our trust and retirement services operation into new office space as well as equipment purchased for new personnel at our insurance and mutual fund administration services operations. For such quarters, professional fees increased by $52,000, or 25.2%, primarily due to a $155,000 increase in appraiser and consulting fees at our insurance operation due to its increased volume of business, partially offset by a $145,000 reduction in legal fees paid during the second quarter of 2001 compared to the second quarter of 2000. For the quarter ended June 30, 2001 compared to the second quarter of 2000, interest expense declined by $26,000 due to the pay off a loan in February 2001, and our provision for bad debt declined by $239,000, or 67.0%, due to a reduction in the amount of reserve taken in 2001 for doubtful receivables generated by our mutual fund administration operation. For such quarters, other operating expense increased by $137,000, primarily due to a decrease in the amount of expense reimbursement we received from VSX Holdings for management and consulting services during the second quarter of 2001 compared to the second quarter 2000, which declined from $640,000 to $433,000. - 17 - Other income increased by $57,000 for the second quarter of 2001 compared to the second quarter of 2000, primarily due to $35,000 of unrealized gains on investments, compared to unrealized losses of $15,000 in the second quarter of 2000. Net loss for the quarter ended June 30, 2001 was $307,000 compared with a net loss of $143,000 for the same quarter of 2000. Gross revenue increased in the second quarter of 2001 by $951,000 with a corresponding increase in gross profit of $869,000 compared to the second quarter of 2000. Offsetting improved profits were increased expenses of $1,253,000, resulting primarily from higher employee compensation and benefits expense of $1,195,000. The second quarter of 2000 also included a $163,000 loss from discontinued operations, without any corresponding amount in 2001. Net loss for the second quarter six months of 2001 was a basic and fully diluted loss per share of $0.11 and $0.10, respectively. This compares to a basic and fully diluted loss per share of $0.05 for the quarter ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. Our primary sources of liquidity historically have been and continue to be cash flow from operating activities, available borrowing capacity from capitalized leases and a loan from a regional bank to finance capital equipment. The net decrease in cash and cash equivalents at June 30, 2001 from December 31, 2000 was $1,245,000. The net decrease reflected a repayment of borrowings, an increase in receivables and an increase in loans receivable. We received $820,000 from VSX Holdings, LLC during the six months ended June 30, 2001 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 June 30, 2001, Unified Banking Company had a ratio of Tier 1 capital to total assets equal to 8.9%. 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. Unified Banking Company experienced net growth in assets of 55.4% during the six months of 2001, while deposits increased 37.1% 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 $13,809,000 at June 30, 2001 compared to $13,834,000 at year-end 2000. The decrease in total stockholders' equity was due to our loss from operations for the six months ended June 30, 2001, partially offset by $79,000 in unrealized gains on securities. - 18 - 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. We believe that anticipated revenue 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 an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks not presently known to us or that we currently believe are immaterial also may impair our business operations. Our business could be harmed by any of these risks. 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. In assessing these risks, you should refer to the other information contained in this report, including our consolidated financial statements and related notes. NEED FOR ADDITIONAL CAPITAL; RISK RELATING TO ACQUISITIONS. Our pending and proposed projects have required and will continue to require substantial capital for investments in and development of such projects. There can be no assurance that we will be able to raise the capital necessary to fund our projects. The failure to raise or generate such funds may require us to delay or abandon some of our planned future expansion or expenditures, which could have a material adverse effect on our growth. To expand our markets and take advantage of the consolidation trend in the financial services industry, our business strategy includes growth through acquisitions. Although we believe that the operations of the companies we have acquired since June 1, 1997 are being successfully integrated with our operations, there can be no assurance that such integration will continue to be successful, that future acquisitions can be consummated on acceptable terms or that any acquired companies can be successfully integrated into our operations. We also are continually investigating opportunities for acquisitions. In connection with future acquisitions, we may incur additional indebtedness or may issue additional equity. Our ability to make future acquisitions may be constrained by our ability to obtain such additional financing. To the extent we use equity to finance future acquisitions, there is a risk of dilution to holders of our common stock. In addition, acquisitions may involve a number of special risks, including: initial reductions in our reported operating results; diversion of management's attention; unanticipated problems or legal liabilities; and a possible reduction in reported earnings due to amortization of acquired intangible assets in the event that such acquisitions are made at levels that exceed the fair market value of net tangible assets. Some or all of these items could have a material adverse effect on us. There can be no assurance that businesses acquired in the future will achieve sales and profitability that justify the investment therein. In addition, to the extent that consolidation becomes more prevalent in the industry, the prices for attractive acquisition candidates may increase to unacceptable levels. 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 - 19 - 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 may be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the lending business and could have a material adverse effect on our consolidated operating results. Unified Banking Company's credit risk with respect to its real estate and construction loan portfolio relates principally to the general creditworthiness of individuals and the value of real estate serving as security for the repayment of loans. Our credit risk with respect to Unified Banking Company's commercial and consumer installment loan portfolio relates principally to the general creditworthiness of businesses and individuals within its local market. We make various assumptions and judgments about the collectibility of Unified Banking Company's loan portfolio and provide an allowance for potential losses based on a number of factors. If our assumptions are wrong, the allowance for loan losses may not be sufficient to cover loan losses. We may have to increase the allowance in the future. Additions to our allowance for loan losses would decrease our net income. UNIFIED BANKING COMPANY MAY BE UNABLE TO MANAGE INTEREST RATE RISKS THAT COULD REDUCE OUR NET INTEREST INCOME. Like other financial institutions, Unified Banking Company's results of operations are affected principally by net interest income, which is the difference between interest earned on loans and investments and interest expense paid on deposits and other borrowings. We cannot predict or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, affect interest income and interest expense. While Unified Banking Company continually takes measures intended to manage the risks from changes in market interest rates, changes in interest rates can still have a material adverse effect on our profitability. In addition, certain assets and liabilities may react in different degrees to changes in market interest rates. For example, interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. Further, some of Unified Banking Company's assets, such as adjustable rate mortgages, have features, including rate caps, which restrict changes in their interest rates. Factors such as inflation, recession, unemployment, money supply, international disorders, instability in domestic and foreign financial markets, and other factors beyond our control may affect interest rates. Changes in market interest rates also will affect the level of voluntary prepayments on loans and the receipt of payments on mortgage-backed securities resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. Although Unified Banking Company pursues an asset-liability management strategy designed to control our risk - 20 - 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 35.1% 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 and 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 revenue and expansion of our operations and anticipate that further significant expansion will be required to address potential growth in our customer base and market opportunities. Such growth has placed, and, if sustained, will continue to place, strain on our management, information systems, operation and resources. Our ability to manage any future growth will continue to depend upon the successful expansion of our sales, marketing, customer support, administrative infrastructure and the ongoing implementation and improvement of a variety of internal management systems, procedures and controls. Continued growth also will require us to hire more personnel, and expand management information systems. Recruiting qualified personnel is an intensely competitive and time-consuming process. There can be no assurance that we will be able to attract and retain the necessary personnel to accomplish our growth strategies or that we will not experience constraints that will adversely affect our ability to support satisfactorily our clients and operations. There can be no assurance that we will be able to attract, manage and retain additional personnel to support any future growth, if any, or will not experience significant problems with respect to any infrastructure expansion or the attempted implementation of systems, procedures and controls. If our management is unable to manage growth effectively, our business, financial condition and results of operations could be materially adversely affected. DEPENDENCE UPON TECHNOLOGY; PROPRIETARY RIGHTS. Our success and ability to compete is dependent in part upon our technology, although we believe that our success is more dependent upon our technical expertise than our proprietary rights. We principally rely upon a combination of copyright, trademark and trade secret laws and contractual restrictions to protect our proprietary technology. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization or to develop similar technology independently, and there can be no assurance that such measures have been, or will be, adequate to protect our proprietary technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. We propose to operate a substantial portion of our business over the Internet, which is subject to a variety of risks. Such risks include, but are not limited to, the substantial uncertainties that exist regarding the system for assigning domain names and the status of private rules for resolution of disputes regarding rights to domain names. There can be no assurance that we will continue to be able to - 21 - employ our current domain names in the future or that the loss of rights to one or more domain names will not have a material adverse effect on our business and results of operations. Although we do not believe that we infringe the proprietary rights of any third parties, there can be no assurance that third parties will not assert such claims against us in the future or that such claims will not be successful. We could incur substantial costs and diversion of management resources with respect to the defense of any claims relating to proprietary rights, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we may become obligated under certain agreements to indemnify another party in connection with infringement by us of the proprietary rights of third parties. In the event we are required to indemnify parties under these agreements, it could have a material adverse effect on our business, financial condition and results of operations. In the event a claim relating to proprietary technology or information is asserted against us, we may seek licenses to such intellectual property. There can be no assurance, however, that licenses could be obtained on commercially reasonable terms, if at all, or that the terms of any offered licenses would be acceptable to us. The failure to obtain the necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations. RISKS TO PHYSICAL NETWORK; RISKS TO INTEGRITY OF DATA ON NETWORK. Our operations are partially dependent upon our ability to protect our network infrastructure against damage from fire, earthquakes, severe flooding, mudslides, power loss, telecommunications failures and similar events or to construct networks that are not vulnerable to the effects of these events. The occurrence of a natural disaster or other unanticipated problems at our network in the future could cause additional major interruptions in the services provided by us. In addition, some networks may experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. Unauthorized use of our network could jeopardize the security of confidential information stored in our computer systems, which may result in liability to our customers or deter potential customers. Our failure to adequately manage service disruptions resulting from physical damage to our network or breaches of the network's integrity, could have a material adverse effect on our business, financial condition and results of operations. SECURITY RISKS. Despite the implementation of network security measures by us, such as limiting physical and network access to our routers, our Internet access systems and information services are vulnerable to computer viruses, break-ins and similar disruptive problems caused by our customers or other Internet users. Such problems caused by third parties could lead to interruption, delays or cessation in service to our customers. Furthermore, such inappropriate use of the Internet by third parties also could potentially jeopardize the security of confidential information stored in the computer systems of our customers and other parties connected to the Internet, which may deter potential subscribers. Persistent security problems continue to plague public and private data networks. Recent break-ins reported in the press and otherwise have reached computers connected to the Internet at major corporations and Internet access providers and have involved the theft of information, including incidents in which hackers bypassed firewalls by posing as trusted computers. Alleviating problems caused by computer viruses, break-ins or other problems caused by third parties may require significant expenditures of capital and resources by us, which could have a material adverse effect on us. Until more comprehensive security technologies are developed, the security and privacy concerns of existing and potential customers may inhibit the growth of the Internet service industry in general and our customer base and revenues in particular. Moreover, if we experience a breach of network security or privacy, there can be no assurance that our customers will not assert or threaten claims against us based on or arising out of such breach, or - 22 - 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 us 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. 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. - 23 - The following table illustrates Unified Banking Company's estimated static gap with prepayments calculated as of June 30, 2001:
TIME TO MATURITY OR REPRICING 0 TO 1 1 TO 2 2 TO 3 (DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS --------- ------ ------ ------ RATE SENSITIVE ASSETS Federal funds sold ...................... $ 1,217 $ -- $ -- $ -- ------- ------ ------ ------ Securities U. S. agencies ........................ -- 579 568 8,388 FHLB stock ............................ 190 -- -- -- ------- ------ ------ ------ Total securities .................... 190 579 568 8,388 ------- ------ ------ ------ Loans Commercial Fixed ............................... -- 10 10 10 Variable ............................ 7,080 -- -- -- Secured by deposits ................. 30 -- -- -- ------- ------ ------ ------ Total commercial .................. 7,110 10 10 10 ------- ------ ------ ------ Real Estate Commercial .......................... -- 67 1,123 13 ------- ------ ------ ------ Residential Fixed ............................. -- 324 33 32 Variable .......................... 2,002 -- -- -- ------- ------ ------ ------ Total residential ............... 2,002 324 33 32 ------- ------ ------ ------ Total real estate ............ 2,002 391 1,156 45 ------- ------ ------ ------ Construction Fixed ............................... -- -- -- -- Variable ............................ 1,086 -- -- -- ------- ------ ------ ------ Total construction .............. 1,086 -- -- -- ------- ------ ------ ------ Personal Home equity loans ................... 5,360 -- -- -- Installment loans ................... -- 296 20 11 Personal open end letters of credit . 3,853 -- -- -- Loans secured by deposits ........... -- -- -- 9 ------- ------ ------ ------ Total personal .................... 9,213 296 20 20 ------- ------ ------ ------ Total loans ............................. 19,411 697 1,186 75 ------- ------ ------ ------ TOTAL RATE SENSITIVE ASSETS ........... $20,818 $1,275 $1,753 $8,463 ======= ====== ====== ====== RATE SENSITIVE LIABILITIES Interest bearing deposits NOW accounts .......................... $ 1,016 $ -- $ -- $ -- ------- ------ ------ ------ Money market accounts Market rate accounts ................ 4,127 -- -- -- Business market rate accounts ....... 2,461 -- -- -- Special personal MMDA ............... 925 -- -- -- Special business MMDA ............... 418 -- -- -- ------- ------ ------ ------ Total money market accounts ....... 7,931 -- -- -- ------- ------ ------ ------ Savings ............................... 44 -- -- -- ------- ------ ------ ------ Time deposits CD's > 100K ......................... -- 100 369 5,000 CD's < 100K ......................... -- 293 150 178 ------- ------ ------ ------ Total time deposits ............... -- 393 519 5,178 ------- ------ ------ ------ Individual retirement accounts ...... -- -- -- -- ------- ------ ------ ------ Total interest bearing deposits ... 8,991 393 519 5,178 ------- ------ ------ ------ Borrowed funds (repurchase agreements) .. -- 2 -- -- ------- ------ ------ ------ TOTAL RATE SENSITIVE LIABILITIES ...... $ 8,991 $ 395 $ 519 $5,178 ======= ====== ====== ====== TIME TO MATURITY OR REPRICING 3 TO 6 6 TO 9 9 TO 12 12 TO 48 (DOLLARS IN THOUSANDS) MONTHS MONTHS MONTHS MONTHS ------ ------ ------- -------- RATE SENSITIVE ASSETS Federal funds sold ...................... $ -- $ -- $ -- $ -- ------ ------ ------ ------- Securities U. S. agencies ........................ 1,450 1,369 1,289 10,770 FHLB stock ............................ -- -- -- -- ------ ------ ------ ------- Total securities .................... 1,450 1,369 1,289 10,770 ------ ------ ------ ------- Loans Commercial Fixed ............................... 30 30 230 412 Variable ............................ -- -- -- -- Secured by deposits ................. -- -- -- -- ------ ------ ------ ------- Total commercial .................. 30 30 230 412 ------ ------ ------ ------- Real Estate Commercial .......................... 339 42 1,429 2,690 ------ ------ ------ ------- Residential Fixed ............................. 95 93 90 1,328 Variable .......................... -- -- -- -- ------ ------ ------ ------- Total residential ............... 95 93 90 1,328 ------ ------ ------ ------- Total real estate ............ 434 135 1,519 4,018 ------ ------ ------ ------- Construction Fixed ............................... -- -- 238 -- Variable ............................ -- -- -- -- ------ ------ ------ ------- Total construction .............. -- -- 238 -- ------ ------ ------ ------- Personal Home equity loans ................... -- -- -- -- Installment loans ................... 73 72 324 489 Personal open end letters of credit . -- -- -- -- Loans secured by deposits ........... -- 11 -- 16 ------ ------ ------ ------- Total personal .................... 73 83 324 505 ------ ------ ------ ------- Total loans ............................. 537 248 2,311 4,935 ------ ------ ------ ------- TOTAL RATE SENSITIVE ASSETS ........... $1,987 $1,616 $3,599 $15,706 ====== ====== ====== ======= RATE SENSITIVE LIABILITIES Interest bearing deposits NOW accounts .......................... $ -- $ -- $ -- $ -- ------ ------ ------ ------- Money market accounts Market rate accounts ................ -- -- -- -- Business market rate accounts ....... -- -- -- -- Special personal MMDA ............... -- -- -- -- Special business MMDA ............... -- -- -- -- ------ ------ ------ ------- Total money market accounts ....... -- -- -- -- ------ ------ ------ ------- Savings ............................... -- -- -- -- ------ ------ ------ ------- Time deposits CD's > 100K ......................... 670 3,328 808 4,780 CD's < 100K ......................... 2,092 3,718 1,063 11,087 ------ ------ ------ ------- Total time deposits ............... 2,762 7,046 1,871 15,867 ------ ------ ------ ------- Individual retirement accounts ...... 30 66 123 1,099 ------ ------ ------ ------- Total interest bearing deposits ... 2,792 7,112 1,994 16,966 ------ ------ ------ ------- Borrowed funds (repurchase agreements) .. -- -- -- -- ------ ------ ------ ------- TOTAL RATE SENSITIVE LIABILITIES ...... $2,792 $7,112 $1,994 $16,966 ====== ====== ====== ======= TIME TO MATURITY OR REPRICING 48 TO 54 > 54 (DOLLARS IN THOUSANDS) MONTHS MONTHS TOTALS -------- ------ ------ RATE SENSITIVE ASSETS Federal funds sold ...................... $ -- $ -- $ 1,217 ------ ------ ------- Securities U. S. agencies ........................ 1,164 3,069 28,646 FHLB stock ............................ -- -- 190 ------ ------ ------- Total securities .................... 1,164 3,069 28,836 ------ ------ ------- Loans Commercial Fixed ............................... 145 33 909 Variable ............................ -- -- 7,080 Secured by deposits ................. -- -- 30 ------ ------ ------- Total commercial .................. 145 33 8,019 ------ ------ ------- Real Estate Commercial .......................... 1,100 1,415 8,217 ------ ------ ------- Residential Fixed ............................. 657 878 3,530 Variable .......................... -- -- 2,002 ------ ------ ------- Total residential ............... 657 878 5,532 ------ ------ ------- Total real estate ............ 1,757 2,293 13,749 ------ ------ ------- Construction Fixed ............................... -- -- 238 Variable ............................ -- -- 1,086 ------ ------ ------- Total construction .............. -- -- 1,324 ------ ------ ------- Personal Home equity loans ................... -- -- 5,360 Installment loans ................... 9 3 1,297 Personal open end letters of credit . -- -- 3,853 Loans secured by deposits ........... -- -- 35 ------ ------ ------- Total personal .................... 9 3 10,545 ------ ------ ------- Total loans ............................. 1,911 2,329 33,637 ------ ------ ------- TOTAL RATE SENSITIVE ASSETS ........... $3,074 $5,397 $63,689 ====== ====== ======= RATE SENSITIVE LIABILITIES Interest bearing deposits NOW accounts .......................... $ -- $ -- $ 1,016 ------ ------ ------- Money market accounts Market rate accounts ................ -- -- 4,127 Business market rate accounts ....... -- -- 2,461 Special personal MMDA ............... -- -- 925 Special business MMDA ............... -- -- 418 ------ ------ ------- Total money market accounts ....... -- -- 7,931 ------ ------ ------- Savings ............................... -- -- 44 ------ ------ ------- Time deposits CD's > 100K ......................... 646 1,500 17,202 CD's < 100K ......................... 900 2,373 21,855 ------ ------ ------- Total time deposits ............... 1,546 3,873 39,057 ------ ------ ------- Individual retirement accounts ...... 575 2,822 4,715 ------ ------ ------- Total interest bearing deposits ... 2,121 6,695 52,763 ------ ------ ------- Borrowed funds (repurchase agreements) .. -- -- 2 ------ ------ ------- TOTAL RATE SENSITIVE LIABILITIES ...... $2,121 $6,695 $52,764 ====== ====== ======= - 24 - TIME TO MATURITY OR REPRICING 0 TO 1 1 TO 2 2 TO 3 (DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS --------- ------ ------ ------ INCREMENTAL GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $20,818 $ 1,275 $ 1,753 $ 8,463 Total rate sensitive liabilities ...... 8,991 395 519 5,178 Gap ................................... 11,827 880 1,234 3,285 RSA/RSL ............................... 2.32x 3.22x 3.38x 1.63x RSA/assets ............................ 0.32 0.02 0.03 0.13 RSL/assets ............................ 0.14 0.01 0.01 0.08 Gap/assets ............................ 17.95% 1.33% 1.87% 4.98% Gap/RSA ............................... 56.81 68.99 70.42 38.81 CUMULATIVE GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $20,818 $22,093 $23,846 $32,309 Total rate sensitive liabilities ...... 8,991 9,386 9,905 15,083 Gap ................................... 11,827 12,707 13,941 17,226 RSA/RSL ............................... 2.32x 2.35x 2.41x 2.14x RSA/assets ............................ 0.32 0.34 0.36 0.49 RSL/assets ............................ 0.14 0.14 0.15 0.23 Gap/assets ............................ 17.95% 19.28% 21.15% 26.14% Gap/RSA ............................... 56.81 57.51 58.46 53.32 TIME TO MATURITY OR REPRICING 3 TO 6 6 TO 9 9 TO 12 12 TO 48 (DOLLARS IN THOUSANDS) MONTHS MONTHS MONTHS MONTHS ------ ------ ------- -------- INCREMENTAL GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $ 1,987 $ 1,616 $ 3,599 $15,706 Total rate sensitive liabilities ...... 2,792 7,112 1,994 16,966 Gap ................................... (805) (5,496) 1,605 (1,261) RSA/RSL ............................... 0.71x 0.23x 1.80x 0.93x RSA/assets ............................ 0.03 0.02 0.05 0.24 RSL/assets ............................ 0.04 0.11 0.03 0.26 Gap/assets ............................ -1.22% -8.34% 2.44% -1.91% Gap/RSA ............................... -40.53 -340.06 44.59 -8.03 CUMULATIVE GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $34,296 $35,912 $39,512 $55,218 Total rate sensitive liabilities ...... 17,875 24,988 26,982 43,948 Gap ................................... 16,421 10,925 12,530 11,269 RSA/RSL ............................... 1.92x 1.44x 1.46x 1.26x RSA/assets ............................ 0.52 0.54 0.60 0.84 RSL/assets ............................ 0.27 0.38 0.41 0.67 Gap/assets ............................ 24.92% 16.58% 19.01% 17.10% Gap/RSA ............................... 47.88 30.42 31.71 20.41 TIME TO MATURITY OR REPRICING 48 TO 54 > 54 (DOLLARS IN THOUSANDS) MONTHS MONTHS -------- ------ INCREMENTAL GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $ 3,074 $ 5,397 Total rate sensitive liabilities ...... 2,121 6,695 Gap ................................... 953 (1,297) RSA/RSL ............................... 1.45x 0.81x RSA/assets ............................ 0.05 0.08 RSL/assets ............................ 0.03 0.10 Gap/assets ............................ 1.45% -1.97% Gap/RSA ............................... 31.01 -24.04 CUMULATIVE GAP REPORT SUMMARY INFORMATION Total rate sensitive assets ........... $58,292 $63,689 Total rate sensitive liabilities ...... 46,069 52,764 Gap ................................... 12,223 10,925 RSA/RSL ............................... 1.27x 1.21x RSA/assets ............................ 0.88 0.97 RSL/assets ............................ 0.70 0.80 Gap/assets ............................ 18.55% 16.58% Gap/RSA ............................... 20.97 17.15
- 25 - 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, as of June 30, 2001, 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 -16.02% -50.88% -300 -11.79 -31.00 -200 -7.64 -13.40 -100 -3.79 -3.66 0 0.00 0.00 100 3.01 1.29 200 6.60 2.14 300 10.12 2.13 400 13.32 2.62
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. - 26 - 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. - 27 - PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index attached hereto. (b) Reports on Form 8-K. We did not file any Current Reports on Form 8-K during the quarter ended June 30, 2001. - 28 - SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIFIED FINANCIAL SERVICES, INC. (Registrant) Dated: August 8, 2001 By: /s/ Timothy L. Ashburn -------------------------------------------- Timothy L. Ashburn, Chairman and Chief Executive Officer Dated: August 8, 2001 By: /s/ Thomas G. Napurano -------------------------------------------- Thomas G. Napurano, Executive Vice President and Chief Financial Officer - 29 - EXHIBIT INDEX Ex. No. Description ------- ----------- 11.1 Computations of Earnings per Share. - 30 - EX-11.1 3 ex11p1.txt COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 UNIFIED FINANCIAL SERVICES, INC. EARNINGS PER SHARE CALCULATION
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ---------- ----------- INCOME AVAILABLE TO COMMON STOCKHOLDERS Net loss.............................................. $ (104,014) $(1,364,734) $ (306,670) $ (143,036) CALCULATION OF COMMON STOCK Common shares outstanding at beginning of period.......................................... 2,880,028 2,869,862 2,880,028 2,878,462 Shares issued in private placement during period...... -- 9,850 -- 1,250 ----------- ----------- ---------- ---------- Common shares used in basic calculation............ 2,880,028 2,879,712 2,880,028 2,879,712 ----------- ----------- ---------- ---------- Common stock equivalent of options.................... 162,836 169,847 162,836 169,847 ----------- ----------- ---------- ---------- Common shares used in fully diluted calculation.... 3,042,864 3,049,559 3,042,864 3,049,559 ----------- ----------- ---------- ---------- LOSS PER SHARE Basic................................................. $ (0.04) $ (0.47) $ (0.11) $ (0.05) =========== =========== ========== ========== Fully diluted......................................... $ (0.03) $ (0.45) $ (0.10) $ (0.05) =========== =========== ========== ==========
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