-----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, UJ1+A6uOkK+RaSgXw01/oLKE/kPyZrcZ4BfuER5WrFFED+LGj9/E5NMGGPCWIToP B5ig0hYi1oliijETGC0C4Q== 0001068800-98-000035.txt : 19981124 0001068800-98-000035.hdr.sgml : 19981124 ACCESSION NUMBER: 0001068800-98-000035 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIFIED FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0001033926 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 351797759 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22629 FILM NUMBER: 98756694 BUSINESS ADDRESS: STREET 1: 431 N PENNSYLVANIA ST. CITY: INDIANAPOLIS STATE: IN ZIP: 46204-1873 BUSINESS PHONE: 3146343301 MAIL ADDRESS: STREET 1: 431 N PENNSYLVANIA ST CITY: INDIANAPOLIS STATE: IN ZIP: 46204-1873 FORMER COMPANY: FORMER CONFORMED NAME: UNIFIED HOLDINGS INC DATE OF NAME CHANGE: 19970218 10QSB 1 UNIFIED FINANCIAL SERVICES, INC. 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 Commission file number: 0-22629 UNIFIED FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 35-1797759 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 429-431 North Pennsylvania Street Indianapolis, Indiana 46204-1873 (Address of principal executive offices) (Zip code) Issuer's telephone number, including area code: (317) 634-3301 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] On November 13, 1998, the registrant had 1,593,404 shares of Common Stock, $.01 par value, outstanding. TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements: (unaudited) 3 Consolidated Balance Sheets 3 Consolidated Statements of Income 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management Discussion and Analysis of Financial Condition and Results of Operation 18 Overview 18 Comparison of Results for the Nine Months Ended September 30, 1998 and 1997 19 Comparison of Results for the Quarters Ended September 30, 1998 and 1997 20 Liquidity and Capital Resources 21 Year 2000 Compliance 22 PART II. OTHER INFORMATION 25 Item 1. Legal Proceedings 25 Item 2. Changes in Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 28 EXHIBIT INDEX 29
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS
Sept. 30, 1998 Dec. 31, 1997 -------------- ------------- (unaudited) ASSETS: CURRENT ASSETS: Cash and cash equivalents $ 9,367,300 $ 605,654 Investment in securities 14,556 - Investments in affiliated mutual funds 375,134 520,334 Investments in non-affiliated mutual funds 184,619 187,603 Note receivable, affiliated company - 50,000 Note receivable - 4,502 Accounts receivable (net of allowance for doubtful accounts of $2,041 for 1998 and 1997, respectively) 1,865,849 1,505,600 Prepaid and sundry assets 91,598 141,042 ----------- ---------- Total current assets 11,899,056 3,014,735 ----------- ---------- FIXED ASSETS, AT COST: Equipment and furniture (net of accumulated depreciation of $889,404 and $822,293, respectively) 592,021 590,059 Capitalized leased equipment (net of accumulated depreciation of $74,937 and $68,058, respectively) 113,165 74,762 ----------- ---------- Total fixed assets 705,186 664,821 ----------- ---------- NON-CURRENT ASSETS: Investments in debt securities 994,170 958,604 Deferred cost (net of accumulated amortization of $233,594 and $6,900, respectively) 355,851 2,100 Notes receivable, net of current maturity - 8,090 Goodwill (net of accumulated amortization of $8,693 and $0, respectively) 1,556,109 - Equity and investment in affiliate - 284,994 Other non-current assets 23,531 - ----------- ---------- Total non-current assets 2,929,661 1,253,788 ----------- ---------- TOTAL ASSETS $15,533,903 $4,933,344 =========== ========== See notes to consolidated financial statements.
-3- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED BALANCE SHEETS
Sept. 30, 1998 Dec. 31, 1997 -------------- ------------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Current portion of capitalized leases $ 50,928 $ 30,090 Current portion of bank line-of-credit 30,719 30,719 Accounts payable and accrued expenses 1,024,578 617,697 Accrued compensation and benefits 570,855 162,273 Payable to broker/dealers 247,017 274,046 Income taxes payable 4,648 14,355 Deferred income taxes 59,918 24,700 Other liabilities 818,658 740,055 ----------- ---------- Total current liabilities 2,807,317 1,893,875 ----------- ---------- LONG-TERM LIABILITIES: Long-term capitalized lease obligations, net of current portion 51,386 21,374 Bank line-of-credit, net of current portion 298,537 92,158 Deferred income taxes 800 800 ----------- ---------- Total long-term liabilities 350,723 114,332 ----------- ---------- TOTAL LIABILITIES 3,158,040 2,008,207 ----------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock, par value $.01 per share, authorized - 10,000,000 shares; outstanding 1,585,004 shares and 1,027,778 shares, respectively 20,350 14,778 Preferred Stock Series A, par value $.01 per share, authorized - 0 and 10,000 shares, respectively; outstanding 0 and 8,486 shares, respectively - 8,486 Preferred Stock Series B, par value $.01 per share, authorized - 0 and 10,000 shares, respectively; outstanding 0 and 8,583 shares, respectively - 8,583 Preferred Stock Series C, par value $.01 per share, authorized - 2,100 shares; outstanding 1,672 and 0 shares, respectively 1,672 - Additional paid-in capital 11,385,171 1,977,766 Retained earnings 968,670 915,502 ----------- ---------- TOTAL STOCKHOLDERS' EQUITY 12,375,863 2,925,137 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,533,903 $4,933,344 =========== ========== See notes to consolidated financial statements.
-4- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months Ended Sept. 30, Three Months Ended Sept. 30, --------------------------- ---------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- REVENUE: Brokerage $2,541,340 $1,856,475 $ 937,163 $ 649,918 Fund services 1,074,505 1,015,451 528,729 387,882 Investment advisory 2,486,627 1,510,491 1,142,912 609,935 Trust and administration services 900,046 490,396 338,457 105,244 Software and programming services 24,153 126,687 7,651 31,879 Other income 375,923 90,447 198,517 (18,642) ---------- ---------- ---------- ---------- Total revenue 7,402,594 5,089,947 3,153,429 1,766,216 ---------- ---------- ---------- ---------- COST OF SALES: Brokerage revenue charges 1,180,369 982,886 846,959 343,351 Fund services revenue charges 374,410 244,472 125,410 82,472 Investment fees 103,121 63,299 36,848 26,606 Administration fees 59,692 31,745 15,863 6,455 ---------- ---------- ---------- ---------- Total cost of sales 1,717,592 1,322,402 1,025,080 458,884 ---------- ---------- ---------- ---------- Gross profit 5,685,002 3,767,545 2,128,349 1,307,332 ---------- ---------- ---------- ---------- EXPENSES: Employee compensation and benefits 2,263,440 2,182,180 922,362 654,533 Brokerage operating charges 345,704 221,534 158,558 87,340 Fund services operating charges 428,080 189,403 116,364 57,275 Mail and courier 72,842 37,673 23,815 16,289 Telephone 102,339 81,482 44,640 23,688 Equipment rental and maintenance 99,369 65,395 26,668 34,860 Occupancy 218,421 104,538 74,958 7,094 Depreciation and amortization 268,198 156,006 126,496 71,164 All other 828,921 419,348 321,386 141,129 ---------- ---------- ---------- ---------- Total expenses 4,627,314 3,457,559 1,815,247 1,093,372 ---------- ---------- ---------- ---------- INCOME FROM OPERATIONS 1,057,688 309,986 313,102 213,960 ---------- ---------- ---------- ---------- OTHER INCOME (LOSS): Unrealized gain or (loss) on securities (27,028) 1,098 (57,147) (42,952) Realized gain on securities 6,451 23,898 201 - Results of loss (gain) of affiliate (39,945) 54,722 - (25,208) Gain on sale/disposal of fixed assets 5,141 1 - ---------- ---------- ---------- ---------- Total other income (loss) (55,381) 79,718 (56,945) (68,160) ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 1,002,307 389,704 256,157 145,800 INCOME TAXES: Current 1,935 - 31 (3,458) Deferred (6,080) 16,000 - 14,373 ---------- ---------- ---------- ---------- NET INCOME $1,006,452 $ 373,704 $ 256,126 $ 134,885 ========== ========== ========== ========== Preferred dividends $ 65,844 $ 101,854 $ - $ 34,324 ---------- ---------- ---------- ---------- Income available to common stockholders $ 940,608 $ 271,850 $ 256,126 $ 100,561 ========== ========== ========== ========== Weighted average common shares outstanding: Basic 1,274,761 608,558 1,513,603 616,558 Diluted 1,817,524 1,027,776 1,817,524 1,027,776 Earnings per share of common stock: Basic $ 0.74 $ 0.45 $ 0.17 $ 0.16 ========== ========== ========== ========== Diluted $ 0.52 $ 0.26 $ 0.14 $ 0.10 ========== ========== ========== ========== See notes to consolidated financial statements.
-5- UNIFIED FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended Sept. 30, Three Months Ended Sept. 30, --------------------------- ---------------------------- 1998 1997 1998 1997 ----------- --------- ----------- --------- OPERATING ACTIVITIES: Net income $ 1,006,452 $ 373,704 $ 256,126 $ 134,885 Adjustments to reconcile net income to net cash provided (used) in operating activities: Deferred income taxes (6,080) 4,210 - 4,210 Provision for depreciation and amortization 268,198 156,006 105,747 71,164 Amortization of bond discount (450) - (2) - Unrealized gain/(loss) on investments (27,028) 1,098 (21,888) 1,098 Results of affiliated company 39,945 (54,722) - 25,207 Loss (gain) on sale/disposal of fixed assets (5,141) - 24,978 44,050 Excess of net assets of United Investment Advisers, Inc. (814,347) - - - (Increase) decrease in operating assets: Receivables (97,202) (335,321) (197,337) (277,849) Prepaid and sundry assets 49,444 (651) 54,109 (14,570) Increase (decrease) in liabilities: Accounts payable and accrued expenses 125,090 134,084 95,968 249,947 Accrued compensation and benefits 396,376 98,960 278,557 27,423 Payable to broker/dealers (27,029) 511 (90,642) 26,885 Accrued income taxes (8,718) 12,205 89 21,405 Other liabilities (3,546) 412,504 (296,820) (323,993) ----------- --------- ----------- --------- Net cash from/(used) in operating activities 895,964 802,588 172,146 (10,138) ----------- --------- ----------- --------- INVESTING ACTIVITIES: Purchase of fixed assets (195,500) (125,971) (130,846) (68,584) Proceeds from sale of fixed assets 12,379 128,851 - - Proceeds from note receivable - 24,752 - (2,744) Goodwill re: acquisition of Fiduciary Counsel, Inc. (1,564,802) - (1,564,802) - Excess of net assets of Fiduciary Counsel, Inc. 960,359 - 960,359 - Resource Benefit Planners, Inc. and EMCO Estate Management Company, Inc. acquisitions (345) - 1,241 - Investment in mutual funds 133,628 (424,561) 74,570 (105,784) Investment in debt securities (35,116) (154,801) (129,993) (39,159) ----------- --------- ----------- --------- Net cash used in investing activities (689,397) (551,730) (789,471) (218,271) ----------- --------- ----------- --------- FINANCING ACTIVITIES: Dividends to preferred stockholders (65,844) (101,854) - (34,324) Dividends to Health Financial, Inc. common stockholder - (157,007) - - Net proceeds from issuance of common stock 9,941,634 77,815 1,317,525 75,262 Issuance of Preferred Stock Series C 210,000 - - - Redemption of Preferred Stock Series A and Series B (1,706,900) - - - Repayment of borrowing (17,920) - (7,680) - Borrowing under bank line-of-credit 224,299 - - - Borrowing of capitalized leases - 93,320 - 69,130 Repayment of capitalized lease obligations (30,190) (36,785) (8,332) (11,373) ----------- --------- ----------- --------- Net cash provided(used) in financing activities 8,555,079 (124,491) 1,301,513 98,695 ----------- --------- ----------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS 8,781,546 126,367 720,927 (127,714) CASH AND CASH EQUIVALENTS Beginning of period 605,554 538,030 8,646,373 792,111 ----------- --------- ----------- --------- End of Period $ 9,367,300 $ 664,397 $ 9,367,300 $ 664,397 =========== ========= =========== ========= SUPPLEMENTARY INFORMATION Interest paid $ 34,988 $ 6,232 $ 16,274 $ 2,274 =========== ========= =========== ========= Income taxes paid $ 10,712 $ 17,085 $ - $ 300 =========== ========= =========== ========= See notes to consolidated financial statements.
-6- UNIFIED FINANCIAL SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. NATURE OF OPERATIONS The accompanying consolidated financial statements include the accounts of Unified Financial Services, Inc., a Delaware corporation ("Unified" or the "Company") and its subsidiaries: Unified Management Corporation; Unified Fund Services, Inc.; Health Financial, Inc.; First Lexington Trust Company; Resource Benefit Planners, Inc.; Unified Investment Advisers, Inc.; Unified Internet Services, Inc.; EMCO Estate Management Company, Inc.; and Fiduciary Counsel, Inc. Unless the context otherwise indicates, references to "Unified" or the "Company" include Unified and its subsidiaries. Unified Management Corporation, an Indiana corporation ("Management"), is a registered broker dealer under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is a member of the National Association of Securities Dealers, Inc. ("NASD"). Management specializes in mutual fund distribution and shareholder servicing liaison providing such services as: mutual fund distribution, distribution services and support; mutual fund conversion support for broker-dealer requirements; mutual fund trades; individual retirement account ("IRA") custodial services; 12b-1 maintenance, accounting and marketing support; securities (stock and bond) brokerage; brokerage clearing and execution services; consolidated brokerage statement processing; mutual fund and brokerage software development; asset allocation and performance measurement services and statement processing; and retirement account record keeping. Management, as the Company's broker-dealer subsidiary, functions as the distributor of the Unified Funds, a family of four no-load mutual funds sponsored by Unified Investment Advisers, Inc., and also provides specialty services for certain customers of the Unified Funds in addition to its discount brokerage activities. The brokerage subsidiary clears, on a fully-disclosed basis, through U.S. Clearing, a division of Fleet Securities, Inc., and Pershing, a division of Donaldson, Lufkin & Jenrette Securities Corporation. Unified Fund Services, Inc., an Indiana corporation ("Services"), is a registered transfer agent and mutual fund services company, and provides transfer agency, fund accounting, administrative and start-up services for mutual funds. Services' primary services include: mutual fund transfer agency and shareholder recordkeeping; shareholder services support; mutual fund start-up services; administration; fund accounting; compliance; asset allocation services; statement processing; retirement plan services; and fulfillment. Services also provides all of the mutual fund services for the Unified Funds portfolios, and performs other clerical functions for the Unified Funds in addition to typical mutual fund services. Health Financial, Inc., a Kentucky corporation ("Health"), is a registered investment adviser formed in 1986, and manages approximately $375 million in assets for both individuals and institutions, principally private pension plans and foundations. Health specializes in an investment management philosophy that features a balanced discipline of asset allocation utilizing no- load index funds over seven asset classes, including an S&P 500 index, a large cap U.S. stock index, a small cap U.S. bond index, an international stock index, a REIT index and cash. First Lexington Trust Company, a Kentucky corporation ("Lexington"), is a non-bank trust company specializing in retirement plans and currently maintains approximately $65 -7- million in assets under management. Directed by its trust investment committee, the Lexington-based Kentucky trust company provides the same investment philosophy as its sister company, Health, while providing full trust powers and retirement plan services to its customer base. Chartered in 1994, Lexington is regulated by the Kentucky Commissioner of Banking under the Department of Financial Institutions, Commonwealth of Kentucky. On March 10, 1998, the Company acquired Resource Benefit Planners, Inc. ("Benefit Planners"). Benefit Planners, a Kentucky corporation, is a professional services firm that provides consulting, recordkeeping and trust accounting services for qualified retirement and cafeteria plans. In connection with such acquisition, the Company issued 12,000 shares of common stock, $0.01 par value, of the Company (the "Common Stock") in exchange for all the outstanding capital stock of Benefit Planners. As of March 10, 1998, Benefit Planners reported total assets of $282,724 and shareholder's equity of $37,543. On March 31, 1998, Unified Investment Advisers, Inc., a Delaware corporation ("Advisers"), became a wholly owned subsidiary of the Company upon surrender to Advisers by all stockholders of Advisers (other than the Company) of their capital stock of Advisers. The stock surrender occurred upon approval of the shareholders of the Unified family of mutual funds and upon receipt of the required regulatory approval. Advisers, formerly known as Vintage Advisers, Inc., provides mutual fund advisory services for the Unified Funds, the Company's no-load mutual fund family, and is an important component in the tax-free reorganization strategy for consolidating small mutual fund assets. Advisers also retains the exclusive rights to the proprietary V.O.I.C.E. product (Vision for Ongoing Investment in - - - Charity and Education), which Unified believes is a significant - - and valuable asset for the future gathering of mutual fund assets. As of March 31, 1998, Advisers reported total assets of $617,773 and shareholders' equity of $(469,548). During February 1998, the Company formed Unified Internet Services, Inc., an Indiana corporation ("Unified Internet Services"), to develop the Company's website, website television programming and its proprietary search engine for the financial services industry. It currently is anticipated that Unified Internet Services will develop the Company's other industry- related internet products, including an interactive "switch" that will allow consumers access to the Company's products via their television, cable and satellite stations. The Company anticipates development of such products to be completed by the end of 1999. On August 21, 1998, the Company acquired Fiduciary Counsel, Inc. ("Fiduciary Counsel"). Fiduciary Counsel, a Delaware corporation that is based in New York City, was founded in 1931 and provides professional investment management to individuals and institutions on a customized basis. This acquisition will be accounted for under the purchase method of accounting. In connection with the acquisition, the Company issued 36,110 shares of Common Stock and paid $800,835 in cash in exchange for all the capital stock of Fiduciary Counsel. The excess of cost over fair value of net assets acquired was $1,564,802. Goodwill will be amortized on a straight-line method over 15 years. As of August 21, 1998, Fiduciary Counsel reported total assets of $738,157 and total stockholders' equity of $234,783. On August 21, 1998, the Company completed the acquisition of all of the assets and certain of the liabilities of EMCO Estate Management Company, Inc. ("EMCO"). Such assets and liabilities were acquired by a wholly owned subsidiary of the Company that, upon consummation of the transaction, was renamed EMCO Estate Management Company, Inc. -8- EMCO, a Delaware corporation, is a wealth management firm based in New York City. Since 1921, EMCO has been providing fee only services to individuals, families and fiduciaries. EMCO professionals assist clients in a variety of disciplines, including the following: financial, tax and estate planning; family office services such as budgeting, bill paying and payroll administration; trust administration; and income tax return preparation and filing for individuals, trusts, partnerships and small businesses. The acquisition will be accounted for under the pooling-of-interests method of accounting. In connection with such transaction, the Company issued 11,000 shares of Common Stock in exchange for all of the assets and certain of the liabilities of EMCO. As of August 21, 1998, EMCO reported total assets of $67,230 and stockholder's equity of $(110,212). The unaudited interim financial statements of the Company have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the unaudited interim consolidated financial statements have been included herein and are of a normal recurring nature. The 1998 unaudited consolidated financial statements of the Company give effect to the acquisition by the Company of Benefit Planners on March 10, 1998 and EMCO on August 21, 1998, which transactions were accounted for under the pooling-of-interests method of accounting. Due to the immateriality of the financial condition and results of operations of Benefit Planners and EMCO to the Company, the consolidated financial statements of the Company as of and for the three years ended December 31, 1997 have not been restated to give effect to the acquisitions of Benefit Planners and EMCO. The results of operations of Benefit Planners and EMCO have been included in the Company's consolidated financial statements since January 1, 1998. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be obtained for the full year ending December 31, 1998. 2. PROPOSED ACQUISITIONS On October 12, 1998, Unified executed a letter of intent with Fully Armed Productions, Inc., a Kentucky corporation ("Fully Armed Productions"), to acquire all of the capital stock of Fully Armed Productions in exchange for 18,182 shares of Common Stock. The proposed transaction will be governed by a definitive agreement to be negotiated and executed by the parties by December 31, 1998, unless otherwise agreed. Fully Armed Productions provides creative and technological services for the television, radio and Internet industries through its specialty production capabilities. The acquisition is intended to be accounted for under the pooling-of-interests method of accounting. As of September 30, 1998, Fully Armed Productions reported total assets of $37,458 and shareholders' equity of $19,065. On October 16, 1998, Unified entered into an agreement to acquire AmeriPrime Financial Services, Inc. ("AmeriPrime") and its subsidiary, AmeriPrime Financial Securities, Inc. ("AFSI"), each a Texas corporation headquartered in Southlake, Texas. AmeriPrime provides administrative, regulatory, compliance and start-up support services to investment advisors, banks and other money managers in their proprietary mutual fund efforts. AmeriPrime provides mutual fund distribution through AFSI, a NASD broker- dealer registered in all 50 states. AmeriPrime currently supports 28 mutual funds consisting of over $500 million in assets under management. In connection with the acquisition, Unified will issue 410,000 shares of -9- Common Stock in exchange for all of the capital stock of AmeriPrime. The acquisition is intended to be accounted for under the pooling- of-interests method of accounting. As of September 30, 1998, AmeriPrime reported total assets of $267,173 and shareholder's equity of $203,739. On October 16, 1998, Unified entered into an agreement to acquire Equity Underwriting Group, Inc., a Kentucky corporation headquartered in Lexington, Kentucky ("Equity Underwriting"). Equity Underwriting, a holding company for Equity Insurance Managers, Inc., Equity Insurance Managers of Illinois, LLC, 21st Century Claims Service, Inc., Equity Insurance Administrators, Inc. and Z-Net Communications, Inc., provides, through its subsidiaries, specialty insurance products as a general agent or as a broker and currently provides services in the States of Kentucky, Tennessee, West Virginia, Ohio, Indiana and Illinois. Equity Underwriting writes insurance products for primarily niche areas in the insurance marketplace that are considered more "non- standard," representing a higher risk of insured. In connection with the acquisition, Unified will issue 241,745 shares of Common Stock in exchange for all of the capital stock of Equity Underwriting. The acquisition is intended to be accounted for under the pooling-of-interests method of accounting. As of September 30, 1998, Equity Underwriting reported, on a consolidated basis, total assets of $8,279,190 and shareholders' equity of $(3,571,576). On October 16, 1998, Unified entered into an agreement to acquire Commonwealth Premium Finance Corporation, a Kentucky corporation headquartered in Lexington, Kentucky ("CPFC"). CPFC provides financing for the payment of premiums on insurance coverage placed by Equity Underwriting. In connection with the acquisition, Unified will issue 12,800 shares of Common Stock in exchange for all of the capital stock of CPFC. The acquisition is intended to be accounted for under the pooling-of-interests method of accounting. As of September 30, 1998, CPFC reported total assets of $1,716,787 and shareholders' equity of $139,162. On October 16, 1998, Unified entered into an agreement to acquire Commonwealth Investment Services, Inc., a Kentucky corporation headquartered in Lexington, Kentucky ("Commonwealth Investment"). Commonwealth Investment provides investment services to individuals, businesses and institutions throughout the State of Kentucky and surrounding areas through its network of independent agents, primarily certified public accountants. In connection with the acquisition, Unified will issue 27,500 shares of Common Stock in exchange for all of the capital stock of Commonwealth Investment. The acquisition is intended to be accounted for under the pooling-of-interests method of accounting. As of September 30, 1998, Commonwealth Investment reported total assets of $34,130 and shareholder's equity of $34,130. On October 16, 1998, Unified entered into an agreement to acquire Strategic Fund Services, Inc., a Delaware corporation headquartered in New York, New York ("Strategic"). Strategic provides mutual fund administration services to smaller mutual funds and fund complexes, utilizing a proprietary database. In connection with the acquisition, Unified will issue 7,500 shares of Common Stock in exchange for all of the capital stock of Strategic. The acquisition is intended to be accounted for under the pooling-of-interests method of accounting. As of September 30, 1998, Strategic reported total assets of $10,507 and shareholder's equity of $(16,020). On October 31, 1998, Unified executed a letter of intent with SBX Inc., a New Jersey corporation ("SBX"), to acquire all of the capital stock of SBX in exchange for 363,636 shares of Common Stock. The proposed transaction will be governed by a definitive agreement to be -10- negotiated and executed by the parties by January 31, 1999, unless otherwise agreed. SBX was founded in 1997 and is a member of the NASD. Once operative, the primary business of SBX will be to provide NanoCap(TM) securities order matching services through the SBX system. NanoCap(TM) securities are securities issued by SEC- reporting companies under the Exchange Act that are not listed on the Nasdaq or an exchange. Once operational, SBX will make systems and collect information that will allow its subscribers to post firm orders and to match existing orders for NanoCap(TM) securities. The acquisition is intended to be accounted for under the pooling- of-interests method of accounting. As of September 30, 1998, SBX reported total assets of $231,207 and shareholders' equity of $170,471. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation --------------------- The consolidated financial statements include the accounts of the Company, Management, Services, Health, Lexington, Benefit Planners, Advisers, Unified Internet Services, EMCO and Fiduciary. All intercompany transactions and balances between the Company and its subsidiaries have been eliminated. Effective March 10, 1998, the Company acquired Benefit Planners in a transaction accounted for under the pooling-of- interests method of accounting. Due to the immateriality of the financial condition and results of operations of Benefit Planners to the Company, the consolidated financial statements of the Company as of and for the three years ended December 31, 1997 have not been restated to give effect to the acquisition of Benefit Planners. The results of operations of Benefit Planners have been included in the Company's consolidated financial statements since January 1, 1998. In connection with such acquisition, the Company issued 12,000 shares of Common Stock. Effective March 31, 1998, Advisers became a wholly owned subsidiary of the Company upon surrender to Advisers of all the capital stock of Advisers by all stockholders of Advisers (other than the Company). Prior to the surrender of the capital stock to Advisers, the Company accounted for its 33.3% ownership in Advisers on the equity method of accounting. Advisers reported gross revenue for the four months (Advisers' fiscal year end was November 30 prior to its acquisition by the Company) ended March 31, 1998 of $146,519 and loss for the period of $195,967. As of March 31, 1998, Advisers reported total assets of $617,773 and shareholders' equity of $(469,548). Effective August 21, 1998, the Company acquired EMCO in a transaction accounted for under the pooling-of-interests method of accounting. Due to the immateriality of the financial condition and results of operations of EMCO to the Company, the consolidated financial statements of the Company as of and for the three years ended December 31, 1997 have not been restated to give effect to the acquisition of EMCO. The results of operations of EMCO have been included in the Company's consolidated financial statements since January 1, 1998. In connection with such acquisition, the Company issued 11,000 shares of Common Stock. Effective August 21, 1998, the Company acquired Fiduciary Counsel in a transaction accounted for under the purchase method of accounting. The results of operations of Fiduciary Counsel have been included in the Company's consolidated financial statements since its date of -11- acquisition. In connection with such acquisition, the Company issued 36,110 shares of Common Stock and paid $800,835 in cash. Fees and Commissions -------------------- The Company records revenue on the accrual basis of accounting. For the brokerage operations, commissions and clearing revenue are recorded on the settlement date of the related security transactions. This does not materially differ from recording commissions based upon trade date. The investment advisory business revenue, as well as the investment adviser fees earned by third party advisers, is recorded on the accrual basis. The fees earned by the operations and paid to the sub-advisers are based on established fee schedules and contracts. Generally, fees may be collected from the invested assets. Thus, collection of the fees is reasonably certain. The fund services operations provide administrative and investment services to investment companies and separate accounts. Revenue is recorded as it is earned per month based upon accounts and account balances. In connection with this, the Company earns income on the accounts established to transfer these funds for customers. Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation, including the depreciation of capital leased equipment, is provided on a straight-line or accelerated methods over the estimated useful life of the assets for financial statement purposes. Investments and Investment in Debt Securities --------------------------------------------- Investments, which consists primarily of an investment in a mutual fund (affiliated or non-affiliated), are recorded and adjusted to the fair market value as of the date of the financial statements and reported on the statement of operations as unrealized gain or loss on securities. Investment in debt securities are recorded at cost and amortized over the period to maturity for the premium or discount from par value under generally accepted accounting principles. Lexington is required by the Kentucky Department of Financial Institutions to maintain a minimum of $800,000 capital as long as trust assets under management do not exceed $100,000,000. When trust assets under management exceed $100,000,000, the capital requirement will be increased by $350,000. Currently, Lexington has approximately $65,000,000 of trust assets under management. Income Taxes ------------ The Company files consolidated federal and state income tax returns with its subsidiaries. Benefit Planners, prior to its acquisition by the Company, filed as an S-corporation on the cash basis of accounting. As a result, federal and state taxable income and losses were passed through to its sole stockholder. Subsequent to its acquisition by the Company, Benefit Planners will be included in the consolidated tax returns of the Company, which uses the accrual method of tax and accounting reporting. The Company has adopted Statement of Financial Accounting Standards No. 109 accounting for income taxes ("SFAS 109"). SFAS 109 requires use of the liability method of accounting for deferred income taxes. -12- Use of Estimates ---------------- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Statement of Cash Flows ----------------------- For purposes of the statements of cash flows, the Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains money market investments that are not insured by the Federal Deposit Insurance Corporation (the "FDIC") and bank accounts that periodically exceed the FDIC insurance limit during the year. Financial Statement Presentation -------------------------------- Certain amounts in the 1997 financial statements have been reclassified to conform to the 1998 presentation. 4. OPTIONS ------- On May 20, 1998, the stockholders of the Company adopted the Unified Financial Services, Inc. 1998 Stock Incentive Plan (the "Plan") which provides for the granting of stock options and other stock-based awards. The total number of shares of Common Stock issuable under the Plan is not to exceed 1,500,000 shares, subject to adjustment in the event of any change in the outstanding shares of such stock by reason of a stock dividend, stock split, capitalization, merger, consolidation or other similar change generally affecting stockholders of the Company. Of these 1,500,000 shares of stock, no more than 250,000 shares may be issued to participants in the Plan in any plan year. Under the terms of the Plan, employees, directors, advisors and consultants of the Company and its subsidiaries will be eligible to receive the following: (a) Incentive Stock Options; (b) Nonqualified Stock Options; (c) Stock Appreciation Rights; (d) Restricted Stock; (e) Restricted Stock Units; and (f) Performance Awards. As of October 15, 1998, the Board of Directors of the Company had granted options to acquire 19,781 shares of Common Stock to certain employees, directors and advisers of the Company. Such options were fully vested on the date of the grant and have an exercise price as follows: a) 6,800 shares at $25.00 per share. b) 12,981 shares at $27.50 per share. Of such options, 6,500 are intended to qualify as Incentive Stock Options pursuant to Section 422 of the Internal Revenue Code of 1986, as amended. -13- 5. FINANCING --------- The Company has obtained a line of credit totaling a maximum borrowing capacity of Five Hundred Thousand Dollars ($500,000) for the purpose of purchasing various communication and computer hardware and software to support future operating needs. As of September 30, 1998, the amount outstanding under this credit facility was $329,256. The financing converts to a four-year term loan payable in equal monthly principal payments plus interest at 0.5% above bank prime rate. Property, supplies, inventory and intangible assets of the Company are security for this financing. 6. COMMITMENTS AND CONTINGENCIES ----------------------------- The Company, through its subsidiary, Management, leases its corporate headquarters and administrative office facilities located at 429-431 N. Pennsylvania Street, Indianapolis, Indiana, which facility has approximately 10,820 square feet, and is leased pursuant to an operating lease expiring in 2007 for office facilities and equipment. The lease includes provisions for adjustment of operating costs and real estate taxes. Such obligations are allocated between the Company and Management based on estimated usage. The Company also maintains administrative offices at 2353 Alexandria Drive, Suite 100, Lexington, Kentucky; 36 East Fourth Street, The Bartlett Building, Cincinnati, Ohio; and at 36 West 44th Street, The Bar Association Building, Suite 1310, New York, New York. The aggregate minimum rental commitments required under operating leases for office space and equipment at September 30, 1998 were as follows: For the Twelve Months Ended September 30 Lease Commitments ------------ ----------------- 1999 $ 442,014 2000 448,656 2001 451,349 2002 429,112 Thereafter 1,199,291 ---------- Total $2,970,422 ========== The total rental expense was $218,421 and $104,538 for the nine months ended September 30, 1998 and 1997, respectively. -14- 7. CAPITALIZED LEASE OBLIGATIONS ----------------------------- The Company's capitalized lease obligations are payable over a 36-month period. The following is a summary of future minimum lease payments under capitalized lease obligations as of September 30, 1998: For the Twelve Months Ended September 30 Amount ------------ -------- 1999 $ 63,531 2000 43,105 2001 8,741 -------- Subtotal 115,337 Less: amount representing interest 13,063 -------- Net present value $102,314 ======== The Company acquired equipment through capital lease obligations in the amount of $0 and $24,190 during the nine months ended September 30, 1998 and 1997, respectively. 8. CASH SEGREGATED UNDER FEDERAL REGULATION and NET CAPITAL -------------------------------------------------------- REQUIREMENTS FOR MANAGEMENT --------------------------- Management is subject to the Securities and Exchange Commission (the "SEC") Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital, as defined in Rule 15c3-1, of 6-2/3% of aggregate indebtedness of $50,000, whichever is greater, and a ratio of aggregate indebtedness to net capital of not more than 15 to 1. At September 30, 1998, Management had net capital of $614,450, which was in excess of its required net capital of $50,000, and a net capital ratio of 0.39 to 1. Pursuant to Rule 15c3-3, as promulgated by the SEC, Management calculates its reserve requirement and segregates cash and/or securities for the exclusive benefit of its customers on a periodic basis. The reserve requirement calculated by Management was $0 at September 30, 1998. Balances segregated in excess of reserve requirements are not restricted. 9. COMMON AND PREFERRED STOCK -------------------------- Common Stock: Acquisitions The Company has 10,000,000 shares of Common Stock authorized. In connection with the acquisitions described in Note 1, the Company issued the following number of shares of Common Stock: Company acquired Date Shares issued ---------------- --------------- ------------- Benefit Planners March 10, 1998 12,000 EMCO August 21, 1998 11,000 Fiduciary Counsel August 21, 1998 36,110 -15- Private Placement Offering On January 22, 1998, the Company commenced a private placement offering to sell a maximum of 600,000 shares of Common Stock. The first 400,000 shares offered were offered at a price of $25.00 per share and, upon acceptance by the Company of subscriptions for such 400,000 shares, the remaining 200,000 shares in the private placement were offered at a price of $27.50 for share. All of the shares of Common Stock offered by the Company were sold on a best efforts basis. There is no public market for any securities of the Company and there can be no assurance that a market will develop in the future. The offering terminated on June 30, 1998. As of September 30, 1998, the Company had issued 437,338 shares of Common Stock pursuant to the private placement and had reserved an additional 2,400 shares of Common Stock to be issued pursuant to subscriptions accepted in such offering. Preferred Stock: As of September 30, 1998, the total preferred shares authorized for the Company was 1,000,000 shares, par value $.01 per share, of which 102,100 shares were designated at September 30, 1998 as follows:
Shares Shares Stated Par Designated outstanding value value ---------- ----------- ----- ----- Series C Preferred Stock 2,100 1,672 $100 $0.01 Series D Preferred Stock 100,000 -0- $200 $0.01
Series C Preferred Stock Issuance In May 1998, the Company issued 2,100 shares of Series C 6.75% Cumulative Convertible Preferred Stock to certain directors, executive officers and agents of the Company for total consideration of $210,000. Each share of Series C Preferred Stock is convertible, at any time at the option of the holder thereof and without the payment of any additional consideration with respect thereto, into 135 shares of Common Stock. As of September 30, 1998, 428 shares of Series C Preferred Stock had been converted into 57,780 shares of Common Stock. Series D Preferred Stock Authorized In July 1998, the Company authorized 100,000 shares of Series D Junior Participating Preferred Stock. The Company has reserved all of the shares of Series D Preferred Stock for issuance under a Rights Agreement dated August 26, 1998 between the Company and Services, as rights agent. On August 26, 1998, the Board of Directors of Unified declared a dividend distribution of one Preferred Stock Purchase Right (collectively, the "Rights") for each outstanding share of Common Stock. The dividend distribution was payable to the stockholders of record at the close of business on August 26, 1998. Generally, each Right, when exercisable, entitles the registered holder to purchase from the Company one one-hundredth of a share of Series D Preferred Stock at a price of $200.00 per one one-hundredth of a share. -16- Series A and Series B Preferred Stock Redemption On April 25, 1998, the Company redeemed the outstanding Series A and Series B Preferred Stock of the Company. Total consideration of $1,738,326, consisting of principal and accrued interest, was paid to the holders of the Series A and Series B Preferred Stock in connection with the redemption of such shares. -17- ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW The Company, a Delaware holding company, was organized December 7, 1989 and conducts substantially all of its operations through its wholly owned subsidiaries. The Company's principal business is to provide and maintain vertical integration in the financial services industry for its subsidiaries, a "platform" that creates synergy and revenues among its subsidiaries from the fees associated with gathering, managing, maintaining and servicing assets under management. The Company currently maintains approximately $1.5 billion of assets under management and approximately $5 billion of assets under service. The vertically integrated "platform," a subsidiary "home" for managing and servicing virtually every kind of wealth-building asset, is primarily accomplished through three strategies: (1) consolidating financial services companies that expand or deepen the integration by means of tax-free, stock-for-stock pooling-of-interest transactions (this particular consolidation strategy is driven by the Company's goal to protect, maintain, nurture and advance the entrepreneurial spirit of small businesses by providing capital, synergy and vertical integration in an "autonomous" subsidiary environment); (2) consolidating small mutual funds into Unified's mutual fund families by means of tax-free reorganizations (the mutual fund consolidation strategy is assisted by Unified's systems capabilities and highly qualified systems staff which provides innovative and flexible programming options, alternatives and solutions required by small mutual funds to compete against the larger, more capitalized mutual fund families); and (3) the formation of new subsidiaries to develop proprietary products and services that deepen the integration and enhance and advance the synergy and revenues among its subsidiaries. Once a component of Unified's vertically integrated network, each subsidiary then implements its individual business plan in an autonomous environment and achieves its growth and thereby increases earnings and share value predominantly by: (1) leveraging the existing infrastructure and utilizing the vertically integrated platform to realize fully and effect the synergy and the related earnings impact to the Company's earnings; (2) consolidations by the subsidiary, using the Company's stock and/or capital, to acquire important and critical business components along its horizontal business plane; (3) utilizing the Company's capital for necessary expansion; (4) traditional advertising, marketing and selling of the subsidiary's products and services; and (5) networking with the Company's subsidiaries. As of September 30, 1998, Unified owned all of the capital stock of Management, Indianapolis, Indiana, a licensed NASD broker- dealer; Services, Indianapolis, Indiana, a registered transfer agent and mutual fund services company; Advisers, Indianapolis, Indiana, a registered investment adviser under the Investment Advisers Act of 1940, as amended; Health, Lexington, Kentucky, a registered investment adviser; Lexington, Lexington, Kentucky, a non-bank affiliated trust company that is regulated by the Department of Financial Institutions, Commonwealth of Kentucky; Unified Internet Services, Indianapolis, Indiana, a technology and Internet services company; Benefit Planners, Lexington, Kentucky, a professional services firm specializing in back- office recordkeeping for qualified plans; EMCO, New York, New York, an estate, tax and wealth management firm; and Fiduciary Counsel, New York, New York, an investment management firm. As a result of the Company's ownership of Advisers, the Company's subsidiaries provide services for the affiliated Unified Funds, a family of four no-load mutual funds sponsored by Advisers (hereinafter referred to as the "Unified Funds"). The Company provides management services, working capital, systems support and development and equipment for its wholly owned financial services subsidiaries. The Company's subsidiaries concentrate their services over the following lines of business in the financial services industry: mutual -18- fund services, including transfer agency, shareholder and administrative services, fund accounting, compliance and distribution; brokerage and securities services, including third-party introduced clearing services; investment advisory and asset management services for various asset management categories and objectives; tax-free reorganizations and consolidations of financial services companies and small mutual funds; certain non-bank custodial services; trust and retirement services; qualified plan services, including plan participant education; internal and external proprietary product and systems development for financial services institutions, predominately mutual funds, including the Unified Funds; asset allocation services; investment advisory services; financial planning services; and Internet technology and services. The following presents management's discussion and analysis of the Company's consolidated financial condition and results of operations as of the dates and for the periods indicated. This discussion should be read in conjunction with the other information set forth in this Quarterly Report on Form 10-QSB, including the Company's unaudited, consolidated financial statements and the accompanying notes thereto. COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 Total revenue for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997 increased $2,312,647, or 45.4%, from $5,089,947 to $7,402,594. For such periods, brokerage revenues increased $684,865, or 36.9%, investment advisory revenues increased $976,136, or 64.6%, trust and administration services revenues increased $409,650, or 83.5% and other income increased $285,476, or 315.6%. The increase in brokerage revenues was due to the commissions received by Management from the sale of Common Stock in connection with the Company's recently completed private placement (the "Private Placement"). Investment advisory revenues increased due to growth in assets under management at both Health and Lexington and due to the acquisitions by the Company in March 1998 and August 1998 of Advisers and Fiduciary Counsel, respectively. Trust and administrative revenues primarily increased due to the acquisitions by the Company in March 1998 and August 1998 of Benefit Planners and EMCO, respectively. Other income for the first nine months of 1998 increased as a result of additional interest income earned on cash and cash equivalents received in connection with the Private Placement. Gross profit for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997 increased $1,917,457, or 50.9%, from $3,767,545. For such periods, gross profit as a percentage of revenue increased to 76.8% from 74.0%. Brokerage gross profit increased to $1,360,971, or 53.6%, for the nine months ended September 30, 1998 from $873,589, or 47.1%, for the same period of the prior year, reflecting the increased brokerage revenues received by Management in connection with the Private Placement. The increase in the percentage of fund services revenue charges to fund services revenues from 24.1% for the nine months ended September 30, 1997 to 34.8% for the nine months ended September 30, 1998, relates to higher trail commissions. Investment advisory gross profit of $2,383,506 for the nine months ended September 30, 1998 compared to $1,447,192 for the nine months ended September 30, 1997. The increase in the investment fees paid during the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997 was due to increased fees due to the growth in assets under management at both Health and Lexington and increased fees related to the business activities of Advisers and Fiduciary Counsel, which were acquired by the Company in 1998. The revenues and cost of sales of each of Advisers and Fiduciary Counsel are not included in the Company's results of operations for 1997. Trust and administration gross profit increased from $458,651 for the nine months ended September 30, 1997 to $840,354 for the nine months -19- ended September 30, 1998. This increase was principally due to the acquisitions in 1998 of Benefit Planners and EMCO. Income from operations for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997 increased $747,702 from $309,986, or 6.1% of total revenue, to $1,057,688, or 14.3% of total revenue. Total expenses for the nine months ended September 30, 1998 was $4,627,314, or 62.5% of total revenue, as compared to $3,457,559, or 67.9% of total revenue, for the nine months ended September 30, 1997. The increase in each expense item for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997 was principally due to the acquisitions by the Company in 1998 of Benefit Planners, Advisers, Fiduciary Counsel and EMCO. The totals for the nine months ended September 30, 1998 also include a fund service expense adjustment related to prior year periods and increased legal and professional fees related to the Company's acquisitions of Benefit Planners, Advisers, Fiduciary Counsel and EMCO and the pending acquisitions of AmeriPrime, Equity, CPFC, Strategic and Commonwealth. As a percentage of total revenue, employee compensation and benefits declined from 42.9% for the nine months ended September 30, 1997 to 30.6% for the nine months ended September 30, 1998. During the nine months ended September 30, 1997, employee compensation and benefits included a one-time bonus payment to employees in the amount of $125,000. In comparing the nine months ended September 30, 1998 to the nine months ended September 30, 1997, total expenses increased by 33.8%, but, as a percentage of total revenue, decreased by 5.4%, reflecting the improved income from operations. For the nine months ended September 30, 1998, Unified's portion of the loss of Advisers (prior to Unified's acquisition of 100% of the capital stock of Advisors on March 31, 1998) was $39,945 as compared to a $54,722 profit for the nine months ended September 30, 1997. A general decline in the stock market lead to a $17,447 decline in the realized gain on securities and an increase of $28,126 in the unrealized loss on securities in comparing the nine months ended September 30, 1998 to the same period of 1997. Net income for the nine months ended September 30, 1998 increased $632,748, or 169.3%, as compared to net income for the nine months ended September 30, 1997. Increased revenues for the nine months ended September 30, 1998 more than offset the increased expenses during such period as compared to the nine months ended September 30, 1997. For the nine months ended September 30, 1998, net income as a percentage of total revenues increased to 13.6% from 7.3% for the nine months ended September 30, 1997. COMPARISON OF RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997 Total revenue for the quarter ended September 30, 1998 as compared to the quarter ended September 30, 1997 increased $1,387,213, or 78.5%, from $1,766,216 to $3,153,429. For such periods, brokerage revenues increased $287,245, or 44.2%, due to increased commissions at Management. Investment advisory revenues increased significantly from $609,935 during the quarter ended September 30, 1997 to $1,142,912 during the quarter ended September 30, 1998, principally due to a growth in assets under management at both Health and Lexington and due to the acquisitions by the Company in 1998 of Advisers and Fiduciary Counsel. For the quarter ended September 30, 1998, fund services revenues increased $140,847, or 36.3%, as compared to the quarter ended September 30, 1997. Such increase was primarily due to an increase in the number of funds serviced by Services and an increase in the amount of assets under management in the Unified Funds. For the quarter ended September 30, 1998 as compared to the quarter ended September 30, 1997, trust and administrative revenues increased $233,213, or 221.6%, principally due to the acquisitions in 1998 of Benefit Planners and EMCO. The -20- increase in other income for the quarter ended September 30, 1998 as compared to the quarter ended September 30, 1997 was due to additional interest income earned on cash and cash equivalents received in connection with the Private Placement. Gross profit for the quarter ended September 30, 1998 as compared to the quarter ended September 30, 1997 increased $821,017, or 62.8%, from $1,307,332. For such periods, gross profit as a percentage of revenue decreased from 74.0% to 67.5%. The decrease in the gross profit percentage for the quarter ended September 30, 1998 as compared to the quarter ended September 30, 1997 was due to higher trail commission charges. Investment advisory gross profit increased from $583,329, or 95.6%, for the quarter ended September 30, 1997 to $1,106,064, or 96.8%, for the quarter ended September 30, 1998. Such increase was primarily due to increased investment advisory revenues related to increased assets under management at both Health and Lexington and due to the acquisitions in 1998 of Advisers and Fiduciary Counsel. The revenues and cost of sales of each of Advisers and Fiduciary Counsel are not included in the Company's results of operations for 1997. Trust and administration gross profit improved to $322,594, or 95.3%, for the quarter ended September 30, 1998 as compared to $98,789, or 93.9% for the quarter ended September 30, 1997. This increase was principally due to the acquisitions in 1998 of Benefit Planners and EMCO. Income from operations for the quarter ended September 30, 1998 as compared to the quarter ended September 30, 1997 increased $99,142 from $213,960, or 12.1% of total revenue, to $313,102, or 9.9% of total revenue. Total expenses for the quarter ended September 30, 1998 were $1,815,247, or 57.6% of total revenue, as compared to $1,093,372, or 61.9% of total revenue, for the quarter ended September 30, 1997. The increase in each expense item for the quarter ended September 30, 1998 as compared to the quarter ended September 30, 1997 was principally due to the acquisitions by the Company in 1998 of Fiduciary Counsel and EMCO. Total expenses for the quarter ended September 30, 1998 also includes increased legal and professional fees related to the Company's acquisitions of Fiduciary Counsel and EMCO and the pending acquisitions of AmeriPrime, Equity, CPFC, Strategic and Commonwealth. As a percentage of total revenue, employee compensation and benefits declined from 37.1% for the quarter ended September 30, 1997 to 29.2% for the quarter ended September 30, 1998. During the quarter ended September 30, 1997, employee compensation and benefits included a one-time bonus payment to employees in the amount of $125,000. In comparing the quarter ended September 30, 1998 to the quarter ended September 30, 1997, total expenses increased by 66.0%, but, as a percentage of total revenue, decreased by 4.3%, reflecting the improved income from operations. For the quarter ended September 30, 1997, Unified's portion of the loss of Advisers was $25,208 (no loss was recorded for the three months ended September 30, 1998 due to Unified's 100% ownership of Advisers since March 31, 1998). The Company also experienced a $14,195 increase in unrealized losses on securities in the third quarter of 1998 as compared to the third quarter of 1997. Net income for the quarter ended September 30, 1998 increased $121,241, or 89.9%, as compared to net income for the quarter ended September 30, 1997. For the quarter ended September 30, 1998, net income as a percentage of total revenues increased to 8.1% from 7.6% for the quarter ended September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES The assets and liabilities of each of Benefit Planners, Advisers, EMCO and Fiduciary Counsel are included in the Company's balance sheet as of September 30, 1998. The inclusion of these companies and the receipt of funds pursuant to the Private Placement are the principal reasons for the -21- increase from December 31, 1997 to September 30, 1998 of most balance sheet items. The Company's primary source of liquidity historically has been and continues to be cash flow from operating activities, available borrowing capacity from capitalized leases and a loan from a regional bank to finance capital equipment. The net increase in cash and cash equivalents during the first nine months of 1998 from year-end 1997 was $8,781,546. The principal increase reflects net proceeds from the private placement of $9,941,634 and bank borrowing for equipment of $224,299, which proceeds offset the $1,706,900 utilized to redeem the Series A and Series B Preferred Stock. For the nine months ended September 30, 1998, the Company issued 437,338 shares of Common Stock. In addition, during May 1998, the Company issued 2,100 shares of Series C Preferred Stock to certain directors, executive officers and agents of the Company for total consideration of $210,000. On August 21, 1998, the Company acquired Fiduciary Counsel for cash in the amount of $800,835 plus 36,110 shares of Common Stock, creating goodwill of $1,564,801. On April 25, 1998, the Company utilized $1,706,900 of the Private Placement proceeds to redeem the outstanding shares of Series A and Series B Preferred Stock. Pending usage, the Company may invest the remaining net proceeds from the Private Placement in its own no-load mutual fund portfolios. The Private Placement should have a positive effect on the Company assisting further development, marketing, expansion and support of the Company's products and services, some of which are proprietary, promoting aggressive advertising and publicity program for our niche products and services, especially the V.O.I.C.E.(TM) program and the Company's vision for the financial services industry and expanding of the Company's internet investment activities, including banking activities. Changes in balance sheet items related to the acquisitions of Benefit Planners, Advisers, EMCO and Fiduciary Counsel were the following as of September 30, 1998: Item Amount ---- ------ Cash and cash equivalents $554,397 Investments in securities 14,556 Investments in affiliated mutual funds 64,996 Accounts receivable 536,858 Prepaid and sundry assets 50,575 Fixed assets, net 138,501 Deferred cost, net 355,101 Other non-current assets 23,531 Capitalized leases 78,333 Accounts payable and accrued expenses 607,461 Accrued compensation and benefits 274,240 Deferred income taxes 35,218 Other liabilities 143,493 YEAR 2000 COMPLIANCE The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. These programs treat years as occurring between 1900 and the end of 1999 and do not self-convert to reflect the upcoming change in the century. If not corrected, computer applications could create erroneous results by or at the Year 2000. -22- The Company has undertaken a program to understand the nature and extent of the work required to make its systems Year 2000 compliant. This program encompasses operating, information and facilities systems, the Company's products and the readiness of the Company's vendors. The program includes the following phases: awareness and inventory; triage; detailed assessment and resolution; testing; deployment; and contingency plan development for all areas. The Company's objective is to become Year 2000 compliant with its critical systems by the end of the fourth quarter of 1998, allowing substantial time for further testing, verification and conversion of less important activities and systems. The Company has determined that it has no exposure to contingencies related to the Year 2000 for services it sells and that its technology systems are substantially Year 2000 compliant. The Company also is requesting assurance, by no later than December 31, 1998, from its significant vendors that they are addressing this issue to ensure that there will be no major disruptions to the Company's business. Plan Definitions - ---------------- Awareness - Making employees and management aware of Y2K problem and how it affects the Company. Inform employees and management of Y2K project and give routine updates. Inventory - A complete inventory that will identify products that are not Year 2000 compliant. Triage - Decide what systems to keep based on reviews of technical risk and business risk. Systems critical to the business are placed in the detail assessment phase and are corrected. Detailed Assessment - Period in which efforts are focused on: (a) identification of year 2000 problems within a specific system; and (b) identification to appropriate solutions to those problems. Resolution - Period when efforts are focused in repair, replacement or retirement of systems in the Company's organization that incorporate Year 2000 problems. Testing - Deploy fixes and test resolutions. Deployment - Make Year 2000 systems operational. Critical Systems Plan Progress: - ------------------------------ Awareness Plan: Ongoing through 01/2000 Present Status: 100% Inventory Plan: 100% Complete by 9/1998 Present Status: 100% Triage Plan: 100% Completed by 9/1998 Present Status: 100% Assessment Plan: 100% Completed by 10/1998 Present Status: 100% Resolution Plan: 100% Completed by 12/1998 Present Status: 75% Testing Plan: 100% Completed by 12/1999 Present Status: 75% Deployment Plan: 100% Completed by 12/1999 Present Status: 75% -23- The total cost of the Year 2000 project to date has not been material. Based on the program to date, the Company does not expect that future costs of modifications will have a material adverse effect on the Company's financial position or results of operations. An estimated $65,000 will be spent on hardware and software to complete the Year 2000 project over the next year. Because the Company expects that its internal systems will become Year 2000 in a timely manner, the Company believes that the most likely worst case scenario would result from vendors or other third parties failing to achieve Year 2000 compliance. Depending upon the number of third parties, their identity and the nature of the non-compliance, the Year 2000 issue could have a material adverse effect on the Company's financial position or results of operations. However, the Company is developing contingency plans, which should be completed in early 1999, should any critical problems occur in any of the assessment areas noted above. Accordingly, the Company does not expect Year 2000 problems to result in any material adverse effect on the Company's financial position or results of operation. ** ** ** The forward-looking statements contained in this report are inherently subject to risks and uncertainties. The Company's actual results could differ materially from those in the forward-looking statements. Potential risks and uncertainties include a number of factors, including the Company's ability to manage rapid growth, economic conditions generally and in particular those affecting bond and securities markets. An increase in federal and state regulation of the mutual fund industry or the imposition of regulatory penalties also could have an effect on operating results of the Company. -24- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS For the three months ended September 30, 1998, the only sales of the Company's securities were the following: (i) 55,344 shares of Common Stock issued in connection with a private offering of up to 600,000 shares of Common Stock pursuant to subscriptions accepted on or before the termination of the offering on June 30, 1998, 40,600 shares at a price of $25.00 per share and 14,744 shares at a price of $27.50 per share; (ii) 57,780 shares of Common Stock issued upon the conversion of 428 shares of Series C Preferred Stock (no consideration was paid by the stockholder in connection with such conversion); (iii) 36,110 shares of Common Stock issued in connection with the acquisition by the Company of Fiduciary Counsel (such shares were issued in exchange for the outstanding capital stock of Fiduciary Counsel); and (iv) 11,000 shares of Common Stock issued in connection with the acquisition by the Company of all of the assets and certain of the liabilities of EMCO. All shares of stock issued by the Company during such period were issued pursuant to the exemption provided by Rule 506, as promulgated by the SEC. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Under applicable regulations of the Securities and Exchange Commission, all proposals of stockholders to be considered for inclusion in the proxy statement for the 1999 Annual Meeting of Stockholders must be received by the Company by December 30, 1998. The By-Laws of the Company provide that stockholder proposals, including nominations of directors, that do not appear in the proxy statement may be considered at a meeting of stockholders only if written notice of the proposal is received by the Secretary of the Company not less than 60 days and not more than 90 days prior to the anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder must be delivered not earlier than the 10th day prior to such annual meeting and not later than the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Company. Under the By-Laws of the Company, the date by which written notice of a proposal must be received by the Company to be considered at the 1999 Annual Meeting of Stockholders is March 21, 1999. At the 1999 Annual Meeting of Stockholders, the individuals named in the proxy relating to such meeting will exercise discretionary authority to vote on any matter brought before the meeting with respect to which the Company was provided with notice after December 30, 1998 and before March 21, -25- 1999. In addition, the Company will include in the proxy statement advice on the nature of the matter and how the individuals named in the proxy relating to such meeting intend to exercise their discretion to vote on each matter. Notwithstanding the above, the individuals named in the proxy relating to such meeting shall not exercise discretionary authority over a matter if: (i) the Company receives notice of such matter by March 21, 1999; (ii) by March 21, 1999, the proponent of such matter (the "Proponent") provides the Company with a written statement that the Proponent intends to deliver a proxy statement and form of proxy to holders of at least the percentage of the Company's voting shares required under Delaware law to carry the proposal; (iii) the Proponent includes the same statement in its proxy materials filed under Rule 14a-6 of the Securities Exchange Act of 1934, as amended; and (iv) immediately after soliciting the percentage of stockholders required to carry the proposal, the Proponent provides the Company with a statement from any solicitor or other person with knowledge that the necessary steps have been taken to deliver a proxy statement and form of proxy to holders of at least the percentage of the Company's voting shares required under Delaware law to carry the proposal. Any written notice of a stockholder proposal must include the following information: (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (i) the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner, and (ii) the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index attached hereto. (b) Reports on Form 8-K: On August 28, 1998, the Company filed a Current Report on Form 8-K, as amended by Current Report on Form 8-K/A, to report the acquisitions by the Company of Fiduciary Counsel and certain of the assets and liabilities of EMCO. In connection with the acquisition of Fiduciary Counsel on August 21, 1998, the Company issued 36,110 shares of Common Stock in exchange for all of the outstanding capital stock of Fiduciary Counsel. In connection with the acquisition of all of the assets and certain of the liabilities of EMCO on August 21, 1998, the Company issued 11,000 shares of Common Stock in exchange for such assets and liabilities. On September 8, 1998, the Company filed a Current Report on Form 8-K to report the declaration on August 26, 1998 of a dividend distribution of one Preferred Stock Purchase Right (collectively, the "Rights") for each outstanding share of Common Stock. The dividend distribution was payable to the stockholders of record of the Company at the close of business on August 26, 1998. Generally, each Right, when exercisable, entitles the registered holder to purchase from the Company -26- one one-hundredth of a share of a new series of voting preferred stock, designated as Series D Junior Participating Preferred Stock, $.01 par value, at a price of $200.00 per one one-hundredth of a share, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement between the Company and Services, as Rights Agent. -27- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNIFIED FINANCIAL SERVICES, INC. (Registrant) November 20, 1998 By: /s/ Timothy L. Ashburn ---------------------------------------- Timothy L. Ashburn, Chairman, President and Chief Executive Officer -28- EXHIBIT INDEX Ex. No. Description ------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company, filed as Exhibit 4.1(a) to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 3.2 By-laws of the Company, filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 4.1 Certificate of Designations, Preferences, and Relative Rights, Qualifications and Restrictions of the Series C 6.75% Cumulative Convertible Preferred Stock of the Company, filed as Exhibit 4.1(d) to the Company's Quarterly Report on From 10-QSB for the quarter ended September 30, 1997, is incorporated herein by reference. 4.2 Certificate of Designations, Preferences and Rights of Series D Junior Participating Preferred Stock of the Company. 4.3 Rights Agreement, dated as of August 26, 1998, between the Company and Unified Fund Services, Inc., filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated September 3, 1998, is incorporated herein by reference. 10.1 Agreement and Plan of Merger dated April 25, 1997 by and among the Company, HFI Acquisition Corporation, Health Financial, Inc. and Dr. Gregory W. Kasten, filed as Exhibit 2.1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.2 Amended and Restated Agreement and Plan of Merger dated as of April 25, 1997 by and among the Company, FLTC Acquisition Corporation, First Lexington Trust Company and Dr. Gregory W. Kasten, filed as Exhibit 2.2 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.3 Agreement and Plan of Merger dated as of May 8, 1997 by and among the Company, VAI Acquisition Corporation, Vintage Advisers, Inc. and Timothy L. Ashburn, filed as Exhibit 2.3 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.4 First Amendment to Agreement and Plan of Merger dated as of May 31, 1997 by and among the Company, HFI Acquisition Corporation, Health Financial, Inc. and Dr. Gregory W. Kasten, filed as Exhibit 2.4 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. -29- 10.5 Agreement and Plan of Merger, dated July 10, 1998, by and among the Company, Fiduciary Acquisition Corporation, Fiduciary Counsel, Inc., Associated Family Services, Inc., Intellectronic Management Systems, Inc., Jack R. Orben, Andrew E. Beer and Charles C. Hickox, filed as Exhibit 2 to the Company's Current Report on Form 8-K dated August 28, 1998, is incorporated herein by reference. 10.6 Agreement and Plan of Merger, dated October 16, 1998, by and among the Company, AmeriPrime Acquisition Corporation, AmeriPrime Financial Services, Inc. and Kenneth D. Trumpfheller, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated November 5, 1998, is incorporated herein by reference. 10.7 Agreement and Plan of Merger, dated October 16, 1998, by and among the Company, Equity Acquisition Corporation, Equity Underwriting Group, Inc., John R. Owens and D. Richard Meyer, filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated November 5, 1998, is incorporated herein by reference. 10.8 Termination Agreement dated as of December 1, 1997 by and among the Company, VAI Acquisition Corporation, Vintage Advisers, Inc. and Timothy L. Ashburn, filed as Exhibit 2.5 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.9 Release and Surrender Agreement dated as of December 1, 1997 by and among the Company, Vintage Advisers, Inc., Timothy L. Ashburn and Jack R. Orben, filed as Exhibit 2.6 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.10 Employment Agreement dated as of June 1, 1997 by and between Health Financial, Inc. and Dr. Gregory W. Kasten, filed as Exhibit 10.1 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.11 Business Loan Agreement dated as of September 10, 1997 by and between the Company and Bank One, Indiana, N.A., filed as Exhibit 10.2 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.12 Commercial Security Agreement dated as of September 10, 1997 by and between the Company and Bank One, Indiana, N.A., filed as Exhibit 10.3 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. 10.13 Promissory Note dated as of September 10, 1997 issued by the Company in favor of Bank One, Indiana, N.A., filed as Exhibit 10.4 to Amendment No. 1 to the Company's Registration Statement on Form 10-SB, is incorporated herein by reference. -30- 10.14 Unified Financial Services, Inc. 1998 Stock Incentive Plan, filed as Annex A to the Company's Proxy Statement for the Company's 1998 Annual Meeting, is incorporated herein by reference. 11.1 Computation of Per Share Earnings. 27.1 Financial Data Schedule (September 30, 1998). -31- EX-4.2 2 CERTIFICATE OF DESIGNATIONS, PREFERENCES & RIGHTS CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES D JUNIOR PARTICIPATING PREFERRED STOCK OF UNIFIED FINANCIAL SERVICES, INC. I, Timothy L. Ashburn, the Chairman, President and Chief Executive Officer of Unified Financial Services, Inc. (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 151 thereof, DO HEREBY CERTIFY: That, pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation, as amended, of the Company, the said Board of Directors on August 26, 1998 adopted the following resolution creating a series of One Hundred Thousand (100,000) shares of voting Preferred Stock designated as Series D Junior Participating Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Company in accordance with the provisions of its Certificate of Incorporation, as amended, a series of voting Preferred Stock of the Company be and is hereby created, and that the designation and amount thereof and the powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. ---------------------- There shall be a series of the voting preferred stock of the Company which shall be designated as the "Series D Junior Participating Preferred Stock," $0.01 par value, and the number of shares constituting such series shall be One Hundred Thousand (100,000). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series D Junior Participating Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Company. Section 2. Dividends and Distributions. --------------------------- (A) Subject to the rights of the holders of any shares of any series of preferred stock of the Company ranking prior and superior to the Series D Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series D Junior Participating Preferred Stock, in preference to the holders of shares of Common Stock, $.01 par value, of the Company (the "Common Stock") and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on or about the first day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series D Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series D Junior Participating Preferred Stock. In the event the Company shall at any time after August 26, 1998 (the "Rights Declaration Date") declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series D Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Company shall declare a dividend or distribution on the Series D Junior Participating Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series D Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series D Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series D Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series D Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series D Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. ------------- The holders of shares of Series D Junior Participating Preferred Stock shall have the following voting rights: (A) Each share of Series D Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Company. (B) Except as otherwise provided herein, in the Company's Certificate of Incorporation or by law, the holders of shares of Series D Junior Participating Preferred Stock, the holders of shares of Common Stock, and the holders of shares of any other capital stock of the Company -2- having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (C) Except as otherwise set forth herein or in the Company's Certificate of Incorporation, and except as otherwise provided by law, holders of Series D Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- (A) Whenever dividends or distributions payable on the Series D Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series D Junior Participating Preferred Stock outstanding shall have been paid in full, the Company shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series D Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series D Junior Participating Preferred Stock, except dividends paid ratably on the Series D Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) except as permitted in Section 4(A)(iv) below, redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series D Junior Participating Preferred Stock; provided, however, that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series D Junior Participating Preferred Stock; and (iv) purchase or otherwise acquire for consideration any shares of Series D Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series D Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. -3- Section 5. Reacquired Shares. ----------------- Any shares of Series D Junior Participating Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. The Company shall cause all such shares upon their cancellation to be authorized but unissued shares of Preferred Stock which may be reissued as part of a new series of Preferred Stock, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. -------------------------------------- (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Company, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series D Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series D Junior Participating Preferred Stock shall have received $100.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series D Liquidation Preference"). Following the payment of the full amount of the Series D Liquidation Preference, no additional distributions shall be made to the holders of shares of Series D Junior Participating Preferred Stock, unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series D Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in paragraph (C) of this Section 6 to reflect such events as stock dividends, and subdivisions, combinations and consolidations with respect to the Common Stock) (such number in clause (ii) being referred to as the "Adjustment Number"). Following the payment of the full amount of the Series D Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series D Junior Participating Preferred Stock and Common Stock, respectively, holders of Series D Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Series D Junior Participating Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event there are not sufficient assets available to permit payment in full of the Series D Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series D Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Company shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. -4- Section 7. Consolidation, Merger, etc. -------------------------- In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series D Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is exchanged or changed. In the event the Company shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series D Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. Section 8. Redemption. ---------- The shares of Series D Junior Participating Preferred Stock shall not be redeemable. Section 9. Ranking. ------- The Series D Junior Participating Preferred Stock shall rank junior to all other series of the Company's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Fractional Shares. ----------------- Series D Junior Participating Preferred Stock may be issued in fractions which are integral multiples of one one-hundredth of a share. Fractions of shares of Series D Junior Participating Preferred Stock may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by the Company. The holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Series D Junior Participating Preferred Stock represented by such depositary receipts. [Remainder of this page intentionally left blank] -5- IN WITNESS WHEREOF, I have executed and subscribed this Certificate and do affirm and acknowledge the foregoing as true under the penalties of perjury this 9th day of September, 1998. UNIFIED FINANCIAL SERVICES, INC. By: /s/ Timothy L. Ashburn ------------------------------------- Name: Timothy L. Ashburn Title: Chairman, President and Chief Executive Officer State of Missouri ) ) ss. County of St. Louis ) On this 9th day of September, 1998, before me, Denise A. DeRouen, a Notary Public in and for the State of Missouri, personally appeared Timothy L. Ashburn, Chairman, President and Chief Executive Officer of Unified Financial Services, Inc., known to me to be the person who executed the foregoing Certificate of Designation and acknowledged to me that he executed the same pursuant to authority given by the Board of Directors of such corporation as their free and voluntary act, and as the free and voluntary act and deed of such corporation, for the uses and purposes therein set forth. /s/ Denise DeRouen ---------------------------------------- Notary Public My commission expires: March 25, 2002 -6- EX-11.1 3 COMPUTATION OF PER SHARE EARNINGS EX - 11 Calculation of Earnings Per Share UNIFIED FINANCIAL SERVICES, INC. EARNINGS PER SHARE
For the Nine Months Ended Sept. 30, For the Three Months Ended Sept. 30, ----------------------------------- ------------------------------------ 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net income $1,006,452 $ 373,704 $ 219,387 $ 134,885 Dividends on preferred stock 85,844 67,530 - 34,324 ---------- ---------- ---------- ---------- Results after preferred dividend $ 940,608 $ 306,174 $ 219,387 $ 100,581 ========== ========== ========== ========== Basic: Weighted average number of common shares outstanding 1,027,776 608,558 1,027,776 616,558 Weighted average number of common shares related to acquisition of Resource Benefit Planners, Inc. 8,967 12,000 Weighted average number of common shares related to private placement 220,293 421,228 Weighted average number of common shares related to acquisition of EMCO Estate Management Company, Inc. 1,692 5,022 Weighted average number of common shares related to acquisition of Fiduciary Counsel, Inc. 5,558 18,485 Weighted average number of common shares received upon conversion of Series C Preferred Stock 36,159 30,146 Weighted average number of common shares issued 319 946 ---------- ---------- ---------- ---------- Total weighted average shares 1,274,761 608,558 1,513,603 816,558 ========== ========== ========== ========== Basic earnings per share $ 0.74 $ 0.50 $ 0.14 $ 0.16 ========== ========== ========== ========== Diluted: Weighted average number of common shares outstanding 1,027,776 1,027,776 1,027,776 1,027,776 Weighted average number of common shares related to acquisition of Resource Benefit Planners, Inc. 12,000 12,000 Weighted average number of common shares related to private placement 437,338 437,338 Weighted average number of common shares related to acquisition of EMCO Estate Management Company, Inc. 11,000 11,000 Weighted average number of common shares related to acquisition of Fiduciary Counsel, Inc. 36,110 36,110 Weighted average number of common shares received upon conversion of Series C Preferred Stock 57,780 57,780 Weighted average number of common shares issued 3,000 3,000 Weighted average number of common shares to be received upon the conversion of Series C Preferred Stock 225,720 225,720 Weighted average of common stock equivalent shares related to vested options 6,800 - 6,800 - ---------- ---------- ---------- ---------- Total shares 1,817,524 1,027,776 1,817,524 1,027,776 ========== ========== ========== ========== Diluted earnings per share $ 0.52 $ 0.30 $ 0.12 $ 0.10 ========== ========== ========== ==========
-32- EX-27.1 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the unaudited consolidated statements of financial condition and the consolidated statements of operation of Unified Financial Services, Inc. filed as a part of the Company's quarterly report on Form 10-QSB and is qualified in its entirety by reference to such report. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 9,367,300 574,309 1,867,890 2,041 0 11,899,056 1,669,527 964,341 15,533,903 2,807,317 0 20,350 0 1,672 0 15,533,903 0 7,402,594 0 1,717,592 4,627,314 0 34,988 1,002,307 (4,145) 1,006,452 0 0 0 1,006,452 0.74 0.52
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