UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001 Commission File No. 0-22629
UNIFIED FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 35-1797759
(State of Incorporation) (IRS Employer Identification No.)
2424 Harrodsburg Road 40503
Lexington, Kentucky (Zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (859) 296-2016
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
Preferred Stock, $0.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)of the
Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 2002:
Common Stock, $0.01 par value, $43,849,000
Number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 2002:
Common Stock, $0.01 par value, 2,877,634 shares outstanding
DOCUMENTS INCORPORATED BY REFERENCE
AS PROVIDED HEREIN, PORTIONS OF THE DOCUMENTS BELOW ARE INCORPORATED BY REFERENCE:
Document Part--Form 10-K
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REGISTRANT'S PROXY STATEMENT FOR THE 2002
ANNUAL MEETING OF STOCKHOLDERS PART III
1740148
UNIFIED FINANCIAL SERVICES, INC.
FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business....................................................................................2
Item 2. Properties.................................................................................11
Item 3. Legal Proceedings..........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders........................................12
Item 4A. Executive Officers of the Registrant.......................................................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................14
Item 6. Selected Financial Data....................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................17
Item 7A. Quantitative and Qualitative Disclosure about Market Risk..................................26
Item 8. Financial Statements and Supplementary Data................................................53
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................53
Item 11. Executive Compensation.....................................................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................53
Item 13. Certain Relationships and Related Transactions.............................................53
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................53
SIGNATURES.......................................................................................................55
PART I
ITEM 1. BUSINESS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K are or
may constitute forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995). Such forward-looking
statements are based on current expectations, estimates and projections about
Unified Financial Services' industries, management's beliefs and assumptions
made by management. For example, a downturn in economic conditions generally and
in particular those affecting bond and securities markets could lead to an exit
of investors from mutual funds. Similarly, an increase in Federal and state
regulations of the mutual fund, securities or banking industries or the
imposition of regulatory penalties could have an effect on our operating
results. In addition, by accepting deposits at fixed rates, at different times
and for different terms, and lending funds at fixed rates for fixed periods, a
bank accepts the risk that the cost of funds may rise and interest on loans and
investment securities may be at a fixed rate. Similarly, the cost of funds may
fall, but a bank may have committed by virtue of the term of a deposit to pay
what becomes an above-market rate. Investments may decline in value in a rising
interest rate environment. Loans have the risk that the borrower will not repay
all funds due in a timely manner as well as the risk of total loss. Collateral
may or may not have the value attributed to it. Although we believe our loan
loss reserve and our allowance for doubtful accounts are adequate, they may
prove inadequate if one or more large borrowers or clients, or numerous smaller
borrowers or clients, or a combination of both, experience financial difficulty
for individual, national or international reasons. Because the financial
services industry is highly regulated, decisions of governmental authorities can
have a major effect on operating results. These uncertainties, as well as
others, are present in the financial services industry and we caution
stockholders that management's view of the future on which we price and
distribute our products and estimate costs of operations and regulations may
prove to be other than as anticipated. In addition, our current expectations
with respect to our five business lines, our ability to enhance stockholder
value and aggressively and profitably grow assets under management and under
service, our ability to provide a high level of service satisfaction and manage
costs, our ability to expand profit margins, our ability to achieve future
growth and the development of VSX Holdings as an alternative trading system may
prove to be other than expected. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Risk Factors." Unless
required by law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. The data presented in the following pages should be read in
conjunction with our consolidated financial statements and the notes thereto on
pages 30 to 52 of this report.
GENERAL
Unified Financial Services, Inc., a Delaware holding company that was organized on December 7, 1989, is
a vertically integrated provider of financial products and services. We focus on three principal businesses:
o The provision of complete back-office and shareholder services for
the assets of third-party mutual fund families, as well as our
affiliated series funds;
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o Management and administration of 401(k) and other ERISA-directed assets; and
o Management of wealth for individuals through a suite of family-office services.
The integration of our three principal businesses (mutual fund
administration services, trust and retirement services and investment advisory
services) with our banking and brokerage operations allows for the capture of
additional profitable revenues. Further, this integration provides much greater
control of the quality of our component services.
Our fundamental objective is to enhance stockholder value by
aggressively and profitably growing assets under management and under service.
Our ability to provide a high level of service satisfaction, with an emphasis on
managing costs, combined with a dedication to maintaining a highly trained and
motivated workforce should lead to expanding profit margins. We have enjoyed
strong top line revenue growth in recent years and are prepared for anticipated
strong, future growth.
In early spring 2001, our board of directors made the decision to sell
our insurance operations, which operations were determined to be incompatible
with our core business - managing and servicing assets. Our board further
believed that such sale would allow management to focus further on our primary
businesses and provide capital to expand our core business lines. In December
2001, we sold and assigned substantially all of the assets and liabilities of
our insurance subsidiaries to Arthur J. Gallagher & Co. Cash proceeds from the
sale were used to retire approximately $1.6 million of outstanding indebtedness
and will be used to expand our other core business lines. This transaction also
improved our balance sheet.
Our mutual fund administration affiliate, Unified Fund Services, Inc.,
is a highly automated, registered stock transfer agent that provides transfer
agency, fund accounting, administrative and/or compliance services for mutual
fund families. Unified Fund Services is based in Indianapolis, Indiana and also
maintains an office in Dallas, Texas.
Our trust and retirement services affiliate, Unified Trust Company,
National Association, a limited purpose national banking association, was
organized in 2000 upon the conversion of First Lexington Trust Company to a
national banking association. Unified Trust Company, National Association is
based in Lexington, Kentucky and provides complete retirement plan solutions and
trust services to its clients, focusing primarily on providing trust and
administrative services for, and acting as trustee of, 401(k) plans. Unified
Trust Company also provides investment services to individuals, trusts and
business entities.
Our investment advisory affiliate, Fiduciary Counsel, a New York
corporation that dates back to 1931, provides professional investment management
to individuals and institutions from its offices in New York City.
Our banking affiliate, Unified Banking Company, a federal savings bank
that was organized in 1999, provides banking products and services to its
customer base and to the customer base of other subsidiaries of our company.
Unified Banking Company is located in Lexington, Kentucky.
Our brokerage affiliate, Unified Financial Securities, Inc., is a
regional discount brokerage firm with a link to mutual fund assets via its
brokerage account services. Unified Financial Securities, which is located in
Indianapolis, Indiana, also provides brokerage services to our other
subsidiaries.
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Financial information with respect to our business lines for each of
the last three years is contained in Note 15 of our consolidated financial
statements contained in this Annual Report on Form 10-K.
Our principal executive offices are located at 2424 Harrodsburg Road,
Lexington, Kentucky 40503, telephone number (859) 296-2016. We and our
subsidiaries also maintain offices at 431 North Pennsylvania Street,
Indianapolis, Indiana, telephone number (317) 917-7001; 2353 Alexandria Drive,
Lexington, Kentucky 40504, telephone number (859) 296-4407; 1725 Southlake
Boulevard, Southlake, Texas 76092, telephone number (817) 431-2197; 36 West 44th
Street, The Bar Association Building, Suite 1310, New York, New York 10036,
telephone number (212) 852-8852; and One US Bank Plaza, Suite 2100, St. Louis,
Missouri 63101, telephone number (314) 552-6440.
OUR AFFILIATED MUTUAL FUNDS
As of December 31, 2001, our affiliated mutual funds, the AmeriPrime
Advisers Trust and the AmeriPrime Funds, maintained approximately $251.9 million
and $133.4 million, respectively, in total net assets. Each of the AmeriPrime
Advisers Trust and AmeriPrime Funds is administered by Unified Fund Services and
distributed by Unified Financial Securities. The board of trustees of each of
the AmeriPrime Advisers Trust and AmeriPrime Funds consists of two disinterested
trustees and one interested trustee, Kenneth D. Trumpfheller, a director and the
president of Unified Fund Services.
VSX HOLDINGS, LLC
On May 23, 2000, we subscribed for ten shares of VSX Holdings, LLC, a
Delaware limited liability company, in exchange for $10 and certain intangible
property rights. We currently own approximately 0.5% of the outstanding shares
of VSX Holdings, but have the right to purchase up to an additional 1,990
(19.9%) shares at a price of $1 per share, upon the occurrence of certain
specified events. VSX Holdings is involved in the development of an alternative
trading system to be known as VSX.com, which, upon and subject to organization
and regulatory approval, will serve as a virtual, real-time private financial
market place. In connection with the organization of VSX Holdings, a third-party
investor made a $3.0 million loan to VSX Holdings, which loan is evidenced by a
debenture issued by VSX Holdings to such investor. The debenture is secured by
85,000 shares of our common stock pledged by certain executive officers of our
company. In addition, concurrent with the issuance of such debenture, we issued
an option to the third-party investor to acquire shares of our common stock,
which option has a five-year term. The investor may elect to foreclose on the
pledged collateral or exercise the option. Pursuant to such option, the holder
of the option and the debenture is entitled to surrender the debenture to us in
payment of the exercise price of the option. During the years ending May 23,
2002, 2003, 2004 and 2005, the exercise price per share of our common stock
subject to the option will be $50, $55, $60 and $65. Should the investor
foreclose on the pledged collateral, the executive officers would succeed to the
option and/or the claim against VSX Holdings. Should the option be exercised
prior to May 23, 2002 by the holder of the note (whether the investor, the
executive officers or any other holder): (a) we would issue 60,000 shares of
stock (54,545 after May 23, 2002) to the investor, the executive officers or any
other holder, as the case may be, and (b) we would succeed to the $3.0 million
claim against VSX Holdings.
Our investment in VSX Holdings is accounted for on the cost method of
accounting. In April 2001, we entered into a Management and Construction
Agreement with VSX Holdings whereby we agreed to provide consulting and
development services to VSX Holdings. Such contract also memorialized the
payments received by us during 2000 for services delivered to VSX Holdings. For
the years ended December 31, 2001 and 2000, we received payments totaling
$419,977 and $1,535,504, respectively, from VSX Holdings for such consulting and
development services, which amounts are
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recorded as a reduction of "Other operating expenses" on our Consolidated
Statements of Operations for the years ended December 31, 2001 and 2000.
REGULATION OF HOLDING COMPANY ACTIVITIES
Unified Financial Services is registered and qualified as a unitary
savings and loan holding company. As such, we are periodically examined by and
file reports with the Office of Thrift Supervision. Generally there are few
restrictions on the activities of a unitary savings and loan holding company and
its non-savings association subsidiaries. If we cease to be a unitary savings
and loan holding company, and continue to own Unified Banking Company, our
activities and the activities of our non-savings association subsidiaries would
thereafter be subject to substantial restrictions.
In November 1999, legislation was enacted that could have a
far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
Financial Services Modernization Act authorizes affiliations between banking,
securities and insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial activities. Among the new
activities permitted for bank holding companies are securities and insurance
brokerage, securities underwriting, insurance underwriting and merchant banking.
The Federal Reserve Board, in consultation with the Department of Treasury, may
approve additional financial activities. National bank subsidiaries are
permitted to engage in similar financial activities but only on an agency basis
unless they are one of the 50 largest banks in the country. National bank
subsidiaries are prohibited from insurance underwriting, real estate development
and merchant banking. The Gramm-Leach-Bliley Act, however, prohibits future
acquisitions of existing unitary savings and loan holding companies, like
Unified Financial Services, by firms that are engaged in commercial activities
and prohibits the formation of new unitary holding companies. Although the
Gramm-Leach-Bliley Act reduces the range of companies with which we may
affiliate, it may facilitate affiliations with companies in the financial
services industry.
DEPOSITORY INSTITUTION REGULATION
GENERAL. Unified Banking Company is a Federally chartered savings
institution, a member of the Federal Home Loan Bank of Cincinnati and its
deposits are insured by the Federal Deposit Insurance Corporation through the
Savings Association Insurance Fund. As a Federal savings institution, Unified
Banking Company is subject to regulation and supervision by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation and to Office of
Thrift Supervision regulations governing such matters as capital standards,
mergers, establishment of branch offices and activities and general investment
authority. The Office of Thrift Supervision periodically will examine Unified
Banking Company for compliance with various regulatory requirements and for safe
and sound operations. The Federal Deposit Insurance Corporation also has the
authority to conduct special examinations of Unified Banking Company because its
deposits are insured by the Savings Association Insurance Fund. Unified Banking
Company must file reports with the Office of Thrift Supervision describing its
activities and financial condition and must obtain the approval of the Office of
Thrift Supervision prior to entering into certain transactions.
REGULATORY CAPITAL REQUIREMENTS. Under the Office of Thrift
Supervision's regulatory capital requirements, savings associations must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to at least 4.0% (or 3.0% if the institution is rated composite 1
CAMELS under the Office of Thrift Supervision's examination rating system) of
adjusted total assets and "total" capital (a combination of "core" and
"supplementary" capital) equal to 8.0% of risk-weighted assets. In addition, the
Office of Thrift Supervision has adopted regulations that impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-
5
weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total
assets of less than 4.0% (or 3.0% if the institution is rated composite 1 CAMELS under the
Office of Thrift Supervision's examination rating system). As of December 31,
2001, Unified Banking Company had a total risk-based capital ratio of 11.4%, a
ratio of Tier 1 capital to risk-weighted assets of 10.6% and a ratio of Tier 1
capital to adjusted total assets of 8.0%.
QUALIFIED THRIFT LENDER TEST. A savings institution that does not meet
the Qualified Thrift Lender (QTL) test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution shall be restricted to those of a national bank; (iii) the
institution shall not be eligible to obtain any advances from its Federal Home
Loan Bank; and (iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. In addition, any
company that controls a savings institution that fails to qualify as a QTL will
be required to register as, and to be deemed, a bank holding company subject to
all of the provisions of the Bank Holding Company Act of 1956, as amended, and
other statutes applicable to bank holding companies. To meet the QTL test, an
institution's "Qualified Thrift Investments" must total at least 65% of
"portfolio assets." Under Office of Thrift Supervision regulations, portfolio
assets are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets. At December 31, 2001, the percentage of Unified Banking Company's
portfolio assets invested in Qualified Thrift Investments was in excess of the
percentage required to qualify Unified Banking Company under the QTL test.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991, the Federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements, including a
leverage limit, a risk-based capital requirement and any other measure of
capital deemed appropriate by the Federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate Federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. Any company controlling the
institution also could be required to divest the institution or the institution
could be required to divest subsidiaries. If an institution's ratio of tangible
capital to total assets falls below a "critical capital level," the institution
will be subject to conservatorship or receivership within 90 days unless
periodic determinations are made that forbearance from such action would better
protect the deposit insurance fund. The Federal banking regulators will
generally measure a depository institution's capital adequacy on the basis of
the institution's total risk-based capital ratio (the ratio of its total capital
to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a savings institution
that is not subject to an order or written directive to meet or maintain a
specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
The Office
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of Thrift Supervision may reclassify a well capitalized savings institution as
adequately capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category if the Office of Thrift Supervision determines,
after notice and an opportunity for a hearing, that the savings institution is in an
unsafe or unsound condition or that the institution has received and not corrected
a less-than-satisfactory rating for any CAMEL rating category. As of December 31, 2001,
Unified Banking Company was classified as "well-capitalized" under these prompt corrective action
regulations.
TRANSACTIONS WITH RELATED PARTIES. Generally, transactions between a
savings bank or its subsidiaries and its affiliates must be on terms as
favorable to the bank as transactions with non-affiliates. In addition, certain
of these transactions are restricted to a percentage of the bank's capital.
Affiliates of Unified Banking Company include Unified Financial Services and
each of our other subsidiaries. Unified Banking Company's authority to extend
credit to executive officers, trustees and 10% stockholders, as well as entities
under such persons control, currently are governed by Sections 22(g) and 22(h)
of the Federal Reserve Act and Regulation O promulgated by the Board of
Governors of the Federal Reserve System. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans Unified Banking
Company may make to such persons based, in part, on the bank's capital position,
and require certain approval procedures to be followed.
TRUST COMPANY REGULATIONS
Unified Trust Company, National Association, a limited purpose national
trust company, is chartered, regulated and examined by the Office of the
Comptroller of the Currency. Unified Trust Company, NA also is a member of the
Federal Reserve System. As a national trust company, the activities of Unified
Trust Company, NA must comply with various statutory and regulatory
requirements, including, among other things, the maintenance of adequate capital
and the exercise of fiduciary powers. Currently, Unified Trust Company, NA is
required to maintain a minimum of $2.0 million in capital, and may be required
to maintain additional minimum capital as assets under management at the trust
company increase.
REGULATION OF OUR SECURITIES AND PREMIUM FINANCE BUSINESSES
Under the Investment Company Act of 1940, as amended, the advisory,
subadvisory shareholder servicing and distribution agreements between our
subsidiaries and various mutual funds are subject to annual review by each
fund's board of trustees and the agreements must be approved annually to remain
in effect. There are no assurances that the funds' boards of trustees will renew
each agreement with these funds. The non-renewal of those agreements by a fund's
board of trustees could have a material adverse effect on our business. We have
no reason to believe that such approvals will not be granted and that the
various mutual fund agreements will not be renewed.
The securities industry, including broker-dealer, investment advisory
and transfer agency firms in the United States, are subject to extensive
regulation under Federal and state laws. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations, principally
the National Association of Securities Dealers, Inc. The regulations to which
broker-dealers are subjected cover all aspects of the securities business,
including sales methods, trade practices, capital structure of securities firms,
recordkeeping and the conduct of directors, officers and employees. Additional
state and Federal legislation, changes in rules promulgated by the Securities
and Exchange Commission and by self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules often directly affect
the methods of operation and profitability of money managers, broker-dealers and
transfer
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agents. Subject to certain preemptive Federal law, investment-related
firms also are subject to regulation and licensing by state securities
commissions in the states in which they transact business. The Securities and
Exchange Commission, state securities administrators and the self-regulatory
organizations may conduct administrative proceedings that can result in censure,
fine, suspension or expulsion of an investment adviser or broker-dealer, its
officers or employees. The principal purpose of regulation and discipline of
broker-dealers, investment advisers and transfer agents is the protection of
customers and the securities markets rather than protection of creditors and
shareholders of such firms. We also are subject to extensive regulation as to
our duties, affiliations, conduct and limitations on fees.
Our subsidiary, Commonwealth Premium Finance Corporation, must be
licensed as a premium finance company in the states of Kentucky, Tennessee,
Illinois and Ohio. Although Commonwealth Premium Finance Corporation also
conducts business in the states of West Virginia and Indiana, such states
presently do not require premium finance licensure. Applicable regulations in
all states in which Commonwealth Premium Finance Corporation conducts business
require the approval of service charges, forms and applications used by
Commonwealth Premium Finance Corporation in its business and also require
compliance with certain recordkeeping and record inspection requirements.
INDUSTRY REGULATIONS
Our broker-dealer subsidiary, Unified Financial Securities, Inc., is a
National Association of Securities Dealers member. The National Association of
Securities Dealers is a self-regulatory organization that has prescribed rules
with respect to maximum commissions, charges and fees related to sales of shares
in any open-end investment company registered under the Investment Company Act.
Each of Unified Investment Advisers, Health Financial and Fiduciary
Counsel is an investment adviser registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940, as amended. Unified
Investment Advisers serves as the adviser to the Liquid Green Money Market Fund.
Under the Investment Advisers Act, it is unlawful for any investment adviser to:
(1) employ any device, scheme or artifice to defraud any client or prospective
client; (2) engage in any transaction, practice or course of business that
operates as a fraud or deceit upon any client or prospective client; or (3)
engage in any act, practice or course of business that is fraudulent, deceptive
or manipulative.
We, from time to time, may acquire investment advisers to mutual funds.
Once an investment adviser is acquired, its advisory agreement is assigned to us
and automatically terminates under the Investment Company Act. Unified
Investment Advisers' assumption of an advisory agreement must be approved by a
majority of the fund's board of trustees and a majority of its outstanding
voting securities. An investment adviser purchased by us may not benefit from
the sale of its advisory business to Unified Investment Adviser which results in
the assignment of an advisory contract with a mutual fund unless, for a period
of three years after the sale, at least 75% of the board of trustees of the fund
are not interested persons of the new adviser or the predecessor adviser, and no
unfair burden is imposed on the fund as a result of the sale. This 75%
requirement is stricter than the general requirement that only two-thirds of
mutual fund's board of trustees must be "disinterested" under the Investment
Company Act. The effect of such transfer results in the assignment of the old
investment advisory agreement, which requires the new agreement to be approved
by the boards of trustees and the acquired fund's shareholders. There can be no
assurances that a fund's board or its shareholders will approve an advisory
agreement with Unified Investment Advisers after Unified Investment Advisers has
acquired the former adviser to the fund. In addition, Unified Investment
Advisers may be required to assume an advisory contract previously entered into
under disadvantageous terms in order to convince the fund's board or its
shareholders to approve Unified Investment Advisers' assumption of the
agreement.
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Mutual fund directors and investment advisers to mutual funds are
deemed to be "fiduciaries" of the fund. The Securities and Exchange Commission
is authorized to initiate an action to enjoin a breach of fiduciary duties
involving personal misconduct by any officer, director, investment adviser or
principal underwriter of a fund. Shareholders or the Securities and Exchange
Commission also may bring an action against the officers, directors, investment
adviser or principal underwriters for breach of fiduciary duty in establishing
the compensation paid to the investment adviser or underwriter. An investment
adviser or underwriter to a fund, its principals and its employees, also may be
subject to proceedings initiated by the Securities and Exchange Commission to
impose remedial sanctions for violation of any provision of the Federal
securities laws and the regulations adopted thereunder, and the Securities and
Exchange Commission may preclude a firm that has been sanctioned from continuing
to act in such capacity. Investment companies such as the AmeriPrime Funds and
AmeriPrime Advisers Trust are subject to substantive regulation under the
Investment Company Act. Such companies must comply with periodic reporting
requirements. Proxy solicitations are subject to the general proxy rules as well
as to special proxy rules applicable only to investment companies. Shares of
investment companies can only be offered at the next-determined net asset value
plus any sales load. A fund's management agreement initially must be approved by
the fund's board of trustees and a majority of the outstanding shares and, after
two years, must be annually approved, either by the board or by the outstanding
voting shares. A fund's management agreement must automatically terminate in the
event of assignment and typically is subject to termination upon 60-days' notice
by the board or by a vote of the majority of the outstanding voting shares. The
underwriting or distribution agreement also must be annually approved by the
board or by a vote of a majority of the outstanding voting shares, and must
provide for automatic termination in event of assignment. Transactions between
the investment company and an affiliate are prohibited.
REGULATORY PENALTIES FOR FAILURE TO MAINTAIN MINIMUM NET CAPITAL REQUIREMENTS
The Securities Exchange Act imposes minimum net capital requirements
for broker-dealer firms. A decrease below the minimum level of net capital
required to be maintained by Unified Financial Securities under the Securities
Exchange Act could force Unified Financial Securities to suspend activities
pending recovery of net capital. Factors that may affect Unified Financial
Securities' net capital include the general investment climate as well as our
ability to obtain any assets necessary to contribute equity capital to Unified
Financial Securities. Information regarding regulatory minimum net capital is
set forth in Note 10 of our consolidated financial statements included in this
Annual Report on Form 10-K.
Our businesses are subject to various risks and contingencies, many of
which are beyond our ability to control. These risks include: economic
conditions generally and, in particular, those affecting the bond and securities
markets; fluctuations in interest rates; discretionary income available for
investment; customer inability to meet payment or delivery commitments; customer
fraud; and employee fraud, misconduct and error.
COMPLIANCE REQUIREMENTS AND REGULATORY PENALTIES FOR NONCOMPLIANCE
Various aspects of our businesses are subject to Federal and state
regulation as well as to oversight by self-regulatory organizations that,
depending on the nature of any failure to comply with an applicable entity's
rules, may result in the suspension or revocation of licenses or registration,
including broker-dealer, investment adviser, transfer agent and premium finance
licenses and registrations, as well as the imposition of civil fines and
criminal penalties. Failure by us or any of our employees to comply with such
regulations or with any of the laws, rules or regulations of Federal, state or
industry authorities
9
(principally the National Association of Securities Dealers, Securities and Exchange Commission,
Office of the Comptroller of the Currency and Office of Thrift Supervision) could result in
censure, imposition of fines or other sanctions, including revocation of our right to do business or
in suspension or expulsion from the National Association of Securities Dealers.
Any of the foregoing could have a material adverse effect upon us. Such National
Association of Securities Dealers, Securities and Exchange Commission, Office of
the Comptroller of the Currency and Office of Thrift Supervision regulations are
designed primarily for the protection of the investing customers of securities
firms and financial institutions and not our stockholders. Finally, there is no
assurance that we, along with other financial institutions, fund distributors,
administrators and managers will not be subjected to additional stringent
regulation and publicity that may adversely affect our business.
COMPETITION
Since inception, we have encountered substantial competition in the
businesses in which we compete. Our principal competitors include mutual funds,
investment advisers, investment counsel firms and financial institutions such as
banks, trust companies, savings and loan institutions and credit unions.
Competition is influenced by various factors, including breadth, quality of
service and price. All aspects of our business are competitive. Large national
firms have much greater marketing capabilities, offer a broader range of
financial services and compete not only with us and among themselves but also
with commercial banks, insurance companies and others for retail and
institutional clients. Our affiliated mutual funds are subject to competition
from nationally and regionally distributed funds offering equivalent financial
products with returns equal to or greater than those offered by the AmeriPrime
Funds or AmeriPrime Advisers Trust. Competition for assets under management is
intense from both national and regional firms. Access to local investment and
the population of the region by modern communication systems is so efficient
that our geographical position cannot be deemed an advantage. Our investment
management operations compete with a large number of other investment management
firms, commercial banks, insurance companies, broker-dealers and other financial
service firms. Most of these firms are larger and have access to greater
resources than us. The investment advisory industry is characterized by
relatively low cost of entry and the formation of new investment advisory
entities that may compete directly with us is a frequent occurrence. We directly
compete with as many as several hundred firms that are of similar or larger
size. Our ability to increase and retain clients' assets could be materially
adversely affected if client accounts under-perform the market. The ability of
our investment management subsidiaries to compete with other investment
management firms also is dependent, in part, on the relative attractiveness of
their investment philosophies and methods under prevailing market conditions. A
large number of mutual funds are sold to the public by investment management
firms, broker-dealers, insurance companies and banks in competition with the
AmeriPrime Funds and AmeriPrime Advisers Trust. Many of our competitors apply
substantial resources to advertising and marketing their mutual funds, which may
adversely affect the ability of the AmeriPrime Funds and AmeriPrime Advisers
Trust to attract new assets. We expect that there will be increasing pressures
among mutual fund sponsors to obtain and hold market share. Although we may
expand the financial services we provide to our customers, we do not now offer
as broad a range of financial services as national stock exchange member firms,
commercial banks, insurance companies and others.
DEPENDENCE ON KEY CLIENTS
As of December 31, 2001, we provided mutual fund services, transfer
agency, fund accounting, administration and/or distribution services to 30
mutual fund families consisting of 143 portfolios. The contracts with respect to
such funds typically expire within one to three years. No assurance can be given
that any of these funds will remain our clients upon expiration or termination
of the various
10
administration and distribution agreements. The loss by us of such mutual fund
clients could have a material adverse effect on us.
Additionally, Unified Financial Securities has entered into clearing
agreements with its introduced broker-dealer clients that represent a
substantial portion of the assets in the Liquid Green Money Market Fund as their
brokerage sweep facility. The introduced broker-dealer relationships also
represent a significant portion of Unified Financial Securities' revenues from
trading commissions. The loss of clearing clients could have a material adverse
effect on us.
Unified Investment Advisers receives management fees from the Liquid
Green Money Market Fund. As such fund's manager and adviser, Unified Investment
Advisers, and, therefore, our company, are economically dependent on the Liquid
Green Money Market Fund for a portion of their revenue.
DEPENDENCE ON KEY PERSONNEL
We are dependent in a large part on our senior management personnel.
The loss or unavailability of any of these persons could have a material adverse
effect on us. Our success also will depend on our ability to attract and retain
highly skilled personnel in all areas of our business. There can be no assurance
that we will be able to attract and retain personnel on acceptable terms in the
future. We do not presently own insurance covering the lives of our senior
management. There can be no assurance that the services of our senior management
will continue to be available.
EMPLOYEES
As of December 31, 2001, we and our subsidiaries had 178 employees, of
which 176 were full-time employees. None of our employees or the employees of
our subsidiaries are subject to a collective bargaining agreement. We consider
our relationship with our employees and those of our subsidiaries to be good.
ITEM 2. PROPERTIES
----------
We, through our subsidiary, Unified Banking Company, lease our
corporate headquarters and administrative office facilities located at 2424
Harrodsburg Road, Lexington, Kentucky. We sublease approximately 1,700 square
feet from Unified Banking Company. Unified Financial Securities' and Unified
Fund Services' administrative offices are located at 431 North Pennsylvania
Street, Indianapolis, Indiana. Such facilities consist of approximately 12,836
square feet and are subject to a lease expiring in 2007. Health Financial's and
Unified Trust Company, National Association's administrative offices are located
at 2353 Alexandria Drive, Lexington, Kentucky. The operating leases for Health
Financial's and Unified Trust Company, National Association's offices expire in
2002 and 2003 and such offices have approximately 16,094 square feet. Unified
Banking Company's offices are located at 2424 Harrodsburg Road, Lexington,
Kentucky. The operating lease for such offices expires in 2011 and such offices
have approximately 6,772 square feet, exclusive of office space subleased for
our corporate headquarters. Fiduciary Counsel's administrative offices are
located at 36 West 44th Street, New York, New York. The operating lease for such
offices expires in 2002 and such offices have approximately 4,920 square feet.
Unified Fund Services also maintains administrative offices at 1725 Southlake
Boulevard, Southlake, Texas. Such operating lease expires in 2004 and such
office has approximately 1,778 square feet. Our current offices are considered
adequate to serve our foreseeable needs. Other than the administrative office
leases, we have no other significant property holdings.
11
ITEM 3. LEGAL PROCEEDINGS
-----------------
Various claims and lawsuits, incidental to our ordinary course of
business, are pending against us and our subsidiaries. In the opinion of
management, after consultation with legal counsel, resolution of these matters
is not expected to have a material effect on our financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There were no matters submitted during the quarter ended December 31,
2001 to a vote of our stockholders, through the solicitation of proxies or
otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The name, age and position with respect to each of our executive
officers are set forth below:
TIMOTHY L. ASHBURN, 51, has served as our chairman of the board since
1989, as our chief executive officer from 1989 to 1992 and 1994 to present, and
as our president from November 1997 to April 2000. Mr. Ashburn was employed by
Vine Street Trust Company, Lexington, Kentucky, a wholly owned subsidiary of
Cardinal Bancshares, Inc., a Kentucky bank holding company, for the two-year
period from April 1992 through March 1994. Mr. Ashburn also is a member of the
executive committee of our board of directors.
JOHN S. PENN, 50, has served as our president since April 2000, our
chief operating officer since July 1999 and a director since September 1999. Mr.
Penn also served as an executive vice president from July 1999 to April 2000.
Mr. Penn served as a director and executive vice president of Area Bancshares
Corporation, a bank holding company located in Owensboro, Kentucky from
September 1997 to July 1999. Prior thereto, Mr. Penn served as the president,
chief executive officer and a director of Cardinal Bancshares, Inc., a bank
holding company located in Lexington, Kentucky. Mr. Penn also is a member of the
executive and 401(k) investment oversight committees of our board of directors.
THOMAS G. NAPURANO, 60, a certified public accountant and a certified
management accountant, has served as our chief financial officer and an
executive vice president since 1989. Mr. Napurano served as a member of our
board of directors from 1989 to March 2002.
CHARLES H. BINGER, 45, has served as an executive vice president and
our general counsel since December 1999. Prior thereto, Mr. Binger was a partner
in the law firm of Thompson Coburn LLP, St. Louis, Missouri.
ANTHONY J. GHOSTON, 42, has served as a senior vice president and our
chief information officer since November 1997. Mr. Ghoston has been employed by
us in various management positions since 1989.
DAVID F. MORRIS, 40, has served as a senior vice president and our
associate general counsel since December 1999. Prior thereto, Mr. Morris was an
associate in the law firm of Thompson Coburn LLP, St. Louis, Missouri.
12
Dr. Gregory W. Kasten and Mr. Jack R. Orben, by virtue of their status
as an executive officer of a principal subsidiary of our company and a member of
our board of directors during 2001, respectively, also are considered "executive
officers" of our company:
DR. GREGORY W. KASTEN, 46, has served as a director and the president and
chief executive officer of Health Financial, Inc. and Unified Trust Company,
National Association, each a wholly owned subsidiary of our company, since 1986
and 1994, respectively. Dr. Kasten served as a director of our company from 1997
to 2000. Dr. Kasten has been awarded certified financial planner and certified
pension consultant designations and received a Master of Business Administration
degree with an emphasis on finance and investment management. Dr. Kasten also
received a medical degree but has retired from medical practice.
JACK R. ORBEN, 63, served as a director of our company from 1989 to
March 2002. Mr. Orben also is a director of Fiduciary Counsel, Inc., a wholly
owned subsidiary of our company. For various periods during the past five years,
Mr. Orben served as the chairman of the board, chief executive officer and
treasurer of each of Fiduciary Counsel, EMCO Estate Management Company,
Associated Family Services, Inc., Seward, Groves, Richards & Wells, Starwood
Corporation, Fiduciary Alliance Inc. and Intellectronic Management Systems Inc.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
There currently is no established public trading market for our common
stock. We have not had any stock splits or paid any stock dividends during the
periods presented.
SALES PRICE
-----------
HIGH LOW
---- ---
2000
----
First Quarter $40.00 $40.00
Second Quarter 40.00 40.00
Third Quarter 40.00 40.00
Fourth Quarter 40.00 40.00
2001
----
First Quarter $ -- $ --
Second Quarter -- --
Third Quarter -- --
Fourth Quarter 30.00 30.00
Because of our closely held nature, no representation is made that the
foregoing prices are or are not reflective of a "market price." As of March 1,
2002, we reported approximately 310 stockholders of record holding our common
stock.
We have not paid any cash dividends with respect to our common stock
during the disclosed time periods.
14
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following is a selected summary of our consolidated financial
condition and operating results as of and for the years ended December 31, 2001,
2000, 1999, 1998 and 1997:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- --------------
Income Statement Data:
Gross revenue.................... $ 17,627,166 $ 16,046,469 $ 14,825,794 $ 11,290,127 $ 9,614,638
Gross profit..................... 14,205,132 12,816,550 11,601,148 8,870,200 6,291,308
Total expenses................... 16,803,300 14,896,251 12,970,991 7,919,262 6,034,902
Income (loss) from continuing
operations.................... (2,598,168) (2,079,701) (1,369,843) 950,938 256,406
Other income (loss).............. 62,554 (69,044) 3,853 87,887 61,611
Income tax benefit............... 2,293,371 218,910 292,437 233,682 106,351
Net income (loss) from continuing
operations..................... (242,243) (1,929,835) (1,073,553) 1,272,507 424,368
Gain (loss) on sale of operations 2,847,708 (54,952) (129,487) -- --
Net income (loss) from discontinued
operations..................... 763,008 782,097 (547,750) (360,345) (612,230)
Net income (loss)................ 3,368,473 (1,202,690) (1,750,790) 912,162 (187,862)
Common Share Data:
Book value per share at year-end
(fully diluted)................ $ 5.53 $ 4.47 $ 4.68 $ 3.41 $ 1.64
Basic earnings (loss) per share.. 1.17 (0.42) (0.61) 0.42 (0.03)
Fully diluted earnings (loss) per share 1.11 (0.40) (0.59) 0.38 (0.03)
Basic common shares outstanding at
year-end....................... 2,877,634 2,880,028 2,869,862 2,316,767 1,758,931
Fully diluted common shares
outstanding at year-end........ 3,027,030 2,983,114 2,975,323 2,580,013 1,765,731
Balance Sheet Data (at year-end):
Total assets..................... $ 80,190,992 $ 65,126,002 $ 36,748,994 $ 26,498,577 $ 14,344,531
Investment securities............ 555,013 573,272 1,819,176 1,720,342 1,816,758
Total loans, net of allowance.... 43,705,576 20,834,674 2,810,876 -- --
Total deposits................... 55,905,541 34,620,338 7,331,853 -- --
Stockholders' equity............. 16,748,911 13,325,541 13,936,301 8,792,021 2,902,816
Other Selected Financial Data:
Assets under management.......... $891,542,438 $977,844,600 $1,003,982,000 $857,875,355 $786,407,155
Assets under service............. 5,900,463,371 4,800,000,000 4,200,000,000 3,435,000,000 650,000,000
Total employees at year-end...... 178 264 216 83 59
15
The following is a summary of our quarterly consolidated operating
results for the years ended December 31, 2001 and 2000:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2001
- ----
Income Statement Data:
Gross revenue.......................... $ 4,354,300 $ 4,426,371 $ 4,447,389 $ 4,399,106
Gross profit........................... 3,601,301 3,469,602 3,436,240 3,697,989
Total expenses......................... 4,056,170 4,152,881 4,332,848 4,261,401
Loss from continuing operations........ (454,869) (683,279) (896,608) (563,412)
Other income (loss).................... (32,547) 24,261 34,269 36,571
Income tax benefit..................... 498,784 254,602 305,443 1,234,542
Net income (loss) from continuing operations 11,368 (404,416) (556,896) 707,701
Gain on sale of operations............. -- -- -- 2,847,708
Net income from discontinued operations 191,287 97,746 270,095 203,880
Net income (loss)...................... 202,655 (306,670) (286,801) 3,759,289
Earnings Per Share:
Basic earnings (loss) per share........ $ 0.07 $ (0.11) $ (0.10) $ 1.31
Fully diluted earnings (loss) per share 0.07 (0.10) (0.10) 1.24
Basic common shares outstanding at period end 2,880,028 2,880,028 2,880,028 2,877,634
Fully diluted common shares outstanding at
period end........................... 3,050,530 2,982,864 2,905,564 3,027,030
2000
- ----
Income Statement Data:
Gross revenue.......................... $ 4,191,939 $ 4,008,830 $ 3,854,632 $ 3,991,068
Gross profit........................... 3,225,631 3,295,497 2,947,925 3,347,497
Total expenses......................... 4,315,984 3,735,626 3,576,269 3,268,372
Income (loss) from continuing operations (1,090,353) (440,129) (628,344) 79,125
Other income (loss).................... 12,293 (11,830) 4,185 (73,692)
Income tax benefit..................... 48,251 (68,719) 472,627 (233,249)
Net income (loss) from continuing operations (1,029,809) (520,678) (151,532) (227,816)
Loss on sale of operations............. -- -- -- (54,952)
Net income (loss) from discontinued operations (186,736) 372,489 151,711 444,633
Net income (loss)...................... (1,216,545) (148,189) 179 161,865
Earnings Per Share:
Basic earnings (loss) per share........ $ (0.42) $ (0.05) $ -- $ 0.06
Fully diluted earnings (loss) per share (0.42) (0.05) -- 0.05
Basic common shares outstanding at period end 2,880,028 2,880,028 2,880,028 2,880,028
Fully diluted common shares outstanding at
period end........................... 2,905,564 2,905,564 2,905,564 2,983,114
Certain data presented above varies from the amounts previously
reported in our quarterly reports filed with the SEC. We have adjusted certain
previously reported amounts to reflect operations that have been discontinued
since the respective filing date of each such quarterly report and to reflect
certain income statement reclassifications.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------------------------------
The following presents management's discussion and analysis of our
consolidated financial condition and results of operations as of the dates and
for the years indicated. This discussion should be read in conjunction with the
other information set forth in this Annual Report on Form 10-K, including our
audited, consolidated financial statements and the accompanying notes thereto.
As previously disclosed, in December 2001 we sold and assigned
substantially all of the assets and liabilities, respectively, of our insurance
operations. As required by accounting rules, the operating results of our
insurance subsidiaries have been excluded from our results from continuing
operations for the years ended December 31, 2001, 2000 and 1999. Such results
are reported as discontinued operations for such years.
During 2000 and into 2001, our nature of operations changed, and
personnel and costs were oriented to the consolidation, merger and repositioning
of the subsidiaries and lines of business acquired in 1998 and 1999. While this
consolidation, merger and repositioning continued in 2001, the major focus of
2001, in terms of both personnel time and company expense, was the positioning,
marketing, negotiating and due diligence of the sale of our insurance
operations. Legal and professional fees attributable to the preparation, sale
and discontinuation of the insurance operations were charged against the sale.
Additionally, expenses associated with personnel involved with the sale and
discontinuation of the insurance operations were charged against the sale.
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenue for the year ended December 31, 2001 compared to the prior year
increased $1,581,000, or 9.9%, from $16,046,000 to $17,627,000. For such years,
trust and retirement services revenue increased $490,000, or 11.3%, due to
increased trustee fees earned. Mutual fund administration services revenue
increased $620,000, or 12.9 %, due to an increase in assets under service. As of
December 31, 2001, we provided fund administrative services to 30 mutual fund
families consisting of 143 portfolios and approximately $5.9 billion in mutual
fund assets, compared to 29 mutual fund families consisting of 138 portfolios
and approximately $4.8 billion in mutual fund assets as of December 31, 2000.
During 2001, our mutual fund administration services operation added several new
clients; however, as a result of the declines in the financial markets, several
clients discontinued operations. Banking revenue increased $696,000, or 50.2%,
for the year ended December 31, 2001 compared to 2000, primarily due to a
$22,871,000 increase in outstanding loans to customers. Also contributing to the
increase in banking revenue was $337,000 in secondary market loan revenue. For
such years, brokerage revenue declined $324,000, or 10.4%, primarily due to a
$460,000 decline in trading revenue due to the loss of two client relationships
and a decline in business from our remaining introducing firms. In addition, for
such years, mutual fund distribution fees and order flow rebate declined by
$45,000 due to overall market conditions. Partially offsetting these declines
was an increase in investment management fees, distribution income and interest
income, which added $274,000 to revenue. For such years, investment advisory
revenue increased $23,000, or 1.2%, due to increased services to existing
clients and a shifting of existing investment advisory clients to bundled fee
relationships. This increase in fees was partially offset by a decline in fees
received based upon asset values due to the decline in the market value of many
investment portfolios. Assets under management at our investment advisory
operation declined by approximately 15.8% from December 31, 2000 to December 31,
2001. For such years, corporate revenue increased $76,000, or 15.6%, primarily
due to a $135,000 payment that we received in connection with the settlement of
a trademark dispute and a $120,000 increase in filming and rental income,
partially offset by a $125,000 decline in interest income earned.
17
Gross profit for the year ended December 31, 2001 compared to 2000
increased $1,388,000, or 10.8%, from $12,817,000 to $14,205,000. For such years,
gross profit as a percentage of revenue remained relatively flat at 81% versus
80%. Trust and retirement services gross profit increased $25,000, or 0.6%, due
to increased trustee fees earned. For such years, mutual fund administration
services gross profit increased $674,000, or 16.7%, primarily due to the
increase in the amount of assets under service. However, as discussed above, the
closing of several funds offset some of the gain. Banking gross profit increased
$696,000, or 50.2%, for the year ended December 31, 2001 compared to 2000 due to
increased loans outstanding and an increase in secondary market revenue. For
such years, brokerage gross profit declined $95,000, or 8.2%, principally due to
a decline in trading gross revenue due to the loss of two broker client
relationships, decreased trading activity due to overall market conditions and
the termination of our Internet brokerage trading web site at the end of 2000.
However, an increase in investment management fees, distribution income and
interest income offset some of the declines. Investment advisory gross profit
increased $58,000, or 3.4%, due to increased fees received on services provided
to existing clients and a shifting of existing investment advisory clients to
bundled fee relationships. For such periods, corporate gross profit increased
$30,000, or 6.2%, due to the reasons previously discussed.
Total expenses for the year ended December 31, 2001 were $16,803,000,
or 95.3% of total revenue, compared to $14,896,000, or 92.8% of total revenue,
for 2000. Employee compensation and benefits expense increased $409,000, or
4.3%, for the year ended December 31, 2001 compared to 2000 due primarily to
annual merit increases. For such years, occupancy expense increased $122,000, or
17.0%, primarily due to additional space leased by our mutual fund
administration services operation in Indianapolis and our trust and retirement
services operation in Lexington, and the relocation of our mutual fund
administration offices in Texas. For the year ended December 31, 2001,
professional fees declined $379,000, or 38.4%, from the prior year, primarily
due to $330,000 in consulting fees paid during 2000, without any comparable
expense in 2001. For such years, interest expense declined by $143,000, or
53.2%, due to our repayment of outstanding indebtedness. For the year ended
December 31, 2001 compared to the prior year, program administration fees
increased $681,000, or 372.1%, primarily due to a $518,000 loss recognized by
Unified Investment Advisers, Inc., which loss was related to our affiliated
money market fund, and a $175,000 loss recognized by our mutual fund services
operation, which loss was related to certain accounting errors. These losses
were partially offset by a $100,000 recovery during 2001 of a previously
recorded loss item. Our provision for bad debt declined $139,000, or 25.5%, due
to a larger reserve taken in 2000 for doubtful receivables generated by our
mutual fund administration services operation. Our provision for loan losses
declined by $137,000, or 50.4%, due to management's estimation of the quality of
our bank's loan portfolio. For the year ended December 31, 2001 compared to the
prior year, other operating expense increased by $1,617,000 primarily due to a
$288,000 increase in data processing fees at our trust operation, which resulted
from converting to a new data processing system, and a $32,000 increase in data
processing fees at our banking operation. Additionally, 2000 included $1,536,000
recorded as a reduction in operating expense compared to a $420,000 expense
reduction for 2001. Such expense reduction is related to payments we received
from VSX Holdings for management and consulting services.
For the year ended December 31, 2001, we recorded a $2,598,000 loss
from continuing operations, a $518,000 increase from the $2,080,000 loss
recorded for the year ended December 31, 2000. The increase in the loss was due
to the $1,907,000 increase in total expenses, partially offset by the $1,388,000
increase in gross profits for such years. For the years ended December 31, 2001
and 2000, we recorded an income tax benefit of $2,293,000 and $495,000,
respectively (accounting rules required us to recapture prior net operating loss
carryforwards by displaying them as an income tax benefit on continued
operations). As a result, for the years ended December 31, 2001 and 2000, we
recorded a net loss from continuing operations of $242,000 and $1,930,000,
respectively.
18
For the year ended December 31, 2001, we recorded a $2,848,000 net gain
in connection with the sale of our insurance operation. For 2000, we recorded a
$55,000 net loss upon the sale/closure of certain discontinued operations.
Additionally, for the years ended December 31, 2001 and 2000, we recorded
$763,000 and $782,000, respectively, in net income from discontinued operations.
Discontinued operations primarily represent the results of our insurance
operation, which were sold at year-end 2001. As previously discussed, accounting
rules require that these results be excluded from the results of continuing
operations.
We recorded net income of $3,368,000 for the year ended December 31,
2001 compared to a net loss of $1,203,000 for 2000. Net income for the year
ended December 31, 2001 was a basic and fully diluted income per share of $1.17
and $1.11, respectively. This compares to a basic and fully diluted loss per
share of $0.42 and $0.40, respectively, for the year ended December 31, 2000.
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenue for the year ended December 31, 2000 compared to the prior year
increased $1,220,000, or 8.2%, from $14,826,000 to $16,046,000. For such years,
trust and retirement services revenue increased $220,000, or 5.4%, primarily due
to an increase in trustee fees earned. For such years, fund administration
services revenue increased $2,014,000, or 72.6%, due to an increase in the
number of mutual fund clients serviced and a growth in the amount of assets
under service. As of December 31, 2000, we provided fund administrative services
to 29 mutual fund families consisting of 138 portfolios and approximately $4.8
billion in mutual fund assets as compared to 25 mutual fund families consisting
of 136 portfolios and approximately $4.2 billion in mutual fund assets as of
December 31, 1999. Banking revenue increased $854,000, or 160.2%, for the year
ended December 31, 2000 compared to the prior year due to the inclusion of the
results of operations of Unified Banking Company, which commenced operations on
November 1, 1999, in the 2000 revenues (without any revenues for the first ten
months of 1999). For such years, brokerage revenue declined $1,482,000, or
32.2%, principally due to a $787,000 decline in 2000 in private placement
commissions received by our broker-dealer subsidiaries in connection with our
recently completed private placements. We also experienced a $381,000 decline in
trading revenues due to the loss of one client relationship, which was partially
offset by an increase in brokerage revenues due to our relationship with
certified public accountants. In addition, the 1999 revenue included a one-time
commission of fund sales of approximately $100,000. Investment advisory services
revenue increased $72,000, or 3.9%, primarily due to an increase in revenue
earned on assets under management due to new fee arrangements. For such years,
corporate revenues declined $458,000, or 48.5%, which was due to a reduction in
interest income earned on the proceeds of our private placements and a decline
in revenue at certain start-up operations.
Gross profit for the year ended December 31, 2000 compared to the prior
year increased $1,216,000, or 10.5%, from $11,601,000 to $12,817,000. For such
years, gross profit as a percentage of revenue was relatively constant. Trust
and retirement services gross profit increased $157,000, or 4.1%, for the year
ended December 31, 2000 compared to the prior year due to the increase in
trustee fees earned. For such years, mutual fund administration services gross
profit increased $1,740,000, or 75.6%, due to the increase in the number of
mutual fund clients served and the growth in the amount of assets under service.
Banking gross profit increased $854,000, or 160.2%, for the year ended December
31, 2000 compared to the prior year due to the inclusion of the results of
Unified Banking Company in banking gross profit for 2000 (without any amount
included for the first ten months of 1999). Brokerage gross profit declined
$1,093,000, or 48.4%, for the year ended December 31, 2000 compared to the prior
year principally due to the $787,000 decline in private placement commissions
received by our broker-dealer subsidiaries in connection with our recently
completed private placements and a $85,000 decline in gross profits due to the
loss of one client relationship. Additionally, 1999 gross profits included a
one-
19
time commission of fund sales of approximately $100,000. For such years,
investment advisory gross profit increased $18,000, or 1.1%. Corporate gross
profit declined $460,000, or 48.7%, for such years due to declines at certain
start-up operations and a decline in interest income earned on our private
placement proceeds.
Total expenses for the year ended December 31, 2000 were $14,896,000,
or 92.8% of total revenue, as compared to $12,971,000, or 87.5% of total revenue
for the prior year. Employee compensation and benefits expense increased
$2,119,000, or 28.5%, for the year ended December 31, 2000 compared to the prior
year primarily due to (i) new personnel hired in connection with the expansion
of our trust and retirement services and mutual fund administration services
operations, which accounted for $790,000, of such increase, (ii) the expansion
of our senior management team and the hiring of additional accounting and
information services personnel, which accounted for $1,162,000 of such increase,
(iii) the commencement of operations of Unified Banking Company in November
1999, which accounted for $690,000 of such increase and (iv) a $114,000 increase
at our investment advisory operation due to year-end bonuses. These increases in
compensation and benefits expenses were partially offset by a $676,000 decline
in such expenses associated with discontinued operations and a $32,000 decline
in such expenses at our brokerage operations. For such years, telephone expense
increased $112,000, or 39.7%, due to the roll-out of our wide-area network and
telephone costs associated with increased marketing efforts at our mutual fund
administration operation. Equipment rental and maintenance expense increased
$201,000, or 62.8%, primarily due to equipment costs associated with the
increased number of funds serviced at our mutual fund administration operations
and, to a lesser extent, costs associated with the start-up of Unified Banking
Company and expansion activities at our trust and retirement services
operations. Occupancy expense increased by $150,000, or 26.4%, due to the
startup of Unified Banking Company and the expansion of Unified Trust Company,
which added $95,000 and $63,000, respectively, to expense in 2000. For such
years, depreciation and amortization expense increased $155,000, or 28.2%,
primarily due to the depreciation and amortization expense associated with
equipment purchased by Unified Banking Company in connection with its
commencement of business. The purchases of new computers and systems upgrades in
2000 at various operations also added to the increase in such expense. For the
year ended December 31, 2000, professional fees declined by $279,000, or 22.0%,
compared to 1999, primarily due to a $498,000 decline in professional fees at
the corporate level (principally due to a decline in outside legal expenses due
to our hiring of internal legal counsel), partially offset by a $208,000
increase in consulting fees related to the development of a revenue sharing
program for our trust and retirement services operation. Interest expense
declined by $54,000, or 16.6%, due to our reduction of outstanding debt. Program
administration fees declined by $127,000, or 40.9%, due to the recovery of an
employee theft in 2000. Our provision for bad debt was $546,000 for 2000 without
any corresponding amount for 1999 due to a reserve made during 2000 for doubtful
receivables generated by our mutual fund administration services operations. Our
provision for loan losses increased $239,000, or 724.2%, for such years due to
the 641.2% increase in the amount of loans generated by Unified Banking Company.
Unified Banking Company is required by Federal law to maintain a reserve for
possible loan losses. Other operating expenses declined $1,176,000, or 70.8%,
due to a $1,536,000 benefit received by us during the year ended December 31,
2000 in connection with the construction and development of the VSX marketplace
and its corresponding products, with no corresponding benefit included for 1999.
This was partially offset by a $206,000 increase in other operating expenses at
our trust and retirement services operations.
For the year ended December 31, 2000, we recorded a $2,080,000 loss
from continuing operations compared to a $1,370,000 loss for the prior year. The
increase in the loss was due to the $1,925,000 increase in total expenses for
such years, partially offset by the $1,216,000 increase in gross profit for such
years.
20
For the years ended December 31, 2000 and 1999, we recorded a $55,000
and $129,000, respectively, net loss on the sale of discontinued operations.
Additionally, for 2000 and 1999, we recorded $782,000 in net income and $548,000
in net loss, respectively, from discontinued operations.
We recorded a net loss of $1,203,000 for the year ended December 31,
2000 compared to a net loss of $1,751,000 for the prior year. Net loss for the
year ended December 31, 2000 was a basic and fully diluted loss per share of
$0.42 and $0.40, respectively. This compares to a basic and fully diluted loss
per share of $0.61 and $0.59, respectively, for the year ended December 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Our primary sources of liquidity historically have been and
continue to be cash flow from operating activities, available borrowing capacity
from capitalized leases and a loan from a regional bank. The net increase in
cash and cash equivalents at December 31, 2001 from December 31, 2000 was
$3,262,000. The net increase reflected proceeds that we received upon the sale
of our insurance operations, partially offset by our loss from continuing
operations, the repayment of borrowings and the purchase of fixed assets. In
addition, we received $419,977 from VSX Holdings, LLC during the year ended
December 31, 2001 in connection with services we provided relating to the
construction and development of the VSX marketplace and its corresponding
products.
With respect to our banking operations, long-term liquidity is a
function of the core deposit base and an adequate capital base. We are committed
to the growth of our core deposit base and maintenance of our capital base. The
growth of the deposit base is internally generated through product pricing and
product development. During its first three years of operations, Unified Banking
Company is required to maintain a Tier 1 capital to total assets ratio of at
least 8.0%. As of December 31, 2001, Unified Banking Company had a ratio of Tier
1 capital to total assets equal to 8.0%.
Short-term liquidity needs arise from continuous fluctuations in the
flow of funds on both sides of the balance sheet resulting from growth and
seasonal and cyclical customer demands. The securities portfolio provides stable
long-term earnings as well as being a primary source of liquidity. The
designation of securities as available-for-sale and held-to-maturity does not
impact the portfolio as a source of liquidity due to the ability to enter into
repurchase agreements using those securities. We anticipate continued loan
demand in our market area. We have utilized, and expect to continue to utilize,
Federal Home Loan Bank borrowings to fund a portion of future loan growth at
Unified Banking Company.
Unified Banking Company experienced net growth in assets of 64.7%
during the year ended December 31, 2001, while deposits increased 84.2% during
the same period. We continue to emphasize growth in stable core deposits while
utilizing the Federal Home Loan Bank and Federal funds purchased as necessary to
balance liquidity and cost effectiveness. We closely monitor our level of
liquidity to meet expected future needs.
CAPITAL RESOURCES. Total stockholders' equity was $16,748,911 at
December 31, 2001 compared to $13,325,541 at year-end 2000. The increase in
total equity was due to the gain realized upon the sale of the assets of our
insurance subsidiaries, partially offset by our loss from continuing operations
for the year ended December 31, 2001 and the repayment of bank borrowings.
The growth of Unified Banking Company will have an effect on our
working capital. It currently is anticipated that as Unified Banking Company
grows, our working capital ratio will become more in line with ratios
traditionally associated with bank holding companies.
21
We believe that anticipated revenues from operations should be adequate
for the working capital requirements of our existing core businesses over the
next year. In the event that our plans or assumptions change, or if our
resources available to meet unanticipated changes in business conditions prove
to be insufficient to fund operations, we could be required to seek additional
financing prior to that time.
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks not presently known to us or that
we currently believe are immaterial also may impair our business operations. Our
business could be harmed by any of these risks. If any of the following risks
actually occur, our business, financial condition or results of future
operations could be materially adversely affected. In such case, the price of
our common stock could decline, and you may lose all or part of your investment.
In assessing these risks, you should refer to the other information contained in
this report, including our consolidated financial statements and related notes.
NO ASSURANCE OF FUTURE GROWTH. There can be no assurance that we will
achieve growth in assets or earnings. Our ability to achieve growth will be
dependent upon numerous factors including, but not limited to, general economic
conditions, our ability to recruit qualified personnel and our ability to
execute our business plan. We also have completed various acquisitions in the
past few years that have significantly enhanced our rate of growth. We cannot
provide you assurances that we will continue to sustain this rate of growth or
grow at all.
CHANGES IN THE LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT UNIFIED
BANKING COMPANY'S LOAN PORTFOLIO. Unified Banking Company's success depends to a
great extent upon the general economic conditions of Fayette County, Kentucky.
Unlike larger banks that are more geographically diversified, we primarily
provide banking and financial services to customers in Fayette County, Kentucky.
Our commercial, real estate and construction loans, the ability of the borrowers
to repay these loans and the value of the collateral securing these loans are
impacted by local economic conditions. We cannot assure you that favorable
economic conditions will exist in our market.
ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN
LOSSES. As a lender, Unified Banking Company is exposed to the risk that its
customers may be unable to repay their loans according to their terms and that
any collateral securing the payment of their loans may not be sufficient to
assure repayment. Credit losses are inherent in the lending business and could
have a material adverse effect on our consolidated operating results. Unified
Banking Company's credit risk with respect to its real estate and construction
loan portfolio relates principally to the general creditworthiness of
individuals and the value of real estate serving as security for the repayment
of loans. Our credit risk with respect to Unified Banking Company's commercial
and consumer installment loan portfolio relates principally to the general
creditworthiness of businesses and individuals within its local market.
We make various assumptions and judgments about the collectibility of
Unified Banking Company's loan portfolio and provide an allowance for potential
losses based on a number of factors. If our assumptions are wrong, the allowance
for loan losses may not be sufficient to cover loan losses. We may have to
increase the allowance in the future. Additions to our allowance for loan losses
would decrease our net income.
22
UNIFIED BANKING COMPANY MAY BE UNABLE TO MANAGE INTEREST RATE RISKS
THAT COULD REDUCE OUR NET INTEREST INCOME. Like other financial institutions,
Unified Banking Company's results of operations are affected principally by net
interest income, which is the difference between interest earned on loans and
investments and interest expense paid on deposits and other borrowings. We
cannot predict or control changes in interest rates. Regional and local economic
conditions and the policies of regulatory authorities, including monetary
policies of the Board of Governors of the Federal Reserve System, affect
interest income and interest expense. While Unified Banking Company continually
takes measures intended to manage the risks from changes in market interest
rates, changes in interest rates can still have a material adverse effect on our
profitability.
In addition, certain assets and liabilities may react in different
degrees to changes in market interest rates. For example, interest rates on some
types of assets and liabilities may fluctuate prior to changes in broader market
interest rates, while rates on other types may lag behind. Further, some of
Unified Banking Company's assets, such as adjustable rate mortgages, have
features, including rate caps, which restrict changes in their interest rates.
Factors such as inflation, recession, unemployment, money supply,
international disorders, instability in domestic and foreign financial markets,
and other factors beyond our control may affect interest rates. Changes in
market interest rates also will affect the level of voluntary prepayments on
loans and the receipt of payments on mortgage-backed securities resulting in the
receipt of proceeds that may be reinvested at a lower rate than the loan or
mortgage-backed security being prepaid. Although Unified Banking Company pursues
an asset-liability management strategy designed to control our risk from changes
in market interest rates, changes in interest rates can still have a material
adverse effect on our profitability.
INSIDERS MAY CONTROL OUR FUTURE OPERATIONS AS A RESULT OF THE
CONCENTRATION OF CONTROL OF OUR COMMON STOCK. Our executive officers and
directors beneficially own approximately 35.6% of our outstanding common stock.
As a result, these insiders may be able to control the election of our board of
directors and thus our direction and future operations, and our stockholders may
lack an effective vote with respect to such matters.
WE ARE SUBJECT TO EXTENSIVE REGULATION. The banking, trust and
securities industries are heavily regulated under both Federal and state law.
These regulations are primarily intended to protect depositors and the Federal
Deposit Insurance Corporation, with respect to banks, and customers, with
respect to trust companies, broker-dealers and investment advisors, not our
creditors or stockholders. We and our subsidiaries also are subject to the
supervision of the Securities and Exchange Commission, the Office of Thrift
Supervision and the Office of the Comptroller of the Currency, in addition to
other regulatory and self-regulatory organizations. Regulations affecting banks,
trust companies and other financial services companies undergo continuous
change, and the ultimate effect of such changes cannot be predicted. Regulations
and laws may be modified at any time, and new legislation may be enacted that
affects us and our subsidiaries. We cannot assure you that such modifications or
new laws will not adversely affect us or our subsidiaries.
RISKS ASSOCIATED WITH RAPID GROWTH. We have experienced rapid growth in
net revenue and expansion of our operations. Such growth has placed, and, if
sustained, will continue to place, strain on our management, information
systems, operation and resources. Our ability to manage any future growth will
continue to depend upon the successful expansion of our sales, marketing,
customer support, administrative infrastructure and the ongoing implementation
and improvement of a variety of internal management systems, procedures and
controls. Continued growth also will require us to hire more personnel, and
expand management information systems. Recruiting qualified personnel is an
intensely
23
competitive and time-consuming process. There can be no assurance that
we will be able to attract and retain the necessary personnel to accomplish our
growth strategies or that we will not experience constraints that will adversely
affect our ability to support satisfactorily our clients and operations. There
can be no assurance that we will be able to attract, manage and retain
additional personnel to support any future growth, if any, or will not
experience significant problems with respect to any infrastructure expansion or
the attempted implementation of systems, procedures and controls. If our
management is unable to manage growth effectively, our business, financial
condition and results of operations could be materially adversely affected.
DEPENDENCE UPON TECHNOLOGY; PROPRIETARY RIGHTS. Our success and ability
to compete is dependent in part upon our technology, although we believe that
our success is more dependent upon our technical expertise than our proprietary
rights. We principally rely upon a combination of copyright, trademark and trade
secret laws and contractual restrictions to protect our proprietary technology.
It may be possible for a third party to copy or otherwise obtain and use our
products or technology without authorization or to develop similar technology
independently, and there can be no assurance that such measures have been, or
will be, adequate to protect our proprietary technology or that our competitors
will not independently develop technologies that are substantially equivalent or
superior to our technology. We propose to operate a portion of our business over
the Internet, which is subject to a variety of risks. Such risks include, but
are not limited to, the substantial uncertainties that exist regarding the
system for assigning domain names and the status of private rules for resolution
of disputes regarding rights to domain names. There can be no assurance that we
will continue to be able to employ our current domain names in the future or
that the loss of rights to one or more domain names will not have a material
adverse effect on our business and results of operations.
Although we do not believe that we infringe the proprietary rights of
any third parties, there can be no assurance that third parties will not assert
such claims against us in the future or that such claims will not be successful.
We could incur substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary rights, which could
have a material adverse effect on our business, financial condition and results
of operations. In addition, we may become obligated under certain agreements to
indemnify another party in connection with infringement by us of the proprietary
rights of third parties. In the event we are required to indemnify parties under
these agreements, it could have a material adverse effect on our business,
financial condition and results of operations. In the event a claim relating to
proprietary technology or information is asserted against us, we may seek
licenses to such intellectual property. There can be no assurance, however, that
licenses could be obtained on commercially reasonable terms, if at all, or that
the terms of any offered licenses would be acceptable to us. The failure to
obtain the necessary licenses or other rights could have a material adverse
effect on our business, financial condition and results of operations.
RISKS TO PHYSICAL NETWORK; RISKS TO INTEGRITY OF DATA ON NETWORK. Our
operations are partially dependent upon our ability to protect our network
infrastructure against damage from fire, earthquakes, severe flooding,
mudslides, power loss, telecommunications failures and similar events or to
construct networks that are not vulnerable to the effects of these events. The
occurrence of a natural disaster or other unanticipated problems at our network
in the future could cause additional major interruptions in the services
provided by us.
In addition, some networks may experience interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. Unauthorized use of our network could jeopardize the
security of confidential information stored in our computer systems, which may
result in liability to our customers or deter potential customers.
24
Our failure to adequately manage service disruptions resulting from
physical damage to our network or breaches of the network's integrity, could
have a material adverse effect on our business, financial condition and results
of operations.
SECURITY RISKS. Despite the implementation of network security measures
by us, such as limiting physical and network access to our routers, our Internet
access systems and information services are vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our customers or other
Internet users. Such problems caused by third parties could lead to
interruption, delays or cessation in service to our customers. Furthermore, such
inappropriate use of the Internet by third parties also could potentially
jeopardize the security of confidential information stored in the computer
systems of our customers and other parties connected to the Internet, which may
deter potential subscribers. Persistent security problems continue to plague
public and private data networks. Recent break-ins reported in the press and
otherwise have reached computers connected to the Internet at major corporations
and Internet access providers and have involved the theft of information,
including incidents in which hackers bypassed firewalls by posing as trusted
computers. Alleviating problems caused by computer viruses, break-ins or other
problems caused by third parties may require significant expenditures of capital
and resources by us, which could have a material adverse effect on us. Until
more comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet service industry in general and our customer base and revenues in
particular. Moreover, if we experience a breach of network security or privacy,
there can be no assurance that our customers will not assert or threaten claims
against us based on or arising out of such breach, or that any such claims will
not be upheld, which could have a material adverse effect on our business,
financial condition and results of operation.
THERE IS INTENSE COMPETITION FOR PRODUCTS AND SERVICES, ADVERTISING AND
SALES OF GOODS AND SERVICEs. Competition for products and services, advertising
and electronic commerce is intense. We expect that competition will continue to
intensify. Barriers to entry are minimal. Our competitors may develop products
and services that are superior to, or have greater market acceptance than, our
solutions. If we are unable to compete successfully against our competitors, our
business, financial condition and operating results will be adversely affected.
Many of our competitors have greater brand recognition and greater financial,
marketing and other resources than us. This may place us at a disadvantage in
responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives.
COMPETITION. We encounter substantial competition in the businesses in
which we compete. Our principal competitors include mutual funds, investment
advisers, investment counsel firms and financial institutions such as banks,
savings and loan institutions and credit unions. Many of the institutions with
which we compete are larger and have substantially greater financial resources
than us.
NEED FOR ADDITIONAL CAPITAL; RISK RELATING TO ACQUISITIONS. Our pending
and proposed projects have required and will continue to require substantial
capital for investments in and development of such projects. There can be no
assurance that we will be able to raise the capital necessary to fund our
projects. The failure to raise or generate such funds may require us to delay or
abandon some of our planned future expansion or expenditures, which could have a
material adverse effect on our growth.
To expand our markets and take advantage of the consolidation trend in
the financial services industry, our business strategy may include growth
through acquisitions. There can be no assurance that future acquisitions can be
consummated on acceptable terms or that any acquired companies can be
successfully integrated into our operations. In connection with future
acquisitions, we may incur additional indebtedness or may issue additional
equity. Our ability to make future acquisitions may be
25
constrained by our ability to obtain such additional financing. To the
extent we use equity to finance future acquisitions, there is a risk of dilution
to holders of our common stock.
In addition, acquisitions may involve a number of special risks,
including: initial reductions in our reported operating results; diversion of
management's attention; unanticipated problems or legal liabilities; and a
possible reduction in reported earnings due to amortization of acquired
intangible assets in the event that such acquisitions are made at levels that
exceed the fair market value of net tangible assets. Some or all of these items
could have a material adverse effect on us. There can be no assurance that
businesses acquired in the future will achieve sales and profitability that
justify the investment therein. In addition, to the extent that consolidation
continues in the industry, the prices for attractive acquisition candidates may
increase to unacceptable levels.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The business activities of our company expose it to a variety of risks.
Management of these risks is necessary for the long-term profitability of our
company. We manage these risks through the establishment of numerous policies,
procedures and controls. The most significant risks that affect us are market
risk and credit risk.
Market risk is the risk of loss to us resulting from changes in
interest rates, equity prices or both. We are exposed to market risk since we,
through our subsidiaries, maintain positions in fixed-income and equity
securities. We primarily manage our risk through the establishment of trading
policies and guidelines and through the implementation of control and review
procedures.
Our asset/liability strategy is to minimize the sensitivity of earnings
to changes in interest rates while maintaining an acceptable net interest
margin. Unified Banking Company's asset/liability committee monitors the
interest rate sensitivity of the bank's balance sheet on a monthly basis. The
committee reviews asset and liability repricing in the context of current and
future interest rate scenarios affecting the economic climate in our market
areas.
Our pricing policy is that all earning assets and interest bearing
liabilities be either based on floating rates or have a fixed rate not exceeding
five years. Real estate mortgage loans held by us, while having long final
maturities, are comprised of one-, two- or three-year adjustable rate loans. The
adjustable basis of these loans significantly reduces interest rate risk.
26
The following table illustrates Unified Banking Company's estimated
static gap with prepayments calculated as of December 31, 2001:
TIME TO MATURITY OR REPRICING
0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 >48
(DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------
RATE SENSITIVE ASSETS
Federal funds sold........ $ 4,033 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 4,033
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Securities
U. S. agencies.......... -- 546 530 515 1,462 1,342 1,235 8,878 4,114 18,622
FHLB stock.............. 196 -- -- -- -- -- -- -- -- 196
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total securities...... 196 546 530 515 1,462 1,342 1,235 8,878 4,114 18,818
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Loans
Commercial
Fixed................. -- 31 32 244 295 94 92 1,418 919 3,125
Variable.............. 7,923 -- -- -- -- -- -- -- -- 7,923
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total commercial.... 7,923 31 32 244 295 94 92 1,418 919 11,048
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Real Estate
Commercial............ -- 679 39 40 1,279 712 878 4,577 2,619 10,822
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Residential
Fixed............... -- 40 40 40 118 116 114 2,026 2,531 5,025
Variable............ 3,023 -- -- -- -- -- -- -- -- 3,023
Other............... -- 1 1 1 2 2 9 33 80 129
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total residential 3,023 41 41 41 120 118 123 2,059 2,610 8,177
------- ----- ----- ----- ----- ----- ----- ------- ------- --------
Total real estate 3,023 720 80 81 1,399 830 1,001 6,636 5,229 18,999
------- ----- ----- ------ ------ ------ ------- ------- ------- ---------
Construction............
Fixed................. -- -- -- -- 436 -- -- -- -- 436
Variable.............. 1,249 -- -- -- -- -- -- -- -- 1,249
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total construction.. 1,249 -- -- -- 436 -- -- -- -- 1,685
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Personal
Home equity loans..... 5,827 -- -- -- -- -- -- -- -- 5,827
Installment loans..... -- 57 51 95 389 187 362 881 311 2,333
Cash reserve loan..... 10 -- -- -- -- -- -- -- -- 10
Personal open end
letters of credit... 4,223 -- -- -- -- -- -- -- -- 4,223
Loans secured by
deposits............ -- 11 -- -- -- -- -- 5 1 17
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total personal...... 10,060 68 51 95 389 187 362 886 312 12,410
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total loans............... 22,255 819 163 420 2,519 1,111 1,455 8,940 6,460 44,142
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
TOTAL RATE
SENSITIVE ASSETS...... $ 26,484 $ 1,365 $ 693 $ 935 $3,981 $2,453 $2,690 $17,818 $10,574 $66,993
======== ======= ===== ===== ====== ====== ====== ======= ======= =======
27
TIME TO MATURITY OR REPRICING
0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 >48
(DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------
RATE SENSITIVE LIABILITIES
Interest bearing deposits
NOW accounts............ $ 1,159 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 1,159
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Money market accounts
Market rate accounts.. 4,147 -- -- -- -- -- -- -- -- 4,147
Business market rate
accounts............ 841 -- -- -- -- -- -- -- -- 841
Special personal
MMDA................ 1,082 -- -- -- -- -- -- -- -- 1,082
Special business
MMDA................ 474 -- -- -- -- -- -- -- -- 474
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Total money market
accounts.......... 6,544 -- -- -- -- -- -- -- -- 6,544
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Savings accounts........ 55 -- -- -- -- -- -- -- -- 55
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Time deposits
CD's > 100K........... -- 1,643 824 844 821 305 2,053 4,124 1,803 12,416
CD's < 100K........... -- 1,322 752 1,821 1,767 609 4,553 8,993 2,353 22,169
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Total time deposits. -- 2,965 1,576 2,665 2,588 914 6,606 13,117 4,156 34,585
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Individual retirement
accounts............ -- 32 181 3 126 2 128 1,611 2,934 5,019
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Total interest
bearing deposits.. 7,758 2,997 1,757 2,668 2,714 916 6,734 14,728 7,090 47,362
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
TOTAL RATE
SENSITIVE LIABILITIES. $ 7,758 $ 2,997 $ 1,757 $2,668 $ 2,714 $ 916 $ 6,734 $14,728 $ 7,090 $47,362
======== ======== ======= ====== ======= ======= ======= ======= ======= =======
INCREMENTAL GAP REPORT
SUMMARY INFORMATION
Total rate sensitive assets $26,484 $ 1,365 $ 693 $ 935 $ 3,981 $2,453 $ 2,690 17,818 $10,574
Total rate
sensitive liabilities 7,758 2,997 1,757 2,668 2,714 916 6,734 14,728 7,090
Gap...................... 18,726 (1,632) (1,064) (1,733) 1,267 1,538 (4,044) 3,090 3,484
RSA/RSL.................. 3.41x 0.46x 0.39x 0.35x 1.47x 2.68x 0.40x 1.21x 1.49x
RSA/assets............... 0.38 0.02 0.01 0.01 0.06 0.04 0.04 0.26 0.15
RSL/assets................ 0.11 0.04 0.03 0.00 0.04 0.01 0.10 0.21 0.10
Gap/assets................ 26.83% -2.34% -1.52% -2.48% 1.82% 2.20% -5.79% 4.43% 4.99%
Gap/RSA................... 70.71 -119.67 -153.62 -185.67 31.86 62.68 -150.29 17.34 32.95
CUMULATIVE GAP REPORT
SUMMARY INFORMATION
Total rate sensitive assets $26,484 $27,849 $ 28,542 $29,477$ 33,458 $35,911 $38,601 $56,419 $ 66,993
Total rate
sensitive liabilities 7,758 10,755 12,512 15,180 17,894 18,810 25,544 40,272 47,362
Gap....................... 18,726 17,094 16,030 14,297 15,564 17,101 13,057 16,147 19,631
RSA/RSL................... 3.41x 2.59x 2.28x 1.94x 1.87x 1.91x 1.51x 1.40x 1.41x
RSA/assets................ 0.38 0.40 0.41 0.42 0.48 0.51 0.55 0.81 0.96
RSL/assets................ 0.11 0.15 0.18 0.22 0.26 0.27 0.37 0.58 0.68
Gap/assets................ 26.83 24.49% 22.97% 20.48% 22.30% 24.51% 18.71% 23.14% 28.13%
Gap/RSA................... 70.71 61.38 56.16 48.50 46.52 47.62 33.83 28.62 29.30
We measure the impact of interest rate changes on our income statement
through the use of gap analysis. The gap represents the net position of assets
and liabilities subject to repricing in specified time periods. During any given
time period, if the amount of rate-sensitive liabilities exceeds the amount of
rate-sensitive assets, a company would generally be considered negatively gapped
and would benefit from falling rates over that period of time. Conversely, a
positively gapped company would generally benefit from rising rates.
28
Interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously. There are other factors that are
difficult to measure and predict that would influence the effect of interest
rate fluctuations on our income statement. For example, a rapid drop in interest
rates might cause our borrowers to repay their loans at a more rapid pace and
certain mortgage-related investments to be prepaid more quickly than projected.
This could mitigate some of the benefits of falling rates as are expected when
negatively gapped. Conversely, a rapid rise in rates could give us an
opportunity to increase our margins and stifle the rate of repayment on our
mortgage-related loans which would increase our returns.
The following table shows the "rate shock" results of a simulation
model that attempts to measure the effect of rising and falling interest rates
over a two-year horizon in a rapidly changing rate environment.
PERCENTAGE CHANGE IN
BASIS POINT -----------------------------------------------------------
CHANGE IN NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY
INTEREST RATES PROJECTED CHANGE PROJECTED CHANGE
-------------- ------------------- -------------------------------
-400 -28.28 37.60
-300 -20.11 1.66
-200 -12.49 1.05
-100 -6.06 4.35
0 0.00 0.00
100 6.23 -7.82
200 12.28 -16.47
300 18.51 -25.14
400 24.53 -33.67
We use a sensitivity model that simulated these interest rate changes
on our earning assets and interest-bearing liabilities. This process allows us
to explore the complex relationships among the financial instruments in various
interest rate environments.
The preceding sensitivity analysis is based on numerous assumptions
including: the nature and timing of interest rate levels including the shape of
the yield curve; prepayments on loans and securities; changes in deposit levels;
pricing decisions on loans and deposits; reinvestment/replacement of asset and
liability cash flows; and others. While assumptions are developed based upon
current economic and local market conditions, we cannot make any assurances as
to the predictive nature of these assumptions including how client preferences
or competitor influences might change.
Interest rate exposure is measured by the potential impact on our
income statement of changes in interest rates. We use information from our gap
analysis and rate shock calculations as input to help manage our exposure to
changing interest rates.
We use our rate shock information to tell us how much exposure we have
to rapidly changing rates. Based on historical information and our assessment of
future interest rate trends, we do not believe it is likely that rapidly rising
rates would have a significant positive impact on our results of operations.
Conversely, we also believe there is minimal likelihood that rapidly falling
rates would have a significant negative impact on our results of operations.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
To the Board of Directors and
Stockholders of Unified Financial Services, Inc.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated statements of financial condition
of Unified Financial Services, Inc. and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, comprehensive
income, cash flows and changes in stockholders' equity for the years ended
December 31, 2001, 2000 and 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Unified Financial Services, Inc.
and its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001, 2000 and
1999 in conformity with generally accepted accounting principles.
/s/ Larry E. Nunn & Associates, LLC
Columbus, Indiana
February 7, 2002
30
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2001 AND 2000
--------------------------
ASSETS
------
2001 2000
---- ----
Current Assets
Cash and cash equivalents......................................... $ 8,844,482 $ 5,582,098
Due from banks.................................................... 1,357,483 1,162,639
Federal funds sold................................................ 4,033,000 7,667,000
Bond investments (see note 13).................................... 11,374,531 10,841,435
Investment in securities and non-affiliated
mutual funds.................................................... 555,013 573,272
Note receivable (see note 1)...................................... 800,000 --
Loans (net of allowance for loan losses of
$430,000 for 2001 and $305,000 for 2000)........................ 43,705,576 20,834,674
Accounts receivable (net of allowance for
doubtful accounts of $260,299 for 2001 and
$500,042 for 2000).............................................. 5,480,214 13,086,031
Prepaid assets and deposits....................................... 425,061 297,270
Deferred tax asset................................................ 287,435 80,037
-------------- --------------
Total current assets.......................................... 76,862,795 60,124,456
-------------- --------------
Fixed Assets, at cost
Equipment and furniture (net of accumulated
depreciation of $2,330,472 for 2001 and
$4,250,692 for 2000)............................................ 2,277,430 3,500,020
-------------- --------------
Total fixed assets............................................ 2,277,430 3,500,020
-------------- --------------
Non-Current Assets
Investment in affiliate (see note 17)............................. 1,010 10
Goodwill (net of accumulated amortization of
$347,734 for 2001 and $243,414 for 2000)........................ 1,006,061 1,110,380
Other non-current assets.......................................... 43,696 391,136
-------------- --------------
Total non-current assets...................................... 1,050,767 1,501,526
-------------- --------------
TOTAL ASSETS............................................. $ 80,190,992 $ 65,126,002
============== ==============
See independent auditors' report and accompanying notes
31
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2001 AND 2000
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
2001 2000
---- ----
Current Liabilities:
Current portion of capital lease obligations....................... $ 595 $ 7,884
Current portion of bank borrowings................................. 3,153 1,944,662
Borrowed funds..................................................... -- 1,143,000
Bank line-of-credit................................................ 1,104,780 1,668,626
Deposits (see note 13)............................................. 55,905,541 34,620,338
Accounts payable and accrued expenses.............................. 2,448,177 2,508,776
Accrued compensation and benefits.................................. 570,883 440,472
Payable to insurance companies..................................... -- 8,016,752
Payable to broker-dealers.......................................... 142,985 172,374
Income taxes payable............................................... 215,027 --
Deferred income taxes.............................................. 55,608 14,308
Other liabilities.................................................. 1,382,025 827,328
------------- -------------
Total current liabilities...................................... 61,828,774 51,364,520
------------- -------------
Long-Term Liabilities
Long-term portion of capital lease obligations..................... 454 1,049
Long-term portion of borrowings.................................... -- 342,339
Deferred income taxes.............................................. 12,853 --
Other long-term liabilities........................................ 1,600,000 92,553
------------- -------------
Total long-term liabilities.................................... 1,613,307 435,941
------------- -------------
Total liabilities......................................... 63,442,081 51,800,461
------------- -------------
Commitments and Contingencies........................................... -- --
------------- -------------
Stockholders' Equity
Common stock, par value $.01 per share............................. 33,277 33,300
Additional paid-in capital......................................... 16,187,294 16,259,091
Retained earnings (deficit)........................................ 231,300 (3,137,173)
Accumulated other comprehensive income............................. 297,040 170,323
------------- -------------
Total stockholders' equity................................ 16,748,911 13,325,541
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 80,190,992 $65,126,002
============= ===========
See independent auditors' report and accompanying notes
32
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
2001 2000 1999
---- ---- ----
REVENUE:
Gross revenue (see note 15)................... $ 17,627,166 $ 16,046,469 $ 14,825,794
--------------- -------------- -------------
Total gross revenue....................... 17,627,166 16,046,469 14,825,794
--------------- -------------- -------------
COST OF SALES:
Cost of sales (see note 15)................... 3,422,034 3,229,919 3,224,646
--------------- -------------- -------------
Total cost of sales....................... 3,422,034 3,229,919 3,224,646
--------------- -------------- -------------
GROSS PROFIT (see note 15)......................... 14,205,132 12,816,550 11,601,148
--------------- -------------- -------------
EXPENSES:
Employee compensation and benefits............ 9,962,210 9,553,211 7,433,840
Mail and courier.............................. 169,103 145,855 145,411
Telephone..................................... 276,781 394,630 282,438
Equipment rental and maintenance.............. 505,786 521,892 320,665
Occupancy..................................... 839,215 717,580 567,503
Depreciation and amortization................. 749,015 706,215 550,719
Professional fees............................. 608,679 988,085 1,267,318
Interest...................................... 125,690 268,554 322,172
Program administration fees................... 864,233 183,056 309,564
Provision for bad debt........................ 407,216 546,385 --
Provision for loan losses..................... 135,000 272,000 33,000
Business development costs.................... 59,207 114,444 77,789
Other operating expenses (see note 17)........ 2,101,165 484,344 1,660,572
--------------- -------------- -------------
Total expenses............................ 16,803,300 14,896,251 12,970,991
--------------- -------------- -------------
Loss from continuing operations............... (2,598,168) (2,079,701) (1,369,843)
Other income (loss)........................... 62,554 (69,044) 3,853
Income tax benefit............................ 2,293,371 218,910 292,437
--------------- -------------- -------------
Net loss from continuing operations........... (242,243) (1,929,835) (1,073,553)
--------------- -------------- -------------
Gain (loss) on sale of operations (net of income
taxes of $1,842,193 for 2001).............. 2,847,708 (54,952) (129,487)
Income (loss) from discontinued operations
(net of income taxes of $652,627, $253,909 and
$149,718, respectively)....................... 763,008 782,097 (547,750)
--------------- -------------- -------------
Net income (loss).................................. $ 3,368,473 $ (1,202,690) $ (1,750,790)
=============== ============== =============
Per share earnings (loss)
Basic common shares outstanding............... 2,877,634 2,880,028 2,869,862
Net income (loss) - basic..................... $ 1.17 (0.42) (0.61)
Fully diluted common shares outstanding....... 3,027,030 2,983,114 2,975,323
Net income (loss) - fully diluted............. $ 1.11 (0.40) (0.59)
See independent auditors' report and accompanying notes
33
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
2001 2000 1999
---- ---- ----
Net income (loss).................................. $ 3,368,473 $ (1,202,690) $ (1,750,790)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities, net of
re-classification adjustment................. 126,717 205,786 (35,463)
--------------- -------------- -------------
Comprehensive income (loss)........................ $ 3,495,190 $ (996,904) $ (1,786,253)
=============== ============== =============
See independent auditors' report and accompanying notes
34
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------
2001 2000 1999
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ 3,368,473 $ (1,202,690) $(1,750,790)
Adjustments to reconcile net income to cash
provided by operating activities:
Income tax payable............................... 215,027 (136,630) 118,766
Deferred income taxes (benefit).................. (153,245) (103,738) 89,685
Provision for depreciation and amortization...... 952,603 873,224 702,857
Provision for loan losses........................ 135,000 272,000 33,000
Provision for bad debt........................... 409,605 546,385 23,732
Recovery of bad debt............................. 18,981 -- --
Amortization of bond discount.................... (25,255) -- --
Loss on disposal of discontinued operations...... -- 100,203 129,487
Change in market value of securities............. 194,578 18,347 27,680
Comprehensive income (loss)...................... 126,717 205,786 (35,463)
(Gain) loss on disposal of fixed assets.......... (28,998) 15,661 342
(Gain) loss on sale/disposal of securities....... 10,872 35,036 --
(Increase) decrease in operating assets
Receivables................................. 7,177,231 (3,827,983) (718,644)
Loans made to customers, net of repayments.. (23,005,902) (18,295,799) (2,638,676)
Prepaid and sundry assets................... (127,791) 477,377 (522,943)
Notes receivables........................... (800,000) -- --
Other non-current assets.................... 347,440 (49,916) --
Increase (decrease) in operating liabilities
Deposits.................................... 21,285,203 27,288,485 7,331,853
Accounts payable and accrued expenses....... (60,599) 2,044,677 99,266
Accrued compensation and benefits........... 130,411 (113,499) --
Other liabilities........................... (5,983,998) 1,160,896 (1,181,427)
------------- ------------- -----------
Net cash provided by operating activities........ 4,186,353 9,307,822 1,708,725
------------- ------------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment.................................. (613,800) (1,445,190) (2,027,635)
Due from banks......................................... (194,844) (847,824) (314,815)
Bond investments....................................... (699,836) (5,326,279) (5,515,156)
Federal funds sold/purchased........................... 3,634,000 (2,745,000) (4,922,000)
Securities sold/purchased under agreement to repurchase (1,143,000) -- --
Proceeds from sale of fixed assets..................... 1,017,106 4,814 --
Proceeds from sale of securities....................... 106,275 1,617,863 --
Investment in affiliate mutual funds................... (100) (29,461) --
Investment in debt securities.......................... -- -- (33,148)
Investment in affiliate................................ (1,000) (10) (92,611)
Investments in securities and mutual funds............. (101,373) (395,684) --
Investment in other assets............................ -- -- (57,480)
------------- ------------- -----------
Net cash provided by (used in) investing activities.. 2,003,428 (9,166,771) (12,962,845)
------------- ------------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock................. -- 21,640 7,012,656
Proceeds from issuance of treasury stock............... -- 419,058 1,501,800
Proceeds from issuance of Series C preferred stock..... -- -- 100,900
Retirement of common stock............................. (71,820) -- (35,252)
Proceeds from borrowings............................... -- 10,627 2,307,450
Proceeds on bank line of credit........................ 1,309,780 1,270,000 360,000
Repayment of borrowings................................ (4,157,473) (1,910,000) (3,753,457)
Repayment of capital lease obligations................. (7,884) (30,072) (48,475)
Purchase of treasury shares............................ -- (54,551) (873,000)
------------- ------------- -----------
Net cash provided by (used in) financing activities.. (2,927,397) (273,298) 6,572,622
------------- ------------- -----------
Net increase (decrease) in cash and cash equivalents...... 3,262,384 (132,247) (4,681,498)
Cash and cash equivalents - beginning of year............. 5,582,098 5,714,345 10,395,843
------------- ------------- -----------
Cash and cash equivalents - end of year................... $ 8,844,482 $ 5,582,098 $ 5,714,345
============= ============= ===========
See independent auditors' report and accompanying notes
35
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PREFERRED PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
----- ----- ------- -------- ------ ----- -----
Balance at December 31, 1998. $ 27,668 $ 1,672 $8,345,555 $ 417,125 $ -- $ -- $ 8,792,020
1999 net loss (1,750,790) (1,750,790)
Other comprehensive loss (35,463) (35,463)
Issuance of common stock 2,007 7,010,649 7,012,656
Issuance of preferred stock 1,009 99,891 100,900
Repurchase of stock for treasury (873,000) (873,000)
Re-issuance of treasury stock 806,039 695,761 1,501,800
Reduction of goodwill (211,007) (211,007)
Conversion of preferred stock
to common stock 3,619 (2,681) (938) --
Acquisition of minority interest (565,566) (565,566)
Dividends to acquired
companies' stockholders (35,252) (35,252)
----- ------ ---------- ------------ ----- --------- ---------
Balance at December 31, 1999. 33,294 -- 16,050,189 (1,934,483) (35,463) (177,239) 13,936,298
2000 net loss (1,202,690) (1,202,690)
Other comprehensive income 205,786 205,786
Issuance of common stock 6 21,634 21,640
Repurchase of stock for treasury (54,551) (54,551)
Re-issuance of treasury stock 187,268 231,790 419,058
------- ----------- ---------- ---------- ------- -------- ----------
Balance at December 31, 2000. 33,300 -- 16,259,091 (3,137,173) 170,323 -- 13,325,541
2001 net income 3,368,473 3,368,473
Other comprehensive income 126,717 126,717
Repurchase of stock (23) (71,797) (71,820)
------------ ------------ --------- ---------- ------------ --------- -----------
Balance at December 31, 2001. $ 33,277 $ -- $ 16,187,294 $ 231,300 $ 297,040 $ -- $ 16,748,911
======== ========= ============ ============ ========= ========== ============
See independent auditors' report and accompanying notes
36
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 1 - NATURE OF OPERATIONS
Unified Financial Services, Inc., a Delaware holding company for
various financial services companies, was organized on December 7,
1989. We distribute a vertically integrated financial services platform
via the traditional industry channels of our subsidiaries and via the
Internet. Through our subsidiaries, all of which are wholly owned, we
provide services primarily in five lines of business: trust and
retirement services; mutual fund administration services; banking;
brokerage; and investment advisory services.
Our trust and retirement services operation, which is headquartered in
Lexington, Kentucky, provides professional financial management to
individuals and institutions, including private pension plans and
foundations. Our trust subsidiary, a national trust company,
specializes in retirement plans and is regulated by the Office of the
Comptroller of the Currency. Our trust company also provides
consulting, recordkeeping and trust accounting services for qualified
retirement and cafeteria plans.
Our mutual fund administration services operation, which is based in
Indianapolis, Indiana and Southlake, Texas, provides services such as
transfer agency, fund accounting, and administrative, regulatory,
compliance and start-up services for mutual funds, investment advisors,
banks and other money managers in their proprietary mutual fund
efforts.
Our banking operation is headquartered in Lexington, Kentucky. Unified
Banking Company, a federal savings bank, offers various bank products
and services (including, but not limited to, certificates of deposit,
residential mortgage loans and secured personal loans) to its banking
customer base and to our subsidiaries' customers. Our premium finance
subsidiary provides financing for the payment of premiums on insurance
coverage placed by an unaffiliated insurance brokerage operation and is
licensed under applicable governing regulations in the States of
Kentucky, Tennessee, Illinois and Ohio and also conducts business in
the states of West Virginia and Indiana, which do not require licensing
of premium finance companies.
Our brokerage operation, which is headquartered in Indianapolis,
Indiana, consists of a registered broker-dealer under the Securities
Exchange Act of 1934, as amended, that also is a member of the National
Association of Securities Dealers, Inc.
Our investment advisory services operation, which is based in New York
City, provides professional financial management to individuals and
institutions on a customized basis.
On January 31, 2000, Unified Management Company acquired substantially all
of the assets of Commonwealth Investment Services, Inc. Effective February 29,
2000, Resource Benefit Planners, Inc. was merged with and into First Lexington
Trust Company. Effective September 29, 2000, Unified Management Company
was renamed Unified Financial Securities, Inc. Effective October 12, 2000, Unified
Fund Services, Inc. was merged with and into AmeriPrime Financial Services, Inc.
Immediately following, AmeriPrime Financial Services, Inc. was renamed
Unified Fund Services, Inc. Effective November 9, 2000, Equity Underwriting
Group, Inc. was dissolved. On December 31, 2000, Unified Financial Securities,
Inc. acquired substantially all of the assets of AmeriPrime Financial
Securities, Inc. Effective December 31, 2000, Equity Insurance Managers, Inc.
paid a dividend of all of the member interests of Equity Insurance Managers of
Illinois, L.L.C. to us. In December 2000, each of Strategic Fund Services,
Inc., Unified Capital esources, Inc. and VSX Technologies, Inc. was
merged with and into
37
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 1 - NATURE OF OPERATIONS (Continued)
Unified Internet Services, Inc. Each of Unified Financial Securities, Inc.,
Commonwealth Investment Services, Inc., Resource Benefit Planners,
Inc., First Lexington Trust Company, Unified Fund Services, Inc.,
AmeriPrime Financial Services, Inc., Equity Underwriting Group, Inc.,
AmeriPrime Financial Securities, Inc., Unified Capital Resources,
Inc., Strategic Fund Services, Inc., VSX Technologies, Inc. and
Unified Internet Services, Inc. is/was a wholly owned subsidiary of
our company.
On June 26, 2000, First Lexington Trust Company, a subsidiary of our
company, converted to a limited purpose national banking association
with the corporate name "Unified Trust Company, National Association."
Unified Trust Company, National Association is required by the Office
of the Comptroller of the Currency to maintain minimum capital of $2.0
million. As of December 31, 2001 and 2000, Unified Trust Company,
National Association had $2.4 million and $2.1 million, respectively,
total capital.
Effective April 30, 2001, all of the outstanding capital stock of
Health Financial, Inc. was transferred to Unified Trust Company,
National Association. Effective November 13, 2001, EMCO Estate
Management Company, Inc. was dissolved. As of such date, all of the
assets of Estate Management Company were transferred to Unified
Financial Services, Inc., which then made a capital contribution of
such assets to Fiduciary Counsel, Inc. Effective November 19, 2001,
AmeriPrime Financial Securities, Inc. was dissolved and all of its
assets were transferred to Unified Fund Services, Inc.
Effective December 17, 2001, we sold and assigned substantially all of
the assets and liabilities of our insurance subsidiaries, Equity
Insurance Managers, Inc., Equity Insurance Administrators, Inc. and
21st Century Claims Service, Inc., to Arthur J. Gallagher & Co. In
connection with the sale, we received $8.4 million in cash and an
interest-bearing note receivable of $800,000. An additional $800,000
in cash was deposited into an escrow account, and is subject to
possible indemnification claims of Arthur J. Gallagher & Co. pursuant
to the sale agreement. Any funds remaining in the escrow account after
June 16, 2003 (and which are not subject to a claim made by Arthur J.
Gallagher & Co. before such date) will be released to us. The
note receivable is an obligation of Arthur J. Gallagher & Co. and accrues
interest at a 2.5% per annum rate and is payable in 2003. The note
receivable is subject to possible reduction in the event Arthur J.
Gallagher & Co. does not achieve certain revenue or income targets
for the year ending December 31, 2002 with respect to the business that it
acquired from our insurance subsidiaries. Following the closing,
Equity Insurance Managers, Inc., Equity Insurance Administrators,
Inc. and 21st Century Claims Service, Inc. were renamed Unified Insurance
Managers, Inc., Unified Insurance Administrators, Inc. and Unified
Claims Service, Inc.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
----------------------
The Consolidated Financial Statements include the accounts of Unified
Financial Services, Inc. and our subsidiaries after elimination of
all material intercompany accounts and transactions.
The Consolidated Financial Statements give retroactive effect to our
pooling-of-interests transactions. As a result, the Consolidated
Statements of Financial Condition, Statements of Operations, Statements
of Comprehensive Income, Statements of Cash Flows and Statements of
Changes in Stockholders' Equity are consolidated for all periods
presented. As required by
38
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
generally accepted accounting principles, the
Consolidated Financial Statements become our historical consolidated
financial statements upon issuance of the financial statements for the
periods that include the date of the transaction. The Consolidated
Statements of Changes in Stockholders' Equity reflect our accounts as
if the shares of our common stock, $0.01 par value, issued in the
pooling-of-interests transactions had been outstanding during all
periods presented. The Consolidated Financial Statements, including the
notes thereto, should be read in conjunction with our historical
consolidated financial statements.
Fees and Commissions
--------------------
We record revenue on the accrual basis of accounting. For our brokerage
operation, commissions and clearing revenue are recorded on the
settlement date of the related security transaction. This does not
materially differ from recording commissions based upon trade date. In
connection with our private placements of equity securities in 1999 and
2000, Unified Financial Securities, Inc., a subsidiary of our company,
recorded revenue on the accrual basis of accounting (equal to ten
percent of the proceeds of the private placement) and incurred expenses
related to the private placement. Our trust and retirement services
operation's revenue, as well as the investment adviser fees earned by
third party advisers, are recorded on the accrual basis. The fees
earned by the operation and paid to 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. Revenue is recorded as it is earned each month
based upon accounts and account balances. In connection with this, we
earn income on the accounts established to transfer these funds for
customers. For our banking operation, recorded revenue consists of
interest income less interest expense. All other revenue is recorded as
earned.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation, including the
depreciation of capital leased equipment, is provided on the
straight-line or accelerated method over the estimated useful life of
the assets for financial statement purposes.
Investments
-----------
Investments, which consist primarily of investments in mutual funds
(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 Consolidated Statements of Operations as unrealized gain or loss on
securities.
Income Taxes
------------
We file consolidated Federal and state income tax returns with our
subsidiaries.
We have adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires use of the liability
method of accounting for deferred income taxes.
Other Non-Current Assets
------------------------
Other non-current assets consist of deposits, deferred taxes, unearned
revenue and the cash surrender value of life insurance policies.
Intangibles
-----------
We, in acquiring certain businesses, acquired goodwill. We have
determined the value of the goodwill, which is amortized over the
estimated economic lives of the assets on a straight-line
39
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
basis over a period of 10 to 15 years for financial reporting basis.
For tax purposes, goodwill is amortized on a straight-line basis over 15
years.
In 1999, we incurred $663,914 in costs related to the organization and
establishment of our bank, Unified Banking Company. At such time,
management determined that these costs were license and registration
costs and, thus, subject to capitalization and amortization over five
years. During 2001, based upon regulatory and financial accounting
interpretations, management determined that these costs should be
classified as start-up costs, which required the write-off of all
unamortized costs in 1999. This change resulted in a restatement of the
financial information previously reported and had the following balance
sheet and income statement effect:
2001 2000
---- ----
Organizational costs............... $ 663,914 $ 663,914
Accumulated amortization........... 663,914 663,914
Current-year expense............... (132,763) (22,127)
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.
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, we consider
all liquid investments with an original maturity of three months or
less to be cash equivalents. We maintain money market investments that
are not insured by the Federal Deposit Insurance Corporation and bank
accounts that periodically exceed the Federal Deposit Insurance
Corporation's insurance limit during the year.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations."
SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method of accounting. We do not believe that the
adoption of SFAS 141 will have a significant impact on our financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Assets." Under SFAS 142, which
is effective for fiscal years beginning after December 15, 2001,
goodwill and intangible assets deemed to have indefinite lives no
longer will be amortized but will be subject to annual impairment tests
in accordance with SFAS 142. Other intangible assets will continue to
be amortized over their useful lives. We will apply the new rules on
accounting for goodwill and other intangible assets beginning in the
first quarter of 2002. We currently are assessing, but have not
determined, the impact of SFAS 142 on our financial position and
results of operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets to be Disposed Of." SFAS 144
40
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
is effective for fiscal years beginning after December 15, 2001. However,
early adoption was encouraged. We have adopted this statement, but
have determined that it will not have a material impact on our
financial position or results of operations.
Financial Statement Presentation
--------------------------------
Certain amounts in the 2000 and 1999 consolidated financial statements
have been reclassified to conform to the 2001 presentation.
Note 3 - ACQUISITIONS, DISPOSALS AND SALES
As discussed in note 1 of these financial statements, on December 17,
2001, we sold substantially all of the assets and assigned
substantially all of the liabilities of Equity Insurance Managers,
Inc., Equity Insurance Administrators, Inc. and 21st Century Claims
Service, Inc. to Arthur J. Gallagher & Co. This transaction resulted
in the following:
2001
----
Selling price...................... $10,000,000
Basis.............................. 1,035,000
Escrow (see note 1)................ 800,000
Note receivable (see note 1)....... 800,000
Selling expenses................... 2,675,099
-----------
Pre-tax gain....................... 4,689,901
State and federal taxes............ 1,842,193
-----------
Gain on sale....................... $ 2,847,708
===========
Assets and liabilities at December 31, 2001 and 2000 of the sold
operations are summarized below:
2001 2000
---- ----
Receivables........................ $ -- $ 7,566,543
Accounts payable and accrued payable 48,927 220,239
Accrued compensation............... (56,209) 169,443
Other liabilities.................. 598,838 298,639
Note payable....................... -- 107,441
Income taxes payable............... 1,842,193 8,016,752
Payable to insurance companies..... -- 1,490,914
Revenue and profit/(loss) for the insurance operations for the years
ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
---- ---- ----
Revenue............................ $ 12,329,562 $ 12,684,196 $ 9,380,900
Pre-tax income..................... 1,660,855 1,448,230 386,561
After-tax income................... 786,355 1,194,321 214,110
41
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 3 - ACQUISITIONS, DISPOSALS AND SALES (Continued)
At year-end 1999, we sold an insurance contract segment of business of
Equity Insurance Managers of Illinois, L.L.C. (d/b/a/ Irland and
Rogers). The sale price is determined on continued contract revenue and
we anticipate receiving payment for the sale of the contracts over a
two-year period. We recorded this transaction in 1999 based upon the
estimated revenue and costs to our company of closing the location
where the business was conducted. During 2000, the amount of the
anticipated selling price of the book of business was reduced based
upon the continuing revenue and cash received during 2000 and the
additional cost of legal fees related to the business.
2000 1999
---- ----
Sale price......................... $ (55,200) $ 205,200
Value of fixed assets and goodwill. -- (192,205)
Costs to close the location........ 248 (142,482)
--------- ---------
Loss on the sale................... $ (54,952) $(129,487)
========= =========
Equity Insurance Managers of Illinois, L.L.C. was formed to acquire
insurance contracts from an existing business in 1996. A subsidiary of
Equity Underwriting Group owned 55% of this limited liability company.
The transaction was reported under the purchase method of accounting
and this continued with our acquisition of Equity Underwriting Group in
December 1998. In 1999, the seller agreed to a reduction of the unpaid
balance of the note resulting from the sale in the amount of $255,628.
The reduction of this price reduced the goodwill reported under the
original purchase. The minority owner of the new limited liability
company turned in stock certificates and gave up all rights to
ownership during 1999. The receivable from the minority owner of
$565,566, due to its share of operating losses, has been adjusted and
recorded as a reduction of retained earnings in 1999.
During 2000, we discontinued our Strategic Fund Services operation and
Archer Trading operation, in addition to Equity Insurance Managers of
Illinois, L.L.C. As of June 2000, we ceased funding Archer Trading,
Inc.'s losses. The losses of these three discontinued operations,
including the loss on the sale of the Equity Insurance Managers of
Illinois book of business, resulted in the following:
2001 2000 1999
---- ---- ----
Gross revenue...................... $ 902 $ 96,896 $ 303,099
Loss from discontinued operations.. (23,347) (412,224) (761,860)
Assets and liabilities at December 31, 2001 and 2000 of the discontinued operations are
summarized below:
2001 2000
------------- -------------
Receivables............................. $ -- $ 10,610
Accounts payable and accrued payable.... 30,053 29,869
Payable to parent....................... 1,596,748 1,662,748
42
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 4 - OPTIONS
On May 20, 1998, our stockholders adopted the Unified Financial
Services, Inc. 1998 Stock Incentive Plan, which plan subsequently was
amended by our stockholders on May 27, 1999. The Stock Incentive Plan
provides for the granting of stock options and other stock-based
awards. The total number of shares of our common stock issuable under
our Stock Incentive Plan is not to exceed 500,000 shares, subject to
adjustment in the event of any change in our outstanding shares by
reason of a stock dividend, stock split, capitalization, merger,
consolidation or other similar changes generally affecting our
stockholders. Of these 500,000 shares of stock, no more than 250,000
shares may be issued to participants in our Stock Incentive Plan in any
plan year.
Under the terms of our Stock Incentive Plan, employees, directors,
advisors and consultants of our company and subsidiaries will be
eligible to receive the following: (a) incentive stock options; (b)
nonqualified stock options; (c) stock appreciation rights ("SAR"); (d)
restricted stock; (e) restricted stock units; and (f) performance
awards.
As of December 31, 2001, 2000 and 1999, options to acquire 89,396,
104,086 and 105,961 shares, respectively, of our common stock were
outstanding pursuant to our Stock Incentive Plan.
In addition, as of December 31, 2001, our board had granted options to
acquire 60,000 shares of our common stock outside of such plan. The
holder of such options may purchase such options through the surrender
to us of a promissory note issued by VSX Holdings, LLC in the amount of
$3.0 million. Please see note 17.
As of December 31, 2001, 2000 and 1999, the following number of options
were outstanding at the following option exercise prices:
2001 2000 1999
---- ---- ----
$25.00 per share................... 5,390 6,350 6,400
27.50 per share.................. 18,231 19,186 19,551
30.25 per share.................. 500 500 500
40.00 per share.................. 64,275 77,050 79,010
44.00 per share.................. 1,000 1,000 500
45.00 per share.................. -- 66,666 --
50.00 per share.................. 60,000 -- --
As of December 31, 2001, 71,596 of such options were intended to
qualify as incentive stock options pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended.
Options outstanding at December 31, 2000................................ 170,752
Options exercised during period......................................... --
Forfeitures at $25.00 per share............................................. (960)
Forfeitures at $27.50 per share......................................... (955)
Forfeitures at $40.00 per share......................................... (12,775)
Option to acquire 66,666 shares at $45.00 per share converted to option to
acquire 60,000 shares at $50.00 per share............................ (6,666)
Options outstanding at December 31, 2001................................ 149,396
43
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 5 - DEBT AND RELATED MATTERS
In December 2001, we repaid an outstanding term loan (with a principal
balance of $1,893,750 as of December 31, 2000) with a portion of the
proceeds from the sale of our insurance operations.
At December 31, 2000, Equity Insurance Managers, Inc. had $107,440 in
bank borrowings from Unified Banking Company, which was eliminated in
consolidation. A $350,939 loan outstanding at December 31, 2000 was
repaid upon the sale in August 2001 of the property securing the loan.
At December 31, 2001 and 2000, outstanding debt consisted of the
following:
Bank notes payable: 2001 2000
------------------ ----------- -----------
Term loan, interest at prime............................ $ -- $ 1,893,750
Payable in monthly installments including interest at prime plus 0.5%,
final payment due December 31, 2001, collateralized by communication
and computer hardware
and software............................................ -- 32,699
Payable in monthly installments including interest at
8.25%, final payment due March 31, 2014, collateralized
by equipment............................................ -- 350,939
Payable in monthly installments including interest at
10.4%, final payment due April 26, 2002, collateralized
by equipment............................................ 3,153 9,613
----------- -----------
Total................................................... 3,153 2,287,001
----------- -----------
Less current maturities................................. 3,153 1,944,662
----------- -----------
Long-term portion....................................... $ -- $ 342,339
=========== ===========
Lines of credit at December 31, 2001 and 2000 consisted of the
following:
Lines of credit: 2001 2000
--------------- ----------- -----------
Payable at maturity, June 30, 2002, interest at prime,
secured by assignment of receivables.................... 1,064,780 1,660,000
Payable at maturity, December 31, 2002, interest at 10.25% 40,000 8,626
--------- ---------
Total............................................ $ 1,104,780 $ 1,668,626
=========== ===========
44
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 6 - CAPITAL LEASE OBLIGATIONS
We lease both computer and office equipment under capital leases. Such
lease obligations are payable over a 60-month period. Following is a
summary of future minimum lease payments under capitalized lease
obligations as of December 31, 2001 and 2000:
2001 2000
---- ----
2001........................................... $ -- $ 8,355
2002........................................... 724 724
2003........................................... 482 422
----------- -----------
1,206 9,501
Less: amount representing interest 157 568
----------- -----------
Total.................................. $ 1,049 $ 8,933
=========== ===========
We did not acquire equipment through capital lease obligations during
the years ended December 31, 2001 and 2000.
Note 7 - RENTAL AND LEASE INFORMATION
We, through our subsidiary, Unified Banking Company, lease our
corporate headquarters and administrative office facilities located at
2424 Harrodsburg Road, Lexington, Kentucky, which facility has
approximately 1,700 square feet, and is leased pursuant to an operating
lease expiring in 2006. The lease includes provisions for adjustment of
operating costs and real estate taxes.
We also maintain administrative offices at the corporate offices of
Unified Financial Securities, Inc. and Unified Fund Services, Inc, each
of which is located at 429-431 N. Pennsylvania Street, Indianapolis,
Indiana and One Firstar Plaza, Saint Louis, Missouri.
At December 31, 2001, we were committed to minimal rental payments
under certain non-cancellable operating leases. Generally, these leases
include cancellation clauses. The aggregate minimum rental commitments
required under operating leases for office space and equipment at
December 31, 2001 for all operations were as follows:
FOR THE YEARS ENDING DECEMBER 31, LEASE COMMITMENTS
--------------------------------- -----------------
2002................................... $ 859,966
2003................................... 579,995
2004................................... 490,646
2005................................... 428,271
Thereafter............................. 1,432,590
-------------
Total........................... $ 3,791,468
=============
We lease certain office facilities and equipment. Rental expense for
the years ended December 31, 2001, 2000 and 1999 were $1,206,657,
$1,006,325 and $973,820, respectively.
45
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 8 - LEGAL PROCEEDINGS
We are a party to various lawsuits, claims and other legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, all such matters are
without merit or are of such kind, or involve such amounts, that
unfavorable disposition would not have a material adverse effect on our
financial position or results of operations.
Note 9 - EMPLOYEE BENEFIT PLANS
We and our subsidiaries provide a defined contribution retirement plan
that covers substantially all employees. Our board of directors
determines contributions to the plan. For the years ended December 31,
2001, 2000 and 1999, our board of directors did not make any
contributions.
We also maintain a 401(k) plan for the consolidated companies. The plan
includes a matching for funds contributed. We will match the employee's
contribution up to fifty percent of the first six percent of an
employee's pre-tax contribution.
Note 10 -CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL
REQUIREMENTS
Unified Financial Securities, our brokerage subsidiary, is subject to
the Securities and Exchange Commission's Uniform Net Capital Rule
("Rule 15c3-1"), which requires the maintenance of minimum net capital,
as defined, of the greater of (i) 6-2/3% of aggregate indebtedness or
(ii) $50,000, whichever is greater, and a ratio of aggregate
indebtedness to net capital of not more than 15 to 1. At December 31,
2001 and 2000, Unified Financial Securities' net capital was $107,637
and $374,461, respectively, and its ratio of aggregate indebtedness was
4.06 to 1 and 1.44 to 1.
Pursuant to Rule 15c3-3 as promulgated by the Securities and Exchange
Commission, Unified Financial Securities calculates its reserve
requirement and segregates cash and/or securities for the exclusive
benefit of its customers on a periodic basis. The reserve requirement
for Unified Financial Securities was $0 at December 31, 2001 and 2000.
Balances segregated in excess of reserve requirements are not
restricted.
As disclosed in note 1, Unified Financial Securities acquired
substantially all of the assets of Commonwealth Investment Services and
AmeriPrime Financial Securities on January 31, 2000 and December 31,
2000, respectively. As of such dates, Commonwealth Investment Services
and AmeriPrime Financial Securities, respectively, ceased operations.
Note 11- COMMON AND PREFERRED STOCK
Common Stock:
We have 20,000,000 authorized shares of our common stock.
Effective December 10, 1998, we commenced a private placement offering
to sell a maximum of 1,750,000 shares of our common stock. Effective
September 27, 1999, the size of the offering was reduced to 750,000
shares of our common stock, which shares were offered at a price of
$40.00 per share. The offering terminated on March 31, 2000. For the
years ended December 31, 2000 and 1999, we issued 11,530 and 238,270
shares, respectively, of our common stock
46
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 11- COMMON AND PREFERRED STOCK (Continued)
(including 10,929 and 37,545 shares, respectively, from treasury). For the
years ended December 31, 2000 and 1999, aggregate brokerage fees of
$20,500 and $901,780, respectively, were paid to our brokerage
subsidiaries in connection with this private placement offering, which
amount is inclusive of $18,300 and $2,400, respectively, paid to
external brokerage firms.
In our private placement, all shares of our common stock were offered
on a best efforts basis. There is no public market for any of our
securities and there can be no assurance that a market will develop in
the future. The securities offered and sold by us in our private
placements will not be and have not been registered under the
Securities Act of 1933, as amended, and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements.
Preferred Stock:
As of December 31, 2001 and 2000, our total preferred shares authorized
was 1,000,000 with a par value of $.01 per share. Of such authorized
shares, 200,000 shares are designated Series D Convertible Junior
Participating Preferred Stock. We have reserved all of the shares of
Series D Preferred Stock for issuance under a Rights Agreement dated
August 26, 1998 between us and Unified Fund Services, as rights agent.
On August 26, 1998, our board of directors declared a dividend
distribution of one Preferred Stock Purchase Right for each outstanding
share of our common stock. The dividend distribution was payable to the
stockholders of record at the close of business on August 26, 1998.
Generally, each Preferred Stock purchase right, when exercisable,
entitles the registered holder to purchase from our 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.
Note 12 - INCOME TAXES
Consolidated net operating loss carryforwards at December 31, 2001,
2000 and 1999 amounted to approximately $14,100,000, $17,500,000 and
$16,191,000, respectively, expiring from 2004 to 2016.
Consolidated State of Indiana net operating loss carryforwards at
December 31, 2001, 2000 and 1999 amounted to approximately $1,400,000,
$16,000,000 and $15,000,000, respectively, expiring from 2004 to 2016.
We decreased our net operating loss carryforwards by approximately
$3,400,000 in 2001. We increased our net operating loss carryforwards
by approximately $2,500,000 in 2000, which reduced current consolidated
Federal income tax expense to zero.
We record deferred income taxes in accordance with Financial Accounting
Standard No. 109. The deferred tax liability in our consolidated
financial statements as of December 31, 2001, 2000 and 1999 were as
follows:
2001 2000 1999
---- ---- ----
Deferred tax assets................... $ (287,435) $ (80,037) $ (130,927)
Deferred tax liability................ 68,461 14,308 168,936
---------- --------- ----------
Net deferred tax liability............ $ (218,974) $ (65,729) $ 38,009
========== ========= ==========
47
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 12 - INCOME TAXES (Continued)
The components of income tax expense for the years ended December 31,
2001, 2000 and 1999 were as follows:
2001 2000 1999
---- ---- ----
Current income tax:
Federal...................... $ 115,473 $ -- $ 48,083
State and local.............. 207,489 35,000 32,470
--------- --------- ----------
Total current income tax.. 322,962 35,000 80,553
--------- --------- ----------
Deferred income tax:
Federal...................... (77,514) -- (37,863)
State and local.............. (21,800) -- (12,960)
--------- --------- ----------
Total deferred............ (99,314) -- (50,823)
--------- --------- ----------
Total income tax....... $ 223,648 $ 35,000 $ 29,730
========= ========= ==========
Note 13 -RELATED PARTY TRANSACTIONS
As of December 31, 2001, $7,697,306 was eliminated from both bond
investments and deposits on our Consolidated Statements of Financial
Condition, which amount represented cash on deposit at our bank from
various subsidiaries of our company.
Note 14 -FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
value of our financial instruments at December 31, 2001, 2000 and 1999.
Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties.
DECEMBER 31,
---------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------ ----- ------ ----- ------ -----
Financial assets
Cash and cash equivalents $ 8,844 $ 8,844 $ 5,582 $ 5,582 $ 5,714 $ 5,714
Investment in:
Mutual funds and
securities 555 555 573 573 419 419
Mutual funds - affiliates -- -- -- -- 326 326
Receivables 5,480 5,480 13,086 13,086 9,605 9,605
Prepaid and sundry 425 425 297 297 775 775
Financial obligations
Current liabilities 61,825 61,825 49,411 49,411 19,083 19,083
Capital lease obligation 1 1 9 9 39 39
Long-term debt 3 3 2,287 2,287 2,858 2,858
48
UNIFIED FINANCIAL SERVICES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 15 -DISCLOSURES ABOUT REPORTING SEGMENTS
We have five reportable operating segments: trust and retirement
services; mutual fund administration services; banking; brokerage; and
investment advisory services. In addition, we also report corporate as
a separate segment. Discontinued operations are excluded from reported
operating segments.
The accounting policies of these segments are the same as those
described in the summary of significant accounting policies. We
evaluate performance based on profit or loss from operations before
income taxes, not including recurring gains and losses.
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because
each business requires different technology and marketing strategies.
Most of the businesses were acquired as a unit and the management at
the time of the acquisition was retained. Reportable segment revenues,
gross profit, capital expenditures and depreciation and amortization
were as follows for the years ended December 31, 2001, 2000 and 1999
and total assets were as follows as of December 31, 2001 and 2000:
49
UNIFIED FINANCIAL SERVICES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
--------------------------------
Note 15 -DISCLOSURES ABOUT REPORTING SEGMENTS (Continued)
(In thousands) 2001 2000 1999
----------- ----------- -----------
Revenues
Trust and retirement............................. $ 4,820 $ 4,330 $ 4,110
Mutual fund administration....................... 5,410 4,790 2,776
Banking.......................................... 2,083 1,387 533
Brokerage........................................ 2,791 3,115 4,597
Investment advisory.............................. 1,961 1,938 1,866
Corporate........................................ 562 486 944
----------- ----------- -----------
Total....................................... $ 17,627 $ 16,046 $ 14,826
=========== =========== ===========
Gross profit
Trust and retirement............................. $ 4,050 $ 4,025 $ 3,868
Mutual fund administration....................... 4,716 4,042 2,302
Banking.......................................... 2,083 1,387 533
Brokerage........................................ 1,070 1,165 2,258
Investment advisory.............................. 1,772 1,714 1,696
Corporate........................................ 514 484 944
----------- ----------- -----------
Total....................................... $ 14,205 $ 12,817 $ 11,601
=========== ========== ===========
Capital expenditures
Trust and retirement............................. $ 139 $ 272 $ 84
Mutual fund administration....................... 25 87 91
Banking.......................................... 77 630 889
Brokerage........................................ 8 6 28
Investment advisory.............................. 12 -- 26
Corporate........................................ 353 450 910
----------- ----------- -----------
Total....................................... $ 614 $ 1,445 $ 2,028
=========== =========== ===========
Depreciation and amortization
Trust and retirement............................. $ 131 $ 89 $ 65
Mutual fund administration....................... 109 82 67
Banking.......................................... 162 153 84
Brokerage........................................ 18 35 36
Investment advisory.............................. 130 139 140
Corporate........................................ 199 208 159
----------- ----------- -----------
Total....................................... $ 749 $ 706 $ 551
=========== =========== ===========
Total assets
Trust and retirement............................. $ 2,837 $ 3,793
Mutual fund administration....................... 1,909 2,286
Banking.......................................... 64,344 44,634
Brokerage........................................ 778 1,346
Investment advisory.............................. 1,428 1,981
Corporate........................................ 8,895 11,086
----------- -----------
Total....................................... $ 80,191 $ 65,126
=========== ===========
50
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Note 16 -UNIFIED BANKING COMPANY ASSETS AND LIABILITIES
Unified Banking Company commenced operations on November 1, 1999.
Included in our Consolidated Statements of Financial Conditions at
December 31, 2001 and 2000 were the bank's total assets of $69,790,211
and $42,365,604, respectively, and total liabilities of $63,911,290 and
$35,856,084, respectively. As of such dates, certain components of such
assets and liabilities were as follows:
2001 2000
---- ----
Cash ............................................ $ 164,433 $ 124,952
Due from banks................................... 1,357,483 1,162,639
Federal funds sold............................... 4,033,000 7,667,000
Investments in securities:
US agency securities........................ 19,071,837 10,841,435
FHLB stock.................................. 196,300 100,000
Loans:
Real estate loans........................... 26,482,150 14,569,481
Commercial loans............................ 11,047,590 4,257,141
Installment loans........................... 6,573,173 2,419,352
Other loans................................. 32,664 1,141
Allowance for loan losses................... 430,000 305,000
Bank deposits:
Demand deposits............................. 14,637,467 3,468,441
Official checks............................. 1,603,610 64,135
NOW accounts................................ 1,159,688 426,457
Money market accounts....................... 6,543,341 12,724,377
Savings accounts............................ 55,495 34,935
Time deposits............................... 34,584,509 16,648,180
Other interest-bearing deposits............. 5,018,738 1,157,109
Federal and borrowed funds....................... -- 1,143,000
Note 17 -INVESTMENT IN AFFILIATE
On May 23, 2000, we subscribed for 10 shares of VSX Holdings, LLC, a
Delaware limited liability company, in exchange for $10 and certain
intangible property rights. We currently own approximately 0.5% of the
outstanding shares of VSX Holdings, but have the right to purchase up
to an additional 1,990 (19.9%) shares at a price of $1 per share, upon
the occurrence of certain specified events. Our investment in VSX
Holdings is accounted for on the cost method of accounting.
VSX Holdings is involved in the development of an alternative trading
system to be known as VSX.com, which, upon and subject to organization
and regulatory approval, will serve as a virtual, real-time private
financial market place. In connection with the organization of VSX
Holdings, a third-party investor made a $3.0 million loan to VSX
Holdings, which loan is evidenced by a debenture issued by VSX Holdings
to such investor. The debenture is secured by 85,000 shares of our
common stock pledged by certain executive officers of our company. In
addition, concurrent with the issuance of such debenture, we issued an
option to the third-party investor to acquire shares of our common
stock, which option has a five-year term. The investor may elect to
foreclose on the pledged collateral or exercise the option. Pursuant to
such option, the holder of the option and the debenture is entitled to
surrender the debenture to us in payment of the exercise price of the
option. During the years ending May 23, 2002, 2003, 2004 and 2005, the
exercise price per share of our common stock subject to the option will
be $50, $55, $60 and
51
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
--------------------------------
Note 17 -INVESTMENT IN AFFILIATE (Continued)
$65, respectively. Should the investor foreclose on the pledged
collateral, the executive officers would succeed to the option and/or
the claim against VSX Holdings. Should the option be exercised prior to
May 23, 2002 by the holder of the note (whether the investor, the
executive officers or any other holder): (a) we would issue 60,000
shares of stock (54,545 after May 23, 2002) to the investor, the
executive officers or any other holder, as the case may be, and (b) we
would succeed to the $3.0 million claim against VSX Holdings.
We also have entered into a management arrangement with VSX Holdings
whereby we provide consulting and development services to VSX Holdings.
For the years ended December 31, 2001 and 2000, we received payments
totaling $419,977 and $1,535,504, respectively, from VSX Holdings for
such consulting and development services, which amount is recorded as a
reduction of "Other operating expenses" on our Consolidated Statements
of Operations for the years ended December 31, 2001 and 2000. At
December 31, 2001, we had $400,000 in borrowings payable to VSX
Holding, LLC to be repaid in February 2002.
Note 18 - INCOME (LOSS) PER SHARE OF STOCK
Income (loss) per share of stock is computed using the number of common
shares outstanding during the applicable period. Diluted income (loss)
per share of stock is computed using the number of common shares
outstanding and dilutive potential common shares (outstanding stock
options).
Dilutive potential common shares included in the diluted income (loss)
per share calculation were determined using the treasury stock method.
Under the treasury stock method, outstanding stock options are dilutive
when the average "market price" of our common stock exceeds the option
price during a period. In addition, proceeds from the assumed exercise
of dilutive options along with the related tax benefit are assumed to
be used to repurchase common shares at the average market price of such
stock during the period. For the years ended December 31, 2001 and
2000, potential common shares of -0- and 67,666, respectively, were
considered to be anti-dilutive and were excluded from the calculation
of diluted income (loss) per share.
Note 19 -SUBSEQUENT EVENTS
Effective as of January 1, 2002, Unified Trust Company, National
Association became a wholly owned subsidiary of Unified Banking Company
upon the contribution of all of its capital stock to Unified Banking
Company. As of December 31, 2001, Unified Trust Company, National
Association reported consolidated capital at $2.4 million, which
increased Unified Banking Company's consolidated capital to $8.3
million as of January 1, 2002.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------------------------------------------------------------
Information regarding our directors is contained in our Proxy Statement
for the 2002 Annual Meeting of Stockholders under the caption "Proposal 1:
Election of Directors" and is incorporated herein by reference. Information
regarding our executive officers is contained in this report under Item
4A--"Executive Officers of the Registrant" and is incorporated herein by
reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is included in our Proxy Statement for the
2002 Annual Meeting of Stockholders under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance," and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information regarding executive compensation is contained in our Proxy
Statement for the 2002 Annual Meeting of Stockholders under the captions "Report
of Audit, Nominating and Compensation Committee on Executive Compensation and
Audit Matters" and "Compensation of Executive Officers," and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
---------------------------------------------------------------
Information regarding security ownership of certain beneficial owners
and management is contained in our Proxy Statement for the 2002 Annual Meeting
of Stockholders under the caption "Security Ownership of Certain Beneficial
Owners and Management," and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------------------------------------------------
Information regarding certain relationships and related transactions is
contained in our Proxy Statement for the 2002 Annual Meeting of Stockholders
under the captions "Board of Directors and Committees" and "Certain
Relationships and Related Transactions," and is incorporated herein by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-----------------------------------------------------------------
(a) Exhibits:
See Exhibit Index on pages 57-59 hereto.
(b) Reports on Form 8-K.
On December 28, 2001, we filed a Current Report on Form 8-K to report,
pursuant to Item 2 of Form 8-K, our sale and assignment of substantially all of the
assets and liabilities, respectively, of our insurance subsidiaries, Equity
Insurance Managers, Inc., Equity Insurance Administrators, Inc. and
53
21st Century Claims Service, Inc., to Arthur J. Gallagher & Company, which
transaction closed on December 17, 2001. In connection with such transaction,
we received $8.4 million in cash and a note receivable in the principal amount of
$800,000. An additional $800,000 was deposited by Arthur J. Gallagher & Co. into
an escrow account and will be subject to reduction based upon
possible indemnification claims of Arthur J. Gallagher & Co. pursuant to the
purchase agreement. The note is payable on or before February 16, 2003, and is
subject to possible reduction in the principal due thereunder in the event certain
revenue or income targets are not met by Arthur J. Gallagher & Co. for the year ending
December 31, 2002 with respect to the business that it acquired from us.
In such Current Report on Form 8-K, we filed the following unaudited
pro forma consolidated financial statements:
(i) Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2001;
(ii) Unaudited Pro Forma Consolidated Statement of Operations for the Nine Months Ended September
30, 2001; and
(iii) Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2000.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of the
20th day of February 2002.
UNIFIED FINANCIAL SERVICES, INC.
(Registrant)
By /s/ Timothy L. Ashburn
------------------------------------------------------------
Timothy L. Ashburn, Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Unified Financial
Services, Inc., hereby severally and individually constitute and appoint Timothy
L. Ashburn and John S. Penn, and each of them, the true and lawful attorneys and
agents of each of us to execute in the name, place and stead of each of us
(individually and in any capacity stated below) any and all amendments to this
Annual Report on Form 10-K and all instruments necessary or advisable in
connection therewith and to file the same with the Securities and Exchange
Commission, each of said attorneys and agents to have the power to act with or
without the others and to have full power and authority to do and perform in the
name and on behalf of each of the undersigned every act whatsoever necessary or
advisable to be done in the premises as fully and to all intents and purposes as
any of the undersigned might or could do in person, and we hereby ratify and
confirm our signatures as they may be signed by our said attorneys and agents or
each of them to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Timothy L. Ashburn Chairman of the Board February 20, 2002
- ------------------------------------
Timothy L. Ashburn and Chief Executive Officer
/s/ John S. Penn President, Chief Operating February 20, 2002
- ------------------------------------
John S. Penn Officer and Director
/s/ Thomas G. Napurano Executive Vice President, February 20, 2002
- ------------------------------------
Thomas G. Napurano Chief Financial Officer
and Director
55
/s/ Philip L. Conover Director February 20, 2002
- ------------------------------------
Philip L. Conover
/s/ Weaver H. Gaines Director February 20, 2002
- ------------------------------------
Weaver H. Gaines
/s/ Jack R. Orben Director February 20, 2002
- ------------------------------------
Jack R. Orben
56
EXHIBIT INDEX
Ex. No. Description
-----------
3.1(a) 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.
3.1(b) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company, filed as Exhibit 3.1(b) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, is incorporated herein by reference.
3.1(c) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company, filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1999, is incorporated by reference herein.
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 Rights of Series
D Junior Participating Preferred Stock of the Company, filed
as Exhibit 4.2 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1998, is incorporated herein
by reference.
4.2 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 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.*
10.2 Employment Agreement, dated as of December 31, 1999, by and
between the Company and Charles H. Binger, filed as Exhibit
10.24 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999, is incorporated herein by
reference.*
10.3 Employment Agreement, dated as of December 31, 1999, by and
between the Company and David F. Morris, filed as Exhibit
10.25 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999, is incorporated herein by
reference.*
10.4 Employment Agreement, dated as of April 30, 2001, by and
between Fiduciary Counsel, Inc. and Jack R. Orben, filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, is incorporated
herein by reference.*
57
10.5 Amended and Restated Unified Financial Services, Inc. 1998
Stock Incentive Plan, filed as Annex A to the Company's Proxy
Statement for the Company's 1999 Annual Meeting, is incorporated
herein by reference.*
10.6 First Amendment to Amended and Restated Unified Financial
Services, Inc. 1998 Stock Incentive Plan, is filed herewith.*
10.7 First Amendment to Loan Agreement, dated as of June 28, 2000,
by and among Bank One, Kentucky, NA, the Company, Commonwealth
Premium Finance Corporation and Equity Underwriting Group,
Inc., filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, is
incorporated herein by reference.
10.8 Renewal Revolving Credit Note, dated as of June 28, 2000, by
Commonwealth Premium Finance Corporation in favor of Bank One,
Kentucky, NA, filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, is
incorporated herein by reference.
10.9 Second Amendment to Loan Agreement, dated as of December 11,
2000, by and among Bank One, Kentucky, NA, the Company,
Commonwealth Premium Finance Corporation, Equity Insurance
Managers, Inc., Equity Insurance Administrators, Inc. and
21st Century Claims Service, Inc., filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, is incorporated herein by reference.
10.10 Stock Pledge and Security Agreement, dated as of December 11,
2000, by and between the Company and Bank One, Kentucky, NA,
filed as Exhibit 10.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000, is incorporated
herein by reference.
10.11 Third Amendment to Loan Agreement, dated as of February 27,
2001, by and among Bank One, Kentucky, NA, the Company,
Commonwealth Premium Finance Corporation, Equity Insurance
Managers, Inc., Equity Insurance Administrators, Inc. and
21st Century Claims Service, Inc., filed as Exhibit 10.12 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, is incorporated herein by reference.
10.12 Renewal Term Note, dated as of February 27, 2001, by the
Company in favor of Bank One, Kentucky, NA, filed as Exhibit
10.13 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, is incorporated herein by reference.
10.13 Guaranty of Payment and Performance, dated as of February 27,
2001, by the Company in favor of Bank One, Kentucky, NA, filed
as Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, is incorporated herein
by reference.
58
10.14 Fourth Amendment to Loan Agreement and Amendment to Promissory
Notes, dated September 1, 2001, by and among Bank One,
Kentucky, N.A., Commonwealth Premium Finance Corporation,
the Company, Equity Insurance Managers, Inc., Equity Insurance
Administrators, Inc. and 21st Century Claims Service, Inc.,
filed as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001, is incorporated
herein by reference.
10.15 Purchase Agreement, dated December 17, 2001, by and among Arthur
J. Gallagher & Co., the Company, Equity Insurance Managers,
Inc., Equity Insurance Administrators, Inc. and 21st Century
Claims Service, Inc., filed as Exhibit 10 to the Company's
Current Report on Form 8-K, dated December 17, 2001, is
incorporated herein by reference.
11.1 Computations of Earnings per share, is filed herewith.
21.1 List of Subsidiaries, is filed herewith.
23.1 Consent of Larry E. Nunn & Associates, LLC with respect to its
report dated February 7, 2002 regarding the consolidated
financial statements of the Company as of December 31, 2001
and 2000 and for the years ended December 31, 2001, 2000 and
1999, is filed herewith.
24.1 Power of Attorney (included on signature page hereto).
- ---------------
* Management contract or compensatory plan or arrangement.
59