<PAGE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
-------------------------------------------
Commission file number 0-22629
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UNIFIED FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 35-1797759
-------------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
431 NORTH PENNSYLVANIA STREET
INDIANAPOLIS, INDIANA 46204
-------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(317) 917-7001
-------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
/x/ Yes / / No
Number of shares
Title of class outstanding as of August 10, 2000
---------------------------------- -----------------------------------
Common stock, $0.01 par value 2,879,712
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<TABLE>
UNIFIED FINANCIAL SERVICES, INC.
FORM 10-Q
INDEX
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition - June 30, 2000
(Unaudited) and December 31, 1999 1
Consolidated Statements of Operations (Unaudited) - Six and Three
Months Ended June 30, 2000 and 1999 3
Consolidated Statements of Comprehensive Income (Unaudited) - Six
and Three Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flow (Unaudited) - Six Months
Ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Cautionary Statement Regarding Forward-Looking Statements 15
General 15
Comparison of Results for the Six Months Ended June 30, 2000 and 1999 17
Comparison of Results for the Three Months Ended June 30, 2000 and 1999 19
Liquidity and Capital Resources 20
Risk Factors 21
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 30
Item 4. Submission of Matters to a Vote of Securityholders 30
Item 5. Other Matters 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBIT INDEX 33
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
------
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ----
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,288,196 $ 5,709,082
Due from banks 611,014 314,815
Federal funds sold 1,975,000 4,922,000
Bond investments -- 5,515,156
Investment in affiliated mutual funds 438,408 326,271
Investment in securities and non-affiliated
mutual funds 12,068,246 424,547
Loans (net of allowance for loan losses of
$160,000 for 2000 and $33,000 for 1999) 12,652,932 2,810,876
Accounts receivable (net of allowance for
doubtful accounts of $412,119 for 2000 and
$38,326 for 1999) 10,108,909 9,604,833
Prepaid assets and deposits 860,304 899,867
Deferred tax asset -- 5,707
----------- -----------
Total current assets 44,003,009 30,533,154
----------- -----------
Fixed Assets, at cost
Equipment and furniture (net of accumulated
depreciation of $3,839,954 for 2000 and
$3,512,135 for 1999) 2,904,884 2,944,610
----------- -----------
Total fixed assets 2,904,884 2,944,610
----------- -----------
Non-Current Assets
Investment in affiliate 10 --
Investment in debt securities 882,764 1,073,621
Organization cost (net of accumulated
amortization of $97,509 for 2000 and $32,019 for 1999) 575,306 641,688
Goodwill (net of accumulated amortization of
$191,253 for 2000 and $139,093 for 1999) 1,162,541 1,214,701
Other non-current assets 220,233 341,220
----------- -----------
Total non-current assets 2,840,854 3,271,230
----------- -----------
TOTAL ASSETS $49,748,747 $36,748,994
=========== ===========
(Continued on next page)
See accompanying notes.
- 1 -
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<PAGE>
<CAPTION>
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current Liabilities:
Current portion of capital lease obligations $ 12,750 $ 30,073
Current portion of bank borrowings 1,944,133 2,343,965
Lines of credit 2,289,498 1,727,003
Deposits 21,151,467 7,331,853
Accounts payable and accrued expenses 1,941,640 2,731,970
Accrued compensation and benefits 431,804 549,093
Payable to insurance companies 6,445,771 5,670,974
Payable to broker-dealers 301,725 255,158
Income taxes payable, current 21,024 136,630
Income taxes payable, deferred 77,208 83,157
Other liabilities 1,072,095 597,646
----------- -----------
Total current liabilities 35,689,115 21,457,522
----------- -----------
Long-Term Liabilities
Long-term portion of capital lease obligations 2,393 8,933
Long-term portion of borrowings 428,549 514,031
Other long-term liabilities 56,012 104,742
Deferred income taxes 22,551 85,779
----------- -----------
Total long-term liabilities 509,505 713,485
----------- -----------
Total liabilities 36,198,620 22,171,007
----------- -----------
Commitments and Contingencies -- --
----------- -----------
Stockholders' Equity
Common stock, par value $.01 per share 33,297 33,294
Additional paid-in capital 16,241,446 16,050,189
Retained deficit (2,657,528) (1,292,794)
Accumulated other comprehensive income (67,088) (35,463)
----------- -----------
13,550,127 14,755,226
Treasury stock, at cost -- (177,239)
----------- -----------
Total stockholders' equity 13,550,127 14,577,987
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $49,748,747 $36,748,994
=========== ===========
See accompanying notes.
</TABLE>
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<TABLE>
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Gross revenue (see note 12) $14,251,067 $12,665,565 $7,312,561 $6,031,662
----------- ----------- ---------- ----------
Total gross revenue 14,251,067 12,665,565 7,312,561 6,031,662
----------- ----------- ---------- ----------
COST OF SALES:
Cost of sales 4,662,041 4,076,175 2,199,758 2,220,553
----------- ----------- ---------- ----------
Total cost of sales 4,662,041 4,076,175 2,199,758 2,220,553
----------- ----------- ---------- ----------
Gross profit (see note 12) 9,589,026 8,589,390 5,112,803 3,811,109
----------- ----------- ---------- ----------
EXPENSES:
Employee compensation and benefits 6,226,120 4,598,745 3,049,495 2,181,105
Mail and courier 292,520 124,913 137,460 2,796
Telephone 306,302 190,630 159,103 116,816
Equipment rental and maintenance 309,622 268,671 179,333 157,820
Occupancy 476,759 445,163 231,274 234,284
Depreciation and amortization 482,716 430,951 247,218 207,957
Professional fees 961,864 780,093 357,910 239,561
Interest 230,382 237,464 102,818 112,411
Provision for loan losses and bad debt 537,324 3,250 512,433 3,250
Business development 154,005 296,872 154,005 133,696
Other operating expenses 941,744 1,236,428 56,123 656,761
----------- ----------- ---------- ----------
Total expenses 10,919,358 8,613,180 5,187,172 4,046,457
----------- ----------- ---------- ----------
Loss from operations (1,330,332) (23,790) (74,369) (235,348)
----------- ----------- ---------- ----------
OTHER INCOME (LOSS)
Unrealized gain (loss) on securities 10,231 9,701 (15,190) 39,827
Realized gain (loss) on securities (10,491) 2,921 (4,347) 3,734
Loss on sale/disposal of fixed assets (99,480) -- (99,044) --
Equity in results of affiliates -- 54,284 -- 47,443
All other 89,862 -- 76,431 --
----------- ----------- ---------- ----------
Total other income (loss) (9,878) 66,906 (42,150) 91,004
----------- ----------- ---------- ----------
Income (loss) before income taxes (1,340,210) 43,116 (116,519) (144,344)
----------- ----------- ---------- ----------
Income taxes 24,524 44,000 11,915 39,438
----------- ----------- ---------- ----------
Net loss $(1,364,734) $ (884) $ (128,434) $ (183,782)
=========== =========== ========== ==========
Per share earnings
Basic common shares outstanding 2,879,712 2,585,042 2,879,712 2,585,042
Net loss-basic $ (0.47) $ -- $ (0.04) $ (0.07)
Fully diluted common shares outstanding 3,049,559 2,843,958 3,049,559 2,843,958
Net loss-fully diluted $ (0.45) $ -- $ (0.04) $ (0.06)
See accompanying notes.
</TABLE>
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<TABLE>
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2000 1999 2000 1999
----------- ----- --------- ---------
<S> <C> <C> <C> <C>
Net loss $(1,364,734) $(884) $(128,434) $(183,782)
Other comprehensive income,
(loss), net of tax
Unrealized gain (loss) on
securities, net of
reclassification adjustment (31,625) -- 17,572 --
----------- ----- --------- ---------
Comprehensive loss $(1,396,359) $(884) $(110,861) $(183,782)
=========== ===== ========= =========
See accompanying notes.
</TABLE>
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<TABLE>
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
------------ -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (1,364,734) $ (884)
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Income taxes payable (121,555) (1,857)
Deferred income taxes (57,521) (120,939)
Provision for depreciation and amortization 482,716 430,951
Provision for loan losses and bad debt 537,324 --
Unrealized loss on investments (10,231) (9,701)
Loss on disposal of discontinued operations 99,100 --
Loss on disposal of investment of debt securities 9,791 --
Adjustment to goodwill re: purchase of
Fiduciary Counsel, Inc. -- 211,007
Results of affiliate/minority interest -- (54,284)
Deferred start-up costs -- (405,005)
(Increase) decrease in operating assets
Receivables (914,400) (1,510,296)
Loans made to customers, net of repayments (9,969,056) --
Prepaid and sundry assets 39,563 15,713
Other non-current assets 120,987 261,763
Bond investments 5,515,156 --
Federal funds sold 2,947,000 --
Due from banks (296,199) --
Increase (decrease) in operating liabilities
Deposits 13,819,614 --
Accounts payable and accrued expenses (802,475) 660,816
Accrued compensation and benefits (117,289) 239,999
Payable to broker/dealers 46,567 (310,296)
Payable to insurance companies 774,797 120,607
Other long-term liabilities (48,730) (71,704)
Other liabilities 474,449 (68,657)
------------ -----------
Net cash provided by (used in) operating activities 11,164,874 (612,767)
------------ -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment (411,483) (1,450,941)
Proceeds from sale of fixed assets 80 --
Investment in affiliated mutual funds (112,137) --
Investments in securities and mutual funds (11,665,093) 74,770
Investment in affiliate (10) (43,235)
Proceeds from sale of debt securities 181,066 --
------------ -----------
Net cash used in investing activities (12,007,577) (1,419,406)
------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 6,400 5,800,667
Proceeds from reissuance of treasury stock 362,099 --
Proceeds from issuance of Series C preferred stock -- 93,000
Proceeds from lines of credit 562,495 700,000
Dividends to Unified Investment Services, Inc. and Fully
Armed Productions, Inc. shareholders -- (18,624)
Treasury stock -- (635,301)
Repayment of borrowings (485,314) (1,485,046)
Repayment of capital lease obligations (23,863) (27,964)
Purchase of Archer Trading, Inc. -- (73,500)
------------ -----------
Net cash provided by financing activities 421,817 4,353,232
------------ -----------
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<CAPTION>
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(CONTINUED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
---------- -----------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH (420,886) 2,321,059
EQUIVALENTS CASH AND CASH EQUIVALENTS -
Beginning of year 5,709,082 10,342,501
---------- -----------
CASH AND CASH EQUIVALENTS -
End of period $5,288,196 $12,663,560
========== ===========
See accompanying notes.
</TABLE>
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<PAGE>
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
----------------------
Note 1 - NATURE OF OPERATIONS
Unified Financial Services, Inc., a Delaware holding company
for various financial services companies, was organized on
December 7, 1989. We distribute a vertically integrated
financial services platform via the traditional industry
channels of our subsidiaries and via the Internet. Through
our subsidiaries, all of which are wholly owned, we provide
services primarily in six lines of business: trust and
retirement services; mutual fund administration services;
banking; insurance; brokerage; and investment advisory
services.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The consolidated financial statements include the accounts
of Unified Financial Services, Inc. and our subsidiaries
after elimination of all material intercompany accounts and
transactions.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three-month and six-month periods ended June 30, 2000 are
not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from
the audited financial statements at that date but does not
include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements.
For further information refer to the consolidated financial
statements and footnotes thereto included in our Annual
Report on Form 10-KSB for the year ended December 31, 1999.
The consolidated financial statements give retroactive
effect to our pooling-of-interest transactions. As a
result, the consolidated statements of financial condition,
statements of operations and statements of cash flows are
consolidated for all periods presented. As required by
generally accepted accounting principles, the consolidated
financial statements become our historical consolidated
financial statements upon issuance of the financial
statements for the periods that include the date of the
transaction.
- 7 -
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<PAGE>
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
----------------------
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial Statement Presentation
--------------------------------
Certain amounts in the 1999 financial statements have been
reclassified to conform to the 2000 presentation.
Note 3 - UNIFIED TRUST COMPANY, NATIONAL ASSOCIATION
On June 26, 2000, First Lexington Trust Company, a
subsidiary of our company, converted to a limited purpose
national banking association with the corporate name
"Unified Trust Company, National Association." Unified Trust
Company, National Association is required by the Office of
the Comptroller of the Currency to maintain minimum capital
of $2.0 million. As of June 30, 2000, Unified Trust
Company, National Association had $2.2 million total
capital.
Note 4 - OPTIONS
Under the terms of our stock incentive plan, employees,
directors, advisers and consultants of our company and its
subsidiaries are eligible to receive the following:
(a) incentive stock options; (b) nonqualified stock options;
(c) stock appreciation rights; (d) restricted stock;
(e) restricted stock units; and (f) performance awards.
As of June 30, 2000, our board of directors had granted
options to acquire 169,847 shares of our common stock to
certain of our employees, directors and advisers pursuant to
our stock incentive plan. In addition, as of such date, our
board had granted options to acquire 66,666 shares of our
common stock outside of such plan. Such options have
exercise prices as follows:
6,400 shares at $25.00 per share
19,231 shares at $27.50 per share
500 shares at $30.25 per share
76,050 shares at $40.00 per share
1,000 shares at $44.00 per share
66,666 shares at $45.00 per share
As of June 30, 2000, 85,881 of such options were intended to
qualify as incentive stock options pursuant to Section 422
of the Internal Revenue Code of 1986, as amended.
Options outstanding at March 31, 2000 101,406
Options issued during period at
exercise price of $40.00 per share 2,500
Options issued during period at exercise
price of $44.00 per share 500
Options issued during period at exercise
price of $45.00 per share 66,666
Options exercised during period --
Forfeitures at $40.00 per share 1,225
Options outstanding at June 30, 2000 169,847
- 8 -
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<PAGE>
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
----------------------
Note 5 - DEBT AND RELATED MATTERS
Debt at June 30, 2000 consisted of the following:
Bank notes payable:
-------------------
<TABLE>
<S> <C>
Payable in monthly installments including interest at
prime plus .5%, final payment due December 31, 2001,
collateralized by communication and computer hardware
and software $ 108,058
Payable in monthly installments including interest at
8.5%, final payment due January 2, 2001, secured by
assignment of receivables 1,893,750
Payable in monthly installments including interest at
8.25%, final payment due March 31, 2014, collateralized
by equipment 357,983
Payable in monthly installments including interest at
10.4%, final payment due April 26, 2002, collateralized
by equipment 12,891
----------
Total notes 2,372,682
----------
Less current maturities 1,944,133
----------
Long-term portion $ 428,549
==========
Lines of credit:
----------------
Payable at maturity, June 30, 2001, interest at prime,
secured by assignment of receivables $2,040,000
Payable at maturity, December 31, 2000,
interest at 10.25% 9,973
Securities purchased under agreements to repurchase 239,525
----------
$2,289,498
==========
The maturities of notes payable and lines of credit for each of the
succeeding five years subsequent to June 30, 2000, were as follows:
2001--$4,233,631; 2002--$52,804; 2003--$48,005; 2004--$49,486;
2005 and beyond--$278,254.
</TABLE>
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<PAGE>
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
----------------------
Note 6 - CAPITAL LEASE OBLIGATIONS
We lease both computer and office equipment under capital
leases. The lease obligations are payable over a 60-month
period. The following is a summary of future minimum lease
payments under capitalized lease obligations as of June 30,
2000:
YEAR ENDED JUNE 30, AMOUNT
------------------- -------
2000 $13,806
2001 1,814
2002 724
2003 60
-------
16,404
Less: amount representing interest 1,261
-------
Total $15,143
=======
Note 7 - RENTAL AND LEASE INFORMATION
We lease certain office facilities and equipment. Rental
expense for the six months ended June 30, 2000 and 1999 were
$476,759 and $445,163, respectively.
At June 30, 2000, we were committed to minimal rental
payments under certain noncancellable operating leases.
Generally, these leases include cancellation clauses. As of
June 30, 2000, the minimum future rental commitments for
each of the succeeding five years subsequent to June 30,
2000 were as follows: 2001--$1,037,874; 2002--$937,016;
2003--$362,242; 2004--$287,375; and 2005 and
thereafter--$742,842.
Note 8 - COMMITMENTS AND CONTINGENCIES
We are a party to various lawsuits, claims and other legal
actions arising in the ordinary course of business. In the
opinion of management, all such matters are without merit or
are of such kind, or involve such amounts, that unfavorable
disposition would not have a material adverse effect on our
financial position or results of operations.
Note 9 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL
REQUIREMENTS
Unified Management Corporation, Unified Investment Services
and AmeriPrime Financial Securities are subject to the
Securities and Exchange Commission's Uniform Net Capital
Rule ("Rule 15c3-1"), which requires the maintenance of
minimum net capital, as defined, of the greater of (i)
6-2/3% of aggregate indebtedness or (ii) $50,000 for Unified
Management Corporation, $5,000 for Unified Investment
Services and $25,000 for AmeriPrime Financial Securities,
whichever is greater, and a ratio of aggregate indebtedness
to net capital of not more than 15 to 1. At June 30, 2000,
the net capital and ratio of aggregate indebtedness for each
of these entities were as follows:
- 10 -
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UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
----------------------
Note 9 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL
REQUIREMENTS (continued)
JUNE 30,
2000
--------
Net capital:
Unified Management Corporation $465,519
Unified Investment Services 6,910
AmeriPrime Financial Securities 268,817
Ratio of aggregate indebtedness:
Unified Management Corporation .92 to 1
Unified Investment Services .09 to 1
AmeriPrime Financial Securities .04 to 1
Pursuant to Rule 15c3-3 as promulgated by the Securities and
Exchange Commission, Unified Management Corporation, Unified
Investment Services and AmeriPrime Financial Securities
calculate their reserve requirement and segregate cash
and/or securities for the exclusive benefit of their
customers on a periodic basis. The reserve requirement for
Unified Management Corporation, Unified Investment Services
and AmeriPrime Financial Securities was $-0- at June 30,
2000. Balances segregated in excess of reserve requirements
are not restricted.
Note 10 - COMMON STOCK
Effective December 10, 1998, we commenced a private
placement offering to sell a maximum of 1,750,000 shares of
our common stock. Effective September 27, 1999, the size of
the offering was reduced to 750,000 shares of our common
stock, which shares were offered at a price of $40.00 per
share. The offering terminated on March 31, 2000. For the
six months ended June 30, 2000 and 1999, we issued 9,850
(including 9,565 shares from treasury) and 161,080 shares,
respectively, of our common stock. For the six months ended
June 30, 2000 and 1999, aggregate brokerage fees of $25,000
and $593,000, respectively, were paid to Unified Management
Corporation and Unified Investment Services in connection
with this private placement offering, which amount is
inclusive of $23,000 and $0, respectively, paid to external
brokerage firms.
In our private placement, all shares of our common stock
were offered on a best efforts basis. There is no public
market for any of our securities and there can be no
assurance that a market will develop in the future. The
securities offered and sold by us in our private placement
will not be and have not been registered under the
Securities Act of 1933, as amended, and may not be offered
or sold in the United States absent registration or an
applicable exemption from registration requirements.
- 11 -
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UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
----------------------
Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and
estimated fair value of our financial instruments at
June 30, 2000 and 1999. Financial Accounting Standards
Board Statement No. 107, "Disclosures about Fair Value of
Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing
parties.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------
2000 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents $ 5,288 $ 5,288 $12,664 $12,664
Investment in:
Debt securities 883 883 1,037 1,037
Securities and mutual funds 12,506 12,506 661 661
Loans 12,653 12,653 -- --
Receivables (trade) 10,109 10,109 10,384 10,384
Prepaid and sundry 860 860 214 214
Financial liabilities:
Current liabilities 35,677 35,677 14,009 14,009
Capital lease obligation 15 15 64 64
Long-term debt 429 429 277 277
</TABLE>
Note 12 - DISCLOSURES ABOUT REPORTING SEGMENTS
We have six reportable operating segments: trust and
retirement services; mutual fund administration services;
banking; insurance; brokerage; and investment advisory
services. In addition, we also report corporate and
discontinued operations as a separate segment.
The accounting policies of the segments are the same as
those described in the summary of significant accounting
policies. We evaluate performance based on profit or loss
from operations before income taxes, not including recurring
gains and losses.
Our reportable segments are strategic business units that
offer different products and services. They are managed
separately because each business requires different
technology and marketing strategies. Most of the businesses
were acquired as a unit and the management at the time of
the acquisition was retained. Reportable segment revenues
and gross margin were as follows for the six and three
months ended June 30, 2000 and 1999 and total assets,
capital expenditures and depreciation and amortization were
as follows as of and for the six months ended June 30, 2000
and 1999:
- 12 -
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<PAGE>
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
----------------------
Note 12 - DISCLOSURES ABOUT REPORTING SEGMENTS (continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Trust and retirement $ 1,021,091 $ 776,975 $ 511,064 $ 429,104
Mutual fund administration 2,161,353 1,095,117 1,098,878 539,785
Banking 1,074,974 229,253 655,021 119,967
Insurance 5,577,925 5,425,708 3,015,368 2,769,846
Brokerage 1,696,487 2,278,897 695,713 1,391,248
Investment advisory 2,360,612 2,485,395 1,205,305 1,203,052
Corporate and discontinued operations 358,625 374,220 131,212 (521,340)
----------- ----------- ---------- ----------
Total $14,251,067 $12,665,565 $7,312,561 $6,031,662
=========== =========== ========== ==========
Gross profit:
Trust and retirement $ 911,082 $ 627,398 $ 459,587 $410,733
Mutual fund administration 1,748,642 873,232 892,132 436,946
Banking 650,925 229,253 454,265 119,967
Insurance 3,152,782 3,047,313 1,724,893 1,426,304
Brokerage 661,088 1,102,132 300,787 822,873
Investment advisory 2,240,504 2,335,841 1,143,357 1,110,245
Corporate and discontinued operations 224,003 374,221 137,782 (515,959)
----------- ----------- ---------- ----------
Total $ 9,589,026 $ 8,589,390 $5,112,803 $3,811,109
=========== =========== ========== ==========
Total assets
Trust and retirement $ 2,990,510 $ 1,958,621
Mutual fund administration 2,070,651 1,044,947
Banking 30,585,593 2,274,160
Insurance 9,401,231 7,104,105
Brokerage 1,415,375 1,155,001
Investment advisory 3,283,288 4,301,650
Corporate and discontinued operations 2,099 13,779,099
----------- -----------
Total $49,748,747 $31,617,583
=========== ===========
Depreciation and amortization:
Trust and retirement $ 15,010 $ 11,237
Mutual fund administration 38,405 31,415
Banking 83,458 31,155
Insurance 66,693 111,441
Brokerage 16,901 18,312
Investment advisory 92,191 130,094
Corporate and discontinued operations 170,058 97,297
----------- -----------
Total $ 482,716 $ 430,951
=========== ===========
Capital expenditures:
Trust and retirement $ 76,474 $ 30,654
Mutual fund administration 22,132 43,484
Banking 99,938 734,354
Insurance 62,135 56,782
Brokerage 3,165 15,921
Investment advisory 3,164 26,824
Corporate and discontinued operations 144,475 542,922
----------- -----------
Total $ 411,483 $ 1,450,941
=========== ===========
</TABLE>
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<PAGE>
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
----------------------
Note 13 - UNIFIED BANKING COMPANY ASSETS AND LIABILITIES
Unified Banking Company commenced operations on November 1,
1999. Included in our consolidated financial statements at
June 30, 2000 were the bank's total assets of $28,061,299
and total liabilities of $21,442,816 as of such date. As of
such date, certain components of such assets and liabilities
were as follows:
Due from banks $ 611,014
Federal funds sold 1,975,000
Investments in securities:
US agency securities 11,552,054
FHLB stock 100,000
Loans:
Real estate loans 8,256,693
Commercial loans 2,841,773
Installment loans 1,760,660
Other loans 3,806
Allowance for loan losses (160,000)
Bank deposits:
Demand deposits 2,342,547
NOW accounts 340,642
Money market accounts 11,819,920
Savings accounts 57,143
Time deposits 6,152,620
Other interest-bearing deposits 438,595
Federal and borrowed funds 239,525
Note 14 - INVESTMENT IN AFFILIATE
On May 23, 2000, we subscribed for 10 shares of VSX
Holdings, LLC, a Delaware limited liability company, in
exchange for $10 and certain intangible property rights. We
currently own approximately 0.5% of the outstanding shares
of VSX Holdings, but have the right to purchase up to an
additional 1,990 shares at a price of $1 per share, upon the
occurrence of certain specified events. Our investment in
VSX Holdings is accounted for on the equity method of
accounting.
VSX Holdings is involved in the development of an
alternative trading system to be known as VSX.com, which,
upon and subject to organization and regulatory approval, will
serve as a virtual, real-time private financial market place.
In connection with the organization of VSX Holdings, a third
party investor made a $3.0 million loan to VSX Holdings. We
also have entered into a management arrangement with VSX
Holdings whereby we will provide consulting and development
services to VSX Holdings.
- 14 -
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
are or may constitute forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Such
forward-looking statements are based on current expectations, estimates
and projections about Unified Financial Services' industries,
management's beliefs and assumptions made by management. For example, a
downturn in economic conditions generally and in particular those
affecting bond and securities markets could lead to an exit of investors
from mutual funds. Similarly, an increase in Federal and state
regulations of the mutual fund, insurance or banking industries or the
imposition of regulatory penalties could have an effect on our operating
results. In addition, by accepting deposits at fixed rates, at different
times and for different terms, and lending funds at fixed rates for fixed
periods, a bank accepts the risk that the cost of funds may rise and
interest on loans and investment securities may be at a fixed rate.
Similarly, the cost of funds may fall, but a bank may have committed by
virtue of the term of a deposit to pay what becomes an above-market rate.
Investments may decline in value in a rising interest rate environment.
Loans have the risk that the borrower will not repay all funds in a timely
manner as well as the risk of total loss. Collateral may or may not have the
value attributed to it. The loan loss reserve, while believed adequate, may
prove inadequate if one or more large borrowers, or numerous smaller
borrowers, or a combination of both, experience financial difficulty for
individual, national or international reasons. Because the financial
services industry is highly regulated, decisions of governmental authorities,
can have a major effect on operating results. These uncertainties, as well as
others, are present in the financial services industry and stockholders are
cautioned that management's view of the future on which we price and distribute
our products and estimate costs of operations and regulations may prove to
be other than as anticipated. In addition, our current expectations with
respect to our six business lines, our mission with respect to market
leading positions of our trust and retirement services and mutual fund
administration services business lines, our ability to generate supplemental
revenues for our other business lines and our ability to provide superior
returns to our stockholders may prove to be other than expected. Words such
as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to predict; therefore, actual results and
outcomes may differ materially from what is expressed or forecasted in
any such forward-looking statements. Such risks and uncertainties
include those set forth herein under "Risk Factors." Unless required by
law, we undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise.
GENERAL
Unified Financial Services, Inc., a Delaware holding company that
was organized on December 7, 1989, is a vertically integrated provider
of financial products and services, distributing these through six lines
of business: trust and retirement services; mutual fund administration
services; banking; insurance; brokerage; and investment advisory
services. Unified bases its foundation upon two of its lines of
business which seek to be market leaders in their respective fields -
trust and retirement services and mutual fund administration services.
It is the mission of our company to capture market leading
positions in these two business lines, generate supplemental revenue for
each line to the others and, by our ability to distribute our
products/services through electronic delivery channels with strategic
third-party relationships, to provide superior returns to our
stockholders.
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<PAGE>
The current organizational structure and the refinement of our
business strategy is the culmination of the work over the last two and
one-half years towards the creation of today's Unified Financial
Services, Inc. Our foundation, Unified Management Corporation, dates
back to 1952. Unified Management Corporation began as Unified
Underwriters, Inc. and today is a regional discount brokerage firm with
a link to mutual fund assets via its brokerage account services. It is
our broker-dealer subsidiary.
In 1990, Unified Fund Services, Inc. was formed. Unified Fund
Services is a highly automated, registered stock transfer agent that
provides transfer agency, fund accounting, administrative and/or compliance
services to mutual fund families.
Beginning in 1997 with our acquisition of First Lexington Trust
Company and Health Financial, Inc., our fundamental business model was
born. The business model was intent on creating a vertically integrated
financial services platform from which all essential products and
support systems necessary to compete in the financial services industry
would be built or acquired. The guiding principle was to provide one-
stop shopping for consumers and to create an infrastructure whereby all
support systems and related costs are confined within the company.
Thus, we were to become a low-cost provider of all such services.
In 1998, seven new affiliates joined our company and in 1999, six
more were either started or acquired. The organization has been
streamlined through consolidation of like-business affiliates. Thus,
over the course of two and one-half years, thirteen affiliates and four
start-ups have been restructured into the six core businesses.
Over the first half of 2000, as the consolidation process was
proceeding, it became obvious that two of our business lines have a
tremendous opportunity to become market leaders in their respective
disciplines. A market leader commands a national lead position in a
segment of an industry as opposed to a lead position in the entire
industry. Our two potential market leaders, we believe, are trust and
retirement services (Unified Trust Company, National Association) and
mutual fund administration services (Unified Funds Services).
Going forward, the vertically integrated platform will be refined
and managed with these two businesses forming the foundation and being
the main drivers of our income. While we expect the other core lines to
be profitable in their own discipline, each should be significantly
enhanced by the supplemental income each will receive through their
affiliation with the two main driver businesses.
Additionally, we intend to develop the VSX project, a virtual
real-time private financial marketplace. It will be funded by
independent investment and we will retain an equity position and
management contract for services rendered.
Other e-commerce plans include relationships with Copernic
Technologies Inc., a metasearch technology company in Quebec, further
development of our financial services-in-a-box product for private label
sale to third parties and the further development of marketing
relationships with independent business-to-business companies. All of
these initiatives are designed as additional outlets for our core
products and services.
Our principal executive offices are located at 431 North
Pennsylvania Street, Indianapolis, Indiana 46204, and our telephone
number is (317) 917-7001. We also maintain offices at 2353 Alexandria
Drive, Suite 100, Lexington, Kentucky 40504, telephone number (606)
296-4407; 220 Lexington Green Circle, Suite 600, Lexington, Kentucky
40512, telephone number (606) 245-2500; 1793 Kingswood Drive, Southlake,
Texas 76092, telephone number (817) 431-2197; 36 West 44th Street, The
Bar Association
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<PAGE>
Building, Suite 1310, New York, New York 10036, telephone number
(212) 852-8852; and One Firstar Plaza, Suite 2605, St. Louis, Missouri
63101, telephone number (314) 552-6440.
The following presents management's discussion and analysis of our
consolidated financial condition and results of operations as of the
dates and for the periods indicated. This discussion should be read in
conjunction with the other information set forth in this Quarterly
Report on Form 10-Q, including our consolidated financial statements and
the accompanying notes thereto.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues for the six months ended June 30, 2000 compared to the
six months ended June 30, 1999 increased $1,585,502, or 12.5%, from
$12,665,565 to $14,251,067. For such periods, trust and retirement
services revenues increased $244,116, or 31.4%, primarily as a result of
additional fees received in connection with a $72.0 million increase in
assets under management. For such periods, fund administration
services revenues increased $1,066,236, or 97.4%, due to an increase in
the number of mutual fund clients services and a growth in the amount of
assets under service. As of June 30, 2000, we provided fund
administrative services to 27 mutual fund families consisting of
approximately $3.8 billion in mutual fund assets as compared to 21
mutual fund families and $3.5 billion in mutual fund assets as of June
30, 1999.
Banking revenues increased $845,721, or 368.9%, for the six months
ended June 30, 2000 compared to the same period of 1999 due to the
inclusion of the results of operations of Unified Banking Company, which
commenced operations on November 1, 1999, in the 2000 revenues (without
any revenues for 1999), and a 28.7% increase in the number of insurance
policies financed by our premium finance operations.
For the six months ended June 30, 2000 compared to the same period
of 1999, insurance revenues increased $152,217, or 2.8%. The results
for 1999 included revenues derived from our Chicago insurance
operations, which were discontinued at year-end 1999. Excluding the
revenues of the Chicago operations from the 1999 revenues, insurance
revenues increased $706,770, or 14.5%, for the six months ended June 30,
2000 compared to the same period of 1999 due to a $2,500,299, or 14.2%,
increase in total insurance premiums written. We experienced increases
in both our personal and commercial business lines.
For such periods, brokerage revenues declined $582,410, or 25.6%,
principally due to a $568,000 decline in private placement commissions
received by our broker-dealer subsidiaries in connection with our
recently completed private placements. We also experienced a $138,416
decline in trading revenues due to the loss of one client relationship,
which was partially offset by the inclusion in 2000 of revenues
associated with our recently operational Internet trading website and an
increase in brokerage revenues due to our relationship with certified
public accountants. In addition, the volume of our non-Internet trades
increased approximately 11.4% for the six months ended June 30, 2000
compared to the same period of 1999, while the revenues per trade
declined approximately 11.0% for such periods.
Investment advisory services revenues declined $124,783, or 5.0%,
for the six months ended June 30, 2000 compared to the same period of
1999 primarily due to a shifting of assets from our investment advisory
operations to our trust and retirement services operations and a decline
in advisory revenues due to the recent volatility in the securities
markets.
For such periods, corporate and discontinued operations revenues
declined $15,595, or 4.2%, which represented a $26,095 increase in
revenues at certain discontinued operations offset by a reduction in
interest income earned on the proceeds of our private placement and a
decline in revenues at certain start-up entities.
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<PAGE>
Gross profit for the six months ended June 30, 2000 as compared to
same period of 1999 increased $999,637, or 11.6%, from $8,589,389 to
$9,589,026. For such periods, gross profit as a percentage of revenue
declined to 67.3% from 67.8%.
Trust and retirement services gross profit increased $283,684, or
45.2%, for the six months ended June 30, 2000 compared to the
corresponding period of 1999 due to the $72.0 million increase in assets
under management discussed above. For such periods, mutual fund
administration services gross profit increased $875,410, or 100.2%, due
to the increase in the number of mutual fund clients served and assets
under service. Banking gross profit increased $421,672, or 183.9%, for
the six months ended June 30, 2000 compared to the same period of 1999
due to the inclusion of the results of Unified Banking Company in banking
gross profit for 2000 (without any amount included in the 1999 period),
which accounted for 86.0% of the increase, and due to increased financing
activity at our premium finance operations.
For the six months ended June 30, 2000 compared to the same period
of 1999, insurance gross profit increased $105,469, or 3.5%. Excluding
the gross profits attributable to our Chicago insurance operations,
which were discontinued at year-end 1999, insurance gross profits
increased $377,867 for such periods due to an increase in total
insurance premiums written. Brokerage gross profit declined $441,044,
or 40.0%, for the six months ended June 30, 2000 compared to the same
period of 1999 due to the $568,000 decline in commissions received on
our private placements, partially offset by a $100,000 recovery from our
insurance carrier with respect to an employee theft loss which occurred
during the third quarter of 1999.
For such periods, investment advisory gross profit declined
$95,337, or 4.1%, due to an increase in costs of outside service
providers and higher administrative fees associated with the Unified
family of mutual funds. Corporate and discontinued operations gross
profit declined $150,216, or 40.1%, for such periods due to declines at
certain start-up and discontinued operations and a decline in interest
income earned on our private placement proceeds.
Results from operations for the six months ended June 30, 2000 was
a loss of $1,330,332 compared to a loss from operations of $23,790 for
the same period last year. Total expenses for the six months ended June
30, 2000 were $10,919,358, or 76.6% of total revenue, as compared to
$8,613,180, or 68.0% of total revenue for same period of 1999.
Employee compensation and benefits expense increased $1,627,375,
or 35.4%, for the six months ended June 30, 2000 compared to the same
period of 1999 due to (i) new personnel hired in connection with the
expansion of our trust and retirement services and mutual fund
administration services operations, which accounted for $389,000 of such
increase, (ii) the expansion of our senior management team and the
hiring of additional accounting and information services personnel,
which accounted for $731,000 of such increase, and (iii) the
commencement of operations of Unified Banking Company in November 1999,
which accounted for $383,000 of such increase. For such period, mail
and courier expense increased $167,607, or 134.2%, due to increased
marketing efforts at our insurance operations, Unified Banking Company
and certain other companies. Telephone expense increased $115,672, or
60.7%, for the six months ended June 30, 2000 compared to the same
period of 1999 due to telephone costs associated with the increased
marketing efforts at our insurance and mutual fund administration
operations. For such periods, professional fees increased $181,771, or
23.3%, due to consulting services utilized in connection with various
operations. Our provision for loan loss for the six months ended June
30, 2000 was $127,000 (without a corresponding expense for the same
period of 1999). Other operating expenses declined $294,684, or 23.8%,
due to a $640,000 benefit received by us in connection with the
construction and development of the VSX marketplace and its corresponding
products.
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<PAGE>
Net loss for the six months ended June 30, 2000 was $1,364,734
compared with a net loss of $884 for the same period of 1999. For the
six months ended June 30, 2000, the 12.5% increase in revenues compared
to the same period of 1999 was offset by the 26.8% increase in expenses
for such periods, as described above.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues for the quarter ended June 30, 2000 compared to the same
quarter of 1999 increased $1,280,899, or 21.2%, from $6,031,662 to
$7,312,561. For such quarters, trust and retirement services revenues
increased $81,960, or 19.1%, mutual fund administration revenues
increased $559,093, or 103.6%, banking revenues increased $535,054, or
446.0%, insurance revenue increased $245,522, or 8.9%, brokerage
revenues declined $695,535, or 50.0%, investment advisory revenues
increased $2,253, or 0.2%, and corporate and discontinued operations
revenues increased $652,552.
The reasons underlying the variations in revenue by segment
discussed above for the year-to-date periods also were applicable to the
three-month periods. Additionally, with respect to insurance revenues
for such quarters, excluding our Chicago insurance operations from the
revenues for the second quarter of 1999, our insurance revenues increased
$441,118, or 17.1%, for the second quarter of 2000 compared to the
second quarter of 1999. With respect to corporate and discontinued
operations revenues, the increase for the second quarter of 2000
compared to the second quarter of 1999 primarily was due to the non-
recurrence of a $593,000 expense, which was treated as an offset to
revenues in the second quarter of 1999 and was related to our private
placement.
Gross profit increased $1,301,694, or 34.2%, from $3,811,109 for
the second quarter of 1999 to $5,112,803 for the second quarter of 2000.
For such periods, gross profit as a percentage of revenue increased to
69.9% from 63.2%.
For the quarter ended June 30, 2000 compared to the same quarter
of 1999, trust and retirement services gross profit increased $48,854,
or 11.42%, mutual fund administration services gross profit increased
$455,186, or 104.2%, banking gross profit increased $334,298, or 278.7%,
insurance gross profit increased $298,589, or 20.9%, brokerage gross
profit declined to $522,086, or 63.4%, investment advisory gross profit
declined $33,112, or 3.0%, and corporate and discontinued operations
gross profit increased $653,741.
The reasons underlying the variations in gross profit by segment
discussed above for the year-to-date periods also were applicable to the
three-month periods. Additionally, with respect to insurance gross
profit for such quarters, excluding our Chicago insurance operations
from the gross profit for the second quarter of 1999, our insurance
gross profit increased $396,629, or 29.9%, for the second quarter of
2000 compared to the second quarter of 1999.
Results from operations for the quarter ended June 30, 2000 was a
loss of $74,369 compared to a loss from operations of $235,348 for the
same quarter last year. Total expenses for the quarter ended June 30,
2000 were $5,187,172, or 70.9%, of total revenue, as compared to
$4,046,458, or 67.1% of total revenue, for the second quarter of 1999.
The reasons underlying the variations in expense items discussed
above for the year-to-date periods also were applicable to the three-
month periods. Other operating expenses for the second quarter of 2000
includes a $640,000 benefit received by us in connection with the
construction and development of the VSX marketplace and its corresponding
products.
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<PAGE>
Total other income was a loss of $42,150 for the quarter ended
June 30, 2000, a decline of $133,154 from the $91,004 income reported
for the second quarter of 1999. Unrealized loss on securities of
$15,190 for the second quarter of 2000 compared to a $39,827 gain during
the second quarter of 1999. Equity in results of affiliates reflected a
benefit of $47,443 during the second quarter of 1999 and $0 for the same
quarter of 2000. The loss on disposal of fixed assets during the second
quarter of 2000 was principally related to Archer Trading, Inc. ceasing
business.
Net loss was $128,434 for the second quarter of 2000 compared with
net loss of $183,782 for the second quarter of 1999. For the quarter
ended June 30, 2000, the 21.2% increase in revenues was offset by the
28.2% increase in expenses, as described above.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Our primary sources of liquidity historically have
been and continue to be cash flow from operating activities, available
borrowing capacity from capitalized leases and a loan from a regional
bank to finance capital equipment. The net decrease in cash and cash
equivalents at June 30, 2000 from December 31, 1999 was $420,886. The
net decrease reflected the repayment of borrowings, the purchase of
fixed assets and a decline in accounts payable. We received $50,000
from the issuance of 1,250 shares of common stock in our private
placement during the three months ended June 30, 2000.
With respect to our banking operations, long-term liquidity is a
function of the core deposit base and an adequate capital base. We are
committed to growth of our core deposit base and maintenance of our
capital base. The growth of the deposit base is internally generated
through product pricing and product development. During its first three
years of operations, Unified Banking Company is required to maintain a
Tier 1 capital to total assets ratio of at least 8%. As of June 30,
2000, Unified Banking Company had a ratio of Tier 1 capital to total
assets equal to 23.8%.
Short-term liquidity needs arise from continuous fluctuations in
the flow of funds on both sides of the balance sheet resulting from
growth and seasonal and cyclical customer demands. The securities
portfolio provides stable long-term earnings as well as being a primary
source of liquidity. The designation of securities as available-for-
sale and held-to-maturity does not impact the portfolio as a source of
liquidity due to the ability to enter into repurchase agreements using
those securities.
We anticipate continued loan demand in our market areas. We have
utilized, and expect to continue to utilize, Federal Home Loan Bank
borrowings to fund a portion of future loan growth.
Unified Banking Company experienced net growth in assets of 95.1%
during the first six months of 2000, while deposits increased 192.6%
during the same period. We continue to emphasize growth in stable core
deposits while utilizing the Federal Home Loan Bank and Federal funds
purchased as necessary to balance liquidity and cost effectiveness. We
closely monitor our level of liquidity to meet expected future needs.
CAPITAL RESOURCES. Total stockholders' equity was $13,550,127 at
June 30, 2000 compared to $14,577,987 at year-end 1999. The decline in
total equity was due to the issuance of 9,850 shares of our common stock
offset by the loss from operations for the six-month period.
The growth of Unified Banking Company will have an effect on our
working capital. It currently is anticipated that as Unified Banking
Company grows, that our working capital ratio will become more in line
with ratios traditionally associated with bank holding companies.
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<PAGE>
We believe that anticipated revenues from operations should be
adequate for the working capital requirements of our existing core
businesses over the next twelve months. In the event that our plans or
assumptions change, or if our resources available to meet unanticipated
changes in business conditions prove to be insufficient to fund
operations, we could be required to seek additional financing prior to
that time.
RISK FACTORS
You should carefully consider the risks described below before
making a decision to invest in Unified Financial Services. The risks
and uncertainties described below are not the only risks that we face.
If any of the following risks actually occur, our business,
financial condition or results of future operations could be materially
adversely affected. In such case, the trading price of our common stock
could decline, and you may lose all or part of your investment.
NEED FOR ADDITIONAL CAPITAL; RISK RELATING TO ACQUISITIONS. Our
pending and proposed projects have required and will continue to require
substantial capital for investments in and development of such projects.
There can be no assurance that we will be able to raise the capital
necessary to fund our projects. The failure to raise or generate such
funds may require us to delay or abandon some of our planned future
expansion or expenditures, which could have a material adverse effect on
our growth.
To expand our markets and take advantage of the consolidation
trend in the financial services industry, our business strategy includes
growth through acquisitions. Although we believe that the operations of
the companies we have acquired since June 1, 1997 are being successfully
integrated with our operations, there can be no assurance that such
integration will continue to be successful, that future acquisitions can
be consummated on acceptable terms or that any acquired companies can be
successfully integrated into our operations. We also are continually
investigating opportunities for acquisitions. In connection with future
acquisitions, we may incur additional indebtedness or may issue
additional equity. Our ability to make future acquisitions may be
constrained by our ability to obtain such additional financing. To the
extent we use equity to finance future acquisitions, there is a risk of
dilution to holders of our common stock.
In addition, acquisitions may involve a number of special risks,
including: initial reductions in our reported operating results;
diversion of management's attention; unanticipated problems or legal
liabilities; and a possible reduction in reported earnings due to
amortization of acquired intangible assets in the event that such
acquisitions are made at levels that exceed the fair market value of net
tangible assets. Some or all of these items could have a material
adverse effect on us. There can be no assurance that businesses
acquired in the future will achieve sales and profitability that justify
the investment therein. In addition, to the extent that consolidation
becomes more prevalent in the industry, the prices for attractive
acquisition candidates may increase to unacceptable levels.
ANTICIPATE TO INCUR OPERATING LOSSES FOR THE FORESEEABLE FUTURE.
In connection with the expansion of our business and the development of
new distribution channels, we anticipate that we will incur operating
losses for the foreseeable future. We believe that our revenues will
continue to increase but that operating expenses will increase
significantly due to the costs associated with the implementation of our
business plan. In addition, we will incur non-recurring costs in
connection with exiting certain businesses that are not now part of our
business strategy.
NO ASSURANCE OF FUTURE GROWTH. There can be no assurance that we
will continue to achieve growth in assets or earnings. Our ability to
achieve such growth will be dependent upon numerous factors
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including, but not limited to, general economic conditions, our ability
to recruit qualified personnel, our ability to promptly and successfully
integrate acquired businesses with our existing operations and our ability
to execute our business plan. We also have completed various acquisitions
in the past few years that have significantly enhanced our rate of
growth. We cannot provide you assurances that we will continue to
sustain this rate of growth or grow at all.
CHANGES IN THE LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT
UNIFIED BANKING COMPANY'S LOAN PORTFOLIO. Unified Banking Company's
success depends to a great extent upon the general economic conditions
of Fayette County, Kentucky. Unlike larger banks that are more
geographically diversified, we primarily provide banking and financial
services to customers in Fayette County, Kentucky. Our commercial, real
estate and construction loans, the ability of the borrowers to repay
these loans and the value of the collateral securing these loans are
impacted by our local economic conditions. We cannot assure you that
favorable economic conditions will exist in our market.
ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN
LOSSES. As a lender, Unified Banking Company is exposed to the risk
that its customers will be unable to repay their loans according to
their terms and that any collateral securing the payment of their loans
may not be sufficient to assure repayment. Credit losses are inherent
in the lending business and could have a material adverse effect on our
consolidated operating results. Unified Banking Company's credit risk
with respect to its real estate and construction loan portfolio relates
principally to the general creditworthiness of individuals and the value
of real estate serving as security for the repayment of loans. Our
credit risk with respect to Unified Banking Company's commercial and
consumer installment loan portfolio relates principally to the general
creditworthiness of businesses and individuals within its local market.
We make various assumptions and judgments about the collectibility
of Unified Banking Company's loan portfolio and provide an allowance for
potential losses based on a number of factors. If our assumptions are
wrong, the allowance for loan losses may not be sufficient to cover loan
losses. We may have to increase the allowance in the future. Additions
to our allowance for loan losses would decrease our net income.
UNIFIED BANKING COMPANY MAY BE UNABLE TO MANAGE INTEREST RATE
RISKS THAT COULD REDUCE OUR NET INTEREST INCOME. Like other financial
institutions, Unified Banking Company's results of operations are
affected principally by net interest income, which is the difference
between interest earned on loans and investments and interest expense
paid on deposits and other borrowings. We cannot predict or control
changes in interest rates. Regional and local economic conditions and
the policies of regulatory authorities, including monetary policies of
the Board of Governors of the Federal Reserve System, affect interest
income and interest expense. While Unified Banking Company continually
takes measures intended to manage the risks from changes in market
interest rates, changes in interest rates can still have a material
adverse effect on our profitability.
In addition, certain assets and liabilities may react in different
degrees to changes in market interest rates. For example, interest
rates on some types of assets and liabilities may fluctuate prior to
changes in broader market interest rates, while rates on other types may
lag behind. Further, some of Unified Banking Company's assets, such as
adjustable rate mortgages, have features, including rate caps, which
restrict changes in their interest rates.
Factors such as inflation, recession, unemployment, money supply,
international disorders, instability in domestic and foreign financial
markets, and other factors beyond our control may affect interest rates.
Changes in market interest rates also will affect the level of voluntary
prepayments on loans and the receipt of payments on mortgage-backed
securities resulting in the receipt of proceeds that may be reinvested
at a lower rate than the loan or mortgage-backed security being prepaid.
Although
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<PAGE>
Unified Banking Company pursues an asset-liability management strategy
designed to control our risk from changes in market interest rates, changes
in interest rates can still have a material adverse effect on our
profitability.
INSIDERS MAY CONTROL OUR FUTURE OPERATIONS AS A RESULT OF THE
CONCENTRATION OF CONTROL OF OUR COMMON STOCK. Our executive officers
and directors beneficially own approximately 36% of our outstanding common
stock. As a result, these insiders may be able to control the election of
our board of directors and thus our direction and future operations, and our
stockholders may lack an effective vote with respect to such matters.
WE ARE SUBJECT TO EXTENSIVE REGULATION. The banking, trust and
securities industries are heavily regulated under both Federal and state
law. These regulations are primarily intended to protect depositors and
the Federal Deposit Insurance Corporation, with respect to banks, and
customers, with respect to trust companies, broker-dealers and
investment advisors, not our creditors or stock. We and our
subsidiaries also are subject to the supervision of the Securities and
Exchange Commission, the Office of Thrift Supervision and the Office of
the Comptroller of the Currency, in addition to other regulatory and
self-regulatory organizations. Regulations affecting banks, trust
companies and other financial services companies undergo continuous
change, and the ultimate effect of such changes cannot be predicted.
Regulations and laws may be modified at any time, and new legislation
may be enacted that affects us or our subsidiaries. We cannot assure
you that such modifications or new laws will not adversely affect us or
our subsidiaries.
RISKS ASSOCIATED WITH RAPID GROWTH. We have experienced rapid
growth in net revenues and expansion of our operations and anticipate
that further significant expansion will be required to address potential
growth in our customer base and market opportunities. Such growth has
placed, and, if sustained, will continue to place, strain on our
management, information systems, operation and resources. Our ability
to manage any future growth will continue to depend upon the successful
expansion of our sales, marketing, customer support, administrative
infrastructure and the ongoing implementation and improvement of a
variety of internal management systems, procedures and controls.
Continued growth also will require us to hire more personnel, and expand
management information systems. Recruiting qualified personnel is an
intensely competitive and time-consuming process. There can be no
assurance that we will be able to attract and retain the necessary
personnel to accomplish our growth strategies or that we will not
experience constraints that will adversely affect our ability to support
satisfactorily our clients and operations. There can be no assurance
that we will be able to attract, manage and retain additional personnel
to support any future growth, if any, or will not experience significant
problems with respect to any infrastructure expansion or the attempted
implementation of systems, procedures and controls. If our management
is unable to manage growth effectively, our business, financial
condition and results of operations could be materially adversely
affected.
DEPENDENCE UPON TECHNOLOGY; PROPRIETARY RIGHTS. Our success and
ability to compete is dependent in part upon our technology, although we
believe that our success is more dependent upon our technical expertise
than our proprietary rights. We principally rely upon a combination of
copyright, trademark and trade secret laws and contractual restrictions
to protect our proprietary technology. It may be possible for a third
party to copy or otherwise obtain and use our products or technology
without authorization or to develop similar technology independently,
and there can be no assurance that such measures have been, or will be,
adequate to protect our proprietary technology or that our competitors
will not independently develop technologies that are substantially
equivalent or superior to our technology. We propose to operate a
substantial portion of our business over the Internet, which is subject
to a variety of risks. Such risks include, but are not limited to, the
substantial uncertainties that exist regarding the system for assigning
domain names and the status of private rules for resolution of disputes
regarding rights to domain names. There can be no assurance that we
will continue to be able to
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employ our current domain names in the future or that the loss of rights
to one or more domain names will not have a material adverse effect on our
business and results of operations.
Although we do not believe that we infringe the proprietary rights
of any third parties, there can be no assurance that third parties will
not assert such claims against us in the future or that such claims will
not be successful. We could incur substantial costs and diversion of
management resources with respect to the defense of any claims relating to
proprietary rights, which could have a material adverse effect on our
business, financial condition and results of operations. In addition, we
may become obligated under certain agreements to indemnify another party in
connection with infringement by us of the proprietary rights of third
parties. In the event we are required to indemnify parties under these
agreements, it could have a material adverse effect on our business,
financial condition and results of operations. In the event a claim
relating to proprietary technology or information is asserted against
us, we may seek licenses to such intellectual property. There can be no
assurance, however, that licenses could be obtained on commercially
reasonable terms, if at all, or that the terms of any offered licenses
would be acceptable to us. The failure to obtain the necessary licenses
or other rights could have a material adverse effect on our business,
financial condition and results of operations.
RISKS TO PHYSICAL NETWORK; RISKS TO INTEGRITY OF DATA ON NETWORK.
Our operations are partially dependent upon our ability to protect our
network infrastructure against damage from fire, earthquakes, severe
flooding, mudslides, power loss, telecommunications failures and similar
events or to construct networks that are not vulnerable to the effects
of these events. The occurrence of a natural disaster or other
unanticipated problems at our network in the future could cause
additional major interruptions in the services provided by us.
In addition, some networks may experience interruptions in service
as a result of the accidental or intentional actions of Internet users,
current and former employees or others. Unauthorized use of our network
could jeopardize the security of confidential information stored in our
computer systems, which may result in liability to our customers or
deter potential customers.
Our failure to adequately manage service disruptions resulting
from physical damage to our network or breaches of the network's
integrity, could have a material adverse effect on our business,
financial condition and results of operations.
SECURITY RISKS. Despite the implementation of network security
measures by us, such as limiting physical and network access to our
routers, our Internet access systems and information services are
vulnerable to computer viruses, break-ins and similar disruptive
problems caused by our customers or other Internet users. Such problems
caused by third parties could lead to interruption, delays or cessation
in service to our customers. Furthermore, such inappropriate use of the
Internet by third parties also could potentially jeopardize the security
of confidential information stored in the computer systems of our
customers and other parties connected to the Internet, which may deter
potential subscribers. Persistent security problems continue to plague
public and private data networks. Recent break-ins reported in the
press and otherwise have reached computers connected to the Internet at
major corporations and Internet access providers and have involved the
theft of information, including incidents in which hackers bypassed
firewalls by posing as trusted computers. Alleviating problems caused
by computer viruses, break-ins or other problems caused by third parties
may require significant expenditures of capital and resources by us,
which could have a material adverse effect on us. Until more
comprehensive security technologies are developed, the security and
privacy concerns of existing and potential customers may inhibit the
growth of the Internet service industry in general and our customer base
and revenues in particular. Moreover, if we experience a breach of
network security or privacy, there can be no assurance that our
customers will not assert or threaten claims against us based on or
arising out of such breach, or
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that any such claims will not be upheld, which could have a material
adverse effect on our business, financial condition and results of operation.
THERE IS INTENSE COMPETITION FOR INTERNET PRODUCTS AND SERVICES,
ADVERTISING AND SALES OF GOODS AND SERVICES. Competition for Internet
products and services, advertising and electronic commerce is intense.
We expect that competition will continue to intensify. Barriers to
entry are minimal, and competitors can launch new Web sites at a
relatively low cost. Our competitors may develop Internet products and
services that are superior to, or have greater market acceptance than, our
solutions. If we are unable to compete successfully against our competitors,
our business, financial condition and operating results will be adversely
affected. Many of our competitors have greater brand recognition and greater
financial, marketing and other resources than us. This may place us at a
disadvantage in responding to our competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships
and other initiatives.
COMPETITION. We encounter substantial competition in the
businesses in which we compete. Our principal competitors include
mutual funds, investment advisers, investment counsel firms and
financial institutions such as banks, savings and loan institutions and
credit unions. Many of the institutions with which we compete are
larger and have substantially greater financial resources than us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The business activities of our company expose it to a variety of
risks. Management of these risks is necessary for the long-term
profitability of Unified. We manage these risks through the
establishment of numerous policies, procedures and controls. The most
significant risks that affect us are market risk and credit risk.
Market risk is the risk of loss to us resulting from changes in
interest rates, equity prices of both. We are exposed to market risk
since we, through our subsidiaries, maintain positions in fixed-income
and equity securities. We primarily manage our risk through the
establishment of trading policies and guidelines and through the
implementation of control and review procedures.
Our asset/liability strategy is to minimize the sensitivity of
earnings to changes in interest rates while maintaining an acceptable
net interest margin. Unified Banking Company's asset/liability
committee monitors the interest rate sensitivity of the bank's balance sheet
on a monthly basis. The committee reviews asset and liability repricing in
the context of current and future interest rate scenarios affecting the
economic climate in our market areas.
Our pricing policy is that all earning assets and interest bearing
liabilities be either based on floating rates or have a fixed rate not
exceeding five years. Real estate mortgage loans held by us, while
having long final maturities, are comprised of one-, two- or three-year
adjustable rate loans. The adjustable basis of these loans
significantly reduces interest rate risk.
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The following table illustrates our estimated static gap with
prepayments calculated as of June 30, 2000:
<TABLE>
<CAPTION>
TIME TO MATURITY OR REPRICING
---------------------------------------------------------------------------------------------------
0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 48 TO 54 > 54
(DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Federal funds sold $ 1,975 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 1,975
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Securities
U. S. agencies -- 184 181 179 522 501 481 4,452 547 4,606 11,653
FHLB stock 100 -- -- -- -- -- -- -- -- -- 100
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total securities 100 184 181 179 522 501 481 4,452 547 4,606 11,753
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Loans
Commercial
Fixed -- 12 12 12 38 38 188 501 227 76 1,106
Variable 1,736 -- -- -- -- -- -- -- -- -- 1,736
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total commercial 1,736 12 12 12 38 38 188 501 227 76 2,842
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Real Estate
Commercial -- 6 6 6 18 93 1,995 590 909 838 4,460
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Residential
Fixed -- 9 9 9 27 25 24 275 25 356 759
Variable -- 174 -- -- -- -- 849 -- -- -- 1,023
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total residential -- 183 9 9 27 25 873 275 25 356 1,782
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total real estate -- 189 15 15 45 118 2,868 865 934 1,194 6,242
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Personal
Home equity loans 1,925 -- -- -- -- -- -- -- -- -- 1,925
Installment loans -- 243 14 5 74 24 289 156 68 4 876
Personal open end
letters of credit -- -- -- -- 300 557 28 -- -- -- 885
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total personal 1,925 243 14 5 374 581 317 156 68 4 3,686
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Other loans 89 -- -- -- -- -- -- -- -- -- 89
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total loans 3,750 444 41 32 457 737 3,373 1,522 1,229 1,274 12,859
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
TOTAL RATE SENSITIVE ASSETS $ 5,825 $ 628 $222 $211 $978 $1,238 $3,853 $5,974 $1,776 $5,881 $26,587
======= ====== ==== ==== ==== ====== ====== ====== ====== ====== =======
RATE SENSITIVE LIABILITIES
Interest bearing deposits
NOW accounts $ 344 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 344
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Money market accounts
Market rate accounts 2,720 -- -- -- -- -- -- -- -- -- 2,720
Business market rate
accounts 3,116 -- -- -- -- -- -- -- -- -- 3,116
Special personal MMDA 516 -- -- -- -- -- -- -- -- -- 516
Special business MMDA 5,468 -- -- -- -- -- -- -- -- -- 5,468
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total money market
accounts 11,820 -- -- -- -- -- -- -- -- -- 11,820
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Savings 57 -- -- -- -- -- -- -- -- -- 57
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Time deposits
CD's > 100K -- 3,068 -- -- 500 667 677 152 -- -- 5,064
CD's < 100K -- 20 -- 2 447 243 212 165 -- -- 1,089
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total time deposits -- 3,088 -- 2 947 910 889 317 -- -- 6,153
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Other interest bearing
deposits -- -- -- -- -- 8 12 37 223 159 439
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Total interest bearing
deposits 12,221 3,088 -- 2 947 918 901 354 223 159 18,813
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
Borrowed funds (repurchase
agreements) 240 -- -- -- -- -- -- -- -- -- 240
------- ------ ---- ---- ---- ------ ------ ------ ------ ------ -------
TOTAL RATE SENSITIVE
LIABILITIES $12,461 $3,088 $ -- $ 2 $947 $ 918 $ 901 $ 354 $ 223 $ 159 $19,052
======= ====== ==== ==== ==== ====== ====== ====== ====== ====== =======
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<CAPTION>
TIME TO MATURITY OR REPRICING
------------------------------------------------------------------------------------------
0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 48 TO 54 > 54
(DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CUMULATIVE INFORMATION
Total rate sensitive assets $ 5,825 $ 6,453 $ 6,675 $ 6,886 $ 7,865 $ 9,103 $12,956 $18,930 $20,706 $26,587
Total rate sensitive
liabilities 12,461 15,549 15,549 15,551 16,498 17,416 18,317 18,670 18,893 19,052
Gap (6,636) (9,096) (8,874) (8,665) (8,633) (8,313) (5,361) 259 1,813 7,534
RSA/RSL 0.47% 0.41% 0.43% 0.44% 0.48% 0.52% 0.71% 1.01% 1.10% 1.40%
RSA/assets 0.21 0.23 0.24 0.25 0.28 0.32 0.46 0.67 0.74 0.95
RSL/assets 0.44 0.55 0.55 0.55 0.59 0.62 0.65 0.67 0.67 0.68
Gap/assets -23.65 -32.41 -31.62 -30.88 -30.76 -29.62 -19.10 0.92 6.46 26.85
Gap/RSA -113.92 140.97 132.94 125.83 109.77 -91.32 -41.38 1.37 8.75 28.34
</TABLE>
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We measure the impact of interest rate changes on our income
statement through the use of gap analysis. The gap represents the net
position of assets and liabilities subject to repricing in specified
time periods. During any given time period, if the amount of rate-
sensitive liabilities exceeds the amount of rate-sensitive assets, a
company would generally be considered negatively gapped and would
benefit from falling rates over that period of time. Conversely, a
positively gapped company would generally benefit from rising rates.
We have structured our assets and liabilities to mitigate the risk
of either a rising or falling interest rate environment. Depending upon
our assessment of economic factors such as the magnitude and direction
of projected interest rates over the short and long term, we generally
operate within guidelines set by our asset/liability policy and attempt
to maximize our returns within an acceptable degree of risk.
Interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously. There are other factors that are
difficult to measure and predict that would influence the effect of
interest rate fluctuations on our income statement. For example, a
rapid drop in interest rates might cause our borrowers to repay their
loans at a more rapid pace and certain mortgage-related investments to
be prepaid more quickly than projected. This could mitigate some of the
benefits of falling rates as are expected when negatively gapped.
Conversely, a rapid rise in rates could give us an opportunity to
increase our margins and stifle the rate of repayment on our mortgage-
related loans which would increase our returns.
The following table shows the "rate shock" results of a simulation
model that attempts to measure the effect of rising and falling interest
rates over a two-year horizon in a rapidly changing rate environment.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN
BASIS POINT --------------------------------------------------------
CHANGE IN NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY
INTEREST RATES PROJECTED CHANGE PROJECTED CHANGE
-------------- ------------------- --------------------------------
<S> <C> <C>
-400 27.65 23.69
-300 22.43 20.43
-200 15.77 14.95
-100 8.08 7.85
0 0.00 0.00
100 -8.60 -8.01
200 -16.29 -15.91
300 -24.54 -23.50
400 -32.72 -30.46
</TABLE>
We use a sensitivity model that simulated these interest rate
changes on our earning assets and interest-bearing liabilities. This
process allows us to explore the complex relationships among the
financial instruments in various interest rate environments.
The preceding sensitivity analysis is based on numerous
assumptions including: the nature and timing of interest rate levels
including the shape of the yield curve; prepayments on loans and
securities; changes in deposit levels; pricing decisions on loans and
deposits; reinvestment/replacement of asset and liability cas flows; and
others. While assumptions are developed based upon current economic and
local market conditions, we cannot make any assurances as to the
predictive nature of these assumptions including how client preferences
or competitor influences might change.
Interest rate exposure is measured by the potential impact on our
income statement of changes in interest rates. We use information from
our gap analysis and rate shock calculations as input to help manage our
exposure to changing interest rates.
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<PAGE>
We use our rate shock information to tell us how much exposure we
have to rapidly changing rates. Based on historical information and our
assessment of future interest rate trends, we do not believe it is
likely that rapidly rising rates would have a significant positive
impact on our results of operations. Conversely, we also believe there
is minimal likelihood that rapidly falling rates would have a
significant negative impact on our results of operations.
We believe that more likely scenarios include gradual changes in
interest rate levels. We continue to monitor our gap and rate shock
analyses to detect changes to our exposure to fluctuating rates. We
have the ability to shorten or lengthen maturities on newly acquired
assets, sell investment securities, or seek funding sources with
different maturities in order to change our asset and liability
structure for the purpose of mitigating the effect of interest rate
risk.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
For the three months ended June 30, 2000, the only sale of our
securities was 1,250 shares of our common stock issued by us in
connection with our private placement at a price of $40.00 per share.
All shares of stock issued by us during such period were issued pursuant
to the exemption provided by Rule 506, as promulgated by the Securities
and Exchange Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Our 2000 annual meeting of stockholders was held on May 17, 2000.
Of 2,869,862 shares issued, outstanding and eligible to be voted at the
meeting, 1,835,331 shares, constituting a quorum, were represented in
person or by proxy at the meeting. Two matters were submitted to a vote
of the stockholders at the meeting.
1. ELECTION OF CLASS III DIRECTORS. The first matter submitted
was the election of three Class III director nominees to our board of
directors, each to continue in office until the year 2003. There is no
cumulative voting in the election of directors. Upon tabulation of the
votes cast, it was determined that each director nominee had been
elected. The voting results are set forth below:
NAME FOR AGAINST WITHHELD
---- --- ------- --------
Weaver H. Gaines 1,832,693 -- 2,638
Jack R. Orben 1,793,798 -- 41,533
John S. Penn 1,832,693 -- 2,638
Because we have a staggered board, the term of office of the
following named Class I and Class II directors, who were not up for
election at the 2000 annual meeting, continued after the meeting:
Class I (to continue in office until 2001)
Timothy L. Ashburn
Dr. Gregory W. Kasten
Class II (to continue in office until 2002)
Thomas G. Napurano
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS. The
second matter, a proposal to ratify the appointment of Larry E. Nunn &
Associates, LLC as our independent auditors for the year ending December
31, 2000, was approved by an affirmative vote of a majority of the votes
cast on such proposal at the meeting. The voting results on this matter
were as follows:
FOR AGAINST ABSTAIN
--- ------- -------
1,616,379 1,000 217,952
ITEM 5. OTHER MATTERS.
At its May and July meetings, our board of directors elected each
of Philip L. Conover and Richard A. Walker, respectively, as a member of
our board of directors and as a member of the audit, nominating and
compensation committee of the board.
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Mr. Conover currently serves as a private investor and financial
consultant, a member of the board of trustees of the Firstar Reit Fund
and a member of the board of directors and as the chairman of the
compensation committee for Praedictus Corporation, a computer software
company headquartered in Indianapolis, Indiana. Prior thereto,
Mr. Conover served as an Adjunct Professor of Finance, University of
South Florida (1994-96) and Managing Director, Federal Housing Finance
Board, an independent federal regulatory agency (1990-94). From 1972 to
1990, Mr. Conover served in various capacities in the commercial banking
industry, including President and Chief Executive Officer of Trustcorp
Bank of Indianapolis, Vice President and Manager of Bank One Indiana's
Capital Markets Division and a member of the Board of Directors of Bank
One Securities, Inc.
Mr. Walker currently is a management consultant with Walker
Associates, which specializes in strategic planning, continuous
improvement, shareholder relations and corporate governance. Prior to
forming his own firm, Mr. Walker was Executive Vice President, Chief
Administrative Officer, General Counsel and Secretary of Kuhlman
Corporation, a diversified industrial manufacturing company
headquartered in Savannah, Georgia. Kuhlman Corporation, founded in
1894, had annual sales of approximately $800 million and was listed on
the New York Stock Exchange, prior to its sale to Borg-Warner
Automotive, Inc. in 1999. Prior to joining Kuhlman, Mr. Walker was a
partner at the law firm of Harness, Dickey & Pierce, where he
specialized primarily in litigation and licensing. Prior thereto,
Mr. Walker was a Technical Standards Engineer in the Materials
Engineering Department at Ford Motor Company at its Research and
Development Center in Dearborn, Michigan. Mr. Walker earned a Bachelor
of Chemical Engineering, a Master of Engineering and a Juris Doctorate
from the University of Detroit. He also is a graduate of the University
of Michigan Executive Program. He is a member of various professional
organizations and a Director of the Savannah Symphony Orchestra.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index attached hereto.
(b) Reports on Form 8-K.
We did not file any Current Reports on Form 8-K during the quarter
ended June 30, 2000.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
UNIFIED FINANCIAL SERVICES, INC.
(Registrant)
Dated: August 10, 2000 By: /s/ Timothy L. Ashburn
------------------------------------------------
Timothy L. Ashburn, Chairman and Chief Executive
Officer
Dated: August 10, 2000 By: /s/ Thomas G. Napurano
------------------------------------------------
Thomas G. Napurano, Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Ex. No. Description
------- -----------
11.1 Computations of Earnings per Share.
27.1 Financial Data Schedule (June 30, 2000).
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