Back to GetFilings.com
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, 2002
------------------------------------------------------------------------------------
Commission file number 0-22629
--------------------------------------------------------------------------------------------
UNIFIED FINANCIAL SERVICES, INC.
- -------------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 35-1797759
- ---------------------------------------------------------- -----------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
2424 HARRODSBURG ROAD
LEXINGTON, KENTUCKY 40503
- -------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(859) 296-2016
- -------------------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Number of shares
Title of class outstanding as of August 10, 2002
- -------------------------------------------- -------------------------------------------
Common stock, $0.01 par value 2,858,972
UNIFIED FINANCIAL SERVICES, INC.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition - June 30, 2002 (Unaudited)
and December 31, 2001............................................................... 1
Consolidated Statements of Operations (Unaudited) - Six and Three Months
Ended June 30, 2002 and 2001........................................................ 3
Consolidated Statements of Comprehensive Income (Unaudited) - Six and
Three Months Ended June 30, 2002 and 2001........................................... 4
Consolidated Statements of Cash Flow (Unaudited) - Six Months Ended
June 30, 2002 and 2001.............................................................. 5
Notes to Consolidated Financial Statements....... .................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 16
Cautionary Statement Regarding Forward-Looking Statements.......................... 16
General............................................................................ 16
Comparison of Results for the Six Months Ended June 30, 2002 and 2001.............. 17
Comparison of Results for the Three Months Ended June 30, 2002 and 2001............ 19
Liquidity and Capital Resources.................................................... 21
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......................... 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders................................. 27
Item 6. Exhibits and Reports on Form 8-K................................................... 27
SIGNATURES........................................................................................... 28
EXHIBIT INDEX........................................................................................ 29
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
------
JUNE 30, DECEMBER 31,
2002 2001
-------------- --------------
Current Assets
Cash and cash equivalents (see note 14)........................... $ 6,783,040 $ 8,844,482
Due from banks.................................................... 1,419,925 1,357,483
Federal funds sold................................................ 441,000 4,033,000
Bond investments (see note 14).................................... 16,055,627 11,374,531
Investment in securities and non-affiliated
mutual funds.................................................... 600,165 555,013
Note receivable................................................... 800,000 800,000
Loans (net of allowance for loan losses of $490,000
for 2002 and $430,000 for 2001)................................. 56,995,231 43,705,576
Accounts receivable (net of allowance for
doubtful accounts of $14,747 for 2002 and
$260,299 for 2001).............................................. 6,435,429 5,480,214
Prepaid assets and deposits....................................... 252,538 425,061
Deferred tax asset................................................ 280,769 287,435
-------------- --------------
Total current assets.......................................... 90,063,724 76,862,795
-------------- --------------
Fixed Assets, at cost
Equipment and furniture (net of accumulated
depreciation of $2,465,058 for 2002 and
$2,330,472 for 2001)............................................ 2,086,810 2,277,430
-------------- --------------
Total fixed assets............................................ 2,086,810 2,277,430
-------------- --------------
Non-Current Assets
Investment in affiliate (see note 12)............................. 1,010 1,010
Goodwill (net of accumulated amortization of
$347,734 for 2002 and 2001) (see note 3)........................ 1,006,061 1,006,061
Other non-current assets.......................................... 43,696 43,696
-------------- --------------
Total non-current assets...................................... 1,050,767 1,050,767
-------------- --------------
TOTAL ASSETS............................................. $ 93,201,301 $ 80,190,992
============== ==============
(Continued on next page)
See accompanying notes.
-1-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
2002 2001
---------------- --------------
Current Liabilities:
Current portion of capital lease obligations....................... $ 646 $ 595
Current portion of bank borrowings................................. -- 3,153
Borrowed funds..................................................... 5,052,263 --
Bank line-of-credit................................................ 1,460,000 1,104,780
Deposits (see note 14)............................................. 65,979,549 55,905,541
Accounts payable and accrued expenses.............................. 1,295,245 2,448,177
Accrued compensation and benefits.................................. 354,123 570,883
Payable to broker-dealers.......................................... 103,590 142,985
Income taxes payable............................................... 216,564 215,027
Deferred income taxes.............................................. 132,950 55,608
Other liabilities.................................................. 1,876,585 1,382,025
------------- -------------
Total current liabilities...................................... 76,471,515 61,828,774
------------- -------------
Long-Term Liabilities
Long-term portion of capital lease obligations..................... 118 454
Deferred income taxes.............................................. 9,837 12,853
Other long-term liabilities........................................ 800,000 1,600,000
------------- -------------
Total long-term liabilities.................................... 809,955 1,613,307
------------- -------------
Total liabilities......................................... 77,281,470 63,442,081
------------- -------------
Commitments and Contingencies........................................... -- --
------------- -------------
Stockholders' Equity
Common stock, par value $.01 per share............................. 33,090 33,277
Additional paid-in capital......................................... 16,078,230 16,187,294
Retained earnings.................................................. (639,663) 231,300
Accumulated other comprehensive income............................. 448,174 297,040
------------- -------------
Total stockholders' equity................................ 15,919,831 16,748,911
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 93,201,301 $80,190,992
============= ===========
See accompanying notes.
-2-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ --------------------------
2002 2001 2002 2001
------------ ------------ ----------- -----------
REVENUE:
Gross revenue (see note 10)................. $ 8,793,906 $ 8,593,846 $ 4,492,094 $ 4,314,093
------------ ------------ ------------ -----------
Total gross revenue................... 8,793,906 8,593,846 4,492,094 4,314,093
------------ ------------ ------------ -----------
COST OF SALES:
Cost of sales (see note 10)................. 1,805,741 1,582,902 982,067 860,451
------------ ------------ ------------ -----------
Total cost of sales................... 1,805,741 1,582,902 982,067 860,451
------------ ------------ ------------ -----------
GROSS PROFIT (see note 10)....................... 6,988,165 7,010,944 3,510,027 3,453,642
------------ ------------ ------------ -----------
EXPENSES:
Employee compensation and benefits.......... 5,039,782 5,451,656 2,481,315 2,933,524
Mail and courier............................ 76,210 95,936 40,902 44,057
Telephone................................... 141,921 213,859 69,661 94,013
Equipment rental and maintenance............ 242,250 249,263 97,007 117,955
Occupancy................................... 469,622 449,276 243,558 219,671
Depreciation and amortization............... 228,060 383,958 139,246 197,907
Professional fees........................... 300,435 328,980 253,971 79,601
Interest.................................... (7,697) 58,870 (10,895) (12,282)
Program administration fees................. (46,545) 94,810 96,522 81,627
Provision for bad debt...................... 31,407 224,539 3,198 117,805
Provision for loan losses................... 544,403 55,000 514,403 15,000
Business development costs.................. 13,440 19,989 1,940 9,557
Other operating expenses (see note 12)...... 818,180 486,435 419,910 237,675
------------ ------------ ------------ -----------
Total expenses........................ 7,851,468 8,112,571 4,350,738 4,136,110
------------ ------------ ------------ -----------
Loss from continuing operations............. (863,303) (1,101,627) (840,711) (682,468)
Other income (loss)......................... (24,202) (8,285) (18,107) 24,262
Income tax benefit (expense)................ 3,177 398,239 (1,935) 144,314
------------ ------------ ------------ -----------
Net loss from continuing
operations............................ (884,328) (711,673) (860,753) (513,892)
------------ ------------ ------------ -----------
Income (loss) from discontinued operations
(net of income taxes of $8,177,
$423,239, $(1,935) and
$156,378, respectively) .................... 13,365 674,041 (3,163) 240,414
------------ ------------ ------------ -----------
Net loss......................................... $ (870,963) $ (37,632) $ (863,916) $ (273,478)
============ ============ ============ ===========
Per share loss
Basic common shares outstanding............. 2,858,972 2,880,028 2,858,972 2,880,028
Net loss - basic............................ $ (0.30) $ (0.01) $ (0.30) $ (0.09)
Fully diluted common shares outstanding
(see note 13)........................ 2,858,972 2,880,028 2,858,972 2,880,028
Net loss - fully diluted.................... $ (0.30) $ (0.01) $ (0.30) $ (0.09)
See accompanying notes.
-3-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net loss............................................. $ (870,963) $ (37,632) $ (863,916) $ (273,478)
Other comprehensive income (loss), net of tax
Unrealized gain on securities, net of
reclassification adjustment.................. 151,134 78,929 210,252 23,793
---------- --------- ---------- ----------
Comprehensive income (loss).......................... $ (719,829) $ 41,297 $ (653,664) $ (249,685)
========== ========= ========== ==========
See accompanying notes.
-4-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------------------
2002 2001
------------- ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss..................................................... $ (870,963) $ (37,632)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Income tax payable..................................... 1,537 95,935
Deferred income taxes.................................. 80,992 65,729
Provision for depreciation and amortization............ 221,523 506,509
Provision for loan losses.............................. 544,403 55,000
Provision for bad debt................................. 309,945 224,539
Write off of bad debt.................................. (276,593) (28,764)
Amortization of bond discount.......................... (13,315) (11,910)
Change in market value of securities................... (218,389) 117,404
Comprehensive income................................... 151,134 78,929
Loss on disposal of fixed assets....................... -- 15,965
Loss on sale/disposal of securities.................... 13,599 10,470
(Increase) decrease in operating assets
Receivables....................................... (988,567) (1,216,128)
Loan receivables.................................. (13,834,058) (12,441,694)
Prepaid and sundry assets......................... 172,523 6,934
Other non-current assets.......................... -- (118,995)
Increase (decrease) in operating liabilities
Deposits.......................................... 10,074,008 24,829,118
Accounts payable and accrued expenses............. (1,192,327) 253,759
Accrued compensation and benefits................. (216,760) (47,044)
Other liabilities................................. (305,440) 316,746
------------- ------------
Net cash provided by (used in) operating activities.... (6,346,748) 12,674,870
------------- ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment........................................ (132,233) (521,424)
Due from banks............................................... (62,442) 358,754
Federal funds sold/purchased................................. 3,592,000 6,450,000
Bond investments............................................. (4,438,789) (18,290,780)
Securities sold/purchased under agreement to repurchase...... 163,500 (1,141,000)
Borrowed funds............................................... 4,888,763 --
Proceeds from sale of securities............................. 234,556 --
Proceeds from sale of debt securities........................ -- 65,862
Investments in securities and mutual funds................... (303,910) (93,324)
------------- ------------
Net cash provided by (used in) investing activities........ 3,941,445 (13,171,912)
------------- ------------
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of borrowings...................................... (443,154) (1,646,113)
Retirement of common stock................................... (7,920) --
Borrowings on line of credit................................. 795,220 905,000
Repayment of capital lease obligations....................... (285) (6,499)
------------- ------------
Net cash provided by (used in) financing activities....... 343,861 (747,612)
------------- ------------
Net decrease in cash and cash equivalents....................... (2,061,442) (1,244,654)
Cash and cash equivalents - beginning of year................... 8,844,482 5,582,098
------------- ------------
Cash and cash equivalents - end of period....................... $ 6,783,040 $ 4,337,444
============= ============
See accompanying notes.
-5-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
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 our services via the traditional industry
channels of our subsidiaries and via the Internet. Through our
subsidiaries, all of which are wholly owned, we provide services
primarily in five lines of business: trust and retirement
services; mutual fund administration services; banking; brokerage;
and investment advisory services.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of
Unified Financial Services, Inc. and our subsidiaries after
elimination of all material intercompany accounts and
transactions.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the six- and three-month periods ended June 30, 2002
are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002.
On May 31, 2002, we disposed of Fully Armed Productions, Inc.,
which we acquired on June 1, 1999 in exchange for 18,182 shares of
our common stock. In connection with such disposition, and in
exchange for all of the outstanding capital stock of Fully Armed
Productions, Inc., we received 18,182 shares of our common stock
and $37,569 in cash. The results of Fully Armed Productions, Inc.
are shown as a non-cash flow transaction in our Consolidated
Statements of Cash Flow. Due to the immateriality of the results
of Fully Armed Productions, Inc. to the consolidated results of
Unified Financial Services, the consolidated financial statements
contained herein and in our Annual Report on Form 10-K for the
year ended December 31, 2001 have not been restated for the
disposition.
The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
For further information refer to the consolidated financial
statements and footnotes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2001.
Financial Statement Presentation
--------------------------------
Certain amounts in the 2001 financial statements have been
reclassified to conform to the 2002 presentation.
-6-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
Note 3 - NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early
application encouraged. SFAS 144 supersedes Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business." This statement develops one accounting
model (based on the model in SFAS 121) for long-lived assets to be
disposed of, expands the scope of discontinued operations and
modifies the accounting for discontinued operations. This standard
did not have a material impact on our consolidated financial
position, results of operations or cash flows for the six- or
three-month periods ended June 30, 2002.
Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations," addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
cost. This statement is effective for fiscal years beginning after
June 15, 2002. We have adopted this statement, which did not have
a material impact on our consolidated financial position, results
of operations or cash flows for the six- or three-month periods
ended June 30, 2002.
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," addresses the financial accounting and
reporting for acquired goodwill and other intangible assets.
Amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of this statement.
This statement is effective for fiscal years beginning after
December 15, 2001. Effective January 1, 2002, we adopted SFAS 142
and ceased the amortization of goodwill (for the six months ended
June 30, 2002, goodwill amortization would have been approximately
$52,000 and would be approximately $104,000 for the year ending
December 31, 2002). Other provisions of this statement require
that goodwill be measured periodically for impairment. We are
currently in the process of fair valuing our reporting unit with
goodwill in order to determine potential goodwill impairment, but
have not yet determined the impact for 2002.
Statement of Financial Accounting Standards No. 141, "Business
Combinations," requires all business combinations initiated after
June 30, 2001 to be accounted for under the purchase method of
accounting. SFAS No. 141 also sets forth guidelines for applying
the purchase method of accounting in the determination of
intangible assets, including goodwill acquired in a business
combination, and expands financial disclosures concerning business
combinations consummated after June 1, 2001. Management does not
believe that this statement will have a material effect on our
consolidated financial statements.
-7-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
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.
Options granted under our plan may be nonqualified or incentive
stock options and typically are granted at a price equal to the
quoted market price (or valuation made by independent valuation
experts) on our common stock on the trading day immediately prior
to the date of grant. Generally, options granted will have a term
of ten years from the date of the grant, and will vest in
increments of 33% per year over a three-year period or be 100%
vested on the date of grant. Effective as of December 31, 2001, in
conjunction with the sale of our insurance operations, our board
of directors extended to December 31, 2006 the exercise period of
13,255 options held by employees of our former insurance
operations, irrespective of the date of termination of such
employees. All other terms of such options, including the vesting
schedules, were unchanged.
As of June 30, 2002 and 2001, options to acquire 126,621 and
102,836 shares, respectively, of our common stock were outstanding
and issued to certain of our employees, directors and advisers
pursuant to our stock incentive plan. In addition, as of such
dates, our board had granted options to acquire 54,545 and 60,000
shares, respectively, of our common stock outside of such plan
(see note 12).
A summary of our outstanding stock options as of June 30, 2002 and
2001 is as follows:
JUNE 30,
------------------------------------------------
2002 2001
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- ----- ------ -----
Options outstanding at beginning of year...... 149,396 $41.94 170,752 $41.94
Granted....................................... 38,050 16.50 -- --
Option to acquire 66,666 shares at $45.00
per share converted into option to acquire
60,000 shares at $50.00 per share........... -- (6,666)
Option to acquire 60,000 shares at $50.00
per share converted into option to acquire
54,545 shares at $55.00 per share........... (5,455) --
Forfeitures................................... (825) 37.37 (1,250) 40.00
Options outstanding at end of period.......... 181,166 37.88 162,836 41.62
Options exercisable at end of period.......... 166,301 37.82 147,535 41.75
Options available for future grants........... 123,379 n/a 147,164 n/a
As of June 30, 2002, 89,316 of such options were intended to
qualify as incentive stock options pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended.
-8-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
Note 4 - OPTIONS (Continued)
We apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based
employee compensation arrangements whereby compensation costs
related to stock options generally are not recognized in
determining net income. Had we computed compensation costs for our
stock options pursuant to Financial Accounting Standard Board
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the effect would have been
immaterial for the six- and three-month periods ended June 30,
2002 (based upon the Black-Scholes option pricing model) and, in
fact, would have been anti-dilutive for such periods.
Note 5 - BANK LINE OF CREDIT
Bank line of credit at June 30, 2002 consisted of the following:
MAXIMUM LINE LINE OF CREDIT AT
OF CREDIT JUNE 30, 2002
------------- ------------------
Secured by assignment of receivables,
bears interest at prime...................... $2,500,000 $1,460,000
Note 6 - RENTAL AND LEASE INFORMATION
We lease certain office facilities and equipment. Rental expense
for the six months ended June 30, 2002 and 2001 were $469,622 and
$449,276, respectively.
At June 30, 2002, we were committed to minimal rental payments
under certain noncancellable operating leases. As of June 30,
2002, the minimum future rental commitments for each of the
succeeding five years subsequent to June 30, 2002 were as follows:
2003 ......................................$ 626,585
2004 ....................................... 524,540
2005 ....................................... 468,410
2006 ....................................... 408,150
2007 ....................................... 425,325
Thereafter.................................. 794,603
----------
Total.................................. $3,247,613
==========
Note 7 - COMMITMENTS AND CONTINGENCIES
We are a party to various lawsuits, claims and other legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, all such
matters are without merit or are of such kind, or involve such
amounts, that unfavorable disposition would not have a material
adverse effect on our consolidated financial position or results
of operations.
-9-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
Note 8 - CASH SEGREGATED UNDER FEDERAL REGULATION AND NET CAPITAL REQUIREMENTS
Unified Financial Securities is subject to the Securities and
Exchange Commission's Uniform Net Capital Rule, which requires the
maintenance of minimum net capital, as defined, of the greater of
(i) 6-2/3% of aggregate indebtedness or (ii) $50,000, and a ratio
of aggregate indebtedness to net capital of not more than 15 to 1.
At June 30, 2002, the net capital and ratio of aggregate
indebtedness for Unified Financial Securities were $165,000 and
2.068 to 1, respectively.
Unified Financial Securities is a fully disclosed broker-dealer.
As a result, pursuant to Rule 15c3-3 as promulgated by the
Securities and Exchange Commission, Unified Financial Securities
is not required to segregate cash and/or securities for the
benefit of its customers.
Note 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated
fair value of our financial instruments at June 30, 2002 and 2001.
Financial Accounting Standards Board Statement No. 107,
"Disclosures About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties.
JUNE 30,
-------------------------------------------------------
2002 2001
-------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ----- --------- -----
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents............ $ 6,783.0 $ 6,783.0 $ 4,337.4 $ 4,337.4
Due from banks....................... 1,419.9 1,419.9 803.9 803.9
Federal funds sold................... 441.0 441.0 1,217.0 1,217.0
Bond investments..................... 16,055.6 16,055.6 29,024.5 29,024.5
Securities and mutual funds.......... 600.2 600.2 591.4 591.4
Loans, net of allowance.............. 56,995.2 56,995.2 33,221.4 33,221.4
Receivables (trade), net of allowance 6,435.5 6,435.5 14,106.4 14,106.4
Prepaid and sundry................... 252.5 252.5 290.3 290.3
Financial liabilities:
Current liabilities.................. 76,470.9 76,470.9 73,167.4 73,167.4
Capital lease obligation............. 0.7 0.7 2.4 2.4
Term debt............................ -- -- 2,049.6 2,049.6
-10-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
Note 10 - DISCLOSURES ABOUT REPORTING SEGMENTS
We have five reportable operating segments: trust and retirement
services; mutual fund administration services; banking; brokerage;
and investment advisory services. In addition, we also report
corporate as a separate segment.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. We
evaluate performance based on profit or loss from operations
before income taxes, not including recurring gains and losses.
Our reportable segments are strategic business units that offer
different products and services. They are managed separately
because each business requires different technology and marketing
strategies. Most of the businesses were acquired as a unit and the
management at the time of the acquisition was retained. Reportable
segment revenue, gross profit, total assets, depreciation and
amortization and capital expenditures were as follows as of or for
the six or three months ended June 30, 2002 and 2001:
-11-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
AS OF OR FOR THE FOR THE
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenue:
Trust and retirement.......................... $ 2,665,402 $ 2,403,771 $ 1,324,190 $ 1,299,057
Mutual fund administration.................... 2,735,880 2,667,299 1,415,002 1,260,875
Banking....................................... 1,328,176 921,645 723,808 488,002
Brokerage..................................... 1,112,572 1,448,163 580,122 722,115
Investment advisory........................... 803,630 1,006,091 387,700 538,158
Corporate..................................... 148,246 146,877 61,272 5,886
----------- ----------- ----------- -----------
Total.................................... $ 8,793,906 $ 8,593,846 $ 4,492,094 $ 4,314,093
=========== =========== =========== ===========
Gross profit:
Trust and retirement.......................... $ 2,171,023 $ 2,182,383 $ 1,051,656 $ 1,077,669
Mutual fund administration.................... 2,340,639 2,288,291 1,179,227 1,121,885
Banking....................................... 1,328,176 921,645 723,808 488,002
Brokerage..................................... 348,703 556,190 182,440 286,155
Investment advisory........................... 672,818 915,559 320,385 474,044
Corporate..................................... 126,806 146,876 52,511 5,887
----------- ----------- ----------- -----------
Total.................................... $ 6,988,165 $ 7,010,944 $ 3,510,027 $ 3,453,642
=========== =========== =========== ===========
Total assets:
Trust and retirement.......................... $ 2,926,323 $ 3,314,830
Mutual fund administration.................... 2,293,705 1,980,115
Banking....................................... 79,769,392 68,429,843
Brokerage..................................... 686,292 643,080
Investment advisory........................... 1,350,145 1,651,364
Corporate..................................... 5,835,083 1,809,507
Discontinued.................................. 340,361 11,326,696
----------- -----------
Total.................................... $93,201,301 $89,155,435
=========== ===========
Depreciation and amortization:
Trust and retirement.......................... $ 59,285 $ 66,831
Mutual fund administration.................... 62,130 49,007
Banking....................................... 88,349 75,020
Brokerage..................................... 2,561 15,381
Investment advisory........................... 9,988 68,036
Corporate..................................... 5,747 109,683
----------- -----------
Total.................................... $ 228,060 $ 383,958
=========== ===========
Capital expenditures:
Trust and retirement.......................... $ 28,995 $ 131,329
Mutual fund administration.................... 87,990 14,562
Banking....................................... 6,215 51,481
Brokerage..................................... -- 8,216
Investment advisory........................... 1,204 2,710
Corporate..................................... 7,829 77,787
Discontinued.................................. -- 235,339
----------- -----------
Total.................................... $ 132,233 $ 521,424
=========== ===========
-12-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
Note 11 - UNIFIED BANKING COMPANY ASSETS AND LIABILITIES
Unified Banking Company commenced operations on November 1, 1999.
Included in our consolidated financial statements at June 30, 2002
and 2001 were the bank's total assets of $81,861,987 and
$65,896,893, respectively, and total liabilities of $76,410,959
and $59,781,675, respectively. As of such dates, certain
components of such assets and liabilities were as follows:
June 30,
----------------------------
2002 2001
----------- ----------
Due from banks.............................................. $ 1,419,925 $ 803,885
Investments in securities:
US agency securities...................................... 20,999,119 29,024,536
FHLB stock................................................ 497,300 189,600
Loans:
Real estate loans......................................... 36,883,451 20,410,356
Commercial loans.......................................... 12,535,171 8,019,113
Installment loans......................................... 7,962,549 5,184,654
Other loans............................................... 104,061 62,742
Allowance for loan losses................................. 490,000 360,000
Bank deposits:
Demand deposits........................................... 11,104,796 6,557,078
Official checks........................................... 93,126 141,183
NOW accounts.............................................. 3,697,056 1,005,774
Money market accounts..................................... 11,030,744 7,930,178
Savings accounts.......................................... 71,438 43,838
Time deposits............................................. 39,753,253 39,056,370
Other interest-bearing deposits........................... 5,172,627 4,715,035
Federal and borrowed funds.................................. 5,052,263 2,000
Note 12 - INVESTMENT IN AFFILIATE
On May 23, 2000, we subscribed for 10 shares of VSX Holdings, LLC,
a Delaware limited liability company, in exchange for $10 and
certain intangible property rights. We currently own approximately
0.5% of the outstanding shares of VSX Holdings, but have the right
to purchase up to an additional 1,990 (19.9%) shares at a price of
$1 per share, upon the occurrence of certain specified events. Our
investment in VSX Holdings is accounted for on the cost method of
accounting.
VSX Holdings is involved in the development of an alternative
trading system to be known as VSX.com, which, upon and subject to
organization and regulatory approval, will serve as a virtual,
real-time private financial market place. In connection with the
organization of VSX Holdings, a third-party investor made a $3.0
million loan to VSX Holdings, which loan is evidenced by a
debenture issued by VSX Holdings to such investor. The debenture
is secured by 85,000 shares of our common stock pledged by certain
executive officers of our company. In addition, concurrent with
the issuance of such debenture, we issued an option to the
third-party investor to acquire shares of our common stock, which
option has a five-year term. The investor may elect to foreclose
on the pledged collateral or exercise the option. Pursuant to such
option, the holder of the option and the debenture is entitled to
surrender the
-13-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
Note 12 - INVESTMENT IN AFFILIATE (Continued)
debenture to us in payment of the exercise price of the option.
During the years ending May 23, 2003, 2004 and 2005, the exercise
price per share of our common stock subject to the option will be
$55, $60 and $65, respectively. Should the investor foreclose on
the pledged collateral, the executive officers would succeed to
the option and/or the claim against VSX Holdings. Should the
option be exercised prior to May 23, 2003 by the holder of the
note (whether the investor, the executive officers or any other
holder): (a) we would issue 54,545 shares of stock (50,000 after
May 23, 2003) to the investor, the executive officers or any other
holder, as the case may be, and (b) we would succeed to the $3.0
million claim against VSX Holdings.
We also have entered into a management arrangement with VSX
Holdings whereby we provide consulting and development services to
VSX Holdings. For the six months ended June 30, 2002 and 2001 and
the three months ended June 30, 2002 and 2001, we received
payments totaling $219,822 and $819,977, respectively, and
$135,371 and $433,333, respectively, from VSX Holdings for such
consulting and development services, which amount is recorded as a
reduction of "Other operating expenses" on our Consolidated
Statements of Operations.
Note 13 - INCOME (LOSS) PER SHARE OF STOCK
Income (loss) per share of stock is computed using the number of
common shares outstanding during the applicable period. Diluted
income (loss) per share of stock is computed using the number of
common shares outstanding and dilutive potential common shares
(outstanding stock options).
Dilutive potential common shares included in the diluted income
(loss) per share calculation were determined using the treasury
stock method. Under the treasury stock method, outstanding stock
options are dilutive when the average "market price" of our common
stock exceeds the option price during a period. In addition,
proceeds from the assumed exercise of dilutive options along with
the related tax benefit are assumed to be used to repurchase
common shares at the average market price of such stock during the
period. For the six- and three-month periods ended June 30, 2002
and 2001, all potential common shares were considered to be
anti-dilutive and were excluded from the calculation of diluted
loss per share.
Note 14 - RELATED PARTY TRANSACTION
As of June 30, 2002, $4,943,491 was eliminated from both bond
investments and deposits on our Consolidated Statement of
Financial Condition, which amount represented cash on deposit at
our bank from various subsidiaries of our company.
-14-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002 AND 2001
----------------------
Note 15 - SALE OF INSURANCE OPERATIONS
On December 17, 2001, we sold substantially all the assets and
assigned substantially all of the liabilities of our insurance
subsidiaries, Equity Insurance Managers, Inc., Equity Insurance
Administrators, Inc. and 21st Century Claims Service, Inc., to
Arthur J. Gallagher & Co. In connection with the sale, $800,000 in
cash was deposited into an escrow account, and is subject to
possible indemnification claims of Arthur J. Gallagher & Co.
pursuant to the sale agreement. Any funds remaining in the escrow
account after June 16, 2003 (and which are not subject to a claim
made by Arthur J. Gallagher & Co. before such date) will be
released to us. As of December 31, 2001, we established a
long-term liability of $800,000 related to the escrow. As of June
30, 2002, we believed there was a current potential for
approximately $270,000 in claims against the escrow. In addition,
in connection with the sale, we received an interest-bearing note
receivable of $800,000 which is subject to possible reduction in
the event Arthur J. Gallagher does not achieve certain revenue or
income targets for the year ending December 31, 2002 with respect
to the business that it acquired from our insurance subsidiaries.
As of December 31, 2001, we established a liability of $800,000
related to the revenue and income targets. As of June 30, 2002, we
were not able to determine whether Arthur J. Gallagher & Co. would
achieve such targets and, as a result, we did not adjust the
liability as of such date. In accordance with generally accepted
accounting principles, we will adjust the liability when
definitive information is available with respect to such targets.
-15-
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, securities or banking industries or the
imposition of regulatory penalties could have an effect on our operating
results. In addition, by accepting deposits at fixed rates, at different times
and for different terms, and lending funds at fixed rates for fixed periods, a
bank accepts the risk that the cost of funds may rise and interest on loans and
investment securities may be at a fixed rate. Similarly, the cost of funds may
fall, but a bank may have committed by virtue of the term of a deposit to pay
what becomes an above-market rate. Investments may decline in value in a rising
interest rate environment. Loans have the risk that the borrower will not repay
all funds due in a timely manner as well as the risk of total loss. Collateral
may or may not have the value attributed to it. Although we believe our loan
loss reserve and our allowance for doubtful accounts are adequate, they may
prove inadequate if one or more large borrowers or clients, or numerous smaller
borrowers or clients, or a combination of both, experience financial difficulty
for individual, national or international reasons. Because the financial
services industry is highly regulated, decisions of governmental authorities can
have a major effect on operating results. These uncertainties, as well as
others, are present in the financial services industry and we caution
stockholders that management's view of the future on which we price and
distribute our products and estimate costs of operations and regulations may
prove to be other than as anticipated. In addition, our current expectations
with respect to our five business lines, our ability to enhance stockholder
value and aggressively and profitably grow assets under management and under
service, our ability to provide a high level of service satisfaction and manage
costs, our ability to expand profit margins, our ability to achieve future
growth and the development of VSX Holdings as an alternative trading system may
prove to be other than expected. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those listed under "Risk Factors" in our Annual Report
on Form 10-K for the year ended December 31, 2001. 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, provides financial products and services,
principally through three principal businesses:
o The provision of complete back-office and shareholder services for the
assets of third-party mutual fund families, as well as our affiliated
series funds;
o Management and administration of 401(k) and other ERISA-directed assets; and
-16-
o Management of wealth for individuals through a suite of family-office services.
The integration of our three principal businesses (mutual fund
administration services, trust and retirement services and investment advisory
services) with our banking and brokerage operations allows for the capture of
additional profitable revenues. Further, this integration provides much greater
control of the quality of our component services.
Our fundamental objective is to enhance stockholder value by
aggressively and profitably growing assets under management and under service.
Our ability to provide a high level of service satisfaction, with an emphasis on
managing costs, combined with a dedication to maintaining a highly trained and
motivated workforce should lead to expanding profit margins.
Our principal executive offices are located at 2424 Harrodsburg Road,
Lexington, Kentucky 40503, telephone number (859) 296-2016. We and our
subsidiaries also maintain offices at 431 North Pennsylvania Street,
Indianapolis, Indiana, telephone number (317) 917-7001; 2353 Alexandria Drive,
Lexington, Kentucky 40504, telephone number (859) 296-4407; 1725 Southlake
Boulevard, Southlake, Texas 76092, telephone number (817) 431-2197; 36 West 44th
Street, The Bar Association Building, Suite 1310, New York, New York 10036,
telephone number (212) 852-8852; and One US Bank Plaza, Suite 2100, St. Louis,
Missouri 63101, telephone number (314) 552-6440.
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, 2002 AND 2001
Revenue for the six months ended June 30, 2002 compared to the same
period of 2001 increased $200,060, or 2.3%, from $8,593,846 to $8,793,906. For
such periods, gross profit declined by $22,779.
For the first six months of 2002 compared to the same period of 2001,
trust and retirement services revenue increased $261,631, or 10.9%, primarily
due to increased fees, partially offset by lower interest income on lower cash
balances and lower interest rates. For such periods, trust and retirement
services gross profit declined by $11,360 after fees paid to advisor partners
increased slightly year over year, increasing 1.6% from $2.111 million in 2001
to $2.145 million in 2002, and lower interest income and other income of $54,000
year over year. As of June 30, 2002, our trust and retirement services operation
had approximately $525.1 million in assets under management compared to $528.2
million as of June 30, 2001. Our trust and retirement services assets under
management remained relatively constant due to the addition of new client assets
during such periods despite declines in the Dow, S&P 500 and Nasdaq of
approximately 7.8%, 13.8% and 25.0%, respectively, from June 30, 2001 to June
30, 2002.
For such periods, mutual fund administration services revenue increased
$68,581, or 2.6%, and mutual fund administration services gross profit increased
by $52,348. As of June 30, 2002, we provided mutual fund administrative services
to 30 mutual fund families consisting of approximately 192 portfolios and
approximately $8.9 billion in assets under service, compared to 25 mutual fund
families consisting of 119 portfolios and approximately $4.2 billion in mutual
fund assets under service as of June 30, 2001. Approximately $2.8 billion of the
increase in assets under service was added during the month of June 2002 with
our commencement of services for the Huntington Funds. During the past 12
months, our mutual fund services operation added several new clients, but also
saw several clients discontinue
-17-
operations due to market conditions. While ourassets under service increased
period to period, the mix of services (transfer agency, fund accounting and
administrative services) that we provided to certain of our mutual fund clients
changed. We recognize higher margins on administrative services and, to a lesser
extent, fund accounting services compared to transfer agency services. Our pricing,
in certain instances, also is dependent upon the number of shareholder accounts
serviced. An omnibus account may represent a significant amount of assets under
service, but would not generate as much in fees as a fund with hundreds of shareholders
but less assets under service.
Banking revenue and gross profit increased $406,531, or 44.1%, for the
first half of 2002 compared to the first half of 2001, primarily due to an
increase in net interest income and a $105,000 increase in secondary market loan
revenue. Net loans as of June 30, 2002 increased to $57.0 million from $33.7
million as of June 30, 2001. Our banking operation's net interest margin
increased from 1.52% for the six months ended June 30, 2001 to 2.02% for the six
months ended June 30, 2002. During the second quarter of 2002, our net interest
margin rose 30 basis points from the first quarter of 2002 due to the repricing
of higher rate certificates of deposit. We expect our net interest margin to
continue to improve during the remainder of 2002 as our deposits are repriced at
lower market rates. During the first six months of 2002, we were successful in
retaining the vast majority of the maturing certificates of deposits at the
prevailing market rates. We also experienced a $11.5 million, or 19.0%, increase
in deposits from June 30, 2001 to June 30, 2002. Such deposits primarily were
used to fund our banking operation's loan growth.
During June 2002, our banking operation charged-off a $455,000 loan
that management previously had classified as doubtful. We are working
aggressively to collect this loan, and will continue to do so, but, due to
actions taken by the borrower, management believed it necessary to charge-off
this loan at this time.
As of June 30, 2002, our banking operation's ratio of non-performing
loans to total loans was 0.2%, compared to 1.4% at June 30, 2001, after the
charge-off of the $455,000 loan. At June 30, 2002, our non-performing loans
totaled $91,000. We are working aggressively to collect all non-performing
loans, but may be required to increase our provision for loan losses in future
quarters if we are unsuccessful in collecting these loans, which could have a
material effect on our results of operations.
For the six months ended June 30, 2002 compared to the same period of
2001, brokerage revenue and gross profit declined $335,591, or 23.2%, and
$207,487, or 37.3%, respectively. These declines primarily were attributable to
a $83,129 decline in commission revenue collected from introducing firm clients
and a $110,735 decline in commission revenue due to the loss of certain full
service brokerage accounts following the death of the former President of
Commonwealth Investment Services. Also contributing to such decline was a
$48,740 decline in investment management fees resulting from lower trading
volume.
For such periods, investment advisory revenue and gross profit declined
$202,461, or 20.1%, and $242,741, or 26.5%, respectively. Such declines
primarily were due to the lower market value of assets under management at such
operation. Assets under management at our investment advisory operation declined
$108.4 million, or 27.4%, from $396.2 million at June 30, 2001 to $287.8 million
at June 30, 2002. A substantial portion of such decline was attributable to the
overall declines in the financial markets.
Total expenses declined $261,103, or 3.2%, for the six months ended
June 30, 2002 compared to the six months ended June 30, 2001. During the second
half of 2001, management implemented certain expense cuts in an effort to
improve the profitability of our company, which was partially offset by a
-18-
$489,403 increase in the provision for loan losses during 2002, primarily due to
the write-off of one delinquent loan as discussed above. For such periods,
employee compensation and benefits declined by $411,874, or 7.6%. This decline
primarily was attributable to salary reductions taken by certain officers of our
company during the first quarter of 2002, which reductions ranged from 20% to
40% of such officers' annualized salary. Telephone expense declined $71,938, or
33.6%, for the six months ended June 30, 2002 compared to the same period of
2001 due to a change in our company's long distance provider and the termination
of our wide area network. For such periods, depreciation and amortization
expense declined by $155,898, or 40.6%, primarily due to the effect of a
reversal of a previous depreciation accrual and our adoption of Statement of
Financial Accounting Standards No. 142, which required us to cease amortizing
goodwill. Under recently adopted accounting rules, we will be required to
periodically evaluate the carrying value of our goodwill balances to determine
whether the value has been impaired. If we determine there has been an
impairment, we will recognize a charge to our earnings in the quarter we
determine the value has been impaired, which could be material. For such
periods, interest expense declined by $66,567, or 113.1%, due to our repayment
of our outstanding term loan during December 2001. Program administration fees
declined $141,355, or 149.1%, primarily due to a $190,000 insurance recovery in
the first quarter of 2002 related to a loss recorded during 2001 at our mutual
fund services operation. For such periods, our provision for bad debt declined
by $193,132, or 86.0%, due to a larger reserve taken during 2001 for receivables
generated by our mutual fund services operation. Our provision for loan losses
increased by $489,403, or 889.8%, for the six months ended June 30, 2002
compared to the same period of 2001, primarily due to the expense associated
with the $455,000 loan charged-off in June 2002. Unified Banking Company is
required by Federal law to maintain a reserve for possible loan losses based
upon the size of and risks associated with the loan portfolio. For such periods,
other operating expense increased by $331,745, or 68.2%, primarily due a
$819,977 benefit received by us during the six months ended June 30, 2001 in
connection with the construction and development of the VSX marketplace and its
corresponding products, compared to a $219,822 benefit received by us during the
six months ended June 30, 2002. Removing the effect of the benefit received from
VSX Holdings during 2001, other expenses declined $293,000, or 22.4%, for such
periods.
For the six months ended June 30, 2002, we recorded a $863,303 loss
from continuing operations compared to a $1,101,627 loss for the same period of
2001. The $238,324 decline in loss for such periods primarily was a result of
the expense reductions discussed above. For the six months ended June 30, 2002
we recorded a $884,328 net loss from continuing operations compared to a
$711,673 net loss for the same period of 2001. The results for the six months
ended June 30, 2001 included a $398,239 income tax benefit while the same period
of 2002 included a $3,177 income tax benefit.
For the six months ended June 30, 2002, we recorded $13,365 net income
from discontinued operations compared to $674,041 in net income from
discontinued operations for the same period of 2001. Discontinued operations for
the six months ended June 30, 2001 included the operating results of our
insurance operations, which were sold in December 2001.
We recorded a net loss of $870,963, or a basic and fully diluted loss
per share of $0.30, for the six months ended June 30, 2002 compared to a net
loss of $37,632, or a basic and fully diluted loss per share of $0.01, for the
same period of 2001.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Revenue for the second quarter of 2002 compared to the second quarter
of 2001 increased $178,001, or 4.1%, from $4,314,093 to $4,492,094. For such
quarters, gross profit increased by $56,385, or 1.6%.
-19-
For the second quarter of 2002 compared to the same quarter of 2001,
trust and retirement services revenue increased $25,113, or 1.9%, and gross
profit declined $26,013, or 2.4%, each primarily due to the reasons discussed
above.
For such quarters, mutual fund administration services revenue
increased $154,127, or 12.2%, and gross profit increased by $57,342, or 5.1%. As
discussed above, as of June 30, 2002, we provided mutual fund administrative
services to 30 mutual fund families consisting of 192 portfolios and $8.9
billion in assets under service, compared to 25 mutual fund families consisting
of 119 portfolios and $4.2 billion in mutual fund assets under service as of
June 30, 2001.
Banking revenue and gross profit increased $235,806, or 48.3%, for the
second quarter of 2002 compared to the second quarter of 2001, primarily due to
a $175,000, or 70.0%, increase in net interest income and a $21,000 increase in
secondary market loan revenue. Net loans increased $23.9 million, or 71.2%, from
June 30, 2001 to June 30, 2002.
For such quarters, brokerage revenue and gross profit declined
$141,993, or 19.7%, and $103,715, or 36.2%, respectively. These declines
primarily were attributable to a $26,709 decline in commission revenue from
introducing firm clients and a $47,628 decline in commission revenue due to the
loss of certain full service brokerage accounts following the death of the
former President of Commonwealth Investment Services. Also contributing to such
declines was a $39,000 decline in investment management fees resulting from
lower trading volume.
Investment advisory revenue and gross profit declined $150,458, or
28.0%, and $153,659, or 32.4%, respectively, for the second quarter of 2002
compared to the second quarter of 2001. Such declines were primarily due to the
lower market value of assets under management (as discussed above) resulting
from the overall declines in the financial markets from June 30, 2001 to June
30, 2002.
Total expenses increased $214,628, or 5.2%, for the second quarter of
2002 compared to the same quarter of 2001. As discussed above, during the second
half of 2001, management implemented certain expense cuts in an effort to
improve the profitability of our company. For such quarters, employee
compensation and benefits declined by $452,209, or 15.4%, primarily due to the
salary cuts taken by certain officers of the company during the first quarter of
2002. For such quarters, telephone expense declined $24,352, or 25.9%, for the
reasons previously discussed. Equipment rental and maintenance expense declined
$20,948, or 17.8%, for the second quarter of 2002 compared to the same quarter
of 2001, primarily due to certain cost reductions at our mutual fund
administration services operation. For such quarters, depreciation and
amortization expense declined by $58,661, or 29.6%, for the reasons previously
discussed. For such quarters, professional fees increased $174,370, or 219.1%,
primarily due to certain consulting fees paid by the company during the second
quarter of 2002. The second quarter of 2001 also was positively impacted by the
reversal of a $24,000 accrual during such quarter. For such quarters, program
administration fees increased by $14,895, or 18.2%, primarily due to an
increased expense at our mutual fund administration operation. For such
quarters, our provision for bad debt declined by $114,607, or 97.3%, and our
provision for loan losses increased by $499,403, or 3329.4%, each primarily for
the reasons previously discussed. For the second quarter of 2002 compared to the
second quarter of 2001, other operating expense increased by $182,235, or 76.7%,
primarily due a $433,333 benefit received by us during the second quarter of
2001 in connection with the construction and development of the VSX marketplace
and its corresponding products, compared to a $135,371 benefit received by us
during the second quarter of 2002. Removing the effect of the benefit received
from VSX Holdings during the second quarter of 2001, other expenses declined
$127,316, or 19.0%, for such quarters.
-20-
For the second quarter of 2002, we recorded a $840,711 loss from
continuing operations compared to a $682,468 loss for the same quarter of 2001.
The $159,243 increase in loss for such quarters primarily was a result of the
$499,403 increase in the provision for loan loss, partially offset by the
expense reductions discussed above. For the quarter ended June 30, 2002 we
recorded a $860,753 net loss from continuing operations compared to a $513,892
net loss for the same quarter of 2001. The second quarter of 2001 included a
$144,314 income tax benefit while the same quarter of 2002 included a $1,935
income tax expense.
For the second quarter of 2002, we recorded a $3,163 loss from
discontinued operations compared to $240,414 in net income from discontinued
operations for the same quarter of 2001. Discontinued operations for the second
quarter of 2001 included the operating results of our insurance operations,
which were sold in December 2001.
We recorded a net loss of $863,916, or a basis and fully diluted loss
per share of $0.30, for the second quarter of 2002 compared to a net loss of
$273,478, or a basis and fully diluted loss per share of $0.09, for the same
quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Our primary sources of liquidity historically have been and
continue to be cash flow from operating activities, available borrowing capacity
from capitalized leases and a loan from a regional bank. The net decrease in
cash and cash equivalents at June 30, 2002 from December 31, 2001 was
$2,061,442. The net decrease primarily was due to an increase in loans
receivable, partially offset by increased customer deposits.
With respect to our banking operation, 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 consolidated Tier 1 capital to total assets
ratio of at least 8.0%. As of June 30, 2002, Unified Banking Company had a
consolidated ratio of Tier 1 capital to total assets of 8.93%.
Short-term liquidity needs arise from continuous fluctuations in the
flow of funds on both sides of the balance sheet resulting from growth and
seasonal and cyclical customer demands. The securities portfolio provides stable
long-term earnings as well as being a primary source of liquidity. The
designation of securities as available-for-sale and held-to-maturity does not
impact the portfolio as a source of liquidity due to the ability to enter into
repurchase agreements using those securities. We anticipate continued loan
demand in our market area. We have utilized, and expect to continue to utilize,
Federal Home Loan Bank borrowings to fund a portion of future loan growth.
Unified Banking Company experienced net growth in assets of 18.0%
during the first six months of 2002, while deposits increased 11.5% 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 $15,919,831 at June
30, 2002 compared to $16,748,911 at year-end 2001. The decrease in total
stockholders' equity was due to our net loss for the six months ended June 30,
2002, partially offset by $151,134 in unrealized gains on securities for such
period.
-21-
The growth of Unified Banking Company will have an effect on our
working capital. It currently is anticipated that as Unified Banking Company
grows, our working capital ratio will become more in line with ratios
traditionally associated with bank holding companies.
We believe that our existing capital resources should be adequate for
the working capital requirements of our 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.
-22-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The business activities of our company expose it to a variety of risks.
Management of these risks is necessary for the long-term profitability of our
company. We manage these risks through the establishment of numerous policies,
procedures and controls. The most significant risks that affect us are market
risk and credit risk. We also are subject to regulatory risk.
Market risk is the risk of loss to us resulting from changes in
interest rates, equity prices or both. We are exposed to market risk since we,
through our subsidiaries, maintain positions in fixed-income and equity
securities. We primarily manage our risk through the establishment of trading
policies and guidelines and through the implementation of control and review
procedures.
Our asset/liability strategy is to minimize the sensitivity of earnings
to changes in interest rates while maintaining an acceptable net interest
margin. Unified Banking Company's asset/liability committee monitors the
interest rate sensitivity of the bank's balance sheet on a monthly basis. The
committee reviews asset and liability repricing in the context of current and
future interest rate scenarios affecting the economic climate in our market
areas.
Our pricing policy is that all earning assets and interest bearing
liabilities be either based on floating rates or have a fixed rate not exceeding
five years. Real estate mortgage loans held by us, while having long final
maturities, are comprised of one-, two- or three-year adjustable rate loans. The
adjustable basis of these loans significantly reduces interest rate risk.
-23-
The following table illustrates Unified Banking Company's estimated
static gap with prepayments calculated as of June 30, 2002:
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 55 >55
(DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
RATE SENSITIVE ASSETS
Federal funds sold......... $ 441 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 441
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Securities
U.S. agencies............ -- 568 550 534 1,511 1,385 1,266 9,012 784 4,709 20,319
FHLB stock............... 497 -- -- -- -- -- -- -- -- -- 497
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total securities....... 497 568 550 534 1,511 1,385 1,266 9,012 784 4,709 20,816
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Loans
Commercial
Fixed.................. -- 28 29 27 81 83 284 1,266 744 1,136 3,678
Variable............... 8,858 -- -- -- -- -- -- -- -- -- 8,858
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total commercial..... 8,858 28 29 27 81 83 284 1,266 744 1,136 12,536
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Real Estate
Commercial
Fixed................ -- 535 119 45 1,167 1,465 985 4,271 -- -- 8,587
Variable............. 5,640 -- -- -- -- -- -- -- -- -- 5,640
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total commercial... 5,640 535 119 45 1,167 1,465 985 4,271 -- -- 14,227
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Residential
Fixed................ -- 62 415 59 176 172 236 2,727 1,761 1,990 7,598
Variable............. 3,708 -- -- -- -- -- -- -- -- -- 3,708
Other................ -- 6 6 6 20 20 426 277 119 772 1,653
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total residential.. 3,708 68 421 65 196 192 662 3,004 1,880 2,762 12,959
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total real estate 3,708 603 540 110 1,363 1,657 1,647 7,275 1,880 2,762 27,186
-------- ------- ------ ------ ------- ------- -------- ------ ------- ------ --------
Construction
Fixed.................. -- 240 -- -- -- -- -- -- -- -- 240
Variable............... 1,414 -- -- -- -- -- -- -- -- -- 1,414
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total construction... 1,414 240 -- -- -- -- -- -- -- -- 1,654
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Personal
Home equity loans...... 8,090 -- -- -- -- -- -- -- -- -- 8,090
Installment loans...... -- 333 56 47 388 357 415 840 253 50 2,739
Cash reserve loan...... 19 -- -- -- -- -- -- -- -- -- 19
Personal open end
letters of credit.... 5,180 -- -- -- -- -- -- -- -- -- 5,180
Loans secured by
deposits............. -- 10 -- -- 1 1 1 29 1 -- 44
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total personal....... 13,289 343 56 47 389 358 417 869 253 50 16,072
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total loans................ 32,909 1,214 625 184 1,833 2,098 2,347 9,410 2,878 3,948 57,446
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
TOTAL RATE
SENSITIVE ASSETS....... $ 33,847 $ 1,783 $1,175 $ 718 $3,344 $ 3,482 $ 3,614 $ 18,422 $3,662 $ 8,657 $ 78,703
======== ======= ====== ===== ====== ======= ======= ======== ====== ======= ========
-24-
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 55 >55
(DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
RATE SENSITIVE LIABILITIES
Interest bearing deposits
NOW accounts............. $ 3,703 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 3,703
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Money market accounts
Market rate accounts... 4,465 -- -- -- -- -- -- -- -- -- 4,465
Business market rate
accounts............. 2,033 -- -- -- -- -- -- -- -- -- 2,033
Special personal
MMDA................. 680 -- -- -- -- -- -- -- -- -- 680
Special business
MMDA................. 3,853 -- -- -- -- -- -- -- -- -- 3,853
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Total money market
accounts........... 11,031 -- -- -- -- -- -- -- -- -- 11,031
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Savings accounts......... 71 -- -- -- -- -- -- -- -- -- 71
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Time deposits
CD's > 100K............ -- 679 309 951 2,899 3,584 1,987 4,909 100 -- 15,419
CD's < 100K............ -- 501 869 869 5,128 8,402 1,647 6,875 43 -- 24,335
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Total time deposits.. -- 1,180 1,178 1,820 8,027 11,986 3,634 11,784 143 -- 39,754
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Individual retirement
accounts............. -- -- 129 14 136 442 87 4,328 32 4 5,173
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Total interest
bearing deposits... 14,805 1,180 1,307 1,834 8,163 12,428 3,721 16,112 175 4 59,732
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Borrowed funds
Repurchased agreements. -- 164 -- -- -- -- -- -- -- -- 164
FHLB borrowings........ -- 29 28 28 784 72 72 2,040 348 1,488 4,889
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Total borrowed funds. -- 193 28 28 784 72 72 2,040 348 1,488 5,053
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
TOTAL RATE
SENSITIVE LIABILITIES.. $ 14,805 $ 1,373 $ 1,336 $ 1,862 $ 8,947 $ 12,500 $ 3,793 $18,153 $ 523 $ 1,492 $ 64,784
======== ======== ======= ======== ======== ======== ======== ======= ======= ======== ========
INCREMENTAL GAP REPORT
SUMMARY INFORMATION
Total rate sensitive assets $ 33,847 $ 1,783 $ 1,175 $ 718 $ 3,344 $ 3,482 $ 3,614 $18,422 $ 3,662 $ 8,657
Total rate sensitive
liabilities.............. 14,805 1,373 1,336 1,862 8,947 12,500 3,793 18,153 523 1,492
Gap........................ 19,042 410 (161) (1,144) (5,603) (9,018) (179) 269 3,139 7,165
RSA/RSL.................... 2.29x 1.30x 0.88x 0.39x 0.37x 0.28x 0.95x 1.01x 7.00x 5.80x
RSA/assets................. 0.41 0.02 0.01 0.01 0.04 0.04 0.04 0.22 0.04 0.11
RSL/assets................. 0.18 0.02 0.02 0.02 0.11 0.15 0.05 0.22 0.01 0.02
Gap/assets................. 23.26% 0.50% -0.20% -1.39% -6.81% -10.95% -0.22% 0.33% 3.81% 8.70%
Gap/RSA.................... 56.26 23.00 -13.69 -159.40 -167.55 -258.98 -4.95 1.46 85.72 82.77
CUMULATIVE GAP REPORT
SUMMARY INFORMATION
Total rate sensitive assets $ 33,487 $ 35,630 $36,805 $37,523 $ 40,867 $ 44,349 $ 47,963 $66,385 $ 70,047 $ 78,704
Total rate sensitive
liabilities.............. 14,805 16,178 17,514 19,376 28,323 40,823 44,616 62,769 63,292 64,784
Gap........................ 19,042 19,452 19,291 18,147 12,544 3,526 3,347 3,616 6,755 13,920
RSA/RSL.................... 2.29x 2.20x 2.10x 1.94x 1.44x 1.09x 1.08x 1.06x 1.11x 1.21x
RSA/assets................. 0.41 0.44 0.45 0.46 0.50 0.54 0.59 0.81 0.86 0.96
RSL/assets................. 0.18 0.20 0.21 0.24 0.35 0.50 0.55 0.77 0.77 0.79
Gap/assets................. 23.26% 23.76% 23.57% 22.17% 15.32% 4.31% 4.09% 4.42% 8.25% 17.00%
Gap/RSA.................... 56.26 54.59 52.41 48.36 30.69 7.95 6.98 5.45 9.64 17.69
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.
-25
Interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously. There are other factors that are
difficult to measure and predict that would influence the effect of interest
rate fluctuations on our income statement. For example, a rapid drop in interest
rates might cause our borrowers to repay their loans at a more rapid pace and
certain mortgage-related investments to be prepaid more quickly than projected.
This could mitigate some of the benefits of falling rates as are expected when
negatively gapped. Conversely, a rapid rise in rates could give us an
opportunity to increase our margins and stifle the rate of repayment on our
mortgage-related loans which would increase our returns.
The following table shows the "rate shock" results of a simulation
model that attempts to measure the effect of rising and falling interest rates
over a two-year horizon in a rapidly changing rate environment.
PERCENTAGE CHANGE IN
BASIS POINT ------------------------------------------------------------
CHANGE IN NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY
INTEREST RATES PROJECTED CHANGE PROJECTED CHANGE
-------------- ------------------- -------------------------------
-400 -21.08 11.34
-300 -14.05 7.02
-200 -8.44 7.28
-100 -4.26 4.99
0 0.00 0.00
100 4.15 -5.87
200 8.44 -11.77
300 12.63 -17.50
400 16.93 -22.78
We use a sensitivity model that simulated these interest rate changes
on our earning assets and interest-bearing liabilities. This process allows us
to explore the complex relationships among the financial instruments in various
interest rate environments.
The preceding sensitivity analysis is based on numerous assumptions
including: the nature and timing of interest rate levels, including the shape of
the yield curve; prepayments on loans and securities; changes in deposit levels;
pricing decisions on loans and deposits; reinvestment/replacement of asset and
liability cash flows; and others. While assumptions are developed based upon
current economic and local market conditions, we cannot make any assurances as
to the predictive nature of these assumptions including how client preferences
or competitor influences might change.
Interest rate exposure is measured by the potential impact on our
income statement of changes in interest rates. We use information from our gap
analysis and rate shock calculations as input to help manage our exposure to
changing interest rates. We use our rate shock information to tell us how much
exposure we have to rapidly changing rates.
-26-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Information with respect to our 2002 annual meeting of stockholders was
disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31,
2002.
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, 2002.
-27-
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 2, 2002 By: /s/ John S. Penn
---------------------------------------------------------
John S. Penn, President and Chief Executive Officer
Dated: August 2, 2002 By: /s/ Thomas G. Napurano
---------------------------------------------------------
Thomas G. Napurano, Executive Vice President and Chief Financial Officer
-28-
EXHIBIT INDEX
Ex. No. Description
- ------- -----------
11.1 Computations of Earnings per Share
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
-29-