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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File No. 0-22629
UNIFIED FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 35-1797759
(State of Incorporation) (IRS Employer
Identification No.)
2424 HARRODSBURG ROAD 40503
LEXINGTON, KENTUCKY (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (859) 296-2016
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
Preferred Stock, $0.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes____ No X
---
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 28, 2002: Common Stock, $0.01 par value, $24,363,356
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 31, 2003: Common Stock, $0.01 par value, 2,829,246 shares
outstanding
DOCUMENTS INCORPORATED BY REFERENCE
As provided herein, portions of the documents below are
incorporated by reference:
Document Part--Form 10-K
-------- ---------------
NONE NOT APPLICABLE
UNIFIED FINANCIAL SERVICES, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.................................................2
Item 2. Properties..............................................14
Item 3. Legal Proceedings.......................................14
Item 4. Submission of Matters to a Vote of Security Holders.....14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.....................................15
Item 6. Selected Financial Data.................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................17
Item 7A. Quantitative and Qualitative Disclosure about
Market Risk.............................................30
Item 8. Financial Statements and Supplementary Data.............34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.....................60
PART III
Item 10. Directors and Executive Officers of the Registrant......60
Item 11. Executive Compensation..................................63
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters..............67
Item 13. Certain Relationships and Related Transactions..........68
Item 14. Controls and Procedures.................................69
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................70
SIGNATURES....................................................................71
PART I
ITEM 1. BUSINESS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K are or
may constitute forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995). Such forward-looking
statements are based on current expectations, estimates and projections about
Unified Financial Services' industries, management's beliefs and assumptions
made by management. For example, a downturn in economic conditions generally and
in particular those affecting bond and securities markets could lead to an exit
of investors from mutual funds. Similarly, an increase in Federal and state
regulations of the mutual fund, securities or banking industries or the
imposition of regulatory penalties could have an effect on our operating
results. In addition, by accepting deposits at fixed rates, at different times
and for different terms, and lending funds at fixed rates for fixed periods, a
bank accepts the risk that the cost of funds may rise and interest on loans and
investment securities may be at a fixed rate. Similarly, the cost of funds may
fall, but a bank may have committed by virtue of the term of a deposit to pay
what becomes an above-market rate. Investments may decline in value in a rising
interest rate environment. Loans have the risk that the borrower will not repay
all funds due in a timely manner as well as the risk of total loss. Collateral
may or may not have the value attributed to it. Although we believe our loan
loss reserve and our allowance for doubtful accounts are adequate, they may
prove inadequate if one or more large borrowers or clients, or numerous smaller
borrowers or clients, or a combination of both, experience financial difficulty
for individual, national or international reasons. Because the financial
services industry is highly regulated, decisions of governmental authorities can
have a major effect on operating results. These uncertainties, as well as
others, are present in the financial services industry and we caution
stockholders that management's view of the future on which we price and
distribute our products and estimate costs of operations and regulations may
prove to be other than as anticipated. In addition, our current expectations
with respect to our five business lines, our ability to enhance stockholder
value and aggressively and profitably grow assets under management and under
service, our ability to provide a high level of service satisfaction and manage
costs, our ability to expand profit margins, our ability to achieve future
growth and the development of VSX Holdings as an alternative trading system may
prove to be other than expected. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Risk Factors." Unless
required by law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. The data presented in the following pages should be read in
conjunction with our consolidated financial statements and the notes thereto on
pages 34 to 58 of this report.
GENERAL
Unified Financial Services, Inc., a Delaware holding company that was
organized on December 7, 1989, is a vertically integrated provider of financial
products and services. We focus on three principal businesses:
o The provision of complete back-office and shareholder services for the
assets of third-party mutual fund families, as well as our affiliated
series funds;
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o Management and administration of 401(k) and other ERISA-directed assets;
and
o Management of wealth for individuals through a suite of family-office
services.
The integration of our three principal businesses (mutual fund
administration services, trust and retirement services and investment advisory
services) with our banking and brokerage operations allows for the capture of
additional profitable revenues. Further, this integration provides much greater
control of the quality of our component services.
Our fundamental objective is to enhance stockholder value by
aggressively and profitably growing assets under management and under service.
Our ability to provide a high level of service satisfaction, with an emphasis on
managing costs, combined with a dedication to maintaining a highly trained and
motivated workforce should lead to expanding profit margins.
Our mutual fund administration services affiliate, Unified Fund
Services, Inc., is an SEC-registered stock transfer agent that provides transfer
agency, fund accounting, administrative and/or compliance services for mutual
fund families. Unified Fund Services is based in Indianapolis, Indiana and also
maintains an office in Dallas, Texas.
Our trust and retirement services affiliate, Unified Trust Company,
National Association, a limited purpose national banking association, was
organized in 2000 upon the conversion of First Lexington Trust Company to a
national banking association. Unified Trust Company, National Association is
based in Lexington, Kentucky and provides complete retirement plan solutions and
trust services to its clients, focusing primarily on providing trust and
administrative services for, and acting as trustee of, 401(k) plans. Unified
Trust Company also provides investment services to individuals, trusts and
business entities.
Our investment advisory affiliate, Fiduciary Counsel, Inc., a company
that dates back to 1931, provides professional investment management to
individuals and institutions from its offices in New York City.
Our banking affiliate, Unified Banking Company, a federal savings bank
that was organized in 1999, provides banking products and services to its
customer base and to the customer base of other subsidiaries of our company.
Unified Banking Company is located in Lexington, Kentucky.
Our brokerage affiliate, Unified Financial Securities, Inc., is a
regional discount brokerage firm with a link to mutual fund assets via its
brokerage account services. Unified Financial Securities, which is located in
Indianapolis, Indiana, also provides brokerage services to our other
subsidiaries.
In early spring 2001, our board of directors made the decision to sell
our insurance operations, which operations were determined to be incompatible
with our core business - managing and servicing assets. Our board further
believed that such sale would allow management to focus further on our primary
businesses and provide capital to expand our core business lines. In December
2001, we sold and assigned substantially all of the assets and liabilities of
our insurance subsidiaries to Arthur J. Gallagher & Co. Cash proceeds from the
sale were used to retire approximately $1.6 million of outstanding indebtedness
and will be used to expand our other core business lines. This transaction also
improved our balance sheet.
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In keeping with the narrowed business focus we adopted by the sale of
our insurance operations in late 2001, and in spite of the continued precipitous
declines in both the broader market and interest rate indices, our core
businesses, as outlined above, produced some very encouraging results during
2002.
Total revenues for our company grew, fueled by new clients
significantly outpacing lost business in our 401(k) ERISA-directed assets line
of business (this line is represented by Unified Trust Company) and by assets
under service almost doubling at our mutual fund administration services
business (Unified Fund Services). Both instances represent the validation of the
employee efforts and the capital investments we have made in these affiliates
over the last two years.
Further developments included Unified Banking Company growing its loan
portfolio almost 31.7% and our brokerage affiliate closing its retail operations
in Lexington, Kentucky (formerly Commonwealth Investment Services) to better
concentrate its ability to service and support the continued growth in the
mutual fund shareholder servicing business in Indianapolis.
In keeping with the focus of our core business - managing and servicing
assets - in May 2002 we disposed of Fully Armed Productions, Inc., a technology
services company that we acquired in June 1999 in exchange for 18,182 shares of
our common stock. In connection with such disposition, we received 18,182 shares
of our common stock and $37,569 in cash in exchange for all of the outstanding
capital stock of Fully Armed Productions, Inc.
We believe that all of our lines of business have weathered the
prolonged (three-year) volatility and declines in all major market indices and
are positioned to continue to grow as and when these broader markets rebound.
Financial information with respect to our business lines for each of
the last three years is contained in Note 14 of our consolidated financial
statements contained in this Annual Report on Form 10-K.
Our principal executive offices are located at 2424 Harrodsburg Road,
Lexington, Kentucky 40503, telephone number (859) 296-2016. We and our
subsidiaries also maintain offices at 431 North Pennsylvania Street,
Indianapolis, Indiana, telephone number (317) 917-7001; 2353 Alexandria Drive,
Lexington, Kentucky 40504, telephone number (859) 296-4407; 1400 Civic Place,
Suite 264, Southlake, Texas 76092, telephone number (817) 431-2197; 36 West 44th
Street, The Bar Association Building, Suite 1310, New York, New York 10036,
telephone number (212) 852-8852; and One US Bank Plaza, Suite 2100, St. Louis,
Missouri 63101, telephone number (314) 552-6440.
OUR AFFILIATED MUTUAL FUNDS
As of December 31, 2002, our affiliated mutual funds, the AmeriPrime
Advisers Trust and the AmeriPrime Funds, maintained approximately $230.8 million
and $120.2 million, respectively, in total net assets. Each of the AmeriPrime
Advisers Trust and AmeriPrime Funds is administered by Unified Fund Services and
distributed by Unified Financial Securities. The board of trustees of each of
the AmeriPrime Advisers Trust and AmeriPrime Funds consists of three
disinterested trustees and two interested trustees, Timothy L. Ashburn, the
chairman of our company and of Unified Fund Services, and Ronald C. Tritschler,
a stockholder of our company.
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VSX HOLDINGS, LLC
On May 23, 2000, we subscribed for ten shares of VSX Holdings, LLC, a
Delaware limited liability company, in exchange for $10 and certain intangible
property rights. We currently own approximately 0.5% of the outstanding shares
of VSX Holdings, but have the right to purchase up to an additional 1,990
(19.9%) shares at a price of $1 per share, upon the occurrence of certain
specified events. VSX Holdings is involved in the development of an alternative
trading system to be known as VSX.com, which, upon and subject to organization
and regulatory approval, will serve as a virtual, real-time private financial
market place. In connection with the organization of VSX Holdings, a third-party
investor made a $3.0 million loan to VSX Holdings, which loan is evidenced by a
debenture issued by VSX Holdings to such investor. The debenture is secured by
85,000 shares of our common stock pledged by certain executive officers of our
company. In addition, concurrent with the issuance of such debenture, we issued
an option to the third-party investor to acquire shares of our common stock,
which option has a five-year term. The investor may elect to foreclose on the
pledged collateral or exercise the option. Pursuant to such option, the holder
of the option and the debenture is entitled to surrender the debenture to us in
payment of the exercise price of the option. During the years ending May 23,
2003, 2004 and 2005, the exercise price per share of our common stock subject to
the option will be $55, $60 and $65. Should the investor foreclose on the
pledged collateral, the executive officers would succeed to the option and/or
the claim against VSX Holdings. Should the option be exercised prior to May 23,
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.
Our investment in VSX Holdings is accounted for on the cost method of
accounting. In April 2001, we entered into a Management and Construction
Agreement with VSX Holdings whereby we agreed to provide consulting and
development services to VSX Holdings. Such contract also memorialized the
payments received by us during 2000 for services delivered to VSX Holdings. For
the years ended December 31, 2002, 2001 and 2000, we received payments totaling
$258,758, $419,977 and $1,535,504, respectively, from VSX Holdings for such
consulting and development services, which amounts are recorded as a reduction
of "Other operating expenses" on our Consolidated Statements of Operations for
the years ended December 31, 2002, 2001 and 2000.
REGULATION OF HOLDING COMPANY ACTIVITIES
GENERAL. Unified Financial Services is registered and qualified as a
unitary savings and loan holding company. As such, we are periodically examined
by and file reports with the Office of Thrift Supervision. Generally there are
few restrictions on the activities of a unitary savings and loan holding company
and its non-savings association subsidiaries. If we cease to be a unitary
savings and loan holding company, and continue to own Unified Banking Company,
our activities and the activities of our non-savings association subsidiaries
would thereafter be subject to substantial restrictions.
SECURITIES AND EXCHANGE COMMISSION AVAILABILITY OF FILINGS ON SEC WEB
SITE. Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic
and current reports must be filed with the Securities and Exchange Commission
("SEC"). We electronically file the following reports with the SEC: Form 10-K
(Annual Report), Form 10-Q (Quarterly Report), Form 8-K (Report of Unscheduled
Material Events), Form S-8 and 8-A (Registration Statements), and Form DEF 14A
(Proxy Statement). We may file additional forms. The SEC maintains an Internet
site, www.sec.gov, in which all forms filed electronically may be accessed.
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USA PATRIOT ACT OF 2001. In October 2001, the USA Patriot Act of 2001
was enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington D.C. which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcement's and the intelligence communities'
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism or
money laundering.
FINANCIAL SERVICES MODERNIZATION LEGISLATION. In November 1999, the
Gramm-Leach-Bliley Act of 1999, or the GLB, was enacted. The GLB repeals
provisions of the Glass-Steagall Act which restricted the affiliation of Federal
Reserve member banks with firms "engaged principally" in specified securities
activities, and which restricted officer, director or employee interlocks
between a member bank and any company or person "primarily engaged" in specified
securities activities.
In addition, GLB also contains provisions that expressly preempt any
state law restricting the establishment of financial affiliations, primarily
related to insurance. The general effect of the law is to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers by revising
and expanding the Bank Holding Company Act framework to permit a holding company
to engage in a full range of financial activities through a new entity known as
a "financial holding company." "Financial activities" is broadly defined to
include not only banking, insurance and securities activities, but also merchant
banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities or complementary activities that
do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
The GLB also permits national banks to engage in expanded activities
through the formation of financial subsidiaries. A national bank may have a
subsidiary engaged in any activity authorized for national banks directly or any
financial activity, except for insurance underwriting, insurance investments,
real estate or development, or merchant banking, which may only be conducted
through a subsidiary of a financial holding company. Financial activities
include all activities permitted under new sections of the Bank Holding Company
Act or permitted by regulation.
To the extent that GLB permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. The GLB is intended to grant to community banks certain powers as
a matter of right that larger institutions have accumulated on an ad hoc basis
and which unitary savings and loan holding companies already possess.
Nevertheless, the GLB may have the result of increasing the amount of
competition that we face from larger institutions and other types of companies
offering financial products, many of which may have substantially more financial
resources than we have.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, President Bush signed
into law the Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA
are to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.
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The SOA is the most far-reaching U.S. securities legislation enacted in
some time. The SOA generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the SEC under the
Securities Exchange Act of 1934, or the Exchange Act. Given the extensive SEC
role in implementing rules relating to many of the SOA's new requirements, the
final scope of these requirements remains to be determined.
The SOA includes very specific additional disclosure requirements and
new corporate governance rules, requires the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules and mandates further studies of certain issues by the SEC and the
Comptroller General. The SOA represents significant federal involvement in
matters traditionally left to state regulatory systems, such as the regulation
of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of
directors and its committees.
The SOA addresses, among other matters:
* audit committees for all reporting companies;
* certification of financial statements by the chief executive officer
and the chief financial officer;
* the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the twelve-month period following initial
publication of any financial statements that later require
restatement;
* a prohibition on insider trading during pension plan blackout periods;
* disclosure of off-balance sheet transactions;
* a prohibition on personal loans to directors and officers;
* expedited filing requirements for Forms 4's;
* disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
* "real time" filing of periodic reports;
* the formation of a public accounting oversight board;
* auditor independence; and
* various increased criminal penalties for violations of securities
laws.
The SOA contains provisions that became effective upon enactment on
July 30, 2002 and provisions that will become effective from within 30 days to
one year from enactment. The SEC has been delegated the task of enacting rules
to implement various provisions with respect to, among other matters, disclosure
in periodic filings pursuant to the Exchange Act.
DEPOSITORY INSTITUTION REGULATION
GENERAL. Unified Banking Company is a Federally chartered savings
institution, a member of the Federal Home Loan Bank of Cincinnati and its
deposits are insured by the Federal Deposit Insurance Corporation through the
Savings Association Insurance Fund. As a Federal savings institution, Unified
Banking Company is subject to regulation and supervision by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation and to Office of
Thrift Supervision regulations governing such matters as capital standards,
mergers, establishment of branch offices and activities and general investment
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authority. The Office of Thrift Supervision periodically examines Unified
Banking Company for compliance with various regulatory requirements and for safe
and sound operations. The Federal Deposit Insurance Corporation also has the
authority to conduct special examinations of Unified Banking Company because its
deposits are insured by the Savings Association Insurance Fund. Unified Banking
Company must file reports with the Office of Thrift Supervision describing its
activities and financial condition and must obtain the approval of the Office of
Thrift Supervision prior to entering into certain transactions.
REGULATORY CAPITAL REQUIREMENTS. Under the Office of Thrift
Supervision's regulatory capital requirements, savings associations must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to at least 4.0% (or 3.0% if the institution is rated composite 1
CAMELS under the Office of Thrift Supervision's examination rating system) of
adjusted total assets and "total" capital (a combination of "core" and
"supplementary" capital) equal to 8.0% of risk-weighted assets. In addition, the
Office of Thrift Supervision has adopted regulations that impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated composite 1 CAMELS under the
Office of Thrift Supervision's examination rating system). As of December 31,
2002, Unified Banking Company had a total risk-based capital ratio of 9.29%, a
ratio of Tier 1 capital to risk-weighted assets of 6.55% and a ratio of Tier 1
capital to adjusted total assets of 8.41%.
QUALIFIED THRIFT LENDER TEST. A savings institution that does not meet
the Qualified Thrift Lender (QTL) test must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution shall be restricted to those of a national bank; (iii) the
institution shall not be eligible to obtain any advances from its Federal Home
Loan Bank; and (iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. In addition, any
company that controls a savings institution that fails to qualify as a QTL will
be required to register as, and to be deemed, a bank holding company subject to
all of the provisions of the Bank Holding Company Act of 1956, as amended, and
other statutes applicable to bank holding companies. To meet the QTL test, an
institution's "Qualified Thrift Investments" must total at least 65% of
"portfolio assets." Under Office of Thrift Supervision regulations, portfolio
assets are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets. At December 31, 2002, the percentage of Unified Banking Company's
portfolio assets invested in Qualified Thrift Investments was in excess of the
percentage required to qualify Unified Banking Company under the QTL test.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991, the Federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements, including a
leverage limit, a risk-based capital requirement and any other measure of
capital deemed appropriate by the Federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
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monitoring by the appropriate Federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. Any company controlling the
institution also could be required to divest the institution or the institution
could be required to divest subsidiaries. If an institution's ratio of tangible
capital to total assets falls below a "critical capital level," the institution
will be subject to conservatorship or receivership within 90 days unless
periodic determinations are made that forbearance from such action would better
protect the deposit insurance fund. The Federal banking regulators will
generally measure a depository institution's capital adequacy on the basis of
the institution's total risk-based capital ratio (the ratio of its total capital
to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a savings institution
that is not subject to an order or written directive to meet or maintain a
specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
The Office of Thrift Supervision may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category if the Office of
Thrift Supervision determines, after notice and an opportunity for a hearing,
that the savings institution is in an unsafe or unsound condition or that the
institution has received and not corrected a less-than-satisfactory rating for
any CAMEL rating category. As of December 31, 2002, Unified Banking Company was
classified as "adequately capitalized" under these prompt corrective action
regulations.
REGULATION W. Transactions between a bank and its "affiliates" are
quantitatively and qualitatively restricted under the Federal Reserve Act. The
Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember
banks in the same manner and to the same extent as if they were members of the
Federal Reserve System. The Federal Reserve Board has also recently issued
Regulation W, which codifies prior regulations under Sections 23A and 23B of the
Federal Reserve Act and interpretative guidance with respect to affiliate
transactions. Regulation W incorporates the exemption from the affiliate
transaction rules but expands the exemption to cover the purchase of any type of
loan or extension of credit from an affiliate. Affiliates of a bank include,
among other entities, the bank's holding company and companies that are under
common control with the bank. We are considered to be an affiliate of Unified
Banking Company. In general, subject to certain specified exemptions, a bank or
its subsidiaries are limited in their ability to engage in "covered
transactions" with affiliates:
* to an amount equal to 10% of the bank's capital and surplus, in the
case of covered transactions with any one affiliate; and
* to an amount equal to 20% of the bank's capital and surplus, in the
case of covered transactions with all affiliates.
In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
bank or its subsidiary, as those prevailing at the time for comparable
transactions with non-affiliated companies. A "covered transaction" includes:
* a loan or extension of credit to an affiliate;
* a purchase of, or an investment in, securities issued by an affiliate;
* a purchase of assets from an affiliate, with some exceptions;
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* the acceptance of securities issued by an affiliate as collateral for
a loan or extension of credit to any party; and
* the issuance of a guarantee, acceptance or letter of credit on behalf
of an affiliate.
In addition, under Regulation W:
* a bank and its subsidiaries may not purchase a low-quality asset from
an affiliate;
* covered transactions and other specified transactions between a bank
or its subsidiaries and an affiliate must be on terms and conditions
that are consistent with safe and sound banking practices; and
* with some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging
from 100% to 130%, depending on the type of collateral, of the amount
of the loan or extension of credit.
Regulation W generally excludes all non-bank and non-savings
association subsidiaries of banks from treatment as affiliates, except to the
extent that the Federal Reserve Board decides to treat these subsidiaries as
affiliates.
Concurrently with the adoption of Regulation W, the Federal Reserve
Board has proposed a regulation that would further limit the amount of loans
that could be purchased by a bank from an affiliate to not more than 100% of the
bank's capital and surplus.
TRUST COMPANY REGULATIONS
Unified Trust Company, National Association, a limited purpose national
trust company, is chartered, regulated and examined by the Office of the
Comptroller of the Currency. Unified Trust Company, NA also is a member of the
Federal Reserve System. As a national trust company, the activities of Unified
Trust Company, NA must comply with various statutory and regulatory
requirements, including, among other things, the maintenance of adequate capital
and the exercise of fiduciary powers. Currently, Unified Trust Company, NA is
required to maintain a minimum of $2.0 million in capital, and may be required
to maintain additional minimum capital as assets under management at the trust
company increase.
REGULATION OF OUR SECURITIES AND PREMIUM FINANCE BUSINESSES
Under the Investment Company Act of 1940, as amended, the advisory,
subadvisory shareholder servicing and distribution agreements between our
subsidiaries and various mutual funds are subject to annual review by each
fund's board of trustees and the agreements must be approved annually to remain
in effect. There are no assurances that the funds' boards of trustees will renew
each agreement with these funds. The non-renewal of those agreements by a fund's
board of trustees could have a material adverse effect on our business. We have
no reason to believe that such approvals will not be granted and that the
various mutual fund agreements will not be renewed.
The securities industry, including broker-dealer, investment advisory
and transfer agency firms in the United States, are subject to extensive
regulation under Federal and state laws. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations, principally
the National Association of Securities Dealers, Inc. The regulations to which
broker-dealers are subjected cover all aspects of the securities business,
including sales methods, trade practices, capital structure of securities firms,
record keeping and the conduct of directors, officers and employees. Additional
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state and Federal legislation, changes in rules promulgated by the SEC and by
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules often directly affect the methods of operation and
profitability of money managers, broker-dealers and transfer agents. Subject to
certain preemptive Federal law, investment-related firms also are subject to
regulation and licensing by state securities commissions in the states in which
they transact business. The SEC, state securities administrators and the
self-regulatory organizations may conduct administrative proceedings that can
result in censure, fine, suspension or expulsion of an investment adviser or
broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers, investment advisers and transfer agents is the
protection of customers and the securities markets rather than protection of
creditors and shareholders of such firms. We also are subject to extensive
regulation as to our duties, affiliations, conduct and limitations on fees.
Our subsidiary, Commonwealth Premium Finance Corporation, must be
licensed as a premium finance company in the states of Kentucky, Tennessee,
Illinois and Ohio. Although Commonwealth Premium Finance Corporation also
conducts business in the states of West Virginia and Indiana, such states
presently do not require premium finance licensure. Applicable regulations in
all states in which Commonwealth Premium Finance Corporation conducts business
require the approval of service charges, forms and applications used by
Commonwealth Premium Finance Corporation in its business and also require
compliance with certain record keeping and record inspection requirements.
INDUSTRY REGULATIONS
Our broker-dealer subsidiary, Unified Financial Securities, Inc., is a
National Association of Securities Dealers member. The National Association of
Securities Dealers is a self-regulatory organization that has prescribed rules
with respect to maximum commissions, charges and fees related to sales of shares
in any open-end investment company registered under the Investment Company Act.
Fiduciary Counsel, Inc. is an investment adviser registered with the
SEC under the Investment Advisers Act of 1940, as amended. Under the Investment
Advisers Act, it is unlawful for any investment adviser to: (1) employ any
device, scheme or artifice to defraud any client or prospective client; (2)
engage in any transaction, practice or course of business that operates as a
fraud or deceit upon any client or prospective client; or (3) engage in any act,
practice or course of business that is fraudulent, deceptive or manipulative.
Mutual fund directors and investment advisers to mutual funds are
deemed to be "fiduciaries" of the fund. The SEC is authorized to initiate an
action to enjoin a breach of fiduciary duties involving personal misconduct by
any officer, director, investment adviser or principal underwriter of a fund.
Shareholders or the SEC also may bring an action against the officers,
directors, investment adviser or principal underwriters for breach of fiduciary
duty in establishing the compensation paid to the investment adviser or
underwriter. An investment adviser or underwriter to a fund, its principals and
its employees, also may be subject to proceedings initiated by the SEC to impose
remedial sanctions for violation of any provision of the Federal securities laws
and the regulations adopted thereunder, and the SEC may preclude a firm that has
been sanctioned from continuing to act in such capacity. Investment companies
such as the AmeriPrime Funds and AmeriPrime Advisers Trust are subject to
substantive regulation under the Investment Company Act. Such companies must
comply with periodic reporting requirements. Proxy solicitations are subject to
the general proxy rules as well as to special proxy rules applicable only to
investment companies. Shares of investment companies can only be offered at the
next-determined net asset value plus any sales load. A fund's management
agreement initially must be approved by the fund's board of trustees and a
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majority of the outstanding shares and, after two years, must be annually
approved, either by the board or by the outstanding voting shares. A fund's
management agreement must automatically terminate in the event of assignment and
typically is subject to termination upon 60-days' notice by the board or by a
vote of the majority of the outstanding voting shares. The underwriting or
distribution agreement also must be annually approved by the board or by a vote
of a majority of the outstanding voting shares, and must provide for automatic
termination in event of assignment. Transactions between the investment company
and an affiliate are prohibited.
REGULATORY PENALTIES FOR FAILURE TO MAINTAIN MINIMUM NET CAPITAL REQUIREMENTS
The Securities Exchange Act imposes minimum net capital requirements
for broker-dealer firms. A decrease below the minimum level of net capital
required to be maintained by Unified Financial Securities under the Securities
Exchange Act could force Unified Financial Securities to suspend activities
pending recovery of net capital. Factors that may affect Unified Financial
Securities' net capital include the general investment climate as well as our
ability to obtain any assets necessary to contribute equity capital to Unified
Financial Securities.
RISKS OF BUSINESS
Our businesses are subject to various risks and contingencies, many of
which are beyond our ability to control. These risks include: economic
conditions generally and, in particular, those affecting the bond and securities
markets; fluctuations in interest rates; discretionary income available for
investment; customer inability to meet payment or delivery commitments; customer
fraud; and employee fraud, misconduct and error.
COMPLIANCE REQUIREMENTS AND REGULATORY PENALTIES FOR NONCOMPLIANCE
Various aspects of our businesses are subject to Federal and state
regulation as well as to oversight by self-regulatory organizations that,
depending on the nature of any failure to comply with an applicable entity's
rules, may result in the suspension or revocation of licenses or registration,
including broker-dealer, investment adviser, transfer agent and premium finance
licenses and registrations, as well as the imposition of civil fines and
criminal penalties. Failure by us or any of our employees to comply with such
regulations or with any of the laws, rules or regulations of Federal, state or
industry authorities (principally the National Association of Securities
Dealers, SEC, Office of the Comptroller of the Currency and Office of Thrift
Supervision) could result in censure, imposition of fines or other sanctions,
including revocation of our right to do business or in suspension or expulsion
from the National Association of Securities Dealers. Any of the foregoing could
have a material adverse effect upon us. Such National Association of Securities
Dealers, SEC, Office of the Comptroller of the Currency and Office of Thrift
Supervision regulations are designed primarily for the protection of the
investing customers of securities firms and financial institutions and not our
stockholders. Finally, there is no assurance that we, along with other financial
institutions, fund distributors, administrators and managers will not be
subjected to additional stringent regulation and publicity that may adversely
affect our business.
COMPETITION
Since inception, we have encountered substantial competition in the
businesses in which we compete. Our principal competitors include mutual funds,
investment advisers, investment counsel firms and financial institutions such as
banks, trust companies, savings and loan institutions and credit unions.
Competition is influenced by various factors, including breadth, quality of
service and price. All aspects of our business are competitive. Large national
firms have much greater marketing capabilities, offer a broader range of
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financial services and compete not only with us and among themselves but also
with commercial banks, insurance companies and others for retail and
institutional clients. Our affiliated mutual funds are subject to competition
from nationally and regionally distributed funds offering equivalent financial
products with returns equal to or greater than those offered by the AmeriPrime
Funds, AmeriPrime Advisers Trust or Unified Series Trust. Competition for assets
under management and under service is intense from both national and regional
firms. Access to local investment and the population of the region by modern
communication systems is so efficient that our geographical position cannot be
deemed an advantage. Our investment management operations compete with a large
number of other investment management firms, commercial banks, insurance
companies, broker-dealers and other financial service firms. Most of these firms
are larger and have access to greater resources than us. The investment advisory
industry is characterized by relatively low cost of entry and the formation of
new investment advisory entities that may compete directly with us is a frequent
occurrence. We directly compete with as many as several hundred firms that are
of similar or larger size. Our ability to increase and retain clients' assets
could be materially adversely affected if client accounts under-perform the
market. The ability of our investment management subsidiaries to compete with
other investment management firms also is dependent, in part, on the relative
attractiveness of their investment philosophies and methods under prevailing
market conditions. A large number of mutual funds are sold to the public by
investment management firms, broker-dealers, insurance companies and banks in
competition with the AmeriPrime Funds, AmeriPrime Advisers Trust and Unified
Series Trust. Many of our competitors apply substantial resources to advertising
and marketing their mutual funds, which may adversely affect the ability of the
AmeriPrime Funds, AmeriPrime Advisers Trust and Unified Series Trust to attract
new assets. We expect that there will be increasing pressures among mutual fund
sponsors to obtain and hold market share. Although we may expand the financial
services we provide to our customers, we do not now offer as broad a range of
financial services as national stock exchange member firms, commercial banks,
insurance companies and others.
DEPENDENCE ON KEY CLIENTS
As of December 31, 2002, we provided mutual fund services, transfer
agency, fund accounting, administration and/or distribution services to 29
mutual fund families consisting of 185 portfolios. The contracts with respect to
such funds typically expire within one to three years. No assurance can be given
that any of these funds will remain our clients upon expiration or termination
of the various administration and distribution agreements. The loss by us of
such mutual fund clients could have a material adverse effect on us.
DEPENDENCE ON KEY PERSONNEL
We are dependent in a large part on our senior management personnel.
The loss or unavailability of any of these persons could have a material adverse
effect on us. Our success also will depend on our ability to attract and retain
highly skilled personnel in all areas of our business. There can be no assurance
that we will be able to attract and retain personnel on acceptable terms in the
future. We do not presently own insurance covering the lives of our senior
management. There can be no assurance that the services of our senior management
will continue to be available.
EMPLOYEES
As of December 31, 2002, we and our subsidiaries had 159 employees, of
which 156 were full-time employees. None of our employees or the employees of
our subsidiaries is subject to a collective bargaining agreement. We consider
our relationship with our employees and those of our subsidiaries to be good.
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ITEM 2. PROPERTIES
----------
We, through our subsidiary, Unified Banking Company, lease our
corporate headquarters and administrative office facilities located at 2424
Harrodsburg Road, Lexington, Kentucky. We sublease approximately 1,700 square
feet from Unified Banking Company. Unified Financial Securities' and Unified
Fund Services' administrative offices are located at 431 North Pennsylvania
Street, Indianapolis, Indiana. Such facilities consist of approximately 12,836
square feet and are subject to a lease expiring in 2007. Unified Trust Company,
National Association's administrative offices are located at 2353 Alexandria
Drive, Lexington, Kentucky. The operating lease for Unified Trust Company,
National Association's offices expires in 2007 and such offices have
approximately 12,983 square feet. Unified Banking Company's offices are located
at 2424 Harrodsburg Road, Lexington, Kentucky. The operating lease for such
offices expires in 2011 and such offices have approximately 6,772 square feet,
exclusive of office space subleased for our corporate headquarters. Fiduciary
Counsel's administrative offices are located at 36 West 44th Street, New York,
New York. The operating lease for such offices expires in 2005 and such offices
have approximately 4,920 square feet. Unified Fund Services also maintains
administrative offices at 1400 Civic Place, Southlake, Texas. Such operating
lease expires in 2003 and such office has approximately 1,189 square feet. Our
current offices are considered adequate to serve our foreseeable needs. Other
than the administrative office leases, we have no other significant property
holdings.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Various claims and lawsuits, incidental to our ordinary course of
business, are pending against us and our subsidiaries. In the opinion of
management, after consultation with legal counsel, resolution of these matters
is not expected to have a material effect on our consolidated financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------
There were no matters submitted during the quarter ended December 31,
2002 to a vote of our stockholders, through the solicitation of proxies or
otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
There currently is no established public trading market for our common
stock. We have not had any stock splits or paid any stock dividends during the
periods presented.
SALES PRICE
----------------------
HIGH LOW
---- ---
2001
First Quarter $ -- $ --
Second Quarter -- --
Third Quarter -- --
Fourth Quarter 30.00(1) 30.00(1)
2002
First Quarter $ -- $ --
Second Quarter 16.50(1) 16.50(1)
Third Quarter -- --
Fourth Quarter --(2) --(2)
- -------------------
(1) During October 2001 and June 2002 we repurchased approximately 2,400
and 240 shares, respectively, of our common stock from the Unified
Financial Services Equity Participation Plan at a price of $30.00 and
$16.50, respectively, per share. The prices paid for such repurchased
shares were based upon the most recent independent valuation that we
had for our common stock as of the respective date of purchase.
(2) During the fourth quarter of 2002, we repurchased approximately 14,700
shares of our common stock in connection with the extinguishment of an
outstanding loan to Unified Banking Company. In connection with such
repurchase, we (i) gave both a release of claims to the borrower and
(ii) paid $73,630 to Unified Banking Company on behalf of the borrower.
The fair market value of the release was not determined.
Because of our closely held nature, no representation is made that the
foregoing prices are or are not reflective of a "market price." As of March 31,
2003, we reported approximately 335 stockholders of record holding our common
stock. We sold no securities during 2002.
Information regarding equity securities that were authorized for
issuance as of December 31, 2002 with respect to our compensation plans is
included in Part III, Item 12 of this report.
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following is a selected summary of our consolidated financial
condition and operating results as of and for the years ended December 31, 2002,
2001, 2000, 1999 and 1998:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- --------------
Income Statement Data:
Gross revenue.................... $ 17,803,375 $ 17,222,772 $ 15,763,206 $ 14,512,459 $ 11,099,154
Gross profit..................... 15,392,591 14,617,616 12,925,996 11,287,813 8,679,227
Total expenses................... 17,720,154 17,291,046 15,030,764 12,738,007 7,784,336
Income (loss) from continuing
operations.................... (2,327,563) (2,673,430) (2,104,768) (1,450,194) 894,891
Other income (loss).............. (32,342) 62,554 (69,044) 3,853 87,887
Income tax benefit............... 369,439 2,315,931 223,888 305,959 233,682
Net income (loss) from continuing
operations..................... (1,990,466) (294,945) (1,949,924) (1,140,382) 1,216,460
Net gain (loss) on sale of operations 637,681 2,847,708 (54,952) (129,487) --
Net income (loss) from discontinued
operations..................... 6,971 815,710 802,186 (480,921) (304,299)
Net income (loss)................ (1,345,814) 3,368,473 (1,202,690) (1,750,790) 912,161
Common Share Data:
Book value per share at year-end
(fully diluted)................ $ 5.38 $ 5.53 $ 4.47 $ 4.68 $ 3.41
Basic earnings (loss) per share.. (0.47) 1.17 (0.42) (0.61) 0.42
Fully diluted earnings (loss) per share (0.47) 1.11 (0.40) (0.59) 0.38
Basic common shares outstanding at
year-end....................... 2,844,246 2,877,634 2,880,028 2,869,862 2,316,767
Fully diluted common shares
outstanding at year-end........ 2,844,246 3,027,030 2,983,114 2,975,823 2,975,323
Balance Sheet Data (at year-end):
Total assets..................... $ 92,029,898 $ 80,190,992 $ 65,126,002 $ 36,748,994 $ 26,498,577
Investment securities............ 709,687 555,013 573,272 1,819,176 1,720,342
Total loans, net of allowance.... 57,579,002 43,705,576 20,834,674 2,810,876 --
Total deposits................... 67,277,222 55,905,541 34,620,338 7,331,853 --
Stockholders' equity............. 15,494,821 16,748,911 13,325,541 13,936,301 8,792,021
Other Selected Financial Data:
Assets under management..........$ 720,065,488 $ 891,542,438 $ 977,844,600 $1,003,982,000 $ 857,875,355
Assets under service............. 11,681,533,180 5,900,463,371 4,800,000,000 4,200,000,000 3,435,000,000
Total employees at year-end...... 159 178 264 216 83
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The following presents management's discussion and analysis of our
consolidated financial condition and results of operations as of the dates and
for the years indicated. This discussion should be read in conjunction with the
other information set forth in this Annual Report on Form 10-K, including our
audited, consolidated financial statements and the accompanying notes thereto.
In December 2001, we sold our insurance operations to Arthur J.
Gallagher & Co. In connection with the sale, we received $8.4 million in cash
and an interest-bearing note receivable of $800,000, which note was contingent
upon the buyer achieving certain income and revenue targets with respect to the
acquired business. An additional $800,000 of the purchase price was deposited
into escrow by Arthur J. Gallagher & Co., and is subject to possible
indemnification claims pursuant to the sale agreement. As of December 31, 2001,
we established a liability of $800,000 related to the escrow. As of December 31,
2002, we believed there was a current potential for approximately $420,000 in
claims against the escrow. Based thereupon, we recorded $280,000 as income
related to the sale during the year ended December 31, 2002. For the year ended
December 31, 2002, Arthur J. Gallagher & Co. achieved the income and revenue
targets for the acquired business. As a result, the promissory note was earned
in full and we recorded an additional $800,000 as income related to the sale
during 2002. After giving effect to accrued federal and state income taxes and
professional fees of $390,173 and $52,146, respectively, the $1,080,000 recorded
during 2002 as income with respect to the sale of our insurance operation,
resulted in $637,681 in net income related to such sale for the year ended
December 31, 2002. Please see notes 1 and 3 to the audited, consolidated
financial statements contained in this report for more information with respect
to the sale of our insurance operations.
During 2000 and into 2001, our nature of operations changed, and
personnel and costs were oriented to the consolidation, merger and repositioning
of the subsidiaries and lines of business acquired in 1998 and 1999. While this
consolidation, merger and repositioning continued in 2001, the major focus of
2001, in terms of both personnel time and company expense, was the positioning,
marketing, negotiating and due diligence of the sale of our insurance
operations. Legal and professional fees attributable to the preparation, sale
and discontinuation of the insurance operations were charged against the sale.
Additionally, $1,632,311 in corporate expenses associated with personnel
involved with the sale and discontinuation of the insurance operations was
charged against the sale.
In May 2002, we disposed of Fully Armed Productions, Inc., which we
acquired in June 1999 in exchange for 18,182 shares of our common stock. In
connection with such disposition, and in exchange for all of the outstanding
shares of 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 are shown as a non-cash flow transaction in our consolidated
statements of cash flows.
As required by accounting rules, the operating results of our insurance
subsidiaries and Fully Armed Productions, Inc. have been excluded from our
results from continuing operations for the years ended December 31, 2002, 2001
and 2000. Such results are reported as discontinued operations for such years.
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenue for the year ended December 31, 2002 compared to the prior year
increased $580,603, or 3.4%, from $17,222,772 to $17,803,375. For such years,
gross profit increased $774,975, or 5.3%.
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For the year ended December 31, 2002 compared to 2001, trust and
retirement services revenue and gross profit increased $124,021, or 2.6%,
primarily due to increased fees associated with new accounts. During 2002, our
trust and retirement services operation added approximately 250 new accounts,
representing approximately $63.1 million in assets under management. As of
December 31, 2002, our trust and retirement services operation had approximately
$492.4 million in assets under management compared to $511.1 million as of
December 31, 2001, a decline of approximately 3.7% for the year. This minor
decline primarily was due to the effect of the general decline in the financial
markets during 2002, partially offset by the addition of new assets under
management as a result of new client accounts and contributions made during 2002
to existing client accounts.
For such years, mutual fund administration services revenue increased
$685,164, or 12.7%, and mutual fund administration services gross profit
increased $610,069, or 12.9%, each primarily due to an increase in assets under
service at such operation during 2002. As of December 31, 2002, we provided
mutual fund administrative services to 29 mutual fund families consisting of
approximately 185 portfolios and approximately $11.7 billion in assets under
service, compared to 30 mutual fund families consisting of 143 portfolios and
approximately $5.9 billion in mutual fund assets under service as of December
31, 2001. Approximately $2.8 billion of the increase in assets under service was
added during June 2002 with our commencement of services for the Huntington
Funds. During 2002, our mutual fund administration services operation added
several new larger clients, but also saw several smaller clients discontinue
operations due to market conditions. While our assets under service increased
year to year, 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 an account with
hundreds of shareholders but less assets under service. For such years, transfer
agency and fund accounting revenues increased $680,070 and $183,191,
respectively, while administration services revenues declined $164,321.
Banking revenue and gross profit (please see note 14 of the
consolidated financial statements contained in this report) increased $772,410,
or 37.1%, for the year ended December 31, 2002 compared to the year ended
December 31, 2001, primarily due to a $564,000 increase in net interest income
and a $204,000 increase in secondary market loan revenue. Net loans as of
December 31, 2002 increased to $57.6 million from $43.7 million as of December
31, 2001. Our banking operation's net interest margin increased from 1.60% for
the year ended December 31, 2001 to 2.04% for the year ended December 31, 2002.
We also experienced a $5.5 million, or 8.6%, increase in deposits from December
31, 2001 to December 31, 2002. Such deposits primarily were used to fund our
banking operation's loan growth.
During the year ended December 31, 2002, our banking operation
charged-off $536,973 in loans that management previously had classified as
doubtful, of which $455,000 represented one credit. We are working aggressively
to collect this one credit, and other credits when we believe that the borrower
has the financial wherewithal to pay, and will continue to do so. Based upon
prudent banking practice, we believed it necessary to charge-off these loans at
this time.
-18-
As of December 31, 2002, our banking operation's ratio of
non-performing loans to total loans was 0.2%, after giving effect to the
$536,973 charge-off discussed above. At December 31, 2002, our non-performing
loans totaled $115,000. We did not have any non-performing loans at December 31,
2001. 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 year ended December 31, 2002 compared to 2001, brokerage
revenue and gross profit declined $546,522, or 19.6%, and $182,130, or 17.0%,
respectively. These declines were, in large part, attributable to a $215,011
decline in commission revenue due to the loss of certain full service brokerage
accounts. In 2002, management made the decision to begin to exit the retail
brokerage business and terminate our relationship with various certified public
accountants that serve as registered representatives of our brokerage operation,
based upon the risks and costs associated with this type of business. We believe
that all such CPA relationships will be terminated by June 2003. Also
contributing to the declines in brokerage revenue and gross profit were a
$139,222 decline in fees associated with the Liquid Green Money Market Fund,
which fund was transferred to Huntington Bank in September 2002, a $131,527
decline in commission revenue from introducing firm clients and a $85,129
decline in investment management fees resulting from lower trading volume from
and lower asset levels at our trust and retirement services' Manager Resource
program.
For such years, investment advisory revenue and gross profit declined
$398,713, or 20.3%, and $493,638, or 27.9%, 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
$120.2 million, or 34.5%, from $348.5 million at December 31, 2001 to $228.3
million at December 31, 2002. Of such decline, approximately $37.9 million, or
31.6%, was attributable to the transfer of the assets of the Liquid Green Money
Market Fund to the Huntington Funds and approximately $26.9 million, or 22.4%,
was attributable to the termination of such operation's relationship with one
portfolio manager, which manager represented approximately $120,000 in revenue
during 2001.
Corporate revenue and gross profit declined $55,757, or 35.3%,
primarily due to our receipt in 2001 of $135,000 in settlement of a trademark
dispute.
Total expenses increased $429,108, or 2.5%, for the year ended
December 31, 2002 compared to the year ended December 31, 2001. During the
second half of 2001, management implemented certain expense cuts in an effort
to improve the profitability of our company, which cuts were offset by a
$520,590 increase in the provision for loan losses during 2002, primarily due
to the write-off of one delinquent loan as discussed above, and the
establishment of a $454,000 reserve at our mutual fund administrative services
operation for possible losses relating to reconciliation issues. Significant
efforts are being made to resolve the reconciliation items and we will make
every effort to recoup any loss that is determined to have been caused by a
third party. In addition to the $454,000 reserve, we also established a $400,000
reserve related to the estimated costs to ascertain the extent and nature of
such possible losses and to redesign control procedures and make other system
enhancements to ensure that such reconciliation issues do not recur. For such
years, ommission expense increased $290,128, or 32.8%, partially due to a
$148,667 increase in fees paid to mortgage originators at our banking
operation's mortgage department, which department experienced a $214,033, or
60.9%, increase in mortgage revenues. Such personnel do not receive a fixed
salary; rather, they receive commissions based upon the revenues that they
generate. Also contributing to the increase in commission expense was a $141,461
-19-
increase in fees paid to advisor partners at our trust and retirement services
operation. We utilize advisor partners as a non-employee sales force to market
and sell our trust and retirement services operation's products and services.
Data processing expense increased $177,160, or 37.4%, primarily due to the
purchase of a new straight through processing system at our trust and retirement
services operation. Occupancy expense increased $110,299, or 13.1%, primarily
due to an $83,319 increase in expense at Commonwealth Premium Finance Company.
Prior to 2002, Commonwealth Premium Finance Corporation occupied space leased by
a sister company. In December 2001, Commonwealth Premium Finance Corporation
began leasing space following the sale of our insurance operation. Also
contributing to the increase was the loss of a subtenant at our New York office,
which resulted in $14,195 in additional expense. For such years, depreciation
and amortization expense declined $315,468, or 43.6%, primarily due to the
effect of a reversal of a previous depreciation accrual of $187,054 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.
Without the adoption of SFAS No. 142, goodwill expense would have been $104,320.
Professional fees increased $476,107, or 71.2%, primarily due to $280,000 in
fees related to ascertaining the extent and nature of possible reconciliation
losses at our mutual fund administration services operation and to redesign
control procedures and make other system enhancements to ensure that such
reconciliation issues do not recur. For such years, interest expense declined
$129,490, or 105.5%, due to our repayment of our outstanding term loan during
December 2001.Due to the reversal of an over accrual of interest from a prior
year, interest expense was negative for the year ended December 31, 2002.
Program administrative expense declined by $462,185, or 53.5%, primarily due to
a $518,000 loss recognized by Unified Investment Advisers, Inc. in the fourth
quarter of 2001, which loss was related to our affiliated money market fund,
partially offset by a $145,000 recovery during 2002 with respect to this loss.
Also contributing to the decline in 2002 was a $140,000 net insurance recovery
in the first quarter of 2002 related to a loss recorded during 2001 by our
mutual fund services operation. During 2002, we experienced operational issues
at our mutual fund administrative services affiliate relating to reconciliation
issues. As a result, we established a $454,000 reserve related to possible
losses, which was recorded as a program administrative expense during the fourth
quarter of 2002. Our provision for bad debt declined $287,321, or 71.7%, due to
our write-off during 2001 of certain uncollected receivables at our mutual fund
services operations, without any corresponding write-off during 2002. Our
provision for loan losses increased $520,590, or 385.6%, for the year ended
December 31, 2002 compared to 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. Business development costs
declined by $44,016, or 74.3%, due to a decline in marketing costs at our
banking operation. Insurance expense increased $47,843, or 30.3%, for the year
ended December 31, 2002 compared to the prior year, primarily as a result of
increased premiums charged by our insurance carriers. For such years, other
operating expense declined $45,508, or 4.7%, primarily due to a $419,977 benefit
received by us during 2001 in connection with the construction and development
of the VSX marketplace and its corresponding products, compared to a $258,758
benefit received by us during 2002. Removing the effect of the benefit received
from VSX Holdings during 2002 and 2001, other expenses declined $206,727, or
14.9%, primarily due to our efforts to control costs. Also contributing to such
decline was a $87,542 decline in advertising expense at our banking operation.
For the year ended December 31, 2002, we recorded a $1,990,466 loss
from continuing operations compared to a $294,945 loss for 2001. The $1,695,521
increase during such years primarily was due to the decline in income tax
benefit from $2,315,931 for the year ended December 31 2001 to $369,439 for the
year ended December 31, 2002 (accounting rules require us to recapture prior net
operating loss carryforwards by displaying them as an income tax benefit on
continued operations). Also contributing to the increase was the $429,108
increase in expenses, as discussed above, partially offset by the increased
revenues.
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For the year ended December 31, 2002, we recorded $637,681 in net gain
on the sale of operations compared to $2,847,708 in 2001. We recorded $6,971 in
net income from discontinued operations for 2002 compared to $815,710 in net
income from discontinued operations for 2001. Discontinued operations for the
year ended December 31, 2001 included the operating results of our insurance
operations, which were sold in December 2001.
We recorded a net loss of $1,345,814, or a basic and fully diluted loss
per share of $0.47, for the year ended December 31, 2002 compared to net income
of $3,368,473, or basic and fully diluted earnings per share of $1.17 and $1.11,
respectively, for the same period of 2001.
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenue for the year ended December 31, 2001 compared to the prior year
increased $1,459,566, or 9.3%, from $15,763,206 to $17,222,772. For such years,
gross profit increased $1,691,620, or 13.1%, from $12,925,996 to $14,617,616.
For the year ended December 31, 2001 compared to the year ended
December 31, 2002, trust and retirement services revenue increased $489,893, or
11.3%, and gross profit increased $402,228, or 9.1%, each due to increased
trustee fees earned.
For such years, mutual fund administration services revenue increased
$619,654, or 12.9 %, and mutual fund administration services gross profit
increased $674,689, or 16.7%, each primarily due to an increase in the amount of
assets under service. As of December 31, 2001, we provided fund administrative
services to 30 mutual fund families consisting of 143 portfolios and
approximately $5.9 billion in mutual fund assets, compared to 29 mutual fund
families consisting of 138 portfolios and approximately $4.8 billion in mutual
fund assets as of December 31, 2000. During 2001, our mutual fund administration
services operation added several new clients; however, as a result of the
declines in the financial markets, several clients discontinued operations.
Banking revenue and gross profit (please see note 14 of the
consolidated financial statements contained in this report) increased $695,911,
or 50.2%, for the year ended December 31, 2001 compared to 2000, primarily due
to a $22,871,000 increase in outstanding loans to customers. Also contributing
to the increase in banking revenue and gross profit was a $337,000 increase in
secondary market loan revenue.
For such years, brokerage revenue declined $323,761, or 10.4%, and
brokerage gross profit declined $95,555, or 8.2%, primarily due to a $460,000
decline in trading revenue due to the loss of two client relationships and a
decline in business from our remaining introducing firms. In addition, for such
years, mutual fund distribution fees and order flow rebate declined by $45,000
due to overall market conditions. Partially offsetting these declines was an
increase in investment management fees, distribution income and interest income,
which added $274,000 to revenue.
For such years, investment advisory revenue increased $23,437, or 1.2%,
and investment advisory gross profit increased $58,206, or 3.4%, due to
increased services to existing clients and a shifting of existing investment
advisory clients to bundled fee relationships. This increase in fees was
partially offset by a decline in fees received based upon asset values due to
the decline in the market value of many investment portfolios. From December 31,
2000 to December 31, 2001, assets under management at our investment advisory
operation declined by approximately 15.8%.
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For the year ended December 31, 2001 compared to the prior year,
corporate revenue and gross profit declined $45,569, or 22.4%, and $43,858, or
21.7%, respectively, due to the inclusion in 2000 of revenues for Unified
Capital Resources, Inc., which ceased operations during 2000, without any
corresponding revenue in 2001.
Total expenses increased $2,260,282, or 15.0%, for the year ended
December 31, 2001 compared to the year ended December 31, 2000. Commission
expense increased $490,688, or 124.9%, primarily due to increased commissions
paid to personnel at our banking operation's mortgage origination department and
to advisor partners of our trust and retirement services operations. Data
processing expense increased $390,226, or 470.3%, due to a $288,000 increase at
our trust and retirement services operation related to a systems conversion. For
such years, occupancy expense increased $121,635, or 17.0%, primarily due to
additional space leased by our mutual fund administration services operation in
Indianapolis and our trust and retirement services operation in Lexington, and
the relocation of our mutual fund administration offices in Texas. For the year
ended December 31, 2001, professional fees declined $313,364, or 31.9%, from the
prior year, primarily due to $330,000 in consulting fees paid during 2000,
without any comparable expense in 2001. For such years, interest expense
declined by $143,060, or 53.8%, due to our repayment of outstanding indebtedness
during 2001. For the year ended December 31, 2001 compared to the prior year,
program administrative expense increased $681,177, or 372.1%, primarily due to a
$518,000 loss recognized by Unified Investment Advisers, Inc., which loss was
related to our affiliated money market fund, and a $175,000 loss recognized by
our mutual fund services operation, which loss was related to certain accounting
errors. These losses were partially offset by a $100,000 recovery during 2001 of
a previously recorded loss item. Our provision for bad debt declined $162,008,
or 28.8%, due to a larger reserve taken in 2000 for doubtful receivables
generated by our mutual fund administration services operation. Our provision
for loan losses declined by $137,000, or 50.4%, due to management's estimation
of the quality of our bank's loan portfolio. For such years, travel and
entertainment expense declined $270,453, or 52.9%, primarily due to less travel
by staff, which resulted from the narrowed business focus of our company. For
the year ended December 31, 2001 compared to the prior year, other operating
expense increased by $1,349,038, or 350.8%, primarily due to the fact that the
2000 results included $1,535,504 recorded as a reduction in operating expense
compared to a $419,977 expense reduction for 2001. Such expense reduction is
related to payments we received from VSX Holdings for management and consulting
services.
For the year ended December 31, 2001, we recorded a $2,673,430 loss
from continuing operations, a $568,662 increase from the $2,104,768 loss
recorded for the year ended December 31, 2000. The increase in the loss was due
to the $2,260,282 increase in total expenses, partially offset by the $1,691,620
increase in gross profits for such years. For the years ended December 31, 2001
and 2000, we recorded an income tax benefit of $2,315,931 and $223,888,
respectively (accounting rules required us to recapture prior net operating loss
carryforwards by displaying them as an income tax benefit on continued
operations). As a result, for the years ended December 31, 2001 and 2000, we
recorded a net loss from continuing operations of $294,945 and $1,949,924,
respectively.
For the year ended December 31, 2001, we recorded a $2,847,708 net gain
in connection with the sale of our insurance operation. For 2000, we recorded a
$54,952 net loss upon the sale/closure of certain discontinued operations.
Additionally, for the years ended December 31, 2001 and 2000, we recorded
$815,710 and $802,186, respectively, in net income from discontinued operations.
Discontinued operations primarily represented the results of our insurance
operation, which were sold at year-end 2001. As previously discussed, accounting
rules require that these results be excluded from the results of continuing
operations.
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We recorded net income of $3,368,473 for the year ended December 31,
2001 compared to a net loss of $1,202,690 for 2000. Net income for the year
ended December 31, 2001 was a basic and fully diluted income per share of $1.17
and $1.11, respectively. This compares to a basic and fully diluted loss per
share of $0.42 and $0.40, respectively, for the year ended December 31, 2000.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL. The discussion contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is based upon the
audited, consolidated financial statements contained in this report, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carry values of assets and liabilities that are not readily apparent from
other sources. Senior management has discussed the development, selection and
disclosure of these estimates with the members of the audit, nominating and
compensation committee of our board of directors. Actual results may differ from
these estimates under different assumptions or conditions. Management believes
the following critical accounting policies reflect its more significant
estimates and assumptions used in the preparation of the consolidated financial
statements. This discussion should be read in conjunction with the consolidated
financial statements and the related notes that appear elsewhere in this report.
VALUATION OF LONG-LIVED ASSETS, INCLUDING GOODWILL. We review
intangible assets and our operating assets, including goodwill, for impairment
when events or changes in circumstances indicate the carrying value of an asset
may not be recoverable. Our asset impairment review assesses the fair value of
assets based on the future cash flows the assets are expected to generate. An
impairment loss is recognized when estimated undiscounted future cash flows
expected to result from the use of the asset plus net proceeds expected from
disposition of the asset (if any) are less than the carrying value of the asset.
This approach uses our estimates of future market growth, forecasted revenue and
costs, expected periods the assets will be utilized and the appropriate discount
methods. Such evaluations of impairment of long-lived assets, including
goodwill, are an integral part of, but not limited to, our strategic reviews of
our business and operations performed in conjunction with restructuring actions.
When an impairment is identified, the carrying value of the asset is reduced to
its estimated fair value. Deterioration of our business in a geographic region
or within a business segment in the future could also lead to impairment
adjustments as such issues are identified.
Critical estimates in valuing goodwill include, but are not limited to,
those discussed above. Management's estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ from estimates.
Effective January 1, 2002, we adopted Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," at which time goodwill amortization
ceased. Goodwill was tested for impairment by comparing implied value to its
carry value. We engaged an independent third-party appraiser, which assisted us
in concluding that our recorded goodwill was not impaired. Impairment
adjustments after adoption of the accounting rule, if any, are required to be
recognized as operating expense when determined.
ACCRUED LIABILITY FOR OPERATIONAL ISSUES. During 2002, we experienced
operational issues at our mutual fund administrative services affiliate,
primarily relating to reconciliation issues. In connection therewith, we
established an $854,000 reserve, $454,000 of which is related to possible
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reconciliation losses, which may or may not be recoverable, and $400,000 of
which is related to estimated costs for professional fees, related travel and
administration expenses to ascertain the nature and extent of such losses and to
redesign control procedures and make other system enhancements to ensure that
such reconciliation issues do not recur. Management's estimates are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ from estimates.
REVENUE RECOGNITION. Our trust and retirement services operation's
revenue reflects a revenue sharing arrangement, as well as investment adviser
fees earned by third party advisers, which are recorded on the accrual basis.
The fees earned by the operation and paid to sub-advisers are based on
established fee schedules and contracts. Generally, fees paid to our trust
and retirement services operation by the various mutual funds in which client
assets are invested are used to offset the fees due from the client. In the
event such fees do not cover all fees due to our operation, the remainder is
collected from the client. If the fees exceed fees due, a credit is given to the
client. Revenue is recorded as it is earned each month based upon assets under
management times a stated fee schedule. Historically, we have experienced very
low levels of deviation from recorded estimates, and we assume the estimates
are reasonable.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND LOAN LOSSES. We evaluate the
collectibility of our trade and financing receivables based on a combination of
factors. We regularly analyze our customer accounts and, in the event we become
aware of a specific customer's inability to meet its financial obligations to us
(such as in the case of bankruptcy filings or deterioration in the client's
financial position or operating results), we record a reserve for bad debt or
loan loss to reduce the related receivable to an amount we reasonable believe is
collectible. We also record reserves for loan losses for clients based on
requirements of the Office of Trust Supervision, which requires an allowance
based upon a specific percentage of loans outstanding. If circumstances related
to specific customers change, our estimates of the recoverability of receivables
could be further adjusted.
TAXES ON EARNINGS. Our effective tax rate is low because of our federal
income tax net operating loss carryforwards. We record the tax benefit on the
net operating loss when realized.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Our primary sources of liquidity historically have been and
continue to be cash flow from operating activities, as well as cash generated
through our private placements in 1998 and 1999. We also received $800,000 and
$8.4 million in cash for the years ended December 31, 2002 and 2001,
respectively, in connection with the sale of the assets of our insurance
subsidiaries in 2001.
The net decrease in cash and cash equivalents at December 31, 2002 from
December 31, 2001 was $4,279,533. The net decrease of cash and cash equivalent
for the company, excluding Unified Banking Company, was $4,009,061. Of such
amount, net payment of borrowings accounted for $1,108,983. Changes in operating
assets and liabilities resulted in a usage of cash of $2,229,520. Capital
expenditures accounted for a $258,881 usage of cash. Additionally, retirement of
common stock and net cash loss from operations resulted in a usage of cash of
$81,550 and $330,127, respectively. We also received $258,758 from VSX Holdings,
LLC during the year ended December 31, 2002 in connection with services we
provided relating to the construction and development of the VSX marketplace and
its corresponding products.
Unified Banking Company's influence on our consolidated balance sheets
is significant, and also can cause difficulty in understanding our statements of
cash flows. Our banking operation had a decrease of cash and cash equivalent
of $169,141,
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excluding our additional capital investment of $300,000 during 2002. The cash
outflow from our bank was approximately $439,000. The increase in loans made to
bank customers was funded by increased customer deposits, coupled with changes
in federal funds sold, bond investments and borrowed funds, which amounted to a
net increase in cash of approximately $270,000.
With respect to our banking operation, long-term liquidity is a
function of the core deposit base and an adequate capital base. Our banking
operation is committed to growth of its core deposit base and maintenance of its
capital base. The growth of the deposit base is internally generated through
product pricing and product development.
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 serving as 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 loans of 31.7% for
the year ended December 31, 2002, while deposits increased 8.6% 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.
In February 2002, Unified Banking Company borrowed approximately $5.0
million in ten- to 15-year fixed rate amortizing advances from the Federal Home
Loan Bank, which proceeds were invested in 15- to 20-year FNMA mortgage backed
securities. The interest spread between these assets and liabilities is
approximately 1.25%.
CAPITAL RESOURCES. Total stockholders' equity was $15,494,821 at
December 31, 2002 compared to $16,748,911 at year-end 2001. The decline in total
equity was due to our loss from continuing operations for the year ended
December 31, 2002, partially offset by the gain realized upon the sale of the
assets of our insurance subsidiaries. We had no material commitments for capital
expenditures as of December 31, 2002.
The growth of Unified Banking Company will have an effect on our
working capital. It currently is anticipated that as Unified Banking Company
grows, our working capital ratio will become more in line with ratios
traditionally associated with bank holding companies.
We believe that anticipated revenues from operations should be adequate
for the working capital requirements of our existing core businesses over the
next year. In the event that our plans or assumptions change, or if our
resources available to meet unanticipated changes in business conditions prove
to be insufficient to fund operations, we could be required to seek additional
financing prior to that time.
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RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks not presently known to us or that
we currently believe are immaterial also may impair our business operations. Our
business could be harmed by any of these risks. If any of the following risks
actually occur, our business, financial condition or results of future
operations could be materially adversely affected. In such case, the price of
our common stock could decline, and you may lose all or part of your investment.
In assessing these risks, you should refer to the other information contained in
this report, including our consolidated financial statements and related notes.
THERE CAN BE NO ASSURANCE THAT WE WILL ACHIEVE FUTURE GROWTH IN ASSETS
OR EARNINGS. Our ability to achieve growth will be dependent upon numerous
factors including, but not limited to, general economic conditions, our ability
to recruit qualified personnel and our ability to execute our business plan. We
also have completed various acquisitions in the past few years that have
significantly enhanced our rate of growth. We cannot provide you assurances
that we will continue to sustain this rate of growth or grow at all.
CHANGES IN THE LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT UNIFIED
BANKING COMPANY'S LOAN PORTFOLIO. Unified Banking Company's success depends to a
great extent upon the general economic conditions of Fayette County, Kentucky.
Unlike larger banks that are more geographically diversified, we primarily
provide banking and financial services to customers in Fayette County, Kentucky.
Our commercial, real estate and construction loans, the ability of the borrowers
to repay these loans and the value of the collateral securing these loans are
impacted by local economic conditions. We cannot assure you that favorable
economic conditions will exist in our market.
ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN
LOSSES. As a lender, Unified Banking Company is exposed to the risk that its
customers may be unable to repay their loans according to their terms and that
any collateral securing the payment of their loans may not be sufficient to
assure repayment. Credit losses are inherent in the lending business and could
have a material adverse effect on our consolidated operating results. Unified
Banking Company's credit risk with respect to its real estate and construction
loan portfolio relates principally to the general creditworthiness of
individuals and the value of real estate serving as security for the repayment
of loans. Our credit risk with respect to Unified Banking Company's commercial
and consumer installment loan portfolio relates principally to the general
creditworthiness of businesses and individuals within its local market.
We make various assumptions and judgments about the collectibility of
Unified Banking Company's loan portfolio and provide an allowance for potential
losses based on a number of factors. If our assumptions are wrong, the allowance
for loan losses may not be sufficient to cover loan losses. We may have to
increase the allowance in the future. Additions to our allowance for loan losses
would decrease our net income.
UNIFIED BANKING COMPANY MAY BE UNABLE TO MANAGE INTEREST RATE RISKS,
WHICH 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
-26-
policies of the Board of Governors of the Federal Reserve System, affect
interest income and interest expense. While Unified Banking Company continually
takes measures intended to manage the risks from changes in market interest
rates, changes in interest rates can still have a material adverse effect on our
profitability.
In addition, certain assets and liabilities may react in different
degrees to changes in market interest rates. For example, interest rates on some
types of assets and liabilities may fluctuate prior to changes in broader market
interest rates, while rates on other types may lag behind. Further, some of
Unified Banking Company's assets, such as adjustable rate mortgages, have
features, including rate caps, which restrict changes in their interest rates.
Factors such as inflation, recession, unemployment, money supply,
international disorders, instability in domestic and foreign financial markets,
and other factors beyond our control may affect interest rates. Changes in
market interest rates also will affect the level of voluntary prepayments on
loans and the receipt of payments on mortgage-backed securities resulting in the
receipt of proceeds that may be reinvested at a lower rate than the loan or
mortgage-backed security being prepaid. Although Unified Banking Company pursues
an asset-liability management strategy designed to control our risk from changes
in market interest rates, changes in interest rates can still have a material
adverse effect on our profitability.
INSIDERS MAY CONTROL OUR FUTURE OPERATIONS AS A RESULT OF THE
CONCENTRATION OF CONTROL OF OUR COMMON STOCK. Our executive officers and
directors beneficially own approximately 32.9% of our outstanding common stock.
As a result, these insiders may be able to control the election of our board of
directors and thus our direction and future operations, and our stockholders may
lack an effective vote with respect to such matters.
WE ARE SUBJECT TO EXTENSIVE REGULATION. The banking, trust and
securities industries are heavily regulated under both Federal and state law.
These regulations are primarily intended to protect depositors and the Federal
Deposit Insurance Corporation, with respect to banks, and customers, with
respect to trust companies, broker-dealers and investment advisors, not our
creditors or stockholders. We and our subsidiaries also are subject to the
supervision of the SEC, the Office of Thrift Supervision and the Office of the
Comptroller of the Currency, in addition to other regulatory and self-regulatory
organizations. Regulations affecting banks, trust companies and other financial
services companies undergo continuous change, and the ultimate effect of such
changes cannot be predicted. Regulations and laws may be modified at any time,
and new legislation may be enacted that affects us and our subsidiaries. We
cannot assure you that such modifications or new laws will not adversely affect
us or our subsidiaries.
WE HAVE EXPERIENCED RAPID GROWTH IN NET REVENUE AND EXPANSION OF OUR
OPERATIONS. Rapid growth has placed strain on our management, information
systems, operation and resources. During 2002, we established a $454,000 reserve
for possible losses relating to reconciliation issues, a problem that we believe
stemmed from the recent growth of our mutual fund administration services
operation. We also established a $400,000 reserve related to the estimated costs
to ascertain the extent and nature of such possible losses and to redesign
control procedures and make other system enhancements to ensure such
reconciliation issues do not recur. 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
-27-
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.
OUR SUCCESS AND ABILITY TO COMPETE IS DEPENDENT IN PART UPON OUR
TECHNOLOGY. We principally rely upon a combination of copyright, trademark and
trade secret laws and contractual restrictions to protect our proprietary
technology. It may be possible for a third party to copy or otherwise obtain and
use our products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures have
been, or will be, adequate to protect our proprietary technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology. We propose to operate a portion of our
business over the Internet, which is subject to a variety of risks. Such risks
include, but are not limited to, the substantial uncertainties that exist
regarding the system for assigning domain names and the status of private rules
for resolution of disputes regarding rights to domain names. There can be no
assurance that we will continue to be able to employ our current domain names in
the future or that the loss of rights to one or more domain names will not have
a material adverse effect on our business and results of operations.
Although we do not believe that we infringe the proprietary rights of
any third parties, there can be no assurance that third parties will not assert
such claims against us in the future or that such claims will not be successful.
We could incur substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary rights, which could
have a material adverse effect on our business, financial condition and results
of operations. In addition, we may become obligated under certain agreements to
indemnify another party in connection with infringement by us of the proprietary
rights of third parties. In the event we are required to indemnify parties under
these agreements, it could have a material adverse effect on our business,
financial condition and results of operations. In the event a claim relating to
proprietary technology or information is asserted against us, we may seek
licenses to such intellectual property. There can be no assurance, however, that
licenses could be obtained on commercially reasonable terms, if at all, or that
the terms of any offered licenses would be acceptable to us. The failure to
obtain the necessary licenses or other rights could have a material adverse
effect on our business, financial condition and results of operations.
OUR OPERATIONS ARE PARTIALLY DEPENDENT UPON OUR ABILITY TO PROTECT OUR
NETWORK INFRASTRUCTURE AGAINST DAMAGE. Events such as fire, earthquakes, severe
flooding, mudslides, power loss, telecommunications failures and similar events,
and our failure to construct networks that are not vulnerable to the effects of
these events, 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.
OUR NETWORK IS VULNERABLE TO VARIOUS 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
-28-
problems caused by our customers or other Internet users. Such problems caused
by third parties could lead to interruption, delays or cessation in service to
our customers. Furthermore, such inappropriate use of the Internet by third
parties also could potentially jeopardize the security of confidential
information stored in the computer systems of our customers and other parties
connected to the Internet, which may deter potential subscribers. Persistent
security problems continue to plague public and private data networks. Recent
break-ins reported in the press and otherwise have reached computers connected
to the Internet at major corporations and Internet access providers and have
involved the theft of information, including incidents in which hackers bypassed
firewalls by posing as trusted computers. Alleviating problems caused by
computer viruses, break-ins or other problems caused by third parties may
require significant expenditures of capital and resources by us, which could
have a material adverse effect on us. Until more comprehensive security
technologies are developed, the security and privacy concerns of existing and
potential customers may inhibit the growth of the Internet service industry in
general and our customer base and revenues in particular. Moreover, if we
experience a breach of network security or privacy, there can be no assurance
that our customers will not assert or threaten claims against us based on or
arising out of such breach, or that any such claims will not be upheld, which
could have a material adverse effect on our business, financial condition and
results of operation.
THERE IS INTENSE COMPETITION FOR OUR PRODUCTS AND SERVICES, ADVERTISING
AND SALES OF GOODS AND SERVICES. Competition for products and services,
advertising and electronic commerce is intense. We expect that competition will
continue to intensify. Barriers to entry are minimal. Our competitors may
develop products and services that are superior to, or have greater market
acceptance than, our solutions. If we are unable to compete successfully against
our competitors, our business, financial condition and operating results will be
adversely affected. Many of our competitors have greater brand recognition and
greater financial, marketing and other resources than us. This may place us at a
disadvantage in responding to our competitors' pricing strategies, technological
advances, advertising campaigns, strategic partnerships and other initiatives.
Our principal competitors include mutual funds, investment advisers, brokerage
firms, investment counsel firms and financial institutions such as banks,
savings and loan institutions and credit unions.
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 generate or raise the capital
necessary to fund our projects. The failure to generate or raise such funds may
require us to delay or abandon some of our planned future expansion or
expenditures, which could have a material adverse effect on our growth.
To expand our markets and take advantage of the consolidation trend in
the financial services industry, our business strategy may include growth
through acquisitions. There can be no assurance that future acquisitions can be
consummated on acceptable terms or that any acquired companies can be
successfully integrated into our operations. In connection with future
acquisitions, we may incur additional indebtedness or may issue additional
equity. Our ability to make future acquisitions may be 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; and unanticipated problems or legal liabilities. Some or
all of these items could have a material adverse effect on us. There can be no
assurance that businesses acquired in the future will achieve sales and
profitability that justify the investment therein. In addition, to the extent
that consolidation continues in the industry, the prices for attractive
acquisition candidates may increase to unacceptable levels.
-29-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The business activities of our company expose it to a variety of risks.
Management of these risks is necessary for the long-term profitability of our
company. We manage these risks through the establishment of numerous policies,
procedures and controls. The most significant risks that affect us are market
risk and credit risk.
Market risk is the risk of loss to us resulting from changes in
interest rates, equity prices or both. We are exposed to market risk since we,
through our subsidiaries, maintain positions in fixed-income and equity
securities. We primarily manage our risk through the establishment of trading
policies and guidelines and through the implementation of control and review
procedures.
Our asset/liability strategy is to minimize the sensitivity of earnings
to changes in interest rates while maintaining an acceptable net interest
margin. Unified Banking Company's asset/liability committee monitors the
interest rate sensitivity of the bank's balance sheet on a quarterly 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.
-30-
The following table illustrates Unified Banking Company's estimated
static gap with prepayments calculated as of December 31, 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
(Dollars in thousands) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------
RATE SENSITIVE ASSETS
Federal funds sold........ $ 1,479 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 1,479
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Securities
U. S. agencies.......... -- 640 631 618 1,739 1,531 1,272 7,030 3,159 16,620
FHLB stock.............. 508 -- -- -- -- -- -- -- -- 508
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total securities...... 508 640 631 618 1,739 1,531 1,272 7,030 3,159 17,128
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Loans
Commercial
Fixed................. -- 78 76 56 350 153 153 2,603 928 4,396
Variable.............. 13,290 -- -- -- -- -- -- -- -- 13,290
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total commercial.... 13,290 78 76 56 350 153 153 2,603 928 17,686
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Real Estate
Commercial
Fixed............... -- 377 34 260 250 144 905 5,084 -- 7,055
Variable............ 3,475 -- -- -- -- -- -- -- -- 3,475
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total commercial. 3,475 377 34 260 250 144 905 5,084 -- 10,530
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Residential
Fixed............... -- 263 82 191 236 229 222 4,833 1,911 7,967
Variable............ 3,896 -- -- -- -- -- -- -- -- 3,896
Other............... -- 7 7 7 460 21 21 356 784 1,662
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total residential 3,896 270 89 198 696 250 243 5,189 2,695 13,525
------- ------ ----- ------ ----- ----- ----- ------- ------- -------
Total real estate 7,371 647 123 458 946 394 1,148 10,273 2,695 24,055
------- ----- ----- ------ ------ ------ ------- ------- ------- -------
Construction - variable. 2,359 -- -- -- -- -- -- -- -- 2,359
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Personal
Home equity loans..... 7,576 -- -- -- -- -- -- -- -- 7,576
Installment loans..... -- 399 109 760 573 605 106 1,204 35 3,790
Cash reserve loan..... 24 -- -- -- -- -- -- -- -- 24
Personal open end
letters of credit... 2,642 -- -- -- -- -- -- -- -- 2,642
Loans secured by
deposits............ -- -- -- -- 1 11 1 19 -- 32
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total personal...... 10,242 399 110 760 573 616 107 1,222 35 14,064
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
Total loans............... 33,262 1,124 308 1,274 1,870 1,163 1,408 14,099 3,658 58,164
-------- ------- ----- ----- ------ ------ ------ ------- ------- -------
TOTAL RATE
SENSITIVE ASSETS...... $ 35,249 $ 1,763 $ 940 $1,892 $3,608 $2,693 $2,680 $21,129 $ 6,817 $76,771
======== ======= ===== ====== ====== ====== ====== ======= ======= =======
-31-
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------------------
0 to 1 1 to 2 2 to 3 3 to 6 6 to 9 9 to 12 12 to 48 >48
(Dollars in thousands) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------
RATE SENSITIVE LIABILITIES
Interest bearing deposits
NOW accounts............ $ 3,308 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 3,308
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Money market accounts
Market rate accounts.. 4,418 -- -- -- -- -- -- -- -- 4,418
Business market rate
accounts............ 2,079 -- -- -- -- -- -- -- -- 2,079
Special personal
MMDA................ 707 -- -- -- -- -- -- -- -- 707
Special business
MMDA................ 2,683 -- -- -- -- -- -- -- -- 2,683
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Total money market
accounts.......... 9,887 -- -- -- -- -- -- -- -- 9,887
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Savings accounts........ 55 -- -- -- -- -- -- -- -- 55
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Time deposits
CD's > 100K........... -- 1,446 1,424 1,833 2,258 1,578 2,265 6,046 -- 16,851
CD's < 100K........... -- 3,190 2,535 3,579 2,314 1,414 2,546 8,814 51 24,443
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Total time deposits. -- 4,636 3,959 5,412 4,572 2,992 4,811 14,860 51 41,294
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Individual retirement
accounts............ -- 161 262 177 71 2 93 4,886 7 5,659
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Total interest
bearing deposits.. 13,250 4,797 4,221 5,589 4,643 2,994 4,904 19,746 58 60,203
-------- -------- ------- ------ ------- ------- ------- ------- ------- -------
Borrowed funds
Repurchase agreements. -- 24 -- -- -- -- -- -- -- 24
FHLB borrowings....... -- 30 728 25 75 75 75 2,223 1,488 4,719
-------- -------- ------- ------ ------- ------- ------- ----- ----- -------
Total borrowed funds -- 54 728 25 75 75 75 2,223 1,488 4,743
-- --- ----- ---- --- --- ---- ----- ----- -------
TOTAL RATE
SENSITIVE LIABILITIES. $ 13,250 $ 4,851 $ 4,949 $5,614 $ 4,717 $ 3,070 $ 4,979 $ 21,970 $ 1,546 $ 64,946
======== ======== ======= ====== ======= ======= ======= ======= ======= =======
INCREMENTAL GAP REPORT
SUMMARY INFORMATION
Total rate sensitive assets $ 35,249 $ 1,763 $ 940 $ 1,892 $ 3,608 $ 2,693 $ 2,680 $ 21,129 $ 6,817
Total rate sensitive
liabilities......... 13,250 4,851 9,949 5,614 4,717 3,070 4,979 21,970 1,546
Gap....................... 21,999 (3,088) (4,010) (3,722) (1,109) (377) (2,299) (841) 5,271
RSA/RSL................... 2.66x 0.36x 0.19x 0.34x 0.76x 0.88x 0.54x 0.96x 4.41x
RSA/assets................ 0.44 0.02 0.01 0.02 0.04 0.03 0.03 0.26 0.08
RSL/assets................ 0.17 0.06 0.06 0.07 0.06 0.04 0.06 0.27 0.02
Gap/assets................ 27.41% -3.85% -3.00% -4.64% -1.38% -0.47% -2.86% -1.05% 6.57%
Gap/RSA................... 62.41 -175.10 -426.77 -196.75 -30.73 -13.99 -85.78 -3.98 77.32
CUMULATIVE GAP REPORT
SUMMARY INFORMATION
Total rate sensitive assets $35,249 $37,012 $37,952 $39,844 $ 43,452 $46,145 $48,825 $69,954 $ 76,771
Total rate sensitive
liabilities......... 13,250 18,101 23,050 28,664 33,381 36,451 41,430 63,400 64,946
Gap....................... 21,999 18,911 14,902 11,180 10,071 9,694 7,395 6,554 11,825
RSA/RSL................... 2.66x 2.04x 1.65x 1.39x 1.30x 1.27x 1.18x 1.10x 1.18x
RSA/assets................ 0.44 0.46 0.47 0.50 0.54 0.57 0.61 0.87 0.96
RSL/assets................ 0.17 0.23 0.29 0.36 0.42 0.45 0.52 0.79 0.81
Gap/assets................ 27.41% 23.56% 18.57% 13.93% 12.55% 12.08% 9.21% 8.16% 14.73%
Gap/RSA................... 62.41 51.10 39.26 28.06 23.18 21.01 15.15 9.37 15.40
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
-32-
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.
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 that 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
INTEREST RATES PROJECTED CHANGE EQUITY PROJECTED CHANGE
-------------- ---------------- --------------------------
-300 -18.94 4.43
-200 -11.24 1.77
-100 -5.15 1.83
0 0.00 0.00
100 5.76 -4.09
200 11.51 -8.94
300 17.03 -13.82
We use a sensitivity model that simulated these interest rate changes
on our earning assets and interest-bearing liabilities. This process allows us
to explore the complex relationships among the financial instruments in various
interest rate environments.
The preceding sensitivity analysis is based on numerous assumptions
including: the nature and timing of interest rate levels including the shape of
the yield curve; prepayments on loans and securities; changes in deposit levels;
pricing decisions on loans and deposits; reinvestment/replacement of asset and
liability cash flows; and others. While assumptions are developed based upon
current economic and local market conditions, we cannot make any assurances as
to the predictive nature of these assumptions including how client preferences
or competitor influences might change.
Interest rate exposure is measured by the potential impact on our
income statement of changes in interest rates. We use information from our gap
analysis and rate shock calculations as input to help manage our exposure to
changing interest rates.
We use our rate shock information to tell us how much exposure we have
to rapidly changing rates. Based on historical information and our assessment of
future interest rate trends, we 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.
-33-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------
To the Board of Directors and
Stockholders of Unified Financial Services, Inc.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated statements of financial condition
of Unified Financial Services, Inc. and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of operations, comprehensive
income, cash flows and changes in stockholders' equity for the years ended
December 31, 2002, 2001 and 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Unified Financial Services, Inc.
and its subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years ended December 31, 2002, 2001 and
2000 in conformity with accounting principles generally accepted in the United
States.
/s/ Larry E. Nunn & Associates, LLC
Columbus, Indiana
January 31, 2003
-34-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND 2001
--------------------------
ASSETS
------
2002 2001
---- ----
Current Assets
Cash and cash equivalents......................................... $ 4,564,949 $ 8,844,482
Due from banks.................................................... 1,656,549 1,357,483
Federal funds sold................................................ 1,479,000 4,033,000
Bond investments (see note 12).................................... 15,685,987 11,374,531
Investment in securities and non-affiliated
mutual funds.................................................... 709,687 555,013
Note receivable (see note 1)...................................... 800,000 800,000
Loans (net of allowance for loan losses of
$550,216 for 2002 and $430,000 for 2001)........................ 57,579,002 43,705,576
Accounts receivable (net of allowance for
doubtful accounts of $68,715 for 2002 and
$260,299 for 2001).............................................. 5,567,891 5,480,214
Prepaid assets and deposits....................................... 830,512 425,061
Deferred tax asset................................................ -- 287,435
-------------- --------------
Total current assets.......................................... 88,873,577 76,862,795
-------------- --------------
Fixed Assets, at cost
Equipment and furniture (net of accumulated
depreciation of $2,308,646 for 2002 and
$2,330,472 for 2001)............................................ 2,028,716 2,277,430
-------------- --------------
Total fixed assets............................................ 2,028,716 2,277,430
-------------- --------------
Non-Current Assets
Investment in affiliate (see note 16)............................. 1,010 1,010
Goodwill (net of accumulated amortization of
$347,734 for 2002 and $347,734 for 2001)........................ 1,006,061 1,006,061
Other non-current assets.......................................... 120,534 43,696
-------------- --------------
Total non-current assets...................................... 1,127,605 1,050,767
-------------- --------------
TOTAL ASSETS............................................. $ 92,029,898 $ 80,190,992
============== ==============
See independent auditors' report and accompanying notes.
- 35 -
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND 2001
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
2002 2001
---- ----
Current Liabilities:
Current portion of capital lease obligations....................... $ -- $ 595
Current portion of bank borrowings................................. -- 3,153
Borrowed funds..................................................... 4,742,783 --
Bank line-of-credit................................................ -- 1,104,780
Deposits (see note 12)............................................. 67,277,222 55,905,541
Accounts payable and accrued expenses.............................. 1,766,741 2,448,177
Accrued compensation and benefits.................................. 491,334 570,883
Payable to broker-dealers.......................................... 79,962 142,985
Income taxes payable............................................... 144,204 215,027
Deferred income taxes.............................................. -- 55,608
Other liabilities.................................................. 1,975,261 1,382,025
------------- -------------
Total current liabilities...................................... 76,477,507 61,828,774
------------- -------------
Long-Term Liabilities
Long-term portion of capital lease obligations..................... -- 454
Deferred income taxes.............................................. -- 12,853
Other long-term liabilities........................................ 57,570 1,600,000
------------- -------------
Total long-term liabilities.................................... 57,570 1,613,307
------------- -------------
Total liabilities......................................... 76,535,077 63,442,081
------------- -------------
Commitments and Contingencies........................................... -- --
------------- -------------
Stockholders' Equity
Common stock, par value $.01 per share (authorized shares - 20,000,000;
issued and outstanding shares - 2,844,246 for
2002 and 2,877,634 for 2001)................................... 32,943 33,277
Additional paid-in capital......................................... 16,004,747 16,187,294
Retained earnings (deficit)........................................ (1,114,514) 231,300
Accumulated other comprehensive income............................. 571,645 297,040
------------- -------------
Total stockholders' equity................................ 15,494,821 16,748,911
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 92,029,898 $ 80,190,992
============= =============
See independent auditors' report and accompanying notes.
- 36 -
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------
2002 2001 2000
---- ---- ----
REVENUE:
Gross revenue (see note 14)................... $ 17,803,375 $ 17,222,772 $ 15,763,206
--------------- -------------- -------------
Total gross revenue....................... 17,803,375 17,222,772 15,763,206
--------------- -------------- -------------
COST OF SALES:
Cost of sales (see note 14)................... 2,410,784 2,605,156 2,837,210
--------------- -------------- -------------
Total cost of sales....................... 2,410,784 2,605,156 2,837,210
--------------- -------------- -------------
GROSS PROFIT (see note 14)......................... 15,392,591 14,617,616 12,925,996
--------------- -------------- -------------
EXPENSES:
Employee compensation and benefits............ 9,916,913 9,861,686 9,440,149
Commission.................................... 1,173,526 883,398 392,710
Data processing............................... 650,354 473,194 82,968
Mail and courier.............................. 152,490 168,752 145,806
Telephone..................................... 255,502 272,000 391,110
Equipment rental and maintenance.............. 464,772 455,305 496,490
Occupancy..................................... 949,514 839,215 717,580
Depreciation and amortization................. 408,113 723,581 689,469
Professional fees............................. 1,144,911 668,804 982,168
Interest...................................... (6,706) 122,784 265,844
Program administrative expense................ 402,048 864,233 183,056
Provision for bad debt........................ 113,495 400,816 562,824
Provision for loan losses..................... 655,590 135,000 272,000
Travel and entertainment...................... 299,915 240,880 511,333
Insurance..................................... 205,506 157,663 189,331
Business development costs.................... 15,191 59,207 92,436
Other operating expenses (see note 16)........ 919,020 964,528 (384,510)
--------------- -------------- -------------
Total expenses............................ 17,720,154 17,291,046 15,030,764
--------------- -------------- -------------
Loss from continuing operations............... (2,327,563) (2,673,430) (2,104,768)
Other loss.................................... (32,342) 62,554 (69,044)
Income tax benefit............................ 369,439 2,315,931 223,888
--------------- -------------- -------------
Net income (loss) from continuing operations.. (1,990,466) (294,945) (1,949,924)
--------------- -------------- -------------
Gain (loss) on sale of operations (net of income taxes
of $390,173, $1,842,193 and $0, respectively). 637,681 2,847,708 (54,952)
Income (loss) from discontinued operations (net of
income taxes of $4,266, $675,187 and
$149,718, respectively) ...................... 6,971 815,710 802,186
--------------- -------------- -------------
Net income (loss).................................. $ (1,345,814) $ 3,368,473 $ (1,202,690)
=============== ============== =============
Per share earnings (loss)
Basic common shares outstanding............... 2,844,246 2,877,634 2,880,028
Net income (loss) - basic..................... $ (0.47) $ 1.17 (0.42)
Fully diluted common shares outstanding....... 2,844,246 3,027,030 2,983,114
Net income (loss) - fully diluted............. $ (0.47) $ 1.11 (0.40)
See independent auditors' report and accompanying notes.
- 37 -
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------
2002 2001 2000
---- ---- ----
Net income (loss).................................. $ (1,345,814) $ 3,368,473 $ (1,202,690)
Other comprehensive income (loss), net of tax
Unrealized gain on securities, net of
re-classification adjustment................. 274,605 126,717 205,786
--------------- -------------- -------------
Comprehensive income (loss)........................ $ (1,071,209) $ 3,495,190 $ (996,904)
=============== ============== =============
See independent auditors' report and accompanying notes.
- 38 -
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------
2002 2001 2000
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ (1,345,814) $3,368,473 $(1,202,690)
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Income tax payable............................... (70,823) 215,027 (136,630)
Deferred income taxes (benefit).................. 218,974 (153,245) (103,738)
Provision for depreciation and amortization...... 401,576 952,603 873,224
Provision for loan losses........................ 655,590 135,000 272,000
Provision for bad debt........................... 410,236 409,605 546,385
Recovery of bad debt............................. (294,796) 18,981 --
Amortization of bond discount.................... (26,042) (25,255) --
Loss on disposal of discontinued operations...... -- 100,203
Change in market value of securities............. (404,087) 194,578 18,347
Comprehensive income............................. 274,605 126,717 205,786
Loss on disposal of fixed assets................. 6,761 (28,998) 15,661
Loss on sale/disposal of securities.............. 13,599 10,872 35,036
(Increase) decrease in operating assets
Receivables................................. (203,117) 7,177,231 (3,827,983)
Loans made to customers, net of repayments.. (14,529,016) (23,005,902) (18,295,799)
Prepaid and sundry assets................... (405,452) (127,791) 477,377
Notes receivables........................... -- (800,000) --
Other non-current assets.................... (76,838) 347,440 (49,916)
Increase (decrease) in operating liabilities
Deposits.................................... 11,371,683 21,285,203 27,288,485
Accounts payable and accrued expenses....... (744,459) (60,599) 2,044,677
Accrued compensation and benefits........... (79,549) 130,411 (113,499)
Other liabilities........................... (949,195) (5,983,998) 1,160,896
------------- ------------- -----------
Net cash provided by (used in) operating activities (5,776,164) 4,186,353 9,307,822
------------- ------------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment.................................. (264,680) (613,800) (1,445,190)
Due from banks......................................... (299,066) (194,844) (847,824)
Bond investments....................................... (3,869,345) (699,836) (5,326,279)
Federal funds sold (purchased)......................... 2,554,000 3,634,000 (2,745,000)
Securities sold (purchased) under agreement to repurchase -- (1,143,000) --
Borrowed funds......................................... 4,742,783 -- --
Proceeds from sale of fixed assets..................... 105,057 1,017,106 4,814
Proceeds from sale of securities....................... 234,556 106,275 1,617,863
Investment in affiliate mutual funds................... -- (100) (29,461)
Investment in affiliate................................ -- (1,000) (10)
Investments in securities and mutual funds............. (414,810) (101,373) (395,684)
------------- ------------- -----------
Net cash provided by (used in) investing activities.. 2,788,495 2,003,428 (9,166,771)
------------- ------------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock................. -- -- 21,640
Proceeds from issuance of treasury stock............... -- -- 419,058
Retirement of common stock............................. (81,550) (71,820) --
Disposition of Fully Armed Productions................. (101,331) -- --
Proceeds from borrowings............................... -- -- 10,627
Proceeds on bank line of credit........................ 985,220 1,309,780 1,270,000
Repayment of borrowings................................ (2,093,154) (4,157,473) (1,910,000)
Repayment of capital lease obligations................. (1,049) (7,884) (30,072)
Purchase of treasury shares............................ -- -- (54,551)
------------- ------------- -----------
Net cash used in financing activities................ (1,291,864) (2,927,397) (273,298)
------------- ------------- -----------
Net increase (decrease) in cash and cash equivalents...... (4,279,533) 3,262,384 (132,247)
Cash and cash equivalents - beginning of year............. 8,844,482 5,582,098 5,714,345
------------- ------------- -----------
Cash and cash equivalents - end of year................... $ 4,564,949 $ 8,844,482 $ 5,582,098
============= ============= ===========
See independent auditors' report and accompanying notes.
- 39 -
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
----- ------- -------- ------ ----- -----
Balance at December 31, 1999........ $ 33,294 $16,050,189 $(1,934,483) $ (35,463) $ (177,239) $ 13,936,298
2000 net loss....................... (1,202,690) (1,202,690)
Other comprehensive income.......... 205,786 205,786
Issuance of common stock............ 6 21,634 21,640
Repurchase of stock for treasury.... (54,551) (54,551)
Re-issuance of treasury stock....... 187,268 231,790 419,058
---------- ----------- ---------- ---------- ---------- ----------
Balance at December 31, 2000........ 33,300 16,259,091 (3,137,173) 170,323 -- 13,325,541
2001 net income..................... 3,368,473 3,368,473
Other comprehensive income.......... 126,717 126,717
Repurchase of stock................. (23) (71,797) (71,820)
----------- ----------- ---------- ---------- ---------- ----------
Balance at December 31, 2001........ 33,277 16,187,294 231,300 297,040 -- 16,748,911
2002 net loss....................... (1,345,814) (1,345,814)
Other comprehensive income.......... 274,605 274,605
Disposition of Fully Armed..........
Productions...................... (182) (101,149) (101,331)
Repurchase of stock................. (152) (81,398) (81,550)
----------- ----------- ---------- ---------- ---------- ----------
Balance at December 31, 2002........ $ 32,943 $16,004,747 $(1,114,514) $ 571,645 $ -- $ 15,494,821
========== =========== =========== ========= ========== ============
See independent auditors' report and accompanying notes.
- 40 -
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 1 - NATURE OF OPERATIONS
Unified Financial Services, Inc., a Delaware holding company for
various financial services companies, was organized on December 7,
1989. We distribute a vertically integrated financial services platform
via the traditional industry channels of our subsidiaries and via the
Internet. Through our subsidiaries, all of which are wholly owned, we
provide services primarily in five lines of business: trust and
retirement services; mutual fund administration services; banking;
brokerage; and investment advisory services.
Our trust and retirement services operation, which is headquartered in
Lexington, Kentucky, provides professional financial management to
individuals and institutions, including private pension plans and
foundations. Our trust subsidiary, a national trust company,
specializes in retirement plans and is regulated by the Office of the
Comptroller of the Currency. Our trust company also provides
consulting, recordkeeping and trust accounting services for qualified
retirement and cafeteria plans.
Our mutual fund administration services operation, which is based in
Indianapolis, Indiana and Southlake, Texas, provides services such as
transfer agency, fund accounting, and administrative, regulatory,
compliance and start-up services for mutual funds, investment advisors,
banks and other money managers in their proprietary mutual fund
efforts.
Our banking operation is headquartered in Lexington, Kentucky. Unified
Banking Company, a federal savings bank, offers various bank products
and services (including, but not limited to, certificates of deposit,
residential mortgage loans and secured personal loans) to its banking
customer base and to our subsidiaries' customers. Our premium finance
subsidiary provides financing for the payment of premiums on insurance
coverage placed by an unaffiliated insurance brokerage operation and is
licensed under applicable governing regulations in the States of
Kentucky, Tennessee, Illinois and Ohio and also conducts business in
the states of West Virginia and Indiana, which do not require licensing
of premium finance companies.
Our brokerage operation, which is headquartered in Indianapolis,
Indiana, consists of a registered broker-dealer under the Securities
Exchange Act of 1934, as amended, that also is a member of the National
Association of Securities Dealers, Inc.
Our investment advisory services operation, which is based in New York
City, provides professional financial management to individuals and
institutions on a customized basis.
On January 31, 2000, Unified Management Company acquired substantially
all of the assets of Commonwealth Investment Services, Inc. Effective
February 29, 2000, Resource Benefit Planners, Inc. was merged with and
into First Lexington Trust Company. Effective September 29, 2000,
Unified Management Company was renamed Unified Financial Securities,
Inc. Effective October 12, 2000, Unified Fund Services, Inc. was
merged with and into AmeriPrime Financial Services, Inc. Immediately
following, AmeriPrime Financial Services, Inc. was renamed Unified
Fund Services, Inc. Effective November 9, 2000, Equity Underwriting
Group, Inc. was dissolved. On December 31, 2000, Unified Financial
Securities, Inc. acquired substantially all of the assets of
AmeriPrime Financial Securities, Inc. Effective December 31, 2000,
-41-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 1 - NATURE OF OPERATIONS (Continued)
Equity Insurance Managers, Inc. paid a dividend of all of the member
interests of Equity Insurance Managers of Illinois, L.L.C. to us. In
December 2000, each of Strategic Fund Services, Inc., Unified Capital
Resources, Inc. and VSX Technologies, Inc. was merged with and into
Unified Internet Services, Inc. Each of Unified Financial Securities,
Inc., Commonwealth Investment Services, Inc., Resource Benefit
Planners, Inc., First Lexington Trust Company, Unified Fund Services,
Inc., AmeriPrime Financial Services, Inc., Equity Underwriting Group,
Inc., AmeriPrime Financial Securities, Inc., Unified Capital
Resources, Inc., Strategic Fund Services, Inc., VSX Technologies, Inc.
and Unified Internet Services, Inc. is/was a wholly owned subsidiary
of our company.
On June 26, 2000, First Lexington Trust Company, a subsidiary of our
company, converted to a limited purpose national banking association
with the corporate name "Unified Trust Company, National Association."
Unified Trust Company, National Association is required by the Office
of the Comptroller of the Currency to maintain minimum capital of $2.0
million. As of December 31, 2002 and 2001, Unified Trust Company,
National Association had $2.2 million and $2.4 million, respectively,
total capital.
Effective April 30, 2001, all of the outstanding capital stock of
Health Financial, Inc. was transferred to Unified Trust Company,
National Association. Effective November 13, 2001, EMCO Estate
Management Company, Inc. was dissolved. As of such date, all of the
assets of Estate Management Company were transferred to Unified
Financial Services, Inc., which then made a capital contribution of
such assets to Fiduciary Counsel, Inc. Effective November 19, 2001,
AmeriPrime Financial Securities, Inc. was dissolved and all of its
assets were transferred to Unified Fund Services, Inc.
Effective December 17, 2001, we sold and assigned substantially all of
the assets and liabilities of our insurance subsidiaries, Equity
Insurance Managers, Inc., Equity Insurance Administrators, Inc. and
21st Century Claims Service, Inc., to Arthur J. Gallagher & Co. In
connection with the sale, we received $8.4 million in cash and an
interest-bearing note receivable of $800,000, which note was subject to
possible reduction in the event Arthur J. Gallagher did not achieve
certain revenue or income targets for the year ended December 31, 2002
with respect to the business that it acquired from our insurance
subsidiaries. Arthur J. Gallagher achieved the revenue and income
targets for the year ended December 31, 2002. An additional $800,000 in
cash was deposited into an escrow account, and is subject to possible
indemnification claims of Arthur J. Gallagher & Co. pursuant to the
sale agreement. Any funds remaining in the escrow account after June
16, 2003 (and which are not subject to a claim made by Arthur J.
Gallagher & Co. before such date) will be released to us. Please see
note 3 of these financial statements for additional information
regarding the promissory note and escrow. Following the closing, Equity
Insurance Managers, Inc., Equity Insurance Administrators, Inc. and
21st Century Claims Service, Inc. were renamed Unified Insurance
Managers, Inc., Unified Insurance Administrators, Inc. and Unified
Claims Service, Inc.
Effective 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 shares of 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 are shown as a
non-cash flow transaction in our Consolidated Statements of Cash Flows.
Effective October 4, 2002 and October 31, 2002, each of Unified
Internet Services, Inc. and Unified Investment Services, Inc.,
respectively, was merged with and into Unified Employee Services, Inc.
-42-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 1 - NATURE OF OPERATIONS (Continued)
Effective October 8, 2002, each of Unified Claims Service, Inc. and
Unified Insurance Administrators, Inc. was merged with and into
Unified Insurance Managers, Inc. Effective October 31, 2002, Health
Financial, Inc. was merged with and into Unified Trust Company,
National Association. Effective November 29, 2002, Unified Fund
Services, Inc. was merged with and into Unified Investment Advisers,
Inc. Immediately following, Unified Investment Advisers, Inc. was
renamed Unified Fund Services, Inc.
On December 31, 2002, we rescinded our contribution of all of the
outstanding capital stock of Unified Trust Company, National
Association to Unified Banking Company. We consummated the original
capital contribution on January 1, 2002.
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.
Fees and Commissions
--------------------
We record revenue on the accrual basis of accounting. For our brokerage
operation, commissions and clearing revenue are recorded on the
settlement date of the related security transaction. This does not
materially differ from recording commissions based upon trade date. In
connection with our private placement of equity securities in 2000,
Unified Financial Securities, Inc., a subsidiary of our company,
recorded revenue on the accrual basis of accounting (equal to ten
percent of the proceeds of the private placement) and incurred expenses
related to the private placement. Our trust and retirement services
operation's revenue, as well as the investment adviser fees earned by
third party advisers, are recorded on the accrual basis. The fees
earned by the operation and paid to sub-advisers are based on
established fee schedules and contracts. Generally, fees may be
collected from the invested assets. Thus, collection of the fees is
reasonably certain. Revenue is recorded as it is earned each month
based upon accounts and account balances. In connection with this, we
earn income on the accounts established to transfer these funds for
customers. For our banking operation, recorded revenue consists of
interest income less interest expense. All other revenue is recorded as
earned.
Accounts Receivable
-------------------
Accounts receivable are carried at cost less an allowance for doubtful
accounts. On a periodic basis, accounts receivable are evaluated and an
allowance for doubtful accounts is established, based on a history of
past write-offs and collections and current credit conditions.
Loans Receivable
----------------
Loans receivable are carried at cost less a loan loss reserve. The loan
loss reserve is determined based on the creditworthiness of the
borrower.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation, including the
depreciation of capital leased equipment, is provided on the
straight-line or accelerated method over the estimated useful life of
the assets for financial statement purposes.
-43-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments
-----------
Investments, which consist primarily of investments in mutual funds
(affiliated or non-affiliated), are recorded and adjusted to the fair
market value as of the date of the financial statements and reported on
the Consolidated Statements of Operations as unrealized gain or loss on
securities.
Income Taxes
------------
We file consolidated Federal and state income tax returns with our
subsidiaries.
We have adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires use of the
liability method of accounting for deferred income taxes.
Other Non-Current Assets
------------------------
Other non-current assets consist of deposits, deferred taxes, unearned
revenue and the cash surrender value of life insurance policies.
Intangibles
-----------
Effective January 1, 2002 we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," at which time goodwill amortization ceased.
Goodwill was tested for impairment by comparing its implied value to
its carrying value. Based upon these tests, we have determined that
goodwill was not impaired. Impairment adjustments recognized after
adoption, if any, are required to be recognized as operating expense.
For tax purposes, goodwill is amortized on a straight-line basis over
15 years.
In 1999, we incurred $663,914 in costs related to the organization and
establishment of our bank, Unified Banking Company. At such time,
management determined that these costs were license and registration
costs and, thus, subject to capitalization and amortization over five
years. During 2001, based upon regulatory and financial accounting
interpretations, management determined that these costs should be
classified as start-up costs, which required the write-off of all
unamortized costs in 1999. This change resulted in a restatement of the
financial information previously reported and had the following balance
sheet and income statement effect:
2001 2000
---- ----
Organizational costs............... $ 663,914 $ 663,914
Accumulated amortization........... 663,914 663,914
Current-year expense............... (132,763) (22,127)
Use of Estimates
----------------
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
Specifically, during 2002, we experienced operational issues with
respect our mutual fund administrative services affiliate, which issues
primarily are related to problems associated with our reconciliation of
various accounts. In connection therewith, we established an $854,000
-44-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
reserve, $454,000 of which is related to possible reconciliation losses
and $400,000 of which is related to estimated costs to ascertain the
extent and nature of such losses and to redesign control procedures and
make other system enhancements to ensure that such reconciliation
issues do not recur.
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, we consider
all liquid investments with an original maturity of three months or
less to be cash equivalents. We maintain money market investments that
are not insured by the Federal Deposit Insurance Corporation and bank
accounts that periodically exceed the Federal Deposit Insurance
Corporation's insurance limit during the year.
Recent Accounting Pronouncements
--------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13 and Technical Corrections," which rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
SFAS No. 44 "Accounting for Intangible Assets of Motor Carriers," and
SFAS No. 64 "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS 145 also amends SFAS No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. As a result of the rescission of SFAS Nos.
4 and 64, the criteria in Accounting Principles Board Opinion No. 30
will be used to classify gains and losses from debt extinguishment.
SFAS No. 145 also amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. We do not believe that the
adoption of SFAS No. 145 will have a material impact on our financial
position or results of operation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires that
the liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. We must adopt this statement
no later than January 1, 2003. We do not believe that the adoption of
SFAS 146 will have a material impact on our financial position or
results of operation.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an Amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9." SFAS 147 requires that acquisitions of
financial institutions, except between two or more mutual enterprises,
be accounted for in accordance with FASB Statements No. 141 and 142.
Additionally, SFAS 147 requires that SFAS No. 144 also applies to the
application of certain long-term customer-relationship intangible
assets recognized in an acquisition of a financial institution. We
adopted this statement on October 1, 2002. We do not believe that the
adoption of SFAS 147 will have a material impact on our financial
position or results of operation.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an Amendment
of FASB Statement No. 123." SFAS 148 provides alternative methods of
transitioning for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. This statement amends
Statement 123 by requiring prominent disclosures in annual and interim
-45-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
financial statements about the method of accounting used and the effect
on reported results. This statement is effective for fiscal years
beginning after December 15, 2003. We do not believe that the adoption
of SFAS 148 will have a material impact on our financial position or
results of operation.
Financial Statement Presentation
Certain amounts in the 2001 and 2000 consolidated financial statements
have been reclassified to conform to the 2002 presentation.
Note 3 - ACQUISITIONS, DISPOSALS AND SALES
On December 17, 2001, we sold substantially all of the assets and
assigned substantially all of the liabilities of Equity Insurance
Managers, Inc., Equity Insurance Administrators, Inc. and 21st Century
Claims Service, Inc. to Arthur J. Gallagher & Co. As discussed in note
1 of these financial statements, in connection with the sale we
received $8.4 million in cash and an interest-bearing promissory note
of $800,000. An additional $800,000 was deposited into escrow for
possible indemnification claims of Arthur J. Gallagher. In connection
with such sale, we had aggregate basis and selling expenses of
$3,710,099. We recorded state and federal income taxes of $1,842,193,
which resulted in an after-tax gain of $2,847,708 with respect to the
sale for the year ended December 31, 2001.
For the year ended December 31, 2002, Arthur J. Gallagher achieved the
income and revenue targets for the acquired business. As a result, the
promissory note was earned in full and we recorded $800,000 as income
related to the sale during 2002. As of December 31, 2001, we
established a liability of $800,000 related to the escrow. As of
December 31, 2002, we believed there was a current potential for
approximately $420,000 in claims against the escrow. Based thereupon,
we recorded $280,000 of the escrow as income related to the sale during
the year ended December 31, 2002. Approximately $100,000 remains
reserved for possible future indemnification claims. For the year ended
December 31, 2002, we recorded $52,146 in additional professional fees
associated with the sale and state and federal income taxes of
$390,173, which resulted in an after-tax gain of $637,681.
For the years ended December 31, 2002 and 2001, we recorded $5,717,755
and $3,485,389 in accumulated pre-tax gain and after-tax gain,
respectively, on the sale of the assets of our insurance subsidiaries.
Assets and liabilities at December 31, 2002 and 2001 of the sold
operations are summarized below:
2002 2001
---- ----
Accounts payable and accrued payable $ -- $ 48,927
Accrued compensation............... -- (56,209)
Other liabilities.................. 300,000 598,838
Income taxes payable............... -- 1,842,193
-46-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 3 - ACQUISITIONS, DISPOSALS AND SALES (Continued)
The insurance operation was inactive during 2002. Revenue and income
for the insurance operation for the years ended December 31, 2001 and
2000 were as follows:
2001 2000
----- -----
Revenue............................ $12,329,56 $12,684,196
Pre-tax income..................... 1,660,855 1,448,230
After-tax income................... 786,355 1,194,321
At year-end 1999, we sold an insurance contract segment of business of
Equity Insurance Managers of Illinois, L.L.C. (d/b/a Irland and
Rogers). The sale price was determined on continued contract revenue
and we received payment for the sale of the contracts over a two-year
period. We recorded this transaction in 1999 based upon the estimated
revenue and costs to our company of closing the location where the
business was conducted. During 2000, the amount of the anticipated
selling price of the book of business was reduced based upon the
continuing revenue and cash received during 2000 and the additional
cost of legal fees related to the business.
2000
----
Sale price.......................... $ (55,200)
Costs to close the location.......... 248
----------
Loss on the sale.................... $ (54,952)
==========
Equity Insurance Managers of Illinois, L.L.C. was formed to acquire
insurance contracts from an existing business in 1996. A subsidiary of
Equity Underwriting Group owned 55% of this limited liability company.
The transaction was reported under the purchase method of accounting
and this continued with our acquisition of Equity Underwriting Group in
December 1998. In 1999, the seller agreed to a reduction of the unpaid
balance of the note resulting from the sale in the amount of $255,628.
The reduction of this price reduced the goodwill reported under the
original purchase. The minority owner of the new limited liability
company turned in stock certificates and gave up all rights to
ownership during 1999. The receivable from the minority owner of
$565,566, due to its share of operating losses, has been adjusted and
recorded as a reduction of retained earnings in 1999.
During 2002, we disposed of Fully Armed Productions, Inc. During 2000,
we discontinued our Strategic Fund Services operation and Archer
Trading operation, in addition to Equity Insurance Managers of
Illinois, L.L.C. As of June 2000, we ceased funding Archer Trading,
Inc.'s losses. The income/losses of these four discontinued operations,
including the loss on the sale of the Equity Insurance Managers of
Illinois book of business, resulted in the following:
2002 2001 2000
---- ---- ----
Gross revenue........................... $ 149,200 $ 405,297 $ 380,160
Gain (loss) from discontinued operations 11,237 51,915 (387,157)
-47-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 3 - ACQUISITIONS, DISPOSALS AND SALES (Continued)
Assets and liabilities at December 31, 2002 and 2001 of the
discontinued operations are summarized below:
2002 2001
---- ----
Accounts payable and accrued payable.... $ -- $ 30,053
Payable to parent....................... 1,546,533 1,596,748
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 December 31, 2002, 2001 and 2000, options to acquire 107,441,
89,396 and 104,086 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
December 31, 2002 and 2001, our board had granted options to acquire
54,545 and 60,000 shares, respectively, of our common stock outside of
such plan (see note 16).
A summary of our outstanding stock options as of December 31, 2002,
2001 and 2000 is as follows:
DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at beginning of year... 149,396 $41.94 170,752 $39.98 105,961 $36.76
Granted.................................... 38,150 16.50 -- -- 78,316 44.28
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) 45.00 -- --
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) 50.00 -- -- -- --
Forfeitures................................ (20,105) 34.92 (14,690) 38.21 (13,525) 39.61
Options outstanding at end of period....... 161,986 38.24 149,396 41.94 170,732 39.98
Options exercisable at end of period....... 161,645 38.23 143,590 42.02 158,987 39.98
Options available for future grants........ 142,559 n/a 160,064 n/a 145,914 n/a
-48
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 4 - OPTIONS (Continued)
As of December 31, 2002, 85,136 of such options were intended to
qualify as incentive stock options pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended.
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 year ended December 31, 2002 (based upon
the Black-Scholes option pricing model) and, in fact, would have been
anti-dilutive for such periods.
Note 5 - DEBT AND RELATED MATTERS
In December 2001, we repaid an outstanding term loan (with a principal
balance of $1,893,750 as of December 31, 2000) with a portion of the
proceeds from the sale of our insurance operations.
At December 31, 2000, Equity Insurance Managers, Inc. had $107,440 in
bank borrowings from Unified Banking Company, which was eliminated in
consolidation. A $350,939 loan outstanding at December 31, 2000 was
repaid upon the sale in August 2001 of the property securing the loan.
At December 31, 2002 and 2001, we had outstanding debt of $0 and
$3,153, respectively. No amounts were outstanding under lines of credit
as of December 31, 2002. Lines of credit at December 31, 2001 consisted
of the following:
Lines of credit: 2001
--------------- ---------------
Payable at maturity, June 30, 2003, interest at prime,
secured by assignment of receivables.................... $ 1,064,780
Payable at maturity, December 31, 2002, interest at 10.25% 40,000
-------------
Total............................................ $ 1,104,780
Note 6 - CAPITAL LEASE OBLIGATIONS
We lease both computer and office equipment under capital leases. Such
lease obligations are payable over a 60-month period. We had no capital
lease obligations as of December 31, 2002. Following is a summary of
future minimum lease payments under capitalized lease obligations as of
December 31, 2001:
2001
-----------
2002........................................... $ 724
2003........................................... 482
-----------
1,206
Less: amount representing interest 157
-----------
Total.................................. $ 1,049
===========
We did not acquire equipment through capital lease obligations during
the years ended December 31, 2002 and 2001.
-49-
UNIFIED FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
--------------------------------
Note 7 - RENTAL AND LEASE INFORMATION
We, through our subsidiary, Unified Banking Company, lease our
corporate headquarters and administrative office facilities located at
2424 Harrodsburg Road, Lexington, Kentucky, which facility has
approximately 1,700 square feet, and is leased pursuant to an operating
lease expiring in 2006. The lease includes provisions for adjustment of
operating costs and real estate taxes.
We also maintain administrative offices at the corporate offices of
Unified Financial Securities, Inc. and Unified Fund Services, Inc, each
of which is located at 429-431 N. Pennsylvania Street, Indianapolis,
Indiana, and at One US Bank Plaza, Saint Louis, Missouri.
At December 31, 2002, we were committed to minimal rental payments
under certain non-cancellable operating leases. Generally, these leases
include cancellation clauses. The aggregate minimum rental commitments
required under operating leases for office space and equipment at
December 31, 2002 for all operations were as follows:
FOR THE YEARS ENDING DECEMBER 31, LEASE COMMITMENTS
--------------------------------- -----------------
2003............................. $ 742,330
2004............................. 676,492
2005............................. 638,354
2006............................. 613,241
Thereafter....................... 1,180,372
-------------
Total........................ $ 3,850,789
=============
We lease certain office facilities and equipment. Rental expense for
the years ended December 31, 2002, 2001 and 2000 were $949,514,
$1,206,657 and $1,006,325, respectively.
Note 8 - LEGAL PROCEEDINGS
We are a party to various lawsuits, claims and other legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, all such matters are
without merit or are of such kind, or involve such amounts, that
unfavorable disposition would not have a material adverse effect on our
consolidated financial position or results of operations.
Note 9 - EMPLOYEE BENEFIT PLANS
We and our subsidiaries provide a defined contribution retirement plan
that covers substantially all employees. Our board of directors
determines contributions to the plan. For the years ended December 31,
2002, 2001 and 2000, our board of directors did not make any
contributions.
We also maintain a 401(k) plan for the consolidated companies. The plan
includes a matching for funds contributed by an employee. We will match
the employee's contribution up to fifty percent of the first six
percent of an employee's pre-tax contribution. For the years ended
December 31, 2002, 2001 and 2000, we contributed $184,482, $189,237 and
$133,901, respectively, as matching contributions.
-50-
UNIFIED FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
--------------------------------
Note 10 - COMMON AND PREFERRED STOCK
Common Stock:
We have 20,000,000 authorized shares of our common stock.
Effective December 10, 1998, we commenced a private placement offering
to sell shares of our common stock. The offering terminated on March
31, 2000. For the year ended December 31, 2000, we issued 11,530 shares
of our common stock (including 10,929 shares from treasury). For the
year ended December 31, 2000, aggregate brokerage fees of $20,500 were
paid to our brokerage subsidiaries in connection with this private
placement offering, which amount is inclusive of $18,300 paid to
external brokerage firms.
In our private placement, all shares of our common stock were offered
on a best efforts basis. There is no public market for any of our
securities and there can be no assurance that a market will develop in
the future. The securities offered and sold by us in our private
placements will not be and have not been registered under the
Securities Act of 1933, as amended, and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements.
Preferred Stock:
As of December 31, 2002 and 2001, our total preferred shares authorized
was 1,000,000 with a par value of $.01 per share. Of such authorized
shares, 200,000 shares are designated Series D Convertible Junior
Participating Preferred Stock. We have reserved all of the shares of
Series D Preferred Stock for issuance under a Rights Agreement dated
August 26, 1998 between us and Unified Fund Services, as rights agent.
On August 26, 1998, our board of directors declared a dividend
distribution of one Preferred Stock Purchase Right for each outstanding
share of our common stock. The dividend distribution was payable to the
stockholders of record at the close of business on August 26, 1998.
Generally, each Preferred Stock purchase right, when exercisable,
entitles the registered holder to purchase from our company one
one-hundredth of a share of Series D Preferred Stock at a price of
$200.00 per one one-hundredth of a share.
Note 11 - INCOME TAXES
Consolidated net operating loss carryforwards at December 31, 2002,
2001 and 2000 amounted to approximately $14,224,000, $14,100,000 and
$17,500,000, respectively, expiring from 2004 to 2016.
We decreased our net operating loss carryforwards by approximately
$3,400,000 in 2001. We increased our net operating loss carryforwards
by approximately $2,500,000 in 2000, which reduced current consolidated
Federal income tax expense to zero.
-51-
UNIFIED FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
--------------------------------
Note 11 - INCOME TAXES (Continued)
We record deferred income taxes in accordance with Financial Accounting
Standard No. 109. We did not record any deferred income taxes as of
December 31, 2002 due to our net operating losses. The deferred tax
liability in our consolidated financial statements as of December 31,
2001 was as follows:
2001
----------
Deferred assets................................ $ (287,435)
Deferred liability............................. 68,461
----------
Net deferred liability......................... $(218,974)
=========
The components of income tax expense for the years ended December 31,
2002, 2001 and 2000 were as follows:
2002 2001 2000
---- ---- ----
Current income tax:
Federal.......................... $ -- $ 115,473 $ --
State and local.................. 25,000 207,489 35,000
--------- --------- ----------
Total current income tax...... 25,000 322,962 35,000
--------- --------- ----------
Deferred income tax:
Federal.......................... -- (77,514) --
State and local.................. -- (21,800) --
--------- --------- ----------
Total deferred................ -- (99,314) --
--------- --------- ----------
Total income tax....... $ 25,000 $ 223,648 $ 35,000
========= ========= ==========
Note 12 - RELATED PARTY TRANSACTIONS
As of December 31, 2002 and 2001, $1,799,220 and $7,697,306 was eliminated
from both bond investments and deposits on our Consolidated Statements
of Financial Condition, which amount represented cash on deposit at our
bank from various subsidiaries of our company.
-52-
UNIFIED FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
--------------------------------
Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
value of our financial instruments at December 31, 2002, 2001 and 2000.
Financial Accounting Standard No. 107, "Disclosures about Fair Value of
Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties.
DECEMBER 31,
----------------------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------- -------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
(In thousands) AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------ ----- ------ ----- ------ -----
Financial assets
Cash and cash equivalents $ 4,564 $ 4,564 $ 8,844 $ 8,844 $ 5,582 $ 5,582
Investment in:..........
Mutual funds and
securities.......... 710 710 555 555 573 573
Loans receivables..... 57,579 57,579 43,706 43,706 20,835 20,835
Receivables........... 5,568 5,568 5,480 5,480 13,086 13,086
Prepaid and sundry.... 831 831 425 425 297 297
Financial obligations
Current liabilities..... 76,477 76,477 61,825 61,825 49,411 49,411
Capital lease obligation -- -- 1 1 9 9
Long-term debt.......... -- -- 3 3 2,287 2,287
-53-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 14 - 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.
Our banking segment, which includes Unified Banking Company and
Commonwealth Premium Finance Company, reports revenue partially in
accordance with the AICPA Audit and Accounting Guide for Banks and
Savings Institutions, which requires that banking revenue be reported
net of interest expense, and partially in accordance with the AICPA
Audit and Accounting Guide for Financial Institutions (other than banks
and insurance companies), which treats the provision for loan losses as
an operating expense. Pursuant to the AICPA guide for banks, banking
revenue is presented net of the provision for loan losses. As a result,
we report our provision for loan losses as an operating expense on our
Statements of Operations. For the years ended December 31, 2002, 2001
and 2000, our banking operation recorded interest expense of
$3,041,457, $3,432,983 and $1,272,346, respectively. Our banking
operation's provision for loan losses was $655,590, $135,000 and
$272,000, respectively for the years ended December 31, 2002, 2001 and
2000. Additionally, pursuant to the AICPA guide for banks, banks
typically do not report gross profit. However, for comparability among
our operating segments, we have reported banking gross profit, which
amount is equal to banking revenue for any given period.
The accounting policies of these segments are the same as those
described in the summary of significant accounting policies. We
evaluate performance based on profit or loss from operations before
income taxes, not including recurring gains and losses.
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because
each business requires different technology and marketing strategies.
Most of the businesses were acquired as a unit and the management at
the time of the acquisition was retained. Reportable segment revenues,
gross profit, capital expenditures and depreciation and amortization
were as follows for the years ended December 31, 2002, 2001 and 2000
and total assets were as follows as of December 31, 2002 and 2001:
-54-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 14 - DISCLOSURES ABOUT REPORTING SEGMENTS (Continued)
(In thousands) 2002 2001 2000
----------- ----------- -----------
Revenues
Trust and retirement............................. $ 4,944 $ 4,820 $ 4,330
Mutual fund administration....................... 6,095 5,410 4,790
Banking.......................................... 2,855 2,083 1,387
Brokerage........................................ 2,245 2,791 3,115
Investment advisory.............................. 1,562 1,961 1,938
Corporate........................................ 102 157 203
----------- ----------- -----------
Total....................................... $ 17,803 $ 17,222 $ 15,763
=========== =========== ===========
Gross profit
Trust and retirement............................. $ 4,944 $ 4,820 $ 4,417
Mutual fund administration....................... 5,326 4,716 4,042
Banking.......................................... 2,855 2,083 1,387
Brokerage........................................ 887 1,069 1,165
Investment advisory.............................. 1,279 1,772 1,712
Corporate........................................ 102 157 203
----------- -------------------------
Total....................................... $ 15,393 $ 14,617 $ 12,926
=========== =========== ===========
Capital expenditures
Trust and retirement............................. $ 44 $ 139 $ 272
Mutual fund administration....................... 201 25 87
Banking.......................................... 6 77 630
Brokerage........................................ -- 8 6
Investment advisory.............................. 4 12 --
Corporate and discontinued....................... 9 353 450
----------- ----------- -----------
Total....................................... $ 264 $ 614 $ 1,445
=========== =========== ===========
Depreciation and amortization
Trust and retirement............................. $ 151 $ 131 $ 89
Mutual fund administration....................... 136 109 82
Banking.......................................... 176 162 153
Brokerage........................................ 5 18 35
Investment advisory.............................. 19 130 139
Corporate........................................ (79) 174 191
----------- ----------- -----------
Total....................................... $ 408 $ 724 $ 689
=========== =========== ===========
Total assets
Trust and retirement............................. $ 2,499 $ 2,837
Mutual fund administration....................... 2,510 1,909
Banking.......................................... 81,441 64,344
Brokerage........................................ 527 778
Investment advisory.............................. 1,604 1,428
Corporate and discontinued....................... 3,448 8,895
----------- -----------
Total....................................... $ 92,029 $ 80,191
=========== ===========
-55-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 15 - UNIFIED BANKING COMPANY STATEMENTS OF FINANCIAL CONDITION AND
OPERATIONS
Unified Banking Company commenced operations on November 1, 1999.
Included in our Consolidated Statements of Financial Condition at
December 31, 2002 and 2001 were the bank's total assets of $80,264,401
and $69,786,649, respectively, and total liabilities of $74,490,805 and
$63,961,290, respectively. As of such dates, certain components of such
assets and liabilities were as follows:
2002 2001
---- ----
Cash ............................................ $ 295,292 $ 164,433
Due from banks................................... 1,656,549 1,357,483
Federal funds sold............................... 1,479,000 4,033,000
Investments in securities:
US agency securities........................ 17,485,206 19,071,837
FHLB stock.................................. 508,200 196,300
Loans:
Real estate loans........................... 33,947,774 26,482,150
Commercial loans............................ 17,685,656 11,047,590
Installment loans........................... 6,643,710 6,573,173
Other loans................................. 32,078 32,664
Allowance for loan losses................... 550,216 430,000
Bank deposits:
Demand deposits............................. 8,600,134 14,637,467
Official checks............................. 273,018 1,603,610
NOW accounts................................ 3,308,130 1,159,688
Money market accounts....................... 9,886,264 6,543,341
Savings accounts............................ 54,930 55,495
Time deposits............................... 41,293,571 34,584,509
Other interest-bearing deposits............. 5,660,393 5,018,738
Federal and borrowed funds....................... 4,742,783 --
The revenue amounts in Note 14 for our banking operation include the
"Subtotal" amounts reflected above for Unified Banking Company plus the
revenues of Commonwealth Premium Finance Corporation.
Note 16 - INVESTMENT IN AFFILIATE
We have entered into a management arrangement with VSX Holdings, LLC, a
Delaware limited liability company, whereby we provide consulting and
development services to VSX Holdings. For the years ended December 31,
2002, 2001 and 2000, we received payments totaling $258,758, $419,977
and $1,535,504, respectively, from VSX Holdings for such consulting and
development services, which amount is recorded as a reduction of "Other
operating expenses" on our Consolidated Statements of Operations for
the years ended December 31, 2002, 2001 and 2000. At December 31, 2001,
we had $400,000 in borrowings payable to VSX Holding, LLC that were
repaid in February 2002.
On May 23, 2000, we subscribed for 10 shares of VSX Holdings in
exchange for $10 and certain intangible property rights. We currently
own approximately 0.5% of the outstanding shares of VSX Holdings, but
-56-
UNIFIED FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
--------------------------------
Note 16 - INVESTMENT AFFILIATE (Continued)
have the right to purchase up to an additional 1,990 (19.9%) shares at
a price of $1 per share, upon the occurrence of certain specified
events. Our investment in VSX Holdings is accounted for on the cost
method of accounting.
VSX Holdings is involved in the development of an alternative trading
system to be known as VSX.com, which, upon and subject to organization
and regulatory approval, will serve as a virtual, real-time private
financial market place. In connection with the organization of VSX
Holdings, a third-party investor made a $3.0 million loan to VSX
Holdings, which loan is evidenced by a debenture issued by VSX Holdings
to such investor. The debenture is secured by 85,000 shares of our
common stock pledged by certain executive officers of our company. In
addition, concurrent with the issuance of such debenture, we issued an
option to the third-party investor to acquire shares of our common
stock, which option has a five-year term. The investor may elect to
foreclose on the pledged collateral or exercise the option. Pursuant to
such option, the holder of the option and the debenture is entitled to
surrender the debenture to us in payment of the exercise price of the
option. During the years ending May 23, 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, 2002) to the investor, the
executive officers or any other holder, as the case may be, and (b) we
would succeed to the $3.0 million claim against VSX Holdings.
Note 17 - INCOME (LOSS) PER SHARE OF STOCK
Income (loss) per share of stock is computed using the number of common
shares outstanding during the applicable period. Diluted income (loss)
per share of stock is computed using the number of common shares
outstanding and dilutive potential common shares (outstanding stock
options).
Dilutive potential common shares included in the diluted income (loss)
per share calculation were determined using the treasury stock method.
Under the treasury stock method, outstanding stock options are dilutive
when the average "market price" of our common stock exceeds the option
price during a period. In addition, proceeds from the assumed exercise
of dilutive options along with the related tax benefit are assumed to
be used to repurchase common shares at the average market price of such
stock during the period. For the years ended December 31, 2002, 2001
and 2000, potential common shares of 161,986, -0- and 67,666,
respectively, were considered to be anti-dilutive and were excluded
from the calculation of diluted income (loss) per share.
-57-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Note 18 - SUBSEQUENT EVENT
On January 2, 2003, we contributed all of the outstanding capital stock
of Commonwealth Premium Finance Corporation to Unified Banking Company.
Below are certain balance sheet and income statement items for
Commonwealth Premium Finance Corporation as of or for the year ended
December 31, 2002.
Loans receivable................................ $ 2,960,343
Total assets.................................... 2,981,888
Note payable.................................... 1,520,000
Other liabilities............................... 276,120
Total shareholder's equity...................... 1,185,768
Gross revenue................................... $ 648,642
Interest expense................................ 61,263
------------
Net revenue................................. 587,378
Operating expense............................... (511,190)
------------
Profit before income taxes...................... $ 76,188
============
Below are certain balance sheet and income statement items for Unified
Banking Company and Commonwealth Premium Finance Corporation pro forma
combined as of and for the year ended December 31, 2002.
Loans receivable................................ $ 60,539,345
Total assets.................................... 83,246,289
Note payable.................................... 1,520,000
Other liabilities............................... 74,766,925
Total shareholder's equity...................... 6,959,364
Gross revenue................................... $ 5,896,449
Interest expense................................ 3,041,457
------------
Net revenue................................. $ 2,854,992
============
-58-
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of our quarterly consolidated operating
results for the years ended December 31, 2002 and 2001:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2002
- ----
Income Statement Data:
Gross revenue.......................... $ 4,301,811 $ 4,492,094 $ 4,546,031 $ 4,463,439
Gross profit........................... 3,699,981 3,782,563 3,858,890 4,051,157
Total expenses......................... 3,722,574 4,623,273 3,977,059 5,397,248
Loss from continuing operations........ (22,593) (840,710) (118,169) (1,346,091)
Other loss............................. (6,096) (18,106) (4,137) (4,003)
Income tax benefit (expense)........... 3,338 (161) (10,096) 376,358
Net loss from continuing operations.... (25,351) (858,977) (132,402) (973,736)
Net gain on sale of operations......... -- -- -- 637,681
Net income (loss) from discontinued operations 18,303 (4,938) (158) (6,236)
Net loss............................... (7,048) (863,915) (132,560) (342,291)
Earnings Per Share:
Basic loss per share................... $ (0.00) $ (0.30) $ (0.05) $ (0.12)
Fully diluted loss per share........... (0.00) (0.30) (0.05) (0.12)
Basic common shares outstanding at period end 2,877,634 2,858,972 2,858,972 2,844,246
Fully diluted common shares outstanding at
period end........................... 2,877,634 2,858,972 2,858,972 2,844,246
2001
- ----
Income Statement Data:
Gross revenue.......................... $ 4,279,753 $ 4,314,093 $ 4,363,286 $ 4,265,640
Gross profit........................... 3,649,898 3,486,575 3,705,097 3,776,046
Total expenses......................... 4,102,247 4,202,234 4,586,866 4,399,699
Loss from continuing operations........ (452,349) (715,659) (881,769) (623,653)
Other income (loss).................... (32,547) 24,261 34,269 36,571
Income tax benefit..................... 498,784 265,937 299,810 1,251,400
Net income (loss) from continuing operations 13,888 (425,461) (547,690) 664,318
Net gain on sale of operations......... -- -- -- 2,847,708
Net income from discontinued operations 188,768 118,791 260,888 247,263
Net income (loss)...................... 202,656 (306,670) (286,802) 3,759,289
Earnings Per Share:
Basic earnings (loss) per share........ $ 0.07 $ (0.11) $ (0.10) $ 1.31
Fully diluted earnings (loss) per share 0.07 (0.11) (0.10) 1.24
Basic common shares outstanding at period end 2,880,028 2,880,028 2,880,028 2,877,634
Fully diluted common shares outstanding at
period end........................... 3,050,530 2,880,028 2,880,028 3,027,030
Certain data presented above varies from the amounts previously
reported in our quarterly reports filed with the SEC. We have adjusted certain
previously reported amounts to reflect operations that have been discontinued
since the respective filing date of each such quarterly report and to reflect
certain income statement reclassifications.
-59-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
DIRECTORS
The name, age, principal occupation or position, term of office and
other directorships with respect to the directors of our company are set forth
below.
WEAVER H. GAINES, 59, has served as a director since 1993. Mr. Gaines
also was a member of our board from 1990 to 1992. Since 1993, Mr. Gaines has
been a director and the chairman for Ixion Biotechnology, Inc., a
development-stage biotechnology company. Mr. Gaines also served as its chief
executive officer from 1993 to December 2002. From 1985 until 1992, Mr. Gaines
held various executive positions at the Mutual Life Insurance Company of New
York, including executive vice president and general counsel, and was a member
of its executive committee and was responsible for management of its investment
services subsidiaries. Mr. Gaines' term as a Class III director of our company
expires at the 2003 annual meeting. Mr. Gaines has been nominated for an
additional three-year term.
JOHN S. PENN, 51, has served as a director since September 1999. Mr.
Penn also has served as our president since April 2000 and our chief executive
officer since April 2002. Mr. Penn served as an executive vice president of our
company from July 1999 to April 2000 and our chief operating officer from
September 1999 to April 2002. Mr. Penn served as a director and executive vice
president of Area Bancshares Corporation, a bank holding company located in
Owensboro, Kentucky, from September 1997 to July 1999. Prior thereto, Mr. Penn
served as the president, chief executive officer and a director of Cardinal
Bancshares, Inc., a bank holding company located in Lexington, Kentucky. Mr.
Penn's term as a Class III director of our company expires at the 2003 annual
meeting. Mr. Penn has been nominated for an additional three-year term.
TIMOTHY L. ASHBURN, 52, has served as our chairman of the board since
1989. Mr. Ashburn also served as our president from November 1997 to April 2000
and our chief executive officer from 1989 to 1992 and from 1994 to April 2002.
Mr. Ashburn has served as a member of the board of trustees of the Unified
Series Trust since October 2002, the AmeriPrime Advisers Trust since November
2002 and the AmeriPrime Fund since December 2002. Mr. Ashburn also has served as
the president of each such fund since October 2002. Mr. Ashburn was employed by
Vine Street Trust Company, Lexington, Kentucky, a wholly owned subsidiary of
Cardinal Bancshares, a Kentucky bank holding company, for the two-year period
from April 1992 through March 1994. Mr. Ashburn's term as a Class I director of
our company expires at the 2004 annual meeting.
ALICE T. KANE, 55, has served as a director of our company since March
2002. Ms. Kane currently serves as Chairman, Asset Management for Blaylock &
Partners, L.P., an investment banking and securities brokerage firm. Ms. Kane
has served as a member of the board of directors of Guess, Inc., an apparel
manufacturer, since June 1998 and of Global Crossing Ltd., a telecommunications
company, since April 2002. Ms. Kane also serves on Guess' and Global Crossing's
audit and compensation committees. From June 1998 to December 2001, Ms. Kane
served as president of American General Fund Group and chairman of VALIC Group
-60-
Annuity Funds with over $18 billion in assets under management. Ms. Kane joined
American General Corporation as executive vice president of its investments
advisory subsidiary, American General Investment Management L.P., in June 1998.
American General Corporation was one of the nation's largest diversified
financial organizations with assets of approximately $98 billion. Prior to
joining American General Corporation, Ms. Kane served her entire financial
services industry career at New York Life Insurance Company, which she joined in
1972. Up until her departure from New York Life, Ms. Kane was executive vice
president and chief marketing officer after serving as executive vice president
with responsibility for managing the company's asset management division from
1994 to 1997. Ms. Kane also was chairman of New York Life's MainStay Mutual
Funds, and served as general counsel of New York Life from 1986 to 1995. Ms.
Kane's term as a Class I director of our company expires at the 2004 annual
meeting.
PHILIP L. CONOVER, 56, has served as a director since July 2000. Since
1996, Mr. Conover has served as a private investor and financial consultant.
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.
Conover's term as a Class I director of our company expires at the 2005 annual
meeting.
EXECUTIVE OFFICERS
The name, age and position with respect to each of our executive
officers are set forth below:
TIMOTHY L. ASHBURN, 52, has served as our chairman of the board since
1989, as our chief executive officer from 1989 to 1992 and 1994 to April 2002,
and as our president from November 1997 to April 2000. Mr. Ashburn was employed
by Vine Street Trust Company, Lexington, Kentucky, a wholly owned subsidiary of
Cardinal Bancshares, Inc., a Kentucky bank holding company, for the two-year
period from April 1992 through March 1994. Mr. Ashburn also is a member of the
executive committee of our board of directors.
JOHN S. PENN, 51, has served as our president since April 2000, our
chief executive officer since April 2002 and a director since September 1999.
Mr. Penn also served as our chief operating officer from July 1999 to April 2002
and as an executive vice president from July 1999 to April 2000. Mr. Penn served
as a director and executive vice president of Area Bancshares Corporation, a
bank holding company located in Owensboro, Kentucky from September 1997 to July
1999. Prior thereto, Mr. Penn served as the president, chief executive officer
and a director of Cardinal Bancshares, Inc., a bank holding company located in
Lexington, Kentucky. Mr. Penn also is a member of the executive and 401(k)
investment oversight committees of our board of directors.
THOMAS G. NAPURANO, 61, a certified public accountant and a certified
management accountant, has served as our chief financial officer and an
executive vice president since 1989. Mr. Napurano served as a member of our
board of directors from 1989 to March 2002.
CHARLES H. BINGER, 46, has served as an executive vice president and
our general counsel since December 1999. Prior thereto, Mr. Binger was a partner
in the law firm of Thompson Coburn LLP, St. Louis, Missouri.
ANTHONY J. GHOSTON, 43, has served as a senior vice president and our
chief information officer since November 1997. Mr. Ghoston has been employed by
us in various management positions since 1989.
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DAVID F. MORRIS, 41, has served as a senior vice president and our
associate general counsel since December 1999. Prior thereto, Mr. Morris was an
associate in the law firm of Thompson Coburn LLP, St. Louis, Missouri.
DR. GREGORY W. KASTEN, 46, by virtue of his status as an executive
officer of a principal subsidiary of our company, also is considered an
"executive officer" of our company. Dr. Kasten has served as a director and the
president and chief executive officer of Unified Trust Company, National
Association since 2000, and of its predecessor, First Lexington Trust Company,
from 1994 to 2000. Dr. Kasten served as a director of our company from 1997 to
2000. Dr. Kasten has been awarded certified financial planner and certified
pension consultant designations and received a Master of Business Administration
degree with an emphasis on finance and investment management. Dr. Kasten also
received a medical degree but has retired from medical practice.
AUDIT COMMITTEE FINANCIAL EXPERT
The current members of our audit, nominating and compensation committee
are Mr. Weaver H. Gaines (chairman), Mr. Philip L. Conover and Ms. Alice T.
Kane. Our board of directors has determined that Mr. Gaines, based upon his
previous experience actively supervising the principal financial officer of
Ixion Biotechnology, Inc., is an "audit committee financial expert" within the
meaning of regulations of the Securities and Exchange Commission. Mr. Gaines is
an "independent" director within the meaning of the listing standards of the
Nasdaq.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that our executive officers and directors, and persons who own more
than ten percent of our outstanding stock, file reports of ownership and changes
in ownership with the Securities and Exchange Commission. To our knowledge,
based solely on our review of such reports furnished to us and written
representations that no other reports were required to be filed, all Section
16(a) filing requirements applicable to our officers, directors and greater than
ten percent beneficial owners were complied with during the year ended December
31, 2002.
CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our
chief executive officer and the chief executive officer of each of our
subsidiaries and all professionals serving in a finance, accounting, treasury or
tax role. A copy of the code of ethics is filed with the SEC as an exhibit to
this report.
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ITEM 11. EXECUTIVE COMPENSATION
----------------------
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation in 2002, 2001 and 2000 of
the individuals who served as our chief executive officer during 2002 and our
four other most highly compensated executive officers in 2002. Mr. Ashburn
served as our chief executive officer until April 2002 and continues to serve as
our chairman. Mr. Penn has served as our chief executive officer since April
2002. Mr. Penn served as our president at all times
during 2002.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
--------------------------
Annual Compensation
-------------------------------------- Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(1) Awards($) Options/SARs(#) Compensation($)
- --------------------------- ---- --------- -------- ----------------- ---------- ------------- ----------------
Timothy L. Ashburn(2) 2002 203,269 -- -- -- -- 5,584(3)
Chairman and Former Chief 2001 275,216 -- -- -- -- 5,538
Executive Officer 2000 280,288 -- -- -- 500 6,262
John S. Penn(4) 2002 174,038 -- -- -- -- 5,584(3)
President and Chief 2001 225,216 150,000 -- -- -- 5,538
Executive Officer 2000 225,134 -- -- -- 500 5,373
Dr. Gregory W. Kasten 2002 361,539 -- -- -- -- 3,853(3)
President and Chief 2001 530,146 -- -- -- -- 3,980
Executive Officer of 2000 619,249 -- -- -- 500 13,185
Unified Trust Company
Charles H. Binger 2002 265,604 -- -- -- -- 5,584(3)
Executive Vice President 2001 313,385 55,000 -- -- -- 5,538
and General Counsel 2000 245,197 -- -- -- 3,125 5,357
Thomas G. Napurano 2002 174,230 -- -- -- -- 5,311(3)
Executive Vice President 2001 225,216 -- -- -- -- 5,538
and Chief Financial Officer2000 225,000 -- -- -- 500 10,565
David F. Morris 2002 156,192 -- -- -- -- 5,370(3)
Senior Vice President and 2001 184,649 20,000 -- -- -- 5,538
Associate General Counsel 2000 159,807 -- -- -- 2,000 4,881
-------------------------
(1) The named executive officers received certain perquisites in 2002, 2001
and 2000, the amount of which did not exceed the lesser of $50,000 or 10%
of any such officer's salary or bonus.
(2) Mr. Ashburn served as our chief executive officer until April 24, 2002.
(3) Includes the following in matching contributions to our Section 401(k)
plan: $5,500 for Messrs. Ashburn, Penn and Binger; $3,769 for Dr. Kasten;
$5,227 for Mr. Napurano; and $5,286 for Mr. Morris. Also includes $84 for
premiums paid by us on a term life insurance policy for the benefit of the
executive officer.
(4) Mr. Penn was elected chief executive officer of our company on April 24,
2002.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
No stock options or stock appreciation rights were granted to the
individuals named in the Summary Compensation Table in 2002.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
The following table presents certain information concerning unexercised
stock options held by the individuals named in the Summary Compensation Table at
December 31, 2002. No options were exercised during fiscal year 2002 by such
individuals.
Shares for Which Value of Unexercised
Unexercised Options held at in-the-money Options/SARs
December 31, 2002 (#) at FY-End ($) (1)
--------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Timothy L. Ashburn 1,500 - $ - $ -
John S. Penn 16,000 - - -
Gregory W. Kasten 1,500 - - -
Charles H. Binger 3,125 - - -
Thomas G. Napurano 3,000 - - -
David F. Morris 2,000 - - -
- ------------------
(1) Based on the fair market value of our common stock on December 31, 2002 of
approximately $16.50 per share, based upon the last independent appraisal
of our common stock.
COMPENSATION OF DIRECTORS
During 2002, directors who were not otherwise employed by us were paid
$2,500 per quarter, provided they attended at least one board meeting during
such quarter. Additionally, directors who were not otherwise employed by us also
received $500 per meeting for each meeting of standing committees of the board
of directors that they attended. Directors also receive reimbursements for
reasonable expenses related to attendance at such meetings and periodic option
grants to acquire shares of our common stock. During 2002, each of the directors
who was not otherwise employed by us was granted an option to acquire 2,250
shares of our common stock at a price of $16.50 per share.
Beginning the second quarter of 2003, directors who are not otherwise
employed by us will be paid $5,000 per quarter as a retainer fee. Additionally,
they also will receive $500 per meeting for each meeting of the board and each
standing committee meeting that they attend. Directors also will receive
reimbursements for reasonable expenses at such meetings and periodic option
grants to acquire shares of our common stock.
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATORY ARRANGEMENTS
Dr. Gregory W. Kasten has an employment agreement with Unified Trust
Company, National Association, a subsidiary of our company, which agreement was
entered into in connection with and as additional consideration for our
acquisition of First Lexington Trust Company in 1997. The initial term of such
agreement was a two-year period beginning on June 1, 1997, the effective date of
the agreement. Commencing on the first anniversary of the effective date, and
continuing at each anniversary date thereafter, the agreement will automatically
renew for an additional year unless prior written notice is provided to Dr.
Kasten. During the initial two-year term of such agreement, Dr. Kasten was paid
an annual base salary of $500,000, which salary was increased to $600,000 in
2000. Effective June 1, 2001, Dr. Kasten voluntarily agreed to a reduction in
his annual salary to $500,000. Effective March 17, 2002, Dr. Kasten voluntarily
agreed to an additional reduction in his annual salary to $400,000. Effective
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May 12, 2002, Dr. Kasten voluntarily agreed to an additional reduction in his
annual salary to $300,000. Effective January 1, 2003, Dr. Kasten voluntarily
agreed to an additional reduction in his annual salary to $275,000. During the
term of the agreement, Dr. Kasten also is eligible to be awarded an incentive
bonus on a basis commensurate with those provided to other peer executive
officers.
If we terminate Dr. Kasten's employment agreement during the term of
his employment without "cause" (generally, willful failure to perform duties,
willful misconduct injurious to us or a material breach of the agreement), or if
Dr. Kasten terminates his employment with "good reason" (generally, the
assignment of duties inconsistent with his position, a material diminution in
authority or responsibilities, a reduction in any benefit specified in his
employment agreement, or any material breach of the agreement by us), we will be
required to pay annual non-compete payments to Dr. Kasten in an amount equal to
$499,200 for a period of three years following the termination of Dr. Kasten's
employment.
Each of Mr. Charles H. Binger and Mr. David F. Morris also has an
employment agreement with us. The term of such agreements is a minimum of five
years, beginning on January 1, 2000, and will continue thereafter until a notice
of termination of such agreement is delivered by us to such executive officers.
The term of the agreements will continue for twelve months after the date of the
notice, and such notice may not be delivered prior to the fourth anniversary of
the agreement.
Pursuant to the terms of their agreements, each of Mr. Binger and Mr.
Morris is entitled to receive an annual increase in his base salary equal to
fifteen and eight percent, respectively, plus the change in the consumer price
index for the previous twelve-month period ending September 30. In addition,
during the term of the agreements, Messrs. Binger and Morris are eligible to be
awarded incentive bonuses on a basis commensurate with those provided to other
peer executive officers of our company. Under the terms of their agreement, Mr.
Binger and Mr. Morris were entitled to a base salary of $369,000 and $205,000,
respectively, during 2002. Effective April 2002, each of Mr. Binger and Mr.
Morris voluntarily agreed to a reduction in his annual salary to $250,000 and
$150,000, respectively, for the remainder of 2002.
If we terminate Mr. Binger's or Mr. Morris' employment agreement during
the term of his employment without "cause" (generally, willful failure to
perform duties or willful misconduct injurious to us), or if Mr. Binger or Mr.
Morris terminates his employment with "good reason" (generally, the assignment
of duties inconsistent with his position, a material diminution in authority or
responsibilities, a reduction in any benefit specified in his employment
agreement, any material breach of the agreement by us or a termination by Mr.
Binger or Mr. Morris of his employment at any time within a period of three
years after a change in control of our company), we would be required to pay
salary continuation benefits to Mr. Binger and Mr. Morris, as the case may be,
in an amount equal to the salary Mr. Binger and Mr. Morris, respectively, would
have been paid through the remainder of the term of the agreement. In addition,
except upon termination of Mr. Binger's or Mr. Morris' employment by us for
"cause," by Mr. Binger or Mr. Morris without "good reason" or upon Mr. Binger's
or Mr. Morris' death or disability, each of Mr. Binger and Mr. Morris would be
entitled to receive certain non-compete payments following the termination of
his employment agreement, which payments would be due within 90 days following
the termination of his employment agreement and on each of the first and second
anniversaries of the date of termination, each in an amount equal to his
then-current annual base salary. The amount of such non-compete payments would
be increased by one-half in the event of our termination of Mr. Binger or Mr.
Morris without "cause" or by Mr. Binger or Mr. Morris with "good reason." If the
receipt of benefits upon a change in control of our company subjects Mr. Binger
or Mr. Morris to any Federal excise tax pursuant to the Internal Revenue Code,
we also will be obligated to pay Mr. Binger and Mr. Morris an additional amount
equal to the entire excise tax due.
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In the event we exercise our right to terminate Messrs. Binger's and
Morris' employment agreements on the first date permitted under such agreements
(December 31, 2004), we would be required to pay Messrs. Binger and Morris an
aggregate of approximately $1,736,393 and $822,158, respectively, which amounts
would be paid in three equal, annual installments, with the first installment
due on or before January 31, 2005. The amount of such payments is based upon the
following assumptions: an assumed two percent increase in the consumer price
index for the year ending September 30, 2003; and that such payments are not
paid as a result of a change in control of our company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The current members of the audit, nominating and compensation committee are
Messrs. Gaines and Conover and Ms. Kane. Messrs. Gaines and Conover served on
the committee at all times during 2002 while Ms. Kane joined the committee in
March 2002. Mr. Gaines served as a director and the president of Unified
Financial Securities, Inc., a subsidiary of our company, while such company was
owned by MONYCO, INC. Mr. Gaines resigned such positions in June 1990 in
connection with our acquisition of Unified Financial Securities, Inc. from
MONYCO, INC.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
-------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The following table sets forth information regarding the amount of our
common stock beneficially owned, as of March 31, 2003, by each of our directors,
the executive officers named in the Summary Compensation Table, any person who
is known by us to own beneficially more than 5% of our common stock and all our
directors and executive officers as a group:
NUMBER OF SHARES PERCENT OF OUTSTANDING
NAME AND ADDRESS(1) BENEFICIALLY OWNED COMMON STOCK
------------------- ------------------ ------------
Timothy L. Ashburn............................................ 197,882 (2)(3)(4) 7.0 %
Dr. Gregory W. Kasten......................................... 403,775 (2)(3)(5) 14.3
John S. Penn.................................................. 16,001 (3) 0.6
Charles H. Binger............................................. 113,150 (3) 4.0
Thomas G. Napurano............................................ 96,724 (2)(3) 3.4
David F. Morris............................................... 49,925 (3) 1.8
Weaver H. Gaines.............................................. 36,600 (3) 1.3
Philip L. Conover............................................. 2,750 (3) --
Alice T. Kane................................................. 2,250 (3) --
J. Robert Owens............................................... 192,615 (6) 6.8
Kenneth D. Trumpfheller....................................... 410,000 14.5
Directors and executive officers
as a group (10 persons).................................... 942,679 (2)(3)(4) 32.9
- -------------------
(1) Except as otherwise indicated, each individual has sole voting and
investment power over the shares listed beside his or her name. The
percentage calculations for beneficial ownership are based upon 2,829,246
shares of our common stock that were issued and outstanding as of March
31, 2003. The address for each person is 2424 Harrodsburg Road, Lexington,
Kentucky 40503.
(2) Includes 5,214, 896, 5,935 and 15,230 shares of our common stock
beneficially owned by Mr. Ashburn, Dr. Kasten, Mr. Napurano and all
directors and executive officers as a group, respectively, and held by our
equity participation plan. No person has voting power over such shares
except Mr. Ashburn, who directs the vote as the plan's trustee. Each of
Mr. Ashburn, Dr. Kasten, Mr. Napurano and all directors and executive
officers as a group, may be deemed to be the beneficial owner(s) of the
shares held by our equity participation plan because such holder(s) retain
sole investment power over such shares.
(3) Includes 1,500, 1,500, 16,000, 3,125, 3,000, 2,000, 3,750, 2,750, 2,250
and 36,075 shares of our common stock that may be acquired by Messrs.
Ashburn, Kasten, Penn, Binger, Napurano, Morris, Gaines and Conover, Ms.
Kane and all directors and executive officers as a group, respectively,
upon exercise of stock options granted by us pursuant to our 1998 Stock
Incentive Plan.
(4) Includes 47,126 shares of our common stock of which Mr. Ashburn may be
deemed to be the beneficial owner based upon his right to vote all shares
held subject to our equity participation plan. Mr. Ashburn disclaims
beneficial ownership of all shares held subject to our equity
participation plan except 5,214 shares. Also includes 26,325 shares of our
common stock that Mr. Ashburn has the right to vote pursuant to that
certain Irrevocable Proxy dated February 8, 2002, which irrevocable proxy
was granted in connection with a promissory note issued in favor of Mr.
Ashburn. Mr. Ashburn does not have the power to dispose of such shares
except upon default of the promissory note.
(5) Includes 869 shares of our common stock owned by Dr. Kasten's spouse,
of which Dr. Kasten disclaims beneficial ownership.
(6) Includes 1,000 shares of our common stock that may be acquired by Mr.
Owens upon exercise of stock options granted by us pursuant to our 1998
Stock Incentive Plan.
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The following schedule provides information, with respect to
compensation plans, on equity securities (common shares) that were authorized
for issuance as of December 31, 2002:
NUMBER OF SHARES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SHARES EQUITY COMPENSATION
TO BE ISSUED WEIGHTED-AVERAGE PLANS (EXCLUDING
UPON EXERCISE OF EXERCISE PRICE OF SHARES REFLECTED IN
OUTSTANDING OPTIONS OUTSTANDING OPTIONS COLUMN (a)
Plan Category (a) (b) (c)
- ------------- ------------------ ------------------ ----------------
Equity compensation plans approved by security
holders....................................... 107,441 $ 29.72 142,559
Equity compensation plans not approved by security
holders....................................... -- -- --
------------------ --------------- -------------
Total............................................ 107,441 $ 29.72 142,559
================== =============== =============
Our stockholders have previously approved our compensation plan.
ITEM 13. Certain Relationships and Related Transactions
----------------------------------------------
Dr. Gregory W. Kasten, the president of Unified Trust Company, National
Association, a subsidiary of our company, is a 25% member in Cygnus, LLC, a
Kentucky limited liability company that owns an office building in which Unified
Trust Company, National Association leases space. During 2002 and 2001, Cygnus,
LLC received payments of approximately $197,174 and $207,600, respectively, from
us with respect to such lease.
In April 2001, we entered into a management agreement with VSX
Holdings, LLC whereby we provide consulting and development services to VSX
Holdings, LLC. For the years ended December 31, 2002 and 2001, we received
payments totaling $258,758 and $419,977, respectively, from VSX Holdings, LLC
for such consulting and development services. Messrs. Timothy L. Ashburn, Thomas
G. Napurano, Charles H. Binger, Anthony J. Ghoston and David F. Morris (each an
executive officer of our company) have an ownership interest in VSX Holdings,
LLC. Please see note 16 to the audited, consolidated financial statements
contained in this report for more information with respect to VSX Holdings, LLC.
In December 2001, in connection with the sale of our insurance
operations, we funded a $300,000 revolving line of credit for the benefit of
John R. Owens, the former president of Equity Insurance Managers, Inc. and a
greater than five percent stockholder of our company. The line of credit has a
term of five years and bears interest at the rate of five percent per annum on
the principal amount from time to time outstanding. The line of credit is
secured by a pledge by Mr. Owens of 19,145 shares of common stock of our
company. Under the documents executed in 2001, Mr. Owens, at any time, may
surrender such shares in satisfaction of any amount due under the line of credit
(any shares surrendered will be valued at a price of $20.00 per share). As of
December 31, 2002, no amount was outstanding pursuant to such line of credit.
The law firm of Thompson Coburn LLP, of which Messrs. Charles H. Binger
and David F. Morris, our company's general counsel and associate general
counsel, respectively, are "of counsel," provided legal services to us and our
subsidiaries during 2002, and is providing legal services during 2003.
-68-
Certain of our officers and directors and companies in which they have
an ownership interest are customers of Unified Banking Company. All such
customer transactions were made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal risk of collectibility or present other
unfavorable features.
Item 14. Controls and Procedures
-----------------------
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our company's
and our subsidiaries' management, including our company's chief executive
officer and our chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. This evaluation included a review of revised reconciliation
procedures put in place following the discovery in the fourth quarter of 2002 of
potential reconciliation losses in our mutual fund administration services
operation. Based upon that evaluation, our chief executive officer and our
chief financial officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information relating to our
company (including our consolidated subsidiaries) required to be included in our
periodic SEC filings.
There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.
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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Our Consolidated Financial Statements are included in Part
II, Item 8:
Independent Auditors' Report
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
(2) Supplementary Consolidated Financial Statement Schedule as of
and for the years ended December 31, 2002, 2001 and 2000:
None.
All other schedules are omitted because of the
absence of conditions under which they are required
or because the required information is included in
the consolidated financial statements or notes
thereto.
(3) Exhibits.
See Exhibit Index on pages 77 to 79 hereto.
(b) Reports on Form 8-K.
We did not file any Current Reports on Form 8-K during the
quarter ended December 31, 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of the
8th day of April 2003.
UNIFIED FINANCIAL SERVICES, INC.
(Registrant)
By /s/ John S. Penn
--------------------------------
John S. Penn, President and
Chief Executive Officer
By /s/ Thomas G. Napurano
--------------------------------
Thomas G. Napurano,
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Unified Financial
Services, Inc., hereby severally and individually constitute and appoint Timothy
L. Ashburn and John S. Penn, and each of them, the true and lawful attorneys and
agents of each of us to execute in the name, place and stead of each of us
(individually and in any capacity stated below) any and all amendments to this
Annual Report on Form 10-K and all instruments necessary or advisable in
connection therewith and to file the same with the Securities and Exchange
Commission, each of said attorneys and agents to have the power to act with or
without the others and to have full power and authority to do and perform in the
name and on behalf of each of the undersigned every act whatsoever necessary or
advisable to be done in the premises as fully and to all intents and purposes as
any of the undersigned might or could do in person, and we hereby ratify and
confirm our signatures as they may be signed by our said attorneys and agents or
each of them to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Timothy L. Ashburn Chairman of the Board April 8, 2003
- ------------------------
Timothy L. Ashburn
/s/ John S. Penn President, Chief Executive April 8, 2003
- ------------------------
John S. Penn Officer and Director
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/s/ Philip L. Conover Director April 8, 2003
- ------------------------
Philip L. Conover
/s/ Weaver H. Gaines Director April 8, 2003
- ------------------------
Weaver H. Gaines
/s/ Alice T. Kane Director April 8, 2003
- -------------------------
Alice T. Kane
-72-
CERTIFICATION
I, John S. Penn, certify that:
(1) I have reviewed this annual report on Form 10-K of Unified
Financial Services, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
(4) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
(5) The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
-73-
(6) The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
April 8, 2003 /s/ John S. Penn
-----------------------
John S. Penn
President and
Chief Executive Officer
-74-
CERTIFICATION
I, Thomas G. Napurano, certify that:
(1) I have reviewed this annual report on Form 10-K of Unified
Financial Services, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
(4) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
(5) The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
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(6) The registrant's other certifying officers and I have
indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
April 8, 2003 /s/ Thomas G. Napurano
-----------------------
Thomas G. Napurano
Chief Financial Officer
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EXHIBIT INDEX
Ex. No. DESCRIPTION
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3.1(a) Amended and Restated Certificate of Incorporation of the
Company, filed as Exhibit 4.1(a) to the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30,
1997, is incorporated herein by reference.
3.1(b) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company, filed as Exhibit 3.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1999, is incorporated herein by reference.
3.1(c) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company, filed as Exhibit 3.1(b) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, is incorporated herein by reference.
3.2 By-laws of the Company, filed as Exhibit 4.2 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997, is incorporated herein by reference.
4.1 Certificate of Designations, Preferences and Rights of Series
D Junior Participating Preferred Stock of the Company, filed
as Exhibit 4.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1998, is
incorporated herein by reference.
4.2 Rights Agreement, dated as of August 26, 1998, between the
Company and Unified Fund Services, Inc., filed as Exhibit 1
to the Company's Registration Statement on Form 8-A dated
September 3, 1998, is incorporated herein by reference.
10.1 Employment Agreement, dated as of June 1, 1997, by and between
Health Financial, Inc. and Dr. Gregory W. Kasten, filed as
Exhibit 10.1 to Amendment No. 1 to the Company's Registration
Statement on Form 10-SB, is incorporated herein by reference.*
10.2 Tri-Party Agreement, dated June 18, 2002, among Health
Financial, Inc., Unified Trust Company, National Association
and Dr. Gregory W. Kasten, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, is incorporated herein by reference.*
10.3 Amendment to Employment Agreement, dated January 1, 2003, by
and between Dr. Gregory W. Kasten and Unified Trust Company,
National Association, is filed herewith.*
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10.4 Employment Agreement, dated as of December 31, 1999, by and
between the Company and Charles H. Binger, filed as Exhibit
10.24 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999, is incorporated herein by
reference.*
10.5 Waiver of Provisions of Employment Agreement, dated May 15,
2002, between the Company and Charles H. Binger, filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, is incorporated
herein by reference.*
10.6 Employment Agreement, dated as of December 31, 1999, by and
between the Company and David F. Morris, filed as Exhibit
10.25 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999, is incorporated herein by
reference.*
10.7 Waiver of Provisions of Employment Agreement, dated May 15,
2002, between the Company and David F. Morris, filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, is incorporated
herein by reference.*
10.8 Employment Agreement, dated as of April 30, 2001, by and
between Fiduciary Counsel, Inc. and Jack R. Orben, filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, is incorporated
herein by reference.*
10.9 Amended and Restated Unified Financial Services, Inc. 1998
Stock Incentive Plan, filed as Annex A to the Company's Proxy
Statement for the Company's 1999 Annual Meeting, is
incorporated herein by reference.*
10.10 First Amendment to Amended and Restated Unified Financial
Services, Inc. 1998 Stock Incentive Plan, filed as Exhibit
10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, is incorporated herein by reference.*
10.11 Third Amendment to Loan Agreement, dated as of February 27,
2001, by and among Bank One, Kentucky, NA, the Company,
Commonwealth Premium Finance Corporation, Equity Insurance
Managers, Inc., Equity Insurance Administrators, Inc. and 21st
Century Claims Service, Inc., filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, is incorporated herein by reference.
10.12 Fourth Amendment to Loan Agreement and Amendment to Promissory
Notes, dated September 1, 2001, by and among Bank One,
Kentucky, N.A., Commonwealth Premium Finance Corporation, the
Company, Equity Insurance Managers, Inc., Equity Insurance
Administrators, Inc. and 21st Century Claims Service, Inc.,
filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001, is
incorporated herein by reference.
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10.13 Line of Credit Note, dated July 22, 2002, by Commonwealth
Premium Finance Corporation in favor of Bank One, Kentucky,
NA, filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, is
incorporated herein by reference.
10.14 Continuing Guaranty, dated July 22, 2002, by the Company in
favor of Bank One, Kentucky, NA, filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, is incorporated herein by reference.
10.15 Purchase Agreement, dated December 17, 2001, by and among
Arthur J. Gallagher & Co., the Company, Equity Insurance
Managers, Inc., Equity Insurance Administrators, Inc. and
21st Century Claims Service, Inc., filed as Exhibit 10 to the
Company's Current Report on Form 8-K, dated December 17, 2001,
is incorporated herein by reference.
11.1 Computations of Earnings per share, is filed herewith.
14.1 Code of Ethics for Financial Professionals, is filed herewith.
21.1 List of Subsidiaries, is filed herewith.
23.1 Consent of Larry E. Nunn & Associates, LLC with respect to its
report dated January 31, 2003 regarding the consolidated
financial statements of the Company as of December 31, 2002
and 2001 and for the years ended December 31, 2002, 2001 and
2000, is filed herewith.
24.1 Power of Attorney (included on signature page hereto).
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, is filed herewith.
99.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, is filed herewith.
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* Management contract or compensatory plan or arrangement.
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