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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 31, 2003 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.)
2353 Alexandria Drive 40504
Lexington, Kentucky (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (859) 514-6174
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 PREDEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO _____
INDICATE BY CHECK MARK IF DISCLOSURE OF DELIQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE ACT).
YES NO __X__
AGGREGAGE MARKET VALUE OF THE COMMON EQUITY HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF JUNE 30, 2003:
COMMON STOCK, $0.01 PAR VALUE, $12,704,513
NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCKS, AS OF MARCH 2, 2004:
COMMON STOCK, $0.01 PAR VALUE, 2,826,117 SHARES OUTSTANDING
DOCUMENTS INCORPORATED BY REFERENCE
AS PROVIDED HEREIN, PORTIONS OF THE DOCUMENTS BELOW ARE INCORPORATED BY
REFERENCE:
DOCUMENT PART--FORM 10-K
REGISTRANT'S PROXY STATEMENT FOR THE PART III
2004 ANNUAL MEETING OF STOCKHOLDERS
UNIFIED FINANCIAL SERVICES, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business....................................................................................2
ITEM 2. Properties..................................................................................9
ITEM 3. Legal Proceedings..........................................................................10
ITEM 4. Submission of Matters to a Vote of Security Holders........................................10
ITEM 4A. Executive Officers of the Registrant.......................................................10
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.............................................................11
ITEM 6. Selected Financial Data....................................................................13
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................13
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk..................................27
ITEM 8. Financial Statements and Supplementary Data................................................28
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......49
ITEM 9A. Controls and Procedures....................................................................49
PART III
ITEM 10. Directors and Executive Officers of the Registrant.........................................50
ITEM 11. Executive Compensation.....................................................................50
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters........................................................................50
ITEM 13. Certain Relationships and Related Transactions.............................................50
ITEM 14. Principal Accounting Fees and Services.....................................................50
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................51
SIGNATURES.......................................................................................................52
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 or securities industries or the imposition of
regulatory penalties could have an effect on our operating results. Investments
may decline in value in a rising interest rate environment. Although we believe
our allowance for doubtful accounts is adequate, it may prove inadequate if one
or more large clients, or numerous smaller 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 three business lines, our ability to enhance
stockholder value and aggressively and profitably grow assets under management,
under service and under administration, our ability to provide a high level of
service satisfaction and manage costs, our ability to expand profit margins, our
ability to achieve future growth and the development of VSX Holdings as an
alternative trading system may prove to be other than expected. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results and outcomes may differ
materially from what is expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth herein under
"Risk Factors." Unless required by law, we undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. The data presented in the following pages should be
read in conjunction with our consolidated financial statements and the notes
thereto on pages 30 to 49 of this report.
GENERAL
Unified Financial Services, Inc., a Delaware holding company that was
organized on December 7, 1989, is an 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, including mutual fund distribution
services;
o Management and administration of 401(k) and other ERISA-directed
assets; and
o Management of wealth for individuals through portfolio
management and a suite of family- office services.
Our fundamental objective is to enhance stockholder value by profitably
growing assets under management, service and administration. A registered
investment adviser tells customers what securities to purchase. The trust
company maintains the activity of the various 401k and ERISA plans. We believe
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that 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 help us to our goal of 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.
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 wealth management and investment services to
individuals as well as investment services to 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 brokerage affiliate, Unified Financial Securities, Inc., serves as
the distributor for various mutual fund families serviced by Unified Fund
Services. Unified Financial Securities is located in Indianapolis, Indiana.
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 are used to expand our other core business lines.
In keeping with the narrowed business focus, in November 2003 we sold
all of the capital stock of Unified Banking Company to Blue River Bancshares,
Inc., for $8.2 million. In addition, in December 2003 we completed the sale of
our small retail brokerage business to Westminster Financial Securities, Inc.
for $40,000 cash. Our broker/dealer subsidiary, Unified Financial Securities,
Inc., will now concentrate exclusively on providing active and passive
distribution services to our mutual fund clients. This increased emphasis on
distribution services strengthens our complete product/service solution to the
third party mutual fund servicing industry in which we compete.
During 2003, total revenues at our trust and retirement operations for
our company grew, fueled by new clients significantly outpacing lost business in
our 401(k) ERISA-directed assets line of business. Assets under service at our
Unified Fund Services increased by 19.9%. Despite the increase, revenue
decreased principally due to Unified Financial Securities exiting the clearing,
retail and discount brokerage business. Assets under management at our
investment advisory affiliate (Fiduciary Counsel, Inc.) decreased 11.2% during
2003 from the prior year.
Unified Trust Company introduced two new products and services. The
Unified Retirement Counselor will help determine how much money to save, choose
an asset allocation, and recommend a combination of funds available in a
person's retirement plan that matches the person's chosen asset allocation. The
Unified Fiduciary Monitoring Index is a useful and value added fund management
technique. It is a mathematical formula for analyzing future mutual fund
performance.
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During 2003, our mutual fund administration operation focused on
improving quality of services and compliance through significantly expanding
internal controls, training employees, hiring experienced employees, and
industry participation. New systems have been implemented to improve operational
efficiency and reduce errors.
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 2353 Alexandria Drive,
Lexington, Kentucky 40504, telephone number (859) 514-6174. Our subsidiaries
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; and 36 West 44th Street, The Bar
Association Building, Suite 1310, New York, New York 10036, telephone number
(212) 852-8852.
INTELLECTUAL PROPERTY
We believe that we have developed and utilize valuable technology and
innovations that are trade secrets and in which we have a proprietary interest.
We seek to protect our proprietary information by, among other things, requiring
employees to execute confidentiality and non-disclosure agreements. We also have
applied for certain trademarks and patents.
OUR AFFILIATED MUTUAL FUNDS
As of December 31, 2003, our affiliated mutual funds, the AmeriPrime
Advisers Trust, the AmeriPrime Funds and the Unified Series Trust, maintained
approximately $329 million, $146 million and $169 million, respectively, in
total net assets. Each of the AmeriPrime Advisers Trust, AmeriPrime Funds and
the Unified Series Trust is administered by Unified Fund Services and
distributed by Unified Financial Securities. The board of trustees of each of
the AmeriPrime Advisers Trust, AmeriPrime Funds and the Unified Series Trust
consists of three disinterested trustees and two interested trustees, Timothy L.
Ashburn and Ronald C. Tritschler, stockholders of our company.
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 shares
at a price of $1 per share, representing approximately 19.9% of VSX, 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, is intended to 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 promissory note issued by VSX
Holdings to such investor. The note initially was secured by 85,000 shares of
our common stock pledged by certain executive officers of our company. During
January 2004, we purchased 35,500 of such shares, which remain pledged as
collateral. In addition, concurrent with the issuance of such note, 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 note is entitled to surrender the note to us in payment of the
exercise price of the option. During the years ending May 23, 2004 and 2005, the
exercise price per share of our common stock subject to the option will be $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
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(whether the investor, the executive officers or any other holder): (a) we would
issue 50,000 shares of stock (46,153 after May 23, 2004) 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, 2003, 2002 and 2001, we received payments totaling
$71,006, $258,758 and $419,977, 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, 2003, 2002 and 2001.
REGULATION OF HOLDING COMPANY ACTIVITIES
USA PATRIOD 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.
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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.
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 NASD, Inc., or NASD. The regulations to which broker-dealers are subject
cover all aspects of the securities business, including sales methods, trade
practices, capital structure of securities firms, recordkeeping and the conduct
of directors, officers and employees. Additional state and Federal legislation,
changes in rules promulgated by the 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 recordkeeping and record inspection requirements.
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INDUSTRY REGULATIONS
Our broker-dealer subsidiary, Unified Financial Securities, Inc., is an
NASD member. The NASD 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, AmeriPrime Advisers Trust and Unified Series Trust
are subject to substantive regulation under the Investment Company Act. Such
companies must comply with periodic reporting requirements. Proxy solicitations
are subject to the general proxy rules as well as to special proxy rules
applicable only to investment companies. Shares of investment companies can only
be offered at the next-determined net asset value plus any sales load. A fund's
management agreement initially must be approved by the fund's board of trustees
and a majority of the outstanding shares and, after two years, must be annually
approved, either by the board or by the outstanding voting shares. A fund's
management agreement must automatically terminate in the event of assignment and
typically is subject to termination upon 60-days' notice by the board or by a
vote of the majority of the outstanding voting shares. The underwriting or
distribution agreement also must be annually approved by the board or by a vote
of a majority of the outstanding voting shares, and must provide for automatic
termination in event of assignment. Transactions between the investment company
and an affiliate are prohibited.
REGULATORY PENALITIES 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; discretionary income available for investment; customer inability to
meet payment or delivery commitments; customer fraud; and employee fraud,
misconduct and error.
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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 NASD, SEC and Office of the Comptroller of
the Currency) 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 NASD. Any of the foregoing could have a material adverse effect upon
us. Such NASD, SEC and Office of the Comptroller of the Currency regulations are
designed primarily for the protection of the investing customers of securities
firms and financial institutions and not our stockholders. Finally, there is no
assurance that we, along with other financial institutions, fund distributors,
administrators and managers will not be subjected to additional stringent
regulation and publicity that may adversely affect our business.
COMPETITION
Since inception, we have encountered substantial competition in the
businesses in which we compete. Our principal competitors include mutual funds,
investment advisers, investment counsel firms and financial institutions such as
banks, trust companies, savings and loan institutions and credit unions.
Competition is influenced by various factors, including breadth, quality of
service and price. All aspects of our business are competitive. Large national
firms have much greater marketing capabilities, offer a broader range of
financial services and compete not only with us and among themselves but also
with commercial banks, insurance companies and others for retail and
institutional clients. Competition for assets under management, under service
and under administration 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. 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, 2003, we provided mutual fund services, transfer
agency, fund accounting, administration and/or distribution services to 31
mutual fund families consisting of 176 portfolios, with revenues from the
largest mutual fund family representing approximately 31.8% of Unified Fund
Services' revenues. 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.
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As of December 31, 2003, we provided trust and retirement services to
approximately 1,800 different clients, with revenues from the largest client
representing 1.9% of our trust company's revenues. Clients have the right to
cancel their contracts at anytime. No assurance can be given that any of these
clients will remain our clients upon expiration or termination of the
agreements.
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, 2003, we and our subsidiaries had 126 employees, of
which 122 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.
WEB SITES
Our web site address is "www.unified.com." We make available free of
charge on our web site our annual report on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K, and amendments thereto, as soon as
reasonably practicable after we file such reports with the SEC. The reference to
our web site does not constitute incorporation by reference of the information
contained in the web site and should not be considered part of this document.
Under Sections 13 and 15(d) of the Securities Exchange Act of 1934,
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.
ITEM 2. PROPERTIES
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We, through our subsidiary, Unified Trust Company, National
Association, lease our corporate headquarters and administrative office
facilities located at 2353 Alexandria Drive, Lexington, Kentucky. 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. Fiduciary Counsel's
administrative offices are located at 36 West 44th Street, New York, New York.
The operating lease for such offices expires on April 30, 2004 and such offices
have approximately 4,920 square feet. There are various alternatives including
extending the lease with the landlord or relocating to another in the New York
area. Our current offices are considered adequate to serve our foreseeable
needs. Other than the administrative office leases, we have no other significant
property holdings.
-9-
ITEM 3. LEGAL PROCEEDINGS
-----------------
On November 15, 2001, an arbitration was filed against Unified
Financial Securities, Inc. and certain other defendants (Martin and Diane
Saniski v. Unified Financial Securities, Inc., Hackett Associates, Inc., Donald
Friedman, Louis Aarons and Cliff Cardine, NASD Arbitration No. 01-05465). The
claimants in such action opened a joint account with Unified Financial
Securities, Inc. into which they deposited restricted shares of PMC Sierra
common stock registered to Martin Saniski. Apparently for estate and income tax
planning purposes, claimants sought to transfer a portion of the shares to an
account belonging to Diane Saniski only, and then transfer the shares to a
charitable remainder trust, which then would sell the shares. The entire
sequence of transfers took a little less than 60 days to complete. During such
60-day period, the market price of the PMC Sierra shares declined. Claimants
allege that they placed an order to sell the PMC Sierra shares with the
individual financial planner with whom they were dealing (an individual who is
not a registered agent of Unified Financial Securities, Inc.), but that the
order was not executed. Claimants request at least $6.5 million in compensatory
damages. Management believes, upon consultation with counsel, that the claims
are without merit and intends to defend the action vigorously. Unified Financial
Securities, Inc. has filed cross claims against the other defendants in this
arbitration and also has filed a claim against Hackett Associates, Inc.,
pursuant to its agreement with Hackett Associates, Inc., for reimbursement of
Unified Financial Securities, Inc.'s expenses to defend this matter. (Hackett is
a broker dealer who cleared through Unified Financial Securities.) The
arbitration with respect to this matter currently is scheduled to be held in
June 2004.
Various other 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,
2003 to a vote of our stockholders, through the solicitation of proxies or
otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The name, age and position with respect to each of our executive
officers are set forth below:
JOHN S. PENN, 52, has served as our president since April 2000, our
chief executive officer since April 2002, a director since September 1999 and
acting chairman since February 2004. 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, 62, 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, 47, 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. Mr. Binger's
employment with our company will terminate on March 31, 2004.
-10-
DAVID F. MORRIS, 42, 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. Mr.
Morris' employment with our company will terminate on March 31, 2004.
DR. GREGORY W. KASTEN, 49, 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
-------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
- -----------------------------------------
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
---- ---
2002
----
First Quarter $ -- --
Second Quarter 16.50 (1) 16.50 (1)
Third Quarter -- --
Fourth Quarter -- (2) -- (2)
2003
----
First Quarter $20.00(3) 20.00 (3)
Second Quarter 8.40 (1) 5.00 (4)
Third Quarter 8.05 (4) 8.05 (4)
Fourth Quarter 20.00 (3) 20.00 (3)
- -------------------
(1) During June 2002 and June 2003, we repurchased 240 and 129 shares,
respectively, of our common stock from the Unified Financial Services
Equity Participation Plan at a price of $16.50 and $8.40, 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 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.
(3) During March 2003 and December 2003, we repurchased 15,000 and 3,000
shares, respectively, of our common stock from former officers of
Equity Underwriting Group pursuant to the terms of agreements that we
entered into with such officers in December 2001 in connection with the
sale of our insurance operations.
(4) Private.
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 2,
2004, we reported approximately 335 stockholders of record holding our common
stock. We sold no securities during 2003. To our knowledge, the most recent
transaction in our common stock occurred on February 3, 2004 at a price of
$10.30 per share.
-11-
The following schedule provides information, with respect to
compensation plans, on equity securities (common stock) of the company that were
authorized for issuance as of December 31, 2003:
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........................ 133,858 $41.14 166,142
Equity compensation plans not approved by
security holders........................ -- -- --
------- ----- -------
Total...................................... 133,858 $41.14 166,142
======= ===== =======
..........Our stockholders have previously approved our compensation plan.
-12-
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, 2003, 2002, 2001, 2000 and 1999:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- --------------
Income Statement Data:
Gross revenue.................... $ 14,754,652 15,535,762 15,718,334 14,776,732 14,426,385
Gross profit..................... 12,592,972 12,197,141 12,340,993 11,939,522 11,201,739
Total expenses................... 13,067,600 13,905,040 14,080,763 13,014,689 12,136,882
Loss from continuing operations.. (474,628) (1,707,899) (1,739,770) (1,075,167) (935,143)
Other income (loss).............. (35,928) (25,636) (60,230) (334,888) (314,151)
Non-recurring expense............ (2,668,078) -- -- -- --
Income tax benefit............... 797,894 123,549 1,926,353 298,658 231,189
Net income (loss) from continuing
operations..................... (2,380,740) (1,609,986) 126,353 (1,111,397) (1,018,105)
Net gain on sale of operations... 1,741,768 637,681 2,847,708 (54,952) (129,487)
Net income (loss) from discontinued
operations..................... 47,864 (373,509) 394,412 (36,341) (603,198)
Net income (loss)................ (591,108) (1,345,814) 3,368,473 (1,202,690) (1,750,790)
Common Share Data:
Book value per share at year-end
(fully diluted)................ $ 4.85 5.45 5.53 4.47 4.68
Basic earnings (loss) per share.. (0.21) (0.47) 1.17 (0.42) (0.61)
Basic earnings (loss) per share-continuing
Operations...........................(.084) (0.56) 0.04 (0.39) (0.35)
Fully diluted earnings (loss) per share (0.21) (0.47) 1.11 (0.40) (0.59)
Fully diluted earnings (loss) per share......
Continuing operations................(0.84) (0.56) 0.04 (0.37) (0.34)
Avg. common shares outstanding at
year-end....................... 2,832,407 2,866,452 2,879,476 2,880,028 2,869,862
Avg. diluted common shares
outstanding at year-end........ 2,832,407 2,866,452 3,029,122 2,984,159 2,975,823
Balance Sheet Data (at year-end):
Total assets of continuing operations$19,339,792 13,564,716 10,404,343 23,069,723 22,292,104
Total assets of discontinued operations -- 80,264,400 69,786,649 42,365,604 14,456,890
Investment securities............ 3,801,072 201,487 358,713 473,272 1,818,676
Total liabilities of continuing
operations 5,853,166 4,137,975 7,178,099 15,944,377 14,856,378
Total liabilities of discontinued operations -- 74,196,320 63,961,290 35,856,084 7,314,630
Stockholders' equity............. 13,486,626 15,494,821 16,748,911 13,325,543 13,936,301
Other Selected Financial Data:
Assets under management.......... $ 879,362,793 720,065,488 891,542,438 977,844,600 1,003,982,000
Assets under service............. 14,008,074,359 11,681,533,180 5,900,463,371 4,800,000,000 4,200,000,000
Total employees at year-end...... 126 144 161 168 102
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.
-13-
In December 2001, we sold substantially all of the assets and assigned
substantially all of the liabilities of our insurance subsidiaries, Equity
Insurance Managers, Inc., Equity Insurance Administrators, Inc. and 21st Century
Claims Service, Inc., to Arthur J. Gallagher & Co. In connection with the sale,
$800,000 in cash was deposited into an escrow account and was subject to
possible indemnification claims of Arthur J. Gallagher & Co. pursuant to the
sale agreement. As of December 31, 2001, we established a liability of $800,000
related to the escrow. Based on our estimate of the anticipated claims
settlement at December 31, 2002, we recorded a gain on the sale of $280,000
during 2002. During the third quarter 2003, we settled all outstanding claims
against the escrow for $250,000. As a result of such settlement, we recorded an
additional gain on the sale of operations of $270,000 during the year ended
December 31, 2003. In addition, we reversed $42,116 in selling expenses accrued
for potential miscellaneous taxes and professional fees that was not required.
During the year ended December 31, 2003, we also accrued $122,599 for income
taxes related to the gain on sale.
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.
In November 2003, we sold Unified Banking Company to Blue River
Bancshares, Inc. in exchange for $8.2 million in cash. In connection with such
sale, we executed a depository agreement pursuant to which we agreed to maintain
deposits solely with Shelby County Bank, a wholly owned subsidiary of Blue River
Bancshares, or Unified Banking Company until we and our subsidiaries have
maintained with either or both of Unified Banking Company and Shelby County Bank
an aggregate minimum deposit balance, computed quarterly, of $8.5 million. The
depository agreement has a term of three years from November 19, 2003. In
connection with the sale, we had selling expenses of $228,449. We recorded state
and federal taxes of $958,355. The after tax gain on sale was $1,552,251.
As required by accounting rules, the operating results of our insurance
subsidiaries, Fully Armed Productions, Inc. and Unified Banking Company have
been excluded from our results from continuing operations for the years ended
December 31, 2003, 2002 and 2001. Such results are reported as discontinued
operations for such years.
COMPARISON OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 and 2002
Revenue for the year ended December 31, 2003 compared to the same
period of 2002 declined $781,110, or 5.0%, from $15,535,762 to $14,754,652. For
such periods, gross profit increased $395,831, or 3.2%, from $12,197,141 to
$12,592,972.
For the year ended December 31, 2003 compared to December 31, 2002,
trust and retirement gross revenue and gross profit increased $421,407, or 8.5%,
and $407,818, or 10.1%, respectively, primarily due to an increase in the
average level of assets under management/administration. During the year ended
-14-
December 31, 2003, our trust and retirement services operation added 126 new
accounts, representing approximately $119.8 million in assets under
administration/management, but also lost 45 accounts representing approximately
$34.4 million in assets under administration/management. As of December 31,
2003, our trust and retirement services operation had approximately $677.4
million in assets compared to $491.8 million as of December 31, 2002 an increase
of approximately 37.7%. Wealth management assets total growth increased
$94,823,824, or 35.1%, to $364,609,329 as of December 31, 2003 from $269,785,505
at December 31, 2002. ERISA assets total growth increased $90,171,784, or 40.5%
to $312,771,784.
For such periods, mutual fund administration services revenue declined
$1,202,937, or 14.4%, and gross profit decreased $22,503, or 0.4%. Our mutual
fund administration services operation consists of Unified Fund Services, Inc.,
our mutual fund administration services subsidiary, and Unified Financial
Securities, Inc., our brokerage subsidiary. Unified Financial Securities gross
revenue declined $1,031,843 from $1,750,032 to $718,189. Gross profit for
Unified Financial Securities decreased $72,200 from $481,421 to $409,520. During
2002, management made the decision to exit the clearing, retail and discount
brokerage business and focus the efforts of our brokerage subsidiary on the
distribution of mutual funds. By the end of 2003, we had completely exited the
retail and discount brokerage businesses. For the year ended December 31, 2003,
Unified Fund Services' revenue decreased by $171,094, or 2.6%, and gross profit
increased $49,697, or .9%, respectively, compared to the same period of 2002.
For the year ended December 31, 2003, transfer agency revenue and gross profit
increased $493,079, or 21.8%, and $562,055, or 28.7%, respectively, due
principally to the addition of the Huntington funds in June 2002, which added
$2.9 billion in assets for all of 2003 versus $3.4 billion for half of 2002. The
addition of five new funds in 2003 added approximately $342 million in assets
under service as of the end of 2003. Fund accounting revenue and gross profit
declined $149,599, or 9.0%, and $146,807, or 10.3%, respectively, due to three
funds closing in early 2003. Retirement service fees revenue and gross profit
declined $91,479, or 32.8%, as more fund clients discontinued operations due to
continuing poor market conditions. Administrative services decreased $38,698, or
2.7% and gross profit decreased $51,566, or 3.6%, due to the closure of three
funds in early 2003. Service plan fees increased $66,951 and gross profit
increased $119,714. For such periods, trail income and net trail income declined
by $201,158, or 42.0%, and $57,799, or 28.7%, respectively, due to a decrease in
basis points received from one of our mutual fund providers. Investment
management fee income and gross profit declined $256,631 due to Unified
Investment Advisers, Inc. ceasing to serve as the investment advisor to the
Liquid Green Money Market Fund in 2002. As of December 31, 2003, we provided
mutual fund administrative services to 31 mutual fund families consisting of 176
portfolios and approximately $14.0 billion in assets under service, compared to
29 mutual fund families consisting of 185 portfolios and approximately $11.7
billion in mutual fund assets under service as of December 31, 2002.
For the year ended December 31, 2003 compared to the same period of
2002, investment advisory revenue and gross profit declined $182,860, or 11.7%,
and $125,033, or 9.8%, respectively. Such declines primarily were due to the
loss of a large client during the early part of 2003. Also contributing to the
decrease in revenue was the loss of a large family client amounting to
approximately $20,000 in fee income. In addition, many of our investment
advisory clients are billed annually in the beginning of the year. Asset levels
were lower during January 2003 than January 2002, which resulted in lower fee
income during 2003. Assets under management at our investment advisory operation
decreased $19.7 million, or 8.6%, to $207,598,658.
Gross revenue and gross profit at our premium financing operation
increased $249,231 and $201,500, respectively. This is primarily due to a
$135,549, or 19.7%, increase in revenues at our premium finance company.
Revenues at such company increased primarily as the result of an increased
volume of loans outstanding and an increased interest spread due to a reduction
in the prime rate of interest. Receivables at our insurance premium finance
company were $4,320,251 at December 31, 2003 compared to $2,960,344 at December
31, 2002.
-15-
For such periods, corporate revenue and gross profit decreased $65,951,
or 64.6%. This is due to interest received on note receivable in 2002.
Total operating expenses decreased $2,024,381, or 11.7%, for the year
ended December 31, 2003 compared to the same period of 2002. Of such decrease,
$1,176,941 relates to cost sales discussed above as a part of gross profit.
Total expenses less cost of sales decreased $847,440. Employee compensation
expense declined by $617,894, or 8.0%, primarily due to salary reductions taken
by certain officers of our company during March and April of 2003 and 2002,
which reductions ranged from 20% to 40% of such officers' annualized salary, and
a reduced employee workforce. Correspondingly, employee benefits decreased by
$50,540, or 4.4%. Data processing expense increased $77,891, primarily due to an
$82,723 increase at our trust and retirement services operation due to its
expanded usage of vendor products. Mail and courier expense declined $22,393, or
17.5%, primarily due to lower business volume at our brokerage subsidiary.
Telephone costs declined $68,645, or 30.4%, primarily due to the elimination of
our wide area network in May 2002. Equipment rental and maintenance expense
decreased by $19,292, or 4.7%, primarily due to $33,058 increase in licensing
fees related to new cash reconciliation software at our mutual fund
administration services operation, offset by a $23,502 decline in expenses
associated with our brokerage clearing relationships. Also contributing to the
decrease is due to capitalizing software in 2003 versus expensing in 2002, which
amounted to $13,995, and $16,185 decline at our corporate segment due to non
recurring system enhancements in 2002. Occupancy increased $57,761, or 7.1%,
primarily due to a $77,422 increase at our premium finance company, which was
part of the selling agreement and a $12,919 increase at our trust company.
Offsetting this is a $30,516 reduction in costs at our corporate segment. For
such periods, depreciation and amortization expense increased $60,547, or 25.1%.
The depreciation and amortization expense recorded for 2003 is typical of our
normal, recurring expense. The expense recorded for 2002 included a reversal of
an accrual made during 2001, which resulted in a reduction of depreciation and
amortization expense for 2002 compared to the same period of 2003. Professional
fees decreased $112,939, or 11.0%, primarily due to a $252,789 decrease at our
mutual fund service operation. This decrease relates to the accrual of costs to
startup the Unified Series Trust in 2002 and the closure of Unified Investment
Advisers, which reduced trustee fees. Also contributing to the decline was a
reduction of $21,087 in professional fees at our brokerage subsidiary due to it
being reimbursed by a third-party clearing broker dealer for legal expenses we
previously paid in connection with a pending arbitration. Expenses at our Trust
operation decreased $38,423. Travel expense decreased $116,818 of which $70,646
is due to accruing expenses relating to the cash management reconciliation issue
in 2002. Also contributing was a decrease in traveling by our corporate staff.
Insurance expenses increased $203,859, or 84.5%, primarily due to our purchase
of expanded insurance coverage and due to a general increase in insurance rates
in the insurance industry. For such periods, errors/recovery expense declined
$210,013, primarily due to a $454,000 accrual at our mutual fund operation in
2002, relating to reconciliation issues. Offsetting expense in 2002 was a
$190,000 recovery in 2002. Provision for bad debt decreased $64,638, or 57.0%.
Business development costs decreased $107,020, or 69.8%. For such periods, other
operating expenses increased $152,694, or 35.1%, primarily due to an increase in
all other expense at our trust operation of $193,649.
Trust and retirement results from operations increased $791,745 from a
loss of $378,867 in 2002 to a profit of $421,407. Of such increase revenue
increased $412,407 and expenses decreased approximately $367,000 principally
related to a reduction in staff and lower operating expenses. Mutual fund
administration results from operations increased $354,371 from $234,019 in 2002
to $588,390 in 2003. Revenue decreased $1,202,937 principally at our brokerage
operations which exited the clearing, retail and discount brokerage business
which has lower gross profit businesses. Our mutual fund administration
operating expenses decreased $494,656. For such periods, errors/recovery expense
declined $210,013, primarily due to a $454,000 accrual in 2002, relating to
reconciliation issues. Offsetting the expense in 2002 was a $190,000 recovery.
Our professional and consulting fees decreased $196,519 due to the closure of
Unified Investment Advisers, which was partially offset by higher consulting
fees related to consulting associated with the cash management reconciliation
project. Our investment advisory results from operations decreased $53,411 due
-16-
to the loss of a large client in early 2003 and many of our investment advisory
clients are billed annually when asset levels were lower during January 2003
than January 2002, which resulted in lower fee income during 2003. Our premium
financing results from operations increased $124,010 primarily as the result of
an increased volume of loans outstanding and an increased interest spread due to
a reduction in the prime rate of interest.
Loss from operations decreased $1,223,271, or 72.0%, due to the
$2,004,381 decrease in expenses as discussed above offset by the $781,110
decrease in revenue. Net loss from continuing operations increased $770,754,
primarily due to a $2,708,078 expense relating to the settlement of employment
contracts. We terminated our in house counsels' employment agreements and will
be utilizing external counsel. We anticipate this will lower expenses.
Partially, offsetting this was an increase of $674,345 in tax benefit.
For the year ended December 31, 2003, we recorded a gain on sale of
operations of $1,741,768 compared to $637,681 for the same period of 2002. For
the year ended December 31, 2003, net gain on sale of Unified Banking Company
was $1,552,251. Net gain on sale of Equity Insurance Managers was $189,517. We
recorded income of $270,000 from settlement of the escrow established for
possible indemnification claims of Arthur J. Gallagher & Co. pursuant to the
sale agreement dated December 17, 2001. The reversal of accruals relating to the
sale of our insurance operations amounted to $42,116. During 2002, the $637,681
gain on sale was related to Equity Insurance Managers. Taxes on the gain on sale
increased $575,288.
Income from discontinued operations for year 2003 was $47,864 compared
to a loss of $373,509 for the same period of 2002. Income for the year ended
December 31, 2003 at Unified Banking Company was $80,004 compared to a loss of
$626,369 for the same period of 2002. During June 2002, Unified Banking Company
charged-off $655,590 in loans, which accounted for most of the 2002 loss. Also
included in net income/loss from discontinued operations is $6,822 related to
Equity Insurance Managers of Illinois, Fully Armed Productions, and Unified
Employee Services.
Net loss decreased $754,706 from a loss of $1,345,814 for the year
ended December 31, 2002 to a loss of $591,108 for the same period of 2003.
Income from discontinued operations improved $421,373 with Unified Banking
Company accounting for $546,365 of the improvement ($655,590 of the $626,369
loss was related to loans written off in 2002). In addition, we recorded a net
gain on the sale of operations of $1,741,768 in 2003 compared to $637,681 in
2002, a change of $1,104,087. The net loss from continuing operations increased
$770,754 from a loss of $1,609,986 in 2002 to a loss of $2,380,740 for the year
ended December 31, 2003. For such periods, expenses declined $2,004,381 and
gross revenue decreased $781,110. Basic and fully diluted earnings per share for
the year ended December 31, 2003 were ($0.21) per share compared to ($0.47) per
share in 2002.
-17-
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
decreased $182,572, or 1.2%, from $15,718,334 to $15,535,762. For such years,
gross profit decreased $143,852, or 1.2%.
For the year ended December 31, 2002 compared to 2001, trust and
retirement services revenue increased $124,021, or 2.6% primarily due to
increased fees associated with new accounts. Gross profit decreased $17,441, or
0.4%, primarily due to an increase in commissions paid. 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.
Our mutual fund administration services operation consists of Unified
Fund Services, Inc., our mutual fund administration services subsidiary, and
Unified Financial Securities, Inc., our brokerage subsidiary. Gross revenue for
our mutual fund administration increased $138,642, or 1.7%. Gross profit
increased $413,746, or 7.2%. For such years, Unified Fund Services revenue
increased $685,164, or 12.7%, and gross profit increased $595,876, 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, Unified Fund
Services 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. 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. All such
CPA relationships terminated in 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.
-18-
For such years, investment advisory revenue and gross profit declined
$398,714, or 20.3%, and $493,636, 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.
Gross revenue and gross profit at our premium financing operation
increased $9,235, or 1.6%. Receivables at our premium finance company were
$2,960,344 at December 31, 2002 and $2,216,803 at December 31, 2001.
Corporate revenue and gross profit declined $55,756, or 35.3%,
primarily due to our receipt in 2001 of $135,000 in settlement of a trademark
dispute. Revenue in 2001 included $82,826 of cash receipts from Equity Insurance
Managers.
Total expenses decreased $204,443, or 1.2%, for the year ended December
31, 2002 compared to the year ended December 31, 2001. Of such decrease, cost of
sales accounts for $38,720. Total expenses less cost of sales decreased
$165,723. 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 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. Data processing expense increased $194,092, or 36.3%, primarily due to
the purchase of a new straight through processing system at our trust and
retirement services operation. Occupancy expense increased $112,993, or 16.1%,
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 $329,293, or 57.7%, 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 $484,273, or 89.6%, 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. Errors/recovery expense decreased
$479,783, or 67.8%. 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 errors during the fourth quarter of 2002. Offsetting this expense
was a $517,000 loss recognized by Unified Investment Advisers, Inc. in the
fourth quarter of 2001, which loss was related to our affiliated money market
fund. We received a partial recovery of $145,000 during 2002 with respect to
this loss. Our provision for bad debt declined $287,321, or 71.7%, due to our
-19-
write-off during 2001 of certain uncollected receivables at our mutual fund
services operations, without any corresponding write-off during 2002. Business
development costs declined by $58,148, or 27.5%, due to a decline in marketing
costs at our trust operation. Insurance expense increased $109,770, or 83.4%,
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 increased $77,142, or 22.2%, 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
$84,077, or 11.0%, primarily due to our efforts to control costs.
Trust and retirement results from operations increased $91,573 to a
loss of $378,867 in 2002 from a loss of $470,440. The improvement is principally
due to lower expenses related to a reduction in staff and lower operating
expenses. Mutual fund administration results from operations increased $178,173
to $234,019 in 2003 from $55,846 in 2002. This increase resulted from a decrease
in operating expenses, partially offset by a decline in revenues. Revenue at our
mutual fund administrative services operation increased $7997,941 while our
brokerage operations revenue declined $659,299. Our brokerage operations began
in 2002 to exit the clearing, retail and discount brokerage business which has
lower profit business. Our 2002 mutual fund administration operating expenses
decreased significantly compared to 2001 as a result of writing off
uncollectible receivables. During the second half of 2001, management
implemented certain expense reductions in an effort to improve the profitability
of the operations. These reductions were offset by the establishment of a
$454,000 reserve for possible losses related to reconciliation issues. We also
established a $400,000 reserved related to the estimated cost to ascertain the
extent and nature of such possible losses and to redesign control procedures and
make other system enhancement to ensure that such reconciliation issues do not
recur. Our investment advisory results of operations decreased $105,246 related
to lower market value of assets under management partially offset by the
elimination of goodwill amortization as required by general accepted accounting
principles and a planned reduction in operating expenses. Our premium financing
results from operations increased $18,402 primarily as the results of an
increased volume of loans outstanding slightly offset by higher operating
expenses.
For the year ended December 31, 2002, we recorded a $1,609,986 net loss
from continuing operations compared to a $126,353 income for 2001. The
$1,736,339 increase in net loss during such years primarily was due to the
decline in income tax benefit from $1,926,353 for the year ended December 31
2001 to $123,549 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 $143,852 decrease in gross profit, as discussed above, offset by the
decreased expenses.
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 $373,509
in net loss from discontinued operations for 2002 compared to $394,412 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 and of our banking operations in
November of 2003.
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.
-20-
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. 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. Specifically, During 2002, we
experienced operational issues with respect to our mutual fund administrative
services affiliate, which issues are primarily related to problems associated
with our reconciliation of various cash accounts. In connection therewith, we
established an $854,000 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. During 2003, we expended all of the $400,000 reserve. At
December 31, 2003, we have estimated a remaining liability of $161,000 of the
$454,000 reserve mentioned above.
-21-
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. 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. During 2003, $550,000 was
released from escrow. We received $800,000 in cash for the years ended December
31, 2002 in connection with the sale of the assets of our insurance subsidiaries
in 2001. We also received $8.2 million in cash before selling expenses of
$228,449 for the year ended December 31, 2003 in connection with the sale of
Unified Banking Company.
Cash and cash equivalents for the year-ended December 31, 2002 of
$4,269,657 increased to $5,536,622 at December 31, 2003. The net increase of
cash and cash equivalents for the company was $1,226,965. Of such amount, we
received $8,200,000 from Blue River Bancshares for the sale of stock of Unified
Banking Company, NA, and we incurred selling expenses of $228,449. We received
cash related to the note receivable from Arthur J. Gallagher & Co. of $800,000
and paid Arthur J. Gallagher & Co. $250,000 related to indemnification claims
with Arthur J. Gallagher & Co. Our premium insurance financing receivable
increased $1,359,907 of which the premium finance operations received proceeds
from its line of credit of $55,000. Our receivables increased $403,750. We
invested the part of the proceeds from the sale of Unified Banking Company of
$6,012,939 less the monies used to finance the premium finance receivable of
$2,430,000. We retired 18,129 shares of our common stock for $316,084. Capital
expenditures accounted for a $228,170 usage of cash. We expended $400,000 for
the cost of professional fees, related travel and administration expenses to
ascertain the nature and extent of operational issues at our mutual fund
operations and we incurred $292,600 related to reconciliation losses. The cash
loss from operations, net of non-cash items such as: provisions for
depreciation, provision for bad debt, change in market value of securities, loss
on disposal of fixed assets. We expended cash of $78,000 for the prepaid income
taxes and deposit on the purchase of Latinvalley LLC., securities of $43,000. We
also received $71,006 from VSX Holdings, LLC during the year ended December 31,
2003 in connection with services we provided relating to the construction and
development of the VSX marketplace and its corresponding products.
-22-
CAPITAL RESOURCES. Total stockholders' equity was $13,486,626 at
December 31, 2003 compared to $15,494,821 at year-end 2002. The decline in total
equity was due to our loss from continuing operations for the year ended
December 31, 2003, partially offset by the gain realized upon the sale of the
assets of our insurance subsidiaries. Contributing to the decline was the
retirement of common stock. We had no material commitments for capital
expenditures as of December 31, 2003.
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.
OFF-BALANCE SHEET ARRANGEMENTS
In connection with the organization of VSX a third-party investor made
a $3.0 million loan to VSX, which loan is evidenced by a note issued by VSX to
such investor. In connection with our subscription for member interests in VSX,
we issued an option to the third-party investor to acquire shares of our common
stock, which option is exercisable for up to 50,000 shares before May 23, 2004
and 46,153 shares after May 23, 2004. The holder of the option may surrender the
$3.0 million promissory note issued with respect to VSX Holding's loan in full
satisfaction of the exercise price of the option.
We have entered into a management arrangement with VSX, a Delaware
limited liability company, whereby we provide consulting and development
services to VSX Holdings. For the years ended December 31, 2003, 2002 and 2001,
we received payments totaling $71,006, $258,758 and $419,977, respectively, from
VSX 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, 2003, 2002 and 2001.
On May 23, 2000, we subscribed for 10 shares of VSX in exchange for $10
and certain intangible property rights. We currently own approximately 0.5% of
the outstanding shares of VSX Holdings, but have the right to purchase up to an
additional 1,990 (19.9%) shares at a price of $1 per share, upon the occurrence
of certain specified events. Our investment in VSX is accounted for on the cost
method of accounting. VSX 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, is intended to serve as a virtual, real-time private
financial market place. In connection with the organization of VSX, a
third-party investor made a $3.0 million loan to VSX, which loan is evidenced by
a debenture issued by VSX Holdings to such investor. The debenture initially was
secured by 85,000 shares of our common stock pledged by certain executive
officers of our company. During January 2004, we purchased 35,500 of such
shares, which remain pledged as collateral. 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.
-23-
CONTRACTUAL OBLIGATIONS
In January 2004, we entered into agreements with our general counsel
and our associate general counsel to buy out their employment contracts. In
accordance with the agreement employment of the officers will cease during early
2004. The agreement requires the Company to pay, the officers a cash settlement
of $2,708,078, which has been accrued as of December 31, 2003 and is reflected
as a non-recurring charge in the statement of operations for 2003. The
agreements also includes the buy back of 47,025 shares of our stock held by the
officers and we granted 35,500 stock options to the officers with an exercise
price of $10.30 per share
PAYMENTS DUE BY PERIOD
Less than 1 to 3 3 to 5 More than
Total 1 year years years 5 years
--------------------------------------------------------------------
Operating leases $1,851,913 522,724 1,329,189 - -
Bank line of credit 55,000 55,000 - - -
Contract settlement liability 3,192,436 3,192,436 - - -
--------- --------- ----------- -- --
Total $5,099,349 3,770,160 1,329,189 - -
========= ========= ========= == ==
RISK FACTORS
Our business is subject to a number of risks and uncertainties. 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 FURTHER 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.
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 24.9% 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 customers, not our creditors
or stockholders. We and our subsidiaries also are subject to the supervision of
the SEC 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.
-24-
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. During 2003, we expended all of the $400,000
reserve. At December 31, 2003, we have estimated the remaining liability of
$161,000 of the $454,000 reserve. The review process is complete. Our ability to
manage any future growth will continue to depend upon the successful expansion
of our sales, marketing, customer support, administrative infrastructure and the
ongoing implementation and improvement of a variety of internal management
systems, procedures and controls. Continued growth also will require us to hire
more personnel, and expand management information systems. Recruiting qualified
personnel is an intensely competitive and time-consuming process. There can be
no assurance that we will be able to attract and retain the necessary personnel
to accomplish our growth strategies or that we will not experience constraints
that will adversely affect our ability to support satisfactorily our clients and
operations. There can be no assurance that we will be able to attract, manage
and retain additional personnel to support any future growth, if any, or will
not experience significant problems with respect to any infrastructure expansion
or the attempted implementation of systems, procedures and controls. If our
management is unable to manage growth effectively, our business, financial
condition and results of operations could be materially adversely affected.
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.
-25-
OUR OPERATIONS ARE PARTIALLY DEPENDENT UPON OUR ABILITY TO PROTECT OUR
NETWORK INFASTRUCTURE 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 SECURITIES RISKS. Despite the
implementation of network security measures by us, such as limiting physical and
network access to our routers, our Internet access systems and information
services are vulnerable to computer viruses, break-ins and similar disruptive
problems caused by our customers or other Internet users. Such problems caused
by third parties could lead to interruption, delays or cessation in service to
our customers. Furthermore, such inappropriate use of the Internet by third
parties also could potentially jeopardize the security of confidential
information stored in the computer systems of our customers and other parties
connected to the Internet, which may deter potential subscribers. Persistent
security problems continue to plague public and private data networks. Recent
break-ins reported in the press and otherwise have reached computers connected
to the Internet at major corporations and Internet access providers and have
involved the theft of information, including incidents in which hackers bypassed
firewalls by posing as trusted computers. Alleviating problems caused by
computer viruses, break-ins or other problems caused by third parties may
require significant expenditures of capital and resources by us, which could
have a material adverse effect on us. Until more comprehensive security
technologies are developed, the security and privacy concerns of existing and
potential customers may inhibit the growth of the Internet service industry in
general and our customer base and revenues in particular. Moreover, if we
experience a breach of network security or privacy, there can be no assurance
that our customers will not assert or threaten claims against us based on or
arising out of such breach, or that any such claims will not be upheld, which
could have a material adverse effect on our business, financial condition and
results of operation.
THERE IS INTENSE COMPETITION FOR 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.
-26-
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.
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.
In connection with our credit risk, 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.
If circumstances related to specific customers change, our estimates of the
recoverability of receivables could be further adjusted.
-27-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Unified Financial Services, Inc. and subsidiaries
Lexington, Kentucky
We have audited the accompanying consolidated statement of financial condition
of Unified Financial Services, Inc. and subsidiaries as of December 31, 2003,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. .
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Unified Financial
Services, Inc. and subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles.
/s/ J.D. Cloud & Co. L.L.P
Certified Public Accountants
Cincinnati, Ohio
February 3, 2004
-28-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Unified Financial Services, Inc.
We have audited the accompanying consolidated statement of financial condition
of Unified Financial Services, Inc. and subsidiaries as of December 31, 2002,
and the related consolidated statements of operations, comprehensive income,
cash flows and changes in stockholders' equity for the years ended December 31,
2002 and 2001. 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 the results of their operations
and their cash flows for the years ended December 31, 2002 and 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ Larry E. Nunn & Associates, LLC
Columbus, Indiana
January 31, 2003
-29-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2003 and 2002
ASSETS
2003 2002
---- ----
Current Assets
Cash and cash equivalents......................................... $ 5,536,622 4,269,657
Investment in securities and mutual funds ........................ 3,801,072 201,487
Note receivable................................................... -- 800,000
Accounts receivable (net of allowance for doubtful accounts of
$10,995 for 2003 and $68,715 for 2002)........................... 2,644,376 2,289,483
Receivables from premium financing................................ 4,320,251 2,960,344
Prepaid assets and deposits....................................... 683,800 600,578
Total assets of discontinued operations........................... -- 80,264,400
------------ ------------
Total current assets, net..................................... 16,986,121 91,385,949
------------- ------------
Fixed Assets, at cost
Equipment and furniture (net of accumulated depreciation of
$1,990,697 for 2003 and $1,875,596 for 2002).................... 1,191,540 1,315,562
------------ ------------
Total fixed assets............................................ 1,191,540 1,315,562
------------ ------------
Non-Current Assets
Investment in affiliate (see note 15)............................. 1,010 1,010
Goodwill (see note 2)............................................. 1,006,061 1,006,061
Other non-current assets (see note 2)............................. 155,060 120,534
------------ ------------
Total non-current assets...................................... 1,162,131 1,127,605
------------ ------------
TOTAL ASSETS............................................. $ 19,339,792 93,829,116
============ ============
The accompanying notes to financial statements are an integral part of these statements
-30-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2003 and 2002
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
2003 2002
---- ----
Current Liabilities:
Borrowing under bank line of credit (see note 6)................... $ 55,000 --
Total liabilities of discontinued operations....................... -- 74,196,320
Accounts payable and accrued expenses.............................. 1,658,340 1,692,768
Contract settlement liability (see note 17)........................ 3,192,436
--
Accrued compensation and benefits.................................. 393,559 447,485
Payable to broker-dealers.......................................... 31,935 79,962
Income taxes payable............................................... -- 144,204
Other liabilities.................................................. 359,387 1,615,986
------------ ------------
Total current liabilities...................................... 5,690,657 78,176,725
------------ ------------
Long-Term Liabilities
Total long-term liabilities........................................ 162,509 157,570
------------ ------------
Total liabilities......................................... 5,853,166 78,334,295
------------ ------------
Commitments and Contingencies........................................... -- --
------------ ------------
Stockholders' Equity
Preferred stock, par value $.01 (authorized shares - 1,000,000;
none issued) .....................................................-- --
Common stock, par value $.01 per share (authorized shares -
20,000,000; issued and outstanding shares - 2,826,117 for
2003 and 2,844,246 for 2002)................................... 32,761 32,943
Additional paid-in capital......................................... 15,643,845 16,004,747
Retained deficit................................................... (1,705,622) (1,114,514)
Accumulated other comprehensive income............................. -- 571,645
------------ ------------
13,970,984 15,494,821
Treasury stock, at cost (47,025 shares)........................... (484,358) --
---------------- --------------
Total stockholders' equity................................ 13,486,626 15,494,821
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 19,339,792 93,829,116
============= ==========
The accompanying notes to financial statements are an integral part of these statements
-31-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
--------------------------------------------
2003 2002 2001
---- ---- ----
REVENUE (see note 14).................................$ 14,754,652 15,535,762 15,718,334
OPERATING EXPENSES:...............................
Cost of sales ................................ 2,161,680 3,338,621 3,377,341
Employee compensation......................... 7,092,153 7,710,047 7,693,831
Employee insurance and benefits............... 1,090,725 1,141,265 1,185,030
Data processing............................... 806,661 728,770 534,678
Mail and courier.............................. 105,905 128,298 148,853
Telephone..................................... 157,126 225,771 242,045
Equipment rental and maintenance.............. 389,301 408,593 397,967
Occupancy..................................... 872,419 814,658 701,665
Depreciation and amortization................. 301,932 241,385 570,678
Professional fees............................. 912,009 1,024,948 540,675
Provision for bad debt........................ 48,857 113,495 400,816
Travel and entertainment...................... 194,069 310,887 266,583
Insurance..................................... 445,231 241,372 131,602
Errors/recovery............................... 17,510 227,523 707,306
Business development costs.................... 46,319 153,339 211,487
Other operating expenses...................... 587,383 424,689 347,547
------------- ------------- ------------
Total operating expenses.................. 15,229,280 17,233,661 17,458,104
------------- ------------- ------------
Loss from operations............................... (474,628) (1,697,899) (1,739,770)
OTHER INCOME/(EXPENSE):
Gain (loss) on securities..................... 16,646 (25,581) (13,456)
Gain (loss) on disposal of assets............. (50,258) (6,761) 76,010
Interest........................................... (2,316) (3,294) (122,784)
Non-recurring charge, net (see note 5)........ (2,668,078) -- --
------------- ------------- ------------
Income (loss) from continuing operations, before
income taxes.................................. (3,178,634) (1,733,535) (1,800,000)
Income tax benefit................................. 797,894 123,549 1,926,353
------------- ------------- ------------
Net income (loss) from continuing operations...... (2,380,740) (1,609,986) 126,353
Gain on sale of operations (net of income taxes of
$965,461, $390,173 and $1,842,193,
respectively)................................ 1,741,768 637,681 2,847,708
Income (loss) from discontinued operations
(net of income taxes $30,964, ($241,624)
and $285,609, respectively).................. 47,864 (373,509) 394,412
------------- ------------- ------------
Net income (loss).................................. $ (591,108) (1,345,814) 3,368,473
============= ============= ============
Per share earnings (loss)
Avg basic common shares outstanding........... 2,832,407 2,866,452 2,879,476
Net income (loss) - basic..................... $ (0.21) (0.47) 1.17
Net income (loss) from continuing
operations................................. $ (0.84) (0.56) 0.04
Avg fully diluted common shares outstanding... 2,832,407 2,866,452 3,029,122
Net income (loss) fully diluted............... $ (0.21) (0.47) 1.11
Net income (loss) from continuing
operations.................................. $ (0.84) (0.56) 0.04
The accompanying notes to financial statements are an integral part of these statements
-32-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
--------------------------------------------
2003 2002 2001
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES.............................$ (591,108) (1,345,814) 3,368,473
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Income tax payable............................... (955,552) 207,395 (1,330,420)
Provision for depreciation and amortization...... 301,932 241,385 570,678
Provision for bad debt........................... 48,857 113,495 400,816
Change in market value of securities............. (16,646) 11,983 2,584
Loss on sale of securities.............. -- 13,599 10,872
Loss on disposal of fixed assets................. 50,258 6,761 (28,998)
Gain on sale of discontinued operations, including income(1,741,768) (264,172) (3,242,120)
Gain on sale of retail brokerage accounts........ (40,000) -- --
Proceeds from sale of securities................. 2,430,000 234,556 106,275
Investments in securities and mutual funds....... (6,012,939) (102,910) (5,173)
(Increase) decrease in operating assets
Receivables................................. (403,750) 551,978 7,287,442
Receivables from premium financings......... (1,359,907) (744,460) (107,441)
Prepaid and sundry assets................... (5,222) (252,029) (96,840)
Notes receivables........................... 800,000 -- (800,000)
Other non-current assets.................... (29,587) (76,838) 347,440
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses....... (34,428) (881,948) (163,725)
Contract settlement liability............... 2,708,078 -- --
Accrued compensation and benefits........... (53,926) (123,398) 130,411
Other liabilities........................... (1,304,626) (1,010,162) (5,814,498)
---------- ----------- ----------
Net cash provided by (used in) operating activities (6,210,334) (3,420,579) 635,776
---------- ---------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment.................................. (228,170) (258,881) (871,503)
Proceeds from sale of fixed assets..................... 2 3,726 1,017,106
Proceeds from sale of retail brokerage accounts........ 40,000 -- --
Net proceeds from sale of discontinued operations ..... 7,971,551 412,721 ,369,921
Investment in affiliate................................ -- -- (1,000)
--------- --------- ----------
Net cash provided by investing activities........... 7,783,383 157,566 5,514,524
--------- --------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Retirement of common stock............................. (361,084) (81,550) (71,820)
Proceeds on bank line of credit........................ 55,000 985,220 1,309,780
Rescission of Fund Armed Productions................... -- -- --
Repayment of borrowings................................ -- (2,050,000) (4,157,473)
Repayment of capital lease obligations................. -- (1,049) (7,884)
--------- --------- ----------
Net cash used in financing activities................ (306,084) (1,147,379) (2,927,397)
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents...... 1,266,965 (4,410,392) 3,222,903
Cash and cash equivalents - beginning of year............. 4,269,657 8,680,049 5,457,146
--------- --------- ----------
Cash and cash equivalents - end of year................... $ 5,536,622 4,269,657 8,680,049
========= ========= ==========
SUPPLEMENTARY INFORMATION
Interest paid ........................................ $ 2,316 3,294 141,564
========== ============= ==========
Income taxes paid ......................................... $ 203,895 283,429 41,575
========== ============= ==========
The accompanying notes to financial statements are an integral part of these
statements.
-33-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, and 2001
---------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL (DEFICIT) INCOME STOCK TOTAL
----- ------- --------- ------ ----- -----
Balance at January 1, 2001.......... $ 33,300 16,259,091 (3,137,173) 170,323 13,325,541
2001 net income 3,368,473 3,368,473
Net unrealized gain on
available-for-sale securities, net
of taxes and reclassification
adjustment.................... 126,717 126,717
Comprehensive income................ 3,495,190
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)
Net unrealized gain on
available-for-sale securities, net
of taxes and reclassification
adjustment........................ 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
2003 net loss...................... (591,108) (591,108)
Net unrealized loss on
available-for-sale securities,
net of taxes and reclassification
adjustments....................... (821,437) (821,437)
Reclassification adjustment for gain
on sale of operations, net of income
taxes of $128,700 249,792 249,792
Comprehensive loss (1,162,753)
Retirement of common stock......... (182) (360,902) (361,084)
Common stock repurchased (see note 15) (484,358) (484,358)
-------- ---------- ----------- ------------ ------------ ------------
Balance at December 31, 2003........$ 32,761 15,643,845 (1,705,622) -- (484,358) 13,486,626
======= ========== =========== ============= ============== ==============
The accompanying notes to financial statements are an integral part of these
statements.
-34-
Note 1 - NATURE OF OPERATIONS
Unified Financial Services, Inc., a Delaware holding company for
various financial services companies, was organized on December 7,
1989. We distribute our services 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 three lines of business: trust and retirement services;
mutual fund administration services; 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. Unified Trust Company, National Association, 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 trust subsidiary is required by the Office of
the Comptroller of the Currency to maintain minimum capital of $2.0
million. As of December 31, 2003 and 2002, Unified Trust Company,
National Association had total capital of $2.5 million and $2.2
million, respectively.
Our mutual fund administration services operation, which is based in
Indianapolis, Indiana, provides services such as transfer agency, fund
accounting, and administrative, regulatory, compliance distributions
services and start-up services for mutual funds, investment advisors,
banks and other money managers in their proprietary mutual fund
efforts. Our brokerage, Unified Financial Securities, Inc.
"Securities", operation consists of a registered broker-dealer under
the Securities Exchange Act of 1934, as amended, that is a member of
the NASD, Inc. As of December 2003, our brokerage operation limited its
business to mutual fund distributor.
Our premium finance subsidiary, Commonwealth Premium Finance
Corporation, 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 investment advisory services operation, which is based in New York
City, provides professional financial management to individuals and
institutions on a customized basis.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States which
required the use of estimates made by our management. Actual results
may vary from those estimates. Our financial statements include the
accounts of Unified Financial Services, Inc. and our subsidiaries after
elimination of all material intercompany accounts and transactions.
Cash and cash equivalents
-------------------------
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 exceed the Federal Deposit Insurance Corporation's
insurance limit during the year.
-35-
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.
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.
Concentration of credit risk in accounts receivable is believed to be
minimal.
Revenue recognition
-------------------
We record all revenue on the accrual basis of accounting. 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. Associated fees are generally based on market values of account
balances.
Fixed Assets
------------
Fixed assets are stated at cost. Depreciation is provided on the
straight-line or accelerated method over the estimated useful life of
the assets for financial statement purposes. Property and equipment at
December 31 consist of:
2003 2002
---- ----
Fixed assets, at cost:
Furniture and Fixtures........................... $ 813,851 939,568
Computer and communication equipment............. 1,663,622 1,621,229
Leasehold improvements 704,764 657,092
--------- ----------
Gross fixed assets 3,182,237 3,217,889
Accumulated depreciation and amortization 1,990,697 1,902,327
--------- ---------
Net fixed assets $ 1,191,540 1,315,562
========= =========
Compensation and related benefits attributable to the development of
computer software for internal use totaling $41,808 in 2003 have been
capitalized and are being amortized over a three year period.
Other Non-Current Assets
------------------------
Other non-current assets consist primarily of deposits and the cash
surrender value of life insurance policies. At December 31, 2003 other
non-current assets also includes our investment of $43,000 for the
purchase of Latinvalley Securities, LLC, securities which as of
December 17, 2003 we have purchased 20% ownership with the remaining
80% pending in 2004.
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.
-36-
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill and other 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.
Significant Estimate
---------------------
Specifically, during 2002, we experienced operational issues with
respect to our mutual fund administrative services affiliate, which
issues primarily are related to problems associated with our
reconciliation of various cash accounts. In connection therewith, we
established an $854,000 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. During 2003, we
expended all of the $400,000 reserve. At December 31, 2003, we have
estimated a remaining liability of $161,000 of the $454,000 reserve
mentioned above.
Recent Accounting Pronouncements
--------------------------------
During 2003, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 132 (revised
2003), "Employers' Disclosures about Pensions and Other Postretirement
Benefits-an amendment of FASB Statements No. 87 Employers Accounting
for Pensions, No.88 Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plan and for Termination
Benefits, and No.106 Employers Accounting for Postretirement Benefits
Other Than Pensions." This statement requires additional disclosures to
those in the original Statement 132 about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans
and other defined benefit postretirement plans. The required
information should be provided separately for pension plans and for
other postretirement benefit plans.
During 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity," which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that falls within its scope as a liability (or an
asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on our financial statements.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," was issued in late 2002. The Interpretation
elaborates on existing disclosure requirements for most guarantees,
including loan guarantees such as financial and performance standby
letters of credit routinely issued by financial institutions. At the
time a guarantor issues a guarantee, the guarantor must recognize an
initial liability for the fair value of the obligations it assumes
under the guarantee. The initial recognition and measurement provisions
of the Interpretation apply to guarantees issued or modified after
December 31, 2002, regardless of the guarantor's fiscal year-end. The
adoption of Interpretation No. 45 did not have a material impact on our
financial statements.
-37-
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
-
During January 2003, the FASB issued Interpretation No. 46
"Consolidation of Variable Interest Entities." This statement explains
how to apply the controlling financial interest criterion in ARB51 to
variable interest entities. Variable interest entities include many
entities that have been referred to as special-purpose entities as well
as other entities that are structured in such a way that a) the equity
investment at risk is not sufficient to permit the entity to finance
itself with subordinated financial support in other forms or b) the
equity investors as a group lack decision-making powers and do not
absorb losses or receive residual returns. The adoption of
Interpretation No. 46 did not have a material impact on our financial
statements.
Off-Balance Sheet Arrangement
-----------------------------
In connection with the organization of VSX Holdings, Inc. ("VSX") a
third-party investor made a $3.0 million loan to VSX, which loan is
evidenced by a debenture issued by VSX to such investor. In connection
with our subscription for member interests in VSX, we issued an option
to the third-party investor to acquire shares of our common stock,
which option is exercisable for up to 50,000 shares before May 23, 2004
and 46,153 shares after May 23, 2004. The holder of the option may
surrender the $3.0 million promissory note issued with respect to VSX's
loan in full satisfaction of the exercise price of the option (see note
4 - "Options" and note 15 - "Investment in Affiliate").
Reclassifications
-----------------
Certain amounts in the 2002 and 2001 consolidated financial statements
have been reclassified to conform to the 2003 presentation. For segment
report purposes, Unified Financial Securities (our brokerage
subsidiary) has been included in mutual fund administration services
based upon management's decision to exit the clearing, discount and
full services brokerage operations and concentrate on mutual fund
distribution. Our premium financing operation has been included in the
corporate segment due to Unified Banking Company being reflected as a
discontinued operation based upon our agreement to sell Unified Banking
Company.
Note 3 - ACQUISITIONS, DISPOSALS AND SALES
Income from discontinued operations reflects Unified Banking Company's
pretax profit of $80,004 and Equity Insurance Managers of Illinois,
L.L.C.'s pretax loss of $1,176 and income taxes provision of $30,964
for the year ended December 31, 2003. For the year-end December 31,
2002, the results from discontinued operations included Unified Banking
Company's pre-tax loss of $626,369, Fully Armed Productions, Inc.'s
pretax profit of $1,174, Equity Insurance Manager of Illinois, L.L.C.'s
pretax profit of $10,062 and income taxes benefit of $241,624. For the
year-end December 31, 2001, the results from discontinued operations
included Unified Banking Company's pretax loss of $810,877, Fully Armed
Productions, Inc.'s pretax profit of $75,262 and Equity Insurance
Managers pretax profit of $1,415,636 and income taxes provision of
$285,609.
Sale of Unified Banking Company
------------------------------
On November 19, 2003, we sold all of the outstanding capital stock of
Unified Banking Company, a wholly owned subsidiary of the Company to
Blue River Bancshares, Inc., an Indiana corporation ("Blue River"). In
connection with the sale, the Company received $8.2 million in cash in
exchange for all of the outstanding capital stock of Unified Banking
Company. In connection with such sale, the recorded net book value of
Unified Banking Company and selling expenses totaled $5,804,887. We
recorded state and federal income taxes on $842,862, which resulted in
an after-tax gain of $1,552,251 with respect to the sale for the year
ended December 31, 2003.
-38-
Note 3 - ACQUISITIONS, DISPOSALS AND SALES (continued)
In connection with the execution of the Stock Purchase Agreement, the
Company and Blue River also executed a Depository Agreement (the
"Depository Agreement"). Pursuant to the Depository Agreement, the
Company has agreed to maintain deposits solely with Shelby County Bank,
a wholly owned subsidiary of Blue River, or Unified Banking Company
until the Company and its subsidiaries have maintained with either or
both of Unified Banking Company and Shelby County Bank an aggregate
minimum deposit balance, computed quarterly, of $8.5 million. The
Depository Agreement has a term of three years from November 19, 2003.
Unified Banking Company commenced operations on November 1, 1999.
Included in our Consolidated Statements of Financial Condition at
October 31, 2003, December 31, 2002 and 2001 were the bank's total
assets of $81,459,523, $80,264,401, and $69,786,649, respectively, and
total liabilities of $75,927,777, $74,196,320, and $63,961,290,
respectively. As of such dates, certain components of such assets and
liabilities were as follows:
OCTOBER 31, DECEMBER 31, DECEMBER
2003 2002 2001
---- ---- ----
Total assets:
Cash ............................................ $ 139,385 295,292 164,433
Due from banks................................... 1,145,323 1,656,549 1,357,483
Federal funds sold............................... 473,000 1,479,000 4,033,000
Investments in securities:
US agency securities........................ 21,595,489 17,485,206 19,071,837
FHLB stock.................................. 529,200 508,200 196,300
Loans:
Real estate loans........................... 38,616,804 33,947,774 26,482,150
Commercial loans............................ 13,676,658 17,685,656 11,047,590
Installment loans........................... 4,903,961 6,463,710 6,573,173
Other loans................................. 51,009 32,078 32,664
Allowance for loan losses........................ 633,297 550,216 430,000
Interest receivable.............................. 292,139 318,064 307,429
Prepaid assets................................... 67,655 52,597 42,241
Fixed assets, net................................ 602,197 713,154 874,083
Other assets..................................... - 177,336 34,266
---------------- ------------- -----------
Total assets $ 81,459,523 80,264,400 69,786,649
============== ============ =============
================================================
Total liabilities:
Federal funds purchased and borrowed funds $3,762,903 4,742,783 --
Bank deposits.................................... 71,790,932 69,076,440 63,602,848
Payables and accrued expenses.................... 205,240 333,248 192,821
Accrued compensation and benefits................ 40,022 43,849 7,204
Income taxes payable, deferred................... 128,680 -- 158,417
----------- ----------- ------------
Total liabilities........................... $75,927,777 74,196,320 63,961,290
=========== ============ =============
Sale of Insurance Operations
----------------------------
On December 17, 2001, we sold substantially all of the assets and
assigned substantially all of the liabilities of our insurance
subsidiaries, Equity Insurance Managers, Inc., Equity Insurance
Administrators, Inc. and 21st Century Claims Service, Inc., to Arthur
J. Gallagher & Co. In connection with the sale, we received an
$800,000 note, payment of which was to be made only when the insurance
subsidiary achieved certain performance measurement in 2002, and cash,
$800,000 of which was deposited in escrow pending possible
indemnification claims of Arthur J. Gallagher and Co. pursuant to the
sale agreement. We recorded a net after tax gain of $2,847,708 on the
sale of the insurance operations reflecting a pretax profit of
$4,689,901. We also recorded
-39-
Note 3 - ACQUISITIONS, DISPOSALS AND SALES (continued)
an $800,000 liability related to the escrow. Also, we recorded an
escrow of $600,000 for two of the principal officers, $240,000 of which
remains at December 31, 2003 in a restricted cash account. 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. During 2002, we also recorded a gain on the sale
of $280,000 based on our estimate of the anticipated claims settlement.
Additionally, during 2002 we accrued $52,146 in selling expenses
related to the sale. During the third quarter 2003, we settled all
outstanding claims against the escrow for $250,000. For the year ended
December 31, 2002, we also accrued $390,173 for income taxes related to
the gain on sale. Based thereupon, we recorded an additional gain on
the sale of operations of $270,000 in 2003. In addition in 2003, we
reversed $42,116 in selling expenses accrued for potential
miscellaneous expenses and professional fees that were not required.
Disposal of Fully Armed Productions
-----------------------------------
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.
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 an annual
valuation made by independent valuation experts on our common stock.
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, regardless of the date of termination of such
employees. All other terms of such options, including the vesting
schedules, were unchanged.
As of December 31, 2003, 2002 and 2001, options to acquire 83,858,
107,441 and 89,396 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, 2003 and 2002, our board had granted options to acquire
50,000 and 54,545 shares, respectively, of our common stock outside of
such plan (see note 15).
-40-
Note 4 - OPTIONS (continued)
A summary of our outstanding stock options as of December 31, 2003,
2002 and 2001 is as follows:
DECEMBER 31,
----------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
Shares Price Shares Price Shares Price
Options outstanding at beginning of year... 161,986 $38.24 149,396 $41.94 170,752 $39.98
Granted.................................... -- -- 38,150 16.50 -- --
Option to acquire 66,666 shares at $45.00
per share converted into option to acquire
60,000 shares at $50.00 per share........ -- -- -- -- (6,666) 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........ (4,545) 50.00 (5,455) 50.00 -- --
Forfeitures................................ (23,583) 29.15 (20,105) 34.92 (14,690) 38.21
Options outstanding at end of period....... 133,858 41.14 161,986 38.24 149,396 41.94
Options exercisable at end of period....... 133,858 41.14 161,645 38.23 143,590 42.02
Options available for future grants........ 166,142 n/a 142,599 n/a 160,604 n/a
As of December 31, 2003, 57,433 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, 2003 (based upon
the Black-Scholes option pricing model).
Note 5 - NON-RECURRING CHARGES, NET
We have chosen to separately disclose special items because the items
are non-recurring in nature and the results excluding special items are
an appropriate measurement of the Company's on-going operating results.
As part of converting our brokerage operations to solely a mutual fund
distributor, we recorded in the fourth quarter of 2003, a pretax gain
of $40,000 from the sale of its discount brokerage operation. In
addition, as part of our cost reduction initiatives/programs, we
entered into agreements with our general counsel and our associate
general counsel to buy out their employment contracts and recorded a
pretax charge of $2,708,078 in the statement of operations (see note
17).
-41-
Note 6 - DEBT AND RELATED MATTERS
At December 31, 2003, Commonwealth Premium Finance Corporation had
outstanding debt of $55,000 under a $2.5 million bank line of credit
agreement. The debt is secured with receivables from premium financings
and bears interest at the prime rate.
Note 7 - RENTAL AND LEASE INFORMATION
We lease certain office facilities and equipment. Rental expense for
continuing operations for the years ended December 31, 2003, 2002 and
2001 were $872,419, $814,658 and $701,665, respectively.
At December 31, 2003, 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, 2003 for all operations were as follows:
FOR THE YEARS ENDING DECEMBER 31, LEASE COMMITMENTS
--------------------------------- -----------------
2004............................. $ 522,724
2005............................. 468,162
2006............................. 452,448
2007............................. 408,579
--------
Total........................ $ 1,851,913
=========
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 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, 2003, 2002
and 2001, our board of directors did not make any contributions. The
plan currently hold 46,966 shares of the Company's common stock, on
behalf of its participants (see note 17).
We also maintain a 401(k) plan for the consolidated companies. The plan
includes a matching for funds contributed by an employee. We 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,
2003, 2002 and 2001, we contributed $148,445, $159,317 and $165,459,
respectively, as matching contributions.
-42-
Note 10 - PREFERRED STOCK
As of December 31, 2003 and 2002, 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.
Such rights were dividend to our common stockholders on that date.
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, 2003 and
2002 amounted to approximately $21,656,000 and $22,242,000,
respectively, expiring from 2004 to 2023. Net deferred income tax
assets primarily consist of the tax effect of the net operating loss
carryforwards. A valuation allowance in amounts equal to the carrying
value of the net deferred income tax asset at December 31, 2003 and
2002, has been established because of the uncertainty regarding its
realizability. The components of income tax expense (benefit) from
continuing operations for the years ended December 31, 2003, 2002 and
2001 were as follows:
2003 2002 2001
---- ---- ----
Current income tax:
Federal $ - - -
State and local 197,567 25,000 201,449
------- --------- -----------
Total current income tax 197,567 25,000 201,449
------- --------- -----------
Deferred income tax:
Federal (995,461) (148,519) (2,127,802)
State and local - - -
--------- -----------
Total deferred (995,461) (148,519) (2,127,802)
------- --------- -----------
Iincome tax expense (benefit) $(797,894) (123,549) (1,926,353)
======= ========= ===========
Deferred federal income tax benefits from continuing operations were
recognized in all periods presented due to the realization of
offsetting deferred income tax expenses that were recognized on the
gain on sales of discontinued operations. The difference in the income
tax benefit, as computed by applying the federal statutory rate of 34%
to income (loss) from continuing operations before income taxes as
compared to the income tax benefit recognized, is primarily
attributable to the tax provision recognized on the discontinued
operations and current state tax expense recognized.
Note 12 - RELATED PARTY TRANSACTIONS
As of December 31, 2003, Commonwealth Premium Finance Company had a
$2,430,000 line of credit funded by Unified Financial Services. Unified
Trust Company leases from Cygnus, LLC, which is 20% owned by a
corporate officer. In connection with this lease, $207,728, $197,174,
and $242,087, were paid in 2003, 2002, and 2001, respectively.
-43-
Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair value of our financial
instruments at December 31, 2003 and 2002 approximates fair value.
Financial Accounting Standards Board Statement No. 107, "Disclosures
About Fair Value of Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
Note 14 - DISCLOSURES ABOUT REPORTING SEGMENTS
We have four reportable operating segments: trust and retirement
services; mutual fund administration services; investment advisory
services; and premium financing. Generally, corporate expenses are not
allocated to the segment for purposes of segment reporting.
The accounting policies of these segments are the same as those
described in the summary of significant accounting policies. We
evaluate performance based on profit or loss from operations before
income taxes, not including recurring gains and losses.
Our reportable segments are strategic business units that offer
different products and services. They are managed separately because
each business requires different technology and marketing strategies.
Most of the businesses were acquired as a unit and the management at
the time of the acquisition was retained. Reportable segment revenues,
profit before income taxes, total assets and depreciation were as
follows for the years ended December 31, 2003, 2002 and 2001:
-44-
Note 14 - DISCLOSURES ABOUT REPORTING SEGMENTS (continued)
(IN THOUSANDS) 2003 2002 2001
----------- ----------- -----------
Revenues
Trust and retirement..............................$ 5,365,139 4,943,732 4,819,711
Mutual fund administration........................ 7,137,001 8,339,938 8,201,296
Investment advisory............................... 1,379,748 1,562,608 1,961,322
Premium finance............................... 836,610 587,379 578,144
Corporate......................................... 36,154 102,105 157,861
---------- ---------- ----------
Total........................................$ 14,754,652 15,535,762 15,718,334
=========== ========== ==========
Gross profit
Trust and retirement..............................$ 4,440,822 4,033,004 4,050,445
Mutual fund administration........................ 6,173,809 6,196,312 5,782,566
Investment advisory............................... 1,153,308 1,278,341 1,771,977
Premium finance............................... 788,879 587,379 578,144
Corporate......................................... 36,154 102,105 157,861
---------- ---------- ----------
Total........................................$ 12,592,972 12,197,141 12,340,993
=========== ========== ==========
Results of operations
Trust and retirement..............................$ 412,878 (378,867) (470,440)
Mutual fund administration........................ 588,390 234,019 55,846
Investment advisory............................... 24,868 78,279 183,525
Premium finance............................... 386,257 262,247 243,845
Corporate......................................... (4,591,027) (1,929,213) (1,812,776)
---------- ----------- ----------
Income (loss) from continuing operations,
before
income taxes............................... (3,178,634) (1,733,535) (1,800,000)
Income tax benefit......................... 797,894 123,549 1,926,353
Discontinued operations.................... 1,789,632 264,172 3,242,120
------------ ------------ -----------
Net income (loss)........................... $ (591,108) (1,345,814) 3,368,473
========== =========== ==========
Total assets
Trust and retirement............................. $ 2,988,609 2,498,976 2,837,227
Mutual fund administration........................ 2,769,690 3,037,853 2,686,962
Investment advisory............................... 1,298,193 1,603,977 1,428,026
Premium finance............................... 4,341,586 2,975,848 2,257,953
Corporate......................................... 7,941,714 3,742,547 8,322,341
Discontinued Operations........................... -- 79,969,915 62,658,482
---------- ---------- ----------
Total.......................................$ 19,339,792 93,829,116 80,190,991
========== ========== ==========
Depreciation and amortization
Trust and retirement.............................$ 79,562 150,495 130,810
Mutual fund administration........................ 173,638 140,898 126,611
Investment advisory............................... 9,250 18,535 129,672
Premium finance................................... 1,964 9,487 9,334
Corporate......................................... 37,518 (78,030) 174,251
--------------- -------------- ----------
Total.......................................$ 301,932 241,385 570,678
=========== =========== ===========
Note 15 - INVESTMENT IN AFFILIATE
We have entered into a management arrangement with VSX, a Delaware
limited liability company, whereby we provide consulting and
development services to VSX Holdings. For the years ended December 31,
2003, 2002 and 2001, we received payments totaling $71,006, $258,758
and $419,977, respectively, from VSX 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, 2003, 2002 and 2001.
-45-
Note 15 - INVESTMENT IN AFFILIATE (continued)
On May 23, 2000, we subscribed for 10 shares of VSX in exchange for $10
and certain intangible property rights. We currently own approximately
0.5% of the outstanding shares of VSX Holdings, but have the right to
purchase up to an additional 1,990 (19.9%) shares at a price of $1 per
share, upon the occurrence of certain specified events. Our investment
in VSX is accounted for on the cost method of accounting.
VSX 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, a
third-party investor made a $3.0 million loan to VSX, which loan is
evidenced by a debenture issued by VSX Holdings to such investor. The
debenture initially was secured by 85,000 shares of our common stock
pledged by certain executive officers of our company. During January
2004, we purchased 35,500 of such shares, which remain pledged as
collateral. 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 and receive, in
exchange, shares of the Unified equivalent to the debenture face amount
divided by the exercise price. During the years ending May 23, 2004 and
2005, the exercise price per share of our common stock subject to the
option will be $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.
Note 16 - 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, 2003, 2002
and 2001, potential common shares of 133,858, 161,986,and -0-,
respectively, were considered to be anti-dilutive and were excluded
from the calculation of diluted income (loss) per share.
Note 17 - SUBSEQUENT EVENTS
In January 2004, we entered into agreements with our general counsel
and our associate general counsel to buy out their employment
contracts. In accordance with the agreement employment of the officers
will cease during early 2004. The agreement requires the Company to
pay, the officers a cash settlement of $2,708,078 and buy back 47,025
shares of our stock held by the officers for $484,358. The sum of the
required payments, $3,192,436, is reflected as a contract settlement
liability on the statement of financial condition at December 31, 2003.
In connection with the agreement, we also granted 35,500 stock options
to the officers with an exercise price of $10.30 per share.
-46-
Note 17 - SUBSEQUENT EVENTS (continued)
As of December 17, 2003 we purchased 20% of Latinvalley Securities,
LLC. The remaining 80% ownership and amendment to the member agreement
to provide authority to serve as a mutual fund distributor is pending
approval of by the NASD. Effective January 14, 2004, the name
Latinvalley Securities, LLC was changed to Unified Distributors, LLC.
As of January 26, 2004, Securities entered into a new NASD Membership
Agreement. Securities is now required to maintain a net capital
requirement of $5,000 pursuant to SEC rule 5c3-(a)(1)(I) and
(a)(2)(vi). Pursuant to SEC rule 15c3-(k)(1), the customer protection
rule, Securities business is now limited to the distribution of mutual
funds. This rule also stipulates the Broker Dealer will not hold
customer funds or safe-keep customer securities.
The board of directors has authorized the buy back of our common stock
held by the Unified Equity Participation plan. Such shares are held for
the benefit of employees of our company. During early 2004, the 46,996
shares in the plan are anticipated to be repurchased. Upon repurchase
the plan will be terminated.
-47-
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of our quarterly consolidated operating
results for the years ended December 31, 2003 and 2002:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------
2003
Income Statement Data:
Gross revenue.......................... $ 3,623,251 3,399,274 3,621,477 4,110,650
Gross profit........................... 3,247,547 2,919,313 3,107,628 3,318,484
Total expenses......................... 3,248,464 3,116,666 3,212,495 3,489,975
Loss from continuing operations........ (917) (197,353) (104,867) (171,491)
Other loss............................. (4,528) 10,519 4,481 (2,714,478)
Income tax benefit (expense).......... (142) 53,930 34,549 709,557
Net loss from continuing operations.... (5,587) (132,904) (65,837) (2,176,412)
Net gain on sale of operations......... - 93,534 100,103 1,548,131
Net income (loss) from discontinued operations 15,238 36,905 17,798 (22,077)
Net loss............................... 9,651 (2,465) 52,064 (650,358)
Earnings Per Share:
Basic loss per share................... $ 0.00 0.00 0.02 (0.23)
Fully diluted loss per share........... 0.00 0.00 0.02 (0.23)
Basic common shares outstanding at period end 2,829,246 2,829,117 2,829,117 2,826,117
Fully diluted common shares outstanding at
period end........................... 2,829,246 2,829,117 2,829,117 2,826,117
2002
Income Statement Data:
Gross revenue.......................... $ 3,860,904 3,382,241 3,621,477 4,671,140
Gross profit........................... 3,259,075 2,900,173 3,107,628 2,930,265
Total expenses......................... 3,183,227 3,313,857 3,212,495 4,185,461
Loss from continuing operations........ 75,848 (413,684) (104,867) (1,255,196)
Other income (loss).................... (6,096) (18,107) 4,481 (15,974)
Income tax benefit..................... (35,330) (1,935) 34,549 126,265
Net income (loss) from continuing operations 34,422 (433,726) (65,837) (1,144,845)
Net gain on sale of operations......... - - 100,103 537,578
Net income from discontinued operations (41,470) (430,189) 17,798 80,352
Net income (loss)...................... (7,048) (863,915) 52,064 (526,915)
Earnings Per Share:
Basic earnings (loss) per share........ $ 0.00 (0.30) 0.02 (0.19)
Fully diluted earnings (loss) per share 0.00 (0.30) 0.02 (0.19)
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
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.
-48-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------------------------------------------
On September 5, 2003, the Audit, Nominating and Compensation Committee
of our Board of Directors approved the engagement of J.D. Cloud & Co. LLP as our
independent auditors for the year ended December 31, 2003. The committee
retained J.D. Cloud & Co. based upon the committee's determination that our
company would benefit from J.D. Cloud & Co.'s relative size, local service and
experience. Additional information with respect to our new auditor as well as
our former auditor is contained in our Current Report on Form 8-K, dated
September 5, 2003, as filed with the Securities and Exchange Commission.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
We maintain disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in our filings
under the Securities Exchange Act of 1934 is recorded, processed, evaluated,
summarized and reported accurately within the time periods specified in the
Securities and Exchange Commission's rules and forms. As of the end of the
period covered by this report, an evaluation was performed under the supervision
and with the participation of management, including our chief executive officer
and chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures are effective in timely alerting them to
material information relating to the company, including the consolidated
subsidiaries required to be included in this report and other reports that we
file or submit under the Securities Exchange Act of 1934. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective as of the date of
that evaluation. The conclusions of our chief executive officer and chief
financial officer from this evaluation were communicated to the audit,
nominating, and compensation committee of our board of directors. In connection
with this evaluation, there were no breaches of such controls that would require
disclosure to the audit committee or our auditors.
During the period covered by this report, there were no changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information regarding our directors is contained in our Proxy Statement
for the 2004 Annual Meeting of Stockholders and is incorporated herein by
reference. Information regarding our executive officers is contained in this
report under "Executive Officers of the Registrant" and is incorporated herein
by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is included in our Proxy Statement for the
2004 Annual Meeting of and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information regarding executive compensation is contained in our Proxy
Statement for the 2004 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
Information regarding security ownership of certain beneficial owners
and management is contained in our Proxy Statement for the 2004 Annual Meeting
of Stockholders under the caption and is incorporated herein by reference.
Information regarding our company's equity compensation plans is
contained in this report under, "Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities," and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding certain relationships and related transactions is
contained in our Proxy Statement for the 2004 Annual Meeting of and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
--------------------------------------
Information regarding our independent auditor, including a description
of fees charged and services performed, is contained in our Proxy Statement for
the 2004 Annual Meeting of Stockholders and is incorporated herein by reference.
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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,
2003, 2002 and 2001:
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 to hereto.
(b) Reports on Form 8-K.
Date of Report ITEM Reported
--------------- -------------
November 19, 2003 ITEM 2 (reporting sale of
Unified Banking Company to
Blue River Bancshares,Inc.)
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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
2nd day of March 2004.
UNIFIED FINANCIAL SERVICES, INC.
(Registrant)
By /s/ John S. Penn
----------------------------------------------------------
John S. Penn, President, Chief Executive Officer and
Acting Chairman
By /s/ Thomas G. Napurano
----------------------------------------------------------
Thomas G. Napurano, Executive Vice President and
Chief Financial Officer
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POWER OF ATTORNEY
We, the undersigned officers and directors of Unified Financial
Services, Inc., hereby severally and individually constitute and appoint 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/ John S. Penn Acting Chairman President, Chief March 2, 2004
- ------------------------------------
John S. Penn Executive Officer and Director
/s/ Philip L. Conover Director March 2, 2004
- ------------------------------------
Philip L. Conover
/s/ Weaver H. Gaines Director March 2, 2004
- ------------------------------------
Weaver H. Gaines
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EXHIBIT INDEX
Ex. No. Description
- ------- -----------
3.1(a) Amended and Restated Certificate of Incorporation of the
Company, filed as Exhibit 4.1(a) to the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30,
1997, is incorporated herein by reference.
3.1(b) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company, filed as Exhibit 3.1 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 Letter, dated May 19, 2003, from Unified Trust Company, National Association
to Dr. Gregory W. Kasten, is filed herewith.*
10.2 Severance and Settlement Agreement, dated as of January 23, 2004, by and among
Charles H. Binger, the Company, Unified Fund Services, Inc., Unified Financial
Securities, Inc., Unified Trust Company, National Association, Fiduciary
Counsel, Inc., Commonwealth Premium Finance Corporation, Unified Employee
Services, Inc., Unified Insurance Managers, Inc. and Equity Insurance of
Illinois, LLC, is filed herewith.*
10.3 Severance and Settlement Agreement, dated as of January 23, 2004, by and among
David F. Morris, the Company, Unified Fund Services, Inc., Unified Financial
Securities, Inc., Unified Trust Company, National Association, Fiduciary
Counsel, Inc., Commonwealth Premium Finance Corporation, Unified Employee
Services, Inc., Unified Insurance Managers, Inc. and Equity Insurance of
Illinois, LLC, is filed herewith.*
10.4 Ashburn Agreement, dated as of February 18, 2004, by and between Timothy L.
Ashburn and the Company, Unified Fund Services, Inc. Unified Financial
Securities, Inc., Unified Financial Securities, Inc., Unified Trust Company,
National Association, Fiduciary Counsel, Inc. Commonwealth Premium Finance
Corporation, Unified Employee Services, Inc. Unified Insurance Managers, Inc.
and Equity Insurance of Illinois, LLC, is filed herewith.*
10.5 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.*
10.6 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.*
10.7 Amendment to Employment Agreement, dated January 1, 2003, by
and between Dr. Gregory W. Kasten and Unified Trust Company,
National Association, filed as Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2002, is incorporated herein by reference.*
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10.8 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.*
10.9 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.*
10.10 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.*
10.11 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.*
10.12 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.*
10.13 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.*
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10.14 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.*
10.15 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.
10.16 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.
10.17 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.
10.18 Stock Purchase Agreement, dated June 9, 2003, by and between
the Company and Blue River Bancshares, Inc., filed as Exhibit
2 to the Company's Current Report on Form 8-K, dated June 9,
2003, is incorporated herein by reference.
10.19 Depository Agreement, dated June 9, 2003, by and between the Company and Blue
River Bancshares, Inc., filed as Exhibit 10 to the Company's Current Report on
Form 8-K, dated November 19, 2003, is incorporated herein by reference.
14.1 Code of Ethics for Financial Professionals, filed as Exhibit 14.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, is
incorporated herein by reference.
16.1 Letter from Larry E. Nunn & Associates, LLC, dated September
9, 2003, to the Securities and Exchange Commission regarding
ITEM 4 disclosure contained in Unified Financial Services,
Inc.'s Current Report on Form 8-K, dated September 5, 2003,
filed as Exhibit 16 to the Company's Current Report on Form
8-K, dated September 5, 2003, is incorporated herein by
reference.
21.1 List of Subsidiaries is filed herewith.
23.1 Consent of J.D. Cloud & Co., LLC with respect to its report dated February 3,
2004 regarding the consolidated financial statements of the Company as of and
for the year ended December 31, 2003, is filed herewith.
23.2 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 for the years ended December 31, 2002 and
2001, is filed herewith.
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24.1 Power of Attorney (included on signature page hereto).
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 is filed herewith.
32 Certifications pursuant to Rule 13a - 14(b) under the Securities Exchange
Act of 1934 and the 18 U.S.C. ss.1350.
- ---------------
* Management contract or compensatory plan or arrangement.
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