SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-21502
UNITED FIDELITY, INC.
(Exact name of small business issuer as specified in its charter)
Illinois 37-1267618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5250 South Sixth Street, Springfield, Illinois 62703
(Address of principal executive offices)
(217) 786-4300
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
The number of shares of Common Stock, no par value per share, outstanding as
of March 31, 1996: 220,211 .
This document consists of 14 pages.
<PAGE> UNITED FIDELITY, INC.
QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
for the three months ended March 31, 1996 and 1995 . . . . . . . 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and 1995 . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 13
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
United Fidelity, Inc. and Subsidiary
Consolidated Balance Sheets
March 31 December 31
1996 1995
<S> <C> <C>
Assets
Cash and cash equivalents $ 199,941 $ 289,677
Equity securities at market 1,125 1,125
(cost $1,125)
Mortgage origination fees receivable 62,616 87,036
Receivables for mortgage loans 2,289,856 5,335,668
Loans held for sale 2,301,879 866,636
Notes receivable 300,000 300,000
Other receivables 139,882 105,491
Furniture, fixtures and equipment, net of
accumulated depreciation of $ 396,655
and $ 384,239, respectively 103,822 116,838
Total assets $5,399,121 $7,102,471
Liabilities
Accounts payable $ 43,209 $ 47,910
Line of credit 4,339,197 6,020,000
Notes payable 8,386 9,250
Other liabilities 85,638 112,699
Total liabilities 4,476,430 6,189,859
Minority interest 704,307 701,285
Shareholders' Equity
Class A 9% noncumulative, convertible and callable
preferred stock, $ 15 par value, 700,000 shares
authorized, 220,211 issued and outstanding
in 1996 and 1995 3,303,165 3,303,165
Common stock, no par value, $.20 stated value,
10,000,000 shares authorized, 220,211 issued
and outstanding in 1996 and 1995 44,042 44,042
Additional paid-in capital 2,452,970 2,452,970
Accumulated deficit (5,581,793) (5,588,850)
Total shareholders' equity 218,384 211,327
Total liabilities and
shareholders' equity $5,399,121 $7,102,471
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
United Fidelity, Inc.
and Subsidiary
Consolidated Statements of Operations
Quarter Ended
March 31 March 31
1996 1995
<S> <C> <C>
Revenue :
Mortgage origination income $ 455,448 $ 257,250
Loan fees 68,277 63,416
Interest earned 71,945 48,324
Interest charges (99,470) (48,207)
Other income 8,050 6,469
504,250 327,252
Expenses:
Mortgage loan commissions and fees 141,191 115,006
Employee compensation and benefits 148,324 284,305
Loan costs 70,337 70,152
Depreciation and amortization 12,754 21,899
Other general and administrative 109,298 193,429
481,904 684,791
Income (loss) before income tax provision 22,346 (357,539)
Income tax provision - -
Minority interest in gain (15,289) -
Net income (loss) $ 7,057 $ (357,539)
Weighted average common
shares outstanding 220,211 1,994,211
Net income (loss) per common share $ 0.03 $ (0.18)
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
United Fidelity, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended
March 31 March 31
1996 1995
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 7,057 $ (357,539)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 12,754 21,899
Minority interest in gain 3,022 -
Loss on sale of equipment 62 -
Changes in assets and liabilities:
(Increase) decrease in origination
fees receivable 24,420 (31,264)
(Increase) decrease in receivable
for mortgage loans sold 3,045,812 (882,377)
(Increase) decrease in loans held for sale (1,435,243) 159,793
(Increase) decrease in other receivables (34,391) (23,850)
Increase (decrease) in accounts
payable - other (4,701) 17,350
Increase (decrease) in line of credit (1,680,803) 821,428
Increase (decrease) in other liabilities (27,061) (177)
Net cash used in operating activities (89,072) (274,737)
Cash Flows From Investing Activities
Proceeds from sale of equity securities - 2,124
Proceeds from sale of furniture and equipment 200 -
Net cash provided by investing activities 200 2,124
Cash Flows From Financing Activities
Payments on note payable (864) -
Increase in accounts payable - affiliate - 9,673
Net cash provided by (used in) financing activities (864) 9,673
Net decrease in cash (89,736) (262,940)
Cash and cash equivalents at beginning of period 289,677 449,188
Cash and cash equivalents at end of period $ 199,941 $ 186,248
Supplemental disclosure of cash flow information:
Taxes paid during the period $ - $ -
Interest paid during the period $ 99,470 $ 49,928
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
United Fidelity, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared by United Fidelity, Inc. ("Fidelity" or the "Company") and
include the accounts of its 71% owned subsidiary, First Fidelity Mortgage
Company ("FFMC"). These statements reflect all adjustments, consisting of
only normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of financial results for the three month
periods ended March 31, 1996 and 1995, in accordance with generally accepted
accounting principles for interim financial reporting and pursuant to Item
310(b) of Regulation S-B. Certain information and footnote disclosures
normally included in audited financial statements have been omitted pursuant
to such rules and regulations. These interim consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements for the years ended December 31, 1995 and
1994. The results of operations for the three month periods ended March 31,
1996 and 1995, are not necessarily indicative of the results for the full year.
NOTE 2. RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified
to conform to the 1996 presentation.
NOTE 3. SHAREHOLDERS' EQUITY
During the first three months of 1996, Shareholders' Equity increased
as a result of the Company's net gain of $7,057.
NOTE 4. INCOME PER SHARE
Net gain per share was calculated by dividing net gain by the
average number of shares outstanding for the period. The convertible
preferred stock was not considered as a common stock equivalent in the
calculation as its effect would be antidilutive.
6
<PAGE>
United Fidelity, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
NOTE 5. COMMITMENTS AND CONTINGENCIES
In connection with mortgage servicing activities, related fiduciary
funds held in trust for investors in non-interest bearing accounts totaled
$5,687 and $28,123 at March 31, 1996 and December 31, 1995, respectively.
These funds are segregated in special bank accounts and are excluded from the
assets and liabilities of the Company.
At March 31, 1996, and December 31, 1995, the Company had
$2,289,856 and $5,335,668, respectively, in outstanding accounts
receivable from various mortgage investors. This amount represents loans
which the Company closed, funded and sold, but for which the Company has
not yet received reimbursement from a permanent investor. In general, the
time span between the date of funding by the Company and the receipt of funds
from the investor does not exceed 30 days.
Collection of the Company's receivables is dependent on the purchasing
ability of its permanent investors. None of the investors has ever defaulted
on a payment commitment.
The Company's primary business activity is the origination, closing,
selling and servicing of real estate mortgage loans on one-to-four family
residential property located in Northern and Central Illinois. The volume
of business is, accordingly, directly dependent on economic conditions in
those areas and the financial well-being and creditworthiness of borrowers.
NOTE 6. BORROWING ARRANGEMENTS
FFMC has a Mortgage Loan Repurchase Agreement with a lender on an
individual loan basis. The lender requires one hundred percent participation
in the loans it funds. There are no covenant restrictions with this
agreement. The fees for this agreement are $50 per loan with interest being
prime plus one percent. FFMC began utilizing the agreement in June 1995.
The interest incurred on these funds as of March 31, 1996 and 1995 was
$89,542 and $0 and the related fees totaled $9,250 and $0, respectively.
7
<PAGE>
United Fidelity, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
NOTE 6. BORROWING ARRANGEMENTS (Continued)
FFMC had a "Master Participation Agreement" with a lender on an
individual loan basis. The lender required one hundred percent
participation in the loan it funds. There were no covenant restrictions
with this agreement. The fees for this agreement were $100 per loan with
interest being prime plus one half of a percent. FFMC discontinued use of
this line of credit in 1995.
NOTE 7. INCOME TAXES
The Company files separate federal income tax returns for itself and its
71% owned subsidiary. No provisions for income taxes have been reflected
in the statements of operations due to net operating loss carryforward in
excess of current period earnings.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Set forth below is management's discussion and analysis of the significant
items in the balance sheets, statements of operations and statements of cash
flows for the three months ended March 31, 1996 and 1995. The primary purpose
of management's discussion and analysis is to enhance the reader's understanding
of the Company's operations as reflected in its financial statements. This
information should be read in conjunction with the consolidated financial
statements and notes thereto on pages 3 through 8.
FINANCIAL CONDITION
The size of the Company's balance sheet is influenced by how much
has been borrowed from warehouse lenders to fund loans.
The Company utilizes its lines of credit to borrow money to fund loan
closings then repays these monies as funds are received from final investors.
The timing of the loan closings and the receipt of funds from the final
investors materially impacts the balance sheet.
The financial condition of the Company stabilized in 1995 and began
improving in 1996. The year end 1994 audit opinion expressed a condition
of going concern, whereas, improvements in financial condition resulted
in a year end 1995 audit opinion with no going concern or other
qualifying expression.
Three Months Ended March 31, 1996, Compared to Year Ended December 31, 1995
(a) Assets
Cash and cash equivalents decreased as the Company utilized cash to
reduce payables existing at the end of the fourth quarter. Receivables for
both mortgage loans sold and mortgage origination fees decreased due to the
timing of loan closings and the availability of loans held for sale. This
is reflected in the significant increase in loans held for sale. The Company
was holding more loans at the end of the first quarter of 1996 than the fourth
quarter of 1995.
At March 31, 1996, the Company holds a $300,000 note receivable. The
note originated as partial payment of proceeds to FFMC from United Trust,
Inc. for preferred and common stock issued by FFMC in the May 1995
restructure. Interest is received quarterly.
(b) Liabilities
The line of credit liability decreased as the Company had fewer loans
funded from its lender pending receipts from final investors.
9
<PAGE>
(c) Shareholders' Equity
During the first three months of 1996, Shareholders' Equity increased
slightly from operating income of $7,057.
Results of Operations
The Company's principal source of revenue is mortgage origination
income, which is directly related to the dollar amount of mortgage loans
sold. Mortgage origination income is comprised primarily of points that
borrowers pay at loan closings, premium paid by or discount paid to permanent
investors when they purchase a loan and service release fees paid by
investors to purchase loan servicing.
Three Months Ended March 31, 1996, Compared to Three Months Ended March 31, 1995
A comparison of selected mortgage company statistics for the periods
discussed by management is provided by the following table:
ACTIVITY FOR MARCH 31, MARCH 31,
THREE MONTHS ENDED 1996 1995
Loans sold $26,416,945 $12,307,827
Number of loans sold 237 149
Mortgage origination income $ 455,448 $ 257,250
Loan offices 3 5
Loan originators 13 29
Other personnel 17 23
The Company reported a net gain of $7,057 at March 31, 1996 compared to
a net loss of ($357,529) for the same period one year ago.
The Company has materially changed its operations in the twelve month
period from March 31, 1995 to March 31, 1996. During the second quarter of
1995, the Company and its subsidiary went through a restructure to eliminate
unprofitable branches, reduce operating expenses and provide additional
capitalization and cash to enable FFMC to meet its financial obligations.
Operating expenses were reduced by reducing employment contracts, eliminating
salaries for loan officers, streamlining workflows and renegotiating lease
agreements.
10
<PAGE>
The Company sold approximately 88 more loans with the total dollar
volume of $14,109,118, than the previous year. The increase in loan
volume is reflected in the increase in gross revenue of $176,998 or 54%.
This increase can be attributed entirely to the increase in mortgage
origination income.
Interest charges exceeded interest earned during the first quarter of
1996. This is the result of the interest rate on the line of credit
exceeding interest earned on mortgage loans originated. Both interest
amounts significantly exceed first quarter 1995 as a result of the substantial
increase in closed loan volumes over the prior year.
Total expenses decreased 30% from the prior year. The reduction in
employee compensation and benefits expense can be attributed to two factors.
First, the number of employees decreased 42% from the same period last year.
Also, guaranteed minimum salaries for loan originators has been
discontinued. Loan originators receiving a draw against future production
has been significantly limited. Draws against future production are
utilized as a way of providing new loan officers a source of income while
they establish themselves and begin to generate loan production. Mortgage
loan commissions and fees increased $26,185 resulting from increased mortgage
originations.
Other general and administrative expenses decreased 43% from the
comparable period of the prior year. Branch offices determined to be
unprofitable were closed during 1995. Remaining leases on the closed branches
were negotiated for a final settlement thus eliminating future costs and
liability. Leases on existing office space were renegotiated, resulting in
lower monthly rents.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 1996, Compared to Three Months Ended March 31, 1995
(a) Operating Activities
Consolidated operating activities produced negative cash flows of more
than $89,000 during the first quarter of 1996. The use of cash was caused
by the reduction in the balance of the Company's line of credit while the
loans held for sale increased $1,400,000. Loans held for sale are affected
by the volume of loans closed, the timing of these closings and the processing
time necessary to send the loans to the final investor.
Consolidated operating activities produced negative cash flows during
1995. Approximately $357,000 was needed to fund the Company's loss for the
first three months. The overall use of cash is less than the $357,000 used to
fund the loss because the increase in mortgage loan related receivables was
less than the increase in payables for warehouse borrowings as the loans
held for sale balance declined from December 31, 1994.
11
<PAGE>
(b) Financing Activities
There have been no significant financing activities during the first
quarter of 1996 or 1995.
(c) Future Outlook
The Company continues to implement procedures to help the mortgage
company stop the losses and drain on cash that occurred in 1994 and early
1995. Results for the three months ended March 31, 1996 show a gain of
$7,057 in 1996 compared to a loss of $(357,539) in 1995. This gain was
the first quarterly profit since the inception of the Company. Loan
production increased more than $14,000,000 over the same period last year.
In April 1996, the Company took additional steps to reduce costs and lower
the breakeven point of operations. These steps primarily included
salary reductions and workflow restructurings resulting in a reduction of
personnel needed. Management continues to closely monitor the mortgage company
activity and make changes and adjustments where deemed appropriate.
The mortgage banking business is highly competitive. FFMC competes with a
large number of other mortgage bankers, state and national banks, thrift
institutions, credit unions and insurance companies. Mortgage bankers
compete primarily with respect to price and service. Competition may also
occur on mortgage terms and closing costs. FFMC competes, in part, by
maintaining and expanding its close relationships with real estate brokers,
builders, developers and permanent lenders. Many competitors have financial
resources that are substantially greater than those of FFMC. The future
profitability of FFMC is dependent on its ability to compete with these
organizations.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor any of its principals are presently
engaged in any material pending litigation which might have an
adverse impact on its financial position.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matter to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The Company incorporates herein by reference those exhibits
previously filed by the Company with the Securities and
Exchange Commission in the Company's Registration of Securities
on Form 10-SB, Form 10-KSB, and Forms 10QSB, File No. 0-21502.
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UNITED FIDELITY, INC.
May 14, 1996 /s/ Robert E. Cook
Robert E. Cook
President
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 199,941 289,677
<SECURITIES> 1,125 1,125
<RECEIVABLES> 5,094,233 6,694,831
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,295,299 6,985,633
<PP&E> 500,477 501,077
<DEPRECIATION> (396,655) (384,239)
<TOTAL-ASSETS> 5,399,121 7,102,471
<CURRENT-LIABILITIES> 4,476,430 6,189,859
<BONDS> 0 0
0 0
3,303,165 3,303,165
<COMMON> 44,042 44,042
<OTHER-SE> (3,128,823) (3,135,880)
<TOTAL-LIABILITY-AND-EQUITY> 5,399,121 7,102,471
<SALES> 455,448 257,250
<TOTAL-REVENUES> 603,720 375,459
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 481,904 684,791
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 99,470 48,207
<INCOME-PRETAX> 22,346 (357,539)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 22,346 (357,539)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,057 (357,539)
<EPS-PRIMARY> .03 (.18)
<EPS-DILUTED> 0 0
</TABLE>
