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 SEPTEMBER 30, 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 itscharter)
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 September 30, 1996: 220,211 .
This document consists of 16 pages.
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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 September 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for
the nine months ended September 30, 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. . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 14
2
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED FIDELITY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 144,620 $ 289,677
Equity securities at market 1,125 1,125
(cost $1,125)
Mortgage origination fees receivable 29,653 87,036
Receivables for mortgage loans 1,528,604 5,335,668
(3,807,064)
Loans held for sale 2,034,510 866,636
Notes receivable 300,000 300,000
Other receivables 174,397 105,491
Furniture, fixtures and equipment, net of
accumulated depreciation of $ 422,067
and $ 384,239, respectively 78,410 116,838
Total assets $ 4,291,319 $ 7,102,471
LIABILITIES
Accounts payable $ 60,728 $ 47,910
Line of credit 3,412,092 6,020,000
Notes payable 7,321 9,250
Other liabilities 98,041 112,699
Total liabilities 3,578,182 6,189,859
Minority interest 643,527 701,285
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 (5,730,567) (5,588,850)
Total shareholders' equity 69,610 211,327
Total liabilities and shareholders' equity $ 4,291,319 $7,102,471
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
United Fidelity, Inc. and Subsidiary
Consolidated Statements of Operations
Quarter Ended Nine Months Ended
September 30 September 30 September 30 September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue:
Mortgage origination
income $ 331,441 $ 507,588 $1,125,298 $1,248,878
Loan fees 38,165 66,560 160,740 194,652
Interest earned 59,574 90,098 190,245 209,360
Interest charges (75,402) (109,155) (253,014) (223,730)
Loss on sale
equity securities 0 (124) 0 (124)
Other income 7,995 11,074 24,123 19,669
361,773 566,041 1,247,392 1,448,705
Expenses:
Mortgage loan
commissions and fees 174,230 194,924 471,249 483,128
Employee compensation
and benefits 117,012 191,545 400,496 683,091
Loan costs 44,777 71,386 175,119 215,768
Depreciation and
amortization 12,634 17,553 38,166 73,202
Other general and
administrative 87,810 134,057 327,903 530,873
436,463 609,465 1,412,933 1,986,062
Income (loss) before
income tax provision (74,690) (43,424) (165,541) (537,357)
Income tax provision - - - -
Minority interest in
(income) loss 15,030 2,714 23,824 (3,417)
Net loss $ (59,660) $ (40,710) $ (141,717) $ (540,774)
Weighted average
common shares
outstanding 220,211 220,211 220,211 1,168,943
Net loss per common
share $ (0.27) $ (0.18) $ (0.64) $ (0.46)
See accompanying notes to consolidated financial statements.
4
</TABLE>
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<TABLE>
UNITED FIDELITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (141,717) $ (540,774)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 38,166 73,202
Minority interest in gain (loss) (57,758) 3,417
Loss on sale of equipment 62 -
Loss on sale of equity securities - -
Changes in assets and liabilities:
(Increase) decrease in origination
fees receivable 57,383 (33,318)
(Increase) decrease in receivable
for mortgage loans sold 3,807,064 (451,496)
(Increase) decrease in loans held
for sale (1,167,874) 610,009
(Increase) decrease in other
receivables (68,906) (4,282)
Increase (decrease) in accounts
payable - other 12,818 (93,151)
Increase (decrease) in line of
credit (2,607,908) (15,159)
Increase (decrease) in other
liabilities (14,658) (9,847)
NET CASH USED IN OPERATING ACTIVITIES (143,328) (461,275)
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 (1,929) -
FFMC stock issuance in restructure - 325,000
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (1,929) 325,000
NET DECREASE IN CASH (145,057) (134,151)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 289,677 449,188
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 144,620 $ 315,037
Supplemental disclosure of cash flow
information:
Taxes paid during the period $ - $
Interest paid during the period $ 253,014 $ 223,730
See accompanying notes to consolidated financial statements.
5
</TABLE>
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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 nine month
periods ended September 30, 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 nine month periods ended
September 30, 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 nine months of 1996, Shareholders' Equity decreased
as a result of the Company's net loss of $141,717.
NOTE 4. LOSS PER SHARE
Net loss per share was calculated by dividing net loss 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
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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
$0 and $28,123 at September 30, 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 September 30, 1996, and December 31, 1995, the Company had
$1,528,604 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
and selling 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 September 30,
1996 and 1995 was $228,736 and $73,378 and the related fees totaled $23,600
and $6,550, respectively.
7
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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. The interest incurred on these funds as of
September 30, 1995 was $128,891.
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 a net operating loss
carryforward and current period losses.
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 nine months ended September 30, 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.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
(a) ASSETS
Cash and cash equivalents decreased as the Company utilized cash to
fund current period operations. 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 third quarter of 1996 than the fourth quarter of
1995.
At September 30, 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 nine months of 1996, Shareholders' Equity decreased
from an operating loss of $141,717. No dividends have been paid in 1996.
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.
QUARTER ENDED SEPTEMBER 30, 1996, COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
A comparison of selected mortgage company statistics for the periods
discussed by management is provided by the following table:
ACTIVITY FOR SEPTEMBER 30, SEPTEMBER 30,
THREE MONTHS ENDED 1996 1995
Loans sold $ 18,250,112 $ 26,041,359
Number of loans sold 140 240
Mortgage origination income $ 331,441 $ 507,588
Loan offices 2 3
Loan originators 12 14
Other personnel 13 17
The Company reported a net loss of ($59,660) for the quarter ended
September 30, 1996 compared to a net loss of ($40,710) for the same period
one year ago.
The Company materially changed its operations during the quarter ended
June 30, 1995. During that quarter, 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>
Loans sold decreased 42% (100 loans), with a corresponding 30%
decrease in total dollar volume during the third quarter of 1996 compared
to the third quarter 1995. The average loan sold was $130,358 in the third
quarter compared to $108,506 the same period in 1995, an increase of more
than $21,500. The decrease in dollar volume, along with the smaller
margins available for the larger loans, is reflected in mortgage
origination income for the period. Mortgage origination income was
$176,147 or 35% less in 1996 than for the same period of 1995.
Interest charges exceeded interest earned during the third quarter of
1996. This is the result of the interest rate on the line of credit
exceeding interest earned on mortgage loans originated.
Total expenses decreased 28% from the prior year. The reduction in
employee compensation and benefits expense can be attributed to two
factors. First, the number of employees decreased 19% 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.
Other general and administrative expenses decreased 34% 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.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
A comparison of selected mortgage company statistics for the periods
discussed by management is provided by the following table:
ACTIVITY FOR SEPTEMBER 30, SEPTEMBER 30,
NINE MONTHS ENDED 1996 1995
Loans sold $ 66,089,501 $ 58,876,546
Number of loans sold 554 594
Mortgage origination income $ 1,125,298 $ 1,248,878
Loan offices 2 3
Loan originators 12 14
Other personnel 13 17
The Company reported a net loss of ($141,717) at September 30, 1996
compared to a net loss of ($540,774) for the same period one year ago.
11
<PAGE>
The Company materially changed its operations 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.
The Company sold 40 loans with the total dollar volume of $7,212,955,
more than the previous year. However, profit margins on loans sold have
decreased from 1995. The average loan sold was $119,295 and $99,119 in
1996 and 1995, respectively. Mortgage origination income as a percentage
of loans sold decrease from 2.12% in 1995 to 1.70% in 1996. Profit margins
decrease as the loan size increase.
Interest charges exceeded interest earned during the first nine
months of 1996. This is the result of the interest rate on the line of
credit exceeding interest earned on mortgage loans originated. Interest
expense increased over the same period of a year ago due to the higher
interest rates charged on our line of credit. However, an increase in
interest income was not realized due to the decrease in loan volume.
Total expenses decreased 29% from the prior year. The reduction in
employee compensation and benefits expense can be attributed to two
factors. First, the number of employees decreased 19% 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 decreased slightly in 1996 compared to 1995,
resulting from decreased mortgage originations.
Other general and administrative expenses decreased 38% 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
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
(a) OPERATING ACTIVITIES
Consolidated operating activities produced negative cash flows of more
than $143,000 during the first nine months 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 $1,167,800. Loans held for sale
are affected by the volume of
12
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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 $540,000 was needed to fund the Company's loss for the
first nine months. The overall use of cash is less than the $540,000 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.
(b) FINANCING ACTIVITIES
There have been no significant financing activities during the first
nine months of 1996.
Significant financing activities occurred in the first six months of
1995. These activities included a restructuring of the companies
subsidiary (FFMC). As a part of the restructuring, FFMC issued preferred
stock and additional common stock. The Company received $325,000 in cash
from the stock issuances.
(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 nine months ended September 30, 1996 show a
stabilization in expenses compared to 1995. 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.
13
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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 REPORT 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.
14
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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.
November 8, 1996 Robert E. Cook
Robert E. Cook
President
15
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 144,620 315,037
<SECURITIES> 1,125 9,209
<RECEIVABLES> 4,067,164 4,490,188
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,212,909 5,063,780
<PP&E> 500,477 511,392
<DEPRECIATION> 422,067 386,719
<TOTAL-ASSETS> 4,291,319 4,939,107
<CURRENT-LIABILITIES> 3,578,182 4,032,268
<BONDS> 0 0
0 0
3,303,165 3,303,165
<COMMON> 44,042 44,042
<OTHER-SE> (3,277,597) (3,139,692)
<TOTAL-LIABILITY-AND-EQUITY> 4,291,319 4,939,107
<SALES> 0 0
<TOTAL-REVENUES> 1,500,406 1,672,435
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,412,933 1,986,062
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 253,014 223,730
<INCOME-PRETAX> (165,541) (537,357)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (165,541) (537,357)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (141,717) (540,774)
<EPS-PRIMARY> (.64) (.46)
<EPS-DILUTED> (.64) (.46)
</TABLE>
