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 June 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 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 June 30, 1996: 220,211 .
This document consists of 16 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 June 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 1996 and 1995. . . 4
Consolidated Statements of Cash Flows for
the six months ended June 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
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
United Fidelity, Inc. and Subsidiary
Consolidated Balance Sheets
June 30 December 31
1996 1995
Assets
Cash and cash equivalents $ 154,637 $ 289,677
Equity securities at market 1,125 1,125
(cost $1,125)
Mortgage origination fees receivable 39,318 87,036
Receivables for mortgage loans 2,479,400 5,335,668
Loans held for sale 2,341,208 866,636
Notes receivable 300,000 300,000
Other receivables 162,898 105,491
Furniture, fixtures and equipment, net of
accumulated depreciation of $ 409,433
and $ 384,239, respectively 91,044 116,838
Total assets $ 5,569,630 $ 7,102,471
Liabilities
Accounts payable $ 71,907 $ 47,910
Line of credit 4,602,415 6,020,000
Notes payable 7,858 9,250
Other liabilities 90,222 112,699
Total liabilities 4,772,402 6,189,859
Minority interest 667,958 701,285
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 (5,670,907) (5,588,850)
Total shareholders' equity 129,270 211,327
Total liabilities and
shareholders' equity $ 5,569,630 $ 7,102,471
See accompanying notes to consolidated financial statements.
3
<PAGE>
United Fidelity,Inc. and Subsidiary
Consolidated Statements of Operations
Quarter Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
Revenue:
Mortgage origination income $ 338,409 $ 484,040 $ 793,857 $ 741,290
Loan fees 54,298 64,676 122,575 128,092
Interest earned 58,726 70,938 130,671 119,262
Interest charges (78,142) (66,368) (177,612) (114,575)
Other income 8,078 2,126 16,128 8,595
381,369 555,412 885,619 882,664
Expenses:
Mortgage loan
commissions and fees 155,828 173,198 297,019 288,204
Employee compensation
and benefits 135,160 207,241 283,484 491,546
Loan costs 60,005 74,230 130,342 144,382
Depreciation and amortization 12,778 33,750 25,532 55,649
Other general and administrative 130,795 203,387 240,093 396,816
494,566 691,806 976,470 1,376,597
Income (loss) before
income tax provision (113,197) (136,394) (90,851) (493,933)
Income tax provision - - - -
Minority interest in
(income) loss 24,083 (6,131) 8,794 (6,131)
Net loss $ (89,114) $(142,525) $ 82,057) $(500,064)
Weighted average
common shares outstanding 220,211 1,311,903 220,211 1,651,172
Net loss per common share $ (0.40) $ (0.11) $ (0.37) $ (0.30)
See accompanying notes to consolidated financial statements.
4
<PAGE>
United Fidelity,Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended
June 30 June 30,
1996 1995
Cash Flows From Operating Activities
Net loss $ (82,057) $ (500,064)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 25,532 55,649
Minority interest in gain (loss) (33,327) 6,131
Loss on sale of equipment 62 -
Changes in assets and liabilities:
(Increase) decrease in origination
fees receivable 47,718 (30,626)
(Increase) decrease in receivable
for mortgage loans sold 2,856,268 125,643
(Increase) decrease in loans
held for sale (1,474,572) (554,213)
(Increase) decrease in other receivables (57,407) (25,699)
Increase (decrease) in
accounts payable - other 23,997 (57,079)
Increase (decrease) in line of credit (1,417,585) 552,554
Increase (decrease) in other liabilities (22,477) (7,294)
Net cash used in operating activities (133,848) (434,998)
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 (1,392) -
FFMC stock issuance in restructure - 325,000
Net cash provided by (used in)
financing activities (1,392) 325,000
Net decrease in cash (135,040) (107,874)
Cash and cash equivalents at
beginning of period 289,677 449,188
Cash and cash equivalents at end of period $ 154,637 341,314
Supplemental disclosure of cash flow information:
Taxes paid during the period $ - $ -
Interest paid during the period $ 177,612 $ 114,575
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 havebeen
prepared by United Fidelity, Inc. ("Fidelity" or the "Company") andinclude
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 six month
periods ended June 30, 1996 and 1995, in accordance with generally
accepted accounting principles for interim financial reporting andpursuant
to Item 310(b) of Regulation S-B. Certain information andfootnote
disclosures normally included in audited financial statementshave 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 six month periods ended June
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 six months of 1996, Shareholders' Equity decreased
as a result of the Company's net loss of $82,057.
NOTE 4. INCOME PER SHARE
Net loss 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 effec 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 fiduciaryfunds
held in trust for investors in non-interest bearing accounts totaled $0 and
$28,123 at June 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 June 30, 1996, and December 31, 1995, the Company had
$2,479,400 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 creditworthinessof 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 June 30, 1996
and 1995 was $159,684 and $0 and the related fees totaled $17,250 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 percentparticipation in the loan
it funds. There were no covenant restrictionswith 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 a net operatingloss
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 andstatements of cash
flows for the six months ended June 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 asreflected in its financial
statements. This information should be read in conjunction with the
consolidated financial statements and notesthereto 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 orother qualifying
expression.
Six Months Ended June 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 second quarter of 1996 than the fourth quarter
of 1995.
At June 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 theMay 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 six months of 1996, Shareholders' Equity decreased
from an operating loss of $82,057. No dividends have been paidin 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 discountpaid to permanent investors
when they purchase a loan and service release fees paid by investors to
purchase loan servicing.
Quarter Ended June 30, 1996, Compared to Quarter Ended June 30, 1995
A comparison of selected mortgage company statistics for the periods
discussed by management is provided by the following table:
ACTIVITY FOR JUNE 30, JUNE 30,
THREE MONTHS ENDED 1996 1995
Loans sold $21,422,444 $20,522,360
Number of loans sold 177 205
Mortgage origination income $ 338,409 $ 484,040
Loan offices 2 3
Loan originators 12 17
Other personnel 13 17
The Company reported a net loss of ($89,114) for the quarter ended
June 30, 1996 compared to a net loss of ($142,525) 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, reduceoperating expenses
and provide additional capitalization and cash toenable FFMC to meet its
financial obligations. Operating expenses werereduced by reducing employment
contracts, eliminating salaries for loan officers, streamlining workflows
and renegotiating lease agreements.
10
<PAGE>
The Company sold 28 fewer loans with the total dollar volume of the
loans 4% greater than the previous year. The increase in dollar volume,
along with the decrease in the number of loans sold, reflects the decrease in
margins available for the larger loans. The average incomeper loan sold
decreased from $2,361 during the second quarter 1995 to $1,912 for the second
quarter 1996. The average loan size increasedapproximately $21,000 over
the same period. The decrease in margins is reflected in the decrease in
gross revenue of $145,631 or 30%.
Interest charges exceeded interest earned during the second 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 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 29% 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 36% 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 futurecosts
and liability. Leases on existing office space were renegotiated,resulting
in lower monthly rents.
Six Months Ended June 30, 1996, Compared to Six Months Ended June 30, 1995
A comparison of selected mortgage company statistics for the periods
discussed by management is provided by the following table:
ACTIVITY FOR JUNE 30, JUNE 30,
THREE MONTHS ENDED 1996 1995
Loans sold $47,839,389 $32,830,187
Number of loans sold 414 354
Mortgage origination income $ 793,857 $ 741,290
Loan offices 2 3
Loan originators 12 17
Other personnel 13 17
The Company reported a net loss of ($82,057) at June 30, 1996 compared
to a net loss of ($500,064) for the same period one year ago.
11
<PAGE>
The Company has materially changed its operations in the six month
period ended June 30, 1995 compared to the six month period ended June 30,
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.
The Company sold 60 loans with the total dollar volume of $15,009,202,
more than the previous year. However, profit margins on loans sold have
decreased from 1995. The average loan sold was $115,550 and $92,741 in
1996 and 1995, respectively. Mortgage origination income as a percentage of
loans sold decrease from 2.26% in 1995 to 1.66% in 1996. Profit margins
decrease as the loan size increase.
Interest charges exceeded interest earned during the first six months 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 the first six months of 1995 as a result of the
increase in closed loan volumes over the prior year.
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 29% 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 slightly in 1996 compared to 1995, resulting from increased
mortgage originations.
Other general and administrative expenses decreased 39% 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
June Months Ended June 30, 1996, Compared to Six Months Ended June 30, 1995
(a) Operating Activities
Consolidated operating activities produced negative cash flows of
almost $134,000 during the first six months of 1996. The use ofcash was
caused by the reduction in the balance of the Company's lineof credit
while the loans held for sale increased $1,400,000. Loans held for sale are
affected by the volume of
12
<PAGE>
loans closed, the timing ofthese closings and the processing time necessary
to send the loans to the final investor.
Consolidated operating activities produced negative cash flows during
1995. Approximately $500,000 was needed to fund the Company's loss for
the first six months. The overall use of cash is less than the $500,000
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
six 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 six months ended June 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 nationalbanks, 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 closerelationships 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
<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.
14
<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.
August 9, 1996 /s/ Robert E. Cook
Robert E. Cook
President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 154,637 341,314
<SECURITIES> 1,125 6,836
<RECEIVABLES> 5,283,506 5,092,050
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,439,268 5,440,200
<PP&E> 500,477 505,487
<DEPRECIATION> (409,433) (363,261)
<TOTAL-ASSETS> 5,569,630 5,582,426
<CURRENT-LIABILITIES> 4,772,402 4,021,999
<BONDS> 0 0
0 0
3,303,165 3,303,165
<COMMON> 44,042 44,042
<OTHER-SE> (3,217,937) (3,100,529)
<TOTAL-LIABILITY-AND-EQUITY> 5,569,630 5,582,426
<SALES> 916,432 869,382
<TOTAL-REVENUES> 1,063,231 997,239
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 976,470 1,376,597
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 177,612 114,575
<INCOME-PRETAX> (90,851) (493,933)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (90,851) (493,933)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (82,057) (500,064)
<EPS-PRIMARY> (.37) (.30)
<EPS-DILUTED> (.37) (.30)
</TABLE>
