U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT UNDER 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) 241-6300
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
Class A Common Stock, no par value
Class A Preferred Stock, $15 par value per share
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
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to the Form
10-KSB.[]
Issuer's revenues for its most recent fiscal year: $1,608,026
The aggregate market value of the voting stock held by non-
affiliates as of December 31, 1996, computed by reference to the book
value at December 31, 1996: $22,736.
The number of shares of Common Stock, no par value per share,
outstanding as of March 1, 1997: 220,211 .
Index to Exhibits appears on pages 16-17 .
<PAGE> 1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a.) BUSINESS DEVELOPMENT
United Fidelity, Inc., is an Illinois corporation
incorporated in 1990. United Fidelity, Inc. is referred to herein,
together with its 71% owned subsidiary, First Fidelity Mortgage
Company, as the "Company" and on a parent only basis as
"Fidelity". The only activity of Fidelity was the sale of its stock
from May 1991 through June 2, 1994 in an Illinois intrastate
offering. First Fidelity Mortgage Company, an Illinois corporation
("FFMC"), also incorporated in Illinois in 1990, is engaged in the
real estate mortgage brokerage and banking business with two offices
at December 31, 1996.
The Company has incurred losses since its
organization. The Company incurred losses of $2,830,137 in 1994,
$535,180 in 1995, and $194,970 in 1996. The extent of the losses
has placed continuing existence of the Company in jeopardy. The
amount of shareholders' equity has decreased from $2,692,105 as of
December 31, 1993 to $16,357 as of December 31, 1996. For FFMC
to continue to remain viable, it must be able to generate profits
and cashflow in 1997. The extent and causes of the Company's
operational losses are discussed in this Item 6 Management
Discussion and Analysis of Financial Condition and Results of
Operations, and in the Financial Statements, beginning at Page F-1.
* STOCK SALES
In 1991, Fidelity began an intrastate initial public
offering only to the residents of Illinois. The units consisting of
one share of preferred stock and one share of common stock of
Fidelity were sold by employee agents of Fidelity. The securities
were registered with the Illinois Securities Department but were not
registered under the provisions of the Securities Act of 1933, as
amended, in reliance upon an exemption from registration under that
Act as provided in Section 3(a)(11) and Rule 147 promulgated
thereunder. The offering was initially for $21,000,000 and was
re-registered with the Illinois Securities Department in May 1992, and
May 1993, in that amount. The amount of the offering was reduced to
$12,000,000 in the May 1994, re-registration. Shortly after the
May 1994, re-registration, on June 2, 1994, Fidelity stopped the sale
of the securities because of the then recent operational losses of
FFMC. The Board of Directors of Fidelity voted to voluntarily
terminate the offering on August 18, 1994. On December 7, 1994,
the Illinois Securities Department officially terminated the
offering. At the termination of the offering 220,211 units for
$6,606,330 had been sold.
The proceeds of the offering were used to expand the
Company's mortgage brokerage and mortgage banking operations, fund
losses from operations, pay offering expenses, and pay administrative
expenses.
During 1995, as part of the restructure of FFMC, certain
of the common stock of UFI was retired, at no cost. Retired were
those shares issued to promoters, directors, salespeople and
employees of affiliated companies. This means that the public
shareholders who purchased common and preferred stock in units
during the public offering effectively own all of the outstanding
stock of UFI.
The original concept of the Company was to organize or
acquire entities offering residential real estate mortgage loans,
mortgage life insurance, title insurance, and residential
property and casualty insurance. The proceeds of the public offering
were to be used for the organization or acquisition of these
entities. In furtherance of this concept, the Company acquired
the operating assets of a residential real estate mortgage
brokerage firm in the Chicago, Illinois, Metropolitan Area in 1991.
Due to the slower than expected progress of the sale of the
Company's securities, the remaining portions of the Company's
strategy were never implemented.
At December 31, 1996, the focus of management of the
Company is to reduce expenses and increase revenues at FFMC so that
the Company becomes profitable and has a positive cash flow.
<PAGE> 2
(b.) BUSINESS OF ISSUER
REAL ESTATE MORTGAGE BANKING
FFMC is the sole operating subsidiary of Fidelity.
Fidelity itself conducts no operations. FFMC is in the
residential real estate mortgage brokerage and banking business.
* INDUSTRY OVERVIEW
Mortgage banking generally is the business of (i)
producing mortgage loans, either by making such loans as a
direct lender (referred to as "origination") or by purchasing such
loans from other lenders, (ii) warehousing mortgage loans pending
sale to third-party investors, (iii) selling mortgage loans in the
secondary mortgage market or to other third-party investors, (iv)
selling or purchasing the right to service mortgage loans and (v)
servicing mortgage loans.
PRODUCTION OF LOANS
In early 1993, FFMC received approval from the Federal
National Mortgage Association ("Fannie Mae") as a seller and servicer
of one-to-four family first mortgages for Fannie Mae. This approval
allows FFMC to participate directly in the secondary mortgage
securities market. FFMC's ability to package and sell its own
mortgage backed securities also allows it to participate in the
wholesale mortgage market (i.e. buying loans from other mortgage
origination companies). Later in 1993, FFMC received approval from
the Federal Home Loan Mortgage Corporation ("Freddie Mac") as a
seller/servicer under its Home Mortgage Program.
The Company originates and purchases conventional mortgage
loans and loans insured by the Federal Housing Authority
("FHA") or guaranteed by the Veterans' Administration ("VA").
The Company's guidelines for underwriting the conventional
conforming loans it originates or purchases comply with the
criteria established by Fannie Mae. Similarly, the Company's
guidelines for underwriting FHA insured loans and VA guaranteed
loans comply with the criteria established by such agencies. The
Company's underwriting guidelines and property standards for
conventional nonconforming mortgage loans (e.g., loans for single
family homes with an original balance in excess of the maximum
amounts set by Fannie Mae, or for loans that do not otherwise meet
the criteria established by Fannie Mae) are based on the underwriting
standards required by large investors to which such loans will be
sold.
At December 31, 1996, the Company operated two branch
offices in Illinois staffed by 24 personnel including a total of 12
commissioned loan officers. The Company currently operates two
production offices, located in Glen Ellyn and Peoria, Illinois. The
Company's marketing strategy is to solicit loan business from
real estate brokers, builders, developers and other real estate
professionals as sources for potential customers. In addition,
customers contact the Company directly, most significantly in
connection with refinances. To implement the Company's marketing
strategy, loan officers actively solicit the real estate
professionals in the area served by their branch office in an
effort to develop referral networks that will provide recurring
business. The Company believes that its commission-based
compensation system attracts highly motivated loan officers and
creates incentives to achieve high levels of production.
A table of selected mortgage company statistics for 1996
and 1995 follows:
<PAGE> 3
ACTIVITY FOR YEAR ENDED 1996 1995
Loans originated $ 87,743,397 $88,920,620
Pipeline from prior year $ 5,600,000 $ 8,500,000
Loans closed $ 79,222,010 $ 82,234,096
Loan fallout $ 9,235,387 $ 9,586,524
Loans held for sale $ 2,720,954 $ 6,064,465
Year end pipeline $ 4,886,000 $ 5,600,000
Number of loans closed 669 817
Number of loans unsold 31 50
Average loan closed $ 118,419 $ 100,654
Mortgage origination fees $ 1,458,530 $ 1,753,606
SALE OF LOANS
The Company sells the loans that it originates or
purchases primarily to Fannie Mae or large investors. Sales of
loans are generally made without recourse to the Company in the
event of default by the borrower. In connection with loan sales,
the Company makes representations and warranties customary in
the industry relating to, among other things, compliance with
laws, regulations and program standards and accuracy of information.
In the event of a breach of these representations and warranties,
the Company may be required to repurchase such loans.
The Company sells its nonconforming loan production on an
ongoing basis to large investors in privately negotiated
transactions on a nonrecourse basis. The Company currently sells
all servicing rights associated with nonconforming loans together with
the underlying loan itself. Sales of loans with servicing attached
results in a higher initial sale price for the loan, but with no
recurring revenue from the servicing. These loans are sold pursuant
to purchase agreements that involve commitments by investors to
purchase loans meeting defined criteria.
The sale of mortgage loans may generate a gain or loss
to the Company. Gains or losses result primarily from two factors.
First, the Company may make a loan to a borrower at a price (i.e.,
interest rate and discount) which is higher or lower than the
Company would receive if it immediately sold the loan in the
secondary market. These pricing differences occur principally
as a result of competitive pricing conditions in the primary
loan origination market. Second, gains or losses may occur from
changes in interest rates which result in changes in the market value
of the loans from the time the price commitment is given to the
borrower until the time that the loan is sold by the Company.
Prior to 1995, the Company unsuccessfully endeavored to
minimize its interest rate risk on commitments it had made to
consumers by entering into forward sale commitments of
mortgage-backed securities. The forward commitments to sell were
intended to mitigate the Company's risk resulting from potential
changes in market interest rates between the time that the Company
commits to make a loan at an agreed price and the time that the
Company closes and sells that loan. FFMC incurred net hedging
losses of $0, $0 and $576,956 during 1996, 1995 and 1994,
respectively. FFMC discontinued use of forward contracts during 1994.
There were no forward contracts outstanding at December 31, 1996.
<PAGE> 4
LOAN SERVICING
The Company began servicing loans in March 1993 subsequent
to its approval by Fannie Mae as a seller/servicer. In July
1994, the Company sold substantially all its servicing portfolio to
a third party. The proceeds from the sale of servicing was
$839,864 less costs of $32,107, realizing net proceeds of $807,757.
The Company sold the servicing portfolio to raise cash to pay
operating expenses.
The Company's loan servicing included collecting and
remitting loan payments, accounting for principal and interest,
holding escrow funds for payment of mortgage-related expenses such
as taxes and insurance, making inspections as required of the
mortgage premises, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of
unremedied defaults and generally administering the loans.
During 1995, the Company discontinued loan servicing
entirely. At December 31, 1996, the Company held no serviced loans.
FINANCING WAREHOUSE LENDING OPERATIONS
FFMC had a "Master Participation Agreement" with a
lender on an individual loan basis. The lender required one
hundred percent participation in the loans it funded. 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. As usage of this agreement increased, the fees
and interest decreased based on quoted monthly volume. FFMC began
utilizing the agreement in October 1994. The interest incurred on
these funds in 1996, 1995 and 1994 was $678, $150,732 and $0 and the
related fees totaled $0, $35,425 and $0, respectively. FFMC
discontinued the use of this line in late 1995.
On May 10, 1995, FFMC secured an additional source of
mortgage funding and entered into a Mortgage Loan Repurchase
Agreement with a lender on an individual loan basis. The lender
requires one hundred percent participation in the loan 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 in 1996 and 1995 was $279,992 and
$143,076 and the related fees totaled $29,700 and $12,400,
respectively.
* COMPETITION
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.
Currently, FFMC is competing primarily in the six county
Chicago, Illinois metropolitan area with an additional down-state
retail origination office located in Peoria. FFMC does not rely on
any one customer or market segment for its loan originations nor does
it rely on any one permanent investor to buy its loans.
* REGULATORY REQUIREMENTS
The Company's mortgage banking business is subject to
the rules and regulations of Fannie Mae, FHA and VA with
respect to originating, processing, selling and servicing mortgage
loans. In addition, there are other federal and state statutes and
regulations affecting such activities. The rules and regulations,
among other things, impose licensing obligations on the
Company, prohibit discrimination and establish underwriting
guidelines which include provisions for inspections and appraisals,
require credit reports on prospective borrowers and fix maximum
loan amounts. Moreover, lenders such as the Company are required
annually to submit audited
<PAGE> 5
financial statements to Fannie Mae, FHA and VA , and each regulatory
entity has its own financial requirements. The Company's affairs
are also subject to examination by Fannie Mae, FHA and VA at
all times to assure compliance with the applicable regulations,
policies and procedures. Failure to comply with these requirements
can lead to loss of approved status, termination of servicing
contracts without compensation to the servicer, demands for
indemnification or loan repurchases and administrative enforcement
actions.
Mortgage loan origination activities are subject to,
among other regulatory requirements, fair housing laws, the
Equal Credit Opportunity Act, the Federal Truth-in Lending Act, the
Real Estate Settlement Procedures Act, the Fair Credit Reporting
Act, and the regulations promulgated thereunder. These
laws prohibit discrimination in residential lending and require
the disclosure of certain information to borrowers concerning
credit and settlement costs. Regulatory requirements are designed
to protect either the interests of consumers, or the owners or
insurers of mortgage loans. Failure to comply with these laws and
regulations can lead to class action lawsuits and administrative
enforcement actions.
FFMC is required under the Illinois Residential Mortgage
Act of 1987 to obtain and maintain in force a license as a
Residential Mortgage Licensee from the Commissioner of Savings and
Residential Finance of the State of Illinois. Under the Illinois
Residential Mortgage Act, FFMC is required to maintain a net worth
of at least $100,000, maintain a surety bond in the amount of
$20,000 and a fidelity bond of $300,000, submit annual certified
audits to the Commissioner, and submit an annual report of
activities to the Commissioner. As of December 31, 1996, FFMC is
in compliance with these requirements.
FFMC is approved to conduct direct endorsement
underwriting of HUD insured mortgages. To retain this approval FFMC
must maintain a net worth of at least $100,000, maintain a warehouse
line of credit of not less than $250,000, develop a quality control
plan for its operations, employ a manager of its main office and
each branch office with at least one year's experience in the
mortgage-related activities for which FFMC is approved to perform,
and have at least one senior corporate officer who possesses at
least the same knowledge and experience as the manager. As of
December 31, 1996, FFMC is in compliance with these requirements.
FFMC is also approved as a non-supervised mortgagee
under the direct endorsement program of the National Housing Act.
As a non-supervised mortgagee, FFMC is able to completely process
applications for HUD mortgage insurance without prior HUD review or
approval. To maintain such approval, FFMC must be in good standing
with HUD for the submission of loans (outlined above), have 5 years'
experience in the origination of single-family mortgages or have
a principal manager who has such experience, have a net worth of
not less than $250,000, and have staff members who have completed
specified HUD programs. As of December 31, 1996, FFMC is in
compliance with these requirements.
* SEASONALITY
The mortgage banking industry is subject to seasonal
trends. These trends reflect the general pattern of sales of
homes. These sales typically peak during the spring and summer
seasons and decline to lower levels from mid-November through
January. Cyclical trends resulting from increasing or decreasing
interest rates and the state of the economy generally also affect
the mortgage banking industry and may tend to accentuate or
counteract seasonal trends.
* PERSONNEL
At December 31, 1996, FFMC had a total of 24 personnel
of which 22 were located in the Glen Ellyn, Illinois office. The
Glen Ellyn personnel complement is broken down as follows: executive
management, 1; loan origination, 11; appraisal, 2; processing, 3;
closing and shipping, 2 and other, 3. All of FFMC's employees are
full time. The employees located in the branch origination
offices generally consist of loan originators and loan processors.
<PAGE> 6
ITEM 2. DESCRIPTION OF PROPERTY
FFMC leases all its offices from outside third
parties. See Footnote H in the accompanying consolidated financial
statements for additional information concerning these leases.
ITEM 3. LEGAL PROCEEDINGS
Neither Fidelity nor any of its principals or its
subsidiaries are presently engaged in any material pending litigation
which might have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE> 7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a.) As of December 31, 1996, there was no established public trading
market for Fidelity's common or preferred stock.
(b.) As of December 31, 1996, there were 220,211 shares of preferred
stock held by 2,224 shareholders and 220,211 shares of common stock
held by 2,224 shareholders. See the consolidated statements of
shareholders' equity and Note J in the accompanying consolidated
financial statements for more information concerning equity
transactions.
(c.) As of December 31, 1996, no cash dividends had been declared on
either the common or preferred stock of Fidelity. Further,
management of Fidelity does not anticipate that dividends will be
paid for a substantial period of time.
ITEM 6. 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 for the years ended
December 31, 1996, and 1995, statements of operations and statements
of cash flows for the years ended December 31, 1996, 1995 and
1994. The primary purpose of management's discussion and analysis is
to enhance the reader's understanding of Fidelity's operations as
reflected in its financial statements. This information should
be read in conjunction with the consolidated financial
statements and notes thereto at pages F-1 through F-17. Further,
management urges the reader to review Item 1. Business within
this Form 10-KSB while reading this discussion.
The Company reported net losses of $194,970,
$535,180 and $2,830,137 in 1996, 1995 and 1994 respectively. As a
result of the losses, during 1994 and 1995, management reduced the
size and then terminated the public offering, closed branch
offices, reduced compensation to officers, restructured its
commissions payments to loan originators, and terminated its
forward delivery commitment transactions. Most of the changes in
items included in the Company's financial statements result from
changes in its mortgage loan origination activities and its public
stock offering, which has been voluntarily terminated.
A comparison of selected mortgage company statistics
for the periods discussed by management is provided by the following
table:
ACTIVITY FOR YEAR ENDED 1996 1995
Loans originated $ 87,743,397 $ 88,920,620
Pipeline from prior year $ 5,600,000 $ 8,500,000
Loans closed $ 79,222,010 $ 82,234,096
Loans sold $ 81,216,711 $ 84,009,533
Mortgage origination income $ 1,458,530 $ 1,753,606
Loan originators 12 13
Administrative personnel 12 16
<PAGE> 8
FINANCIAL CONDITION
The size of the Company's balance sheet is directly related
to production volume, the timing of loan closings and the lag time
from the loan closing to the shipping and exchange of cash with the
final investor. The Company's receivables for mortgage loans,
loans held for sale, and line of credit borrowings from warehouse
lenders decreased in 1996 as the Company closed approximately $6.2
million of loans in December 1996 compared to $8.0 million in December
1995.
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.
(a) ASSETS
Receivables for mortgage loans sold and mortgage
origination fees decreased significantly as the Company's mortgage
loan volume was substantially less during December 1996 than
December 1995. This item is also effected by the timing and
expediency in which the Company receives its funds from the final
investors.
Loans held for sale increased at year end 1996 as
compared to year end 1995. During 1996, the timing of loan
closings directly affected the loans held for sale balance.
At December 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. The note,
receivable from First Commonwealth Corporation a subsidiary of
United Trust, Inc., bears interest at a rate of 1% over prime as
declared by The Wall Street Journal. At December 31, 1996, the
prime rate was 8.25%. Interest is received quarterly.
(b) LIABILITIES
Accounts payable increased compared to the prior
period. The accounts payable balance is comparable to the prior
year-end balance and consists of items relating to the normal business
operations.
The line of credit liability decreased by
approximately $3.3 million as the Company's loan volume was less
than December 1995. The line of credit liability increases and
decreases in relation to the fluctuations in receivables for mortgage
loans and mortgage loans held for sale. The Company utilizes its line
of credit to fund each loan closing.
(c) SHAREHOLDERS' EQUITY
The Company's equity declined $195,000 for the year. The
decline is the result of the net loss reported for 1996.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
The Company reported a net loss of $195,000 during 1996
compared to a net loss of $535,000 during 1995. The mortgage
company closed $79,222,000 in 1996 compared to $82,234,000 in 1995,
a decrease of 3.7%, and a corresponding decrease in the number of
loans sold of 148 (18.1%). The average loan sold was $118,419 in
1996 compared to $100,654 for 1995, an increase of 17.6%. The
decrease in dollar volume, along with the smaller margins for larger
loans, is reflected in mortgage origination income for the year.
Mortgage origination
<PAGE> 9
income was $295,076 or 16.8% less in 1996 than for 1995. Related
accounts regarding loan originations, such as loan fees and interest
charges, also decreased in 1996.
Total expenses decreased significantly in 1996 compared
to 1995. Total expenses decreased $677,437 or 27.0%. The primary
causes for the reduction in expenses are employee compensation and
benefits. The decreases in these expenses can be attributable to two
factors. First, the number of employees decreased 17% during
1996. Also, guaranteed minimum salaries for loan
originators has been discontinued. Loan originators receiving a
draw against future production has also been significantly limited.
Other general and administrative expenses decreased
$248,432 (38.0%) for 1996 compared to 1995. Branch offices
determined to be unprofitable were closed during 1995 existing
office space leases were renegotiated and expenses for existing
offices were closely reviewed. These actions contributed
significantly to the reduction in general expenses.
To summarize, the Company reduced its net loss in 1996
compared to 1995. Significant influences include a decrease in the
number of employees, the discontinuance of unprofitable offices, and
tighter control over general and employee related expenses. These
measures helped to minimize the effects of the decrease in loan
volume.
1995 COMPARED TO 1994
The Company reported a net loss of $513,000 during 1995
compared to a net loss of $2,830,000 during 1994. Prior to the
restructure of the Company's subsidiary in May 1995, the Company
reported losses of $485,000. The remainder of the year, following
the restructure, reported losses were only $28,000. The Company has
taken significant steps in late 1994 and throughout 1995 to
curtail the losses. Certain of these actions are as follows:
- Branch offices determined to be unprofitable were
closed.
- All activities related to forward contracts were
ceased.
- An outside investment banker was engaged on a
consulting basis to review the operations of the
Company and recommend changes he deemed
necessary.
- A new management team was installed at FFMC and
has been given a substantial inducement in stock
and stock options in FFMC in order to stay with
the Company.
- United Trust, Inc. invested $615,000 of new
capital in an issue of Preferred Stock of FFMC
and $10,000 of new capital in common stock of
FFMC.
- Procedures were implemented to reduce operating
expenses of FFMC thereby lowering the breakeven
point of operations. Management compensation was
reduced through the negotiation of employment
contracts. Guaranteed minimum salaries for loan
originators was discontinued. Leases on branch
offices were renegotiated. Leases on closed
branch offices were negotiated for a final
settlement thus eliminating future costs and
liability.
The Company's principal source of on-going revenue is
mortgage origination income, which is directly related to the
aggregate principal 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.
Mortgage origination income increased from 1994 to 1995,
as the aggregate principal amount of loans sold increased, the yield
on the loans sold remained steady, and marketing losses were
eliminated. The Company
<PAGE> 10
incurred interest expense for warehouse borrowings on a net amount
in 1994 and 1995 (the borrower's note amount less any fees,
interest, and/or escrows), while earning interest income from
borrowers on the gross amount of the note. Servicing income of
$9,315, $100,046 and $52,441 from FFMC's loan servicing portfolio is
included in other income in 1995, 1994 and 1993, respectively.
During 1994, the Company sold a significant portion of its serviced
loans portfolio. The Company discontinued servicing loans during
1995.
The number of FFMC salaried personnel decreased to 29 at
December 31, 1995 from 54 at December 31, 1994. As a result,
employee compensation and benefits decreased. Health insurance
costs were $78,015, $209,978 and $60,759 for 1995, 1994 and 1993,
respectively. FFMC's health insurance carrier was changed in August
of 1994 in an attempt to lower health insurance costs. The new
carrier requires higher premiums, but no claim costs are paid by FFMC.
The Company had 13 loan originators at the end of 1995
compared to 27 at the end of 1994. Closed loan production was
approximately $82.2 million and $61.1 million in 1995 and 1994,
respectively.
Other general and administrative expenses decreased 34%
from the prior period. The decrease is the result of cost savings
from the closure of certain branch offices, the renegotiation of
existing leases and stricter management control over expenses.
To summarize, the Company significantly reduced the net
loss in 1995 compared to 1994. Significant influences include an
increase in loan volume, the discontinuance of hedging activities,
and tighter control over general and employee related expenses.
LIQUIDITY AND CAPITAL RESOURCES
(a) OPERATING ACTIVITIES
Consolidated operating activities produced negative cash
flows of $155,000, $490,000 and $339,000 in 1996, 1995 and 1994,
respectively. Approximately $195,000 was needed to fund the Company's
loss in 1996. The actual need for cash was less than $195,000 due
primarily to depreciation charges included in net income.
Operating activities produced approximately $535,000 short fall in
1995. The actual need for cash was less than $535,000 due
primarily to depreciation charges included in net income.
Operating activities produced negative cash flows during
1994 of $2.8 million. The overall use of cash is less than the $2.8
million used to fund the loss because the decrease in mortgage loan
related receivables was greater than the decrease in payables for
warehouse borrowings as the Company used less of its own cash to
warehouse loans.
(b) FINANCING ACTIVITIES
Cash was used by financing activities in 1996 due to
repayment of the note payable. (See note Go of the notes
to financial statements). No other financing activities took place
in 1996. Cash was provided through financing activities of $335,000
and $146,000 during 1995 and 1994, respectively. Through the
restructure of FFMC, the Company received cash from the issuance of
$615,000 of preferred stock of FFMC and $10,000 of common stock of
FFMC, in exchange for $325,000 cash and a $300,000 note receivable.
During 1994, cash was provided by the sale of capital
stock. However, sale of the Company's stock was stopped June 2, 1994
by the Company. The Board of Directors of the Company voted to
voluntarily terminate the offering on August 18, 1994. On December
7, 1994, the Illinois Securities Department officially terminated
the offering. Cash was used for incremental costs of the
offering charged to offering costs. Cash was also used
<PAGE> 11
to repay the demand notes and accounts payable to an affiliated
company.
(c) FUTURE OUTLOOK
Management continues to search for alternatives to
improve the performance of FFMC. There can be no assurance that
the actions taken will stop the losses or provide adequate loan
volume for profitable operations. For FFMC to continue to remain
viable, it must be able to generate profits and cash flows in 1997.
<PAGE> 12
ITEM 7. FINANCIAL STATEMENTS.
INDEX OF FINANCIAL STATEMENTS
The following consolidated financial statements of
Fidelity are included as required by Item 7 of this Form 10-KSB.
Page
Report of Independent Auditors* F-1
Consolidated Balance Sheets as of
December 31, 1996 and 1995* F-2
Consolidated Statements of Operations
for the years ended December 31,
1996, 1995 and 1994* F-3
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1996, 1995 and 1994* F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994* F-5
Notes to Consolidated Financial Statements* F-6
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
* filed herewith
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
NONE
<PAGE> 13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(a.) IDENTITY OF DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the names, ages, positions, and
certain other information regarding the directors and executive
officers of Fidelity. All of the following, except as noted, have
held their positions with Fidelity since its formation in 1990.
ROBERT E. COOK (71) President and Director; Chairman of the Board
of First Fidelity Mortgage Company, since 1991; Director of
United Trust, Inc., since 1984; special advisor and consultant to
United Trust, Inc., 1987 to 1994; Director of United Trust Assurance
Company from 1986 to 1992; Director of United Trust Life Insurance
Company, 1989 to 1991; President of Cook-Witter, Inc., a
governmental consulting and lobbying firm with offices in
Springfield, Illinois, from 1985 to 1992. Executive Vice
President of the Illinois Association of Realtors from 1956
to 1984, serving as that Association's chief executive
officer and chief lobbyist and legislative consultant.
JAMES E. MELVILLE (51) Director; Chief Financial Officer from 1993
and Senior Executive Vice President of United Trust, Inc., United
Income, Inc., and United Trust Group, Inc., 1992 to present; Chief
Financial Officer from 1993, Senior Executive Vice President and
Director of certain non-insurance companies affiliated with United
Trust Group, Inc., 1992 to present; President and Chief Operating
Officer of certain life insurance companies affiliated with United
Trust Group, Inc. since 1992; Senior Executive Vice President and
Chief Operating Officer, Commonwealth Industries Corp. and
Subsidiaries, 1984 to 1991 and President 1989 to 1991; Senior Vice
President and Chief Financial Officer, Massachusetts General,
Englewood, CO, 1976 to 1984; CPA, Coopers & Lybrand, Chicago, IL,
1973 to 1976.
ROBERT TOMLINSON (47) Director; President of Elite Advisory
Services, Inc., a registered investment advisor and financial
consultant, financial advisory services firm; Certified Financial
Planner; investment company and variable contract products, and
direct participation programs; member of the Institute of Certified
Financial Planners, and the International Board of Certified
Financial Planners; served on the Financial Advisors Service Board to
Charles Schwab of Charles Schwab and Company.
The term of office of each director expires at the annual
meeting of shareholders upon election and qualification of his
or her successor. Fidelity's executive officers serve at the
pleasure of the Board of Directors.
(b.) SIGNIFICANT EMPLOYEES
Management of Fidelity's sole operating subsidiary,
FFMC, is under the direction of Mr. Donald A. Lickel who serves
as FFMC's President.
(c.) FAMILY RELATIONSHIPS
NONE
(d.) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
NONE
<PAGE> 14
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF 1934
Based solely upon a review of Forms 3 in the custody of
Fidelity, or lack thereof, none of the persons who were officers,
directors, or holders of 10% of the outstanding common stock during
1996, including those listed on page 26 of this Form 10-KSB, filed an
initial report of beneficial ownership of the common stock of
Fidelity on the effective date (approximately June 30, 1993)
of Fidelity's registration statement filed on Form 10-SB.
According to the stock transfer records of Fidelity,
since the date of the required filing on Form 3, none of the
reporting persons engaged in any transactions that were not reported
on a timely basis.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides information concerning the
cash and non-cash compensation earned and received by the
Company's Chief Executive Officer and its most highly compensated
executive officer for the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Name Annual
and Compen-
Principal Salary Bonus sation
Position Year ($) ($) ($)
Robert E. Cook 1996 0 0 0
President 1995 0 0 0
1994 58,000 0 0
1993 58,000 0 0
1992 58,000 0 0
Donald A. Lickel 1996 60,000 0 0
President of FFMC 1995 60,000 15,000 0
1994 60,000 45,453 0
Long Term Compensation
Securities All
Name Restricted Under- Other
and Stock lying LTIP Compen-
Principal Award(s) Options/ Payouts sation
Position Year ($) SARs (#) ($) ($)
Robert E. Cook 1996 0 0 0 0
President 1995 0 0 0 0
1994 0 0 0 0
1993 0 0 0 0
1992 0 0 0 0
Donald A. Lickel 1996 0 0 0 0
President of FFMC 1995 0 0 0 0
1994 0 0 0 0
LONG TERM COMPENSATION
The Company has no stock options, stock appreciation
rights or long-term incentive awards outstanding to its executive
officers at December 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a.) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
NONE
<PAGE> 15
(b.) SECURITY OWNERSHIP OF MANAGEMENT
NONE
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
United Trust, Inc. provides accounting and related
services to the Company. See Notes E and I of the accompanying
consolidated financial statements for additional information
concerning related party transactions.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a.) INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
3 (2) Articles of Incorporation
and by-laws
4 (2) Instruments defining the rights
of holders, incl. indentures
10 (a) (2) Asset purchase agreement
10 (b) (2) Master assignment and security
agreement
10 (c) (4) Master agreement with Fannie Mae
10 (d) (4) Master agreement with GE Capital
Mortgage Services, Inc.
10 (e) (5) Line of credit agreement
10 (f) (6) $18 million credit agreement between
the Company and the mortgage banker
named therein
10 (g) (7) Loan servicing purchase and sale agreement
with MidAmerica Federal Savings Bank
10 (h) (8) Master participation agreement for
warehouse funding
10 (i) (8) Stock purchase agreement dated May 26,
1995 between First Fidelity Mortgage
Company and United Trust, Inc.
10 (j) (8) Consulting agreement with Autumnwood
Financial Corporation
10 (k) (8) Employment agreement - Donald Lickel
<PAGE> 16
10 (l) (8) Employment agreement - Alan Armour
10 (m) (8) Employment agreement - Joseph Cuttone, Jr.
11 (1) Statement re. computation of earnings
per share
16 (2) Letter on change in certifying
accountants
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
21 (2) Subsidiaries of the registrant
28 Additional exhibits-
(2) (i) Prospectus dated May 23, 1991
(2) (ii) Prospectus dated May 22, 1992
(3) (iii) Prospectus dated May 21, 1993
FOOTNOTES:
1) See Note C-11 in accompanying consolidated financial statements
on page F-8.
(2) Incorporated by reference from the Company's Registration of
Securities on Form 10-SB, File No. 0-21502, filed 04/06/93.
(3) Incorporated by reference from the Company's Registration of
Securities on Amended Form 10-SB, File No. 0-21502, filed
06/18/93.
(4) Incorporated by reference from the Company's quarterly report on
Form 10-QSB, as of 6/30/93.
(5) Incorporated by reference from the Company's quarterly report on
Form 10-QSB, as of 9/30/93.
(6) Incorporated by reference from the Company's annual report on
Form 10-KSB, as of 12/31/93.
(7) Incorporated by reference from the Company's quarterly report on
Form 10-QSB, as of 9/30/94.
(8) Incorporated by reference from the Company's annual report on
Form 10-KSB, as of 12/31/94.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth
quarter of the year ended December 31, 1995.
* filed herewith
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
UNITED FIDELITY, INC.
(Registrant)
/s/ Robert E. Cook March 24, 1997
Robert E. Cook, President
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Robert E. Cook March 24, 1997
Robert E. Cook, President & Director
/s/ James E. Melville March 24, 1997
James E. Melville, Director
/S/ Robert Tomlinson March 24, 1997
Robert Tomlinson, Director
<PAGE> 18
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of United
Fidelity, Inc. (an Illinois corporation) and subsidiary as of December
31, 1996, and the related statements of income, retained earnings, 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 generally accepted auditing
standards, and with generally accepted Government Auditing Standards
for financial and compliance audits issued by the Comptroller General
of 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 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 financial position of United
Fidelity, Inc. as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
Craig Shaffer & Associates LTD.
Certified Public Accountants
Des Plaines, Illinois 60018
March 20, 1997
F-1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED FIDELITY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31
1996 1995
<S> <C> <C>
Assets
Cash and cash equivalents $ 134,367 $ 289,677
Equity securities at market 1,125 1,125
(cost $1,125)
Mortgage origination fees receivable 24,316 87,036
Receivables for mortgage loans 1,657,724 5,335,668
Loans held for sale 1,155,902 866,636
Notes receivable 300,000 300,000
Other receivables 169,724 105,491
Furniture, fixtures and equipment,
net of accumulated depreciation
of $ 431,240 and $ 384,239,
respectively 64,807 116,838
Total assets $3,507,965 $ 7,102,471
Liabilities
Accounts payable $ 53,962 $ 47,910
Line of credit 2,676,808 6,020,000
Notes payable 6,777 9,250
Other liabilities 132,354 112,699
Total liabilities 2,869,901 6,189,859
Minority interest 621,707 701,285
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 (5,783,820) (5,588,850)
Total shareholders' equity 16,357 211,327
Total liabilities and
shareholders' equity $3,507,965 $7,102,471
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Years Ended December 31
<S> <C> <C> <C>
1996 1995 1994
Revenue :
Mortgage origination income $ 1,458,530 $ 1,753,606 $ 417,047
Loan fees 190,008 247,949 257,917
Interest earned 237,423 283,411 549,425
Interest charges (310,371) (321,121) (526,109)
Gain on sale fixed assets 287 0 0
Gain on sale equity securities 0 1,204 0
Sale of servicing 0 0 807,757
Other income 32,149 29,052 125,074
1,608,026 1,994,101 1,631,111
Expenses:
Mortgage loan commissions
and fees 649,615 713,216 591,072
Employee compensation and
benefits 511,400 769,497 1,855,960
Loan costs 215,884 280,042 306,015
Interest expense 0 0 32,697
Hedging losses on forward
contracts 0 0 576,956
Depreciation and amortization 50,618 93,767 111,373
Other general and administrative 405,722 654,154 987,175
1,833,239 2,510,676 4,461,248
Income (loss) before income
tax provision (225,213) (516,575) (2,830,137)
Income tax provision 0 0 0
Minority interest in loss 30,243 (18,605) 0
Net income (loss) $ (194,970) $ (535,180)$(2,830,137)
Weighted average common
shares outstanding 220,211 929,811 1,984,418
Net loss per common share $ (0.89) $ (0.58)$ (1.43)
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<TABLE>
9% Preferred Common Stock Capital
Stock Outstanding Stock
Shares Amount Share Amount Subscribed
<S> <C> <C> <C> <C> <C>
Balances at December
31, 1993 176,852 $ 2,652,780 1,954,852 $390,970 $285,258
Subscriptions of
capital stock
units in public
offering 43,359 650,385 43,359 8,672 (285,258)
Costs of public
offering 0 0 0 0 0
Repurchase of common
stock 0 0 4,000 (800) 0
Unrealized loss 0 0 0 0 0
Net loss 0 0 0 0 0
Balances at December
31, 1994 220,211 3,303,165 1,994,211 398,842 0
Subscriptions of
capital stock
units in public
offering 0 0(1,774,000)(354,800) 0
Costs of public
offering 0 0 0 0 0
Repurchase of
common stock 0 0 0 0 0
Net loss 0 0 0 0 0
Balances at December
31, 1995 220,211 3,303,165 220,211 44,042 0
Net loss 0 0 0 0 0
Balances at December
31, 1996 220,211 $ 3,303,165 220,211 $ 44,042 $ 0
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<TABLE>
Additional Un-
Paid-in realized Accumulated
Capital Loss Deficit Total
<S> <C> <C> <C> <C>
Balances at December
31, 1993 $ 1,587,797 $ (1,167) $ (2,223,533) $ 2,692,105
Subscriptions of
capital stock
units in public
offering 639,673 0 0 1,013,472
Costs of public
offering (42,735) 0 0 (42,735)
Repurchase of
common stock 0 0 0 (800)
Unrealized loss 0 (1,230) 0 (1,230)
Net loss 0 0 (2,830,137) (2,830,137)
Balances at December
31, 1994 2,184,735 (2,397) (5,053,670) 830,675
Subscriptions of
capital stock
units in public
offering 354,800 0 0 0
Costs of public
offering (86,565) 0 0 (86,565)
Repurchase of common
stock 0 2,397 0 2,397
Net loss 0 0 (535,180) (535,180)
Balances at December
31, 1995 2,452,970 0 (5,588,850) 211,327
Net loss 0 0 (194,970) (194,970)
Balances at December
31, 1996 $ 2,452,970 $ 0 $ (5,783,820) $ 16,357
</TABLE>
F-5a
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (194,970) $ (535,180) $ (2,830,137)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Depreciation and
amortization 50,618 93,767 111,373
Minority interest in
loss (30,243) 18,605 0
(Gain) loss on sale
of equipment (287) 232 2,481
Gain on sale equity
securities 0 (1,204) 0
Changes in assets and liabilities:
(Increase) decrease in
origination fees
receivable 62,720 (66,270) 146,822
(Increase) decrease in
receivable for mortgage
loans sold 3,677,944 (3,713,328) 18,750,590
(Increase) decrease in
loans held for sale (289,266) 1,763,238 1,693,748
(Increase) decrease in
other receivables (64,233) (67,370) 54,516
Increase (decrease) in
accounts payable 6,052 (103,711) 72,278
Increase (decrease) in
line of credit (3,343,192) 2,094,272 (18,028,280)
Increase (decrease) in
other liabilities (29,680) 26,846 (312,357)
Net cash (used) provided by
operating activities (154,537) (490,103) (338,966)
Cash Flows From Investing
Activities
Proceeds from sale of
equity securities 0 9,929 1,766
Purchase of equity securities 0 (1,125) 0
Proceeds from sale of
furniture and equipment 1,700 510 11,772
Purchase of furniture
and equipment 0 (13,472) (26,906)
Net cash provided (used) by
investing activities 1,700 (4,158) (13,368)
Cash Flows From Financing Activities
Proceeds from sale of
capital stock 0 500 1,013,472
Proceeds from notes payable 0 9,250 (800)
Proceeds from notes payable (2,473) 0 0
Capitalization by United
Trust, Inc. 0 325,000 (42,735)
Decrease in notes payable -
affiliate 0 0 (475,000)
Increase in accounts payable -
affiliate 0 0 (349,014)
Net cash provided by financing
activities (2,473) 334,750 145,923
Net (decrease) increase in cash (155,310) (159,511) (206,411)
Cash and cash equivalents at
beginning of period 289,677 449,188 655,599
Cash and cash equivalents at
end of period $ 134,367 $ 289,677 $ 449,188
</TABLE>
<TABLE>
Supplemental disclosure of cash flow information:
<S> <C> <C> <C>
Taxes paid during the
period $ 0 $ 0 $ 0
Interest paid during the
period $ 274,266 $ 168,492 $ 497,572
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A--ORGANIZATION
United Fidelity, Inc. (the "Company") was formed on October 24, 1990,
primarily for the purpose of providing integrated financial services
to purchasers of residential real estate in Illinois. Present
services include residential real estate mortgage banking.
The Company was engaged in a $21,000,000 intrastate securities
offering, which was reduced to a $12,000,000 offering on May 23,
1994. The Board of Directors of the Company voted to voluntarily
terminate the offering on August 18, 1994. Upon termination of
the offering, this securities offering had raised $6,604,310.
During 1995, the Company and UTI worked together to eliminate at no
cost all of the Common shares of United Fidelity, Inc. issued to
promoters, directors, salespeople and employees of affiliated
companies. This means that the public shareholders who purchased
Common and Preferred Stock in units effectively own all of the
outstanding stock of UFI. See Note C.
First Fidelity Mortgage Company ("FFMC"), a 71% owned subsidiary of
the Company, is engaged in the residential mortgage brokerage and
banking business and operates two production offices. The offices
are located in Glen Ellyn and Peoria, Illinois. FFMC originates
residential mortgage loans, arranges to sell the loans to a
permanent investor and provides temporary funding from the date
the loan closes until such time as the permanent investor funds the
loan (usually within 30 days of the loan closing).
NOTE B--ACCOUNTING POLICIES
1. NATURE OF OPERATIONS
United Fidelity, Inc. is a mortgage banking holding company
that, through its subsidiary, is engaged in the residential mortgage
brokerage and banking business.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its 71% owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
3. USE OF ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual result
could differ from those estimates.
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks and
certificates of deposit with original maturities of three months or
less.
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
5. RECEIVABLES FOR MORTGAGE LOANS SOLD
When mortgage loans are delivered to the final investor, the
Company records receivables for mortgage loans sold and recognizes
gains and losses on such sales. The receivable for mortgage loans
sold is satisfied upon settlement with the final investor, usually
within 30 days of the sale.
6. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are reported at the lower of aggregate
cost or market value. Cost is the face value of the mortgage reduced
by the net deferred fees and costs which are recognized upon sale.
The related servicing rights may either be sold or retained. Gains
or losses on such sales are recognized at the time of sale and are
determined by the difference between net sales proceeds and cost.
7. FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Depreciation is
provided using straight-line and accelerated methods over periods
ranging from five to seven years.
8. INTANGIBLE ASSETS
Tangible and identifiable intangible assets were recorded based on
values stated in the asset purchase agreement and estimates of fair
market value of the respective assets at the date of acquisition.
Goodwill, representing the acquisition cost of First Mortgage
Corporation assets in excess of the value of net assets acquired, was
eliminated through the restructuring of the Company's investment in
FFMC.
Organizational costs consist principally of legal and registration
fees resulting from the establishment of the Company.
Amortization expense pertaining to organizational costs was $0, $0
and $5,532 for each of the years ended December 31, 1996, 1995 and
1994.
At December 31, 1996 and 1995, no intangible assets remain on the
balance sheet.
9. DEFERRED LOAN FEES AND COSTS
In accordance with Financial Accounting Standards Board
Statement No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases", lending transaction fees and costs are deferred
and recognized as income or expense in the periods the related loans
are sold.
10. MORTGAGE ORIGINATION INCOME
Mortgage origination income includes all mortgage related revenues
other than loan fees, servicing fees and interest.
11. LOAN FEES
Loan fees include payments received from borrowers, usually at
the time of application, to cover loan costs (the costs of
appraisals and credit reports provided by third parties and paid for
by FFMC).
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. MORTGAGE SERVICING FEES AND LATE CHARGES
The Company recognizes mortgage servicing fees and late charges
as income when collected. Servicing fees are calculated on the
basis of outstanding principal balances of loans serviced. Income
from mortgage servicing is included in "other income" in the
Consolidated Statements of Operations.
13. LOSS PER SHARE
Net loss per share is calculated by dividing net loss by the weighted
average number of shares outstanding for the years ended December 31,
1996, 1995, and 1994. The convertible preferred stock is not
considered as a common stock equivalent in the calculation as its
effect would be antidilutive.
NOTE C-- SUBSIDIARY RESTRUCTURE
Prior to implementation of the plan of restructure in May 1995, the
Company incurred losses from operations, reduction in production
volume and substantial cash flow problems. An outside investment
banker was engaged to review the operations of the Company and
recommend changes he deemed necessary. On May 26, 1995, based on
the recommendation of the outside investment banker, the Company, FFMC
and United Trust, Inc. ("UTI"), have cooperated together to
accomplish:
A. Elimination at no cost of almost all of the Common
shares of United Fidelity, Inc. issued to promoter,
directors, salespeople and employees of affiliated companies.
This means that the public shareholders who purchased Common
and Preferred Stock in units effectively own all of the
outstanding stock of UFI.
B. A new management team has been installed at FFMC and has
been given a substantial inducement in stock and stock
options in FFMC in order to stay with the Company.
C. UTI invested $615,000 of new capital in an issue of Preferred
Stock of FFMC and $10,000 of new capital in common stock of
FFMC and further agreed to guarantee up to $2,000,000 of
mortgage credit lines for FFMC. This capitalization, which
provided an additional $325,000 in cash, allowed unpaid bills
to be brought current and permitted loan originations to
continue uninterrupted.
D. In exchange for the 100 shares of FFMC common stock
previously owned, UFI received 1,000,000 shares of the newly
authorized common stock. UFI also contributed $259,035 in
assets to FFMC. These assets included $34,435 in cash,
$6,369 in equity securities, $44,700 mortgage loan
receivable and $173,531 in receivables resulting from prior
advances.
E. The series A Preferred Stock issued to UTI is redeemable at
any time at the option of management. If the shares
currently outstanding are redeemed prior to May 26, 1998,
accrued dividends will be waived. Also, if FFMC redeems
300,000 of UTI's shares of Series A Preferred Stock prior to
May 26, 1996, FFMC may then redeem 50,000 shares of common
stock owned by UTI for an aggregate purchase price of $2,500.
If the remaining shares of Series A Preferred Stock are
redeemed prior to May 26, 1997, the Company may then
redeem an additional 50,000 shares of common stock
owned by UTI for an aggregate purchase price of $2,500.
The May 26, 1996 redemption date was not exercised by the
Company.
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
F. On April 26, 1995, FFMC sold 105,000 shares of common
stock (4.2% outstanding) to Autumnwood Financial Corporation
for $250 and 105,000 shares of common stock to FFMC's
president for $250. In addition, stock options were offered
to two key loan officers where in each can purchase 127,500
shares for $250. The options expired on May 8, 1996.
As a result of these transactions, UFI owns 1,000,000 of the 1,410,000
shares of the common stock issued and outstanding, or 71% of FFMC.
UTI owns all 615,000 shares of the preferred stock issued and
outstanding and 200,000 shares of common stock.
In addition to the above, during 1995, management has implemented
procedures to reduce expenses of FFMC extensively and thereby
lowered the breakeven point of operations. These procedures
included closing unprofitable branch offices, ceasing forward
contract activities, and reducing operating expenses. Operating
expenses were reduced by reducing employment contracts, eliminating
minimum salaries for loan officers and renegotiating lease agreements
for branch offices.
NOTE D--NOTE RECEIVABLE
The Company has a note receivable from First Commonwealth
Corporation, a subsidiary of UTI, in the amount of $300,000 at
December 31, 1996. The note bears interest at a variable per annum
rate equal to 1% over the variable per annum rate of interest most
recently announced by the Wall Street Journal as the prime rate. As
of March 1, 1997, the prime rate was 8.25%.
NOTE E--FURNITURE AND EQUIPMENT
Furniture and equipment as of December 31 consist of the following:
Cost 1996 1995
Furniture and fixtures $ 231,438 $ 236,468
Computer hardware 182,113 182,113
Computer software 72,034 72,034
Equipment under capital lease 10,462 10,462
496,047 501,077
Less accumulated depreciation 431,240 384,239
$ 64,807 $ 116,838
Depreciation expense amounted to $ 50,618, $ 73,394 and $96,474 in
1996, 1995, and 1994, respectively.
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE F--BORROWING ARRANGEMENTS
FFMC had a "Master Participation Agreement" with a lender on an
individual loan basis. The lender required one hundred percent
participation in the loans it funded. 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.
As usage of this agreement increased, the fees and interest
decreased based on quoted monthly volume. FFMC began utilizing the
agreement in October 1994. The interest incurred on these funds in
1996, 1995 and 1994 was $678, $150,732 and $0 and the related fees
totaled $0, $35,425 and $0, respectively. FFMC discontinued use of
this line late in 1995.
On May 10, 1995, FFMC secured an additional source of mortgage
funding and entered into a Mortgage Loan Repurchase Agreement with a
lender on an individual loan basis. The lender requires one hundred
percent participation in the loan 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 in 1996 and 1995 was $279,992 and $143,076 and the
related fees totaled $29,700 and $12,400, respectively.
NOTE G--NOTES PAYABLE
At December 31, 1996, the Company has a note payable of $6,777.
The note, dated October 30, 1995, bears interest at 6% per annum and
requires equal monthly payments for a term of forty eight months.
The note was originated in connection with the purchase of an
automobile by FFMC. Expected principal reductions for the next five
years are as follows:
1997 2,262
1998 2,401
1999 2,114
2000 0
2001 0
NOTE H--INCOME TAXES
Until the FFMC restructure in May 1995 (See Note C), the
Company filed a consolidated federal income tax return which
included the results of FFMC. Following the restructure, the
Company and FFMC are no longer eligible to file a consolidated
federal income tax return pursuant to the Internal Revenue Service
Code relating to percentage of ownership.
No provisions for income taxes for the years ended December 31, 1996,
1995, and 1994 have been reflected in the statements of operations
due to net operating losses since inception.
At December 31, 1996, the Company has tax net operating loss
carryforwards for federal income tax purposes available to offset
future taxable income as follows:
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
Expiration
Year
Ending UFI FFMC
2005 $ 14,000 $ 0
2006 281,000 309,000
2007 280,000 198,000
2008 231,000 616,000
2009 174,000 2,768,000
2010 23,000 486,000
2011 1,000 224,000
Total $1,004,000 $4,601,000
The Company has established a deferred tax asset of $1,962,000 for
its operating loss carryforward and has established an allowance of
$1,962,000.
NOTE I--COMMITMENTS, CONTINGENCIES, AND OFF BALANCE SHEET RISK
1. LEASES
The Company leases office facilities under various operating leases
having initial or remaining noncancelable lease terms in excess of
one year. Rent expense under these leases aggregates $85,920,
$161,929 and $273,196 for 1996, 1995, and 1994, respectively.
Minimum rental commitments under the aforementioned leases as of
December 31, 1996, are as follows:
YEAR AMOUNT
1997 $ 89,202
1998 83,265
1999 0
TOTAL $172,467
2. UNINSURED CASH BALANCES
The Company maintains its cash balances at several financial
institutions located in Illinois. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000.
At December 31, 1996 and 1995, the Company's uninsured balances
aggregate to approximately $79,728 and $32,552, respectively. In
connection with mortgage servicing activities, no related
fiduciary funds held in trust were uninsured at December 31, 1996 and
1995.
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
3. RECEIVABLES FOR MORTGAGE LOANS SOLD
At December 31, 1996 and 1995, the Company had $1,657,724
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.
4. PIPELINE OF MORTGAGE LOAN APPLICATIONS IN PROCESS
As of December 31, 1996, and 1995, commitments to fund mortgage loan
applications in process with pre-established interest rates and fees
aggregated over $4.9 and $5.6 million, respectively. The Company
has adequate lines of credit at December 31, 1996, and 1995, to
fund its projected loan closings from its mortgage loan pipeline.
5. FORWARD CONTRACTS
The Company sold mortgage-backed securities through forward
delivery commitments with major dealers in such securities. Forwards
are used as hedges of anticipated mortgage loan sales. Forward
contracts involve selling mortgage-backed securities at a specified
price for delivery on a specified future date. Risks arise from the
possible inability of counterparties to meet the terms of their
contracts and from movements in mortgage values and interest
rates. Gains and losses related to forwards are recognized in the
same period in which gains and losses on the related hedged mortgage
loans are recognized. The Company discontinued use of forward
contracts during 1994. There were no forward contracts outstanding
at December 31, 1996 and 1995.
6. REPURCHASE REQUIREMENTS
Mortgage loans and their related servicing rights are sold under
agreements that define certain criteria for the mortgage loan. If
the criteria are not met, FFMC is required to repurchase the mortgage
loan.
Conforming conventional loans serviced by FFMC are sold to the
Federal National Mortgage Association ("FNMA") on a non-recourse
basis, whereby foreclosure losses are generally the responsibility of
FNMA rather than FFMC.
7. CONCENTRATION OF BUSINESS
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 credit worthiness of borrowers.
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE J--TRANSACTIONS WITH RELATED PARTIES
United Trust, Inc. provides the Company with accounting and related
services. The Company incurred expenses of $0, $0 and $82,069 for
services performed during 1996, 1995 and 1994, respectively. The
Company rented office space from United Trust, Inc. through May
1996, and incurred rent expense of $0, $0 and $6,000 in 1996, 1995,
and 1994, respectively. The above amounts are included in
"employee compensation and benefits" and "other general and
administrative" expenses, respectively, in the accompanying
Consolidated Statements of Operations.
NOTE K--SHAREHOLDERS' EQUITY
1. INITIAL SALE OF COMMON STOCK
In October 1990, the Company issued 2,043,000 shares of no par value
common stock at $.20 stated value per share. The proceeds from the
stock sale were $408,600. As a part of the restructure of FFMC in
May 1995, the shares outstanding issued to officers, promoters,
salespeople, and affiliated companies, were retired at no cost to the
Company.
2. PUBLIC OFFERING OF STOCK
During the first five months of 1994, the Company continued to
market its public stock offering. The Company's original offering
was 700,000 units ("units"), which was reduced to 400,000 units with
the prospectus dated May 23, 1994. Each unit consists of one share
of no par value common stock and one share of Class A, 9%
noncumulative convertible preferred stock, $15 par value per share.
Each share of Class A preferred stock may be converted, at the
holder's option, into two shares of common stock until three years
after the completion of the offering, unless extended by the Company.
The Company may, at its option, at any time, call for redemption of
all or any portion of the shares of Class A preferred stock, and pay
the holder $20 per share, plus any declared but unpaid dividends.
The units are offered to the public at $30 per unit. Upon any
liquidation, dissolution, or winding up of the Company, the holders
of the Class A preferred stock will be entitled to receive, from
the assets of the Company remaining after paying or providing for
the payment of all creditors, and before any payments to the
holders of the common stock, an amount equal to $15 per share,
together with an amount equal to any declared and unpaid dividends.
Due to the recent losses of FFMC, the Company stopped the sale of its
stock units to the public on June 2, 1994. The Board of
Directors of the Company voted to voluntarily terminate the
offering on August 18, 1994.
This public stock offering is exempt from the registration
requirements of the Securities Act of 1933, as amended, as
provided by Section 3(a)11 and Rule 147 promulgated thereunder.
Accordingly, this public stock offering is not registered with the
Securities and Exchange Commission.
3. REPURCHASE OF COMMON STOCK
In 1995, the Company retired 1,774,000 shares of common stock as
part of the reorganization of FFMC. The shares, which had been
issued to officers, promoter, salespeople, and affiliated companies,
were
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
retired at no cost.
During the year ended December 31, 1994, the Company repurchased
4,000 shares of common stock from certain of the original organizers
at the original issue cost of $800.
4. OFFERING COSTS
Costs directly attributable to the distribution of the stock are
charged against the gross proceeds of the public offering rather
than to operations. The following costs have been specifically
identified as costs of the offering:
1996 1995 1994
Commissions - - 109,920
Legal fees - - 21,095
Printing - - 8,161
Other - - (96,441)
Total $ - $ - $ 42,735
5. PROCEEDS OF PUBLIC OFFERING
The Company deposited all proceeds from the public stock offering
into a segregated bank account. Generally, amounts equal to 17%
or less of the subscriptions deposited were then transferred to
the Company's operating account, leaving 83% or more of the
subscription proceeds in the segregated account. However, during
1994 and 1993, in addition to transferring 17% for offering
costs, the Company transferred $927,720 and $169,131, respectively,
for general corporate expenses. In 1995, the segregated account was
closed and all remaining funds were used for general corporate
expenses.
Activity in the segregated account was as follows:
1996 1995
Beginning balance - $ 221,319
Subscription deposits - -
Interest credited - 4,579
Interest used for operations - (4,579)
Funds used for offering costs - -
Line of credit to FFMC - -
Repayment of line of credit - -
Funds used for general
corporate expenses - (221,316)
Balance remaining $ - $ -
<PAGE>
UNITED FIDELITY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE L--OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $274,266, $168,492 and
$497,572 in interest expense for the years 1996, 1995 and 1994,
respectively. The Company paid $0 in federal income tax for the
years 1996, 1995 and 1994.
As part of the subsidiary's restructure on May 26, 1995 (see
NOTE C), UTI transferred a $300,000 note receivable as partial
consideration for preferred stock issued by FFMC.
NOTE M--FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1996 follow:
Estimated
Carrying Fair
Amount Value
FINANCIAL ASSETS:
Cash and cash equivalents $ 134,367 $ 134,367
Loans held for sale $ 1,155,902 $1,155,902
Notes Receivable $ 300,000 $ 300,000
FINANCIAL LIABILITIES:
Lines of credit $ 2,676,000 $2,676,000
Notes and accounts payable $ 60,739 $ 60,739
Other liabilities $ 132,354 $ 132,354
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND CASH EQUIVALENTS - Due to the short term nature of
these assets, the carrying amount is a reasonable estimate of fair
value.
LOANS HELD FOR SALE - Fair value is estimated using quoted market
prices.
LINES OF CREDIT, NOTES AND ACCOUNTS PAYABLE AND OTHER LIABILITIES
- - The carrying amount is a reasonable estimate of fair value.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 134,367 289,677
<SECURITIES> 1,125 1,125
<RECEIVABLES> 3,307,666 6,694,831
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,443,158 6,985,633
<PP&E> 496,047 501,077
<DEPRECIATION> 431,240 384,239
<TOTAL-ASSETS> 3,507,965 7,102,471
<CURRENT-LIABILITIES> 2,863,124 6,180,609
<BONDS> 0 0
0 0
3,303,165 3,303,165
<COMMON> 44,042 44,042
<OTHER-SE> (3,330,850) (3,135,880)
<TOTAL-LIABILITY-AND-EQUITY> 3,507,965 7,102,471
<SALES> 0 0
<TOTAL-REVENUES> 1,918,397 2,315,222
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,833,239 2,510,676
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 310,371 321,121
<INCOME-PRETAX> (225,213) (516,575)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (225,213) (516,575)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (194,970) (535,180)
<EPS-PRIMARY> (0.89) (0.58)
<EPS-DILUTED> (0.89) (0.58)
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