SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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) 241-6300
(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 May 12, 1997:
220,211.
This document consists of 13 pages.
<PAGE> 1
UNITED FIDELITY, INC.
QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations
for the three months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
United Fidelity, Inc. and Subsidiary
Consolidated Balance Sheets
March 31 December 31
1997 1996
Assets
Cash and cash equivalents $ 45,654 $ 134,367
Equity securities at market 1,125 1,125
(cost $1,125)
Mortgage origination fees
receivable 24,558 24,316
Receivables for mortgage loans 1,976,656 1,657,724
Loans held for sale 1,452,983 1,155,902
Notes receivable 300,000 300,000
Other receivables 166,834 169,724
Furniture, fixtures and
equipment, net of accumulated
depreciation of $ 434,602 and
$ 431,240, respectively 57,242 64,807
Total assets $ 4,025,052 $ 3,507,965
Liabilities
Accounts payable $ 61,573 $ 53,962
Line of credit 3,268,184 2,676,808
Notes payable 6,224 6,777
Other liabilities 176,044 132,354
Total liabilities 3,512,025 2,869,901
Minority interest 585,348 621,707
Shareholders' Equity
Class A 9% noncumulative,
convertible and callable
preferred stock, $ 15 par value,
700,000 shares authorized,
220,211 issued and outstanding
in 1997 and 1996 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 1997 and 1996 44,042 44,042
Additional paid-in capital 2,452,970 2,452,970
Accumulated deficit (5,872,498) (5,783,820)
Total shareholders' equity (72,321) 16,357
Total liabilities and
shareholders' equity $ 4,025,052 $ 3,507,965
See accompanying notes to consolidated financial statements.
<PAGE> 3
United Fidelity, Inc. and Subsidiary
Consolidated Statements of Operations
Quarter Ended
March 31 March 31
1997 1996
Revenue :
Mortgage origination income $ 237,755 $ 455,448
Loan fees 29,908 68,277
Interest earned 30,201 71,945
Interest charges (44,599) (99,470)
Other income 7,003 8,050
260,268 504,250
Expenses:
Mortgage loan commissions
and fees 146,713 141,191
Employee compensation
and benefits 107,598 148,324
Loan costs 48,664 70,337
Depreciation and amortization 7,565 12,754
Other general and
administrative 62,633 109,298
373,173 481,904
Income (loss) before income
tax provision (112,905) 22,346
Income tax provision - -
Minority interest in gain (loss) 24,227 (15,289)
Net income (loss) $ (88,678) $ 7,057
Weighted average common
shares outstanding 220,211 220,211
Net income (loss) per common share $ (0.40) $ 0.03
See accompanying notes to consolidated financial statements.
<PAGE> 4
United Fidelity, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended
March 31 March 31
1997 1996
Cash Flows From Operating Activities
Net income (loss) $ (88,678) $ 7,057
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation and amortization 7,565 12,754
Minority interest in gain (36,359) 3,022
Loss on sale of equipment - 62
Changes in assets and liabilities:
(Increase) decrease in origination
fees receivable (242) 24,420
(Increase) decrease in receivable
for mortgage loans sold (318,932) 3,045,812
(Increase) decrease in loans held
for sale (297,081) (1,435,243)
(Increase) decrease in other
receivables 2,890 (34,391)
Increase (decrease) in accounts
payable 7,611 (4,701)
Increase (decrease) in line of
credit 591,376 (1,680,803)
Increase (decrease) in other
liabilities 43,690 (27,061)
Net cash used in operating activities (88,160) (89,072)
Cash Flows From Investing Activities
Proceeds from sale of furniture
and equipment - 200
Net cash provided by investing activities - 200
Cash Flows From Financing Activities
Payments on note payable (553) (864)
Net cash used in financing activities (553) (864)
Net decrease in cash (88,713) (89,736)
Cash and cash equivalents at beginning
of period 134,367 289,677
Cash and cash equivalents at end of period $ 45,654 $ 199,941
Supplemental disclosure of cash
flow information:
Taxes paid during the period $ - $ -
Interest paid during the period $ 44,599 $ 49,928
See accompanying notes to consolidated financial statements.
<PAGE> 5
United Fidelity, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by United Fidelity, Inc. ("Fidelity" or the "Company") and include
the accounts of its 71% owned subsidiary, First Fidelity Mortgage Company
("FFMC"). These statements reflect all adjustments, consisting of only
normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of financial results for the three month
periods ended March 31, 1997 and 1996, in accordance with generally accepted
accounting principles for interim financial reporting and pursuant to Item
310(b) of Regulation S-B. Certain information and footnote disclosures
normally included in audited financial statements have been omitted pursuant
to such rules and regulations. These interim consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements for the years ended December 31, 1996 and
1995. The results of operations for the three month periods ended March 31,
1997 and 1996, are not necessarily indicative of the results for the full
year.
NOTE 2. RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
NOTE 3. SHAREHOLDERS' EQUITY
During the first three months of 1997, Shareholders' Equity decreased
as a result of the Company's net loss of ($88,678).
NOTE 4. INCOME PER SHARE
Net gain (loss) per share was calculated by dividing net gain (loss)
by the weighted average number of shares outstanding for the period. The
convertible preferred stock was not considered as a common stock equivalent
in the calculation as its effect would be antidilutive.
NOTE 5. COMMITMENTS AND CONTINGENCIES
At March 31, 1997, and December 31, 1996, the Company had $1,976,656
and $1,657,724, 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.
<PAGE> 6
United Fidelity, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
Collection of the Company's receivables is dependent on the purchasing
ability of its permanent investors. None of the investors has ever defaulted
on a payment commitment.
The Company's primary business activity is the origination, closing
selling and servicing of real estate mortgage loans on one-to-four family
residential property located in Northern and Central Illinois. The volume
of business is, accordingly, directly dependent on economic conditions in
those areas and the financial well-being and creditworthiness of borrowers.
NOTE 6. BORROWING ARRANGEMENTS
FFMC has a Mortgage Loan Repurchase Agreement with a lender on an
individual loan basis. The lender requires one hundred percent participation
in the loans it funds. There are no covenant restrictions with this agreement.
The fees for this agreement are $50 per loan with interest being prime plus
one percent. FFMC began utilizing the agreement in June 1995. The interest
incurred on these funds as of March 31, 1997 and 1996 was $39,499 and $89,542
and the related fees totaled $5,100 and $9,250, respectively.
NOTE 7. INCOME TAXES
The Company files separate federal income tax returns for itself and
its 71% owned subsidiary. No provisions for income taxes have been reflected
in the statements of operations due to a net operating loss carryforward and
current period losses.
<PAGE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Set forth below is management's discussion and analysis of the
significant items in the balance sheets, statements of operations and
statements of cash flows for the three months ended March 31, 1997 and 1996.
The primary purpose of management's discussion and analysis is to enhance
the reader's understanding of the Company's operations as reflected in its
financial statements. This information should be read in conjunction with
the consolidated financial statements and notes thereto on pages 3 through 7.
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 has deteriorated compared to the
first quarter of 1996. Loan productivity has not been at a level sufficient
to cover operating costs, resulting in a significant reduction in the cash
position of the Company. The Company has implemented several cost reduction
strategies, however, revenues derived from mortgage origination income has
not consistently remained at a level sufficient to cover operating expenses.
Three Months Ended March 31, 1997, Compared to Year Ended December 31, 1996
(a) Assets
Cash and cash equivalents decreased as the Company utilized cash to
reduce payables existing at the end of the fourth quarter and cover operating
activities during the first quarter. Receivables for both mortgage loans
sold and mortgage origination fees increased due to the timing of loan
closings and the availability of loans held for sale. This is reflected in
the increase in loans held for sale. The Company was holding more loans at
the end of the first quarter of 1997 than the fourth quarter of 1996.
At March 31, 1997, the Company holds a $300,000 note receivable. The
note originated as partial payment of proceeds to FFMC from United Trust,
Inc. for preferred and common stock issued by FFMC in the May 1995
restructure. Interest is received quarterly.
(b) Liabilities
The line of credit liability increased as the Company had more loans
funded from its lender pending receipts from final investors.
(c) Shareholders' Equity
During the first three months of 1997, Shareholders' Equity decreased
from an operating loss of ($88,678).
<PAGE> 8
Results of Operations
The Company's principal source of revenue is mortgage origination income,
which is directly related to the dollar amount of mortgage loans sold. Mortgage
origination income is comprised primarily of points that borrowers pay at
loan closings, premium paid by or discount paid to permanent investors when
they purchase a loan and service release fees paid by investors to purchase
loan servicing.
Three Months Ended March 31, 1997, Compared to Three Months Ended March 31, 1996
A comparison of selected mortgage company statistics for the periods
discussed by management is provided by the following table:
ACTIVITY FOR THREE MONTHS ENDED MARCH 31, 1997 MARCH 31,1996
Loans sold $13,198,349 $26,416,945
Number of loans sold 103 237
Mortgage origination income $ 237,755 $ 455,448
Loan offices 2 3
Loan originators 11 13
Other personnel 11 17
The Company reported a net loss of ($88,678) at March 31, 1997 compared
to a net gain of $7,057 for the same period one year ago.
The Company sold approximately 134 fewer loans with the total dollar
volume half that of the previous year. The decrease in loan volume is
reflected in the decrease in gross revenue of $243,982 or 48%.
Interest charges exceeded interest earned during the first quarter of
1997. This is the result of the interest rate on the line of credit exceeding
interest earned on mortgage loans originated. Both interest amounts are
less than first quarter 1996 as a result of the substantial decrease in
closed loan volumes from the prior year.
Total expenses decreased $108,731 (23%) from the prior year, reflecting
the steps taken to reduce costs. The reduction in employee compensation and
benefits expense can be attributed to the 27% decrease in the number of
employees from the same period last year. Most of the reduction came in
the form of support personnel. Mortgage loan commissions and fees increased
$5,185 resulting from the write off of draws of $20,000 against future
commissions which were deemed uncollectible.
Other general and administrative expenses decreased 43% from the
comparable period of the prior year. The decrease reflects the decrease in
fewer support personnel, offices and related overhead expenses as the Company
continues efforts to reduce and control costs.
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 1997, Compared to Three Months Ended March 31, 1996
(a) Operating Activities
Consolidated operating activities produced negative cash flows of more
than $88,000 during the first quarter of 1997. The use of cash was caused
by use of cash for operations. Also, receivables for mortgage loans sold
and loans held for sale increased from year end, resulting in a further
strain in the cash position of the Company.
Consolidated operating activities produced negative cash flows of more
than $89,000 during the first quarter of 1996. The use of cash was caused by
the reduction in the balance of the Company's line of credit while the loans
held for sale increased $1,400,000. Loans held for sale are affected by the
volume of loans closed, the timing of these closings and the processing time
necessary to send the loans to the final investor.
(b) Financing Activities
There have been no significant financing activities during the first
quarter of 1997 or 1996.
(c) Future Outlook
The Company continues to implement procedures to help the mortgage
company stop the losses and drain on cash that occurred in the last part of
1996 and early 1997. Results for the three months ended March 31, 1997 show
a loss of more than ($88,000) compared to a gain of $7,000 in 1996. The
primary cause of this loss is the significant reduction in loans closed in
1997 compared to 1996. Loan production decrease 50% from the same period
last year. Loan production included only $2,460,000 in closed loans in
February 1997 and has improve to more than $7,000,000 in April 1997. Also,
in April 1997, the Company took additional steps to reduce costs and lower
the breakeven point of operations. These steps primarily included additional
reductions in salaried personnel. Management continues to closely monitor the
mortgage company activity and make changes and adjustments where deemed
appropriate. It is imperative that loan production remain at a level
sufficient to maintain operating expenses. Expenses are continually monitored
and reduced where possible. Loan production is pivitol to the effects expense
reductions can have on Company profitability. Company resources are very
limited.
The mortgage banking business is highly competitive. FFMC competes with
a large number of other mortgage bankers, state and national banks, thrift
institutions, credit unions and insurance companies. Mortgage bankers compete
primarily with respect to price and service. Competition may also occur on
mortgage terms and closing costs. FFMC competes, in part, by maintaining and
expanding its close relationships with real estate brokers, builders,
developers and permanent lenders. Many competitors have financial resources
that are substantially greater than those of FFMC. The future profitability of
FFMC is dependent on its ability to compete with these organizations.
<PAGE> 10
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.
<PAGE> 11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UNITED FIDELITY, INC.
May 14, 1997 /s/ Robert E. Cook
Robert E. Cook
President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 45,654 199,941
<SECURITIES> 1,125 1,125
<RECEIVABLES> 3,921,031 5,094,233
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,967,810 5,295,299
<PP&E> 491,844 500,477
<DEPRECIATION> (434,602) (396,655)
<TOTAL-ASSETS> 4,025,052 5,399,121
<CURRENT-LIABILITIES> 3,512,025 4,476,430
<BONDS> 0 0
0 0
3,303,165 3,303,165
<COMMON> 44,042 44,042
<OTHER-SE> (3,419,528) (3,128,823)
<TOTAL-LIABILITY-AND-EQUITY> 4,025,052 5,399,121
<SALES> 237,755 455,448
<TOTAL-REVENUES> 304,867 603,720
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 373,173 481,904
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 44,599 99,470
<INCOME-PRETAX> (112,905) 22,346
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (112,905) 22,346
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (88,678) 7,057
<EPS-PRIMARY> (.40) .03
<EPS-DILUTED> 0 0
</TABLE>
