SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 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 August 12, 1997: 220,211.
This document consists of 14 pages.
<PAGE>
UNITED FIDELITY, INC.
QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets at June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 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 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
United Fidelity, Inc. and Subsidiary
Consolidated Balance Sheets
June 30 December 31
1997 1996
<TABLE>
<S> <C> <C>
Assets
Cash and cash equivalents $ 107,472 $ 134,367
Equity securities at market - 1,125
(cost $1,125)
Mortgage origination fees receivable 15,952 24,316
Receivables for mortgage loans 1,263,182 1,657,724
Loans held for sale 1,674,845 1,155,902
Notes receivable 300,000 300,000
Other receivables 28,906 169,724
Furniture, fixtures and equipment,
net accumulated depreciation of
$ 443,013 and $ 427,037, respectively 48,831 64,807
Total assets $ 3,439,188 $ 3,507,965
Liabilities
Accounts payable $ 73,370 $ 53,962
Line of credit 2,860,905 2,676,808
Notes payable 5,663 6,777
Other liabilities 172,805 132,354
Total liabilities 3,112,743 2,869,901
Minority interest 531,094 621,707
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 (6,004,826) (5,783,820)
Total shareholders' equity (204,649) 16,357
Total liabilities and shareholders'
equity $ 3,439,188 $ 3,507,965
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
United Fidelity, Inc. and Subsidiary
Consolidated Statements of Operations
Quarter Ended Six Months Ended
June 30 June 30 June 30 June 30
1997 1996 1997 1996
<TABLE>
<S> <C> <C> <C> <C>
Revenue :
Mortgage origination
income $ 304,156 $ 338,409 $ 541,911 $ 793,857
Loan fees 31,566 54,298 61,474 122,575
Interest earned 57,607 58,726 87,808 130,671
Interest charges (73,837) (78,142) (118,436) (177,612)
Other income 7,681 8,078 14,684 16,128
327,173 381,369 587,441 885,619
Expenses:
Mortgage loan
commissions and fees 247,514 155,828 394,227 297,019
Employee compensation
and benefits 85,665 135,160 193,263 283,484
Loan costs 29,826 60,005 78,490 130,342
Depreciation and
amortization 8,411 12,778 15,976 25,532
Other general and
administrative 130,073 130,795 192,706 240,093
501,489 494,566 874,662 976,470
Income (loss) before income
tax provision (174,316) (113,197) (287,221) (90,851)
Income tax provision - - - -
Minority interest in
(income) loss 41,988 24,083 66,215 8,794
Net loss $ (132,328) $ (89,114) $ (221,006) $ (82,057)
Weighted average common
shares outstanding 220,211 220,211 220,211 220,211
Net loss per common
share $ (0.60) $ (0.40) $ (1.00) $ (0.37)
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
United Fidelity, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended
June 30 June 30
1997 1996
<TABLE>
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (221,006) $ (82,057)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 15,976 25,532
Minority interest in gain (loss) (90,613) (33,327)
Loss on disposal of securities 1,125 -
Loss on sale of equipment - 62
Changes in assets and liabilities:
(Increase) decrease in
origination fees receivable 8,364 47,718
(Increase) decrease in receivable
for mortgage loans sold 394,542 2,856,268
(Increase) decrease in loans held
for sale (518,943) (1,474,572)
(Increase) decrease in other
receivables 140,818 (57,407)
Increase (decrease) in accounts
payable 19,408 23,997
Increase (decrease) in line of credit 184,097 (1,417,585)
Increase (decrease) in other
liabilities 40,451 (22,477)
Net cash used in operating activities (25,781) (133,848)
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 (1,114) (1,392)
Net cash provided by (used in) financing
activities (1,114) (1,392)
Net decrease in cash (26,895) (135,040)
Cash and cash equivalents at beginning
of period 134,367 289,677
Cash and cash equivalents at end
of period $ 107,472 $ 154,637
Supplemental disclosure of cash flow information:
Taxes paid during the period $ - $ -
Interest paid during the period $ 118,436 $ 153,731
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
United Fidelity, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by United Fidelity, Inc. ("Fidelity" or the "Company") and include
the accounts of its 71% owned subsidiary, First Fidelity Mortgage Company
("FFMC"). These statements reflect all adjustments, consisting of only
normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of financial results for the six month
periods ended June 30, 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 six month periods ended June 30,
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 six months of 1997, Shareholders' Equity decreased as
a result of the Company's net loss of $(221,006).
NOTE 4. NET LOSS PER SHARE
Net loss per share was calculated by dividing net 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 June 30, 1997, and December 31, 1996, the Company had $1,263,182
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
6
<PAGE>
United Fidelity, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
reimbursement from a permanent investor. In general, the time span between
the date of funding by the Company and the receipt of funds from the investor
does not exceed 30 days.
Collection of the Company's receivables is dependent on the purchasing
ability of its permanent investors. None of the investors has ever defaulted
on a payment commitment.
The Company's primary business activity is the origination, closing,
selling and servicing of real estate mortgage loans on one-to-four family
residential property located in Northern and Central Illinois. The volume
of business is, accordingly, directly dependent on economic conditions in
those areas and the financial well-being and creditworthiness of borrowers.
NOTE 6. BORROWING ARRANGEMENTS
FFMC has a Mortgage Loan Repurchase Agreement with a lender on an
individual loan basis. The lender requires one hundred percent
participation in the loans it funds. There are no covenant restrictions
with this agreement. The fees for this agreement are $50 per loan with
interest being prime plus one percent. FFMC began utilizing the agreement
in June 1995. The interest incurred on these funds as of June 30, 1997
and and 1996 was $106,436 and $159,684 and the related fees totaled $12,000
and $17,250, 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.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Set forth below is management's discussion and analysis of the
significant items in the balance sheets, statements of operations and
statements of cash flows for the six months ended June 30, 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 recieved 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 continued to deteriorate.
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.
In an attempt to stop the cash drain and bring the Company to a
profitable state, in early June, the Company discontinued solicitation of
new loans at its two branch offices and began a close out phase of these
facilities. Only personnel necessary to process the remaining outstanding
loans were retained. At July 31, the close out was essentially complete
and all remaining personnel of the two offices were terminated.
In conjunction with this close out, the Company turned its focus to a
new branch office located in Hillside, Illinois, a suburb of Chicago. This
office was established to function with significantly less overhead than
the previous operations. The office is staffed with three individuals,
including a loan officer and a part time office assistant. The office
offers both residential and commercial loans with A, B, C or D quality
grades. The previous loan offices issued only A grade residential
mortgages. The greater variety of loan offerings allows the Company to
compete on a broader level and in markets where competition is not as
intense. The Company's desire is to focus more on the commercial lending
than on residential. In addition to less competition in the commercial and
lower grade residential loan markets, profit margins are greater.
Six Months Ended June 30, 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 six months of 1997. Receivables for
both mortgage loans sold and mortgage origination fees decreased, while the
balance of loans held for sale increased. These balances are dependent
upon the number and timing of loan closings. The Company was holding more
loans at the end of the second quarter of 1997 than the fourth quarter of
1996.
8
<PAGE>
At June 30, 1997, the Company held a $300,000 note receivable. The
note originated as partial payment of proceeds to FFMC 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 six months of 1997, Shareholders' Equity decreased
from an operating loss of $(221,006).
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.
Effects of the close out of the previous offices and establishment of
the Hillside office had little impact in operating results through June 30.
These effects should become more evident with the third quarter results.
Quarter Ended June 30, 1997, Compared to Quarter Ended June 30, 1996
A comparison of selected mortgage company statistics for the periods
discussed by management is provided by the following table:
ACTIVITY FOR JUNE 30, JUNE 30,
THREE MONTHS ENDED 1997 1996
Loans sold $18,298,965 $21,422,444
Number of loans sold 142 177
Mortgage origination income $ 304,156 $ 338,409
Loan offices 2 2
Loan originators 7 12
Other personnel 8 13
9
<PAGE>
The Company reported a net loss of ($132,328) for the quarter ended
June 30, 1997 compared to a net loss of ($89,114) for the same period one
year ago.
The Company sold 31 fewer loans with an approximate total dollar
volume of $3,100,000 less than the previous year. The decrease in loan
volume is reflected in the decrease in gross revenue of $34,253 or 10%.
Interest charges exceeded interest earned during the second 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 second quarter 1996 as a result of the decrease in
closed loan volumes from the prior year.
Total expenses increased $6,900 from the prior year. During the
second quarter of 1997, the Company has established allowances for
uncollectible loan officer advances of $84,000. As these loan officers
left the employ of the Company and no future production remained,
collectability of these advance balances became more difficult and less
likely. As of June 30, 1997, all loan officer advances have a corresponding
allowance. These allowances were established through a charge to the income
statement line item "mortgage loan commissions and fees".
Other general and administrative expenses were comparable to the same
period of the prior year. The Company maintained two offices during this
period with operating costs remaining consistent.
Six Months Ended June 30, 1997, Compared to Six Months Ended June 30, 1996
A comparison of selected mortgage company statistics for the periods
discussed by management is provided by the following table:
ACTIVITY FOR JUNE 30, JUNE 30,
SIX MONTHS ENDED 1997 1996
Loans sold $31,496,945 $47,839,389
Number of loans sold 245 414
Mortgage origination income $ 541,911 $ 793,857
Loan offices 2 2
Loan originators 7 12
Other personnel 8 13
The Company reported a net loss of ($221,006) at June 30, 1997
compared to a net loss of ($82,057) for the same period one year ago.
The Company sold approximately 169 fewer loans with the total dollar
volume 34% less than the previous year. The decrease in loan volume is
reflected in a decrease in gross revenue of $251,946 or 32%.
Interest charges exceeded interest earned during the first six months
of 1997. This is the result of the
10
<PAGE>
interest rate on the line of credit exceeding interest earned on mortgage
loans originated. Both interest amounts are less than first six months of
1996 as a result of the substantial decrease in closed loan volumes from
the prior year.
Total expenses decreased $101,808 (10%) from the prior year,reflecting
the steps taken to reduce costs. The decrease occurred despite an increase
in mortgage loan commissions and fees. The increase is a result of
establishing more than $116,000 in allowances for uncollectible loan
officer advances. As these loan officers left the employ of the Company,
collectibility of these advance balances became more difficult and less
likely. The reduction in total costs can be directly attributed to
employee compensation and general and administrative expenses. These costs
decreased 26% from the comparable period of the prior year. The decrease
reflects the decrease in fewer support personnel, offices and related
overhead expenses, for the six month period, as the Company continues
efforts to reduce and control costs.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 1997, Compared to Six Months Ended June 30, 1996
(a) Operating Activities
Consolidated operating activities produced negative cash flows of more
than $25,000 during the first six months of 1997. The use of cash was
caused by use of cash for operations. Also, receivables for loans held for
sale increased almost $519,000 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 $133,000 during the first six months of 1996. The use of cash was
caused by the reduction in the balance of the Company's line of credit
while the loans held for sale increased $1,417,000. 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
six months of 1997 or 1996.
11
<PAGE>
(c) Future Outlook
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.
The Company is attempting a new direction with the close out of its
previous loan offices and the establishment of the Hillside office. The
new office will function with significantly lower overhead costs, offer a
wider variety of mortgage products and focus on lending activity in markets
with less competition and greater profit margins. The success of this
change is imperitive to the success of the Company. Resources are very
limited.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor any of its principals are presently
engaged in any material pending litigation which might have an
adverse impact on its financial position.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matter to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The Company incorporates herein by reference those exhibits
previously filed by the Company with the Securities and Exchange
Commission in the Company's Registration of Securities on Form
10-SB, Form 10-KSB, and Forms 10QSB, File No. 0-21502.
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNITED FIDELITY, INC.
August 12, 1997 ROBERT E. COOK
Robert E. Cook
President
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 107,472 154,637
<SECURITIES> 0 1,125
<RECEIVABLES> 3,282,885 5,322,824
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,390,357 5,473,536
<PP&E> 491,844 500,477
<DEPRECIATION> (443,013) (409,433)
<TOTAL-ASSETS> 3,439,188 5,569,630
<CURRENT-LIABILITIES> 3,107,080 4,764,544
<BONDS> 0 0
0 0
3,303,165 3,303,165
<COMMON> 44,042 44,042
<OTHER-SE> (3,551,856) (3,217,937)
<TOTAL-LIABILITY-AND-EQUITY> 3,439,188 5,569,630
<SALES> 0 0
<TOTAL-REVENUES> 705,877 1,063,231
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 874,662 976,470
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 118,436 177,612
<INCOME-PRETAX> (287,221) (90,851)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (287,221) (90,851)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (287,006) (82,057)
<EPS-PRIMARY> (1.00) (0.37)
<EPS-DILUTED> (1.00) (0.37)
</TABLE>
