<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _____________________ to _____________________
Commission file number 0-20832
DEGEORGE FINANCIAL CORPORATION
(formerly MILES HOMES, INC.)
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1625724
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
99 Realty Drive, Cheshire, Connecticut 06410
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 699 - 3400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
Shares of Common Stock outstanding as of November 13, 1996: 10,810,193
<PAGE>
DEGEORGE FINANCIAL CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 3
1996 and December 31, 1995
Consolidated Statements of Operations for the 4
three and nine months ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows for the 5
nine months ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11-14
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
2
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DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,042 $ 2,838
Notes receivable, net 45,473 35,074
Receivable from related parties 1,012 466
Inventory 11,694 6,958
Prepaid expenses and other assets 10,539 7,024
Deposits 15,290 8,644
Senior Bond collateral fund 3,053 --
Real estate owned 6,021 2,943
Property, plant and equipment, net 8,920 6,416
Property held for sale, net 1,091 5,144
Assets of discontinued operations 2,931 7,663
Intangible assets, net 2,149 2,492
-------- --------
Total assets $109,215 $ 85,662
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 8,546 $ 6,414
Accrued construction costs and unearned
revenue on sold notes receivable 39,110 14,113
Accrued expenses 5,565 9,867
Customer deposits 1,583 857
12% Senior notes 44,318 44,215
Notes payable 3,567 3,634
Capital lease obligations 1,001 1,244
-------- --------
Total liabilities 103,690 80,344
-------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common Stock; par value $.10, 25,000,000 shares
authorized, 10,810,193 shares outstanding 1,081 1,081
Paid in capital 47,384 47,384
Accumulated deficit (42,940) (43,147)
-------- --------
Total stockholders' equity 5,525 5,318
-------- --------
Total liabilities and stockholders' equity $109,215 $ 85,662
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
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DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net housing revenue $ 29,163 $ 18,436 $ 63,980 $ 43,664
Financial services revenue 1,314 1,034 3,130 4,522
----------- ----------- ----------- ----------
Total revenue 30,477 19,470 67,110 48,186
Costs and expenses:
Cost of sales 17,540 11,176 39,728 27,191
Selling 3,715 3,296 9,855 8,745
General & administrative 4,800 3,580 12,385 10,779
Provision for credit losses 907 719 1,978 1,849
Interest expense 1,605 1,638 4,767 5,966
Other (income) expense (228) (225) (745) (79)
----------- ----------- ----------- ----------
Income (loss) from continuing operations
before income taxes and extraordinary items 2,138 (714) (858) (6,265)
Income tax benefit (provision) -- -- -- --
----------- ----------- ----------- ----------
Income (loss) from continuing operations
before extraordinary items 2,138 (714) (858) (6,265)
Extraordinary gain on sale of real property -- -- 552 --
Extraordinary gain (loss) on extinguishment of debt -- 925 -- (3)
----------- ----------- ----------- ----------
Income (loss) from continuing operations 2,138 211 (306) (6,268)
Discontinued operations-Patwil Homes, Inc.
Income (loss) from operations (109) (1,587) 513 (4,454)
----------- ----------- ----------- ----------
Net income (loss) $ 2,029 $ (1,376) $ 207 $ (10,722)
=========== ============ =========== ==========
Earnings per common share:
Income (loss) from continuing operations
before extraordinary items $ 0.20 $ (0.07) $ (0.08) $ (0.58)
Income (loss) from extraordinary items -- 0.09 0.05 (0.00)
Income (loss) from continuing operations 0.20 0.02 (0.03) (0.58)
Income (loss) from discontinued operations (0.01) (0.15) 0.05 (0.41)
----------- ------------ ----------- ----------
Net income (loss) $ 0.19 $ (0.13) $ 0.02 $ (0.99)
=========== ============ =========== ==========
Weighted average number of common shares outstanding 10,810,193 10,810,193 10,810,193 10,810,193
=========== ============ =========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
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DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 207 $(10,722)
-------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,033 1,201
Provision for credit losses 1,978 1,062
Provision for sales promotions and incentives 2,491 5,290
Extraordinary loss on extinquishment of debt -- 3
Loss (gain) on sale of property, equipment and land (682) 60
Discontinued operations (513) 6,268
Decrease (increase) in other operating assets (Note 9) (36,189) 19,809
Increase (decrease) ino ther operating liabilities (Note 9) 23,553 15,424
-------- ---------
Total adjustments (8,329) 49,117
-------- ---------
Net cash provided (used) by operating activities of:
Continuing operations (8,122) 38,395
Discontinued operations 775 (6,573)
-------- ---------
Net cash provided (used) by operating activities (7,347) 31,822
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Amortization of mortgage loan servicing rights 7,269 --
Proceeds from sales of property, equipment and land 6,794 1,273
Purchase of property, equipment and land (5,252) (2,385)
-------- ---------
Net cash provided (used) by investing activities 8,811 (1,112)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable-revolver -- (61,372)
Borrowings on notes payable-revolver -- 40,600
Principal payments on 12% Senior Notes -- (3,601)
Borrowings on notes payable-other 103 --
Payments to senior bond collateral fund (3,053) --
Principal payments on capital leases (310) (269)
Deferred debt issue cost -- (26)
-------- ---------
Net cash provided (used) by financing activities (3,260) (24,668)
-------- ---------
Net change in cash and cash equivalents (1,796) 6,042
Cash and cash equivalents-beginning of period 2,838 1,301
-------- ---------
Cash and cash equivalents-end of period $ 1,042 $ 7,343
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 2,913 $ 3,919
Income taxes paid (refunded), net $ (23) $ 28
Property and equipment acquired by capital lease $ -- $ --
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
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DEGEORGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management, contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of September
30, 1996, the results of operations for the three and nine months ended
September 30, 1996 and 1995 and cash flows for the nine months ended
September 30, 1996 and 1995. The results of operations for the three and
nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year. These results have been determined
on the basis of generally accepted accounting principles and practices
applied consistently with those used in the preparation of the Company's 1995
Annual Report on Form 10-K.
DeGeorge Financial Corporation (the "Company") is a holding company
whose only significant assets are its investment in its wholly-owned
operating subsidiaries DeGeorge Home Alliance, Inc. ("DeGeorge Home
Alliance") and its wholly-owned subsidiary, Plymouth Capital Company, Inc.
("Plymouth Capital"), and Patwil Homes, Inc. ("Patwil Homes"). Pursuant to a
vote of a majority of its stockholders at the Annual Meeting of Stockholders
on November 7, 1996, the name of the Company was changed to DeGeorge
Financial Corporation from Miles Homes, Inc. DeGeorge Home Alliance, formerly
Miles Homes Services, Inc., changed its name on October 29, 1996 (see
"Subsequent Events"). The combined assets, liabilities, earnings and equity
of DeGeorge Home Alliance, Patwil Homes and Plymouth Capital are
substantially equivalent to the assets, liabilities, earnings and equity of
the Company on a consolidated basis. Accordingly, separate financial
statements and other disclosures concerning DeGeorge Home Alliance, Patwil
Homes and Plymouth Capital are not deemed to be material to investors. In
November 1995, the Company announced the close down of the Patwil Homes
business (see "Discontinued Operations").
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
the accompanying consolidated financial statements be read in conjunction
with the financial statements and notes thereto incorporated by reference in
the Company's Annual Report on Form 10-K.
Certain reclassifications have been made to the results of operations
and statements of cash flows for the three and nine months ended September
30, 1995 to conform to the presentation for the three and nine months ended
September 30, 1996.
6
<PAGE>
NOTE 2--NOTES RECEIVABLE:
Notes receivable at September 30, 1996 and December 31, 1995 are as
follows (in thousands):
September 30, December 31,
1996 1995
------------- ------------
Contractual value of notes receivable $ 60,766 $ 51,010
Less: unearned income (11,430) ( 9,535)
-------- --------
Total 49,336 41,475
Less:
Allowance for sales promotions and incentives ( 1,919) ( 4,777)
Allowance for credit losses ( 1,769) ( 1,371)
Deferred loan processing fees, net ( 175) ( 253)
-------- -------
Notes receivable, net $45,473 $35,074
-------- -------
-------- -------
NOTE 3--INVENTORY:
Inventory at September 30, 1996 and December 31, 1995 is as follows (in
thousands):
September 30, December 31,
1996 1995
------------- ------------
Raw materials $ 7,470 $ 5,556
Construction in progress and model homes 4,224 1,402
------- -------
Inventory $11,694 $ 6,958
-------- -------
-------- -------
NOTE 4--DEPOSITS:
Deposits at September 30, 1996 and December 31, 1995 consist of
approximately $14.5 million and $7.9 million, respectively, of net holdback
funding pursuant to the terms of the Construction Loan Purchasing and
Servicing Agreement dated April 14, 1995. Additionally, at September 30,
1996 and December 31, 1995, approximately $782, 000 and $720,000,
respectively, relate to lease and other deposits.
NOTE 5--INCOME TAXES:
Significant components of deferred income taxes at September 30, 1996 and
December 31, 1995 are as follows (in thousands):
September 30, December 31,
1996 1995
------------- ------------
Credit and refinancing allowances $ 4,109 $ 4,015
Goodwill 1,928 1,972
Net operating loss carryforward 7,654 6,748
Other, net 863 1,923
-------- --------
Total gross deferred tax assets 14,554 14,658
Less: valuation allowance (14,554) (14,658)
-------- --------
Deferred income taxes $ -0- $ -0-
-------- --------
-------- --------
7
<PAGE>
At September 30, 1996 and December 31, 1995, the Company had net
operating loss carryforwards for federal income tax purposes of $19.1 million
and $16.9 million, respectively, which expire in 2010.
Income tax benefit (provision) for the three and nine months ended
September 30, 1996 and 1995 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Statutory U.S. tax rate $(724) $ (72) $ 88 $ 2,131
State taxes, net of federal income
tax benefit (127) (424) 16 (39)
Effect of temporary differences -- 411 -- 415
Valuation allowance 851 85 (104) (2,507)
----- ----- ----- --------
Income tax benefit (provision) $ -0- $ -0- $ -0- $ -0-
----- ----- ----- --------
----- ----- ----- --------
During the quarter and nine months ended September 30, 1996 the Company
did not record a tax provision or benefit. The third quarter income from
continuing operations of $2.1 million resulted in the reduction of net
operating loss carryforwards and a corresponding reduction in the valuation
reserve of $851,000. For the nine months ended September 30, 1996, the loss
from continuing operations of $306,000 increased the valuation reserve by
$104,000.
NOTE 6--SUMMARIZED FINANCIAL INFORMATION:
Summarized financial information of DeGeorge Home Alliance as of
September 30, 1996 and December 31, 1995 and for the three and nine months
ended September 30, 1996 and 1995 is as follows (in thousands):
September 30, December 31,
1996 1995
------------- ------------
Total assets $115,251 $87,524
Total liabilities 102,429 74,586
Total assets include intercompany receivables of $25.2 million and $27.7
million, respectively, at September 30, 1996 and December 31, 1995.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Net revenue $30,477 $19,470 $67,110 $48,186
Net income (loss) 2,182 518 (206) (5,392)
NOTE 7--COMMITMENTS AND CONTINGENCIES:
There has been no significant change in the status of lawsuits or
commitments described in Note 13 to the Consolidated Financial Statements
contained in the Company's 1995 Annual Report on Form 10-K.
8
<PAGE>
NOTE 8--DISCONTINUED OPERATIONS:
On November 27, 1995, the Company formally announced its intent to phase
out and close down the operations of its Patwil Homes subsidiary. Contracts
for the construction of Patwil Homes' customers' homes are in the final
stages of completion. All selling and marketing activities ceased at
December 31, 1995.
The results of Patwil Homes have been classified as discontinued
operations for all periods presented in the Consolidated Statements of
Operations. The assets of Patwil Homes have been classified as Assets of
Discontinued Operations in the Consolidated Balance Sheets as of September
30, 1996 and December 31, 1995. Additionally, discontinued operations have
been segregated in the Consolidated Statements of Cash Flows for all periods
presented.
As a result of the Company's decision to discontinue the operations of
Patwil Homes, the Company recorded, as of December 31, 1995, an estimated
loss on disposal of approximately $8.2 million, which includes a provision of
approximately $1.7 million for losses during the phase-out period, the
write-off of approximately $5.7 million of goodwill and deferred costs,
approximately $600,000 relating to the write-down of fixed assets (to net
realizable value) and approximately $200,000 of accrued severance wages and
benefits for 41 employees.
Summarized below are the Assets of Discontinued Operations (in
thousands):
September 30, December 31,
1996 1995
------------- ------------
Cash $ 603 $ --
Notes receivable 265 147
Inventory 350 798
Prepaid expenses and other assets 176 152
Deposits -- 59
Costs of uncompleted contracts in excess
of related billings 596 3,434
Assets held for sale, net 941 3,073
------ ------
Assets of discontinued operations $2,931 $7,663
------ ------
------ ------
Condensed income (loss) from operations of Patwil Homes for the three and
nine months ended September 30, 1996 and 1995 follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Net revenues $ 399 $ 7,811 $ 5,704 $ 30,746
Cost of sales (432) (6,615) (5,077) (26,491)
Selling, general and administrative
expenses (79) (2,854) (117) (8,709)
Income tax benefit (provision) 3 71 3 --
----- ------- ------- --------
Income (loss) $(109) $(1,587) $ 513 $ (4,454)
----- ------- ------- --------
----- ------- ------- --------
9
<PAGE>
NOTE 9--CONSOLIDATED STATEMENTS OF CASH FLOWS:
Changes in other operating assets and liabilities in the Consolidated Statements
of Cash Flows are as follows (in thousands):
Nine Months Ended
September 30
-----------------
1996 1995
---- ----
Decrease (increase) in:
Notes receivable, net $(10,399) $31,526
Receivable from related parties (546) (186)
Inventory (4,736) (1,625)
Prepaid expenses and other assets (17,430) (9,781)
Cost of uncompleted contracts in excess of related
billings -- (1,208)
Deferred tax asset -- 1,357
Real estate owned (3,078) (274)
-------- ------
Total decrease (increase) in other operating
asset $(36,185) $19,809
-------- -------
-------- -------
Increase (decrease) in:
Accounts payable and accrued expenses $ (2,170) $12,902
Accrued construction costs and unearned
revenue on sold notes receivable 24,997 3,081
Billings of uncompleted contracts in excess of related
costs -- ( 491)
Payable to related parties -- ( 240)
Customer deposits 726 172
-------- -------
Total increase (decrease) in other operating
liabilities $ 23,553 $15,424
-------- -------
-------- -------
NOTE 10--SIGNIFICANT TRANSACTIONS:
On July 2, 1996, the Company received payment of $2.6 million pursuant
to the sales agreement dated February 7, 1996 wherein the Company sold its
corporate facility located in the Minneapolis, Minnesota metropolitan area.
The funds received on July 2, 1996 were substituted as collateral (in place
of the Minneapolis facility) for Senior Secured Bonds of approximately $2.6
million by mutual agreement with the bondholders. All other terms of the
bond indenture agreement survive as previously agreed. The sales agreement
further provides for payments of $350,000 on October 1, 1996 (which amount
was timely received) and $750,000 on July 1, 1997. Previously, the Company
had received an initial cash payment of $500,000.
NOTE 11--SUBSEQUENT EVENTS:
On October 15, 1996, the Company purchased $625,000, face value, of
outstanding 12% Senior Notes due 2001. These Senior Notes were purchased for
$522,000 plus accrued interest of $2,000. The Company has recorded a pre-tax
gain of $63,000 after the write-off of original issue discount and
unamortized bond issue costs.
Pursuant to a vote of a majority of its stockholders at the Annual Meeting
of Stockholders on November 7, 1996, the name of the Company was changed to
DeGeorge Financial Corporation from Miles Homes, Inc. Previously, on
October 29, 1996, the Company changed the name of its wholly-owned subsidiary
Miles Homes Services, Inc. to DeGeorge Home Alliance, Inc.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
Total revenue from continuing operations for the quarter ended
September 30, 1996 increased by $11.0 million, or 56.5%, to $30.5
million from $19.5 million for the same period in 1995. Net housing
revenue increased to $29.2 million for the third quarter of 1996 from
$18.4 million for the quarter ended September 30, 1995, an increase of
$10.7 million, or 58.2%. The third quarter revenue increase was
primarily attributable to the significant increase in shipment volume
activity for standard orders, which escalated to 537 orders shipped
from 341 for the third quarter of 1995, an increase of 196 units, or
57.5%. Sales of turnkey homes contributed an additional $2.3 million
to net housing revenue during the third quarter of 1996, an increase
of $2.0 million over the $300,000 recorded in the third quarter of
1995.
For the nine months ended September 30, 1996, total revenue increased
to $67.1 million from $48.2 million for the similar period in 1995, an
increase of $18.9 million, or 39.3%. Net housing revenue for the nine
month period in 1996 increased $20.3 million, to $64.0 million as
compared to $43.7 million in 1995, or an increase of 46.5%. The
year-to-date increase in net housing revenue reflects the sustained
increase in standard order shipments during the third quarter of 1996,
which together with the second quarter of 1996 account for over 90%
of standard orders shipped. As compared to the nine month period in
1995, standard order shipments increased by 36.4%, to 1,150 units from
843 units. Net housing revenue from turnkey operations contributed
$4.3 million for the nine month period ending September 30, 1996 as
compared to $500,000 for the similar period in 1995.
Financial services revenue for the third quarter of 1996 was $1.3
million as compared to $1.0 million for the quarter ended September
30, 1995, reflecting an increase in interest income on an expanded
portfolio of customer loan accounts, the majority of which the Company
anticipates it will sell at a later date under the Construction Loan
Purchase and Servicing Agreement entered into with a mortgage
financing company dated April 14, 1995. For the nine months ended
September 30, 1996 and 1995, respectively, financial services revenue
was $3.1 million and $4.5 million, a decrease of $1.4 million. The
year-to-date decrease in financial services revenue was primarily due
to the previous sale of construction loans to the mortgage financing
company.
COST OF SALES
Cost of sales from continuing operations, which includes cost of
materials, warehousing, material handling, shipping and construction
monitoring, increased to $17.5 million for the three months ended
September 30, 1996 as compared to $11.2 million for the similar period
in 1995. As a percentage of net housing revenue, cost of sales for
the third quarter was down slightly (60.1% in 1996 as compared to
60.6% in 1995).
For the nine months ended September 30, 1996, cost of sales increased
to $39.7 million from $27.2 million for the similar period in 1995.
As a percentage of net housing revenue, cost of sales was essentially
unchanged (62.1% and 62.3% in 1996 and 1995, respectively).
11
<PAGE>
SELLING EXPENSES
Selling expenses from continuing operations for the third quarter of
1996 increased by $400,000 or 12.7% (to $3.7 million in 1996 from $3.3
million in 1995). For the nine months ended September 30, 1996, the
increase in selling expenses from continuing operations was also
12.7%, an increase of $1.1 million ($9.8 million in 1996 versus $8.7
million in 1995). The increases were the result of compensation paid
to sales personnel in connection with increased order and shipment
activity and was partially offset by a reduction in year-to-date costs
for sales collateral material which were a non-recurring charge
recorded in the second and third quarters of 1995.
At September 30, 1996 and 1995, DeGeorge Home Alliance had 130 and
114, respectively, of full-time sales representatives. In addition,
part-time affiliate sales representatives increased to 95 at September
30, 1996 from 19 the previous year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses from continuing operations were
$4.8 million and $12.4 million, respectively, for the three and nine
months ended September 30, 1996 as compared to $3.6 million and $10.8
million, respectively, for the similar periods in 1995. The third
quarter and nine month increases ($1.2 million and $1.6 million,
respectively) were primarily attributable to non-recurring
compensation, transition and facilities costs incurred in connection
with the movement of operations from Plymouth, Minnesota to Cheshire,
Connecticut.
INTEREST EXPENSE
Interest expense for the third quarters of 1996 and 1995 was
essentially unchanged at $1.6 million for both periods, of which $1.4
million related to interest costs on the 12% Senior Notes due 2001.
For the nine months ended September 30, 1996, interest expense
decreased by $1.2 million, to $4.8 million from $6.0 million, over the
similar period in 1995. Components of this decrease include $300,000
of reduced interest costs related to the purchase on July 25, 1995 of
$4.9 million, face value, of outstanding 12% Senior Notes and $800,000
of non-recurring 1995 interest expense and credit line facility costs
related to the BT Commercial Corporation revolving credit facility,
which was retired in April 1995 with proceeds from the Construction
Loan Purchase and Servicing Agreement with a mortgage financing
company.
INCOME TAX
At September 30, 1996 and December 31, 1995, the Company had net
operating loss carryforwards for federal income tax purposes of $19.1
million and $16.9 million, respectively. At December 31, 1995 the
Company had recorded a valuation reserve of $14.7 million. During the
quarter and nine months ended September 30, 1996 the Company did not
record a tax provision or a tax benefit. The third quarter income
from continuing operations of $2.1 million resulted in the reduction
of net operating loss carryforwards and a corresponding reduction in
the valuation reserve by $850,000. For the nine months ended
September 30, 1996, the loss from continuing operations of $300,000
12
<PAGE>
decreased the valuation reserve by $100,000. At September 30, 1996,
the valuation reserve was $14.6 million.
NET INCOME (LOSS)
Income from continuing operations before income taxes and
extraordinary items for the third quarter ended September 30, 1996 was
$2.1 million or $0.20 per share, as compared to a loss of $700,000, or
$0.07 per share, for the third quarter of 1995. Net income for the
third quarter of 1996 (which includes a $100,000 loss from the
discontinued operations of Patwil Homes) was $2.0 million, or $0.19
per share. For the third quarter of 1995, the net loss was $1.4
million, or $0.13 per share, including the loss of $1.6 million, net
of taxes, for the discontinued operations of Patwil Homes and an
extraordinary gain of $900,000 on the purchase of $4.9 million, face
value, of 12% Senior Notes. Excluding the extraordinary gain in the
1995 third quarter, the comparable operating result was a loss of $2.3
million, or $0.21 per share.
For the nine months ended September 30, 1996, loss from continuing
operations before income taxes and extraordinary items was $900,000,
or $0.08 per share, as compared to a loss of $6.3 million, or $0.58
per share, for the same period in 1995. Net income for the nine
months ended September 30, 1996 was $200,000 (including $500,000 of
income relating to Patwil Homes), or $0.02 per share, as compared to a
loss of $10.7 million (including the loss of $4.5 million relating to
Patwil Homes), or $0.99 per share.
QUARTERLY RESULTS
Income from continuing operations before income taxes and
extraordinary items increased by $2.8 million in the third quarter, to
$2.1 million in 1996 from a loss of $700,000 in 1995. Gross margin
contributed an additional $4.4 million and was offset by increased
selling, general and administrative expenses of $1.6 million, the
majority of which were non-recurring costs related to the movement of
operations from Minnesota to Connecticut. Total revenue increased by
$11.0 million in 1996, reflecting an increase of $10.7 million in net
housing revenue, or 58.2%, and an increase of $300,000 in financial
services revenue. The increase in net housing revenue is principally
attributable to increased first shipments to customers for standard
deliveries, rising to 537 units in 1996 from 341 units in 1995, an
increase of 196 units, or 57.5%. Total shipment volume, which
includes turnkey homes and community based housing, was 584 units as
compared to 376 units in 1995, an increase of 208 units, or 55.3%.
Gross orders received during the third quarter were 520 as compared to
687 received in the same period in 1995. The decrease in order volume
activity during the third quarter is partly the result of a change in
the criteria for acceptance of orders (i.e. orders without
identifiable lots were not being recorded) and the residual effect of
competitive activities of former employees of the Company (see
"Pending Action Against Former Employees" below). Correspondingly,
order inventory was down 19.2%, to 567 units from 702 units as of
September 30, 1996 and 1995, respectively. Though the decrease in
gross orders during the quarter was 24.3%, on a year-to-date basis
gross orders remained up 11.0% over 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, cash and cash equivalents were $1.0 million as
compared to $2.8 million at December 31, 1995. During the third
quarter of 1996, the Company sold $53.8
13
<PAGE>
million, net face value ($54.9
million gross sales less $1.1 million of repurchased accounts), of
construction loans pursuant to a Construction Loan Purchase and
Servicing Agreement (the "Agreement") with a mortgage financing
company. Net proceeds to the Company, for the three month period,
were $39.8 million, after discounting (at a rate of 1 1/2% over prime)
of $7.7 million and deposits (which remain the property of the
Company) of $6.3 million. For the nine months ended September 30,
1996, the Company sold $119.1 million, net face value ($122.4 million
gross sales less $3.2 million of repurchased accounts) of construction
loans pursuant to the Agreement. Net proceeds to the Company, for the
nine month period, were $101.7 million, after discounts of $9.9
million and deposits of $7.5 million. At September 30, 1996, the
Company was servicing, on behalf of the mortgage finance company,
approximately $147.6 million face value of previously sold
construction loans.
As a result of write-offs occasioned by the discontinuance of
operations of Patwil Homes and losses incurred by the Company for the
fiscal year ended December 31, 1995, the Company is in violation of
the minimum tangible net worth covenant in the Agreement with the
mortgage finance company. Although a waiver of this violation has not
been obtained, management has had discussions with the mortgage
financing company concerning this issue and believes that the
Agreement can be revised to accommodate the Company's present
financial condition and anticipated operating results. In the
interim, the Company has continued to conduct business in the same
manner as it had prior to the occurrence of the covenant violation and
has received assurance from the mortgage financing company that they
expect to continue to do so. If, however, the mortgage financing
company should stop purchasing construction loans under the Agreement,
which it may have a right to do as a result of the covenant violation,
a serious and immediate working capital shortage would result.
PENDING ACTION AGAINST FORMER EMPLOYEES
On August 20, 1996, the Company initiated a lawsuit in federal
court in Minnesota against three former executives of the Company:
Paul Vogel, David Gaither and Ray Parker, alleging that these
individuals conspired to form a competing business that
misappropriated proprietary information and trade secrets. The
Company further alleges that the defendants intentionally disrupted
the Company's ongoing business operations by falsely creating a
grim view of the Company's financial situation among employees and
sales representatives to convince them to leave the Company and
join the defendants' new venture. The Company also alleges that
these defendants, which included the Company's national sales
manager and a regional sales manager, while still employed by the
Company, encouraged members of the Company's independent sales
force to curtail sales activity.
Vogel, Gaither and Parker have consented to court orders enjoining
them from using the Company's trade secrets and proprietary
information in their business venture, although they continue to deny
that they have misappropriated such trade secrets or proprietary
information. This action is now in the discovery phase.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: none
(b) Reports on Form 8-K:
On September 19, 1996, the Company filed a Form 8-K
containing a balance sheet and statement of operations as
of and for the two months ended August 31, 1996, pursuant
to an extension of time granted by The Nasdaq Stock
Market, Inc. to the Company to evidence compliance with
the minimum net tangible assets requirement of the
National Association of Securities Dealers By-Laws, which
filing demonstrated such compliance.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEGEORGE FINANCIAL CORPORATION
(Registrant)
Dated: November 13, 1996
BY: /s/ PETER R. DEGEORGE
Peter R. DeGeorge
Chairman and Chief Executive Officer
BY: /s/ SALVATORE A. BUCCI
Salvatore A. Bucci
Chief Accounting Officer
16
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,042
<SECURITIES> 0
<RECEIVABLES> 46,485
<ALLOWANCES> 0
<INVENTORY> 11,694
<CURRENT-ASSETS> 0
<PP&E> 16,032
<DEPRECIATION> 0
<TOTAL-ASSETS> 109,215
<CURRENT-LIABILITIES> 0
<BONDS> 44,318
0
0
<COMMON> 1,081
<OTHER-SE> 4,444
<TOTAL-LIABILITY-AND-EQUITY> 109,215
<SALES> 67,110
<TOTAL-REVENUES> 67,110
<CGS> 0
<TOTAL-COSTS> 39,728
<OTHER-EXPENSES> 23,473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,767
<INCOME-PRETAX> (858)
<INCOME-TAX> 0
<INCOME-CONTINUING> (858)
<DISCONTINUED> 513
<EXTRAORDINARY> 552
<CHANGES> 0
<NET-INCOME> 207
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0
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