<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 JUNE 30, 1998
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
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1625724
- ----------------------------------------------------------------------------
(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
- ----------------------------------------------------------------------------
(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 August 14, 1998: 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 June 30, 1998 3
and December 31, 1997
Consolidated Statements of Operations and 4
Comprehensive Income for the three and
six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the six 5
months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 6-13
ITEM 2. Management's Discussion and Analysis of Financial 14-20
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
2
<PAGE>
DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,007 $ 1,179
Notes receivable, net 154,785 124,181
Mortgage loans held for sale 1,460 451
Receivables from related parties 582 661
Construction projects in process and inventory 8,007 4,774
Land held for sale 184 184
Prepaid expenses and other assets 4,350 3,777
Holdback reserve deposit, net 13,006 10,686
Senior Bond collateral fund 2,597 2,829
Real estate owned 4,349 3,280
Property, plant and equipment, less accumulated depreciation
of $3,707 and $3,024 for 1998 and 1997, respectively 16,297 13,146
Assets of discontinued operations 979 1,060
Intangible assets, less accumulated amortization of
$2,297 and $2,071 for 1998 and 1997, respectively 1,328 1,554
----------- ----------
Total assets $ 208,931 $ 167,762
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 10,580 $ 11,569
Accrued construction costs and unearned
income on sold notes receivable 1,395 4,358
Accrued expenses 7,492 7,236
Deferred income 6,600 4,623
Customer deposits 440 255
Collateralized borrowings 158,921 103,430
12% Senior notes 43,895 43,819
Notes payable 3,310 3,757
Capital lease obligations 119 -
----------- ----------
Total liabilities 232,752 179,047
----------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit):
Common Stock; par value $.10, 25,000,000 shares
authorized, 10,810,193 shares issued and outstanding 1,081 1,081
Paid in capital 47,384 47,384
Accumulated deficit (72,286) (59,750)
----------- ----------
Total stockholders' equity (deficit) (23,821) (11,285)
----------- ----------
Total liabilities and stockholders' equity (deficit) $ 208,931 $ 167,762
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial services income $ 4,330 $ 3,541 $ 8,250 $ 4,819
---------- ---------- ---------- ----------
Contract services:
Contract revenue 17,627 18,833 28,267 32,358
Materials and handling charges (11,222) (11,420) (16,662) (20,757)
---------- ---------- ---------- ----------
Contract services income 6,405 7,413 11,605 11,601
---------- ---------- ---------- ----------
Construction services:
Construction revenue 2,424 2,975 4,819 5,435
Cost of construction (2,109) (2,666) (4,224) (4,619)
---------- ---------- ---------- ----------
Construction services income 315 309 595 816
---------- ---------- ---------- ----------
Total income 11,050 11,263 20,450 17,236
Operating expenses:
Selling 7,798 3,380 13,205 7,275
General and administrative 5,330 4,570 10,344 8,435
Provision for credit losses 1,555 311 2,156 474
Interest expense 3,512 2,387 6,439 4,192
Other expense (income) 393 591 728 879
Distribution center closing costs 819 - 819
---------- ---------- ---------- ----------
(Loss) income from continuing operations
before income taxes (7,538) (795) (12,422) (4,838)
Income tax (provision) benefit (5) - (11) -
---------- ---------- ---------- ----------
(Loss) income from continuing operations (7,543) (795) (12,433) (4,838)
Discontinued operations-Patwil Homes, Inc.
(Loss) income from operations (82) (57) (103) (111)
---------- ---------- ---------- ----------
Net (loss) income $ (7,625) $ (852) $ (12,536) $ (4,949)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and diluted (loss) earnings per common share:
(Loss) income from continuing operations $ (0.70) $ (0.07) $ (1.15) $ (0.45)
(Loss) income from discontinued operations (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Net (loss) income $ (0.71) $ (0.08) $ (1.16) $ (0.46)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDING JUNE 30, 1998 AND 1997
($ IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (12,536) $ (4,949)
----------- ----------
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 965 2,878
Accretion of discount on collateralized borrowings 4,930 2,472
Provision for credit losses 2,156 474
Provision for sales promotions and incentives 2,338 334
Loss (gain) on sale of property, plant and equipment (125) 101
Loss (gain) from discontinued operations 103 112
Loss (gain) on sale of real estate owned 440 (193)
Gain on sale of loans (219) (221)
Loans originated for sale (18,428) (14,488)
Proceeds from sales of loans 17,638 14,709
Decrease (increase) in other operating assets (5,231) 10,028
(Decrease) increase in other operating liabilities (1,534) (18,846)
----------- ----------
Total adjustments 3,033 (2,640)
----------- ----------
Net cash (used in) provided by operating activities of:
Continuing operations (9,503) (7,589)
Discontinued operations (22) 940
----------- ----------
Net cash (used in) provided by operating activities (9,525) (6,649)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 206 1,269
Purchase of property, plant and equipment (3,757) (996)
Proceeds from sales of real estate owned 1,871 1,574
Net increase in notes (34,147) (40,340)
Notes receivable repurchased (5,159) (1,671)
----------- ----------
Net cash (used in) provided by investing activities (40,986) (40,164)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from collateralized borrowings,
net of discounting 86,290 45,328
Repayments of collateralized borrowings (35,485) -
Principal payments on notes payable - other (529) (191)
Borrowings on notes payable - other 82 673
Principal payments on capital leases (19) (925)
----------- ----------
Net cash provided by (used in) financing activities 50,339 44,885
----------- ----------
Net change in cash and cash equivalents (172) (1,928)
Cash and cash equivalents - beginning of the period 1,179 3,737
----------- ----------
Cash and cash equivalents - end of the period $ 1,007 $ 1,809
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
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 June 30,
1998, the results of operations for the three months and six months ended
June 30, 1998 and 1997 and cash flows for the six months ended June 30, 1998
and 1997 of the Company. The results of operations for the three and six
months ended June 30, 1998 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 1997 Annual
Report on Form 10-K.
DeGeorge Financial Corporation (the "Company") is a holding company
whose significant assets are its investment in its wholly owned operating
subsidiaries DeGeorge Home Alliance, Inc. ("DeGeorge"), and its wholly owned
subsidiary, DeGeorge Capital Corp. ("DeGeorge Capital"), DeGeorge Homes of
Florida, Inc. ("DeGeorge/Florida"), DeGeorge Homes of New England, Inc.
("DeGeorge/New England") and DeGeorge Aviation, Inc. ("DeGeorge Aviation").
DeGeorge Capital, formerly Plymouth Capital Company, Inc., changed its name
effective April 1, 1998. The combined assets, liabilities, earnings and
equity of DeGeorge, DeGeorge Capital, DeGeorge/Florida, DeGeorge/New England
and DeGeorge Aviation 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, DeGeorge Capital, DeGeorge/Florida, DeGeorge/New England and
DeGeorge Aviation are not deemed to be material to investors. During the six
months ended June 30, 1998, the Company continued the phase out of operations
for its wholly owned subsidiary, Patwil Homes, Inc. ("Patwil Homes"). See
"Note 9 - Discontinued Operations".
The Company is currently dependent upon cash flow from the financing of
construction loans for its working capital needs. Since April 1995, the
Company has been transferring its construction loans to a mortgage financing
company pursuant to the Construction Loan Purchase and Servicing Agreement
(the "Construction Loan Agreement") under which the Company may, at its
discretion and subject to certain criteria, transfer all of its construction
loans. On June 1, 1997, certain provisions of the Construction Loan Agreement
were amended (the "June 1997 Amendment"), including a reduction in the
holdback deposit requirement from 12% to 8% and a change in the benchmark for
computing the interest rate on its borrowings, from prime plus 1 1/2% to the
three month London Interbank Offered Rate ("LIBOR") plus 3% (10% and 8.69%,
respectively, at June 30, 1998), effectively reducing the interest rate on
its borrowings 131 basis points at June 30, 1998. The June 1997 Amendment
also extended the term of the Construction Loan Agreement to June 1, 1999. As
of August 1, 1997, the Construction Loan Agreement was further amended to
provide for transfer of construction loans for turnkey activities and an
earlier transfer of core business construction loans involving customer land
acquisition advances. On March 31, 1998, the Construction Loan Agreement was
further amended to permit the Company to remit payoff funds that the Company
receives in its capacity as servicer to the mortgage financing company within
15 days of receipt. Previously, the Company had an obligation to immediately
remit such funds to the mortgage financing company, though in practice, the
Company transferred such funds to the mortgage financing company on a lag
basis, usually in connection with a further transfer of construction loans.
6
<PAGE>
DEGEORGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS 125"). Under FAS
125, the Company is accounting for the transfer of its notes receivable under
the Construction Loan Agreement as a pledge of collateral in a borrowing
arrangement for all transactions occurring after December 31, 1996. Prior to
January 1, 1997, the Company accounted for the transfers of its receivables
as sales. Although there is no difference in substance or form from sales of
notes receivable that occurred prior to January 1, 1997 to those that were
transferred after December 31, 1996, the transactions that occurred prior to
1997 retain their sale characteristics in the financial statements since FAS
125 prohibits retroactive application to transactions occurring before
January 1, 1997. Thus, loans transferred prior to 1997 are not recognized as
assets (or as pledged collateral) on the balance sheets of the Company, while
loans transferred in 1997 and 1998 are so recognized.
Consistent with the adoption of FAS 125, financial services income
includes interest accrued on construction loans transferred pursuant to the
Construction Loan Agreement after December 31, 1996 without offset for
related interest expense. The cost of the related collateralized borrowings
on notes receivable transferred after 1996 is included in interest expense.
For loans underwritten prior to 1997, servicing income continues to be
recognized net of servicing expense in financial services income.
DeGeorge's closure of its distribution centers in April 1997
fundamentally changed its method of operations. Contract services income
represents margin earned by DeGeorge from services rendered to customers,
including technical support services, budgeting services and materials
purchasing services. Concurrent with the closing of its distribution centers,
DeGeorge determined that recording contract services income ratably over the
service period based on the ratio of services performed at the time of sale
and thereafter to total services performed over the service period more
closely matched DeGeorge's new business operations. Accordingly, upon the
closing of the construction loan, which is the confirmed point of sale for
DeGeorge, 60% of the related contract service income is recognized with the
balance of unearned contract services income recognized ratably over the
following ten month period.
For contracts fulfilled prior to April 1997, contract revenue and
materials charges were recognized based on the ratio of individual shipments
of materials to total shipments of materials. Contract revenue is reflected
net of sales discounts and allowances, which typically consist of a free
interest period or merchandise.
Construction services income reflects the results of operations for
turnkey homebuilding operations as well as sales to American Indian tribal
groups, community service and non-profit organizations. DeGeorge has adopted
the completed contract method of accounting for recognizing construction
revenue from turnkey operations. Under this method, billings and costs are
accumulated during the period of construction, but no profits are recorded
before the completion of the work. Provisions for estimated losses on
uncompleted contracts are made when determined. Administrative costs are not
allocated to construction projects.
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 1997 Annual Report on Form 10-K.
7
<PAGE>
DEGEORGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Certain reclassifications have been made to the financial statements for
the three and six months ended June 30, 1997 to conform to the presentation
for the three and six months ended June 30, 1998. These reclassifications had
no effect on net loss.
NOTE 2 -- NOTES RECEIVABLE:
Notes receivable at June 30, 1998 and December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- -----------
<S> <C> <C>
Contractual value of notes receivable $244,301 $166,662
Less: unfunded contractual obligations (81,669) (37,034)
-------- --------
Less: 162,632 129,628
Allowance for sales promotions and incentives (1,187) (691)
Allowance for estimated credit losses (4,890) (3,571)
Deferred loan origination fees, net (1,770) (1,185)
-------- --------
Notes receivable, net $154,785 $124,181
-------- --------
-------- --------
</TABLE>
At June 30, 1998 and December 31, 1997, $165.9 million and $107.8 million,
respectively, of the contractual value of notes receivable have been pledged as
collateral under the Construction Loan Agreement. Loans transferred under the
Construction Loan Agreement prior to January 1, 1997, the balance of which was
$29.0 million and $61.1 million at June 30, 1998 and December 31, 1997,
respectively, retained their sale characteristics and are not included in notes
receivable.
NOTE 3 -- TRANSFER AND SERVICING OF NOTES RECEIVABLE:
Under the Construction Loan Agreement, loans are transferred at face value,
net of cost of funds discounting. The Construction Loan Agreement also provides
for a deposit account, owned by the Company, for retention of a portion of the
proceeds from the transfer of construction loans as security for credit losses.
Deposits are reflected in the financial statements net of allowance for
estimated credit losses representing the estimated impairment of the deposit in
connection with the recourse provisions of the Construction Loan Agreement on
construction loans transferred. The Company received interest income (reflected
in financial services income) on deposit funds of $190,000 and $278,000 for the
three months ended June 30, 1998 and 1997, respectively. For the respective six
month periods in 1998 and 1997, interest income on deposit funds was $359,000
and $566,000, respectively.
Funds retained under the holdback provision of the Construction Loan
Agreement are presented as holdback reserve deposit on the balance sheet, net of
estimated credit losses anticipated on construction loans sold, as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------- -----------
<S> <C> <C>
Holdback $14,457 $12,447
Allowance for estimated credit losses (1,451) (1,761)
------- -------
Holdback reserve deposit, net $13,006 $10,686
------- -------
------- -------
</TABLE>
8
<PAGE>
DEGEORGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
As earlier described, transfers of loans under the Construction Loan
Agreement subsequent to 1996 are considered financing arrangements and not loan
sales. At June 30, 1998 and December 31, 1997, the balance of these
collateralized borrowings is $158.9 million and $103.4 million, respectively,
which is net of discount of $7.0 and $4.4 million, respectively. For the six
months ended June 30, 1998 and 1997, $4.9 million and $2.5 million,
respectively, of discount accretion is included in interest expense.
Loans transferred prior to January 1, 1997 were treated as sales of
notes receivable. At the time of their sale, the fair value of mortgage
servicing rights was calculated based upon estimated service fees that the
Company would expect to receive over the life of the loans sold, less
incremental costs associated with servicing the loans. For the six months
ended June 30, 1998 and 1997, service fee expense, which includes
amortization of mortgage servicing rights, was $2.9 million and $6.6 million,
respectively. Service fee expense is reflected in the financial statements as
an offset to service fee income in financial services income.
NOTE 4 -- CONSTRUCTION PROJECTS IN PROCESS AND INVENTORY:
Construction projects in process and inventory at June 30, 1998 and
December 31, 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Construction projects in progress and model homes $8,007 $4,733
Raw materials inventory - 41
------ ------
Construction projects in process and inventory $8,007 $4,774
------ ------
------ ------
</TABLE>
NOTE 5 -- INCOME TAXES:
Income tax provision (benefit) for the six months ended June 30, 1998
and 1997 differs from the amount of income tax determined by applying the
applicable U.S. statutory federal tax rate of 34% to pre-tax (loss) income as
a result of the following differences (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Statutory U.S. tax rate $(2,568) $ 304 $(4,167) $ 1,691
State taxes, net of federal income tax benefit (449) 53 (726) 298
Effect of temporary differences - (4) - (4)
Valuation allowance 3,022 (353) 4,904 (1,985)
------- ------- -------- -------
$ 5 $ - $ 11 $ -
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
The significant components of deferred income taxes at June 30, 1998
and December 31, 1997 are as follows (in thousands):
9
<PAGE>
DEGEORGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Credit and refinancing allowances $ 2,133 $ 2,179
Goodwill 1,604 1,648
Net operating loss carryforward 21,860 17,399
Other, net 250 (283)
-------- -------
Total gross deferred tax assets 25,847 20,943
Less: valuation allowance (25,847) (20,943)
-------- --------
Deferred income taxes $ - $ -
-------- --------
-------- --------
</TABLE>
At June 30, 1998 and December 31, 1997, the Company has net
operating loss carryforwards of $54.7 million and $43.5 million,
respectively, which will fully expire by the year 2019.
NOTE 6 -- CONSOLIDATED STATEMENTS OF CASH FLOWS:
Changes in other operating assets and liabilities in the Consolidated
Statements of Cash Flows are as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
(Increase) decrease in:
Deferred loan origination fees $ 584 $ 57
Receivable from related parties 79 (47)
Construction projects in process and inventory (3,233) 3,088
Prepaid expenses and other assets (573) (1,254)
Holdback reserve deposit (2,320) 8,033
Senior Bond collateral fund 232 151
-------- --------
Total (increase) decrease in other operating assets $ (5,231) $ 10,028
-------- --------
-------- --------
Decrease (increase) in:
Accounts payable and accrued expenses $ (733) $ 1,461
Accrued construction costs and unearned
income on sold notes receivable (2,963) (20,387)
Customer deposits 185 80
Deferred income 1,977 -
-------- --------
Total (decrease) increase in other operating liabilities $ (1,534) $(18,846)
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Interest paid $ 7,517 $ 6,785
Income taxes paid (refunded), net $ 109 $ 68
Supplemental schedule of non-cash investing and financing activities:
Transfer of notes receivable to REO $ 4,119 $ 2,140
Notes receivable originated from sale of REO $ - $ 375
Capital leases incurred for acquisition of equipment $ 138 $ -
</TABLE>
10
<PAGE>
DEGEORGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 7 -- SUMMARIZED FINANCIAL INFORMATION:
Summarized financial information of DeGeorge as of June 30, 1998 and
December 31, 1997 and for the three and six months ended June 30, 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- ------------
<S> <C> <C>
Total assets $208,090 $174,382
Total liabilities $232,022 $178,137
</TABLE>
Total assets include intercompany receivables of $24.1 million and
$24.0 million, respectively, at June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ---------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total income $ 10,788 $ 11,536 $ 19,494 $ 17,610
Net (loss) income $ (7,378) $ (700) $(12,098) $ (4,625)
</TABLE>
NOTE 8 -- 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 1997 Annual Report on Form 10-K, except for the
lease of an office facility in Boca Raton, Florida that will house DeGeorge's
expanding telemarketing operations. The term of the lease is ten years with a
total minimum lease obligation of $6.6 million over the term of the lease.
NOTE 9 -- DISCONTINUED OPERATIONS:
Summarized below are the assets of discontinued operations (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Cash $ 3 $ 57
Notes receivable 56 52
Inventory 70 80
Prepaid expenses and other assets 64 71
Costs of uncompleted contracts in excess of related billings 340 354
Assets held for sale, net 446 446
------ -------
Assets of discontinued operations $ 979 $1,060
------ -------
------ -------
</TABLE>
Condensed (loss) income from discontinued operations for the three
months and six months ended June 30, 1998 is as follows (in thousands):
11
<PAGE>
DEGEORGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ - $ - $ - $ 171
Cost of sales - (13) - (163)
Selling, general and administrative expenses (82) (45) (103) (120)
------ ------ ------ ------
Discontinued operations - (loss) income $ (82) $ (58) $ (103) $ (112)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
NOTE 10 -- SIGNIFICANT TRANSACTIONS:
On January 30, 1998, the Company signed a definitive agreement to be
acquired through a merger by a company controlled by Mr. Peter R. DeGeorge,
Chairman and Chief Executive Officer of the Company, and certain current and
former directors, officers and related parties. Under the merger agreement, each
of the outstanding shares of common stock of the Company, other than shares
owned by members of the buy-out group, will be converted into the right to
receive $1.50 in cash.
The merger agreement and the consideration to be received by holders
of shares of common stock, other than members of the buy-out group, were
approved by the Company's Board of Directors following the unanimous
recommendation of a Special Committee of independent directors on January 29,
1998. The merger is subject to obtaining all necessary corporate and regulatory
approvals, but is not subject to financing.
On April 29, 1998, the Company filed a Preliminary Proxy Statement
with the Securities and Exchange Commission (the "SEC") in connection with a
special meeting of the Company's stockholders to consider the approval and
adoption of the Agreement and Plan of Merger dated as of January 29, 1998. On
June 30, 1998, the Company filed a revised Preliminary Proxy Statement and
response letter with the SEC pursuant to the SEC's comment letter dated June 10,
1998.
The Company has received further comments from the SEC and is
preparing responses. The Company expects to complete the merger during the third
fiscal quarter of 1998.
On June 16, 1998, DeGeorge entered into a lease agreement, effective
July 1, 1998, for 46,644 square feet of office space in Boca Raton, Florida. The
term of the lease is ten years and the lease has a base rent in the first year
of $396,000 plus applicable taxes with an annual increase of approximately 3%
for each of the subsequent years. In addition to base rent, DeGeorge is liable
for a pro-rata share of operating expenses ("overhead rent"). In the first year
of the lease, overhead rent is expected to be $210,000 plus applicable taxes.
The Company has been given a concession of free base rent for the first six
months of the lease and one-half of base rent for months seven through eighteen.
This facility will house DeGeorge's expanding telemarketing operations.
NOTE 11 -- SUBSEQUENT EVENTS:
On July 17, 1998, DeGeorge Aviation sold its one-half interest in a
jet aircraft for $1.45 million. The Company recognized a $4,000 gain on the
sale.
12
<PAGE>
DEGEORGE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
On July 16, 1998, DeGeorge Aviation contributed $5.5 million to PRD
Aviation, LLC ("PRD Aviation") for a 50% ownership in PRD Aviation. Peter R.
DeGeorge, Chairman and Chief Executive Officer of the Company is the Managing
Member and 50% co-owner of PRD Aviation. On July 17, 1998, PRD Aviation
purchased a jet aircraft for $10.8 million plus anticipated capital improvement
costs of $200,000. The jet aircraft will be chartered to outside parties and
will also be used by Company personnel when traveling on Company business. The
Company pays the cost of operation (I.E., excluding the profit component of the
external charter rate) for its actual use.
Effective July 29, 1998, three former executives of the Company and
their co-defendants settled the lawsuit that the Company had initiated against
them in 1996. The defendants agreed to pay the Company a total of $1.35 million
in damages over time, of which $1.2 million is payable by December 31, 1998. The
Company reserved the right to reinstate the lawsuit if the payments due in 1998
are not paid as agreed. The separate lawsuits against certain former sales
representatives of DeGeorge who left DeGeorge to join one of the corporate
defendants in the above-described action are continuing and are in the discovery
stage.
On July 31, 1998, the Company filed a Notice of Termination on Form 15
with the SEC with respect to the common stock, par value $.10 per share, of
the Company and the 12% Senior Notes due 2001 (the "Senior Notes") of
DeGeorge. The Company expects the registration of these securities with the
SEC to terminate ninety days after the filing. The effect of this termination
is that the Company and DeGeorge are no longer required to file reports with
the SEC, although they are still required to deliver similar reports to
bondholders under the terms of the indenture governing the Senior Notes.
Nonetheless, the Company has determined to voluntarily file this report.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion makes various comparisons relevant to the
results of operations of the Company for the three and six months ended June 30,
1998 and 1997 with regard to continuing and discontinued operations.
Discontinued operations relate to the phase out of operations for the Company's
wholly owned subsidiary, Patwil Homes, which ceased new business activities in
late 1995 and has since been executing a plan of liquidation. Except where
noted, all references herein are to continuing operations.
CHANGES IN BUSINESS OPERATIONS, INCOME RECOGNITION AND PRESENTATION OF
OPERATING RESULTS
In April 1997, DeGeorge closed its distribution centers, which
fundamentally changed its operations. Concurrently with the closing of its
distribution centers, DeGeorge determined that recording contract services
income ratably over the service period based on the ratio of services performed
at the time of sale and thereafter to total services performed over the service
period more closely matched DeGeorge's business operations. Accordingly, upon
the closing of the construction loan, which is the confirmed point of sale for
DeGeorge, 60% of the related contract service income is recognized with the
balance of unearned contract services income recognized ratably over the
following ten month period. For contracts with shipments prior to April 1997,
contract revenue and materials charges were recognized based on the ratio of
individual shipments of materials to total shipments of materials.
Effective January 1, 1997, the Company adopted FAS 125 under which
the Company began accounting for the transfer of its notes receivable under the
Construction Loan Agreement as a pledge of collateral in a borrowing arrangement
for all transactions occurring after December 31, 1996 (see "Liquidity and
Capital Resources" below). Prior to January 1, 1997, the Company had treated the
transfer of its receivables as sales. Thus, transactions occurring prior to 1997
are not reflected as assets (or as pledged collateral) on the balance sheets of
the Company for the dates presented while transactions occurring after 1996 are
so reflected. For periods subsequent to the adoption of FAS 125, financial
services income reflects interest charged to customers on construction loans
transferred pursuant to the Construction Loan Agreement after December 31, 1996
without offset for related interest expense. The cost of funds on post-1996
notes receivable transferred is included in interest expense. For loans
underwritten prior to 1997, servicing income continues to be reflected net of
servicing expense in financial services income. Interest income on deposits,
previously reflected in other (income) expense, has been reclassified to
financial services income for all periods presented. Other than recasting the
presentation of results of operations to reflect current business operations, no
restatement of results of operations for prior periods has been made.
RESULTS OF OPERATIONS
NET INCOME (LOSS)
The Company reported a net loss of $7.6 million for the quarter ended
June 30, 1998, or $0.71 per share, as compared to a net loss of $900,000, or
$0.08 per share, for the similar period in 1997. Net loss for the six months
ended June 30, 1998 was $12.5 million, or $1.16 per share as compared to a
net loss of $4.9 million, or $0.46 per share, for the similar period in 1997.
Net loss for the respective periods includes $100,000, or $0.01 per share, of
loss from discontinued operations for both 1998 and 1997. Per share amounts
are based on 10.8 million weighted average shares outstanding for each
period. Basic and diluted per share amounts are equal for all periods because
the effect of common stock equivalents was anti-dilutive.
14
<PAGE>
FINANCIAL SERVICES INCOME
Financial services income is comprised principally of interest charged
to customers on construction loans, net loan servicing income, loan
origination fees and customer insurance placement fees. During the second
quarter of 1998, financial services income increased to $4.3 million from
$3.5 million in the similar period in 1997, an increase of $800,000. The key
component of this increase ($2.3 million) relates to the change in
presentation of interest earnings from customers under construction loans
that were transferred after December 31, 1996, as earlier described. Fees
earned on mortgage origination activities also increased during the quarter,
up $200,000 over the second quarter of 1997. Increases in financial services
income were offset by a reduction of $800,000 in service fees collected on
accounts sold pursuant to the Construction Loan Agreement prior to January 1,
1997, a decrease of $800,000 of interest income on customer accounts in the
Company's portfolio of notes receivable and a decrease of $100,000 in
interest earnings on reduced reserves held pursuant to the Construction Loan
Agreement (see "Liquidity and Capital Resources" below).
For the six months ended June 30, 1998, financial services income
increased to $8.2 million from $4.8 million, an increase of $3.4 million over
the same period in 1997. Of this net increase, $4.6 million relates to the
change in presentation of interest earnings as described above. Other
components of the six month increase include an additional $700,000 and
$100,000 of fees earned on mortgage origination activities and customer
insurance placement fees, respectively. Year-to-date increases in financial
services income were offset by a reduction of $1.2 million in service fees
collected on accounts sold pursuant to the Construction Loan Agreement prior
to January 1, 1997, a decrease of $600,000 of interest income on customer
accounts in the Company's portfolio of notes receivable and a decrease of
$200,000 in interest earnings on reduced reserves held pursuant to the
Construction Loan Agreement.
CONTRACT SERVICES INCOME
Contract services income, as described above, represents the income
realized on DeGeorge's core business support activities. Contract services
income was $17.6 million for second quarter of 1998 as compared to $18.8
million for the similar period in 1997, a decrease of $1.2 million, or 6.4%.
Although contract services income decreased during the second quarter, loan
closings increased to 390 in 1998 as compared to 292 in 1997, an increase of
98, or 33.6%. The decrease in contract services income reflects the effect of
the change in the method of recording contract services income, which
occurred during the second quarter of 1997. During this 1997 period, contract
services income for contracts executed prior to the closing of the
distribution centers was recorded based on the ratio of individual shipments
of materials to total shipments while contract services income for contracts
fulfilled after the closing of the distribution centers was recorded ratably
over the service period. Due to the accelerated pace of vacating the
distribution facilities and the typical second quarter increase in shipping
volume characteristic of activity in cold-weather states, shipments were up
during the 1997 second quarter, which contributed to an increase in contract
services income in 1997. The impact of this activity and change is also
reflected in contract services income for the comparative six month periods
ending June 30, 1998 and 1997, which aggregated $11.6 million for both
periods even though loan closings were up 34.1% in 1998, to 660 from 492 in
the same period in 1997. The increase in loan closings during the three and
six month periods ending June 30, 1998 is due to the increase in backlog
(i.e., the inventory of active loan applications in process) at March 31,
1998 and December 31, 1997.
Loan applications received during the second quarter of 1998 increased
80.6%, to 1,403 from 777 in the second quarter of 1997. For the six months
ended June 30, 1998, total loan applications received were up 67.1%, to 2,306
from 1,380 in the similar period in 1997. At June 30, 1998, DeGeorge had 949
loan applications in active processing as compared to 388 at June 30, 1997,
an increase of 561, or 144.6%. Backlog at June 30, 1998 includes 440
preliminary credit-approved loan applications for which
15
<PAGE>
customers had also identified their building site as compared to 192 similar
loan applications at June 30, 1997, an increase of 129.2%. Backlog also
includes 509 and 196 loan applications at June 30, 1998 and 1997,
respectively, which were in early stages of processing, an increase of 159.7%.
Materials and handling charges relating to contract services reflect the
cost of materials that DeGeorge provides to customers and arranges to have
delivered to customers' construction sites, and for periods prior to the
second quarter of 1997, also includes distribution center warehousing and
truck fleet costs. During the second quarter of 1997, materials and handling
charges includes a $1.0 million charge relating to the disposal of inventory
in connection with the accelerated closing of the distribution centers.
For marketing purposes, DeGeorge may offer sales promotions to customers
at the time of sale, typically consisting of free interest for the first
several months or merchandise (such as appliances). Contract revenue is
reported net of promotions.
CONSTRUCTION SERVICES INCOME
Construction services income aggregates the results of operations for
the turnkey homebuilding activities of DeGeorge/Florida and DeGeorge/New
England as well as sales to American Indian and non-profit groups.
Construction services income was $300,000 in the each of the quarters ending
June 30, 1998 and 1997 on essentially the same volume of activity. For the
six months ended June 30, 1998, construction services income was $600,000 as
compared to $800,000 in the comparable period in 1997, a decrease of
$200,000. The decrease in construction services income for the comparative
six month periods is primarily attributable to reduced first quarter 1998
construction activity and associated margin on community service sales.
SELLING EXPENSES
Selling expenses increased by $4.4 million during the second quarter of
1998, to $7.8 million from $3.4 million in 1997. For the six months ended
June 30, 1998, selling expenses increased by $6.0 million, to $13.2 million
from $7.3 million in the same period in 1997. The substantial increases in
selling expenses for the three and six months ended June 30, 1998 are
primarily attributable to an increase of $2.6 million for both periods in
direct response and advertising costs, of which $800,000 pertains to the
expensing of prepaid infomercial production costs at time of first airing
that were included in prepaid expenses and other assets as of March 31, 1998.
Other components of the three and six month increases in selling expenses
include, respectively, $700,000 and $1.6 million of staffing and other costs
relating to branch sales offices established in the latter part of 1997;
$700,000 and $1.3 million of compensation paid to sales representatives in
connection with expanding direct marketing operations that were in the early
stage of development in the second quarter of 1997; and $300,000 and $500,000
of increased wages relating to additional sales management staff required to
direct expanding sales activities. During the second quarter of 1998, the
increase in selling expenses also includes $200,000 of additional commissions
to sales representatives on increased sales activity.
At June 30, 1998 and 1997, DeGeorge had 404 and 187 field sales
representatives, respectively. In addition, the Company had 63 and 15
telemarketing representatives in its direct marketing operations at June 30,
1998 and 1997, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $5.3 million for the quarter
ended June 30, 1998 as compared to $4.6 million for the similar period in
1997, an increase of $700,000. For the six months ended June 30, 1998 and
1997, general and administrative expenses totaled $10.3 million and $8.4
million, respectively, an increase of $1.9 million. The second quarter and
six month increases in general
16
<PAGE>
and administrative expenses were, respectively, principally attributable to
$300,000 and $900,000 of staffing, depreciation and facilities charges
associated with expanded operations at the Company's headquarters that
replace services previously provided at DeGeorge's distribution centers,
which were closed in the second quarter of 1997. Other components of the
three and six month increases include $100,000 and $300,000 of costs relating
to increased staffing for improvements in processing and information
technology and $300,000 and $500,000 in professional fees, primarily
attributable to the pending merger proposal. In addition, for the comparative
six months ended June 30, 1998 and 1997, property and franchise taxes and
travel relating to the development of branch offices each increased by
$100,000.
PROVISION FOR CREDIT LOSSES
During the three and six months ended June 30, 1998, the Company
recorded a provision for credit losses of $1.5 million and $2.2 million as
compared to $300,000 and $500,000 for the similar periods in 1997,
respectively. The provision for credit losses reflects the replenishment to
the allowance for credit losses based on management's estimate of the
potential impairment of notes receivable after taking into account specific
charges to the allowance during the period.
For the six month period ended June 30, 1998, the provision for credit
losses as a percentage of the total opening customer account balances for all
loans serviced by the Company was 2.6% (annualized) as compared to 2.5% for
fiscal 1997, on aggregate 1998 and 1997 opening balances of $167.1 million
and $173.1 million, respectively.
INTEREST EXPENSE
Interest expense for the quarter and six months ended June 30, 1998
increased by $1.1 million and $2.3 million, respectively, all of which is
directly attributable to the change in the method of accounting for the
transfer of notes receivable under the Construction Loan Agreement pursuant
to the Company's adoption of FAS 125 on a prospective basis, effective
January 1, 1997 (see "Changes in Business Operations, Income Recognition and
Presentation of Operating Results" above). Other principal components of
interest expense for the three and six month periods ending June 30, 1998
include $1.3 million and $2.7 million, respectively, of interest paid on
$44.5 million of outstanding 12% Senior Notes due 2001 of DeGeorge and
$100,000 of related amortization of debt issuance costs.
OTHER (INCOME) EXPENSE
Other expense for the three and six months ended June 30, 1998 was
$400,000 and $700,000 as compared to $600,000 and $900,000 for the same
periods in 1997. The decrease in the second quarter of 1998 is attributable
to a $200,000 non-recurring charge incurred in the second quarter of 1997 for
customer accommodations relating to the conversion to local purchase. The
decrease of $200,000 for the comparative six month periods is comprised of a
gain of $200,000 from the sale of fixed assets recorded in the 1998 period
and $300,000 of non-recurring 1997 customer accommodations relating to the
conversion to local purchase, offset by an increase of $300,000 in
maintenance and write-down costs in connection with the servicing of real
estate owned.
INCOME TAXES
The Company provides for the recognition of deferred tax assets and
liabilities based on expected future tax consequences of events that have
been recognized in the Company's financial statements. As of December 31,
1997, the Company had accumulated a gross deferred tax asset of $20.9
million, against which the Company recorded a full valuation allowance.
During the first six months of 1998, the net loss
17
<PAGE>
for tax purposes and changes in temporary differences caused an increase in
the gross deferred tax asset to $25.8 million, against which a full valuation
allowance has also been recorded.
For federal income tax purposes, the Company had net operating loss
carryovers of $54.7 million at June 30, 1998, which will fully expire by the
year 2019.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, cash and cash equivalents were $1.0 million as
compared to $1.2 million at December 31, 1997.
Since April 1995, the Company has been transferring its construction
loans to a mortgage financing company pursuant to the Construction Loan
Agreement, under which the Company may, at its discretion and subject to
certain criteria, transfer all of its construction loans. The June 1997
Amendment provided for a reduction in the holdback deposit requirement from
12% to 8% (resulting in the return of $7.5 million of deposits to the Company
in June 1997) and a change in the benchmark for computing the interest rate
on its borrowings, from prime plus 1 1/2% to the three month London Interbank
Offered Rate ("LIBOR") plus 3% (10% and 8.69%, respectively, at June 30,
1998), effectively reducing the interest rate on the Company's borrowings 131
basis points at June 30, 1998. The June 1997 Amendment also extended the term
of the Construction Loan Agreement to June 1, 1999. As of August 1, 1997, the
Construction Loan Agreement was further amended to provide for transfer of
construction loans for turnkey activities and an earlier transfer of core
business construction loans involving customer land acquisition advances. On
March 31, 1998, the Construction Loan Agreement was further amended to permit
the Company to remit payoff funds that the Company receives in its capacity
as servicer to the mortgage financing company within 15 days of receipt.
While the Company gains a "float" on such funds, which the Company uses to
finance its operations, the Company is still required to pay interest on such
funds through the date of remittance. Previously, the Company had an
obligation to immediately remit such funds to the mortgage financing company,
though in practice, the Company transferred such funds to the mortgage
financing company on a lag basis, usually in connection with a further
transfer of construction loans.
Under the Construction Loan Agreement, loans are transferred at face
value, net of cost of funds discounting. The Construction Loan Agreement also
provides for a deposit account, owned by the Company, for retention of a
portion of the proceeds from the transfer of construction loans as security
for credit losses. The balance of deposits at June 30, 1998 and December 31,
1997 was $14.5 million and $12.4 million, respectively. Deposits are
presented in the financial statements net of allowance for estimated credit
losses ($1.5 million and $1.7 million at June 30, 1998 and December 31, 1997,
respectively) on construction loans transferred.
During the three months ended June 30, 1998, the Company transferred
$52.4 million, net face value ($54.4 million gross transfers less $2.0
million of repurchased accounts), of construction loans pursuant to the
Construction Loan Agreement. Net proceeds to the Company for the second
quarter of 1998 were $45.8 million, after discounting of $4.4 million and
deposits of $2.2 million. For the six months ended June 30, 1998, the Company
transferred $88.6 million, net face value ($93.8 million gross transfers less
$5.2 million of repurchased accounts), of construction loans pursuant to the
Construction Loan Agreement. Net proceeds to the Company for the six months
ended June 30, 1998 were $79.1 million, after discounting of $7.5 million and
deposits of $2.0 million.
As of June 30, 1998, the Company was servicing $29.0 million, face
value, of previously transferred construction loans. Collateralized borrowings
at June 30, 1998 of $165.9 million represent financing transactions occurring
after December 31, 1996, which are reported in the financial statements
18
<PAGE>
net of prepaid interest of $7.0 million, or $158.9 million. As of December
31, 1997, the Company was servicing $61.1 million, face value, of previously
transferred construction loans.
The Company is currently dependent upon cash flow from the financing of
construction loans under the Construction Loan Agreement for its working
capital needs. At June 30, 1998, the Company was committed to fund
expenditures relating to contractual obligations with customers of $83.1
million. In addition, debt service requirements relating to the 12% Senior
Notes, notes payable and capital leases are expected to be $2.8 million for
the balance of fiscal 1998. The Company's available balance of notes
receivable and inventory of loan applications staged for loan closing at June
30, 1998 exceeded the Company's cash flow needs at that date and the Company
believes that a majority of its notes receivable will be eligible for
financing under the terms of the Construction Loan Agreement. The Company
also believes it will generate sufficient new notes receivable for financing
under the Construction Loan Agreement to meet its anticipated cash needs.
The Company has invested $4.3 million in its corporate facility,
which is subject to a mortgage, the balance of which was $500,000 at June 30,
1998. In June 1997, the Company began construction of a second facility adjacent
to its corporate offices. The cost of completion for the second facility,
including furniture and fixtures, is expected to be $5.3 million of which $4.5
million had been disbursed as of June 30, 1998. The Company believes that the
mortgaging of these and other real estate holdings would provide a significant
source of working capital. Additional sources of cash available to the Company
include the sale of certain other assets and the further disposition of
remaining assets of discontinued operations. The Company believes that the
proceeds from these asset sales would be reflective of their carrying value.
During the six months ended June 30, 1998, DeGeorge/Florida invested
$2.5 million in residential building lots that are being held for current
development. The Company believes that these lots could be sold at their
carrying value.
TERMINATION OF REGISTRATION OF SECURITIES
On July 31, 1998, the Company filed a Notice of Termination on Form
15 with the SEC with respect to the common stock, par value $.10 per share, of
the Company and the 12% Senior Notes due 2001 (the "Senior Notes") of DeGeorge.
The Company expects the registration of these securities with the SEC to
terminate ninety days after the filing. The effect of this termination is that
the Company and DeGeorge will no longer be required to file reports with the
SEC, although they would be required to deliver similar reports to bondholders
under the terms of the indenture governing the Senior Notes.
SETTLEMENT OF LITIGATION
Effective July 29, 1998, three former executives of the Company and
their co-defendants settled the lawsuit which the Company had initiated against
them in 1996. The defendants agreed to pay the Company a total of $1.35 million
in damages over time, of which $1.2 million is payable by December 31, 1998. The
Company reserved the right to reinstate the lawsuit if the payments due in 1998
are not paid as agreed.
The separate lawsuits against certain former sales representatives of
DeGeorge who left DeGeorge to join one of the corporate defendants in the
above-described action are continuing and are in the discovery stage.
YEAR 2000 ISSUE
The Year 2000 Issue relates to whether computer systems will properly
recognize and process date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or possibly fail. The Company is heavily dependent on computer processing
in the conduct of substantially all of its business activities.
In 1997, the Company launched a "Year 2000" initiative to assess the
potential impact on its data
19
<PAGE>
processing systems of the Year 2000 Issue. As part of the Company's effort to
address this issue, a formal plan was established to analyze computer systems
and equipment, purchased software and hardware, office equipment and
facilities, and external interfaces.
The formal plan was implemented in the fourth quarter of 1997 and is
expected to be completed by July 1999. Items were prioritized and scheduled for
completion based on the date that management estimated any impact could
adversely affect Company operations. All software that would have created a
potential impact on fiscal year 1998 was modified by December 31, 1997, without
incident. As of June 1998, more than half of the programming scheduled to be
finished during 1998 has been completed.
All purchased hardware, software and electronic devices will be
certified as Year 2000 compliant by the manufacturer or replaced before any
potential impact to Company operations can occur. The Company has very few
electronic external interfaces. In each such instance, the external resource
will be required to certify they are Year 2000 compliant.
The approximate cost of this project to date is $77,000, which
principally reflects employee wages and benefits. For the full period of
implementation of this plan, the Company estimates that the total cost of this
initiative will be $500,000.
20
<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:
There have been no reports on Form 8-K since the
filing of the Company's 1997 Annual Report on Form 10-K.
21
<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: August 14, 1998
By: /s/ SALVATORE A. BUCCI
-----------------------------
Salvatore A. Bucci
Senior Vice President and
Chief Financial Officer
22
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