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, 1997
------------------
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
- -------------------------------------------------------------------------------
(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 November 14, 1997: 10,810,193
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
1997 and December 31, 1996
Consolidated Statements of Operations for the three 4
and nine months ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows for the nine 5
months ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements 6-12
ITEM 2. Management's Discussion and Analysis of Financial 13-20
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
DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Cash and cash equivalents $ 4,390 $ 3,737
Notes receivable, net 96,293 26,726
Receivable from related parties 1,078 1,047
Inventory 4,575 7,833
Prepaid expenses and other assets 8,057 4,158
Deposits 10,860 19,249
Mortgage servicing rights 424 5,982
Senior Bond collateral fund 2,910 3,008
Real estate owned 8,258 6,576
Property, plant and equipment, net 10,626 12,191
Property held for sale, net 184 417
Assets of discontinued operations 1,324 2,549
Deferred income taxes 336 336
Intangible assets, net 1,667 2,006
------------- ------------
Total assets $150,982 $95,815
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 8,858 $ 7,053
Accrued construction costs and unearned
income on sold notes receivable 5,961 28,857
Accrued expenses 7,029 4,399
Customer deposits 985 821
Collateralized notes receivable 83,311 -
12% Senior notes 43,839 43,738
Notes payable 3,962 3,527
Capital lease obligations - 925
------------- ------------
Total liabilities 153,945 89,320
------------- ------------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit):
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 (51,428) (41,970)
------------- ------------
Total stockholders' equity (deficit) (2,963) 6,495
------------- ------------
Total liabilities and stockholders'
equity (deficit) $150,982 $95,815
------------- ------------
------------- ------------
See accompanying notes to consolidated financial statements
3
DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS EXCEPT PER SHARE DATA)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
Services income:
Contract fee income $ 5,588 $ - $ 13,642 $ -
Net financial services income 2,959 1,594 6,752 3,926
----------- ---------- ---------- ----------
Total services income 8,547 1,594 20,394 3,926
----------- ---------- ---------- ----------
Housing income:
Net standard housing revenue - 25,894 16,625 57,682
Construction revenue 2,433 3,269 7,868 6,298
Cost of sales (2,114) (17,473) (18,808) (39,588)
----------- ---------- ---------- ----------
Housing income, net 319 11,690 5,685 24,392
----------- ---------- ---------- ----------
Total income 8,866 13,284 26,079 28,318
Operating expenses:
Selling 4,358 3,715 11,633 9,855
General & administrative 4,949 4,867 13,384 12,525
Provision for credit losses 1,436 907 1,910 1,978
Other interest expense 1,577 1,605 4,743 4,767
Other (income) expense 322 52 1,315 (501)
Distribution center closing costs 733 - 2,552 -
----------- ---------- ---------- ----------
Income (loss) from continuing operations
before income taxes (4,509) 2,138 (9,458) (306)
----------- ---------- ---------- ----------
Income tax benefit (provision) - - - -
Income (loss) from continuing operations (4,509) 2,138 (9,458) (306)
Discontinued operations-Patwil Homes, Inc.
Income (loss) from operations - (109) - 513
----------- ---------- ---------- ----------
Net income (loss) $ (4,509) $ 2,029 $ (9,458) $ 207
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Earnings per common share:
Income (loss) from continuing operations (0.42) 0.20 (0.87) (0.03)
Income (loss) from discontinued operations - (0.01) - 0.05
----------- ---------- ---------- ----------
Net income (loss) $ (0.42) $ 0.19 $ (0.87) $ 0.02
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Weighted average number of common shares
outstanding 10,810,193 10,810,193 10,810,193 10,810,193
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements
4
DEGEORGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1997 AND 1996
($ IN THOUSANDS)
(Unaudited)
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (9,458) $ 207
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 6,786 8,302
Provision for credit losses 1,910 1,978
Provision for sales promotions and incentives 1,688 2,491
Loss (gain) on sale of property, plant and equipment 299 (682)
Loss (gain) from discontinued operations - (513)
Decrease (increase) in other operating assets (Note 6) (59,261) (145,420)
Increase (decrease) in other operating liabilities (Note 6) (18,297) 23,553
--------- ---------
Total adjustments (66,875) (110,291)
--------- ---------
Net cash provided (used) by operating activities of:
Continuing operations (76,333) (110,084)
Discontinued operations 1,225 775
--------- ---------
Net cash provided (used) by operating activities (75,108) (109,309)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 2,799 6,794
Purchase of property, plant and equipment (2,088) (5,252)
--------- ---------
Net cash provided (used) by investing activities 711 1,542
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from financing of construction loans receivable,
net of discounting 79,667 -
Proceeds (repurchases) from sales of construction loans
receivable,
net of discounting (4,127) 109,231
Principal payments on notes payable - other (238) -
Borrowings on notes payable - other 673 103
Payments to senior bond collateral fund - (3,053)
Principal payments on capital leases (925) (310)
--------- ---------
Net cash provided (used) by financing activities 75,050 105,971
--------- ---------
Net change in cash and cash equivalents 653 (1,796)
Cash and cash equivalents - beginning of the period 3,737 2,838
--------- ---------
Cash and cash equivalents - end of the period $ 4,390 $ 1,042
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Interest paid $ 9,469 $ 2,913
Income taxes paid (refunded), net $ 191 $ (23)
See accompanying notes to consolidated financial statements
5
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, 1997, the results of operations for the three and nine months ended
September 30, 1997 and 1996 and cash flows for the nine months ended September
30, 1997 and 1996 of the Company. The results of operations for the three and
nine months ended September 30, 1997 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 1996 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, Plymouth Capital Company, Inc. ("Plymouth Capital"); DeGeorge Homes
of Florida, Inc. ("DeGeorge/Florida") and DeGeorge Homes of New England, Inc.
("DeGeorge/New England"). 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, formerly Miles Homes Services, Inc., changed its name on October 29,
1996. The combined assets, liabilities, earnings and equity of DeGeorge,
Plymouth Capital, DeGeorge/Florida and DeGeorge/New England 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, Plymouth Capital, DeGeorge/Florida and
DeGeorge/New England are not deemed to be material to investors. During 1996,
the Company essentially completed the phase out of operations for its wholly
owned subsidiary, Patwil Homes, Inc. ("Patwil Homes"). See "Note 9 -
Discontinued Operations".
On April 14, 1995 the Company entered into a Construction Loan Purchase and
Servicing Agreement ("the Construction Loan Agreement") with a mortgage
financing company under which the Company may transfer, at its discretion and
subject to certain criteria, all of its construction loans. The Construction
Loan Agreement was amended in March 1997 (the "March 1997 Amendment"), June
1997 (the "June 1997 Amendment") and August 1997 (the "August 1997 Amendment").
The March 1997 Amendment revised the provisions of the minimum tangible net
worth covenant. The June 1997 Amendment revised certain other provisions,
including a reduction in the holdback deposit requirement from 12% to 8% and a
change in the benchmark for computing the cost of funds, from prime plus 11/2%
to three month LIBOR plus 3% (10% and 8.77%, respectively, at September 30,
1997), effectively reducing the Company's cost of funds 123 basis points as of
September 30, 1997. The June 1997 Amendment also extended the term of the
Construction Loan Agreement to June 1, 1999. The August 1997 Amendment
provided for the transfer of construction lending for turnkey activities and an
earlier transfer of core business construction loans pursuant to customer land
acquisition advances.
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
6
receivable under the Construction Loan Agreement as a pledge of collateral in a
borrowing arrangement for all transactions occurring after December 31, 1996.
Although there is no difference in substance or form from sales of notes
receivable that occurred prior to January 1, 1997 to those that transferred
after December 31, 1996, the transactions that occurred prior to 1997 retain
their sale characteristics since FAS 125 proscribes retroactive application to
transactions occurring before January 1, 1997. Thus, transactions occurring
prior to 1997 are not included in construction loans underwritten or
collateralized notes receivable while all transactions that occurred after
December 31, 1996 are reflected as such in the balance sheet as of September
30, 1997.
During the second quarter of 1997, the Company introduced local purchase of
building materials in the customer's locality. As a result of the Company's
change in business operations, DeGeorge has adopted the method of recording its
service fees (contract fee 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. Contract fee income commences upon
the closing of the construction loan, which is the confirmed point of sale for
DeGeorge. Since the Company no longer takes title to materials in the
customary distribution process, cost of sales (which had included the cost of
materials, warehousing, material handling and shipping) has been eliminated for
DeGeorge core business activities. Certain other costs (e.g. construction
support services), formerly included in cost of sales, have been reclassified
to general and administrative expenses.
Results of operations for the second and third quarters of 1997 reflect the
impact of changes in the Company's business operations. In order to provide a
useful comparison of results of operations for the quarters and nine month
periods ended September 30, 1997 and 1996, total income has been recast to
reflect the contribution to margin for the services sector of operations, which
is the predominant business of the Company, and the housing sector, which
reflects the results of operations for turnkey construction activities,
including DeGeorge/Florida and DeGeorge/New England. For comparative purposes,
the prior period results for turnkey activities have been segregated from net
housing revenue, as previously termed, and reclassified to construction
revenue. Accordingly, net standard housing revenue reflects the results of
DeGeorge shipments from distribution centers. Cost of sales has been
repositioned to illustrate the contribution to margin from housing activity,
which is consistent with the presentation of services income. During the
third quarters and nine month periods of 1997 and 1996, cost of sales includes
the combined activities of distribution center shipments as well as turnkey
construction costs.
As a result of the change in business operations, income from Company
activities is reflected on a fee income basis. Contract fee income includes
services to customers for advisory and support services (e.g. planning,
budgeting, materials scheduling). Net financial services income continues to
reflect net interest charges to customers on construction loans, net loan
servicing income, loan origination fees and customer insurance placement fees.
Interest income on deposits, previously reflected in other income/expense, has
been reclassified to net financial services income. Other than recasting the
presentation of results of operations to properly reflect current business
operations, no restatement of results of operations for prior periods has been
made.
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 financial statements for
the three and nine months ended September 30, 1996 to conform to the
resentation for the three and nine months ended September 30, 1997.
7
NOTE 2--NOTES RECEIVABLE:
Notes receivable at September 30, 1997 and December 31, 1996 are as follows
(in thousands):
September 30, December 31,
1997 1996
------------- ------------
Construction loans underwritten $150,870 $43,452
Less: unfunded loan obligations (46,920) (6,315)
unearned income (5,416) (8,757)
------------- ------------
98,534 28,380
Less:
Allowance for sales promotions and incentives (801) (878)
Allowance for credit losses (709) (675)
Deferred loan processing fees, net (731) (101)
------------- ------------
Notes receivable, net $ 96,293 $26,726
------------- ------------
------------- ------------
At September 30, 1997, $83.3 million of construction loans underwritten
have been pledged as collateral under the Construction Loan Agreement. Loans
transferred prior to January 1, 1997, the balance of which was $83.9 million at
September 30, 1997, continue to retain their sale characteristics and are not
included in notes receivable.
NOTE 3--TRANSFER AND SERVICING OF NOTES RECEIVABLE:
Amounts owed to the Company under the holdback provisions of the
Construction Loan Agreement are included in deposits, which are stated net of
estimated credit losses on construction loans sold at September 30, 1997 and
December 31, 1996, as follows (in thousands):
September 30, December 31,
1997 1996
------------- ------------
Holdback $12,565 $22,370
Allowance for estimated credit losses (1,853) (3,542)
------------- ------------
Net holdback (included in deposits) $10,712 $18,828
------------- ------------
------------- ------------
Mortgage servicing rights on receivables transferred prior to January 1,
1997 (sales) at September 30, 1997 is as follows (in thousands):
September 30,
1997
-------------
Balance, beginning of year $5,982
Originated on transfers -
Less : Amortization (5,558)
-------------
Mortgage servicing rights $ 424
-------------
-------------
Prepaid interest on receivables transferred after December 31, 1996
(financings) at September 30, 1997 is as follows (in thousands):
September 30,
1997
-------------
Balance, beginning of year $ -
Originated on transfers 6,702
Less: Amortized interest expense (2,077)
-------------
Prepaid interest (included in prepaid expenses and
other assets) $ 4,625
-------------
-------------
8
NOTE 4--INVENTORY:
Inventory at September 30, 1997 and December 31, 1996 is as follows (in
thousands):
September 30, December 31,
1997 1996
------------- ------------
Raw materials $ - $4,241
Construction in progress and model homes 4,575 3,592
------------- ------------
Inventory $4,575 $7,833
------------- ------------
------------- ------------
NOTE 5--INCOME TAXES:
Significant components of deferred income taxes at September 30, 1997 and
December 31, 1996 are as follows (in thousands):
September 30, December 31,
1997 1996
------------- ------------
Credit allowances $ 2,078 2,544
Goodwill 1,715 1,832
Net operating loss carryforward 10,656 7,012
Other, net 3,356 2,649
------------- ------------
Total gross deferred tax assets 17,805 14,037
Less: valuation allowance (17,469) (13,701)
------------- ------------
Deferred income taxes $ 336 $ 336
------------- ------------
------------- ------------
At September 30, 1997 and December 31, 1996, the Company had net operating
loss carryforwards for federal income tax purposes of $26.7 million and $17.5
million, respectively, which will fully expire by the year 2012.
Income tax benefit (provision) for the three and nine months ended
September 30, 1997 and 1996 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1997 1996 1997 1996
------- ------ ------- -----
Statutory U.S. tax rate $1,519 $(724) $3,210 $ 88
State taxes, net of federal income
tax benefit 268 (127) 566 16
Effect of temporary differences (4) - (8) -
Valuation allowance (1,783) 851 (3,768) (104)
------- ------ ------- -----
Income tax benefit (provision) $ -0- $ -0- $ -0- $ -0-
------- ------ ------- -----
------- ------ ------- -----
For the nine months ended September 30, 1997, the Company did not record a
tax provision or benefit. The nine month net loss of $9.5 million resulted in
an increase in net operating loss carryforwards and a corresponding increase in
the valuation allowance of $3.8 million.
9
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):
Nine Months Ended
September 30
------------------------
1997 1996
--------- -----------
Decrease (increase) in:
Notes receivable $(71,477) $(119,630)
Receivable from related parties (31) (546)
Inventory 3,258 (4,736)
Prepaid expenses and other assets 2,798 (8,905)
Deposits 7,775 (6,058)
Mortgage servicing rights - (2,467)
Senior Bond collateral fund 98 -
Real estate owned (1,682) (3,078)
--------- -----------
Total decrease (increase) in other operating assets $(59,261) $(145,420)
--------- -----------
--------- -----------
Increase (decrease) in:
Accounts payable and accrued expenses $ 4,435 $(2,170)
Accrued construction costs and unearned
income on sold notes receivable (22,896) 24,997
Customer deposits 164 726
--------- -----------
Total increase (decrease) in other operating
liabilities $(18,297) $23,553
--------- -----------
--------- -----------
NOTE 7-- SUMMARIZED FINANCIAL INFORMATION:
Summarized financial information of DeGeorge as of September 30, 1997 and
December 31, 1996 and for the three and nine months ended September 30, 1997
and 1996 is as follows (in thousands):
September 30, December 31,
1997 1996
------------- ------------
Total assets $157,258 $100,743
Total liabilities 152,819 88,083
Total assets include intercompany receivables of $24.0 million and $25.2
million, respectively, at September 30, 1997 and December 31, 1996.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1997 1996 1997 1996
-------- ------- ------- -------
Total income $ 8,624 $13,060 $25,208 $27,815
Net income (loss) (4,272) 2,450 (8,897) 559
10
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 1996 Annual Report on Form 10-K, except as follows:
Effective May 1, 1997, the operating lease for the Denver distribution
facility was terminated. This lease had originally extended to February 28,
2000. As a result of the cancellation of this lease, future minimum lease
obligations have been reduced by $408,000.
NOTE 9-- DISCONTINUED OPERATIONS:
Summarized below are the assets of discontinued operations (in thousands):
September 30, December 31,
1997 1996
------------- ------------
Cash $ 161 $ 695
Notes receivable 77 182
Inventory 142 357
Prepaid expenses and other assets 75 124
Costs of uncompleted contracts in excess
of related billings 412 349
Assets held for sale, net 457 842
------------- ------------
Assets of discontinued operations $1,324 $2,549
------------- ------------
------------- ------------
Condensed income (loss) from discontinued operations for the three and
nine months ended September 30, 1997 and 1996 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
Net revenues $ 117 $ 399 $ 288 $ 5,704
Cost of sales (109) (432) (272) (5,077)
Selling, general and administrative
expenses (70) (76) (190) (114)
------- ------- ------- -------
Discontinued operations - income (loss) $ (62) $ (109) $ (174) $ 513
------- ------- ------- -------
------- ------- ------- -------
Loss from discontinued operations for the three and nine months ended
September 30, 1997 is reflected in other (income) expense.
NOTE 10--SIGNIFICANT TRANSACTIONS:
On July 31, 1997, the Company sold its one-half interest in a jet aircraft
for $1.45 million in cash. In January 1996, the Company paid $1.5 million plus
transaction fees for its half-interest in the aircraft and has paid for certain
upgrades to the aircraft during its period of ownership. At the time of sale,
the Company recognized a loss of $50,000 on the original purchase price and a
write-off of $114,000, net of depreciation, of transaction fees and
improvements.
11
NOTE 11--SUBSEQUENT EVENTS:
On October 9, 1997, the Company repurchased the same one-half interest in
a jet aircraft for $1.45 million, which it had earlier sold.
On November 13, 1997 the Company issued a press release announcing that
it had reached a settlement with the Securities and Exchange Commission (the
"SEC") of the investigation that has been ongoing for more than two years.
Under the settlement, the Company consented to a cease and desist order in an
SEC administrative proceeding without admitting or denying the SEC's
findings. In addition, the Company has agreed to hire a consultant acceptable
to the staff of the SEC to advise it with respect to improving procedures
relating to the approval, recording and disclosure of related party
transactions. The Company has also agreed to adopt the recommendations of the
consultant unless such recommendations are impractical or unduly burdensome.
The Company is not paying any fine or civil penalty under the settlement.
In a separate prodeeding, Peter R. DeGeorge, Chairman of the Board and Chief
Executive Officer of the Company, settled with the SEC without admitting or
denying the SEC's allegations. He agreed to the entry of an injunction
against him prohibiting future violations of the federal securities laws and
further agreed to the payment of a civil penalty of $50,000 and a payment in
the nature of restitution to the Company of $248,000 (which includes $44,000
of prejudgment interest).
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following discussion makes various comparisons relevant to the
results of operations of the Company for the three and nine months
ended September 30, 1997 and 1996 with regard to continuing and
discontinued operations. Discontinued operations relate to the phase
out of operations for Patwil Homes, which was essentially completed
during 1996. Loss from discontinued operations during 1997 is
included in other (income) expense. Except where noted, all
references herein are to continuing operations.
CHANGES IN BUSINESS OPERATIONS
During the second quarter of 1997, the Company introduced local
purchase of building materials in the customer's area. Local
purchasing enables DeGeorge to timely meet its customers' building
materials needs by arranging for direct delivery from local vendors to
customers' building sites. This approach eliminates the process of
purchasing and warehousing building materials for later delivery to
customers from Company owned or leased distribution centers, which
locations restricted the Company's ability to expand its sales areas
and burdened the Company with escalating shipping and fixed facilities
costs. Accordingly, DeGeorge closed all three of its distribution
centers in the second quarter of 1997 and began servicing customers
through local vendors at that time.
The change to local purchase represents the final phase of the
Company's transition into its new business of providing single-source
construction financing and comprehensive support services to qualified
entry-level and move-up buyers. Prior changes have included the
standardization of its product, the relocation and restructuring of
Company operations and the expansion of its selling and marketing
activities through long-form television information commercial
("infomercial") airings, direct mail campaigns and increased sales
representative concentrations in selected markets.
As a result of the Company's change in business operations, DeGeorge
has adopted the method of recording its service fees (contract fee
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. Contract fee income commences upon
the closing of the construction loan, which is the confirmed point of
sale for DeGeorge. Since the Company no longer takes title to
materials in the customary distribution process, cost of sales (which
had included the cost of materials, warehousing, material handling and
shipping) has been eliminated for DeGeorge core business activities.
Certain other costs (e.g. construction support services), formerly
included in cost of sales, have been reclassified to general and
administrative expenses. Revenue and cost of sales for DeGeorge
shipments from distribution centers during 1997 are reported in a
manner consistent with prior periods.
CHANGES IN PRESENTATION OF OPERATING RESULTS
The presentation of results of operations for 1997 reflects the impact
of changes in the Company's business operations. In order to provide
a useful comparison of results of operations for the quarterly and
nine month periods ended September 30, 1997 and 1996,
13
total income has been recast to reflect the contribution to margin for
the services sector of operations, which is the predominant business
of the Company, and the housing sector, which reflects the results
of operations for turnkey construction activities, including
DeGeorge/Florida and DeGeorge/New England. For comparative purposes,
the prior period results for turnkey activities have been segregated
from net housing revenue, as previously termed, and reclassified to
construction revenue. Accordingly, net standard housing revenue
reflects the results of DeGeorge shipments from distribution centers.
Cost of sales has been repositioned to illustrate the contribution to
margin from housing activity, which is consistent with the
presentation of services income. For the nine months ended September
30, 1997 and 1996, cost of sales includes the combined activities of
distribution center shipments as well as turnkey construction costs.
As a result of the change in business operations, income from Company
activities is reflected on a fee income basis. Contract fee income
includes services to customers for advisory and support services (e.g.
planning, budgeting, materials scheduling). Net financial services
income continues to reflect net interest charges to customers on
construction loans, net loan servicing income, loan origination fees
and customer insurance placement fees. Interest income on deposits,
previously reflected in other income/expense, has been reclassified to
net financial services income. Other than recasting the presentation
of results of operations to properly reflect current business
operations, no restatement of results of operations for prior periods
has been made.
INCOME
Total income for the third quarter ended September 30, 1997 decreased
to $8.9 million from $13.3 million for the same period in 1996, a
decrease of $4.4 million. Total income from DeGeorge core business
activities was down $5.4 million during comparative third quarters, to
$5.6 million from $11.0 million, directly the result of the decrease
in the volume of orders recorded in the first and second quarters of
1997 (see "Pending Action Against Former Employees" below). During
the third quarter of 1997, net financial services income increased
$1.4 million over the quarter ended September 30, 1996, principally
due to an increase of $800,000 in net loan servicing and interest
income on construction loans transferred, plus an increase of $400,000
relating to fees earned on mortgage originations placed by Plymouth
Capital.
For the comparative nine month periods ended September 30, 1997, total
income decreased by $2.2 million, to $26.1 million from $28.3 million.
The impact of the third quarter drop in recorded revenue from DeGeorge
core business activities resulted in a year-to-date net decrease of
$5.0 million. Net financial services income reflects an increase of
$2.8 million, of which $1.9 million relates to an increase in net loan
servicing and interest income on construction loans transferred. Fees
earned on mortgage originations contributed an additional $700,000 to
the increase in total income.
COST OF SALES
Cost of sales includes the cost of materials, warehousing, shipping
and material handling for shipments of DeGeorge product from
distribution centers as well as costs of construction for turnkey
housing activity. Effective with the change to local purchase of
building materials, DeGeorge closed its distribution centers and
ceased all warehousing and handling activities, thereby eliminating
the majority of its cost of sales. On an on-going basis, cost of
sales will continue to reflect the cost of construction for turnkey
projects and will be reflected as an offset to construction revenue in
the statement of operations.
14
SELLING EXPENSES
Selling expenses increased by $600,000 during the third quarter, to
$4.3 million in 1997 from $3.7 million in 1996. The third quarter
increase includes $600,000 of direct response advertising costs, of
which $500,000 pertains to airings of the Company's infomercial, an
increase of $700,000 in direct marketing and sales management
expansion costs and an increase of $400,000 in costs pertaining to
permanent mortgage origination activities of Plymouth Capital. Third
quarter increased selling costs were offset by a $1.1 million
reduction in commissions to sales representatives attributable to
restructured commission plans and reduced loan closings.
For the nine months ended September 30, 1997, selling expenses
increased $1.8 million, to $11.6 million in 1997 from $9.8 million in
1996. This increase is primarily attributable to an increase of $2.4
million in direct response advertising costs, of which $2.2 million
pertained to costs incurred for initial and subsequent airings of its
infomercial, which amount includes the write-off of $700,000 of
production costs that were included in prepaid expenses and other
assets at December 31, 1996. The increase in selling expenses for the
nine month period also includes $1.4 million of wages relating to
direct marketing and sales management expansion costs, $700,000 in
costs pertaining to permanent mortgage origination activities and
$200,000 of commissions paid in connection with turnkey sales. The
year-to-date increases were offset by $2.3 million of reduced
commission expenses and $600,000 of reduced recruitment costs and
savings achieved through the elimination of reimbursed expenses to
sales representatives.
At September 30, 1997 and 1996, respectively, DeGeorge had 190 and 130
full-time sales representatives.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $4.9 million and $4.8
million, respectively, for the three months ended September 30, 1997
and 1996, and $13.4 million and $12.5 million, respectively, for the
comparative nine month periods. The $900,000 increase for comparative
nine month periods is attributable to an increase of $300,000 in
facilities charges from expanded operations at the Company's
headquarters to replace services previously provided at the closed
distribution centers; an increase of $700,000 in personnel costs
relating to increased staffing for improvements in processing and
information technology and relocation costs incurred in recruiting key
managers and an increase of $200,000 in legal fees incurred in
connection with the pending action against former employees of the
Company. This increase was partially offset by a decrease of $300,000
for non-recurring costs recorded in 1996 relating to the closure of
the Company's former corporate facility in Minnesota.
INTEREST EXPENSE
Interest expense for the third quarters and nine month periods of 1997
and 1996 was unchanged at $1.6 million and $4.7 million, respectively.
For the three and nine months ended September 30, 1997, interest
expense includes $1.3 million and $4.0 million, respectively, of
interest charges related to the 12% Senior Notes due 2001.
15
OTHER (INCOME) EXPENSE
Other expense for the quarter ended September 30, 1997 was $300,000 as
compared to $100,000 for the similar period in 1996. For the nine
months ended September 30, 1997, other expense was $1.3 million as
compared to other income of $500,000 in 1996. During the nine month
period in 1996, the Company recorded non-recurring gains on sales of
fixed assets of $700,000. In addition, during the third quarter of
1997, the Company recorded a loss of $200,000 on the sale of its
one-half interest in a jet aircraft, primarily from the write-off of
transaction fees and improvements. Other components of the nine month
increase in other expense include $600,000 of non-recurring customer
accommodations in connection with the conversion to local purchase and
a $200,000 loss from discontinued operations, which was reported
separately in 1996.
DISTRIBUTION CENTER CLOSING COSTS
During the second quarter of 1997, DeGeorge closed its distribution
centers in Owatonna, Minnesota, Denver, Colorado and Ft. Wayne,
Indiana. The closing of these facilities resulted in additional
non-recurring costs of $700,000 during the third quarter. The third
quarter charge includes $200,000 of accrued residual lease costs and a
$200,000 write-off of leasehold improvement costs in connection with
the closure of the Ft. Wayne facility, which remains idle.
Total distribution center closing costs are reflected in the charge of
$2.6 million for the nine month period ending September 30, 1997.
This net non-recurring charge includes the write-off of $500,000 of
inventory capitalization; the write-off of $700,000 of residual lease
costs and leasehold improvements; shut-down costs of $600,000,
including the payment of $400,000 in severance, wages and benefits;
and losses of $700,000 and $300,000, respectively, on the disposal of
inventory and equipment. An offsetting $200,000 gain was recorded on
the sale of the Company's distribution center in Owatonna, Minnesota.
INCOME TAXES
On January 1, 1993, the Company adopted FAS 109 which 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, 1996, the Company
had accumulated a gross deferred tax asset of $14.0 million, against
which the Company had recorded a valuation allowance of $13.7 million,
resulting in the recognition of deferred income taxes of $300,000.
During the quarter and nine months ended September 30, 1997, the
Company did not record a tax provision or tax benefit. The nine month
net loss of $9.5 million resulted in an increase in net operating loss
carryforwards and a corresponding increase in the valuation reserve of
$3.8 million.
During 1997, the Company requested and the Internal Revenue Service
approved a change in the Company's tax year end to December 31. At
September 30, 1997 and December 31, 1996, the Company had net
operating loss carryforwards for federal income tax purposes of $26.7
million and $17.5 million, respectively, which will fully expire by
the year 2012.
16
NET INCOME (LOSS)
Net loss for the quarter ended September 30, 1997 was $4.5 million, or
$0.42 per share, as compared to net income of $2.0 million, or $0.19
per share, for the third quarter of 1996. The results of operations
for the third quarter of 1996 includes loss from discontinued
operations of $100,000, or $0.01 per share.
For the nine months ended September 30, 1997, net loss was $9.5
million, or $0.87 per share, as compared to net income of $200,000, or
$0.02 per share, for the similar period in 1996. The prior year
results include income from discontinued operations of $500,000, or
$0.05 per share. The results of operations for the nine months ended
September 30, 1997, reflect $3.2 million of non-recurring charges
relating to distribution center closing costs and customer
accommodations associated with the Company's change to local purchase
of building materials in the customers' area. Year-to-date loss from
discontinued operations of $200,000 is also included in other expense
in 1997.
QUARTERLY RESULTS
For the three months ended September 30, 1997, the Company reported
total income of $8.9 million as compared to $13.3 million in the
similar period in 1996, a decrease of $4.4 million. During the third
quarter, selling, general and administrative expenses increased by
$700,000, primarily due to the continued realignment and expansion of
direct marketing and sales management activities.
Loan applications received during the third quarter of 1997 increased
by 51.0% over the similar period in 1996 (785 in 1997 versus 520 in
1996). Loan closings recorded during the quarter, which reflects the
confirmed point of sale and the earliest stage of fee income
recognition for DeGeorge sales, were 197 in 1997 compared to 424 in
the similar period in 1996. The decrease in loan closings is directly
attributable to reduced order activity in the first and second
quarters of 1997 that occurred as a result of the departure of a large
number of the Company's most productive sales representatives during
the period from July 1996 to March 1997. Many of these sales
representatives were recruited to join a competing company set up by
former employees of DeGeorge (see "Pending Action Against Former
Employees" below). As a reaction to the significant disruption of its
field sales activity, the Company was compelled to step up its
recruitment of field sales representatives. Accordingly, the Company
implemented revisions to the field sales compensation structure and
recruitment processes in the latter part of 1996. Since initiating
these changes, DeGeorge has steadily rebuilt its field sales force.
At September 30, 1997, the number of field sales representatives
increased to 190, of which only 51, or 26.8%, were included in the
total of 130 at September 30, 1996. The balance of the present field
sales force is comprised of individuals with less than one year of
experience with DeGeorge. Through seasoning and training of new sales
representatives, the flow of loan applications has shown sustained
growth throughout the third quarter, resulting in an elevation of the
inventory of active loan applications to 664 at September 30, 1997 as
compared to 512 at September 30, 1996, an increase of 29.7%. The
Company believes that the productivity of the new sales force will
continue to increase as they gain experience and more fully develop
their prospect lists.
17
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 utilizing misappropriated
proprietary information and trade secrets of the Company. The Company
further alleged 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 alleged that these
defendants, which included the Company's former national sales manager
and a former regional sales manager, while still employed by the
Company, encouraged members of the Company's independent sales force
to curtail or redirect sales activity. This action is still in the
discovery phase.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, cash and cash equivalents were $4.4 million as
compared to $3.7 million at December 31, 1996.
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 cost of funds, from prime plus 11/2% to
three month LIBOR plus 3% (10% and 8.77%, respectively, at September
30, 1997), effectively reducing the cost of funds 123 basis points as
of September 30, 1997. 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 lending for turnkey activities and an
earlier transfer of core business construction loans pursuant to
customer land acquisition advances.
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 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. Prior to January 1, 1997, the Company had
treated the transfer of its receivables as sales. Although there is
no difference in substance or form for sales of notes receivable that
occurred prior to January 1, 1997 to those that transferred after
December 31, 1996, the transactions that occurred prior to 1997 retain
their sale characteristics since FAS 125 proscribes retroactive
application to transactions occurring before January 1, 1997. Thus,
transactions occurring prior to 1997 are not included in construction
loans underwritten or collateralized notes receivable while all
transactions that occurred after December 1996 are reflected as such
in the balance sheet as of September 30, 1997.
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
18
transfer of construction loans as security for credit losses. The
balance of deposits at September 30, 1997 and December 31, 1996 was
$12.6 million and $22.4 million, respectively. The significant
decrease in the balance of deposits is attributable to the one-third
reduction in reserve requirements as provided for in the June 1997
Amendment, which resulted in the return of $7.5 million of deposits
to the Company in June 1997. Deposits are reflected in the financial
statements net of provision for estimated credit losses ($1.9 million
and $3.6 million at September 30, 1997 and December 31, 1996,
respectively) on construction loans transferred.
During the third quarter of 1997, the Company transferred $34.5
million, net face value ($37.0 million gross transfers less $2.5
million of repurchased accounts), of construction loans pursuant to
the Construction Loan Agreement. Net proceeds to the Company for the
third quarter were $32.8 million, after discounting of $2.6 million
and net return of deposits of $900,000. For the nine months ended
September 30, 1997, the Company transferred $82.2 million, net face
value ($86.3 million gross transfers less $4.1 of repurchased
accounts), of construction loans pursuant to the Construction
Loan Agreement. Net proceeds to the Company for the nine month period
were $76.3 million, after discounting of $6.7 million and net return
of deposits of $800,000.
As of September 30, 1997, the Company was servicing $167.2 million,
face value, of previously transferred construction loans. Of this
amount, $83.9 million were transferred prior to January 1, 1997 as
sales of notes receivable. The balance of $83.3 million represents
financing transactions occurring after December 31, 1996.
BUY-OUT PROPOSAL
On September 12, 1997, the Company received a proposal from the
Company's chairman to take the Company private in a negotiated
business combination. Under the buy-out proposal (the "Proposal"),
a new company will be formed by the Company's chairman and possibly
certain other persons to acquire all outstanding common stock of
the Company ("Common Stock"), other than shares owned by members of
the buy-out group, at a cash price of $1.30 per share. In
connection with the Proposal, the Company's Board of Directors
appointed a special committee of the Board, consisting of the Board's
two independent directors, P. Peter Pascali and John H. Warren, to
review, consider and respond to the Proposal. The special committee
has retained Rogers & Wells as counsel to the special committee and
the Company and Houlihan Lokey Howard & Zukin Capital to render an
opinion to the special committee as to the fairness of the
Proposal, from a financial point of view, to the stockholders of
the Company, and to advise and assist the special committee with
respect to the Proposal.
NASDAQ LISTING
By letter dated September 11, 1997, The Nasdaq Stock Market, Inc.
("Nasdaq") notified the Company that, based upon the Company's Form
10-Q report for the quarter ended June 30, 1997, Nasdaq intended to
review the Company's eligibility for continued listing in light of
Nasdaq's minimum net tangible assets requirement. Nasdaq issued a
notice of delisting to the Company, but has stayed the delisting
pending the Company's appeal. A hearing with respect to the
Company's appeal has been scheduled for November 21, 1997. The
Company believes that it will not be able to meet Nasdaq's minimum
net tangible assets requirement within a time frame acceptable to
Nasdaq. Therefore, it is probable that the Common Stock will be
delisted. As a consequence of any such delisting, holders of
Common Stock would likely find it more difficult to dispose of,
or obtain accurate quotations as to the price of, the Common Stock.
19
SEC ENFORCEMENT MATTER AND SETTLEMENTS
On November 13, 1997 the Company issued a press release announcing
that it had reached a settlement with the Securities and Exchange
Commission (the "SEC") of the investigation that has been ongoing
for more than two years. Under the settlement, the Company
consented to a cease and desist order in an SEC administrative
proceeding without admitting or denying the SEC's findings. In
addition, the Company has agreed to hire a consultant acceptable to
the staff of the SEC to advise it with respect to improving
procedures relating to the approval, recording and disclosure of
related party transactions. The Company has also agreed to adopt
the recommendations of the consultant unless such recommendations
are impractical or unduly burdensome. The Company is not paying any
fine or civil penalty under the settlement.
In a separate proceeding, Peter R. DeGeorge, Chairman of the Board
and Chief Executive Officer of the Company, settled with the SEC
without admitting or denying the SEC's allegations. He agreed to
the entry of an injunction against him prohibiting future
violations of the federal securities laws and further agreed to the
payment of a civil penalty of $50,000 and a payment in the nature
of restitution to the Company of $248,000 (which includes $44,000
of prejudgment interest).
20
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.40 Third Amendment to Construction Loan Purchase and Servicing
Agreement dated as of August 1, 1997.
(b) Reports on Form 8-K:
On July 25, 1997, the Company filed a Form 8-K disclosing the
resignation of Price Waterhouse LLP ("Price") as auditor for
the Company, effective July 18, 1997. In connection with
Price's audit for the two most recent fiscal years, and the
subsequent interim periods preceding the resignation of Price,
there were no reportable disagreements on any matter of
accounting principles or practices, financial statement
disclosure or auditing scope or procedure which disagreement,
if not resolved to the satisfaction of Price, would have
caused Price to make a reference to the subject matter of the
disagreement in connection with its report.
On September 19, 1997, the Company filed a Form 8-K disclosing
the engagement of McGladrey & Pullen LLP as auditor for the
Company effective September 12, 1997; the receipt by the
Company of a proposal dated September 12, 1997 from the
Company's chairman to take the Company private; and the
receipt by the Company of a letter dated September 11, 1997
from The Nasdaq Stock Market, Inc. ("Nasdaq") notifying the
Company that, based upon the Company's Form 10-Q report for
the quarter ended June 30, 1997, Nasdaq intended to review the
Company's eligibility for continued listing in light of
Nasdaq's minimum net tangible assets requirement.
21
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 14, 1997
By: /s/ SALVATORE A. BUCCI
-----------------------
Salvatore A. Bucci
Senior Vice President and
Chief Financial Officer
22
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE
10.40 Third Amendment to Construction Loan 24
Purchase and Servicing Agreement
23
EXHIBIT 10.40
THIRD AMENDMENT TO
CONSTRUCTION LOAN PURCHASE AND SERVICING AGREEMENT
This Third Amendment to Construction Loan Purchase and Servicing Agreement
dated as of August 1, 1997 (this "AMENDMENT"), by and between DeGeorge
Financial Corporation, formerly known as Miles Homes, Inc. (the "PARENT"),
DeGeorge Home Alliance, Inc., formerly known as Miles Homes Services, Inc.
("DEGEORGE"), Plymouth Capital Company, Inc. ("PLYMOUTH CAPITAL") (the Parent,
DeGeorge and Plymouth Capital being referred to collectively as the "SELLERS"),
and Residential Funding Corporation ("RFC") amends certain provisions of that
Construction Loan Purchase and Servicing Agreement dated as of April 14, 1995,
as previously amended by that First Amendment thereto dated as of March 1,
1997, and by that Second Amendment thereto dated as of June 1, 1997 (such
Agreement, as so previously amended and as amended, supplemented or otherwise
modified from time to time, the "AGREEMENT"), by and between the Sellers and
RFC.
WHEREAS, RFC and the Sellers have agreed to amend portions of the Agreement
as set forth herein.
In consideration of the mutual promises contained herein and in the
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
1. DEFINITIONS. For purposes of this Amendment, all section references
shall refer to sections of the Agreement and, unless otherwise indicated, all
capitalized terms shall have the meanings assigned to those terms in the
Agreement.
2. ADDITION OF NEW SECTION 2.09. The Agreement is hereby amended to add
the following new Section 2.09:
Section 2.09. PURCHASE OF CONSTRUCTION LOANS WITH PAYMENT FOR LAND
ACQUISITION ADVANCES. (a) Notwithstanding the other provisions of this
Article II, the purchase price paid by RFC with respect to a Construction
Loan may include an amount attributable to the portion of such Construction
Loan advanced to the applicable Borrower for land acquisition costs (such
portion being hereinafter referred to as a "LAND ACQUISITION ADVANCE"),
subject to the remaining provisions of this Section 2.09.
(b) If the Sellers wish RFC to fund a Land Acquisition Advance with
respect to a Construction Loan, they shall so notify RFC prior to or at the
time
24
they submit the applicable Construction Loan File to RFC pursuant to
Section 2.01. Such notification may be in writing, by electronic means or
by other means previously agreed to by RFC and shall specify in dollars the
portion of such Construction Loan which will constitute a Land Acquisition
Advance. It is understood and agreed by the parties that the amount of any
Land Acquisition Advance with respect to a Construction Loan submitted for
purchase pursuant to this Section 2.09 will be included in the face amount
of the Mortgage Note with respect to such Construction Loan.
(c) Notwithstanding the provisions of Section 2.02(a), if RFC approves
for purchase a Construction Loan which includes a Land Acquisition Advance,
and provided that all of the conditions to purchase set forth in Article V
have been met, RFC shall pay the purchase price for such Construction Loan
in the manner set forth in this Section 2.09. In such event, such purchase
price shall be comprised of the Initial Purchase Price and the Subsequent
Purchase Price, as such terms are defined in paragraphs (f) and (g) below.
(d) RFC shall pay the Initial Purchase Price on the applicable
Construction Loan Purchase Date. The representation and warranty set forth
in Section 3.01(b)(i) shall not be deemed to have been made by the Sellers
at such Construction Loan Purchase Date, but the remaining representations
and warranties set forth in Section 3.01(b) shall be deemed to have been
made by the Sellers at such date.
(e) Unless the Sellers are required to repurchase a Construction Loan
pursuant to paragraph (l) below, RFC shall pay the Subsequent Purchase
Price on such date on or after the Construction Loan Purchase Date as is
specified by the Sellers in writing, by electronic means or by other means
previously agreed to by RFC. The date upon which the Subsequent Purchase
Price is so paid is referred to herein as the "SUBSEQUENT PAYMENT DATE."
The representations and warranties set forth in Section 3.01(b), including,
without limitation, the representation and warranty set forth in Section
3.01(b)(i), shall be deemed to have been made by the Sellers at the
Subsequent Payment Date.
(f) The "INITIAL PURCHASE PRICE" of a Construction Loan subject to
this Section 2.09 shall equal the product of (i) the amount of the Land
Acquisition Advance with respect to such Construction Loan (adjusted as set
forth in Section 2.02(c), net of any Pre-purchase Prepayment, and in no
event to exceed $75,000 unless otherwise specifically agreed by RFC),
multiplied by (ii) the appropriate discount factor set forth in the
Purchase Price Discount Tables included in Exhibit B, based on the
Estimated Life of such Construction Loan and an annualized rate of return
to RFC on its investment in such
25
Construction Loan of 3% above LIBOR in effect as of the applicable
Construction Loan Purchase Date.
(g) The "SUBSEQUENT PURCHASE PRICE" of a Construction Loan subject to
this Section 2.09 shall equal the product of (i) the face amount of the
Mortgage Note for such Construction Loan (adjusted as set forth in Section
2.02(c) and net of the applicable Land Acquisition Advance and of any
Pre-purchase Prepayment), multiplied by (ii) the appropriate discount factor
set forth in the Purchase Price Discount Tables included in Exhibit B,
based on the Estimated Life of such Construction Loan and an annualized
rate of return to RFC on its investment in such Construction Loan of 3%
above LIBOR in effect as of the applicable Subsequent Payment Date.
(h) The Initial Purchase Price and the Subsequent Purchase Price shall
each be paid in the manner specified in Section 2.03. For purposes of
calculating the Holdback Amount with respect to the Initial Purchase Price,
the Initial Adjusted Principal Amount shall be deemed to equal the amount
described in paragraph (f)(i) above. For purposes of calculating the
Holdback Amount with respect to the Subsequent Purchase Price, the Initial
Adjusted Principal Amount shall be deemed to equal the amount described in
paragraph (g)(i) above.
(i) The Initial Purchase Price and the Subsequent Purchase Price of
each Construction Loan subject to this Section 2.09 shall be subject to
adjustment pursuant to the provisions of Section 2.04. For purposes of
Section 2.04(c), the Adjusted Purchase Price of a Construction Loan subject
to this Section 2.09 shall be calculated separately with respect to the
applicable Initial Purchase Price and the applicable Subsequent Purchase
Price as set forth in paragraphs (j) and (k) below.
(j) With respect to the Initial Purchase Price, the Adjusted Purchase
Price shall be deemed to equal the product of (i) the amount described in
paragraph (f)(i) above, multiplied by (ii) the appropriate discount factor
set forth in the Adjusted Purchase Price Discount Tables included in
Exhibit B, based on the actual number of days from the applicable
Construction Loan Purchase Date to the date upon which such Construction
Loan was repaid in full and an annualized rate of return to RFC on its
investment in such Construction Loan of 3% above LIBOR as of the applicable
Construction Loan Purchase Date.
(k) With respect to the Subsequent Purchase Price, the Adjusted
Purchase Price shall be deemed to equal the product of (i) the amount
described in paragraph (g)(i) above, multiplied by (ii) the appropriate
26
discount factor set forth in the Adjusted Purchase Price Discount Tables
included in Exhibit B, based on the actual number of days from the
applicable Subsequent Payment Date to the date upon which such Construction
Loan was repaid in full and an annualized rate of return to RFC on its
investment in such Construction Loan of 3% above LIBOR as of the applicable
Subsequent Payment Date.
(l) If the construction with respect to a Construction Loan subject to
this Section 2.09 is not commenced within 120 days after the Sellers make
the applicable Land Acquisition Advance to the Borrower, the Sellers shall
immediately repurchase such Construction Loan from RFC unless otherwise
specifically agreed by RFC. The repurchase price in such event shall equal
the result of the following calculation:
(i) the sum of the amounts described in paragraphs (f)(i) and
(g)(i) above with respect to such Construction Loan, less any
principal payments received with respect to such Construction Loan by
RFC prior to the date of such repurchase,
PLUS
(ii) all out-of-pocket expenses incurred by RFC in connection
with any delinquency, default, liquidation, foreclosure or sale with
respect to such Construction Loan (including, without limitation,
expenses with respect to the related Mortgaged Property and Borrower),
PLUS (if a positive number) OR MINUS (if a negative number)
(iii) the sum of
(A) the difference between (x) the Initial Purchase Price with
respect to such Construction Loan and (y) the product of (I) the
amount described in paragraph (f)(i) above with respect to such
Construction Loan, multiplied by (II) the appropriate discount factor
set forth in the Adjusted Purchase Price Discount Table included in
Exhibit B, based on the actual number of days from the applicable
Construction Loan Purchase Date to the date of such repurchase and an
annualized rate of return to RFC on its investment in such
Construction Loan of 3% above LIBOR as of the applicable Construction
Loan Purchase Date, plus
27
(B) the difference between (x) the Subsequent Purchase Price with
respect to such Construction Loan and (y) the product of (I) the
amount described in paragraph (g)(i) above with respect to such
Construction Loan, multiplied by (II) the appropriate discount factor
set forth in the Adjusted Purchase Price Discount Table included in
Exhibit B, based on the actual number of days from the applicable
Subsequent Payment Date to the date of such repurchase and an
annualized rate of return to RFC on its investment in such
Construction Loan of 3% above LIBOR as of the applicable Subsequent
Payment Date.
RFC shall not be required to withdraw the repurchase price for a
Construction Loan subject to this paragraph (l) from the Loan Loss Reserve
Fund, but instead shall be entitled to be paid such amount by the Sellers
by wire transfer of immediately available funds to an account designated by
RFC. Upon such repurchase by the Sellers, RFC shall, at the expense of the
Sellers, reassign such Construction Loan (without representation, warranty
or recourse) to the Sellers in blank and shall deliver the Construction
Loan File for such Construction Loan to the Sellers.
(m) In the event that a Construction Loan subject to this Section 2.09
shall become subject to Section 2.06(b), 2.06(c), or 3.03(b), the amounts
specified in such sections shall be calculated in a manner consistent with
that specified in paragraph (l) above.
(n) Each Construction Loan which is subject to this Section 2.09 shall
be and remain subject to all of the other provisions of this Agreement,
except to the extent that such other provisions are expressly modified by
this Section 2.09.
3. ADDITION OF NEW SECTION 2.10. The Agreement is hereby amended to add
the following new Section 2.10:
Section 2.10. CONSTRUCTION LOANS WITH RESPECT TO OWNED TURNKEY HOMES.
(a) Notwithstanding the other provisions of this Agreement, Construction
Loans may include loans made by RFC to wholly-owned subsidiaries of the
Sellers ("SUBSIDIARIES") for the purpose of financing the construction by
the Subsidiaries of model homes owned by the Subsidiaries which have not
been pre-sold ("OWNED TURNKEY HOMES") and, to the extent otherwise
permitted by this Agreement, the acquisition of the related land. The
applicable Subsidiary shall be the maker of the Mortgage Note evidencing
each Construction Loan subject to this Section 2.10 (each an "OWNED TURNKEY
HOME CONSTRUCTION LOAN"), and such Subsidiary shall be deemed the
28
Borrower with respect to such Construction Loan. The Seller which owns
the applicable Subsidiary shall be named as the promisee with respect to
each such Mortgage Note and as the mortgagee with respect to the related
Mortgages.
(b) The aggregate unpaid principal balance of all Owned Turnkey Home
Construction Loans held by RFC at any time shall not exceed $3 million
unless otherwise specifically agreed by RFC.
(c) If the Sellers wish RFC to fund an Owned Turnkey Home Construction
Loan, they shall so notify RFC prior to or at the time they submit the
applicable Construction Loan File to RFC pursuant to Section 2.01. Such
notification may be in writing, by electronic means or by other means
previously agreed to by RFC. Notwithstanding the provisions of Exhibit A,
the Sellers shall not be required to submit the items numbered 10, 11, 13
through 19, 22, or 23 through 25 on Exhibit A as part of the Construction
Loan File with respect to an Owned Turnkey Home Construction Loan.
(d) Notwithstanding the provisions of Section 2.02(a), the Construction
Loan Purchase Date with respect to an Owned Turnkey Home Construction Loan
shall be the date upon which RFC provides funds to the Sellers with respect
thereto. The representations and warranties set forth in Section 3.01(b)
shall be deemed to have been made by the Sellers at such date.
(e) The amount provided by RFC with respect to an Owned Turnkey Home
Construction Loan shall equal (and shall be deemed to be) the Purchase Price
with respect thereto, calculated in accordance with Section 2.02(b).
Notwithstanding the provisions of Section 2.02(b), the Estimated Life of an
Owned Turnkey Home Construction Loan shall be the anticipated number of
months remaining to completion of the related Owned Turnkey Home plus six
months.
(f) RFC shall provide funds to the Sellers with respect to an Owned
Turnkey Home Construction Loan in the manner specified in Section 2.03,
including, without limitation, the provisions thereof relating to the
Holdback Amount.
(g) Notwithstanding the provisions of Section 3.04(h), Owned Turnkey
Home Construction Loans funded by RFC pursuant to this Section 2.10 need not
have been originated in accordance with those portions of the Plymouth
Capital Underwriting Manual which pertain to the credit of the Borrower.
29
(h) The provisions of Section 6.03(a) shall not be applicable to Owned
Turnkey Home Construction Loans subject to this Section 2.10.
(i) If the Mortgaged Property securing an Owned Turnkey Home
Construction Loan subject to this Section 2.10 is not sold to a third party
unaffiliated with the Sellers within 180 days after the completion of
construction, the Sellers shall immediately repurchase such Owned Turnkey
Home Construction Loan from RFC unless otherwise specifically agreed by
RFC. The repurchase price in such event shall be calculated in the manner
specified in Section 2.06(c). RFC shall not be required to withdraw the
repurchase price for such an Owned Turnkey Home Construction Loan from the
Loan Loss Reserve Fund, but instead shall be entitled to be paid such
amount by the Sellers by wire transfer of immediately available funds to an
account designated by RFC. Upon such repurchase by the Sellers, RFC shall,
at the expense of the Sellers, deliver the Construction Loan File for such
Owned Turnkey Home Construction Loan to the Sellers.
(j) Each Owned Turnkey Home Construction Loan which is subject to this
Section 2.10 shall be and remain subject to all of the other provisions of
this Agreement, except to the extent that such other provisions are
expressly modified by this Section 2.10.
4. ADDITION OF NEW SECTION 2.11. The Agreement is hereby amended to add
the following new Section 2.11:
Section 2.11. CONSTRUCTION LOANS WITH RESPECT TO PRE-SOLD TURNKEY
HOMES. (a) Notwithstanding the other provisions of this Agreement,
Construction Loans may include loans made by RFC to the Subsidiaries for
the purpose of financing the construction by the Subsidiaries of homes to
be constructed on land owned by the Subsidiaries, which homes and land are
the subject of an executed contract for the sale thereof by the
Subsidiaries to an unaffiliated third party and, to the extent otherwise
permitted by this Agreement, the acquisition of the related land. Such
homes are referred to herein as "PRE-SOLD TURNKEY HOMES," and such
contracts for sale are referred to herein as "SALES AGREEMENTS" The
applicable Subsidiary shall be the maker of the Mortgage Note evidencing
each Construction Loan subject to this Section 2.11 (each a "PRE-SOLD
TURNKEY HOME CONSTRUCTION LOAN"), and such Subsidiary shall be deemed the
Borrower with respect to such Construction Loan. The Seller which owns the
applicable Subsidiary shall be named as the promisee with respect to each
such Mortgage Note and as the mortgagee with respect to the related
Mortgages.
30
(b) The face amount of the Mortgage Note with respect to any Pre-sold
Turnkey Home Construction Loan shall not exceed the lesser of (i) the
estimated cost to complete the applicable Pre-sold Turnkey Home, as set
forth in the related Construction Loan File, plus, if such Pre-sold Turnkey
Home Construction Loan includes a Land Acquisition Advance, the amount of
such advance, or (ii) 70% of the estimated value of such Pre-sold Turnkey
Home upon completion, based upon the estimated appraised value of such
Pre-sold Turnkey Home as set forth in the related Construction Loan File.
(c) If the Sellers wish RFC to fund a Pre-sold Turnkey Home
Construction Loan, they shall so notify RFC prior to or at at the time they
submit the applicable Construction Loan File to RFC pursuant to Section
2.01. Such notification may be in writing, by electronic means or by other
means previously agreed to by RFC. Notwithstanding the provisions of
Exhibit A, the Sellers shall not be required to submit the items numbered
10, 11, 13 through 19, 22, or 23 through 25 on Exhibit A as part of the
Construction Loan File with respect to a Pre-sold Turnkey Home Construction
Loan. The Construction Loan File with respect to each Pre-sold Turnkey
Home Construction Loan also shall include the following items:
(i) The original executed Sales Agreement with respect to the
related Pre-sold Turnkey Home.
(ii) An assignment to RFC, in form and substance satisfactory to
RFC, of all of the seller's rights (but not its obligations) under the
Sales Agreement referred to in (i).
(iii) An assignment to RFC, in form and substance satisfactory to
RFC, of all of the seller's right, title and interest in and to any and
all funds escrowed by the purchaser under the Sales Agreement referred
to in (i), which assignment shall specifically identify the escrow
account in which such funds are held and the escrow agent with respect
thereto.
(iv) The Sellers' written good-faith estimate of the appraised
value of the related Pre-sold Turnkey Home upon completion.
(d) Notwithstanding the provisions of Section 2.02(a), the
Construction Loan Purchase Date with respect to a Pre-sold Turnkey Home
Construction Loan shall be the date upon which RFC provides funds to the
Sellers with respect thereto. The representation and warranty set forth in
Section 3.01(b)(i) shall not be deemed to have been made by the Sellers at
such Construction Loan Purchase Date, but the remaining representations and
warranties set
31
forth in Section 3.01(b) shall be deemed to have been made by the Sellers
at such date.
(e) The amount provided by RFC with respect to a Pre-sold Turnkey Home
Construction Loan shall equal (and shall be deemed to be) the Purchase
Price with respect thereto, calculated in accordance with Section 2.02(b)
or, if applicable, Section 2.09.
(f) RFC shall provide funds to the Sellers with respect to a Pre-sold
Turnkey Home Construction Loan in the manner specified in Section 2.03,
including, without limitation, the provisions thereof relating to the
Holdback Amount.
(g) Notwithstanding the provisions of Section 3.04(h), Pre-sold
Turnkey Home Construction Loans funded by RFC pursuant to this Section 2.11
need not have been originated in accordance with those portions of the
Plymouth Capital Underwriting Manual which pertain to the credit of the
Borrower; provided, that the Sellers shall have no reason to believe that
the purchaser under the applicable Sales Agreement would not qualify as a
"Borrower" under such portions of such Manual.
(h) The provisions of Section 6.03(a) shall not be applicable to
Pre-sold Turnkey Home Construction Loans subject to this Section 2.10.
(i) If the closing of the sale contemplated by the Sales Agreement
with respect to a Pre-sold Turnkey Home does not occur within 90 days after
the completion of construction, the Sellers shall immediately repurchase
the related Pre-sold Turnkey Home Construction Loan from RFC unless
otherwise specifically agreed by RFC. The repurchase price in such event
shall be calculated in the manner specified in Section 2.06(c). RFC shall
not be required to withdraw the repurchase price for such a Pre-sold
Turnkey Home Construction Loan from the Loan Loss Reserve Fund, but instead
shall be entitled to be paid such amount by the Sellers by wire transfer of
immediately available funds to an account designated by RFC. Upon such
repurchase by the Sellers, RFC shall, at the expense of the Sellers,
deliver the Construction Loan File for such Pre-sold Turnkey Home
Construction Loan to the Sellers.
(j) Each Pre-sold Turnkey Home Construction Loan which is subject to
this Section 2.11 shall be and remain subject to all of the other
provisions of this Agreement, except to the extent that such other
provisions are expressly modified by this Section 2.11.
32
5. ADDITION OF NEW SECTION 2.12. The Agreement is hereby amended to add
the following new Section 2.12:
Section 2.12. CONSIDERATION TO BE GIVEN TO SPECIALTY-TYPE
CONSTRUCTION LOANS. RFC agrees that if requested by Sellers, it will give
consideration to the purchase of specialty-type construction loans not
contemplated by the terms of this Agreement. The Sellers understand and
agree that RFC is not obligated to purchase, or to agree to purchase, any
such loans.
6. AMENDMENT OF EXHIBIT B. Exhibit B is hereby amended to read in its
entirety as follows. All references in this Agreement to "the appropriate
discount factor set forth in" Exhibit B shall be deemed to refer to the discount
factor calculated in accordance with Exhibit B as so amended:
EXHIBIT B TO CONSTRUCTION LOAN PURCHASE AND SERVICING AGREEMENT
CALCULATION OF DISCOUNT FACTORS
Where the Agreement requires a discount factor to be determined by
reference to this Exhibit B, the discount factor shall be determined in
accordance with the following formulae. In the following formulae, the
variable terms are as follows:
R is the discount rate to be applied, expressed as a decimal. At
the date of execution of the Third Amendment to the Agreement,
this rate is 3% above LIBOR determined as of the applicable date
specified in the Agreement.
D is the number of days from the date of purchase of a Construction
Loan by RFC to the estimated repayment date, the repayment date,
or the repurchase date, as applicable, with respect to such
Construction Loan. Notwithstanding the provisions of Section
2.02(b), the "Estimated Life" of a Construction Loan shall be
expressed in days rather than in months.
If D is 365 or less, the following formula shall be applied:
1
------------------
1 + ((R * (D/365))
If D is more than 365 but less than 731, the following formula shall be
applied:
1
----------------------------------
(1 + R) * (1 + (R * ((730-D)/365)))
33
If D is 731 or more, the discount factor shall be calculated using a
formula consistent with those set forth above.
7. CONTINUED EFFECTIVENESS OF AGREEMENT. The Agreement shall continue to
be in full force and effect and is hereby ratified and confirmed in all
respects, and all references to the Agreement in any document shall hereafter be
deemed to refer to the Agreement as amended hereby. This Amendment is hereby
incorporated into, and shall for all purposes be deemed to be a part of, the
Agreement.
8. SECTION HEADINGS. Section headings in this Amendment are for
convenience only and shall not in any way limit or affect the meaning or
interpretation of any of the provisions of this Amendment.
9. ENTIRE AGREEMENT. The Agreement, as amended by this Amendment,
embodies the entire agreement between the parties as to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof.
10. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same instrument.
11. EFFECTIVENESS. This Amendment shall be of no force or effect unless
and until it has been executed and delivered by RFC and each of the Sellers.
34
IN WITNESS WHEREOF, each of the undersigned parties to this Amendment has caused
this Amendment to be duly executed in its corporate name by one of its duly
authorized officers, all as of the date first above written.
DeGEORGE FINANCIAL CORPORATION
Attest:
By: /s/ SALVATORE A. BUCCI
-------------------------------------
By: /s/ PAUL H. BEGEMANN Name: Salvatore A. Bucci
-------------------------------- Its: Senior Vice President and
Name: Paul H. Begemann Chief Financial Officer
------------------------------
Its: Assistant Secretary
-------------------------------
DeGEORGE HOME ALLIANCE, INC.
Attest:
By: /s/ SALVATORE A. BUCCI
-------------------------------------
By: /s/ PAUL H. BEGEMANN Name: Salvatore A. Bucci
-------------------------------- Its: Senior Vice President
Name: Paul H. Begemann
------------------------------
Its: Assistant Secretary
-------------------------------
PLYMOUTH CAPITAL COMPANY, INC.
Attest:
By: /s/ SALVATORE A. BUCCI
-------------------------------------
By: /s/ PAUL H. BEGEMANN Name: Salvatore A. Bucci
-------------------------------- Its: President
Name: Paul H. Begemann
------------------------------
Its: Assistant Vice President and
-------------------------------
Assistant Secretary
-------------------------------
RESIDENTIAL FUNDING CORPORATION
Attest:
By: /s/ JEFFREY B. GRIFFIN
-------------------------------------
By: /s/ JEFFREY S. DETWILER Name: Jeffrey B. Griffin
-------------------------------- Its: Director
Name: Jeffrey S. Detwiler
------------------------------
Its: Managing Director
-------------------------------
35