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, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-20832
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MILES HOMES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 41-1625724
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Realty Drive, Cheshire, Connecticut 06410
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(Address of principal executive offices) (Zip Code)
(203) 271-0011
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Shares of Common Stock outstanding as of August 9, 1996: 10,810,193
MILES HOMES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 3
1996 and December 31, 1995.
Consolidated Statements of Operations for the 4
three and six months ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows for the 5
six months ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements 6-10
ITEM 2. Management's Discussion and Analysis of Financial 11-15
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
2
MILES HOMES, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
(Unaudited)
June 30, December 31,
1996 1995
----------- ------------
ASSETS
Cash and cash equivalents $ 1,971 $ 2,838
Notes receivable, net 34,853 35,074
Receivable from related parties 997 466
Inventory 9,838 6,958
Prepaid expenses and other assets 13,164 7,024
Deposits 11,458 8,644
Real estate owned 5,460 2,943
Property, plant and equipment, net 8,787 6,416
Property held for sale, net 1,091 5,144
Assets of discontinued operations 3,455 7,663
Intangible assets, net 2,263 2,492
-------- --------
Total assets $ 93,337 $ 85,662
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 7,019 $ 6,414
Accrued construction costs and unearned
revenue on sold notes receivable 27,444 14,113
Accrued expenses 5,057 9,867
Customer deposits 1,377 857
12% Senior notes 44,284 44,215
Notes payable 3,624 3,634
Capital lease obligations 1,036 1,244
-------- --------
Total liabilities 89,841 80,344
-------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common Stock; par value $.10, 25,000,000
authorized, 10,810,193 shares outstanding 1,081 1,081
Paid in capital 47,384 47,384
Accumulated deficit (44,969) (43,147)
-------- --------
Total stockholders' equity 3,496 5,318
-------- --------
Total liabilities and stockholders' equity $ 93,337 $ 85,662
-------- --------
-------- --------
See Accompanying Notes to Consolidated Financial Statements
3
MILES HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS EXCEPT PER SHARE DATA)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net housing revenue $ 25,230 $ 17,429 $ 34,817 $ 25,228
Financial services revenue 975 1,484 1,816 3,488
----------- ----------- ----------- -----------
Total revenue 26,205 18,913 36,633 28,716
Costs and expenses:
Cost of sales 15,288 10,521 22,188 16,015
Selling 3,563 3,498 6,140 5,449
General & administrative 3,877 3,756 7,585 7,199
Provision for credit losses 712 800 1,071 1,130
Interest expense 1,569 1,860 3,162 4,328
Other (income) expense (49) 141 (517) 146
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and extraordinary items 1,245 (1,663) (2,996) (5,551)
Income tax benefit (provision) - (1,555) - -
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
extraordinary items 1,245 (3,218) (2,996) (5,551)
Extraordinary gain on sale of real property 552 - 552 -
Extraordinary loss on extinguishment of debt - (928) - (928)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 1,797 (4,146) (2,444) (6,479)
Discontinued operations-Patwil Homes, Inc.
Income (loss) from operations 310 (1,923) 622 (2,867)
----------- ----------- ----------- -----------
Net income (loss) $ 2,107 $ (6,069) $ (1,822) $ (9,346)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share:
Income (loss) from continuing operations
before extraordinary items $ 0.11 $ (0.30) $ (0.28) $ (0.51)
Income (loss) from extraordinary items 0.05 (0.08) 0.05 (0.08)
Income (loss) from continuing operations 0.16 (0.38) (0.23) (0.59)
Income (loss) from discontinued operations 0.03 (0.18) 0.06 (0.27)
----------- ----------- ----------- -----------
Net income (loss) $ 0.19 $ (0.56) $ (0.17) $ (0.86)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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
MILES HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDING JUNE 30, 1996 AND 1995
(Unaudited)
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,822) $ (9,346)
--------- ---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 730 854
Provision for credit losses 1,071 1,130
Provision for sales promotions and incentives 1,472 2,874
Extraordinary loss on extinquishment of debt - 928
Loss (gain) on sale of property, equipment and land (444) 14
Discontinued operations (622) 2,867
Decrease (increase) in other operating assets (Note 9) (19,023) 21,163
Increase (decrease) in other operating liabilities (Note 9) 9,646 7,060
--------- ---------
Total adjustments (7,170) 36,890
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Net cash provided (used) by operating activities of:
Continuing operations (8,992) 27,544
Discontinued operations 385 (2,825)
--------- ---------
Net cash provided (used) by operating activities (8,607) 24,719
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CASH FLOWS FROM INVESTING ACTIVITIES
Amortization of mortgage loan servicing rights 4,362 -
Proceeds from sales of property, equipment and land 6,730 829
Purchase of property, equipment and land (3,191) (1,363)
--------- ---------
Net cash provided (used) by investing activities 7,901 (534)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable-revolver - (61,372)
Borrowings on notes payable-revolver - 40,600
Borrowings on notes payable-other 57 -
Principal payments on capital leases (218) (216)
Deferred debt issue cost - (26)
--------- ---------
Net cash provided by financing activities (161) (21,014)
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Net change in cash and cash equivalents (867) 3,171
Cash and cash equivalents-beginning of period 2,838 1,301
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Cash and cash equivalents-end of period $ 1,971 $ 4,472
--------- ---------
--------- ---------
Supplemental disclosures of cash flow information:
Interest paid $ 2,913 $ 3,919
Income taxes paid (refunded), net $ (23) $ 28
Property and equipment acquired by capital lease $ - $ -
See Accompanying Notes to Consolidated Financial Statements.
5
MILES HOMES, INC.
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,
1996, the results of operations for the three and six months ended June 30, 1996
and 1995 and cash flows for the six months ended June 30, 1996 and 1995. The
results of operations for the three and six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year. These
results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's 1995 Annual Report on Form 10-K.
The Company is a holding company whose only significant assets are its
investment in its wholly-owned operating subsidiaries Miles Homes Services, Inc.
("Miles Homes") and its wholly-owned subsidiary, Plymouth Capital Company, Inc.
("Plymouth Capital"), and Patwil Homes, Inc. ("Patwil Homes"). The combined
assets, liabilities, earnings and equity of Miles Homes, Patwil Homes and
Plymouth Capital are substantially equivalent to the assets, liabilities,
earnings and equity of the Company on a consolidated basis. Accordingly,
separate financial statements and other disclosures concerning Miles Homes,
Patwil Homes and Plymouth Capital are not deemed to be material to investors.
In November 1995, the Company announced the close down of the Patwil Homes
business (see "Discontinued Operations").
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying
consolidated financial statements be read in conjunction with the financial
statements and notes thereto incorporated by reference in the Company's Annual
Report on Form 10-K.
Certain reclassifications have been made to the results of operations and
statements of cash flows for the three and six months ended June 30, 1995 to
conform to the presentation for the three and six months ended June 30, 1996.
NOTE 2--NOTES RECEIVABLE:
Notes receivable at June 30, 1996 and December 31, 1995 are as follows (in
thousands):
June 30, December 31,
1996 1995
--------- ------------
Contractual value of notes receivable $52,228 $51,010
Less: unearned income (12,959) (9,535)
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Total 39,269 41,475
Less:
Allowance for sales promotion
and incentives (3,532) (4,777)
Allowance for credit losses (735) (1,371)
Deferred loan processing fees, net (149) (253)
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Notes receivable, net $34,853 $35,074
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------- -------
6
NOTE 3--INVENTORY:
Inventory at June 30, 1996 and December 31, 1995 are as follows (in
thousands):
June 30, December 31,
1996 1995
--------- ------------
Raw materials $6,867 $5,556
Speculation and model homes 2,971 1,402
------ ------
Inventory $9,838 $6,958
------ ------
------ ------
NOTE 4--DEPOSITS:
Deposits at June 30, 1996 and December 31, 1995 consist of approximately
$10.7 million and $7.9 million, respectively, of net holdback funding pursuant
to the terms of the Construction Loan Purchasing and Servicing Agreement dated
April 14, 1995. Additionally, at June 30, 1996 and December 31, 1995,
approximately $758, 000 and $720,000, respectively, relate to lease and other
deposits.
NOTE 5--INCOME TAXES:
Significant components of deferred income taxes at June 30, 1996 and
December 31, 1995 are as follows (in thousands):
June 30, December 31,
1996 1995
--------- ------------
Credit and refinancing allowances $ 3,876 $ 4,015
Goodwill 1,942 1,972
Net operating loss carryforward 8,551 6,748
Other, net 996 1,923
-------- --------
Total gross deferred tax assets 15,365 14,658
Less valuation allowance (15,365) (14,658)
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Deferred income taxes $ -0- $ -0-
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-------- --------
At June 30, 1996, and December 31, 1995 the Company had net operating loss
carryforwards for federal income tax purposes of $21.4 million and $16.9
million, respectively, which expire in 2010.
Income tax benefit (provision) for the three and six months ended June 30,
1996 and 1995 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1996 1995 1996 1995
------ ------- ------ ------
Statutory U.S. tax rate $ (630) $ 881 $ 812 $2,203
State taxes, net of federal
income tax benefit (111) 152 143 385
Effect of temporary differences - 4 - 4
Valuation allowance 741 (2,592) (955) (2,592)
------ ------- ------ ------
Income tax benefit
(provision) $ -0- $(1,555) $ -0- $ -0-
------ ------- ------ ------
------ ------- ------ ------
7
The income tax provision recorded at June 30, 1995 reversed, in its entirety,
the income tax benefit that was recorded in the first quarter of 1995.
NOTE 6--SUMMARIZED FINANCIAL INFORMATION:
Summarized financial information of Miles Homes as of June 30, 1996 and
December 31, 1995 and for the three and six months ended June 30, 1996 and 1995
is as follows (in thousands):
June 30, December 31,
1996 1995
--------- ------------
Total assets $113,419 $87,524
Total liabilities 87,053 74,586
Total assets include intercompany receivables of $25.2 million and $27.7
million, respectively, at June 30, 1996 and December 31, 1995.
Three Months Ended Six Months Ended
June 30 June 30
------------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
Net revenues $25,123 $18,480 $34,847 $28,283
Net income (loss) 1,623 (3,734) (2,274) (5,910)
NOTE 7--COMMITMENTS AND CONTINGENCIES:
There has been no significant change in the status of lawsuits or
commitments described in Note 13 to the Consolidated Financial Statements
contained in the Company's 1995 Annual Report on Form 10-K.
NOTE 8--DISCONTINUED OPERATIONS:
On November 27, 1995, the Company formally announced its intent to phase
out and close down the operations of its Patwil Homes subsidiary. Contracts for
the construction of Patwil Homes' customers' homes will be completed during the
phase-out period, and all selling and marketing activities have ceased at
December 31, 1995.
The results of Patwil Homes have been classified as discontinued operations
for all periods presented in the Consolidated Statements of Operations. The
assets of Patwil Homes have been classified as Assets of Discontinued Operations
in the Consolidated Balance Sheet as of June 30, 1996 and December 31, 1995.
Additionally, discontinued operations have been segregated in the Consolidated
Statements of Cash Flows for all periods presented.
As a result of the Company's decision to discontinue the operations of
Patwil Homes, the Company recorded, as of December 31, 1995, an estimated loss
on disposal of approximately $8.2 million, which includes a provision of
approximately $1.7 million for losses during the phase-out period, the write-off
of approximately $5.7 million of goodwill and deferred costs, approximately
$600,000 relating to the write-down of fixed assets (to net realizable value)
and approximately $200,000 of accrued severance wages and benefits for 41
employees.
8
Summarized below are the Assets of Discontinued Operations (in thousands):
June 30, December 31,
1996 1995
--------- ------------
Notes receivable $ 285 $ 147
Inventory 392 798
Prepaid expenses and other assets 61 152
Deposits - 59
Costs of uncompleted contracts in excess
of related billings 865 3,434
Assets held for sale, net 1,852 3,073
------ ------
Assets of discontinued operations $3,455 $7,663
------ ------
------ ------
Condensed income (loss) from operations of Patwil Homes for the three and
six months ended June 30, 1996 and 1995 follows (in thousands):
Three Months Ended Six Months Ended
June 30 June 30
------------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
Net revenues $2,295 $10,591 $5,305 $22,935
Cost of sales (1,948) (9,071) (4,645) (19,876)
Selling, general and
administrative expenses (37) (2,743) (38) (5,855)
Income tax benefit (provision) - (700) - (71)
------ ------- ------ -------
$ 310 $(1,923) $ 622 $(2,867)
------ ------- ------ -------
------ ------- ------ -------
NOTE 9--CONSOLIDATED STATEMENTS OF CASH FLOWS:
Changes in other operating assets and liabilities in the Consolidated
Statements of Cash Flows are as follows (in thousands):
June 30,
--------------------
1996 1995
-------- --------
Decrease (increase) in:
Notes receivable, net $ 221 $ 33,025
Receivable from related parties (531) (178)
Inventory (2,880) (2,193)
Prepaid expenses and other assets (13,316) (7,541)
Cost of uncompleted contracts in excess of
related billings - (1,262)
Real estate owned (2,517) (688)
-------- --------
Total decrease (increase) in other operating
assets $(19,023) $ 21,163
-------- --------
-------- --------
Increase (decrease) in:
Accounts payable and accrued expenses $ (4,205) $ 4,192
Accrued construction costs and unearned
revenue on sold notes receivable 13,331 2,582
Payable to related parties - (239)
Customer deposits 520 525
-------- --------
Total increase (decrease) in other
operating liabilities $ 9,646 $ 7,060
-------- --------
-------- --------
9
NOTE 10--SIGNIFICANT TRANSACTIONS:
On April 11, 1996, Herbert L. Getzler, then Vice Chairman of the Board of
Directors and Chief Financial Officer of the Company, borrowed approximately
$608,000 from the Company. This amount was used (i) to repay approximately
$154,000 borrowed from the Company by Mr. Getzler on December 30, 1994 to pay
taxes on restricted common stock of the Company purchased by him on December 23,
1994 at a discount plus interest of approximately $20,000 on that amount, (ii)
to repay a loan by the Company to Mr. Getzler of $160,000 made on January 3,
1995 to meet margin calls on his common stock plus interest on that amount of
approximately $20,000, and (iii) to repay a loan from Mr. Peter R. DeGeorge,
Chairman and Chief Executive Officer of the Company, to Mr. Getzler of $200,000
made on December 3, 1992 plus interest on that amount at 7% per annum totaling
approximately $52,000.
Also, on April 11, 1996, James G. Einloth, Executive Vice President of
Patwil Homes, Inc., borrowed approximately $309,000 from the Company. This
amount was used (i) to repay approximately $106,000 borrowed from the Company by
Mr. Einloth on December 30, 1994 to pay taxes on restricted common stock of the
Company purchased by him on December 23, 1994 at a discount plus interest of
approximately $14,000 on that amount, and (ii) to repay a loan from Mr. DeGeorge
to Mr. Einloth of $150,000 made on December 3, 1992 plus interest on that amount
at 7% per annum totaling approximately $39,000.
These loans will be secured by 303,752 shares of common stock of the
Company, in the case of Mr. Getzler, and 154,727 shares of common stock of the
Company, in the case of Mr. Einloth. The notes are demand notes and bear
interest at the rate of 10% per annum. Interest accrues and is payable on the
date the outstanding principal balance is paid. These notes are non-recourse to
the individuals involved, except for the stock to be pledged as security. There
is no prepayment penalty on these notes.
Separately, on June 11, 1996, the Company sold its distribution facility in
Mountaintop, Pennsylvania for the contract price of $1.3 million. The Company
had owned this facility free of any mortgage or encumbrance. At the time of
sale, the Company received net cash proceeds of $1.1 million (after deduction
for settlement expenses). During the quarter ended June 30, 1996, the Company
recorded gain of $552,000 relative to the disposal of this asset.
NOTE 11--SUBSEQUENT EVENTS:
On July 2, 1996, the Company received payment of $2.6 million pursuant to
the sales agreement dated February 7, 1996 wherein the Company sold its
corporate facility located in the Minneapolis, Minnesota metropolitan area. The
funds received on July 2, 1996 were deposited to a fund that will amortize
Senior Secured Bonds of approximately $2.6 million that were secured by the
facility. Previously, the Company had received an initial cash payment of
$500,000. The agreement further provides for subsequent payments of $350,000 on
October 1, 1996 and $750,000 on July 1, 1997 as well as continued partial
occupancy of the facility by Miles Homes through October 1, 1996.
On August 1, 1996, Herbert L. Getzler, Vice Chairman and Chief Financial
Officer of the Company, retired from his day-to-day managerial duties for
personal health reasons. Mr. Getzler will remain on the Company's Board of
Directors.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
Total revenue from continuing operations for the quarter ended June
30, 1996 increased by $7.3 million, or 38.6%, to $26.2 million from
$18.9 million for the same period in 1995. Net housing revenue
increased to $25.2 million for the second quarter of 1996 from $17.4
million for the quarter ended June 30, 1995, an increase of $7.8
million, or 44.8%. The second quarter revenue increase was primarily
attributable to the elevated volume of activity in standard orders,
which increased to 514 orders shipped from 411 for the second quarter
of 1995, an increase of 103 units, or 25.1%. In addition, sales of
turnkey homes in Florida contributed $1.1 million to net housing
revenue for the second quarter of 1996, an increase of $900,000 over
the $200,000 recorded in the second quarter of 1995.
For the six months ended June 30, 1996, total revenue increased to
$36.6 million from $28.7 million for the similar period in 1995, an
increase of $7.9 million, or 27.6%. Net housing revenue for the six
month period in 1996 increased $9.6 million, to $34.8 million versus
$25.2 million in 1995, or an increase of 38.0%. Attributes of year-
to-date increases in net housing revenue were consistent with activity
recorded for the second quarter, including an aggregate of $1.8
million for turnkey homes settled in Florida, as compared to $200,000
recorded in 1995, during which period the first sales of turnkey homes
were recorded.
Financial services revenue for the second quarter of 1996 was $1.0
million as compared to $1.5 million for the quarter ended June 30,
1995. For the six months ended June 30, 1996 and 1995, respectively,
financial services revenue was $1.8 million and $3.5 million, a
decrease of $1.7 million. The decrease in financial services revenue
was primarily due to the continued sale of construction loans under
the Construction Loan Purchase and Servicing Agreement entered into
with a mortgage financing company dated April 14, 1995.
COST OF SALES
Cost of sales from continuing operations, which includes cost of
materials, warehousing, material handling, shipping and construction
monitoring, increased to $15.3 million for the three months ended June
30, 1996 as compared to $10.5 million for the similar period in 1995.
As a percentage of net housing revenue, cost of sales for the second
quarter was essentially unchanged (60.6% and 60.4% for 1996 and 1995,
respectively).
For the six months ended June 30, 1996, cost of sales increased to
$22.2 million from $16.0 million for the similar six month period in
1995. As a percentage of net housing revenue, cost of sales was also
constant as compared with the same prior year period (63.7% versus
63.5% in 1996 and 1995, respectively).
11
SELLING EXPENSES
Selling expenses from continuing operations for the second quarter of
1996 increased 1.9% (to $3.6 million in 1996 from $3.5 million in
1995). For the six months ended June 30, 1996, the increase in
selling expenses from continuing operations was 12.7%, an increase of
$700,000 ($6.1 million in 1996 versus $5.4 million in 1995). The
increases were the result of incentives and wages paid to sales
personnel in connection with increased order and delivery activity and
was partially offset, in the second quarter of 1996, by a reduction in
costs for sales collateral material which were a non-recurring charge
in the second quarter of 1995.
At June 30, 1996 and 1995, Miles Homes had 123 and 120,
respectively, of full-time sales representatives. In addition,
part-time affiliate sales representatives increased to 97 at
June 30, 1996 from 24 the previous year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses from continuing operations were
$3.9 million and $7.6 million, respectively, for the three and six
months ended June 30, 1996 as compared to $3.8 million and $7.2
million, respectively, for the similar periods in 1995. The second
quarter and six month increases ($100,000 and $400,000, respectively)
were primarily attributable to non-recurring relocation and
transition expenses incurred in connection with the movement of
operations from Plymouth, Minnesota to Cheshire, Connecticut, which
increases were partially offset by a reduction in wage and salaries
costs.
INTEREST EXPENSE
Interest expense for the second quarter of 1996 decreased by $300,000
compared to the same period in 1995. Approximately one-half of this
reduction is attributable to the Company's purchase on July 25, 1995
of $4.9 million, face value, of outstanding 12% Senior Notes due 2001
of Miles Homes. The balance of the second quarter decrease is
comprised primarily of reduced interest costs relating to the
Company's retirement of a secured revolving credit facility with BT
Commercial Corporation in April 1995 with proceeds from the
Construction Loan Purchase and Servicing Agreement entered into with a
mortgage financing company.
For the six months ended June 30, 1996, interest expense decreased by
$1.2 million over the similar period in 1995. Components of this
decrease include $300,000 of reduced interest costs related to the
purchase of the 12% Senior Notes and $800,000 of non-recurring 1995
interest expense and line facility costs related to the BT Commercial
Corporation revolving credit facility.
Interest expense from continuing operations for the three and six
months ended June 30, 1996 includes $1.4 million and $2.7 million,
respectively, relating to the 12% Senior Notes of which $44.3 million
(net of $800,000 of original issue discount) is outstanding at June
30, 1996.
INCOME TAX
At June 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of $21.4 million. At December 31, 1995
the Company recorded a valuation reserve of $14.7 million. During the
quarter and six months ended June 30, 1996 the
12
Company did not record a tax provision or a tax benefit. The
second quarter income of $2.1 million resulted in the reduction of
net operating loss carryforwards and a corresponding reduction in
the valuation reserve by $900,000. For the six months ended June
30, 1996 the loss of $1.8 million increased the valuation reserve
by $700,000. At June 30, 1996 the valuation reserve was $15.4
million.
SALE OF REAL PROPERTY
On June 11, 1996, the Company sold its distribution facility in
Mountaintop, Pennsylvania for the contract price of $1.3 million. The
Company had owned this facility free of any mortgage or encumbrance.
At the time of sale, the Company received net cash proceeds of $1.1
million (after deduction for settlement expenses). During the second
quarter, the Company recorded gain of $600,000 relative to the
disposal of this asset.
NET INCOME (LOSS)
Income from continuing operations before income taxes and
extraordinary items for the second quarter ended June 30, 1996 was
$1.2 million or $0.11 per share, as compared to a loss of $1.7
million, or $0.15 per share, for the second quarter of 1995. During
the second quarters of 1996 and 1995, unrelated extraordinary items
were recorded, which resulted in a gain in 1996 of $600,000, or $0.05
per share, and loss of $900,000, or $0.08 per share, in 1995.
Further, the Company reversed, during the second quarter of 1995, the
tax benefit of $1.6 million that was recorded in the first quarter of
1995.
Net income for the second quarter of 1996 (which includes $300,000 of
income from the discontinued operations of Patwil Homes) was $2.1
million, or $0.19 per share. For the second quarter of 1995, the
comparable net loss was $4.5 million (excluding the tax provision of
$1.6 million and including the loss of $1.9 million, net of taxes, for
the discontinued operations of Patwil Homes), or $0.42 per share.
For the six months ended June 30, 1996, loss from continuing
operations before income tax and extraordinary items was $3.0 million,
or $0.28 per share, as compared to $5.6 million, or $0.51 per share,
for the same period in 1995. Net loss for the six months ended June
30, 1996 (including $600,000 of income relating to Patwil Homes) was
$1.8 million, or $0.17 per share, as compared to a loss of $9.3
million (including the loss of $2.9 million, net of taxes, relating to
Patwil Homes), or $0.86 per share.
QUARTERLY RESULTS
Income from continuing operations before income taxes and
extraordinary items increased by $2.9 million in the second quarter of
1996, to $1.2 million in 1996 from a loss of $1.7 million in 1995,
primarily from an increase in gross margin of $3.0 million for the
comparable quarters. Total revenue increased by $7.3 million in 1996,
reflecting an increase of $7.8 million in net housing revenue, or
44.8%, offset by a decrease of $500,000 in financial services
revenue. The increase in net housing revenue is principally
attributable to increased first shipments to customers for standard
deliveries, rising to 514 units in 1996 from 411 units in 1995, an
increase of 103 units, or 25.1%. The decrease in financial services
revenue of $500,000 results from the sale of construction loans to a
mortgage financing company and is partially offset by an aggregate
benefit of $400,000 relating to a decrease in interest expense from
the purchase of 12% Senior Notes and an increase in investment income.
13
Gross orders received during the second quarter were 953 as compared
to 678 received in 1995, or an increase of 40.6%. The sustained
increase in order volume activity during the second quarter is the
primary factor contributing to the 35.5% increase in orders in active
processing (1,149 in 1996 versus 848 in 1995). The number of orders
is significantly more than the number of homes eventually shipped
due to order disqualifications during the underwriting process and
customer cancellations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, cash and cash equivalents were $2.0 million as
compared to $2.8 million at December 31, 1995. During the second
quarter of 1996, the Company sold $37.9 million, net face value ($38.9
million gross sales less $1.0 million of repurchased accounts), of
construction loans pursuant to a Construction Loan Purchase and
Servicing Agreement (the "Agreement") with a mortgage financing
company. Net proceeds to the Company, for the three month period,
were $32.6 million, after discounting (at a rate of 1 1/2% over
prime) of $3.2 million and deposits (which remain the property of
the Company) of $2.0 million. For the six months ended June 30,
1996, the Company sold $65.3 million, net face value ($67.4 million
gross sales less $2.1 million of repurchased accounts) of
construction loans pursuant to the Agreement. Net proceeds to the
Company, for the six month period, were $56.7 million, after
discounts of $5.4 million and deposits of $3.2 million. At June 30,
1996, the Company was servicing, on behalf of the mortgage finance
company, approximately $108.4 million face value of previously sold
construction loans.
As a result of write-offs occasioned by the discontinuance of
operations of Patwil Homes and losses incurred by the Company for the
fiscal year ended December 31, 1995, the Company is in violation of
the minimum tangible net worth covenant in the Agreement with the
mortgage finance company. Although a waiver of this violation has not
been obtained, management has had discussions with the mortgage
financing company concerning this issue and believes that the
Agreement can be revised to accommodate the Company's present
financial condition and anticipated operating results. In the
interim, the Company has continued to conduct business in the same
manner as it had prior to the occurrence of the covenant violation and
has received assurance from the mortgage financing company that they
expect to continue to do so. If, however, the mortgage financing
company should stop purchasing construction loans under the Agreement,
which it may have a right to do as a result of the covenant violation,
a serious and immediate working capital shortage would result.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
On April 11, 1996, Herbert L. Getzler, then Vice Chairman of the Board
of Directors and Chief Financial Officer of the Company, borrowed
approximately $608,000 from the Company. This amount was used (i) to
repay approximately $154,000 borrowed from the Company by Mr. Getzler
on December 30, 1994 to pay taxes on restricted common stock of the
Company purchased by him on December 23, 1994 at a discount plus
interest of approximately $20,000 on that amount, (ii) to repay a loan
by the Company to Mr. Getzler of $160,000 made on January 3, 1995 to
meet margin calls on his common stock plus interest on that amount of
approximately $20,000, and (iii) to repay a loan from Mr. Peter R.
DeGeorge, Chairman and Chief Executive Officer of the Company, to Mr.
Getzler of $200,000 made on December 3, 1992 plus interest on that
amount at 7% per annum totaling approximately $52,000.
14
Also, on April 11, 1996, James G. Einloth, Executive Vice President of
Patwil Homes, Inc., borrowed approximately $309,000 from the Company.
This amount was used (i) to repay approximately $106,000 borrowed from
the Company by Mr. Einloth on December 30, 1994 to pay taxes on
restricted common stock of the Company purchased by him on December
23, 1994 at a discount plus interest of approximately $14,000 on that
amount, and (ii) to repay a loan from Mr. DeGeorge to Mr. Einloth of
$150,000 made on December 3, 1992 plus interest on that amount at 7%
per annum totaling approximately $39,000.
These loans will be secured by 303,752 shares of common stock of the
Company, in the case of Mr. Getzler, and 154,727 shares of common
stock of the Company, in the case of Mr. Einloth. The notes are
demand notes and bear interest at the rate of 10% per annum. Interest
accrues and is payable on the date the outstanding principal balance
is paid. These notes are non-recourse to the individuals involved,
except for the stock to be pledged as security. There is no
prepayment penalty on these notes.
On August 1, 1996, Mr. Getzler, Vice Chairman and Chief Financial
Officer of the Company, retired from his day-to-day managerial duties
for personal health reasons. In connection with the retirement of Mr.
Getzler, the Company has agreed to pay to Mr. Getzler $350,000 in
severance, payable in five equal monthly installments, commencing
August 1, 1996. The first of these payments was made, as scheduled,
on August 1, 1996.
NASDAQ LISTING
On May 20, 1996, the Company received a letter from The Nasdaq Stock
Market, Inc. ("Nasdaq") notifying the Company that, based upon the
Company's Form 10-Q report for the quarter ended March 31, 1996, the
Company had fallen below the minimum net tangible assets requirement
of the National Association of Securities Dealers By-Laws and thus was
subject to being delisted. After a presentation by the Company, and
the announcement by the Company of its second quarter profit, Nasdaq
has determined that the Company will be granted an extension of time
to evidence compliance with all criteria for continued listing on the
Nasdaq National Market. The Company has agreed to submit to Nasdaq a
balance sheet and statement of operations as of and for the month
ended July 31, 1996. The Company has also agreed to file with Nasdaq
and the Securities and Exchange Commission, a Form 8-K report (or
other public filing) containing a balance sheet and statement of
operations as of and for the two months ended August 31, 1996, which
the Company believes will evidence compliance with all criteria for
continued listing.
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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 1995 Annual Report on Form 10-K.
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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.
MILES HOMES, INC.
(Registrant)
Dated: August 9, 1996
BY: /s/ ALISON R. C. SOMMERS
------------------------
Alison R. C. Sommers
Principal Financial Officer
BY: /s/ SALVATORE A. BUCCI
----------------------
Salvatore A. Bucci
Chief Accounting Officer
17