1
Exhibit 13
1999 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT: (Year Ended December 31)
Revenue $ 852,445 $ 739,613 $ 614,004 $ 577,192 $ 527,822
Gross margin $ 184,570 $ 151,114 $ 119,341 $ 109,103 $ 95,861
Income before extraordinary loss $ 41,611 $ 27,651 $ 17,437 $ 14,110 $ 9,876
Income per common share before
extraordinary loss:
Basic $ 4.75 $ 3.29 $ 2.15 $ 1.60 $ 1.12
Diluted $ 4.68 $ 3.26 $ 2.14 $ 1.60 $ 1.12
Weighted average common shares outstanding:
Basic 8,761,822 8,392,560 8,108,293 8,800,000 8,800,000
Diluted 8,883,189 8,487,872 8,150,015 8,818,543 8,800,000
Dividends per common share $ 0.20 $ 0.15 -- -- --
BALANCE SHEET: (December 31)
Total assets $ 531,562 $ 427,147 $ 366,020 $ 305,359 $ 281,143
Notes and mortgage notes payable $ 162,075 $ 105,293 $ 113,950 $ 100,345 $ 102,549
Subordinated notes $ 50,000 $ 50,000 $ 50,000 $ 25,000 $ 24,513
Stockholders' equity $ 200,512 $ 166,640 $ 115,506 $ 112,319 $ 99,496
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED QUARTERLY FINANCIAL AND OPERATING DATA
THREE MONTHS ENDED
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
(Dollars in thousands, except per share amounts) 1999 1999 1999 1999
- ---------------------------------------------------------------------------------------------------------------------
New contracts, net 888 819 1,198 1,167
Homes delivered 1,154 1,097 1,001 689
Backlog 2,154 2,420 2,698 2,501
Total revenue $ 255,002 $ 235,106 $ 213,513 $ 148,824
Gross margin $ 53,727 $ 50,307 $ 46,301 $ 34,235
Income before income taxes $ 18,558 $ 20,071 $ 17,475 $ 12,676
Net income $ 1,228 $ 12,143 $ 10,571 $ 7,669
Net income per common share:
Basic $ 1.30 $ 1.38 $ 1.20 $ 0.87
Diluted $ 1.28 $ 1.36 $ 1.18 $ 0.86
Weighted average common shares outstanding:
Basic 8,657,695 8,782,259 8,796,249 8,812,283
Diluted 8,772,940 8,915,592 8,938,142 8,918,866
Dividends per common share $ 0.05 $ 0.05 $ 0.05 $ 0.05
Three Months Ended
- ---------------------------------------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share amounts) 1998 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
New contracts, net 998 926 1,039 1,145
Homes delivered 1,136 1,008 876 609
Backlog 2,023 2,161 2,243 2,080
Total revenue $ 237,983 $ 208,794 $ 175,606 $ 117,230
Gross margin $ 47,555 $ 42,301 $ 35,299 $ 25,959
Income before income taxes $ 14,072 $ 13,760 $ 11,218 $ 7,503
Net income $ 8,315 $ 8,210 $ 6,625 $ 4,501
Net income per common share:
Basic $ 0.94 $ 0.93 $ 0.80 $ 0.59
Diluted $ 0.93 $ 0.92 $ 0.79 $ 0.58
Weighted average common shares outstanding:
Basic 8,813,061 8,812,102 8,323,049 7,604,132
Diluted 8,905,545 8,909,013 8,419,804 7,698,571
Dividends per common share $ 0.05 $ 0.05 $ 0.05 --
20
2
1999 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Segment Information
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Our reportable segments are strategic business units that offer different
products and services. The business segments are defined as homebuilding and
financial services. The homebuilding operations include the construction and
sale of single-family attached and detached homes and the development and sale
of land. The homebuilding segment includes similar operations in several
geographic regions which have been aggregated for segment reporting purposes.
The financial services operations include the origination of mortgage loans,
primarily for purchasers of our homes, and title services. The loans and the
majority of the servicing rights are sold to outside mortgage lenders.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment revenue represents
the elimination of revenue included in financial services revenue for fees paid
by the homebuilding operations to lock in interest rates. Fees paid by the
homebuilding segment to the financial services segment were at market prices for
the services provided. Unallocated income includes interest from other segments.
Unallocated expenses include salaries and other administrative expenses which
are not identifiable with a specific segment. Unallocated assets consist
primarily of cash, deferred taxes and other assets not associated with a
specific business segment.
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Revenue:
Homebuilding $ 839,689 $ 729,103 $ 607,812
Financial services 17,290 14,609 10,627
Intersegment (4,534) (4,099) (4,435)
- -----------------------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 852,445 $ 739,613 $ 614,004
=================================================================================================================
Depreciation and Amortization:
Homebuilding $ 1,487 $ 999 $ 857
Financial services 106 77 117
Unallocated amounts 645 685 649
- -----------------------------------------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $ 2,238 $ 1,761 $ 1,623
=================================================================================================================
Interest Expense:
Homebuilding $ 14,221 $ 12,744 $ 11,583
Financial services 179 384 159
Unallocated amounts - - -
- -----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 14,400 $ 13,128 $ 11,742
=================================================================================================================
Income Before Income Taxes:
Homebuilding $ 51,006 $ 36,523 $ 23,947
Financial services 10,459 8,209 5,494
Unallocated amounts 7,315 1,821 (19)
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TOTAL INCOME BEFORE INCOME TAXES $ 68,780 $ 46,553 $ 29,422
=================================================================================================================
Income Taxes:
Homebuilding $ 20,388 $ 15,354 $ 10,097
Financial services 3,857 2,782 1,896
Unallocated amounts 2,924 766 (8)
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TOTAL INCOME TAXES $ 27,169 $ 18,902 $ 11,985
=================================================================================================================
Assets:
Homebuilding $ 477,271 $ 362,362 $ 301,269
Financial services 38,945 42,132 44,223
Unallocated amounts 15,346 22,653 20,528
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TOTAL ASSETS $ 531,562 $ 427,147 $ 366,020
=================================================================================================================
Capital Expenditures:
Homebuilding $ 1,142 $ 967 $ 7,723
Financial services 208 82 180
Unallocated amounts 175 183 605
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TOTAL CAPITAL EXPENDITURES $ 1,525 $ 1,232 $ 8,508
=================================================================================================================
21
3
1999 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
CONSOLIDATED
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
TOTAL REVENUE. Total revenue for 1999 was $852.4 million, another
record and an increase of $112.8 million over 1998. The overall increase was the
result of an increase of $110.6 million in homebuilding revenue and a $2.7
million increase in financial services revenue. The increase in homebuilding was
the result of growth of $117.5 million in housing revenue offset by a $6.9
million decline in land revenue. Housing increased as a result of an 8.6%
increase in the number of Homes Delivered and a 7.4% increase in the average
sales price of Homes Delivered in comparison to 1998. The decrease in land
revenue was primarily due to a decrease in lot sales to outside homebuilders in
the Washington, D.C. market. The increase of $2.7 million in financial services
revenue occurred as a result of increases in the number of loans originated, the
average loan amount and revenue earned from the sale of loans.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $22.2
million over 1998. The increase related to homebuilding and financial services,
for which income before income taxes increased by $14.5 million and $2.3
million, respectively. The increase in homebuilding was due to an increase in
the number and average sales price of Homes Delivered. In addition, housing
gross margin increased from 19.3% in 1998 to 20.2% in 1999. The increase in
income before income taxes for financial services was primarily the result of a
significant increase in income from the sale of loans due to increases in loan
volume and the average loan amount, and the favorable interest rate environment
during the last part of 1998 and early 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUE. Total revenue for 1998 of $739.6 million represented an
increase of $125.6 million over 1997. Increases in housing revenue of $127.4
million and other revenue of $3.1 million were partially offset by a $4.9
million decrease in land revenue. The increase in housing revenue was
attributable to a 15.1% increase in the number of Homes Delivered and a 6.0%
increase in the average sales price of Homes Delivered. The increase in other
revenue is primarily attributable to financial services in which both the number
of loans originated and the revenue earned from the sale of loans increased in
the current year. The decrease in land revenue was primarily due to less
expensive lots being sold to third parties in the Washington, D.C. market.
INCOME BEFORE INCOME TAXES. Income before income taxes for 1998
increased 58.2% over 1997. The increase related primarily to homebuilding, which
increased from $23.9 million to $36.5 million and financial services, which
increased from $5.5 million to $8.2 million. The increase in housing was due to
the increase in the number of Homes Delivered and an increase in gross margin.
Housing gross margin increased from 18.0% in 1997 to 19.3% in 1998. The increase
in financial services was primarily due to the significant increase in income
from the sale of loans due to increased loan volume and the favorable interest
rate environment during 1997 and throughout 1998.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
We have experienced, and expect to continue to experience, significant
seasonality and quarter-to-quarter variability in homebuilding activity levels.
In general, Homes Delivered increase substantially in the third and fourth
quarters. We believe that this seasonality reflects the tendency of home buyers
to shop for a new home in the spring with the goal of closing in the fall or
winter, as well as the scheduling of construction to accommodate seasonal
weather conditions. The following tables reflect this cycle for the Company
during the four quarters of 1999 and 1998:
THREE MONTHS ENDED
-----------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
(Dollars in thousands) 1999 1999 1999 1999
- -------------------------------------------------------------------------
Total revenue $255,002 $235,106 $213,513 $148,824
Unit data:
New contracts, net 888 819 1,198 1,167
Homes delivered 1,154 1,097 1,001 689
Backlog at end of
period 2,154 2,420 2,698 2,501
Three Months Ended
-----------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
(Dollars in thousands) 1998 1998 1998 1998
- --------------------------------------------------------------------------
Total revenue $237,983 $208,794 $175,606 $117,230
Unit data:
New contracts, net 998 926 1,039 1,145
Homes delivered 1,136 1,008 876 609
Backlog at end of
period 2,023 2,161 2,243 2,080
- --------------------------------------------------------------------------
22
4
1999 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
HOMEBUILDING SEGMENT
The following table sets forth certain information related to our homebuilding
segment:
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------
Revenue:
Housing sales $823,159 $705,620 $578,185
Lot and land sales 14,959 21,873 26,814
Other income 1,571 1,610 2,813
- -----------------------------------------------------------------------
Total revenue $839,689 $729,103 $607,812
- -----------------------------------------------------------------------
Revenue:
Housing sales 98.0% 96.9% 95.4%
Lot and land sales 1.8 3.0 4.4
Other income 0.2 0.1 0.2
- -----------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
Land and housing costs 80.5 81.7 82.1
- -----------------------------------------------------------------------
Gross Margin 19.5 18.3 17.9
General and administrative
expenses 2.9 3.0 3.1
Selling expenses 6.4 6.5 6.6
- -----------------------------------------------------------------------
Operating Income 10.2 8.8 8.2
Allocated expenses 4.1 3.8 4.2
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Income Before Income Taxes 6.1% 5.0% 4.0%
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MIDWEST REGION
Unit data:
New contracts, net 2,523 2,524 2,059
Homes delivered 2,454 2,259 1,910
Backlog at end of period 1,391 1,322 1,057
Average sales price of
homes in Backlog $ 192 $ 183 $ 178
Aggregate sales value of
homes in Backlog $267,000 $242,000 $188,000
Number of active subdivisions 73 73 75
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FLORIDA REGION
Unit data:
New contracts, net 696 730 700
Homes delivered 662 652 666
Backlog at end of period 367 333 255
Average sales price of
homes in Backlog $ 214 $ 196 $ 188
Aggregate sales value of
homes in Backlog $ 78,000 $ 65,000 $ 48,000
Number of active subdivisions 24 27 30
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NORTH CAROLINA, VIRGINIA AND
MARYLAND, AND ARIZONA REGION
Unit data:
New contracts, net 853 854 600
Homes delivered 825 718 576
Backlog at end of period 396 368 232
Average sales price of
homes in Backlog $ 365 $ 359 $ 303
Aggregate sales value of
homes in Backlog $145,000 $132,000 $ 70,000
Number of active subdivisions 38 40 35
- -----------------------------------------------------------------------
TOTAL
Unit data:
New contracts, net 4,072 4,108 3,359
Homes delivered 3,941 3,629 3,152
Backlog at end of period 2,154 2,023 1,544
Average sales price of
homes in Backlog $ 228 $ 217 $ 198
Aggregate sales value of
homes in Backlog $490,000 $439,000 $306,000
Number of active subdivisions 135 140 140
- -----------------------------------------------------------------------
A home is included in "New Contracts" when our standard sales contract is
executed. "Homes Delivered" represents homes for which the closing of the sale
has occurred and title has transferred to the buyer.
"Backlog" represents homes for which the standard sales contract has been
executed, but which are not included in Homes Delivered because closings for
these homes have not yet occurred as of the end of the period specified. Most
cancellations of contracts for homes in Backlog occur because customers cannot
qualify for financing and usually occur prior to the start of construction.
Since we arrange financing with guaranteed rates for many of our customers, the
incidence of cancellations after the start of construction is low. The
cancellation rate of homes in backlog at December 31, 1998, 1997 and 1996 was
11.1%, 12.8% and 14.1%, respectively. Unsold speculative homes, which are in
various stages of construction, totaled 135, 159 and 158 at December 31, 1999,
1998 and 1997, respectively.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
TOTAL REVENUE. Total revenue for the homebuilding segment was $839.7, an
increase of $110.6 from 1998 to 1999. This increase was due to a 16.7% increase
in housing revenue offset by a 31.6% decrease in land revenue. The increase in
housing revenue was partially due to an increase of 8.6% in the number of Homes
Delivered. Homes Delivered increased in the majority of our markets, but most
significantly in Charlotte, Indianapolis, Phoenix and Tampa. Housing also
experienced an increase of 7.4% in the average sales price of Homes Delivered.
This increase occurred in the majority of our markets due to product mix and
higher land and regulatory costs which were passed on to the home buyer. The
Phoenix market had a significant affect on the increase due to both increased
closings and a substantially higher average sales price. The decrease in land
revenue of $6.9 million was primarily attributable to the Washington, D.C.
market, where both the Virginia and Maryland divisions had decreases in lot
sales to outside homebuilders in comparison to 1998.
HOME SALES AND BACKLOG. New Contracts recorded in 1999 were slightly
lower than the prior year. New Contracts recorded were lower in all of our
regions. New Contracts recorded in January 2000 were 11.8% lower than New
Contracts recorded in January 1999; however, it was the third best January in
our history. We believe the decrease overall was mainly attributable to an
increase in sales prices, as a result of increased material and labor costs, and
three increases in the prime lending rate during the third and fourth quarters
of 1999. The number of New Contracts recorded in future periods will be
dependent on numerous factors, including future economic conditions, timing of
land development, consumer confidence, number of subdivisions and interest rates
available to potential home buyers.
23
5
1999 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
At December 31, 1999, the total sales value of the Company's Backlog of
2,154 homes was approximately $490.0 million, representing an 11.6% increase in
sales value and a 6.5% increase in units over the levels reported at December
31, 1998. The average sales price of homes in Backlog increased 5.1% from
December 31, 1998 to December 31, 1999. This increase was primarily due to
increases in markets where we are building in more upscale and certain niche
subdivisions.
GROSS MARGIN. The gross margin for the homebuilding segment was 19.5% for
1999, an increase of 1.2% over 1998. The increase consisted of an increase in
gross margin from housing sales of 0.9% and an increase in gross margin from
land and lot sales of 14.4%. The increase in housing gross margin is
attributable to favorable market conditions and management's continued focus on
maintaining accurate, up-to-date costing information so that sales prices can be
set to achieve the desired margins. The increase was also due to an increase in
internally developed land. The increase in land and lot sales gross margin was
due to the sale of land in Maryland at an unusually high margin. Lot and land
gross margins can vary significantly depending on the sales price, the cost of
the subdivision and the stage of development in which the sale takes place.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $21.9 million or 3.0% of total revenue for 1998 to $24.3 million
or 2.9% of total revenue for 1999. While the percentage remained fairly
constant, the increase in expense was primarily attributable to the increase in
payroll and related costs required to support the growth in income and
operations.
SELLING EXPENSES. Selling expenses increased from $47.1 million or 6.5%
in 1998 to $53.4 million or 6.4% in 1999. While the percentage remained
relatively stable, the increase in expense was due to the increases in sales
commissions paid to outside Realtors and internal salespeople as a result of the
increase in Homes Delivered.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUE. Total revenue for the homebuilding segment for 1998 was
$729.1 million, a 20.0% increase over 1997. This increase was due to a 22.0%
increase in housing revenue and was offset by an 18.4% decrease in land revenue.
The increase in housing revenue was partially due to a 15.1% increase in the
number of Homes Delivered. Homes Delivered were higher in all of our markets
with the exception of Orlando and Charlotte. The increase in housing revenue was
also due to a 6.0% increase in the average sales price of Homes Delivered. The
average sales price of Homes Delivered increased in nearly all of our markets
due to product mix and higher land and regulatory costs which have generally
been passed on to the home buyer. The decrease in land revenue from $26.8
million to $21.9 million was primarily attributable to the Washington, D.C.
market. The Maryland division sold less expensive lots to outside homebuilders
in 1998.
HOME SALES AND BACKLOG. New Contracts recorded in 1998 were 22.3% higher
than the prior year. New Contracts recorded were higher in nearly all of our
markets. We believe the increase in New Contracts was partially due to favorable
market conditions and low interest rates.
At December 31, 1998, the total sales value of our Backlog of 2,023 homes
was approximately $439.0 million, representing a 43.5% increase in sales value
and a 31.0% increase in units over the levels reported at December 31, 1997. The
increase in units is a result of record high new contracts recorded in 1998. The
average sales price of homes in Backlog increased 9.6% from December 31, 1997 to
December 31, 1998. This increase was primarily due to increases in markets where
we are building in more upscale and certain niche subdivisions.
GROSS MARGIN. The overall gross margin for the homebuilding segment was
18.3% for 1998 and 17.9% for 1997. The gross margin from housing sales was 19.3%
in 1998 compared to 18.0% in 1997. The gross margin from lot and land sales
decreased from 22.9% to 14.4%. The increase in margin is attributable to
favorable market conditions and Management's continued focus on maintaining
accurate, up-to-date costing information so that sales prices can be set to
achieve the desired margins. We have also focused on acquiring or developing
lots in premier locations to obtain higher margins. The decrease in gross margin
from lot and land sales was primarily due to the Washington, D.C. market. The
Maryland and Virginia divisions had significant lot sales to outside
homebuilders in 1997 at very high margins which did not occur in 1998. Lot and
land gross margins can vary significantly depending on the sales price, the cost
of the subdivision and the phase in which the sale takes place.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $18.6 million for 1997 to $21.9 million for 1998. However,
general and administrative expenses as a percentage of total revenue decreased
from 3.1% from 1997 to 3.0% for 1998. The increase in expense was primarily
attributable to an increase in real estate taxes and incentive compensation.
Real estate taxes increased in 1998 as our investment in land development
activities increased over prior year balances. More incentive compensation was
recorded in 1998 compared to 1997 due to the increase in net income.
SELLING EXPENSES. Selling expenses increased from $40.1 million for 1997
to $47.1 million for 1998. However, selling expenses as a percentage of total
revenue decreased from 6.6% for 1997 to 6.5% for 1998. The increase in expense
was primarily due to increases in sales commissions
24
6
1999 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
paid to outside Realtors and internal salespeople as a result of the increase in
sales volume. There were also increases in advertising, model and sales
incentive compensation expenses.
FINANCIAL SERVICES SEGMENT
The following table sets forth certain information related to our financial
services segment:
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
===========================================================
Number of loans
originated 3,102 2,958 2,395
Revenue:
Loan origination fees $ 4,633 $ 3,931 $ 3,212
Sale of loans 7,331 6,256 4,522
Other 5,326 4,422 2,893
===========================================================
Total Revenue 17,290 14,609 10,627
- -----------------------------------------------------------
General & administrative
expenses 6,831 6,400 5,133
- -----------------------------------------------------------
Operating Income $10,459 $ 8,209 $ 5,494
- -----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
TOTAL REVENUE. Total revenue for the year ended December 31, 1999 was
$17.3 million, an 18.4% increase over the $14.6 million recorded for 1998. Loan
origination fees increased 17.9% from 1998 to 1999. The increase was due to a
4.9% increase in the number of loans originated during 1999 compared to 1998,
along with an increase in the average loan amount. At December 31, 1999, M/I
Financial was operating in eight of our eleven markets. Of these eight markets,
88% of our Homes Delivered were financed through M/I Financial.
Revenue from the sale of loans increased 17.2% to $7.3 million in 1999.
The increase was primarily due to more mortgages originated during 1999 as
compared to 1998. We also continued to concentrate on the securitization of
loans with FNMA and FHLMC. The increase was also due to more favorable terms
negotiated with investors, resulting in an increase in servicing release
premiums. The increase was also caused by favorable market conditions during the
last part of 1998 and early part of 1999. M/I Financial uses hedging methods
whereby it has the option, but is not required, to complete the hedging
transaction.
Revenue from other sources increased 20.4% from 1998 to 1999. This
increase was primarily due to increased earnings from title services as a result
of increased closings. Additionally, we expanded into the Washington, D.C. title
agency market in early 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 1999 were $6.8 million, a 6.7% increase over
1998. This was mainly due to an increase in general expenses to support the
growth related to origination and title services.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUE. Total revenue for 1998 was $14.6 million, a 37.5% increase
over the $10.6 million recorded for 1997. Loan origination fees increased 22.4%
from 1997 to 1998. This increase was due to a 23.5% increase in the number of
loans originated during 1998 over 1997, along with an increase in the average
loan amount. At December 31, 1998, M/I Financial was operating in eight of our
eleven markets. Of these eight markets, 90% of our Homes Delivered were financed
through M/I Financial.
Revenue from the sale of loans increased 38.3% to $6.3 million in 1998.
The increase was primarily due to a 23.5% increase in mortgages originated in
1998 over 1997, favorable market conditions during the second, third and fourth
quarters of 1998 and the continued shift toward fixed rate loans. We also
concentrated on the securitization of loans with FNMA and FHLMC. More favorable
terms negotiated with investors resulted in an increase in servicing release
premiums. The increase in marketing and service fees was also due to an increase
in average loan amounts.
Revenue from other sources increased 52.8% from 1997 to 1998. This
increase was primarily due to earnings from our interest in a limited liability
company that provides title services and expanded into Florida late in 1997.
Revenue from other sources also increased because of an increase in loan
application fees received in 1998 compared to 1997. There were 616 more
applications taken in 1998 compared to 1997. Interest income increased due to
more mortgages originated in 1998 compared to 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for 1998 were $6.4 million, a 24.7% increase over 1997. Loan application
expenses increased due to 616 more loan applications taken during 1998. Bank
interest expense increased due to an increase in mortgages originated. Incentive
compensation increased due to a significant increase in net income. General and
administrative expenses also increased because of expenses related to the
expansion of title services into Florida late in 1997 compared to the full year
of 1998.
OTHER OPERATING RESULTS
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses increased to $17.5 million in 1999 from $16.4 million in
1998. However, as a percentage of total revenue, general and administrative
expenses decreased from 2.2% to 2.1%. The increase in expense was primarily
attributable to an increase in incentive
25
7
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
Management's Discussion & Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
compensation and charitable contributions expensed in 1999 due to the
significant increase in net income.
Corporate general and administrative expenses increased to $16.4 million
in 1998 from $14.5 million in 1997. However, as a percentage of total revenue,
general and administrative expenses for 1998 and 1997 decreased from 2.4% to
2.2%. The increase in expense was primarily attributable to an increase in
incentive compensation, profit sharing and charitable contributions in 1998 due
to the significant increase in net income.
INTEREST EXPENSE. Homebuilding interest expense for 1999 increased to
$14.2 million from $12.7 million in 1998. Interest expense was higher in 1998
due to an increase in the average borrowings outstanding which increased due to
a significant increase in our backlog and land inventories. This was partially
offset by a decrease in the weighted average interest rate and an increase in
capitalized interest. Capitalized interest increased due to a significant
increase in land under development.
Homebuilding interest expense for 1998 increased to $12.7 million from
$11.6 million in 1997. Interest expense was higher in the current year due to an
increase in the average borrowings outstanding which increased due to a
significant increase in our backlog and land inventories. Also, in 1998, we
experienced less of an increase in capitalized interest than in 1997 as a result
of an increase in the proportion of raw land and developed lots to total
inventory on which we do not capitalize interest.
INCOME TAXES. The effective tax rate decreased from 40.6% to 39.5% from
1998 to 1999. The decrease is primarily attributed to lower state taxes in 1999.
The effective tax rate decreased slightly from 40.7% to 40.6% from 1997
to 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our financing needs depend upon our sales volume, asset turnover, land
acquisition and inventory balances. We have incurred substantial indebtedness,
and may incur substantial indebtedness in the future, to fund the growth of our
homebuilding activities. Our principal source of funds for construction and
development activities has been from internally generated cash and from bank
borrowings, which are primarily unsecured.
NOTES PAYABLE BANKS. At December 31, 1999, we had bank borrowings
outstanding of $132.0 million under our Bank Credit Facility. The Bank Credit
Facility permits aggregate borrowings, other than for the issuance of letters of
credit, not to exceed the lesser of: (i) $250.0 million and (ii) our borrowing
base. Under the terms of the Bank Credit Facility, the banks will determine
annually whether or not to extend the maturity date of the commitments by one
year. In 1999, the banks did not extend the maturity date. The Bank Credit
Facility matures September 30, 2003, at which time the unpaid balance of the
revolving credit loans outstanding will be due and payable.
An additional $15.4 million was outstanding as of December 31, 1999 under
the M/I Financial loan agreement, which permits borrowings of $30.0 million to
finance mortgage loans initially funded by M/I Financial for our customers and a
limited amount for loans to others. The Company and M/I Financial are
co-borrowers under the M/I Financial loan agreement. This agreement limits the
borrowings to 95% of the aggregate face amount of certain qualified mortgages.
The agreement terminates on June 22, 2001, at which time the unpaid balance is
due.
At December 31, 1999, we had the right to borrow up to $280.0 million
under our credit facilities, including $30.0 million under the M/I Financial
loan agreements. At December 31, 1999, we had $132.6 million of unused borrowing
availability under our loan agreements. We also had approximately $48.5 million
of completion bonds and letters of credit outstanding at December 31, 1999.
SUBORDINATED NOTES. At December 31, 1999, there was outstanding $50.0
million of Senior Subordinated Notes. The notes bear interest at a fixed rate of
9.51% and mature August 29, 2004.
LAND AND LAND DEVELOPMENT. Over the past several years, our land
development activities and land holdings have increased significantly.
Single-family lots, land and land development costs increased 49.5% from
December 31, 1998 to December 31, 1999. This increase was primarily due to the
shortage of qualified land developers in certain markets. Additionally, we
developed more land due to the competitive advantages that can be achieved by
developing land internally rather than purchasing lots from developers or
competing homebuilders. We continue to purchase some lots from outside
developers under option contracts, when possible; however, we will continue to
evaluate all of our alternatives to satisfy our increasing demand for lots in
the most cost effective manner.
The $62.0 million increase in notes payable banks - homebuilding
operations from December 31, 1998 to December 31, 1999 reflects increased
borrowings primarily attributable to increases in houses under construction and
single-family lots, land and land development costs. Houses under construction
increased $26.3 million from December 31, 1998 to December 31, 1999, and
single-family lots, land and land development costs increased $84.3 million.
Borrowing needs may continue to increase as we invest in land under development
and developed lots, depending upon the market and competition.
At December 31, 1999, mortgage notes payable outstanding were $14.7
million, secured by an office building, lots and land with a recorded book value
of $21.6 million.
26
8
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
Management's Discussion & Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
PURCHASE OF TREASURY SHARES. On February 16 and December 15, 1999, our
Board of Directors approved the repurchase of up to 1,000,000 shares of
outstanding common stock. On February 15, 2000, our Board of Directors
authorized the repurchase of up to 2,000,000 shares, replacing the existing
repurchase programs. The purchases may occur in the open market and/or in
privately negotiated transactions as market conditions warrant. As of December
31, 1999 we had purchased 509,000 shares at an average price of $14.59.
IMPACT OF NEW ACCOUNTING STANDARDS. In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." In June 1999, FASB issued Statement of Financial Accounting
Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS 137
deferred the adoption of SFAS 133 until our 2001 annual financial statements. We
have not yet determined what, if any, impact the adoption of this standard will
have on our consolidated financial statements.
YEAR 2000 COMPLIANCE. During 1999, we successfully upgraded our computer
system and software to be Year 2000 compliant. The cost to upgrade was
immaterial. We experienced no material problems with our systems or significant
customers, regulatory agencies or suppliers related to the Year 2000.
INTEREST RATES AND INFLATION
Our business is significantly affected by general economic conditions of
the United States and, particularly, by the impact of interest rates. Higher
interest rates may decrease the potential market by making it more difficult for
home buyers to qualify for mortgages or to obtain mortgages at interest rates
that are acceptable to them. Increases in interest rates also would increase our
interest expense as the rate on the revolving loans is based upon floating rates
of interest. The weighted average interest rate on our outstanding debt was 8.2%
for 1999 and 8.5% for 1998 and 1997.
In conjunction with our mortgage banking operations, we use hedging
methods to reduce our exposure to interest rate fluctuations between the
commitment date of the loan and the time the loan closes.
In recent years, we generally have been able to raise prices by amounts
at least equal to our cost increases and, accordingly, have not experienced any
detrimental effect from inflation. Where we develop lots for our own use,
inflation may increase our profits because land costs are fixed well in advance
of sales efforts. We are generally able to maintain costs with subcontractors
from the date a home is started to the date of close. However, in certain
situations, unanticipated costs may occur between the time of start and the time
a home is constructed, resulting in lower gross profit margins.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We wish to take advantage of the safe harbor provisions included in the
Private Securities Litigation Reform Act of 1995. Accordingly, in addition to
historical information, this Management's Discussion & Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements,
including, but not limited to, statements regarding our future financial
performance and financial condition. These statements involve a number of risks
and uncertainties. Any forward-looking statements that we make herein and in
future reports and statements are not guarantees of future performance, and
actual results may differ materially from those in such forward-looking
statements as a result of various factors including, but not limited to, those
referred to below.
GENERAL REAL ESTATE, ECONOMIC AND OTHER CONDITIONS. The homebuilding
industry is significantly affected by changes in national and local economic and
other conditions. Many of these conditions are beyond our control. These
conditions include employment levels, changing demographics, availability of
financing, consumer confidence and housing demand. In addition, homebuilders are
subject to risks related to competitive overbuilding, availability and cost of
building lots, availability of materials and labor, adverse weather conditions
which can cause delays in construction schedules, cost overruns, changes in
government regulations and increases in real estate taxes and other local
government fees. Interest rate increases also adversely affect the industry as
it is impossible to predict whether rates will be at levels that are attractive
to prospective home buyers. The prime lending rate increased three times in the
third and fourth quarters of 1999. This caused mortgage interest rates to
increase, and we believe as a result, sales have decreased. If mortgage interest
rates continue to increase, our business could be adversely affected.
LAND DEVELOPMENT ACTIVITIES. We develop the lots for a majority of our
subdivisions. Therefore, our short- and long-term financial success will be
dependent on our ability to develop these subdivisions successfully. Acquiring
land and committing the financial and managerial resources to develop a
subdivision involves significant risks. Before a subdivision generates any
revenue, we must make material expenditures for items such as acquiring land and
constructing subdivision infrastructure (such as roads and utilities).
THE COMPANY'S MARKETS. We have operations in Columbus and Cincinnati,
Ohio; Indianapolis, Indiana;
27
9
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
Management's Discussion & Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North
Carolina; the Virginia and Maryland suburbs of Washington, D.C.; and Phoenix,
Arizona. Adverse general economic conditions in these markets could have a
material adverse impact on our operations. In 1999, approximately 40% of our
housing revenue and a significant portion of our operating income were derived
from operations in the Columbus market.
COMPETITION. The homebuilding industry is highly competitive. We compete
in each of our local market areas with numerous national, regional and local
homebuilders, some of which have greater financial, marketing, land acquisition,
and sales resources than we do. Builders of new homes compete not only for home
buyers, but also for desirable properties, financing, raw materials and skilled
subcontractors. We also compete with the resale market for existing homes which
provides certain attractions for home buyers over building a new home.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONSIDERATIONS. The
homebuilding industry is subject to increasing local, state and Federal
statutes, ordinances, rules and regulations concerning zoning, resource
protection (preservation of woodlands and hillside areas), building design, and
construction and similar matters, including local regulations which impose
restrictive zoning and density requirements in order to limit the number of
homes that can eventually be built within the boundaries of a particular
location. Such regulation affects construction activities, including
construction materials which must be used in certain aspects of building design,
as well as sales activities and other dealings with home buyers. We must also
obtain licenses, permits and approvals from various governmental agencies for
our development activities, the granting of which are beyond our control.
Furthermore, increasingly stringent requirements may be imposed on homebuilders
and developers in the future. Although we cannot predict the impact on us of
compliance with any such requirements, such requirements could result in time
consuming and expensive compliance programs.
We are also subject to a variety of local, state and Federal statutes,
ordinances, rules and regulations concerning the protection of health and the
environment. The particular environmental laws, which apply to any given
project, vary greatly according to the project site and the present and former
uses of the property. These environmental laws may result in delays, cause us to
incur substantial compliance costs (including substantial expenditures for
pollution and water quality control) and prohibit or severely restrict
development in certain environmentally sensitive regions. Although there can be
no assurance that we will be successful in all cases, we have a general practice
of requiring an environmental audit and resolution of environmental issues prior
to purchasing land in an effort to avoid major environmental issues in our
developments.
In addition, we have been, and in the future may be, subject to periodic
delays or may be precluded from developing certain projects due to building
moratoriums. These moratoriums generally relate to insufficient water supplies
or sewage facilities, delays in utility hook-ups or inadequate road capacity
within the specific market area or subdivision. These moratoriums can occur
prior to, or subsequent to, commencement of our operations without notice or
recourse.
RISK OF MATERIAL AND LABOR SHORTAGES. The residential construction
industry has, from time to time, experienced significant material and labor
shortages in insulation, drywall, brick, cement and certain areas of carpentry
and framing, as well as fluctuations in lumber prices and supplies. In 1999, we
experienced shortages in certain areas such as drywall and brick material, along
with framing and plumbing labor. Continued shortages in these areas could delay
construction of homes which could adversely affect our business; however, at
this time, we do not anticipate a material effect for fiscal year 2000.
SIGNIFICANT VOTING CONTROL BY PRINCIPAL SHAREHOLDERS. As of December 31,
1999, members of the Irving E. Schottenstein family owned approximately 34% of
our outstanding common shares. Therefore, members of the Irving E. Schottenstein
family have significant voting power.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our primary
market risk results from fluctuations in interest rates. We are exposed to
interest rate risk through the borrowings under our unsecured revolving credit
facilities which permit borrowings up to $280.0 million. To minimize the effect
of the interest rate fluctuation, we have three interest rate swap arrangements
with certain banks for a total notional amount of $75.0 million. Under these
agreements we pay a fixed rate of 5.10% on $25.0 million and 6.25% on $50.0
million.
Assuming a hypothetical 10% change in short-term interest rates, interest
expense would not change significantly, as the interest rate swap agreements
would partially offset the impact.
Additionally, M/I Financial offers fixed and adjustable rate mortgage
loans to buyers of our homes. The loans are granted at current market interest
rates which are guaranteed from the loan lock date through the transfer of the
title of the home to the buyer. M/I Financial hedges its interest rate risk
using optional and mandatory forward sales to hedge risk from the loan lock date
generally to the date a loan is closed. At December 31, 1999, the notional
principal amount under these forward sales agreements was approximately $106.0
million and the related fair value of these agreements was approximately $1.2
million. The hedging agreements outstanding at December 31, 1999 mature within
90-120 days. Gains or losses on these agreements are recognized at the time the
loan is sold.
28
10
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of
M/I Schottenstein Homes, Inc.:
We have audited the accompanying consolidated balance sheets of M/I
Schottenstein Homes, Inc. and its subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of M/I Schottenstein Homes, Inc.
and its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Columbus, Ohio
February 23, 2000
29
11
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Year Ended December 31,
(Dollars in thousands, except per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Revenue $ 852,445 $ 739,613 $ 614,004
- ---------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 667,875 588,499 494,663
General and administrative 48,430 44,254 38,092
Selling 52,960 47,179 40,085
Interest 14,400 13,128 11,742
- ---------------------------------------------------------------------------------------------------------------
Total costs and expenses 783,665 693,060 584,582
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 68,780 46,553 29,422
- ---------------------------------------------------------------------------------------------------------------
Income taxes (credit):
Current 26,520 18,328 14,172
Deferred 649 574 (2,187)
- ---------------------------------------------------------------------------------------------------------------
Total income taxes 27,169 18,902 11,985
- ---------------------------------------------------------------------------------------------------------------
Net income $ 41,611 $ 27,651 $ 17,437
- ---------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic $ 4.75 $ 3.29 $ 2.15
Diluted $ 4.68 $ 3.26 $ 2.14
Weighted average shares outstanding (in thousands):
Basic 8,762 8,393 8,108
Diluted 8,883 8,488 8,150
- ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
30
12
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
December 31,
(Dollars in thousands, except par values) 1999 1998
- -------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 5,665 $ 10,068
Cash held in escrow 828 870
Receivables 39,988 42,361
Inventories:
Single-family lots, land and land development costs 254,385 170,115
Houses under construction 163,266 136,965
Model homes and furnishings - at cost (less accumulated
depreciation: 1999 - $41; 1998 - $45) 12,349 15,054
Land purchase deposits 2,702 1,366
Building, office furnishings, transportation and
construction equipment - at cost (less accumulated
depreciation: 1999 - $5,733; 1998 - $4,962) 19,368 20,015
Investment in unconsolidated joint ventures and
limited liability companies 20,238 17,850
Other assets 12,773 12,483
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 531,562 $ 427,147
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable banks - homebuilding operations $ 132,000 $ 70,000
Note payable bank - financial services operations 15,400 23,500
Mortgage notes payable 14,675 11,793
Senior subordinated notes 50,000 50,000
Accounts payable 63,198 51,364
Accrued compensation 18,244 18,131
Accrued interest, warranty and other 23,827 23,810
Customer deposits 13,706 11,909
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 331,050 260,507
- -------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value; authorized -
2,000,000 shares; none outstanding -- --
Common stock - $.01 par value; authorized 38,000,000
shares; issued - 8,813,061 shares 88 88
Additional paid-in capital 62,282 61,067
Retained earnings 145,337 105,485
Treasury stock - at cost - 496,221 shares
at December 31, 1999 (7,195) --
- -------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 200,512 166,640
- -------------------------------------------------------------------------------------------------------------
TOTAL $ 531,562 $ 427,147
- -------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
31
13
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Common Stock
------------------------ Additional
Shares Paid-in Retained Treasury
(Dollars in thousands, except per share amounts) Outstanding Amount Capital Earnings Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,800,000 $ 88 $ 50,573 $ 61,658 --
Net income -- -- -- 17,437 --
Purchase of treasury shares (1,202,439) -- -- -- $ (14,250)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,597,561 88 50,573 79,095 (14,250)
Net income -- -- -- 27,651 --
Dividends to stockholders, $0.15 per
common share -- -- -- (1,261) --
Sale of treasury shares, net
of expenses 1,200,000 -- 10,338 -- 14,221
Retirement of treasury shares (2,439 shares) -- -- (29) -- 29
Stock options exercised 15,500 -- 185 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 8,813,061 88 61,067 105,485 --
Net income -- -- -- 41,611 --
Dividends to stockholders, $0.20 per
common share -- -- -- (1,759) --
Purchase of treasury shares (509,000) -- -- -- (7,429)
Stock options exercised 12,100 -- (78) -- 221
Deferred stock awards -- -- 1,291 -- --
Stock awards issued 679 -- 2 -- 13
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 8,316,840 $ 88 $ 62,282 $ 145,337 $ (7,195)
===================================================================================================================================
See Notes to Consolidated Financial Statements.
32
14
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,611 $ 27,651 $ 17,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from property disposals 103 126 128
Depreciation and amortization 2,238 1,761 1,623
Deferred income taxes (credit) 649 306 (2,187)
Decrease (increase) in cash held in escrow 42 1,667 (2,144)
Decrease (increase) in receivables 2,373 1,458 (9,372)
Increase in inventories (86,194) (38,134) (13,720)
Decrease (increase) in other assets (1,101) 737 (432)
Increase in accounts payable 11,834 8,588 10,777
Increase in accrued liabilities 1,421 5,811 7,609
Equity in undistributed income of unconsolidated
joint ventures and limited liability companies (618) (610) (376)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (27,642) 9,361 9,343
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,525) (1,232) (8,508)
Purchase of limited liability company -- (2,500) --
Investment in unconsolidated joint ventures and
limited liability companies (21,726) (20,669) (15,701)
Distributions from unconsolidated joint ventures and
limited liability companies 970 1,305 1,145
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,281) (23,096) (23,064)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments 53,900 (14,500) 7,700
Principal repayments of mortgage notes payable (1,147) (371) (45)
Subordinated notes:
Proceeds from issuance -- -- 50,000
Principal repayments -- -- (25,000)
Debt issuance costs -- -- (699)
Net increase in customer deposits 1,797 4,355 483
Dividends paid (1,759) (1,261) --
Proceeds from exercise of stock options 158 185 --
Proceeds from sale of treasury shares - net of expenses -- 24,559 --
Payments to acquire treasury shares (7,429) -- (14,250)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 45,520 12,967 18,189
- ------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (4,403) (768) 4,468
Cash balance at beginning of year 10,068 10,836 6,368
- ------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 5,665 $ 10,068 $ 10,836
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest - net of amount capitalized $ 13,249 $ 12,916 $ 11,143
Income taxes $ 27,857 $ 18,019 $ 11,602
NON-CASH TRANSACTIONS DURING THE YEAR:
Building and lots and land acquired with mortgage notes
payable - net $ 4,029 $ 6,214 $ 5,950
Single-family lots distributed from unconsolidated
joint ventures and limited liability companies $ 18,986 $ 17,360 $ 12,694
Deferred stock awards $ 1,291 -- --
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
33
15
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of M/I Schottenstein Homes, Inc. and its
subsidiaries (the "Company"). All significant intercompany transactions have
been eliminated. The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company is engaged primarily in the construction and sale of
single-family residential property in Columbus and Cincinnati, Ohio; Tampa,
Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina;
Indianapolis, Indiana; the Virginia and Maryland suburbs of Washington, D.C.;
and Phoenix, Arizona. The Company designs, sells and builds single-family homes
on finished lots, which it develops or purchases ready for home construction.
The Company also purchases undeveloped land to develop into finished lots for
future construction of single-family homes and for sale to others.
The Company conducts mortgage banking activities through M/I Financial
Corp. ("M/I Financial") that originates mortgage loans primarily for purchasers
of the Company's homes. The loans and the servicing rights are sold to outside
mortgage lenders. The Company is also a majority owner in two title insurance
agencies that provide title services to purchasers of the Company's homes. The
Company also has an investment in two other title insurance agencies (see Note
2).
CASH AND CASH HELD IN ESCROW. Cash and cash held in escrow were primarily
held in one bank at December 31, 1999 and 1998.
INVENTORIES. Inventories are recorded at cost which is not in excess of
net realizable value. Houses under construction include lot costs, construction
costs, capitalized interest and indirect costs. These costs, other than
capitalized interest, are charged to cost of sales as housing sales are closed.
Capitalized interest is included in interest expense when the respective housing
sales are closed. Lot costs are transferred to houses under construction from
land costs when construction commences.
Depreciation on model home furnishings is recorded using an accelerated
method over the estimated useful lives of the assets.
Land and development costs, capitalized interest and real estate taxes
incurred during land development are allocated to each residential lot in a
development phase based on relative estimated market values or the average cost
basis, when appropriate. Reserves are established for inventories where the net
realizable value is deemed to be less than cost.
Management believes such reserves are adequate.
INTEREST. The Company capitalizes interest during development and
construction. Capitalized interest is charged to interest expense as the related
inventory is delivered. The summary of total interest is as follows:
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
Interest capitalized, beginning of year $ 7,957 $ 7,620 $ 6,862
Interest incurred 15,329 13,465 12,500
Interest expensed (14,400) (13,128) (11,742)
- ------------------------------------------------------------------------------------------
Interest capitalized, end of year $ 8,886 $ 7,957 $ 7,620
- ------------------------------------------------------------------------------------------
REVENUE RECOGNITION. Revenue and cost of revenue from the sale of real
estate are recognized at the time title is transferred to the buyer and the
buyer has met the minimum down payment requirement. Discounts and other sales
incentives are included as a reduction of homebuilding revenue.
The following summarizes both housing and lot and land sales and cost of
sales included in revenue and cost of revenue:
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------
Housing sales $823,159 $705,620 $578,185
Housing cost of sales 657,220 569,773 473,995
Lot and land sales 14,959 21,873 26,814
Lot and land cost of sales 10,655 18,726 20,668
- --------------------------------------------------------------------------
M/I Financial recognizes revenue from application fees when received,
while revenue from loan origination fees is recorded when each loan closes. M/I
Financial sells its loans and servicing rights to outside mortgage lenders. The
revenue from these transactions is recorded when the loans are sold and the
servicing is purchased by the investor. M/I Financial uses various methods to
hedge the interest rate risk related to the loans it has committed to make to
home buyers (see Note 14). Gains or losses resulting from these hedging
transactions are included in revenue when the gain or loss from the sale of the
related loan is recorded.
WARRANTY COST. The Company provides a two-year limited warranty on
materials and workmanship and a thirty-year limited warranty against major
structural defects. Warranty expense was $6,461,000, $5,257,000 and $4,791,000
for 1999, 1998 and 1997, respectively.
DEPRECIATION. Depreciation of building, model and office furnishings,
transportation and construction equipment is computed using both straight-line
and
34
16
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
accelerated methods based on the estimated useful lives of the assets.
Depreciation expense was $2,077,000, $1,599,000 and $1,368,000 in 1999, 1998 and
1997, respectively.
AMORTIZATION. The costs incurred in connection with the issuance of
Subordinated Notes (see Note 8) are being amortized over the terms of the
related debt. Amortization of these costs is included in interest expense.
Unamortized debt issuance costs of $755,000 and $917,000 relating to the
Subordinated Notes are included in other assets at December 31, 1999 and 1998,
respectively.
ADVERTISING. The Company expenses advertising costs as incurred. The
Company expensed $8,113,000, $7,284,000 and $5,569,000 in 1999, 1998 and 1997,
respectively.
PER SHARE DATA. Per share data is calculated based on the weighted
average number of common shares outstanding during the year. The difference
between basic and diluted shares outstanding is due to the effect of dilutive
stock options and deferred stock.
PROFIT SHARING. The Company has a trusteed, deferred profit-sharing plan
which covers substantially all Company employees and permits members to make
contributions to the plan on a pre-tax salary reduction basis in accordance with
the provisions of Section 401(k) of the Internal Revenue Code. Company
contributions to the plan are made at the discretion of the Board and totaled
$1,450,000, $1,250,000 and $950,000 in 1999, 1998 and 1997 respectively
(including payment of expenses incurred by the plan).
ASSET IMPAIRMENTS. Annually, or more frequently if events or
circumstances change, a determination is made by management to ascertain whether
single-family lots, land and land development costs and property and equipment
have been impaired based on the sum of expected future undiscounted cash flows
from operating activities. If the estimated net cash flows are less than the
carrying amount of such assets, the Company will recognize an impairment loss in
an amount necessary to write down the assets to a fair value as determined from
expected future discounted cash flows.
IMPACT OF NEW ACCOUNTING STANDARDS. In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS 137
deferred the adoption of SFAS 133 until the Company's 2001 annual financial
statements. The Company has not yet determined what, if any, impact the adoption
of this standard will have on its consolidated financial statements.
DEFERRED STOCK PLANS. Effective November 1, 1998, the Company adopted a
non-qualified deferred compensation stock plan (the "Executives' Deferred
Compensation Plan"). The purpose of the Executives' Deferred Compensation Plan
(the "Plan") is to provide certain eligible employees of the Company an
opportunity to defer a portion of their compensation and to invest in the
Company's common stock, by providing that amounts deferred under the Plan will
be distributed in the Company's common stock. Compensation expense recorded
related to the Plan was $661,000 and $1,111,000 in 1999 and 1998, respectively.
In 1997, the Company adopted the Director Deferred Compensation Plan (the
"Plan") to provide its directors with an opportunity to defer all or a portion
of their eligible compensation and to invest in the Company's common stock.
2. TRANSACTIONS WITH RELATED PARTIES
Related parties are entities owned by, or partially owned by, certain
stockholders of the Company or joint ventures and limited liability companies
(see Notes 4 and 5) in which investments by the Company are accounted for by the
equity method.
On March 17, 1997 and August 1, 1997, the Company purchased 500,000 and
702,439 shares, respectively, of the Company's common stock from the Melvin L.
Schottenstein family interests and trusts at an average per share price of
$11.85. These shares were held as treasury shares by the Company until they were
sold to the public on May 5, 1998.
The Company paid rent of $849,000 and $943,000 in 1998 and 1997,
respectively, to a limited liability company in which the Company owned a 1/3
interest. The Company purchased the remaining 2/3 interest in 1998 (see Notes 5
and 9).
The Company owns a 49.9% interest in two title insurance agencies and
accounts for these investments under the equity method of accounting. The total
of these investments was approximately $10,000 at December 31, 1999 and $5,000
at December 31, 1998 and 1997. Approximately $1,785,000, $1,573,000 and
$1,343,000 of title insurance premiums and closing fees were paid to these
agencies in 1999, 1998 and 1997, respectively.
35
17
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. RECEIVABLES
Receivables consist of the following:
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------
Mortgage loans to be funded $36,764 $40,263
Accounts receivable 3,224 2,098
- ------------------------------------------------------------
Total receivables $39,988 $42,361
- ------------------------------------------------------------
Mortgage loans to be funded relate to houses sold and closed prior to
December 31, which were subsequently funded by unrelated lending institutions.
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND LIMITED LIABILITY COMPANIES -
LAND RELATED
At December 31, 1999, the Company had interests varying from 33% to 50%
in joint ventures and limited liability companies that engage in land
development activities. These interests are recorded using the equity method of
accounting.
The Company receives its percentage interest of profits or its percentage
interest of the lots developed in the form of a capital distribution. The
Company received distributions of $18,986,000, $17,360,000 and $12,694,000 in
developed lots at cost in 1999, 1998 and 1997, respectively, and purchased lots
totaling $187,000, $533,000 and $1,300,000 in 1999, 1998 and 1997 from the joint
ventures and limited liability companies.
Summarized condensed combined financial information for the joint
ventures and limited liability companies, which is included in the homebuilding
segment, as of December 31, 1999 and 1998 and for each of the three years in the
period ended December 31, 1999 is as follows:
SUMMARIZED CONDENSED COMBINED BALANCE SHEETS
- -----------------------------------------------------------------------
December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------
Assets:
Single-family lots, land and
land development costs $47,505 $39,689
Other assets 970 1,422
- -----------------------------------------------------------------------
Total $48,475 $41,111
- -----------------------------------------------------------------------
Liabilities:
Debt $ 93 $ --
Other liabilities 5,549 5,028
- -----------------------------------------------------------------------
Total liabilities 5,642 5,028
Partners' equity:
Company's equity 19,143 16,039
Other 23,690 20,044
- -----------------------------------------------------------------------
Total Partners' equity 42,833 36,083
- -----------------------------------------------------------------------
Total $48,475 $41,111
- -----------------------------------------------------------------------
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------
Revenue $ 168 $ 604 $ 1,159
Costs and expenses 450 682 1,250
- -----------------------------------------------------------------------------
Income (loss) $(282) $ (78) $ (91)
- -----------------------------------------------------------------------------
Included in the Company's investment in joint ventures and limited
liability companies at December 31, 1999 and 1998 is $482,000 and $449,000,
respectively, of capitalized interest and other costs. Letters of credit
totaling approximately $6,931,000 are outstanding at December 31, 1999 and serve
as completion bonds for joint venture and limited liability company development
work in progress.
5. INVESTMENT IN LIMITED LIABILITY COMPANIES -- NON-LAND RELATED
The Company was a 1/3 owner of a limited liability company (the "LLC")
(ownership interest of $1,169,000 at December 31, 1997) that built, owned and
operated an office building in Columbus, Ohio. This interest was recorded using
the equity method of accounting.
Summarized condensed financial information for the LLC at December 31,
1997 was as follows: Assets, Liabilities and Partners' Equity were $12,168,000,
$8,460,000 and $3,708,000, respectively. In addition, revenue and net loss for
the year ended December 31, 1997 were $943,000 and ($123,000), respectively.
In September 1998, the Company acquired the remaining 2/3-ownership
interest for cash of $2,500,000. The purchase price was allocated to assets and
liabilities as follows: total assets - $11,863,000; total liabilities -
$8,390,000, including a mortgage payable of $8,333,000.
6. NOTES PAYABLE BANKS
On November 23, 1999, the Company entered into a new bank loan agreement
with our lenders. The new agreement increased the amount of credit to $250.0
million, increased the amount of letters of credit available to $35.0 million,
added two additional lenders and made immaterial modifications to the covenants.
The remaining terms of the agreement remain substantially the same as those in
the agreement that it replaced.
At December 31, 1999, the Company's homebuilding operations had revolving
credit loans of $132,000,000 and letters of credit totaling $27,461,000
outstanding under a loan agreement with nine banks. Borrowings under the loan
agreement are at LIBOR plus a margin of between 1.60% and 2.35% and are
primarily unsecured. This agreement provides for total borrowing availability
not to exceed the lesser of $250,000,000 under the revolving credit agreement
and $35,000,000 in the form of letters of credit; or the Company's borrowing
base, which is calculated based on specified percentages of certain types of
assets held by the Company as of each month end. Under the terms of the
agreement, the banks shall make an annual determination as to whether or not to
extend the maturity date of the commitment by one year. The revolving credit
facility and letter of credit commitment expire September 30, 2003, at which
time the unpaid balance of the revolving credit loans outstanding is
36
18
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
due and payable. The Company is also required to pay a commitment fee of 1/4 of
1% based upon the average daily unused portion of the note. The terms of the
loan agreement contain covenants which require the Company, among other things,
to maintain minimum net worth and working capital amounts and to maintain
certain financial ratios. This agreement also places limitations on the amount
of additional indebtedness that may be incurred by the Company, on the
acquisition of undeveloped land, on dividends that may be paid and on the
aggregate cost of certain types of inventory the Company can hold at any one
time. At December 31, 1999, approximately $7,808,000 of retained earnings was
available for cash dividends and repurchases of the Company's stock under the
terms of the loan agreement.
At December 31, 1999, $15,400,000 was outstanding under a revolving loan
agreement with a bank ("M/I Financial loan agreement") pursuant to which the
Company was permitted to borrow up to $30,000,000 to finance mortgage loans
initially funded by M/I Financial for customers of the Company and a limited
amount for loans to others. This agreement limits the borrowings based on the
aggregate face amount of the mortgages and contains restrictive covenants
requiring M/I Financial to maintain minimum net worth and certain minimum
financial ratios. Under the loan agreement, interest is calculated at (a) the
prime rate less 0.50%, (b) LIBOR plus 1.60% or (c) a combination of (a) and (b).
A commitment fee of 1/4 of 1% is payable quarterly based upon the average daily
unused portion of the note. The agreement terminates on June 20, 2001, at which
time the unpaid balance is due.
At December 31, 1999, the Company had $132,600,000 of unused borrowing
availability under its loan agreement. The weighted average interest rate of the
Company's total bank borrowings was 7.5%, 7.8% and 8.0% at December 31, 1999,
1998 and 1997, respectively.
On February 26, 1998 and September 23, 1998 the Company entered into
$50.0 million and $25.0 million interest rate SWAP agreements to exchange a
floating LIBOR rate for a fixed rate of 5.50% and 5.10%, respectively. The $25.0
SWAP agreement expires September 25, 2000; the $50.0 SWAP agreement was
cancelled on February 28, 2000 (see Note 11). During 1999 and 1998 these
agreements resulted in an increase (decrease) of $135,000 and $(26,000),
respectively, of interest expense.
7. MORTGAGE NOTES PAYABLE
Mortgage notes payable of $14,675,000 and $11,793,000 at December 31,
1999 and 1998, respectively, represent mortgages collateralized by a building
and land and lots (book value of $21,583,000 and $15,450,000 at December 31,
1999 and 1998, respectively).
DECEMBER 31, 1999
------------------------------------
INTEREST MATURITY
(Dollars in thousands) AMOUNT RATE DATE
- ---------------------------------------------------------------
Building $ 8,177 8.117 % 4/1/17
Land and lots 6,498 5.77%-10.00% 8/30/02
- ---------------------------------------------------------------
Total $14,675 - -
===============================================================
December 31, 1998
------------------------------------
Interest Maturity
(Dollars in thousands) Amount Rate Date
- ---------------------------------------------------------------
Building $8,303 8.117 % 4/1/17
Land and lots 3,490 5.770 % 6/30/02
- ---------------------------------------------------------------
Total $11,793 - -
================================================================
8. SUBORDINATED NOTES
In August 1997, the company issued $50,000,000 of Senior Subordinated
Notes. The Senior Subordinated Notes bear interest at a fixed rate of 9.51% and
mature August 29, 2004. The Senior Subordinated Notes contain covenants that
include restrictions on the incurrence of additional debt, stock repurchases and
the payment of dividends.
9. LEASE COMMITMENTS
The Company leases various office facilities, automobiles, model
furnishings, and model homes under operating leases with remaining terms of 1 to
4 years. At December 31, 1999, the future minimum rental commitments, totaling
$5,810,000 under non-cancelable operating leases with initial terms in excess of
one year are as follows: 2000 - $3,488,000; 2001 - $1,460,000; 2002 - $624,000;
2003 - $234,000; 2004 - $4,000; and $0 thereafter.
The Company entered into a 20-year lease for its new office building and
moved into this new facility in December 1996. Rental expense was $849,000 and
$943,000 for 1998 and 1997, respectively. In September 1998, the Company
purchased this facility.
The Company's total rental expense was $6,608,000, $7,056,000 and
$6,515,000 for 1999, 1998 and 1997, respectively.
10. PREFERRED STOCK
The Articles of Incorporation authorize the issuance of 2,000,000 shares
of preferred stock, par value $.01 per share. The Board of Directors of the
Company is authorized, without further stockholder action, to divide any or all
shares of the authorized preferred stock into series and to fix and determine
the designations, preferences and relative, participating, optional or other
special rights (excluding, under current Ohio law, voting rights) and
qualifications, limitations or restrictions thereon, of any series so
established, including dividend rights, liquidation preferences, redemption
rights and conversion privileges.
37
19
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS
On November 16, 1999 and February 15, 2000, the Board of Directors
approved a $0.05 per share cash dividend payable to stockholders of record of
its common stock on January 3 and April 3, 2000, payable on January 21 and April
21, 2000. The Company's loan agreement and Subordinated Notes place limits on
dividends (see Notes 6 and 8).
On February 1, 2000 the Company entered into two $25.0 million interest
rate SWAP agreements to exchange a floating LIBOR rate for a fixed rate of
6.25%. The SWAP agreements expire January 31, 2003. The bank exercised their
option to cancel the existing $50.0 million interest rate SWAP agreement on
February 28, 2000.
From January 1, 2000 through February 25, 2000, the Company purchased
183,200 shares of our outstanding common stock at an average price of $13.70.
Also, on February 15, 2000, the Board of Directors authorized the repurchase of
up to 2,000,000 shares, replacing the existing repurchase programs.
12. STOCK INCENTIVE PLAN
The Company's Stock Incentive Plan includes stock option, restricted
stock and stock appreciation programs, under which the maximum number of shares
of common stock that may be granted under the plan in each calendar year shall
be 5% of the total issued and outstanding shares of common stock as of the first
day of each such year the plan is in effect. No awards have been granted under
the restricted stock and stock appreciation programs. Stock options are granted
at the market price at the close of business on the date of grant. Options
awarded vest 20% annually over five years and expire after ten years. The
following summarizes the transactions under the stock option program:
Weighted
Option Price Avg. Exercise
Shares Per Share Price
- -------------------------------------------------------------------------------
Options outstanding
December 31, 1996 193,850 $6.75-$16.125 $11.429
Granted 28,600 10.625 10.625
Forfeited (1,250) 6.75-16.125 11.05
- -------------------------------------------------------------------------------
Options outstanding
December 31, 1997 221,200 $6.75-$16.125 $11.327
Granted 46,100 22.75 22.75
Exercised (15,500) 6.75-16.125 11.927
Forfeited (6,050) 6.75-22.75 12.145
- -------------------------------------------------------------------------------
Options outstanding
December 31, 1998 245,750 $6.75-$22.75 $13.412
Granted 51,950 18.563 18.563
Exercised (12,100) 6.75-16.125 11.747
Forfeited (7,900) 6.75-22.75 16.082
- -------------------------------------------------------------------------------
Options outstanding
December 31, 1999 277,700 $6.75-$22.75 $14.372
- -------------------------------------------------------------------------------
Weighted
Option Price Avg. Exercise
Shares Per Share Price
- --------------------------------------------------------------------------------
Options exercisable at
December 31, 1997 67,720 $6.75-10.875
55,760 16.125-22.75
-------
Total 123,480 $11.977
December 31, 1998 88,980 6.75-10.875
71,270 16.125-22.75
-------
Total 160,250 $12.395
December 31, 1999 108,070 6.75-10.875
83,830 16.125-22.75
-------
Total 191,900 $12.764
- --------------------------------------------------------------------------------
At December 31, 1999, options outstanding have a weighted average
remaining contractual life of 6.5 years.
In February 2000, the Company granted options for an additional 75,350
shares with the same terms as the previous awards, at a price of $13.38 which
represents the market value at the date of grant.
As required under SFAS 123, the fair value of each option grant was
estimated on the date of grant. The Company used the Black-Scholes
option-pricing model with the following assumptions used for grants in 1999:
expected volatility of 40.16%; risk-free interest rate of 7.00%; dividend rate
of 0.26%; and an expected life of 4 years, for grants in 1998: expected
volatility of 35.82%; risk-free interest rate of 7.00%; dividend rate of 0.22%;
and an expected life of 4 years, and for grants in 1997: expected volatility of
37.64%; risk-free interest rate of 7.00%; no dividends; and an expected life of
4 years. Based on these calculations, the fair value of the stock options at the
date of grant were immaterial to the Company's financial statements at December
31, 1999, 1998 and 1997.
13. INCOME TAXES
The provision for income taxes consists of the following:
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------
Federal $23,368 $15,897 $ 8,927
State and local 3,801 3,005 3,058
- -------------------------------------------------------------
Total $27,169 $18,902 $11,985
- -------------------------------------------------------------
Reconciliations of the differences between income taxes computed at
federal statutory tax rates and consolidated provision for income taxes are as
follows:
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------
Federal taxes at statutory rate $24,073 $16,294 $10,298
Deduct federal tax effect of:
State and local taxes -
net of federal tax benefit 2,471 2,277 1,988
Other 625 331 (301)
- -------------------------------------------------------------------------
Total $27,169 $18,902 $11,985
- -------------------------------------------------------------------------
The tax effects of the significant temporary differences which comprise
the deferred tax assets and liabilities at December 31, 1999 and 1998 are as
follows:
38
20
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------------
Assets:
Warranty, insurance and other
reserves $4,164 $4,099
Inventory reserve 2,888 2,885
Inventories 1,183 772
State taxes 454 177
Depreciation 35 -
Other 343 1,102
- ------------------------------------------------------------------------
Total deferred tax assets 9,067 9,035
- ------------------------------------------------------------------------
Liabilities:
Depreciation 1,284 975
Prepaid expenses and deferred charges 1,690 1,318
- ------------------------------------------------------------------------
Total deferred tax liabilities 2,974 2,293
- ------------------------------------------------------------------------
Net deferred tax asset $6,093 $6,742
- ------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
M/I Financial offers fixed and adjustable rate mortgage loans, primarily
to buyers of the Company's homes. At December 31, 1999, M/I Financial is
committed to fund $125,667,000 in mortgage loans to home buyers. Of this total,
approximately $8,595,000 are adjustable rate loans and $117,072,000 are fixed
rate loan commitments. The loans are granted at current market interest rates
which are guaranteed through the transfer of the title of the home to the buyer
(the "Closing"). M/I Financial uses hedging methods to reduce its exposure to
interest rate fluctuations between the lock date of the loan and the time the
home closes. The method to be used is determined at the time of the loan lock
based on the market conditions and alternatives available. M/I Financial's
policy requires that there be no interest rate risk on loans closed and waiting
to be sold. Also according to policy, the pipeline of committed loans is to be
hedged at 70 to 95% of the committed balance.
One of the methods that M/I Financial used to hedge the interest rate
risk relative to unclosed loans is to purchase commitments from outside
investors to acquire the loans at the interest rate at which the loan will be
closed. The cost, if any, of these purchase commitments is recorded as an asset
and is expensed as loans are closed under the related commitments. Any remaining
unused balance is expensed when the commitment expires, or earlier is the
Company determines that they will be unable to use the entire commitment prior
to its expiration date. The Company expended $354,000, $93,000 and $498,000 in
1999, 1998 and 1997, respectively, related to purchase commitments from outside
investors to acquire mortgage loans. Such costs are expensed as a component of
cost of goods sold. At December 31, 1999, the Company had approximately
$19,875,000 of commitments to deliver mortgage loans to outside investors.
The Company also hedges its interest rate risk using optional and
mandatory forward sales of mortgage-backed securities. In these agreements, the
Company agrees to sell and later agrees to buy similar but not identical
mortgage-backed securities. The Company also has the option of delivering these
securities. Generally, the agreements are fixed-coupon agreements whereby the
interest rate and maturity date of both transactions are approximately the same
and are established to correspond with the closing of the fixed interest rate
mortgage loan commitments of the Company. The difference between the two values
of the mortgage-backed securities in the agreements at settlement provide hedge
on the interest rate risk exposure in the mortgage loan commitments and is
included in the gain or loss of the sale of the loans to third party investors.
At December 31, 1999, these agreements matured within 90 to 120 days. Securities
under forward sales agreements averaged approximately $122,500,000 during 1999
and the maximum amount outstanding at any month end during 1999 was
$149,000,000. Hedging gains of $6,180,000 were deferred at year end as the
mortgage loans and commitment contracts qualified for hedge accounting.
To reduce the credit risk associated with accounting losses, which would
be recognized if counterparties failed completely to perform as contracted, the
Company limits the entities that management can enter into a commitment with to
the primary dealers in the market. The risk of accounting loss is the difference
between the market rate at the time a counterparty fails and the rate the
Company committed to for the mortgage loans and any purchase commitments
recorded with the counterparty.
The following table presents the carrying amounts and fair values of the
Company's financial instruments and the fair value of the Company's unrecognized
financial instruments at December 31, 1999 and 1998. SFAS 107, "Disclosures
about Fair Value of Financial Instruments", defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale.
1999 1998
---------------------------- ----------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------
Assets:
Cash, including
cash in escrow $ 6,493 $ 6,493 $10,938 $ 10,938
Mortgage loans
to be funded 36,764 36,772 40,263 40,807
Accounts receivable 3,224 3,224 2,098 2,098
Liabilities:
Notes payable banks $147,400 $147,400 $93,500 $ 93,500
Mortgage notes payable 14,675 14,675 11,793 11,793
Subordinated notes 50,000 50,000 50,000 50,000
Accounts payable 63,198 63,198 51,364 51,364
Other liabilities 55,777 55,777 53,850 53,850
Unrecognized Financial
Instruments:
Letters of credit -- $ 430 -- $ 230
Commitments to
extend real estate loans -- 7,111 -- 4,111
Forward sale of
mortgage-backed
securities -- 1,228 -- (32)
Interest rate swap
Agreements -- 274 -- (657)
39
21
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at December 31,
1999 and 1998:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND OTHER LIABILITIES. The
carrying amounts of these items are a reasonable estimate of their fair value.
MORTGAGE LOANS TO BE FUNDED. The estimated fair value of mortgage loans
to be funded at December 31, 1999 and 1998 includes the estimated gains and
servicing rights which will be realized when the loans are sold. The estimated
fair value was determined based on market quotes at December 31, 1999 and 1998.
NOTES PAYABLE BANKS. The interest rates currently available to the
Company fluctuate with the LIBOR rate of the lending institutions and thus their
carrying value is a reasonable estimate of fair value.
MORTGAGE NOTES PAYABLE. The estimated fair value was determined by
comparing the interest rates and terms of the note agreements to debt
instruments with similar terms and remaining maturities.
SUBORDINATED NOTES. The estimated fair value was determined based upon
market quotes at December 31, 1999 and 1998.
LETTERS OF CREDIT. Letters of credit and outstanding completion bonds of
$48,530,000 and $30,644,000 represent potential commitments at December 31, 1999
and 1998. The letters of credit generally expire within one to two years. The
estimated fair value of letters of credit was determined using fees currently
charged for similar arrangements.
COMMITMENTS TO EXTEND REAL ESTATE LOANS, FORWARD SALE OF MORTGAGE-BACKED
SECURITIES AND INTEREST RATE SWAP AGREEMENTS. The fair value of these financial
instruments was determined based upon market quotes at December 31, 1999 and
1998
15. COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the Company had sales agreements outstanding, some
of which have open contingencies for approval of financing, to deliver 2,154
homes with an aggregate purchase price of approximately $490,000,00. At December
31, 1999, the Company had options and contingent purchase contracts to acquire
land and developed lots with an aggregate purchase price of approximately
$190,789,000. Purchase of properties is contingent upon satisfaction of certain
requirements by the Company and the sellers.
At December 31, 1999, the Company had outstanding approximately
$48,530,000 of completion bonds and standby letters of credit, which serve as
completion bonds for development work in progress, deposits on land and lot
purchase contracts and miscellaneous deposits.
The Company is involved from time to time in routine litigation.
Management does not believe that the ultimate resolution of this litigation will
be material to the consolidated financial statements of the Company.
16. BUSINESS SEGMENTS
The business segment information for 1999, 1998 and 1997 included on page
21 of the annual report is an integral part of these consolidated financial
statements.
40
22
1999 M/I SCHOTTENSTEIN HOMES, INC.
ANNUAL REPORT
Stock Market Prices and Dividends
The Company's common stock is traded on the New York Stock Exchange under
the symbol "MHO". As of January 31, 2000, there were approximately 260 record
holders of the Company's common stock. At that time there were 8,813,061 shares
issued and 8,316,840 shares outstanding. The table below presents the highest
and lowest prices for the Company's common stock during each of the quarters
presented:
1999 HIGH LOW
- -------------------------------------------------------------
First quarter $22.25 $16.63
Second quarter 22.00 17.63
Third quarter 20.13 16.50
Fourth quarter 18.19 13.13
1998 HIGH LOW
- -------------------------------------------------------------
First quarter $24.56 $17.75
Second quarter 26.81 18.13
Third quarter 25.69 18.13
Fourth quarter 24.69 16.75
The highest and lowest prices for the Company's common stock from January
1, 2000 through February 25, 2000 was $15.65 and $12.75.
Prior to fiscal 1998, the Company had not paid any dividends. On February
9, 1998, the Board of Directors approved cash dividends of $.05 per share. The
Company has subsequently paid cash dividends each quarter. On November 16, 1999
and February 15, 2000, the Board of Directors approved cash dividends of $.05
per share, payable to stockholders of record of its common stock on January 3
and April 3, 2000, payable on January 21 and April 21, 2000. The Company's loan
agreement and Subordinated Notes place limits on dividends (see Notes 6 and 8 to
the consolidated financial statements).
41
23
EXECUTIVE OFFICERS
IRVING E. SCHOTTENSTEIN
Chairman and
Chief Executive Officer
ROBERT H. SCHOTTENSTEIN
President
STEVEN SCHOTTENSTEIN
Chief Operating Officer
KERRII B. ANDERSON
Senior Vice President,
Chief Financial Officer
OTHER KEY OFFICERS
PAUL S. COPPEL
President Land Operations and
General Counsel
PHILLIP G. CREEK
Senior Vice President,
Treasurer
JAMES B. FELDMAN
Regional President
ROBERT C. MOESLE
Regional President
PAUL S. ROSEN
Senior Vice President
LLOYD T. SIMPSON
Regional President
DIRECTORS
IRVING E. SCHOTTENSTEIN (1*, 2)
Chairman of the Board and
Chief Executive Officer
KERRII B. ANDERSON
Senior Vice President,
Chief Financial Officer
FRIEDRICH K.M. BOHM (2, 3, 4*)
Managing Partner and
Chief Executive Officer,
NBBJ
THOMAS D. IGOE (2, 4)
Retired Senior Vice President,
Bank One NA
JEFFREY H. MIRO (2, 4)
Chairman,
Miro, Weiner and Kramer
ROBERT H. SCHOTTENSTEIN (1, 2)
President
STEVEN SCHOTTENSTEIN (1)
Chief Operating Officer
LEWIS R. SMOOT, SR. (1, 2, 3*, 4)
President and
Chief Executive Officer,
The Smoot Corporation
NORMAN L. TRAEGER (2*, 3, 4)
President,
The Discovery Group
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
3 Easton Oval
Columbus, Ohio 43219
www.mihomes.com
STOCK EXCHANGE LISTING
New York Stock Exchange (MHO)
TRANSFER AGENT AND REGISTRAR BankBoston, N.A.
c/o EquiServe, Limited Partnership
P.O. Box 8040
Boston, Massachusetts 02266-8040
www.equiserve.com
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Columbus, Ohio
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 9:00 A.M. on April 19,
2000, at the offices of the Company, 3 Easton Oval, Columbus, Ohio.
FORM 10-K
Stockholders may receive a copy of the Company's annual report to the
Securities and Exchange Commission on Form 10-K without charge by writing
to:
Investor Relations
M/I Schottenstein Homes, Inc.
3 Easton Oval
Suite 500
Columbus, OH 43219
(1) Executive Committee
(2) Compensation Committee
(3) Audit Committee
(4) Executive Officer Compensation Committee
* Chairman
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