UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 1-12434
M/I SCHOTTENSTEIN HOMES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1210837
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(State of Incorporation) (I.R.S. Employer Identification No.)
3 Easton Oval, Suite 500, Columbus, Ohio 43219
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(Address of Principal Executive Offices) (Zip Code)
(614) 418-8000
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(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 7,567,976 shares
outstanding as of May 10, 2002
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 2002 (Unaudited) and December 31, 2001 3
Unaudited Consolidated Statements of Income
for the Three Months Ended March 31, 2002 and 2001 4
Unaudited Consolidated Statement of Shareholders'
Equity for the Three Months Ended March 31, 2002 5
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2002 and 2001 6
Notes to Interim Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
-2-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
2002 2001
(Dollars in thousands, except par values) (UNAUDITED)
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ASSETS:
Cash $ 11,362 $ 9,988
Cash held in escrow 1,552 560
Receivables 45,386 55,013
Inventories:
Single-family lots, land and land development costs 279,392 287,110
Houses under construction 200,938 181,742
Model homes and furnishings - at cost (less accumulated depreciation:
March 31, 2002 - $37; December 31, 2001 - $49) 4,006 7,761
Land purchase deposits 1,109 2,623
Building, office furnishings, transportation and construction equipment - at
cost (less accumulated depreciation: March 31, 2002 - $7,741;
December 31, 2001 - $7,453) 21,739 22,276
Investment in unconsolidated joint ventures and limited liability companies 22,354 22,457
Other assets 22,117 22,580
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TOTAL ASSETS $609,955 $612,110
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LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Notes payable banks - homebuilding operations $ 96,000 $100,000
Note payable bank - financial services operations 22,400 30,000
Mortgage notes payable 14,249 14,227
Senior subordinated notes 50,000 50,000
Accounts payable 59,982 55,656
Accrued compensation 5,428 20,789
Customer deposits 19,402 18,487
Other liabilities 44,700 43,060
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TOTAL LIABILITIES 312,161 332,219
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Commitments and Contingencies
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SHAREHOLDERS' 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 63,592 62,954
Retained earnings 257,501 241,956
Treasury stock - at cost - 1,251,985 and 1,344,058 shares, respectively,
held in treasury at March 31, 2002 and December 31, 2001 (23,387) (25,107)
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TOTAL SHAREHOLDERS' EQUITY 297,794 279,891
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $609,955 $612,110
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See Notes to Interim Unaudited Consolidated Financial Statements.
-3-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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THREE MONTHS ENDED MARCH 31,
2002 2001
(In thousands, except per share amounts) (UNAUDITED) (Unaudited)
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Revenue $215,562 $178,155
Costs and expenses:
Land and housing 161,628 137,422
General and administrative 10,726 9,666
Selling 13,997 12,373
Interest 3,536 3,115
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Total costs and expenses 189,887 162,576
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Income before income taxes 25,675 15,579
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Income taxes:
Current 9,707 5,260
Deferred 49 756
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Total income taxes 9,756 6,016
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Income before cumulative effect of change in accounting principle 15,919 9,563
Cumulative effect of change in accounting principle - net of income taxes -- 2,681
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Net income $ 15,919 $ 12,244
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Earnings per common share - basic:
Income before cumulative effect of change in accounting principle $ 2.12 $ 1.27
Cumulative effect of change in accounting principle - net of income taxes -- .36
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Net income $ 2.12 $ 1.63
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Earnings per common share - diluted:
Income before cumulative effect of change in accounting principle $ 2.05 $ 1.23
Cumulative effect of change in accounting principle - net of income taxes -- .35
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Net income $ 2.05 $ 1.58
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Weighted average shares outstanding (in thousands):
Basic 7,516 7,513
Diluted 7,749 7,756
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See Notes to Interim Unaudited Consolidated Financial Statements.
-4-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
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THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
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Common Stock
-------------- Additional
(Dollars in thousands, except Shares Paid-In Retained Treasury
per share amounts) Outstanding Amount Capital Earnings Stock
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Balance at December 31, 2001 7,469,003 $88 $62,954 $241,956 $(25,107)
Net income -- -- - 15,919 --
Dividends to shareholders,
$0.05 per common share -- -- - (374) --
Stock options exercised 20,903 -- 209 -- 1,330
Deferral of executive and
director stock -- -- 898 -- --
Executive and director deferred
stock distributions 71,170 -- (469) -- 390
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BALANCE AT MARCH 31, 2002 7,561,076 $88 $63,592 $257,501 $(23,387)
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See Notes to Interim Unaudited Consolidated Financial Statements.
-5-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED MARCH 31,
2002 2001
(In thousands) (UNAUDITED) (Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $15,919 $12,244
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Loss (gain) from property disposals 19 (4)
Depreciation 561 446
Deferred income taxes 49 756
Increase in cash held in escrow (992) (548)
Decrease in receivables 9,627 13,326
Increase in inventories (3,392) (31,081)
Decrease in other assets 414 148
Increase (decrease) in accounts payable 4,326 (2,303)
Increase in customer deposits 915 3,871
Decrease in other liabilities (12,823) (12,393)
Equity in undistributed income of unconsolidated joint
ventures and limited liability companies (303) (227)
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Net cash provided by (used in) operating activities 14,320 (15,765)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (36) (203)
Investment in unconsolidated joint ventures and limited liability companies (2,703) (2,044)
Distributions from unconsolidated joint ventures and limited liability companies 285 240
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Net cash used in investing activities (2,454) (2,007)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments (11,600) 18,600
Proceeds from mortgage notes payable - net of repayments 22 (1,844)
Dividends paid (374) (376)
Proceeds from exercise of stock options and deferred stock 1,460 606
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Net cash (used in) provided by financing activities (10,492) 16,986
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Net increase (decrease) in cash 1,374 (786)
Cash balance at beginning of year 9,988 8,555
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Cash balance at end of period $11,362 $ 7,769
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SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $ 3,779 $ 2,603
Income taxes $ 4,749 $ 4,778
NON-CASH TRANSACTIONS DURING THE PERIOD:
Distribution of single-family lots from unconsolidated joint ventures and
limited liability companies $ 2,824 $ 1,806
Deferral of executive and director stock $ 898 $ 674
Executive and director deferred stock distributions $ 469 $ --
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See Notes to Interim Unaudited Consolidated Financial Statements.
-6-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of M/I Schottenstein Homes,
Inc. and its subsidiaries ("the Company") and notes thereto have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information. The results of operations for the
three months ended March 31, 2002 and 2001 are not necessarily indicative of the
results for the full year.
In the opinion of management, the accompanying consolidated financial statements
reflect all adjustments (all of which are normal and recurring in nature)
necessary for a fair presentation of financial results for the interim periods
presented. It is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements, accounting policies
and financial notes thereto included in the Company's Annual Report to
Shareholders for the year ended December 31, 2001.
NOTE 2. LOAN AGREEMENT
On March 6, 2002, the Company entered into a new bank loan agreement that
replaced the previous loan agreement in its entirety. The loan agreement
increased the number of banks from ten to twelve and revised certain covenants.
Interest is based on the prime rate or the Eurodollar rate. The loan agreement
matures in March of 2006.
On May 2, 2002, the Company and M/I Financial Corp., a wholly-owned subsidiary,
amended their bank loan agreement. The Company and M/I Financial have the
ability to borrow up to $30 million at a rate of interest based on the prime
rate or the Eurodollar rate. This agreement terminates on May 1, 2003.
NOTE 3. INTEREST
The Company capitalizes interest during land development and home construction.
Capitalized interest is charged to interest expense as the related inventory is
delivered to a third party. The summary of total interest is as follows:
THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
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Interest capitalized, beginning of period $12,187 $10,337
Interest incurred 3,727 4,409
Interest expensed (3,536) (3,115)
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Interest capitalized, end of period $12,378 $11,631
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NOTE 4. CONTINGENCIES
At March 31, 2002, the Company had options and contingent purchase contracts to
acquire land and developed lots with an aggregate purchase price of
approximately $139 million.
-7-
NOTE 5. PER SHARE DATA
Per share data is calculated based on the weighted average number of common
shares outstanding during each period. The difference between basic and diluted
shares outstanding is the effect of dilutive stock options and deferred stock.
There are no adjustments to net income necessary in the calculation of basic or
diluted earnings per share.
NOTE 6. ACCOUNTING STANDARDS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," the Company
recorded a fair value change of $1.8 million and $1.2 million for the first
quarter ended March 31, 2002 and March 31, 2001, respectively, related to loan
commitments, forward sales of mortgage-backed securities and interest rate
swaps. Changes in fair value of loan commitments and forward sales are recorded
in revenue. The change in fair value of interest rate swaps is recorded in
general and administrative expense.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that statement, SFAS 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS
44, "Accounting for Intangible Assets of Motor Carriers." This statement amends
SFAS 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This statement is
effective for the first quarter in the year ended December 31, 2003. The Company
does not believe the adoption of SFAS 145 will have a significant impact on the
consolidated financial statements.
NOTE 7. DIVIDENDS
On April 25, 2002, the Company paid to shareholders of record of its common
stock on April 2, 2002, a cash dividend of $0.05 per share. On April 18, 2002,
the Board of Directors approved a $0.05 per share cash dividend payable to
shareholders of record on July 1, 2002, payable on July 25, 2002. Total
dividends paid in 2002 through April 25 were approximately $750,000.
-8-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
CONSOLIDATED
Total Revenue. Total revenue for the three months ended March 31, 2002
was $215.6 million, a 21% increase over the $178.2 million recorded for the
comparable period in 2001. This was the result of an increase in homebuilding
revenue of $37.2 million and an increase in financial services revenue of $1.5
million. The increase in homebuilding revenue consisted primarily of an increase
in housing revenue of $34.9 million and an increase in land revenue of $1.3
million. Housing revenue increased as a result of an 8.9% increase in Homes
Delivered. The increase in land revenue was primarily attributable to lot sales
in the Phoenix market that did not occur in 2001's first quarter. The increase
in financial services revenue consisted of a 17.5% increase in loan origination
fees, a 36.8% increase in revenue from the sale of loans, and a 16.1% increase
in revenue from other sources.
Income Before Income Taxes. Income before income taxes for the first
quarter of 2002 was $25.7 million, a $10.1 million increase over the comparable
period in 2001. The increase was due primarily to an increase in homebuilding
income before income taxes of 85.1% resulting from the higher number of Homes
Delivered and an increase in gross profit from 20.8% to 22.3%. Income before
income taxes increased for the financial services segment due to increased loan
origination fees. Unallocated amounts include interest from other segments along
with salaries and other administrative expenses which are not identifiable with
a specific segment.
For the three months ended March 31, 2001, the cumulative effect of a
change in accounting principle resulted in an increase in income of
approximately $2.7 million, net of income taxes. This accounting change was the
result of the January 1, 2001 adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires us to record the
value of interest rate swaps, certain loan commitments and forward sales of
mortgage-backed securities at fair value. No such cumulative adjustment was
recorded for the quarter ended March 31, 2002.
The information below is presented in conformity with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," for all
periods presented.
THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
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Revenue:
Homebuilding $210,869 $173,707
Financial services 6,907 5,400
Intersegment (2,214) (952)
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Total revenue $215,562 $178,155
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Income before income taxes:
Homebuilding $ 15,819 $ 8,546
Financial services 5,257 3,821
Unallocated amounts 4,599 3,212
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Total income before income taxes $ 25,675 $ 15,579
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-9-
HOMEBUILDING SEGMENT
The following table sets forth certain information related to our homebuilding
segment:
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands) 2002 2001
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Revenue:
Housing $203,687 $168,823
Land and lot 5,830 4,530
Other 1,352 354
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Total revenue $210,869 $173,707
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Revenue:
Housing 96.6% 97.2%
Land and lot 2.8 2.6
Other 0.6 0.2
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Total revenue 100.0 100.0
Land and housing costs 77.7 79.2
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Gross margin 22.3 20.8
General and administrative expenses 3.1 3.1
Selling expenses 6.5 7.1
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Operating income 12.7 10.6
Allocated expenses 5.2 5.7
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Income before income taxes 7.5% 4.9%
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OHIO AND INDIANA REGION
Unit data:
New contracts, net 738 910
Homes delivered 527 440
Backlog at end of period 1,797 1,775
Average sales price of homes in Backlog $ 222 $ 204
Aggregate sales value of homes in Backlog $398,000 $363,000
Number of active subdivisions 85 85
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FLORIDA REGION
Unit data:
New contracts, net 198 252
Homes delivered 197 196
Backlog at end of period 487 548
Average sales price of homes in Backlog $ 214 $ 209
Aggregate sales value of homes in Backlog $104,000 $115,000
Number of active subdivisions 25 28
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NORTH CAROLINA, VIRGINIA, MARYLAND AND ARIZONA REGION
Unit data:
New contracts, net 147 214
Homes delivered 122 141
Backlog at end of period 284 387
Average sales price of homes in Backlog $ 379 $ 380
Aggregate sales value of homes in Backlog $108,000 $147,000
Number of active subdivisions 30 32
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TOTAL
Unit data:
New contracts, net 1,083 1,376
Homes delivered 846 777
Backlog at end of period 2,568 2,710
Average sales price of homes in Backlog $ 238 $ 230
Aggregate sales value of homes in Backlog $610,000 $625,000
Number of active subdivisions 140 145
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-10-
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
in Backlog occur because customers cannot qualify for financing and usually
occur prior to the start of construction. Because 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 for the quarter ended
March 31, 2002 and March 31, 2001 was 22% and 19%, respectively. Unsold
speculative homes, which are in various stages of construction, totaled 106 and
97 at March 31, 2002 and March 31, 2001, respectively.
Total Revenue. Total revenue for the homebuilding segment for the
quarter ended March 31, 2002 was $210.9 million, a 21.4% increase over 2001's
first quarter. The increase consisted of an increase in housing revenue of $34.9
million and an increase in land revenue of $1.3 million. Housing revenue
increased as a result of the 8.9% increase in Homes Delivered. Homes Delivered
increased in all of our markets except Tampa, Charlotte, Raleigh and Virginia.
The increase in land revenue was primarily attributable to lot sales in the
Phoenix market which did not occur in the first quarter of 2001.
Home Sales and Backlog. New Contracts in the first quarter of 2002
decreased 21.3% from 2001's first quarter. New Contracts decreased in all of the
Company's markets with the exception of Raleigh. New Contracts recorded in April
2002 were 14% lower than New Contracts recorded in April 2001. 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
homebuyers.
At March 31, 2002, our Backlog consisted of 2,568 homes with an
approximate sales value of $610 million. This represents a 5.2% decrease in
units and a 2.3% decrease in sales value compared to the first quarter of 2001.
The average sales price of homes in Backlog increased by 3.1% with increases
occurring in virtually all of our markets.
Gross Margin. The overall gross margin for the homebuilding segment was
22.3% for the three-month period ended March 31, 2002 compared to 20.8% for the
three-month period ended March 31, 2001. Housing gross margin increased from
21.0% to 23.0% and land gross margin increased from 9.7% to 18.0% from 2001's
first quarter. The increase in housing gross margin was the result of improved
operating efficiencies and our focus on acquiring or developing lots in premier
locations to obtain higher margins. The increase in land gross margin resulted
from lot sales in the Phoenix market which did not occur in the first quarter of
2001.
General and Administrative Expenses. General and administrative
expenses increased to $6.5 million for the first three months of 2002 compared
to $5.4 million for the first three months of 2001. As a percentage of revenue,
general and administrative expenses remained consistent at 3.1%. The increase in
dollars was primarily due to increases in homeowner's association expenses and
real estate taxes resulting from the increase in operations.
Selling Expenses. Selling expenses increased to $13.6 million, or 6.5%
of revenue, for the first quarter of 2002 from $12.3 million, or 7.1% of
revenue, for the first quarter of 2001. The increase primarily related to
additional sales commissions paid to outside realtors and internal salespeople
resulting from the increase in the number and average sales price of Homes
Delivered.
-11-
FINANCIAL SERVICES SEGMENT
The following table sets forth certain information related to the financial
services segment:
THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
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Number of loans originated 686 620
Revenue
Loan origination fees $1,187 $1,010
Sale of loans 4,119 3,012
Other 1,601 1,378
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Total revenue 6,907 5,400
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General and administrative expenses 1,650 1,579
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Operating income $5,257 $3,821
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Financial services consist primarily of originating mortgages for our
homebuyers, processing and selling these mortgages and the related servicing
rights on the secondary market, and providing title services.
Total Revenue. Total revenue for the three months ended March 31, 2002
was $6.9 million, a 27.9% increase over the $5.4 million recorded for the
comparable period in 2001. Loan origination fees increased 17.5% compared to the
first quarter of 2001 due to a 10.6% increase in loans originated and an
increase in the average loan amount.
Revenue from the sale of loans increased 36.8% from $3.0 million for
the three months ended March 31, 2001 to $4.1 million for the three months ended
March 31, 2002. This was primarily the result of an increase in loans originated
and an increase in the average loan amount.
Revenue from other sources increased 16.1% from $1.4 million for the
three months ended March 31, 2001 to $1.6 million for the three months ended
March 31, 2002. This was primarily due to increased earnings from title services
as a result of the increase in the number of Homes Delivered.
General and Administrative Expenses. General and administrative
expenses for the three months ended March 31, 2002 and 2001 remained consistent
at $1.6 million.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. Corporate general and
administrative expenses decreased from $2.8 million for the three months ended
March 31, 2001 to $2.7 million for the three months ended March 31, 2002. As a
percentage of total revenue, general and administrative expenses decreased to
1.2% for the three months ended March 31, 2002 from 1.6% for the comparable
period in the prior year. The decrease was due to various general and
administrative expenses decreasing as a result of increased efficiency.
Interest Expense. Corporate and homebuilding interest expense for the
first quarter of 2002 totaled $3.5 million, a 13.4% increase from the $3.1
million recorded for the comparable period of the
-12-
prior year. Interest expense was higher due to a decrease in capitalized
interest resulting from the decrease in land under development.
Income Taxes. The effective tax rate for the three months ended March
31, 2002 decreased to 38.0% from 38.6% for the first quarter of 2001 due to tax
savings strategies.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
policies generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. On an on-going basis,
management evaluates such estimates and judgments and makes adjustments as
deemed necessary. Actual results could differ from these estimates using
different estimates and assumptions, or if conditions are significantly
different in the future.
Estimates and judgments are inherent in calculations relating to
inventory valuation; property and equipment depreciation; valuation of
derivative financial instruments; accounts payable on inventory; reserves for
costs to complete, warranty, self-insurance on general liability, litigation,
health care and workers' compensation, executive employment agreements, and
financial services; income taxes, and contingencies. Other items that could have
a significant impact on the financial statements include the risks and
uncertainties listed in the "Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995" below.
LIQUIDITY AND CAPITAL RESOURCES
Our financing needs depend on 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 operations. Our principal source of funds for construction and
development activities has been from internally generated cash and from bank
borrowings, which are primarily unsecured. See Safe Harbor Statement for further
discussion of factors that could impact our source of funds.
Notes Payable Banks. At March 31, 2002, we had bank borrowings
outstanding of $96 million under our Bank Credit Facility. The Bank Credit
Facility permits borrowing base indebtedness not to exceed the lesser of $315
million or our borrowing base. The Bank Credit Facility matures in March of
2006.
We also had approximately $22 million outstanding at March 31, 2002
under the M/I Financial loan agreement which permits borrowings of $30 million
to finance mortgage loans initially funded by M/I Financial for our customers.
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. On May 2, 2002, the Company and M/I
Financial amended the bank agreement to extend the termination date to May of
2003.
-13-
At March 31, 2002, we had the right to borrow up to $345 million under
our credit facilities, including $30 million under the M/I Financial loan
agreement. We had approximately $212 million of unused borrowing availability
under our credit facilities and approximately $50 million of completion bonds
and letters of credit outstanding at March 31, 2002.
Subordinated Notes. At March 31, 2002, there were outstanding $50
million of Senior Subordinated Notes. The notes bear interest at a fixed rate
and mature in August of 2006.
Mortgage Notes Payable. At March 31, 2002, mortgage notes payable
outstanding were approximately $14 million, secured by an office building, lots
and land with a recorded book value of approximately $21 million.
Land and Land Development. Over the past several years we have
increased our land development activities and land holdings. Single-family lots,
land and land development costs decreased slightly from December 31, 2001 to
March 31, 2002. We continue to purchase some lots from outside developers under
contracts. We will continue to evaluate all of our alternatives to satisfy our
increasing demand for lots in the most cost effective manner.
Universal Shelf Registration. In April 2002, we filed a $150 million
universal shelf registration statement on Form S-3 with the Securities and
Exchange Commission. Pursuant to the filing, the Company may, from time to time
over an extended period, offer new debt and/or equity securities. This shelf
registration will allow us to expediently access capital markets in the future.
The timing and amount of offerings, if any, will depend on market and general
business conditions.
Purchase of Treasury Shares. We are authorized to repurchase up to 2.0
million shares of our outstanding common shares. The purchases may occur on the
open market and/or in privately negotiated transactions as market conditions
warrant. As of March 31, 2002, we had purchased a total of 1.6 million shares at
an average price of $18. No shares were purchased during the first quarter of
2002.
INTEREST RATES AND INFLATION
Our business is significantly affected by the general economic
conditions of the United States of America and, particularly, by the impact of
in interest rates. Higher interest rates may decrease our potential market by
making it more difficult for homebuyers to qualify for mortgages or to obtain
mortgages at interest rates that are acceptable to them. Increases in interest
rates would also increase our interest expense because the rate on the revolving
loans is based on floating rates of interest. The weighted average interest rate
for our outstanding debt for the three months ended March 31, 2002 and 2001 was
8.6% and 8.8 %, respectively.
In conjunction with our mortgage-banking operations, hedging methods
are used 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 have generally been able to raise prices by amounts
at least equal to our cost increases and, accordingly, have not experienced any
detrimental effect from inflation. When 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 construction is started on a home through the delivery date.
However, in certain situations, unanticipated costs may occur between the time
of start and the delivery date resulting in lower gross profit margins.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In addition to historical information, this Management's Discussion and
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.
- We are particularly susceptible to changes in the economy and to
interest rate fluctuations as well as to the effect that each of
these has on consumer confidence.
- We must risk significant capital to maintain our desired land
position.
- Our operations are located in various markets throughout the
United States. However, a significant portion of our operating
income is derived from operations in the Columbus market.
- We face significant competition for home sales, properties,
financing, building materials and skilled subcontractors.
- Increased levels of zoning, environmental and other regulatory
initiatives can adversely affect our profitability.
- Periodic material and labor shortages can adversely affect our
sales and profitability.
- Our principle shareholders can exercise significant control over
shareholder matters.
ITEM 3: 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 $345 million. To
minimize the effects of interest rate fluctuations, we have interest rate swap
agreements with certain banks for a total notional amount of $225 million, of
which $150 million are intended to offset each other. Under the remaining $75
million, we pay fixed rates of interest. Assuming a hypothetical 10% change in
short-term interest rates, our 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. At March 31, 2002, the notional principal amount
under these loan commitments was $176 million and the related fair value was a
loss of approximately $4 million.
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 March 31, 2002, the notional principal amount under
these forward sales agreements was approximately $179 million and the related
fair value of these agreements was a gain of approximately $1 million. The
hedging agreements
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outstanding at March 31, 2002 mature within 90-120 days. These agreements are
recorded at fair value on the balance sheet and any gains or losses are recorded
in revenue.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - none.
- ----------------------------
Item 2. Changes in Securities and Use of Proceeds - none.
- -------------------------------------------------
Item 3. Defaults Upon Senior Securities - none.
- ------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - none.
- -----------------------------------------------------------
Item 5. Other Information - none.
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The exhibits required to be filed herewith are set forth below. No
reports were filed on Form 8-K for the quarter for which this report is filed.
EXHIBIT
NUMBER DESCRIPTION
10.1 First Amendment to Revolving Credit Agreement by and among M/I
Financial Corp., the Company and Guaranty Bank dated May 2, 2002.
10.2 Company's 2002 Chief Executive Officer Bonus Program.
10.3 Company's 2002 President Bonus Program.
10.4 Company's 2002 Chief Operating Officer Bonus Program.
10.5 Company's 2002 Chief Financial Officer Bonus Program.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
M/I Schottenstein Homes, Inc.
----------------------------------------
(Registrant)
Date: May 10, 2002 by: /s/ Robert H. Schottenstein
-------------------------------
Robert H. Schottenstein
President and Director
Date: May 10, 2002 by: /s/ John A. Wilt
-------------------------------
John A. Wilt
Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE #
- -------------- -------------------------------------------------------------------- ------------
10.1 First Amendment to Revolving Credit Agreement by and among M/I
Financial Corp., the Company and Guaranty Bank dated May 2, 2002.
10.2 Company's 2002 Chief Executive Officer Bonus Program.
10.3 Company's 2002 President Bonus Program.
10.4 Company's 2002 Chief Operating Officer Bonus Program.
10.5 Company's 2002 Chief Financial Officer Bonus Program.
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