.
.
.
EXHIBIT 13
2002 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) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT (YEAR ENDED DECEMBER 31):
Revenue $1,033,025 $ 976,766 $ 935,039 $ 852,445 $ 739,613
Gross margin $ 249,273 $ 221,554 $ 198,972 $ 184,570 $ 151,114
Income before cumulative effect of change in
accounting principle $ 66,612 $ 52,601 $ 44,444 $ 41,611 $ 27,651
Cumulative effect of change in accounting
principle - net of income taxes - $ 2,681 - - -
Net income $ 66,612 $ 55,282 $ 44,444 $ 41,611 $ 27,651
Net income per common share before cumulative
effect of change in accounting principle:
Basic $ 4.41 $ 3.49 $ 2.82 $ 2.38 $ 1.65
Diluted $ 4.30 $ 3.39 $ 2.76 $ 2.34 $ 1.63
Net income per common share:
Basic $ 4.41 $ 3.66 $ 2.82 $ 2.38 $ 1.65
Diluted $ 4.30 $ 3.56 $ 2.76 $ 2.34 $ 1.63
Weighted average common shares outstanding:
Basic 15,104,456 15,091,854 15,766,730 17,523,644 16,785,120
Diluted 15,505,326 15,529,844 16,112,222 17,766,378 16,975,744
Dividends per common share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.075
BALANCE SHEET (DECEMBER 31):
Total assets $ 578,458 $ 612,110 $ 567,642 $ 531,562 $ 427,147
Notes and mortgage notes payable $ 41,458 $ 144,227 $ 159,219 $ 162,075 $ 105,293
Subordinated notes $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Shareholders' equity $ 339,729 $ 279,891 $ 228,889 $ 200,512 $ 166,640
- -------------------------------------------------------------------------------------------------------------------
Shares outstanding and per share data for prior periods have been adjusted for
the 2-for-1 stock split effective June 19, 2002.
22
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Selected Consolidated Quarterly Financial and Operating Data
- -------------------------------------------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
-------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
(Dollars in thousands, except per share amounts) 2002 2002 2002 2002
- -------------------------------------------------------------------------------------------------------------------
New contracts, net 907 1,059 1,081 1,083
Homes delivered 1,187 1,067 1,040 846
Backlog at end of period 2,321 2,601 2,609 2,568
Revenue $ 297,515 $ 261,509 $ 258,439 $ 215,562
Gross margin $ 68,480 $ 64,392 $ 62,467 $ 53,934
Net income $ 15,894 $ 17,901 $ 16,898 $ 15,919
Net income per common share:
Basic $ 1.05 $ 1.18 $ 1.12 $ 1.06
Diluted $ 1.03 $ 1.15 $ 1.09 $ 1.03
Weighted average common shares outstanding:
Basic 15,074,651 15,168,259 15,141,925 15,031,816
Diluted 15,411,328 15,529,849 15,523,667 15,498,538
Dividends per common share $ 0.025 $ 0.025 $ 0.025 $ 0.025
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share amounts) 2001 2001 2001 2001
- --------------------------------------------------------------------------------------------------------------
New contracts, net 951 906 1,214 1,376
Homes delivered 1,303 1,167 980 777
Backlog at end of period 2,331 2,683 2,944 2,710
Revenue $ 309,400 $ 266,834 $ 222,377 $ 178,155
Gross margin $ 69,133 $ 59,566 $ 52,122 $ 40,733
Income before cumulative effect of change
in accounting principle $ 14,765 $ 15,012 $ 13,261 $ 9,563
Cumulative effect of change in accounting
principle - net of income taxes - - - $ 2,681
Net income $ 14,765 $ 15,012 $ 13,261 $ 12,244
Net income per common share before cumulative
effect of change in accounting principle:
Basic $ 0.99 $ 0.99 $ 0.87 $ 0.64
Diluted $ 0.96 $ 0.96 $ 0.85 $ 0.62
Net income per common share:
Basic $ 0.99 $ 0.99 $ 0.87 $ 0.82
Diluted $ 0.96 $ 0.96 $ 0.85 $ 0.79
Weighted average common shares outstanding:
Basic 14,921,720 15,224,248 15,194,162 15,026,992
Diluted 15,422,662 15,711,666 15,665,218 15,511,980
Dividends per common share $ 0.025 $ 0.025 $ 0.025 $ 0.025
- --------------------------------------------------------------------------------------------------------------
23
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Segment Information
- --------------------------------------------------------------------------------
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 development and sale
of land and the construction and sale of single-family attached and detached
homes. 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 and
title services for purchasers of our homes. The loans and 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 before income taxes includes interest
and intercompany profits 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,
----------------------------------------------------
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Homebuilding $1,015,162 $959,295 $920,059
Financial services 23,812 22,241 19,656
Intersegment (5,949) (4,770) (4,676)
- -------------------------------------------------------------------------------------------------------------------
Total Revenue $1,033,025 $976,766 $935,039
- -------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization:
Homebuilding $ 2,023 $ 1,455 $ 1,604
Financial services 101 113 126
Unallocated amounts 115 441 393
- -------------------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 2,239 $ 2,009 $ 2,123
- -------------------------------------------------------------------------------------------------------------------
Interest Expense:
Homebuilding $ 13,362 $ 15,642 $ 18,098
Financial services 448 526 256
Unallocated amounts - - -
- -------------------------------------------------------------------------------------------------------------------
Total Interest Expense $ 13,810 $ 16,168 $ 18,354
- -------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes:
Homebuilding $ 81,920 $ 66,157 $ 52,440
Financial services 15,590 13,872 12,535
Unallocated amounts 11,690 5,013 7,589
- -------------------------------------------------------------------------------------------------------------------
Total Income Before Income Taxes $ 109,200 $ 85,042 $ 72,564
- -------------------------------------------------------------------------------------------------------------------
Income Taxes:
Homebuilding $ 30,818 $ 25,690 $ 20,413
Financial services 6,080 5,291 4,635
Unallocated amounts 5,690 1,460 3,072
- -------------------------------------------------------------------------------------------------------------------
Total Income Taxes $ 42,588 $ 32,441 $ 28,120
- -------------------------------------------------------------------------------------------------------------------
Assets:
Homebuilding $ 504,802 $537,871 $500,864
Financial services 59,142 54,175 50,586
Unallocated amounts 14,514 20,064 16,192
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 578,458 $612,110 $567,642
- -------------------------------------------------------------------------------------------------------------------
Capital Expenditures:
Homebuilding $ 540 $ 10,090 $ 734
Financial services 251 77 47
Unallocated amounts 20 34 129
- -------------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 811 $ 10,201 $ 910
- -------------------------------------------------------------------------------------------------------------------
24
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
CONSOLIDATED
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUE. Total revenue for 2002 was $1.0 billion, an increase of $56.3
million over 2001. The increase was the result of an increase of $55.9 million
in homebuilding revenue and an increase of $1.6 million in financial services
revenue. The increase in homebuilding was the result of growth of $42.8 million
in housing revenue and $12.1 million in land revenue. Housing revenue increased
as a result of a 6.7% increase in the average sales price of Homes Delivered.
This was offset by a 2.1% decrease in the number of Homes Delivered. The
increase in land revenue was primarily due to an increase in lot sales related
to our exit from the Phoenix market. We also experienced increases in land sales
in our Cincinnati, Orlando and Washington, D.C. markets. These increases were
partially offset by decreases in Columbus and Indianapolis. The increase in
financial services revenue was primarily attributable to increases in revenue
earned from the sale of loans and increased earnings from title services.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $24.2
million over 2001. The increase related to both homebuilding and financial
services, which experienced increases of $15.8 million and $1.7 million,
respectively. The increase in homebuilding income was primarily due to increases
in the average sales price of Homes Delivered and housing gross margins. The
increase in financial services income was primarily the result of increased
income from the sale of loans and the favorable interest rate environment during
2002. The increase in unallocated amounts from 2001 to 2002 was primarily due to
certain administrative expenses recognized in 2001 related to exiting the
Phoenix market that were not recognized in 2002.
For the year ended December 31, 2001, the cumulative effect of a change in
accounting principle resulted in an increase in income of $2.7 million, net of
income taxes. This accounting change was the result of the January 1, 2001
adoption of Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which required
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 required for the year ended December 31, 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE. Total revenue for 2001 was $976.8 million, an increase of $41.7
million over 2000. The increase was the result of an increase of $39.2 million
in homebuilding revenue and an increase of $2.6 million in financial services
revenue. The increase in homebuilding was the result of growth of $41.2 million
in housing revenue offset by a decrease of $1.8 million in land revenue. Housing
revenue increased as a result of a 3.9% increase in the number of Homes
Delivered. The average sales price of Homes Delivered increased slightly in
2001. 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 in
financial services revenue occurred as a result of increases in loan origination
fees, the average loan amount, revenue earned from the sale of loans, title
services and the effect of the adoption of SFAS 133.
25
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES. Income before income taxes increased $12.5
million over 2000. The increase related to both homebuilding and financial
services, which experienced increases of $13.7 million and $1.3 million,
respectively. The increase in homebuilding income was due to increases in the
number of Homes Delivered and the housing gross margin. The increase in
financial services income was primarily the result of increased income from the
sale of loans due to increases in loan volume and the average loan amount, and
the favorable interest rate environment during 2001.
For the year ended December 31, 2001, the cumulative effect of a change in
accounting principle resulted in an increase in income of $2.7 million, net of
income taxes. This accounting change was the result of the January 1, 2001
adoption of SFAS 133.
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 homebuyers
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 2002 and 2001:
THREE MONTHS ENDED
---------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
(Dollars in thousands) 2002 2002 2002 2002
- ----------------------------------------------------------------------------------------
Revenue $297,515 $261,509 $258,439 $215,562
Unit data:
New contracts, net 907 1,059 1,081 1,083
Homes delivered 1,187 1,067 1,040 846
Backlog at end of period 2,321 2,601 2,609 2,568
- ----------------------------------------------------------------------------------------
Three Months Ended
---------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
(Dollars in thousands) 2001 2001 2001 2001
- ----------------------------------------------------------------------------------------
Revenue $309,400 $266,834 $222,377 $178,155
Unit data:
New contracts, net 951 906 1,214 1,376
Homes delivered 1,303 1,167 980 777
Backlog at end of period 2,331 2,683 2,944 2,710
- ----------------------------------------------------------------------------------------
26
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and 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) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Revenue:
Housing sales $ 984,564 $941,717 $900,507
Lot and land sales 28,542 16,438 18,257
Other income 2,056 1,140 1,295
- ---------------------------------------------------------------------------------------------------------
Total revenue $1,015,162 $959,295 $920,059
- ---------------------------------------------------------------------------------------------------------
Revenue:
Housing sales 97.0% 98.2% 97.9%
Lot and land sales 2.8 1.7 2.0
Other income 0.2 0.1 0.1
- ---------------------------------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
Land and housing costs 78.7 79.3 80.8
- ---------------------------------------------------------------------------------------------------------
Gross margin 21.3 20.7 19.2
General and administrative expenses 2.7 2.8 2.9
Selling expenses 6.4 6.5 6.1
- ---------------------------------------------------------------------------------------------------------
Operating income 12.2 11.4 10.2
Allocated expenses 4.2 4.5 4.5
- ---------------------------------------------------------------------------------------------------------
Income Before Income Taxes 8.0% 6.9% 5.7%
- ---------------------------------------------------------------------------------------------------------
OHIO AND INDIANA REGION:
Unit data:
New contracts, net 2,667 2,931 2,481
Homes delivered 2,730 2,650 2,567
Backlog at end of period 1,523 1,586 1,305
Average sales price of homes in backlog $ 231 $ 219 $ 209
Aggregate sales value of homes in backlog $ 352,000 $348,000 $273,000
Number of active subdivisions 85 87 82
- ---------------------------------------------------------------------------------------------------------
FLORIDA REGION:
Unit data:
New contracts, net 924 900 850
Homes delivered 869 906 725
Backlog at end of period 541 486 492
Average sales price of homes in backlog $ 227 $ 213 $ 209
Aggregate sales value of homes in backlog $123,000 $103,000 $103,000
Number of active subdivisions 27 28 28
- ---------------------------------------------------------------------------------------------------------
NORTH CAROLINA, VIRGINIA AND MARYLAND, AND ARIZONA REGION:
Unit data:
New contracts, net 539 616 696
Homes delivered 541 671 778
Backlog at end of period 257 259 314
Average sales price of homes in backlog $ 356 $ 417 $ 369
Aggregate sales value of homes in backlog $ 92,000 $108,000 $116,000
Number of active subdivisions 28 30 32
- ---------------------------------------------------------------------------------------------------------
TOTAL:
Unit data:
New contracts, net 4,130 4,447 4,027
Homes delivered 4,140 4,227 4,070
Backlog at end of period 2,321 2,331 2,111
Average sales price of homes in backlog $ 244 $ 240 $ 233
Aggregate sales value of homes in backlog $ 567,000 $559,000 $492,000
Number of active subdivisions 140 145 142
- ---------------------------------------------------------------------------------------------------------
27
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
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 some of our customers, the incidence of cancellations
after the start of construction is low. The cancellation rate for the years
ended December 31, 2002, 2001 and 2000 was 21.4%, 22.1% and 18.3%, respectively.
Unsold speculative homes, which are in various stages of construction, totaled
125, 105 and 107 at December 31, 2002, 2001 and 2000, respectively.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUE. Revenue for the homebuilding segment was $1.0 billion, an increase
of 5.8%, or $55.9 million, from 2001 to 2002. This increase was due to a 4.5%
increase in housing revenue and a 73.6% increase in land revenue. The increase
in housing revenue was due to an increase of 6.7% in the average sales price of
Homes Delivered. The average sales price of Homes Delivered increased in all our
markets. The number of Homes Delivered decreased by 2.1% from 2001 to 2002. The
largest decreases occurred in our Tampa, Charlotte and Phoenix markets. The
increase in land revenue of $12.1 million was primarily attributable to lot
sales relating to our exit from the Phoenix market. We also experienced
increases in land sales in our Cincinnati, Orlando and Washington, D.C. markets
that were partially offset by decreases in Columbus and Indianapolis.
HOME SALES AND BACKLOG. New Contracts recorded in 2002 decreased 7.1% over
the prior year. New contracts decreased in the majority of our markets due
primarily to economic conditions and fewer subdivisions. The number of New
Contracts recorded in future periods will be dependent on numerous factors,
including future economic conditions, timing of land acquisitions and
development, consumer confidence, number of subdivisions and interest rates
available to potential home buyers.
At December 31, 2002, the total sales value of our Backlog of 2,321 homes
was approximately $567 million, representing a 1.4% increase in sales value and
a 0.4% decrease in units compared to the levels recorded at December 31, 2001.
The average sales price of homes in Backlog increased 1.8% from December 31,
2001, with increases occurring in all of our markets except Raleigh and
Washington, D.C.
GROSS MARGIN. The gross margin for the homebuilding segment was 21.3% for
2002, compared to 20.7% for 2001. The increase consisted of an increase in gross
margin from housing sales of $22.4 million, or 11.1%, and an increase in gross
margin from land and lot sales of $3.2 million. The increase in housing's gross
margin was the result of acquiring and developing lots in premier locations,
favorable housing economic conditions including low mortgage rates and improved
operating efficiencies. The increase in land and lot sales' gross margin was due
primarily to lots sold related to our exit from the Phoenix market. 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 $26.7 million in 2001 to $27.1 million in 2002. As a percentage
of revenue, general and administrative expenses decreased slightly from 2.8% of
revenue in 2001 to 2.7% of revenue in 2002. The increase in dollars was
primarily the result of increased incentive compensation due to increased
earnings and homeowners' association dues to support our increase in operations.
28
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
SELLING EXPENSES. Selling expenses increased from $62.5 million, or 6.5% of
total revenue, in 2001 to $64.6 million, or 6.4% of total revenue, in 2002. The
increase in expense was due to increases in sales commissions paid to outside
Realtors and internal salespeople as a result of the increase in the average
sales price of Homes Delivered. Advertising expenses also increased slightly.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE. Revenue for the homebuilding segment was $959.3 million, an
increase of 4.3%, or $39.2 million, from 2000 to 2001. This increase was due to
a 4.6% increase in housing revenue offset by a 10.0% decrease in land revenue.
The increase in housing revenue was due to an increase of 3.9% in the number of
Homes Delivered. Homes Delivered increased in the majority of our markets, but
most significantly in Indianapolis, Tampa and Orlando. The average sales price
of Homes Delivered increased slightly in 2001 to $223,000. The decrease in land
revenue of $1.8 million was primarily attributable to the Washington, D.C.
market, where there was a significant decrease in lot sales to outside
homebuilders in comparison to 2000.
HOME SALES AND BACKLOG. New Contracts recorded in 2001 increased 10.4% over
the prior year. New contracts increased in the majority of our markets, but most
significantly in Columbus, Indianapolis, Orlando and Cincinnati. We believe the
increase was primarily attributable to the favorable interest rate environment
in 2001.
At December 31, 2001, the total sales value of our Backlog of 2,331 homes
was approximately $559 million, representing a 13.6% increase in sales value and
a 10.4% increase in units compared to the levels recorded at December 31, 2000.
The average sales price of homes in Backlog increased 3.0% from December 31,
2000, with increases occurring in all of our markets except Cincinnati and
Orlando.
GROSS MARGIN. The gross margin for the homebuilding segment was 20.7% for
2001, compared to 19.2% for 2000. The increase consisted of an increase in gross
margin from housing sales of $22.6 million, or 12.6%, offset slightly by a
decrease in gross margin from land and lot sales of $2.4 million. The increase
in housing's gross margin was the result of improved operating efficiencies. We
have also focused on acquiring or developing lots in premier locations to obtain
higher margins. The decrease in land and lot sales' gross margin was due
primarily to decreased lots sold in our Washington, D.C. market compared to
2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased slightly from $26.1 million in 2000 to $26.7 million in 2001. As a
percentage of revenue, general and administrative expenses decreased slightly
from 2.9% of revenue in 2000 to 2.8% of revenue in 2001.
SELLING EXPENSES. Selling expenses increased from $56.5 million, or 6.1% of
total revenue, in 2000 to $62.5 million, or 6.5% of total revenue, in 2001. The
increase in expense was due to increases in sales commissions paid to outside
Realtors and internal salespeople as a result of the increase in Homes
Delivered. Model expenses also increased slightly.
29
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
FINANCIAL SERVICES SEGMENT
The following table sets forth certain information related to our financial
services segment:
Year Ended December 31,
------------------------------------
(Dollars in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Number of loans originated 3,388 3,428 3,218
Revenue:
Loan origination fees $ 5,890 $ 5,599 $ 5,078
Sale of loans 10,523 9,995 8,789
Other 7,399 6,647 5,789
- ----------------------------------------------------------------------------------------------------------------
Total Revenue 23,812 22,241 19,656
General & administrative expenses 8,222 8,369 7,121
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes $15,590 $13,872 $12,535
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUE. Revenue for the year ended December 31, 2002 was $23.8
million, a 7.0% increase over the $22.2 million recorded for 2001. Loan
origination fees increased 5.1% from 2001 to 2002. The increase was due to an
increase in the average loan amount. At December 31, 2002, M/I Financial was
operating in eight of our ten markets. In these eight markets, 90% of our Homes
Delivered that were financed were through M/I Financial.
Revenue from the sale of loans increased 5.2% to $10.5 million in 2002.
The increase was primarily due to an increase in the average loan amount and a
favorable interest rate environment.
Revenue from other sources increased 11.3% from 2001 to 2002. The
increase was primarily due to increased earnings from title services as a result
of an increase in the number of loans closed.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the year ended December 31, 2002 were $8.2 million, a 1.7% decrease
over 2001. The decrease was a result of various general and administrative
expenses decreasing as a result of lower volume.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE. Revenue for the year ended December 31, 2001 was $22.2
million, a 13.2% increase over the $19.7 million recorded for 2000. Loan
origination fees increased 10.3% from 2000 to 2001. The increase was due to a
6.5% increase in the number of loans originated during 2001 compared to 2000,
along with an increase in the average loan amount. At December 31, 2001, M/I
Financial was operating in eight of our eleven markets. In these eight markets,
90% of our Homes Delivered that were financed were through M/I Financial.
Revenue from the sale of loans increased 13.7% to $10.0 million in
2001. The increase was primarily due to a higher volume of mortgages originated
during 2001 compared to 2000. The increase was also due to lower interest rates
beginning in the fourth quarter of 2000 that resulted in a majority of fixed
rate mortgages. We entered into an agreement in late 2000 for the sale of
servicing on fixed rate mortgages that locked in favorable servicing released
premiums.
30
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Revenue from other sources increased 14.8% from 2000 to 2001. This
increase was primarily due to increased earnings from title services and an
increase in loan application revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the year ended December 31, 2001 were $8.4 million, a 17.5%
increase over 2000. This was caused primarily by an increase in incentive
compensation due to an increase in net income and an increase in loan
application expenses.
OTHER OPERATING RESULTS
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses increased to $26.6 million in 2002 from $22.9 million in
2001. As a percentage of total revenue, general and administrative expenses
increased from 2.3% to 2.6%.
Corporate general and administrative expenses increased to $22.9
million in 2001 from $18.7 million in 2000. However, as a percentage of total
revenue, general and administrative expenses increased from 2.0% to 2.3%. The
increase in expense was the result of various general and administrative
expenses increasing as a result of an increase in profitability.
INTEREST EXPENSE. Homebuilding interest expense for 2002 decreased to
$13.4 million from $15.6 million in 2001. Interest expense was lower in 2002 due
to a decrease in the average borrowings outstanding and a decrease in
capitalized interest of $0.7 million.
Homebuilding interest expense for 2001 decreased to $15.6 million from
$18.1 million in 2000. Interest expense was lower in 2001 due to a decrease in
the average borrowings outstanding. Interest expense also decreased due to a
decrease in the weighted average interest rate. This was offset by an increase
in capitalized interest of $1.9 million.
INCOME TAXES. The effective tax rate increased from 38.2% to 39.0% from
2001 to 2002. The increase is primarily attributed to higher state taxes in
2002.
The effective tax rate decreased from 38.8% to 38.2% from 2000 to 2001.
The decrease is primarily attributed to lower state taxes in 2001.
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 ongoing 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. Listed below are those policies that we believe are
critical and require the use of complex judgment in their application.
31
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
INVENTORIES: Inventories are recorded at cost which is not in excess of
net realizable value. In addition to the costs of direct land acquisition, land
development and home construction, inventory costs include capitalized interest,
real estate taxes and indirect costs incurred during development and home
construction. Those 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. We assess these
assets for recoverability in accordance with the provisions of SFAS 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. These evaluations for
impairment are significantly impacted by estimates of revenues, costs and
expenses and other factors. If these assets are considered to be impaired, the
impairment loss to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
REVENUE RECOGNITION: Revenue from the sale of a home is recognized when
the closing has occurred and the risk of ownership is transferred to the buyer.
All associated homebuilding costs are charged to costs of sales in the period
when the revenues from home closings are recognized. Homebuilding costs include
land and land development costs, home construction costs (including an estimate
of the costs to complete home construction), previously capitalized indirect
costs and estimated warranty costs. Sales commissions are included in selling,
general and administrative expense when the closing has occurred. All other
costs are expensed as incurred.
We recognize financial services revenues associated with our title
operations as homes are closed, closing services are rendered and title
insurance policies are issued, all of which generally occur simultaneously as
each home is closed. We recognize the majority of the revenues associated with
our mortgage loan operations when the mortgage loans and related servicing
rights are sold to third-party investors. We recognize mortgage loan origination
fees when we close and fund the loans associated with the homes financed. All of
the financial services mortgage loans and related servicing rights are sold to
third-party investors. All of the underwriting risk associated with title
insurance policies is transferred to third-party insurers.
SELF-INSURANCE: Self-insurance accruals are made for certain claims
associated with employee health care, workers' compensation and general
liability insurance. These accruals include management's estimates that may be
based on historical loss development factors. Differences in estimates and
assumptions could result in an accrual requirement materially different from the
calculated accrual.
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 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. See Safe Harbor Statement for further
discussion of factors that could impact our source of funds.
NOTES PAYABLE BANKS. At December 31, 2002, we had no bank borrowings
outstanding 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. This includes a maximum amount of $50 million in letters of
credit. The Bank Credit Facility matures in March 2006.
32
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
We had $29 million outstanding as of December 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. The agreement terminates in May 2003.
At December 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. At December 31, 2002, we had $316 million of unused borrowing
availability under our loan agreements. We also had $36 million of completion
bonds and $15 million of letters of credit outstanding at December 31, 2002.
The $100 million decrease in notes payable banks-homebuilding
operations from December 31, 2001 to December 31, 2002 reflects decreased
borrowings primarily attributable to increased earnings from operations.
SUBORDINATED NOTES. At December 31, 2002, there were outstanding $50
million of Senior Subordinated Notes. The Notes bear interest at a fixed rate of
9.51% through August 2004 and at a slightly higher rate for two additional
years, and mature in August 2006.
MORTGAGE NOTES PAYABLE. At December 31, 2002, mortgage notes payable
outstanding were $13 million, secured by an office building, lots and land with
a recorded book value of $18 million.
LAND AND LAND DEVELOPMENT. Single-family lots, land and land
development costs decreased slightly from December 31, 2001 to December 31,
2002. We continue to purchase some lots from outside developers under contracts.
However, we are strategically focusing on increasing raw ground purchases. We
will continue to evaluate all of our alternatives to satisfy our increasing
demand for lots in the most cost-effective manner.
We have interests in joint ventures and limited liability companies
that engage in land development activities and are recorded using the equity
method of accounting. These entities have no debt on their balance sheets.
UNIVERSAL SHELF REGISTRATION. In April 2002, we filed a $150 million
universal shelf registration statement with the Securities and Exchange
Commission. Pursuant to the filing, we may, from time to time over an extended
period, offer new debt and/or equity securities. Of the equity shares, up to 1
million common shares may be sold by certain shareholders who are considered
selling shareholders. This shelf registration should 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. No debt or equity
securities have been offered for sale as of December 31, 2002.
PURCHASE OF TREASURY SHARES. On December 10, 2002, our Board of
Directors authorized the repurchase of up to $50 million worth of shares of
outstanding common stock. This replaces and supercedes the unused portions of
all of the preexisting repurchase programs that have previously been authorized.
The purchases may occur in the open market and/or in privately negotiated
transactions as market conditions warrant. As of December 31, 2002 we had
purchased 3.5 million shares at an average price of approximately $11 and had
approximately $48 million available to repurchase outstanding common shares from
our current Board approval.
IMPACT OF NEW ACCOUNTING STANDARDS. In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS 142, "Goodwill and Other
Intangible Assets," which was effective January 1, 2002. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the statement includes provisions for the reclassification of certain existing
recognized intangibles such as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported
33
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. The adoption of SFAS 142 did not have
a significant impact on the consolidated financial statements.
In August 2001, the FASB issued SFAS 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." While this statement supersedes SFAS 121,
"Accounting for Impairment of Long-Lived Assets to be Disposed Of," it retains
the fundamental provisions of SFAS 121 for recognition and impairments of assets
to be held and used, and assets to be disposed of by sale. This statement was
effective on January 1, 2002. The adoption of SFAS 144 did not have a
significant impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
4, 44, and 64, Amendment of FASB Statement 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. We do not
believe the adoption of SFAS 145 will have a significant impact on the
consolidated financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
included in restructurings. This Statement eliminates the definition and
requirements for recognition of exit costs as defined in EITF Issue 94-3, and
requires that liabilities for exit activities be recognized when incurred
instead of at the exit activity commitment date. This Statement is effective for
exit or disposal activities initiated after December 31, 2002. We do not believe
the adoption of SFAS 146 will have a significant impact on the consolidated
financial statements.
In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also includes more
detailed disclosures with respect to guarantees. FIN 45 is effective for
guarantees issued or modified starting January 1, 2003 and requires additional
disclosures for the year ended December 31, 2002. We do not expect the
provisions of FIN 45 to have a significant impact on the consolidated financial
statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The transition provisions and the disclosure
requirements of this Statement are effective for fiscal years ending after
December 15, 2002. We continue to apply the intrinsic value-based method to
account for stock options and have complied with the new disclosure
requirements.
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Until now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that the company is not required to
consolidate but in which it has significant variable interest. The
34
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003 and to older entities in the fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements, none of which appear to apply to us at this time, are effective in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. We do not expect the provisions of FIN
46 to have a significant impact on the consolidated financial statements.
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 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
was 8.9%, 8.3% and 8.5% for 2002, 2001 and 2000, 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 a home is started through 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
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 homebuyers. Mortgage rates are currently at historically low
levels. If mortgage interest rates increase, our business could be adversely
affected.
35
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
LAND DEVELOPMENT ACTIVITIES. We develop the lots for a majority of our
subdivisions. Therefore, our short- and long-term financial success will be
dependent upon 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 may make material expenditures for items such as acquiring land and
constructing subdivision infrastructure (roads and utilities).
THE COMPANY'S MARKETS. We have operations in Columbus and Cincinnati,
Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm Beach County, Florida;
Charlotte and Raleigh, North Carolina; and the Virginia and Maryland suburbs of
Washington, D.C. Adverse general economic conditions in these markets could have
a material impact on our operations. In 2002, approximately 40% of our operating
income was 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 homebuyers, 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 homebuyers over the new home
market.
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, building design, and construction and similar matters. This includes
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 also 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 to comply 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 hookups 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. Continued
shortages in these areas
36
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
could delay construction of homes which could adversely affect our business. At
this time, we are not experiencing any significant material or labor shortages
and, therefore, do not anticipate a material effect for fiscal year 2002.
SIGNIFICANT VOTING CONTROL BY PRINCIPAL SHAREHOLDERS. As of December
31, 2002, members of the Irving E. Schottenstein family owned approximately 26%
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 $345 million. To
minimize the effect of the interest rate fluctuation, we have interest rate swap
agreements with certain banks for a total notional amount of $225 million, of
which $150 million 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, 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, 2002, the notional
principal amount under these forward sales agreements was $139 million. The
hedging agreements outstanding at December 31, 2002 mature within 90-120 days.
Gains or losses on these agreements are marked to market monthly and are
recorded as revenue or expense in the consolidated statements of income.
37
INDEPENDENT AUDITORS' REPORT
To the Shareholders 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, 2002 and 2001,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
Columbus, Ohio
February 14, 2003
38
2002 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) 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Revenue $ 1,033,025 $ 976,766 $ 935,039
Costs and expenses:
Land and housing 783,752 755,212 736,067
General and administrative 61,484 57,473 51,734
Selling 64,779 62,871 56,320
Interest 13,810 16,168 18,354
- -----------------------------------------------------------------------------------------------
Total costs and expenses 923,825 891,724 862,475
- -----------------------------------------------------------------------------------------------
Income before income taxes 109,200 85,042 72,564
- -----------------------------------------------------------------------------------------------
Income taxes (credit):
Current 47,628 36,751 31,059
Deferred (5,040) (4,310) (2,939)
- -----------------------------------------------------------------------------------------------
Total income taxes 42,588 32,441 28,120
- -----------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 66,612 52,601 44,444
Cumulative effect of change in accounting
principle - net of income taxes -- 2,681 --
- -----------------------------------------------------------------------------------------------
Net income $ 66,612 $ 55,282 $ 44,444
- -----------------------------------------------------------------------------------------------
Earnings per common share - basic:
Income before cumulative effect of
change in accounting principle $ 4.41 $ 3.49 $ 2.82
Cumulative effect of change in accounting
principle - net of income taxes -- .17 --
- -----------------------------------------------------------------------------------------------
Net income $ 4.41 $ 3.66 $ 2.82
- -----------------------------------------------------------------------------------------------
Earnings per common share - diluted:
Income before cumulative effect of change
in accounting principle $ 4.30 $ 3.39 $ 2.76
Cumulative effect of change in accounting
principle - net of income taxes -- .17 --
- -----------------------------------------------------------------------------------------------
Net income $ 4.30 $ 3.56 $ 2.76
- -----------------------------------------------------------------------------------------------
Weighted average shares outstanding (in thousands):
Basic 15,104 15,092 15,767
Diluted 15,505 15,530 16,112
- -----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
39
2002 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) 2002 2001
- -------------------------------------------------------------------------------------
ASSETS:
Cash $ 953 $ 9,988
Cash held in escrow 381 560
Receivables 56,159 55,013
Inventories:
Single-family lots, land and land development costs 269,863 287,110
Houses under construction 177,225 181,742
Model homes and furnishings - at cost (less accumulated
depreciation: 2002 - $66; 2001 - $49) 1,948 7,761
Land purchase deposits 2,181 2,623
Building, office furnishings, transportation and
construction equipment - at cost (less accumulated
depreciation: 2002 - $7,798; 2001 - $7,453) 20,813 22,276
Investment in unconsolidated joint ventures and
limited liability companies 20,333 22,457
Other assets 28,602 22,580
- -------------------------------------------------------------------------------------
TOTAL ASSETS $ 578,458 $ 612,110
- -------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 58,187 $ 55,656
Accrued compensation 23,213 22,289
Customer deposits 17,089 18,487
Other liabilities 48,782 41,560
Notes payable banks - homebuilding operations -- 100,000
Note payable bank - financial services operations 28,800 30,000
Mortgage notes payable 12,658 14,227
Senior subordinated notes 50,000 50,000
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 238,729 332,219
- -------------------------------------------------------------------------------------
Commitments and Contingencies
- -------------------------------------------------------------------------------------
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 17,626,123 shares 176 88
Additional paid-in capital 65,079 62,954
Retained earnings 306,970 241,956
Treasury stock - at cost - 2,834,704 and 2,688,116
shares, respectively, at December 31, 2002 and 2001 (32,496) (25,107)
- -------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 339,729 279,891
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 578,458 $ 612,110
- -------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
40
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Statements of Shareholders' 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, 1999 16,633,680 $ 88 $ 62,282 $ 145,337 $ (7,195)
Net income -- -- -- 44,444 --
Dividends to shareholders, $0.10 per
common share -- -- -- (1,597) --
Purchase of treasury shares (1,738,200) -- -- -- (15,568)
Stock options exercised 63,800 -- (151) -- 476
Deferral of executive and director stock -- -- 771 -- --
Executive deferred stock distributions 21,054 -- (155) -- 157
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 14,980,334 88 62,747 188,184 (22,130)
Net income -- -- -- 55,282 --
Dividends to shareholders, $0.10 per
common share -- -- -- (1,510) --
Purchase of treasury shares (357,400) -- -- -- (5,657)
Stock options exercised 314,200 -- (640) -- 2,671
Deferral of executive and director stock -- -- 855 -- --
Executive deferred stock distributions 872 -- (8) -- 9
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 14,938,006 88 62,954 241,956 (25,107)
Net income -- -- -- 66,612 --
2-for-1 stock split, par value unchanged -- 88 -- (88) --
Dividends to shareholders, $0.10 per
common share -- -- -- (1,510) --
Income tax effect of stock options and
executive deferred stock distributions -- -- 1,596 -- --
Purchase of treasury shares (381,100) -- -- -- (9,579)
Stock options exercised 156,140 -- 107 -- 1,458
Deferral of executive and director stock -- -- 1,154 -- --
Executive and director deferred stock
distributions 78,373 -- (732) -- 732
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 14,791,419 $ 176 $ 65,079 $ 306,970 $ (32,496)
=========================================================================================================================
See Notes to Consolidated Financial Statements.
41
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Year Ended December 31,
-----------------------------------
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 66,612 $ 55,282 $ 44,444
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss from property disposals 71 12 165
Depreciation 2,239 2,009 2,123
Deferred income tax credit (5,040) (4,310) (2,939)
Income tax benefit from stock transactions 1,596 -- --
Decrease (increase) in cash held in escrow 179 1,150 (882)
Increase in receivables (1,146) (5,054) (9,971)
Decrease (increase) in inventories 43,646 (10,188) 10,219
Increase in other assets (982) (1,537) (4,122)
Increase (decrease) in accounts payable 2,531 (11,688) 4,146
(Decrease) increase in customer deposits (1,398) 5,045 (264)
Increase in other liabilities 9,300 15,956 10,387
Equity in undistributed income of unconsolidated
joint ventures and limited liability companies (1,115) (880) (802)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 116,493 45,797 52,504
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (811) (6,105) (910)
Investment in unconsolidated joint ventures and
limited liability companies (14,283) (15,432) (23,287)
Distributions from unconsolidated joint ventures and
limited liability companies 1,859 2,226 1,016
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (13,235) (19,311) (23,181)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments (101,200) (12,500) (4,900)
Principal repayments of mortgage notes payable (1,569) (7,418) (4,695)
Dividends paid (1,510) (1,510) (1,597)
Proceeds from exercise of stock options
and deferred stock 1,565 2,032 327
Payments to acquire treasury shares (9,579) (5,657) (15,568)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (112,293) (25,053) (26,433)
- ------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (9,035) 1,433 2,890
Cash balance at beginning of year 9,988 8,555 5,665
- ------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 953 $ 9,988 $ 8,555
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest - net of amount capitalized $ 13,964 $ 15,848 $ 17,870
Income taxes $ 44,217 $ 37,050 $ 29,233
NON-CASH TRANSACTIONS DURING THE YEAR:
Land and lots acquired with mortgage
notes payable $ -- $ 4,926 $ 6,739
Distribution of single-family lots from unconsolidated
joint ventures and limited liability companies $ 15,663 $ 14,661 $ 20,225
Non-monetary exchange of fixed assets $ -- $ 4,096 --
Deferral of executive and director stock $ 1,154 $ 855 $ 771
Executive and director deferred stock distributions $ 732 $ 8 $ 155
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
42
2002 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 accounting principles generally accepted in the
United States of America (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; and the Virginia and Maryland suburbs of Washington, D.C.
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 also has an investment in title insurance agencies
that provide title services to purchasers of the Company's homes (see Note 2).
CASH AND CASH HELD IN ESCROW. Cash and cash held in escrow were
primarily held in one bank at December 31, 2002 and 2001.
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.
43
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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:
Year Ended December 31,
-----------------------------------------------------
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Interest capitalized, beginning of year $ 12,187 $10,337 $ 8,886
Interest incurred 13,098 18,018 19,805
Interest expensed (13,810) (16,168) (18,354)
- -------------------------------------------------------------------------------------------------------------------
Interest capitalized, end of year $ 11,475 $12,187 $10,337
- -------------------------------------------------------------------------------------------------------------------
REVENUE RECOGNITION. Revenue and cost of revenue from the sale of real
estate are recognized at the time title is transferred to the buyer. Discounts
and other sales incentives are included as a reduction of homebuilding revenue.
The following summarizes both housing and lot and land revenue and
costs included in revenue and cost of revenue:
Year Ended December 31,
-----------------------------------------------------
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Housing revenue $984,564 $941,717 $900,507
Housing costs 759,207 739,535 720,974
Lot and land revenue 28,542 16,438 18,257
Lot and land costs 24,545 15,677 15,093
- -------------------------------------------------------------------------------------------------------------------
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
homebuyers (see Note 13). Hedging transactions are marked to market monthly and
the resulting gains or losses are included in revenue.
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 amounts are reserved as homes close to homebuyers
and cover estimated material and outside labor costs incurred during the
warranty period. The reserve amounts are based upon historical experience and
geographic location. Warranty expense was $6,493,000, $6,773,000 and $7,061,000
for 2002, 2001 and 2000, respectively. The summary of warranty activity is as
follows:
YEAR ENDED
DECEMBER 31,
(In thousands) 2002
- -----------------------------------------------------------------------------
Warranty reserves, beginning of year $ 7,250
Warranty expense 6,493
Payments made (6,510)
- -----------------------------------------------------------------------------
Warranty reserves, end of year $ 7,233
- -----------------------------------------------------------------------------
44
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
DEPRECIATION. Depreciation of building, model and office furnishings,
transportation and construction equipment is computed using both straight-line
and accelerated methods based on the estimated useful lives of the assets.
Depreciation expense was $2,239,000, $2,009,000 and $1,961,000 in 2002, 2001 and
2000, respectively.
AMORTIZATION. The costs incurred in connection with the issuance of
Subordinated Notes (see Note 9) are being amortized over the terms of the
related debt. Amortization of these costs is included in interest expense.
Unamortized debt issuance costs of $597,000 and $759,000 relating to the
Subordinated Notes are included in other assets at December 31, 2002 and 2001,
respectively.
ADVERTISING. The Company expenses advertising costs as incurred. The
Company expensed $9,984,000, $8,686,000 and $7,768,000 in 2002, 2001 and 2000,
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. There are no adjustments to net income
necessary in the calculation of basic or diluted earnings per share. All share
and per share amounts have been adjusted for the 2-for-1 stock split effective
June 19, 2002.
PROFIT SHARING. The Company has a deferred profit-sharing plan which
covers substantially all Company employees and permits members to make
contributions to the plan on a pre-tax salary 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 $1,900,000,
$1,600,000 and $1,425,000 in 2002, 2001 and 2000, respectively.
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. We assess assets for recoverability in
accordance with SFAS 144.
IMPACT OF NEW ACCOUNTING STANDARDS. In July 2001, the FASB issued SFAS
142, "Goodwill and Other Intangible Assets," which was effective January 1,
2002. SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the statement includes provisions for the
reclassification of certain existing recognized intangibles such as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The adoption of SFAS 142 did not have a significant
impact on the consolidated financial statements.
In August 2001, the FASB issued SFAS 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." While this statement supersedes SFAS 121,
"Accounting for Impairment of Long-Lived Assets to be Disposed of," it retains
the fundamental provisions of SFAS 121 for recognition and impairment of assets
to be held and used, and assets to be disposed of by sale. This statement was
effective on January 1, 2002. The adoption of SFAS 144 did not have a
significant impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
4, 44, and 64, Amendment of FASB Statement 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
45
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
included in restructurings. This Statement eliminates the definition and
requirements for recognition of exit costs as defined in EITF Issue 94-3, and
requires that liabilities for exit activities be recognized when incurred
instead of at the exit activity commitment date. This Statement is effective for
exit or disposal activities initiated after December 31, 2002. The Company does
not believe the adoption of SFAS 146 will have a significant impact on the
consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also includes more
detailed disclosures with respect to guarantees. FIN 45 is effective for
guarantees issued or modified starting January 1, 2003 and requires additional
disclosures for the year ended December 31, 2002. The Company does not expect
the provisions of FIN 45 to have a significant impact on the consolidated
financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The transition provisions and the disclosure
requirements of this Statement are effective for fiscal years ending after
December 15, 2002. The Company will continue to apply the intrinsic value-based
method to account for stock options and has complied with the new disclosure
requirements.
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), to expand upon and strengthen
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
Until now, one company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN 46 also requires
disclosures about variable interest entities that the company is not required to
consolidate but in which it has significant variable interest. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003 and to older entities in the fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements,
none of which appear to apply to the Company at this time, are effective in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
provisions of FIN 46 to have a significant impact on the 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 an opportunity for certain eligible employees of the
Company to defer a
46
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
portion of their compensation and to invest in the Company's common stock.
Compensation expense recorded related to the Plan was $551,000, $686,000 and
$624,000 in 2002, 2001 and 2000, respectively.
In 1997, the Company adopted the Director Deferred Compensation Plan to
provide its directors with an opportunity to defer their director compensation
and to invest in the Company's common stock.
STOCK-BASED COMPENSATION. The Company accounts for its stock-based
employee compensation plan, which is described more fully in Note 11, under the
recognition and measurement principles of APB Option No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
(Dollars in thousands) YEAR ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Net income, as reported $66,612 $55,282 $44,444
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects 2,153 948 217
- -------------------------------------------------------------------------------------------------------------------
Pro forma net income $64,459 $54,334 $44,227
- -------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 4.41 $ 3.66 $ 2.82
Basic - pro forma $ 4.26 $ 3.60 $ 2.81
Diluted - as reported $ 4.30 $ 3.56 $ 2.76
Diluted - pro forma $ 4.16 $ 3.50 $ 2.74
- -------------------------------------------------------------------------------------------------------------------
RECLASSIFICATIONS. Certain amounts in the 2000 and 2001 consolidated
financial statements have been reclassified to conform with the 2002
presentation.
2. TRANSACTIONS WITH RELATED PARTIES
Related parties are entities owned by, or partially owned by, certain
shareholders of the Company or joint ventures and limited liability companies
(see Note 4) in which investments by the Company are accounted for using the
equity method.
In January 2003, the Company purchased land for approximately
$2,200,000 that was under the control of M/I Real Estate Co. M/I Real Estate is
owned by an officer of the Company. The price and terms are equivalent to what
could have been obtained from a third party and was approved by the independent
Board members prior to purchase.
47
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. RECEIVABLES
Receivables consist of the following:
December 31,
---------------------------------
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Mortgage loans to be funded $54,141 $52,853
Accounts receivable 2,018 2,160
- -------------------------------------------------------------------------------------------------------------------
Total receivables $56,159 $55,013
- -------------------------------------------------------------------------------------------------------------------
Mortgage loans to be funded relate to houses closed on or before
December 31, which were subsequently funded by unrelated lending institutions.
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND LIMITED LIABILITY COMPANIES
At December 31, 2002, 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 the lots developed in
the form of a capital distribution. The Company received distributions of
$15,663,000, $14,661,000 and $20,225,000 in developed lots at cost in 2002, 2001
and 2000, respectively, and purchased lots totaling $107,000 in 2000 from the
joint ventures and limited liability companies. No such lots were purchased in
2002 or 2001.
Summarized condensed combined financial information for the joint
ventures and limited liability companies, which is included in the homebuilding
segment, as of December 31, 2002 and 2001 and for each of the three years in the
period ended December 31, 2002 is as follows:
Summarized Condensed Combined Balance Sheets:
December 31,
--------------------------------------
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Assets:
Single-family lots, land and land development costs $40,938 $49,458
Other assets 1,468 2,265
- -------------------------------------------------------------------------------------------------------------------
Total Assets $42,406 $51,723
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Partners Equity:
Liabilities:
Other liabilities $ 3,408 $ 4,085
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 3,408 4,085
- -------------------------------------------------------------------------------------------------------------------
Partners' Equity:
Company's equity $20,333 22,820
Other equity 18,665 24,818
- -------------------------------------------------------------------------------------------------------------------
Total Partners' Equity 38,998 47,638
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Partners' Equity $42,406 $51,723
- -------------------------------------------------------------------------------------------------------------------
48
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Summarized Condensed Combined Statements of Operations:
Year Ended December 31,
----------------------------------------
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Revenue $ 104 $ 139 $ 161
Costs and expenses 410 369 420
- -------------------------------------------------------------------------------------------------------------------
Loss $(306) $(230) $(259)
- -------------------------------------------------------------------------------------------------------------------
Included in the Company's investment in joint ventures and limited
liability companies at December 31, 2002 and 2001 is $290,000 and $379,000,
respectively, of capitalized interest and other costs. Letters of credit
totaling approximately $5,632,000 are outstanding at December 31, 2002 and serve
as completion bonds for joint venture and limited liability company development
work in progress.
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, 2002 and 2001.
Approximately $2,002,000, $1,889,000 and $1,884,000 of title insurance premiums
and closing fees were paid to these agencies in 2002, 2001 and 2000,
respectively.
5. LEASE COMMITMENTS
The Company leases various office facilities, automobiles, model
furnishings, and model homes under operating leases with remaining terms of 1 to
6 years. At December 31, 2002, the future minimum rental commitments totaled
$6,653,000 under non-cancelable operating leases with initial terms in excess of
one year as follows: 2003 - $3,986,000; 2004 - $1,587,000; 2005 - $488,000; 2006
- - $297,000; 2007 - $278,000; and $17,000 thereafter.
The Company's total rental expense was $8,600,000, $8,603,000, and
$7,594,000 for 2002, 2001 and 2000, respectively.
6. 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 shareholder 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 voting rights) and qualifications, limitations or
restrictions thereon, of any series so established, including dividend rights,
liquidation preferences, redemption rights and conversion privileges.
7. NOTES PAYABLE BANKS
At December 31, 2002, the Company's homebuilding operations had no
borrowings and letters of credit totaling $12,174,000 outstanding under a loan
agreement with twelve banks. Borrowings under the loan agreement are at the
Alternate Base Rate and are primarily unsecured. This agreement provides for
total borrowing base indebtedness not to exceed the lesser of $315 million,
including up to $50 million in outstanding letters of credit, under the
revolving credit agreement 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. The revolving credit facility expires in March 2006. The loan
agreement contains covenants that 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
49
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
of additional indebtedness that may be incurred by the Company, on the
acquisition of undeveloped land and on the aggregate cost of certain types of
inventory the Company can hold at any one time.
At December 31, 2002, $28,800,000 was outstanding under a revolving
loan agreement with a bank pursuant to which the Company was permitted to borrow
up to $30 million 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 M/I Financial
loan agreement, interest is calculated at LIBOR plus a margin. The agreement
terminates in May 2003.
At December 31, 2002, the Company had $316.2 million of unused
borrowing availability under its loan agreements. The weighted average interest
rate of the Company's total bank borrowings was 8.9%, 7.7%, and 8.3% at December
31, 2002, 2001 and 2000, respectively, which includes the interest rate swaps as
discussed below. Average borrowings were $83,189,000 in 2002 and $151,847,000 in
2001.
The Company has interest rate swap agreements for a total notional
amount of $225 million, of which $150 million offset each other. The remaining
$75 million have fixed interest rates ranging from 5.97% to 5.98% and expire in
2004. The swaps are not designated as hedges. The Company accounts for interest
rate swaps in accordance with SFAS 133. This statement requires recognition of
all derivative instruments in the balance sheet as either assets or liabilities
and measures them at fair value. Any change in the unrealized gain or loss is
recorded in current earnings. At December 31, 2002 and 2001, the Company
recorded a net liability of $5,300,000 and $4,088,000, respectively, related to
these derivative instruments. The mark-to-market fair value adjustment related
to these instruments was recorded in general and administrative expenses in the
income statement in the amount of $1,212,000 in 2002, $4,088,000 in 2001 and $0
in 2000.
8. MORTGAGE NOTES PAYABLE
Mortgage notes payable of $12,658,000 and $14,227,000 at December 31,
2002 and 2001, respectively, represent mortgages collateralized by a building
and land and lots (book value of $18,403,000 and $20,421,000 at December 31,
2002 and 2001, respectively). At December 31, 2002, future principle payments
under these mortgages are as follows: 2003 - $1,913,000, 2004 - $1,735,000; 2005
- - $1,841,000, 2006 - $220,000, 2007 - $239,000 and $6,724,000 thereafter.
Information relating to the building and land and lots is as follows:
DECEMBER 31, 2002
--------------------------------------------------
INTEREST MATURITY
(In thousands) AMOUNT RATE DATE
- -------------------------------------------------------------------------------------------------------------------
Building $ 7,732 8.117% 4/01/17
Land and lots 4,926 4.78% 5/31/05
- -------------------------------------------------------------------------------------------------------------------
Total $ 12,658 - -
- -------------------------------------------------------------------------------------------------------------------
December 31, 2001
---------------------------------------------------
Interest Maturity
(In thousands) Amount Rate Date
- -------------------------------------------------------------------------------------------------------------------
Building $ 7,893 8.117% 4/01/17
Land and lots 6,334 5.00%-5.77% 5/31/05
- -------------------------------------------------------------------------------------------------------------------
Total $ 14,227 - -
- -------------------------------------------------------------------------------------------------------------------
50
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. 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%
through August 2004 and bear interest at a slightly higher rate for two
additional years, maturing in August 2006. The Senior Subordinated Notes contain
covenants that include restrictions on the incurrence of additional debt, stock
repurchases and the payment of dividends similar to those under the Company's
bank loan agreement (see Note 7).
10. SUBSEQUENT EVENTS
On November 12, 2002 and February 11, 2003, the Board of Directors
approved a $0.025 per share cash dividend payable to shareholders of record of
its common stock on January 2 and April 1, 2003, payable on January 23 and April
24, 2003, respectively.
On December 10, 2002, the Board of Directors authorized the repurchase
of up to $50 million worth of outstanding common stock. From January 1, 2003
through February 14, 2003, the Company purchased 318,300 shares of outstanding
common stock at an average price of $27.
51
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. 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 at December 31, 1999 555,400 $3.38-$11.38 $ 7.19
Granted 150,700 6.69 6.69
Exercised (72,600) 3.38-9.28 5.70
Forfeited (39,700) 5.31-11.38 8.14
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2000 593,800 $3.38-$11.38 $ 7.18
Granted 231,000 16.38 16.38
Exercised (314,200) 3.38-11.38 6.47
Forfeited (2,000) 16.38 16.38
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2001 508,600 $3.38-$16.38 $ 11.76
Granted 225,500 28.55-30.76 28.57
Exercised (156,140) 3.38-16.38 10.02
Forfeited (45,000) 6.69-28.55 17.04
- -------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT DECEMBER 31, 2002 532,960 $5.31-$30.76 $ 18.92
- -------------------------------------------------------------------------------------------------------------------
Weighted
Option Price Avg. Exercise
Options exercisable at: Shares Per Share Price
- -------------------------------------------------------------------------------------------------------------------
December 31, 2000 192,980 $ 3.38-$5.44
116,940 6.69-8.07
81,680 9.28-11.38
-------
Total 391,600 $ 6.74
- -------------------------------------------------------------------------------------------------------------------
December 31, 2001 82,120 $ 3.38-$6.69
46,400 8.07-9.28
81,880 11.38-16.38
-------
Total 210,400 $ 9.92
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 85,636 $ 5.31-$9.28
88,140 11.38-16.38
42,400 28.55-30.76
-------
TOTAL 216,176 $ 14.87
- -------------------------------------------------------------------------------------------------------------------
52
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 2002, options outstanding have a weighted average
remaining contractual life of 8.09 years.
In February 2003, the Company granted options for an additional 231,000
shares with the same terms as the previous awards, at a price of $27.15, 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 binomial option-pricing
model with the following assumptions used for grants in 2002: expected
volatility of 56%; risk-free interest rate of 2.78%; dividend rate of 0.01%; and
an expected life of 6 years. The Company used the binomial option-pricing model
with the following assumptions used for grants in 2001: expected volatility of
31.99%; risk-free interest rate of 4.90%; dividend rate of 0.15%; and an
expected life of 6 years. The Company used the binomial option-pricing model
with the following assumptions used for grants in 2000: expected volatility of
29.54%; risk-free interest rate of 5.11%; dividend rate of 0.28%; and an
expected life of 6 years.
12. INCOME TAXES
The provision for income taxes consists of the following:
December 31,
---------------------------------------------------
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Federal $34,652 $26,316 $23,781
State and local 7,936 6,125 4,339
- -------------------------------------------------------------------------------------------------------------------
Total $42,588 $32,441 $28,120
- -------------------------------------------------------------------------------------------------------------------
Reconciliations of the differences between income taxes computed at
federal statutory tax rates and consolidated provision for income taxes are as
follows:
December 31,
---------------------------------------------------
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Federal taxes at statutory rate $38,220 $29,765 $25,397
State and local taxes - net of federal tax benefit 5,158 3,981 2,820
Other (790) (1,305) (97)
- -------------------------------------------------------------------------------------------------------------------
Total $42,588 $32,441 $28,120
- -------------------------------------------------------------------------------------------------------------------
53
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The tax effects of the significant temporary differences which comprise
the deferred tax assets and liabilities are as follows:
December 31,
----------------------------------
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Warranty, insurance and other reserves $10,592 $ 8,208
Inventory reserve 5,720 4,925
Inventories 1,912 1,415
State taxes 1,352 965
Deferred charges 1,778 249
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 21,354 15,762
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 2,194 1,670
Prepaid expenses and deferred charges 778 750
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 2,972 2,420
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $18,382 $13,342
- -------------------------------------------------------------------------------------------------------------------
13. FINANCIAL INSTRUMENTS
M/I Financial offers fixed and adjustable rate mortgage loans,
primarily to buyers of the Company's homes. At December 31, 2002, M/I Financial
is committed to fund $174,559,000 in mortgage loans to homebuyers. Of this
total, approximately $144,353,000 are fixed rate loans and $30,206,000 are
adjustable 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. Loan commitments that relate to the origination of mortgage
loans that will be held for resale are considered derivative instruments. 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 a
minimum of 70% of the committed balance. At December 31, 2002, the Company has
guaranteed the collectibility of nine loans to a third-party purchaser. We have
estimated the potential loss under this guarantee to be a maximum of $400,000,
which will expire December 2007. The Company has included reserves for this
potential loss in its December 31, 2002 financial statements.
One of the methods that M/I Financial uses 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 if the
Company determines that they will be unable to use the entire commitment prior
to its expiration date. The Company expended $486,000, $292,000 and $59,000 in
2002, 2001 and 2000, respectively, related to purchase commitments from outside
investors to acquire mortgage loans. At December 31, 2002, the Company had
approximately $36,600,000 of commitments to deliver mortgage loans to outside
investors.
The Company enters into forward sale agreements of mortgage-backed
securities to reduce the interest rate risk associated with loans held for sale
and commitments to fund loans. At December 31, 2002, the Company had forward
sale agreements of mortgage-backed securities with notional amounts totaling
$139,000,000 maturing within 90 - 120 days. These agreements are considered
derivative instruments. Prior to the adoption of SFAS 133
54
2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
on January 1, 2001, the Company deferred the related gain or loss until the
related loans were closed and sold as the agreements qualified for hedge
accounting.
Derivative instruments designated in a hedge relationship to mitigate
exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, are considered
fair value hedges. The fair values of the loan commitments and forward sale
agreements of mortgage-backed securities are recorded as derivative assets or
derivative liabilities on the Company's balance sheet. At December 31, 2002 and
2001, the Company recorded a net liability of $880,000 and $1,300,000,
respectively, related to these derivative instruments. The mark-to-market fair
value adjustment related to these two derivative instruments of $420,000 in 2002
and $1,300,00 in 2001 is recorded in current earnings.
The Company's interest rate swaps (see Note 7), were not designated as
hedges under the provisions of SFAS 133. The statement requires such swaps to be
recorded in the consolidated balance sheet at fair value. Changes in their fair
value are recorded in the consolidated statement of income. The fair value of
the Company's interest rate swaps is recorded in other liabilities and the
change in their fair value is recorded in general and administrative expense.
The Company's policy requires that swap contracts be used as hedges and be
effective at reducing risk associated with the expense being hedged. Such
contracts are designated at the inception of the contract.
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 loan and any purchase commitments recorded
with that counterparty.
The following table presents the carrying amounts and fair values of
the Company's financial instruments at December 31, 2002 and 2001. SFAS No. 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.
DECEMBER 31, 2002 December 31, 2001
---------------------------------- ----------------------------------
CARRYING FAIR Carrying Fair
(Dollars in thousands) AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------------------------------------------
Assets:
Cash, including cash in escrow $ 1,334 $ 1,334 $ 10,548 $ 10,548
Mortgage loans to be funded 54,141 57,282 52,853 54,480
Accounts receivable 2,018 2,018 2,160 2,160
Liabilities:
Notes payable banks 28,800 28,800 130,000 130,000
Forward sale of
mortgage-backed securities 1,396 1,396 (1,290) (1,290)
Mortgage notes payable 12,658 12,658 14,227 14,227
Subordinated notes 50,000 50,000 50,000 50,000
Accounts payable 58,187 58,187 55,656 55,656
Interest rate swap agreements 5,300 5,300 4,088 4,088
Commitments to
extend real estate loans (515) (515) 2,626 2,626
Other liabilities 89,084 89,084 75,622 75,622
Unrecognized Financial Instruments:
Letters of credit - 432 - 515
55
2002 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,
2002 and 2001:
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, 2002 and 2001 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, 2002 and 2001.
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 AND SUBORDINATED NOTES. 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.
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, 2002 and 2001.
LETTERS OF CREDIT. Letters of credit and outstanding completion bonds
of $48,165,000 and $48,190,000 represent potential commitments at December 31,
2002 and 2001, respectively. 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.
14. COMMITMENTS AND CONTINGENCIES
At December 31, 2002, the Company had sales agreements outstanding,
some of which have contingencies for financing approval, to deliver 2,321 homes
with an aggregate sales price of approximately $567,000,000. At December 31,
2002, the Company had options and contingent purchase contracts to acquire land
and developed lots with an aggregate purchase price of approximately
$193,525,000. Purchase of properties is contingent upon satisfaction of certain
requirements by the Company and the sellers.
At December 31, 2002, the Company had outstanding approximately
$48,165,000 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 and expire through August 2007.
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.
15. BUSINESS SEGMENTS
The business segment information for 2002, 2001 and 2000 included on
page 24 of the annual report is an integral part of these consolidated financial
statements.
56
2002 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, 2003, there were approximately 380
record holders of the Company's common stock. At that time there were 17,626,123
shares issued and 14,664,919 shares outstanding. The table below presents the
highest and lowest prices for the Company's common stock during each of the
quarters presented:
2002 HIGH LOW
- --------------------------------------------------------------------------------------------------------------
FIRST QUARTER $30.85 $24.30
SECOND QUARTER 37.68 26.93
THIRD QUARTER 39.29 27.10
FOURTH QUARTER 33.28 23.00
2001 HIGH LOW
- --------------------------------------------------------------------------------------------------------------
First quarter $16.87 $12.07
Second quarter 22.75 14.50
Third quarter 22.36 14.26
Fourth quarter 25.61 15.91
The highest and lowest prices for the Company's common stock from
January 1, 2003 through February 14, 2003 were $30.25 and $26.43.
On November 12, 2002 and February 11, 2003, the Board of Directors
approved a $0.025 per share cash dividend payable to shareholders of record of
its common stock on January 2 and April 1, 2003, payable on January 23 and April
24, 2003, respectively.
On December 10, 2002, the Board of Directors authorized the repurchase
of up to $50 million worth of outstanding common stock. From January 1, 2003
through February 14, 2003, the Company purchased 318,300 shares of outstanding
common stock at an average price of $27.
57
EXECUTIVE OFFICERS DIRECTORS (CONTINUED)
- -------------------------------- --------------------------------------
IRVING E. SCHOTTENSTEIN LEWIS R. SMOOT, SR. (1, 2, 3, 4)
Chairman and President and
Chief Executive Officer Chief Executive Officer,
The Smoot Corporation
ROBERT H. SCHOTTENSTEIN
President NORMAN L. TRAEGER (2*, 3, 4)
President,
STEVEN SCHOTTENSTEIN The Discovery Group
Chief Operating Officer
(1) Executive Committee
PHILLIP G. CREEK (2) Compensation Committee
Senior Vice President, (3) Audit Committee
Chief Financial Officer and (4) Executive Officer Compensation Committee
Treasurer * Chairman
OTHER KEY OFFICERS CORPORATE INFORMATION
- -------------------------------- --------------------------------------
JAMES T. MASON CORPORATE HEADQUARTERS
General Counsel 3 Easton Oval
Columbus, Ohio 43219
PAUL S. ROSEN www.mihomes.com
Senior Vice President
STOCK EXCHANGE LISTING
LLOYD T. SIMPSON New York Stock Exchange (MHO)
Regional President
TRANSFER AGENT AND REGISTRAR
DIRECTORS EquiServe Trust Company N.A.
- -------------------------------- C/O EquiServe, Inc.
IRVING E. SCHOTTENSTEIN (1*, 2) 150 Royall Street
Chairman and Canton, MA 02021
Chief Executive Officer (781) 575-3420
www.EquiServe.com
FRIEDRICH K.M. BOHM (2, 3, 4*)
Managing Partner and INDEPENDENT AUDITORS
Chief Executive Officer, Deloitte & Touche LLP
NBBJ Columbus, Ohio
PHILLIP G. CREEK (1, 2) ANNUAL MEETING
Senior Vice President, The Annual Meeting of Shareholders will be held
Chief Financial Officer and at 9:00 A.M. on April 22, 2003, at the offices of
Treasurer the Company, 3 Easton Oval, Columbus, Ohio
THOMAS D. IGOE (2, 3*, 4) FORM 10-K
Retired Senior Vice President, Shareholders may receive a copy of the Company's
Bank One NA annual report to the Securities and Exchange
Commission on Form 10-K without charge by writing to:
JEFFREY H. MIRO (2, 4)
Chairman, Investor Relations
Miro, Weiner and Kramer M/I Schottenstein Homes, Inc.
3 Easton Oval
ROBERT H. SCHOTTENSTEIN (1, 2) Suite 500
President Columbus, OH 43219
STEVEN SCHOTTENSTEIN (1, 2)
Chief Operating Officer
58