1
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Years Ended December 31,
(Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Revenue $ 527,822 $ 491,719 $ 446,060 $ 372,026 $ 269,409
Costs and expenses 511,316 472,526 427,512 359,854 261,528
Income before income taxes 16,506 19,193 18,548 12,172 7,881
Net income (1) 9,876 11,613 11,198 7,304 4,743
Net income per common share (1) 1.12 1.32 1.87 1.33 0.86
Dividends per common share (2) - - - - -
Total assets 281,143 277,614 227,958 172,176 148,497
Notes and mortgage notes payable 102,549 112,765 77,892 61,742 46,970
13 1/4% Senior Subordinated Notes
due October 1, 1996, net of discount - - - 16,664 24,870
14% Subordinated Notes due
December 1, 2001 24,513 24,513 24,513 24,513 20,000
Stockholders' equity 99,496 89,620 79,089 36,830 31,801
Stockholders' equity per common share (3) 11.31 10.18 8.99 6.70 5.78
- --------------------------------------------------------------------------------------------------------------------------------
(1) Information for 1993, 1992 and 1991 includes adjustments to reflect the
taxation of the Company as a C corporation using a 40% combined tax rate for
federal, state and local income taxes. Pro forma information is not provided
for 1995 and 1994 as the Company was taxed as a C corporation during those
periods. The per share information is based upon a weighted average of
8,800,000 common shares for 1995 and 1994, 5,975,068 common shares for 1993
and on a total of 5,500,000 outstanding shares of common stock for 1992 and
1991.
(2) No dividends were paid by the Company during any period in which the stock
was publicly held; however, distributions were made to S corporation
stockholders during 1993, 1992 and 1991 while the Company was privately
held. In January 1994, the Company made distributions of $1,082,000 to the
former S corporation stockholders related to the Company's earnings from
January 1, 1993 to November 8, 1993 (the date the Company's status as an S
corporation was terminated).
(3) The per share information is based on the total shares outstanding at the
end of each period (8,800,000 outstanding for 1995, 1994 and 1993 and
5,500,000 outstanding for 1992 and 1991.)
SELECTED CONSOLIDATED QUARTERLY FINANCIAL AND OPERATING DATA
Three months ended
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
(Dollars in thousands, except per share amounts) 1995 1995 1995 1995
New Contracts 795 811 767 743
Homes Delivered 941 765 697 549
Backlog 1,421 1,567 1,521 1,451
Total revenue $ 169,849 $ 137,092 $ 125,305 $ 95,576
Gross margin $ 31,343 $ 24,823 $ 22,806 $ 16,889
Income before income taxes $ 6,800 $ 4,294 $ 4,002 $ 1,410
Net income $ 4,042 $ 2,575 $ 2,417 $ 842
Net income per common share $ 0.46 $ 0.29 $ 0.27 $ 0.10
Weighted average common shares
outstanding 8,800,000 8,800,000 8,800,000 8,800,000
Three months ended
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share amounts) 1994 1994 1994 1994
New Contracts 677 576 622 932
Homes Delivered 857 778 813 542
Backlog 1,257 1,437 1,639 1,830
Total revenue $ 145,612 $ 131,819 $ 130,367 $ 83,921
Gross margin $ 25,135 $ 23,806 $ 23,904 $ 15,320
Income before income taxes $ 5,458 $ 5,571 $ 6,077 $ 2,087
Net income $ 3,408 $ 3,411 $ 3,572 $ 1,222
Net income per common share $ 0.39 $ 0.39 $ 0.41 $ 0.14
Weighted average common shares
outstanding 8,800,000 8,800,000 8,800,000 8,800,000
20
2
SEGMENT INFORMATION
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
The business segments of the Company are defined as home-building and
financial services. The home-building operations include the development of land
and the sale and construction of single-family attached and detached homes. The
financial services operations include the origination of mortgage loans,
primarily for purchasers of the Company's homes. The loans and the majority of
the servicing rights are sold to outside mortgage lenders.
Intersegment revenue represents the elimination of revenue included in
financial services revenue for fees paid by the home-building operations.
Corporate expenses include salaries and other administrative expenses which are
not identifiable with a specific segment. Interest expense excludes interest
expense related to the financial services segment of $431,000, $323,000 and
$229,000 for 1995, 1994 and 1993, respectively, which is included in the
determination of Financial Services operating income. Corporate assets consist
primarily of cash, deferred taxes and other assets not associated with a
specific business segment.
(Dollars in thousands) 1995 1994 1993
Revenue:
Home-Building $ 522,453,000 $ 487,786,000 $ 442,547,000
Financial Services 7,208,000 5,250,000 4,608,000
Intersegment (1,839,000) (1,317,000) (1,095,000)
Total Revenue $ 527,822,000 $ 491,719,000 $ 446,060,000
Operating Income:
Home-Building $ 39,039,000 $ 37,712,000 $ 36,180,000
Financial Services 2,697,000 1,524,000 1,373,000
Total 41,736,000 39,236,000 37,553,000
Corporate Expenses (11,463,000) (10,401,000) (9,269,000)
Interest Expenses (13,767,000) (9,642,000) (9,736,000)
INCOME BEFORE INCOME TAXES $ 16,506,000 $ 19,193,000 $ 18,548,000
Identifiable Assets:
Home-Building $ 243,117,000 $ 244,429,000 $ 196,372,000
Financial Services 23,694,000 16,430,000 19,573,000
Corporate 14,332,000 16,755,000 12,013,000
Total $ 281,143,000 $ 277,614,000 $ 227,958,000
Capital Expenditures:
Home-Building $ 363,000 $ 1,029,000 $ 618,000
Financial Services 19,000 437,000 42,000
Corporate 309,000 683,000 695,000
Total $ 691,000 $ 2,149,000 $ 1,355,000
Depreciation and Amortization:
Home-Building $ 916,000 $ 893,000 $ 983,000
Financial Services 159,000 124,000 87,000
Corporate 679,000 630,000 516,000
Total $ 1,754,000 $ 1,647,000 $ 1,586,000
21
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
RESULTS OF OPERATIONS
CONSOLIDATED
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUE. Total revenue for 1995 of $527.8 million set a new record
for the Company and represented a 7.3% increase over the $491.7 million reported
for 1994. This increase was primarily attributable to higher housing revenue,
which increased 5.7% to $505.8 million for 1995. This increase was due to a 7.0%
increase in the average selling price of Homes Delivered partially offset by a
1.3% decline in the number of Homes Delivered. Land revenue also increased
significantly as the number of lots developed for sale to third parties
significantly increased during 1995.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased to $16.5
million for 1995 from $19.2 million for the preceding year. This decline was due
to the increase in interest expense, which increased from $10.0 million in 1994
to $14.2 million in 1995. This increase was primarily attributable to an
increase in the weighted average interest rate, due to the increases in the
prime rate of interest in late 1994 and early 1995, as well as an increase in
the average borrowings outstanding.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
TOTAL REVENUE. Total revenue in 1994 was 10.2% greater than total revenue
recorded in 1993, primarily due to the 9.5% increase in housing revenue. This
increase was caused by a 7.1% increase in the average sales price of Homes
Delivered and a 2.2% increase in the number of Homes Delivered.
INCOME BEFORE INCOME TAXES. Income before income taxes increased to $19.2
million for 1994 from $18.5 million for 1993. This increase was primarily due to
the increase in housing revenues which was partially offset by lower gross
margins and higher selling expenses.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant seasonality and quarter-to-quarter variability in home-building
activity levels. In general, Homes Delivered increase substantially in the third
and fourth quarters. The Company believes that this seasonality reflects the
tendency of home buyers to shop for a new home in the spring with the goal of
closing in the fall or winter, as well as the scheduling of construction to
accommodate seasonal weather conditions. The following tables reflect this cycle
for the Company during the four quarters of 1995 and 1994:
Three Months Ended
-----------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
(Dollars in thousands) 1995 1995 1995 1995
- ------------------------------------------------------------------
Total revenue $169,849 $137,092 $125,305 $95,576
In units:
New Contracts,
net of cancellations 795 811 767 743
Homes Delivered 941 765 697 549
Backlog at end
of period 1,421 1,567 1,521 1,451
Three Months Ended
-----------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
(Dollars in thousands) 1994 1994 1994 1994
Total revenue $145,612 $131,819 $130,367 $83,921
In units:
New Contracts,
net of cancellations 677 576 622 932
Homes Delivered 857 778 813 542
Backlog at end
of period 1,257 1,437 1,639 1,830
HOME-BUILDING SEGMENT
The following table sets forth certain information related to the Company's
home-building segment:
Years Ended December 31,
(Dollars in thousands) 1995 1994 1993
Revenue:
Housing Sales $505,810 $478,657$ 437,283
Lot and Land
Sales 16,145 8,528 4,824
Other Income 498 601 440
Total Revenue $522,453 $487,786 $442,547
Revenue:
Housing Sales 96.8% 98.1% 98.8%
Lot and Land Sales 3.1 1.8 1.1
Other Income 0.1 0.1 0.1
Total Revenue 100.0 100.0 100.0
Land and Housing
Costs 83.0 83.0 82.9
Gross Margin 17.0 17.0 17.1
General and
Administrative
Expenses 2.9 2.8 3.0
Selling Expenses 6.6 6.5 5.9
Operating Income 7.5% 7.7% 8.2%
Average sales price
of Homes Delivered $ 171.3 $ 160.1 $ 149.4
Unit data:
New Contracts 3,116 2,807 3,222
Homes Delivered 2,952 2,990 2,926
Backlog at end
of period 1,421 1,257 1,440
Average sales
price of homes
in Backlog $ 169.0 $ 176.4 $ 158.1
Aggregate sales
value of homes
in Backlog $240,095 $221,683 $227,638
22
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
A home is included in "New Contracts" when the Company's standard sales
contract, which requires a deposit and generally has no contingencies other than
for buyer financing, is executed. In the Midwest Region, contracts are sometimes
accepted contingent upon the sale of an existing home. "Homes Delivered"
represents units for which the closing of the sale has occurred and title has
transferred to the buyer. Revenue and cost of revenue for a home sale are
recognized at the time of such closing.
"Backlog" represents homes for which the Company's standard sales contract
has been executed, but which are not included in Homes Delivered because
closings for the sale of such homes have not yet occurred as of the end of the
periods specified. Most cancellations of contracts for homes in Backlog occur
because customers cannot qualify for financing. These cancellations usually
occur prior to the start of construction. Since the Company arranges financing
with guaranteed rates for many of its customers, the incidence of cancellations
after the start of construction is low. In 1995, the Company delivered 2,952
homes, including most of the homes under contract in Backlog at December 31,
1994. Of the 1,257 contracts in Backlog at December 31, 1994, 16% were
cancelled. The cancellation percentages were 14% and 13% for homes in Backlog as
of December 31, 1993 and December 31, 1992, respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUE. Total revenue for the home-building segment for 1995 was $522.5
million, a 7.1% increase over total revenue recorded for 1994. This increase was
primarily attributable to the 5.7% increase in housing revenue as well as a
significant increase in land revenue. The increase in housing revenue was due to
a 7.0% increase in the average sales price of Homes Delivered, partially offset
by a 1.3% decrease in the number of Homes Delivered. The increase in the average
sales price of Homes Delivered was primarily due to the increase in the number
of Homes Delivered in the Columbus Showcase and Maryland divisions where the
average sales prices are significantly higher than the Company's average due to
the types of product offered. In addition, the Maryland and Palm Beach County
divisions experienced significant increases in the average sales price of Homes
Delivered. In Maryland, the increase was primarily due to the opening of a new
subdivision where the average sales price is significantly higher than the
division's average and where sales were particularly strong in 1995. In Palm
Beach County, the Company expanded the product lines offered to include higher
priced homes, allowing the division to build in more upscale areas of the
market.
The decrease in the number of Homes Delivered during 1995 as compared to the
prior year was primarily due to the lower number of homes in backlog at December
31, 1994 as compared to the preceding year end as well as lower New Contracts
recorded during the first quarter of 1995. The Company believes New Contracts
recorded during the first quarter of 1995 were adversely affected by consumer
uncertainty regarding the overall strength of the economy and how it might
affect their future.
The Company also recorded a significant increase in revenue from lot and land
sales, which increased to $16.1 million for 1995 from $8.5 million for the
preceding year. This increase was primarily attributable to the Washington, D.C.
market. Late in 1994, the Company completed development of the first phase of a
six phase land development project. Development is currently in progress on the
second phase of this project. The Company has entered into contracts to sell a
portion of the lots developed in both of these phases to outside home builders.
The Company believes that lot and land revenue will remain at relatively high
levels for the next few years in comparison to historical amounts as the Company
continues to develop this and other projects where a portion of the lots will be
sold to outside home builders.
HOME SALES AND BACKLOG. The Company recorded an 11.0% increase in the number
of New Contracts recorded in 1995 as compared to the prior year. This increase
was primarily attributable to the Columbus Horizon, Indianapolis, Cincinnati and
Raleigh divisions. The Company's lower priced Horizon line of homes was first
introduced in Columbus in May 1993 and sales have continued to increase as new
locations have been opened. Late in 1994, the Company introduced its Horizon
line of homes in both Indianapolis and Cincinnati where it has found strong
acceptance among first-time home buyers. The Raleigh division was able to
increase the number of New Contracts recorded in 1995 primarily due to the
opening of new subdivisions in more desirable locations. The number of New
Contracts recorded in future periods will be dependent on future economic
conditions, consumer confidence and interest rates available to potential home
buyers.
At December 31, 1995, the total sales value of the Company's Backlog of 1,421
homes was approximately $240.1 million, representing an 8.3% increase in sales
value and a 13.0% increase in units from the levels reported at December 31,
1994. The average sales price of homes in backlog decreased 4.2% from December
31, 1994 to December 31, 1995. This decline was primarily due to the
introduction of the Company's lower priced Horizon line into several other
markets in 1995 as well as a significant increase in the Backlog for the
Columbus Horizon division whose average sales price is significantly below the
Company's average.
GROSS MARGIN. The overall gross margin for the housing segment was 17.0% for
both 1995 and 1994. A slight increase in housing gross margins was partially
offset by a decrease in gross margins from lot and land sales. The increase in
housing gross margins was primarily due to the Columbus Horizon, Columbus
Showcase and Maryland divisions where the Company began closing homes in
subdivisions which are in more desirable locations. The decrease in gross
margins from lot and land sales was primarily due to the sale of a tract of
commercial real estate in 1994 which produced a gross margin significantly
higher than normal lot sales. The Company recorded an after-tax gain of
approximately $425,000 from this sale. Excluding the effects of
23
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
this sale, the gross margin from land sales was actually higher in the current
year as the Company has begun to develop lots in certain areas specifically for
sale to third parties where gross margins would be expected to be higher than on
other lot sales where the Company will sometimes accept lower gross margins in
order to reduce inventory levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of total revenue increased from 2.8% for 1994 to 2.9% for 1995. This
increase was primarily due to two factors. Bonus expense for regional and
division managers increased approximately $1.1 million from 1994 to 1995. These
bonuses are based on customer satisfaction ratings, net income and increases in
net income over prior year amounts for the individual's division or region.
While net income for the Company as a whole actually decreased from 1994 to
1995, the net income of certain individual divisions and regions increased
significantly in the current year earning these managers higher bonuses in the
current year. In addition, real estate tax expense and homeowners association
dues increased approximately $890,000 in 1995 as the Company's investment in
developed lots and raw land awaiting development increased over amounts held
during 1994.
SELLING EXPENSES. Selling expenses increased from $31.6 million for 1994 to
$34.3 million for 1995 and as a percentage of total revenue increased from 6.5%
for 1994 to 6.6% for 1995. In terms of actual dollars spent, a portion of the
increase was due to the 5.7% increase in housing revenue which caused a
corresponding increase in variable selling expenses. In addition, bonus expense
recorded for 1995 for both sales managers and individual salespersons was higher
due to the increase in the number of New Contracts recorded in the current year
as well as new bonus plans for individual salespersons which were adopted in
several of our divisions in 1995. Additional expenses were also incurred in 1995
related to the opening of model homes in new subdivisions.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
TOTAL REVENUE. Total revenue for the home-building segment for 1994 was $487.8
million, a 10.2% increase over the $442.5 million reported for 1993. This
increase was primarily due to a 9.5% increase in housing revenues. This increase
was caused by a 7.1% increase in the average sales price of Homes Delivered and
a 2.2% increase in the number of Homes Delivered. The largest increase in the
average sales price of Homes Delivered occurred in the Tampa, Cincinnati,
Charlotte and Raleigh divisions. These divisions have expanded the products
offered to include higher priced homes and have also been required to increase
sale prices due to rising land costs and increases in fees.
The increase in the number of Homes Delivered related primarily to the
Columbus market where the Company introduced its Horizon product line in May
1993. The Company delivered its first Horizon homes in September 1993 and since
that time, this product line has enjoyed strong acceptance among first-time home
buyers.
HOME SALES AND BACKLOG. The Company recorded a 12.9% decrease in the number of
New Contracts entered into in 1994 compared to 1993. The number of New Contracts
recorded in 1994 was lower in all markets except Palm Beach County which
experienced a 4.0% increase. The Company believes that these decreases resulted
from the increase in interest rates available to home buyers, the uncertainty
surrounding future interest rates and reduced buyer enthusiasm from people who
have refinanced their homes at interest rates significantly below the rates
currently available.
The total sales value of the Company's Backlog of 1,257 homes at December 31,
1994 was approximately $221.7 million representing a 2.6% decrease in sales
value and a 12.7% decrease in units from levels reported at December 31, 1993.
GROSS MARGIN. The overall gross margin for the housing segment was 17.0% in
1994 compared to 17.1% in 1993. Housing margins decreased from 17.2% for 1993 to
16.7% for 1994 while gross margins from lot and land sales increased from 1.9%
to 23.9%. The decrease in housing gross margins was primarily attributable to
the Columbus market where shortages of qualified subcontractors in certain areas
of the construction trades resulted in construction delays. Higher costs were
also incurred in 1994 from the unusually severe winter weather experienced in
many of our markets. The significant increase in gross margins from lot and land
sales was due to the sale of a tract of commercial real estate which produced a
gross margin significantly higher than normal lot sales. The Company recorded an
after-tax gain of approximately $425,000 from this sale.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of total revenue decreased from 3.0% in 1993 to 2.8% in 1994. This
decrease was brought about by the 10.2% increase in total revenue and
management's efforts to control increases in general and administrative
expenses.
SELLING EXPENSES. Selling expenses as a percentage of total revenue increased
from 5.9% for 1993 to 6.5% for 1994. A portion of this increase was due to
higher outside realtor commissions as a result of more buyers using outside
Realtors as well as higher commission rates being paid. In addition, with the
softening demand for new homes, the Company increased advertising and
promotional expenditures in an effort to stimulate sales.
24
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
FINANCIAL SERVICES SEGMENT
The following table sets forth certain information related to the Company's
financial services segment:
Years Ended December 31,
(Dollars in thousands) 1995 1994 1993
Number of Loans
Originated 1,873 1,455 1,234
Revenue:
Loan Origination Fees $2,258 $1,688 $1,327
Sale of Servicing and
Marketing Gains 3,047 2,207 2,060
Other 1,903 1,355 1,221
Total Revenue 7,208 5,250 4,608
General & Administrative
Expenses 4,511 3,726 3,236
Operating Income $2,697 $1,524 $1,373
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUE. Total revenue for the year ended December 31, 1995 was $7.2
million, a 37.3% increase over total revenue recorded for 1994. Loan origination
fees increased 33.8% from 1995 to 1994, primarily due to the 28.7% increase in
the number of loans originated as well as an increase in the average loan
amount. The increase in the number of loans originated during 1995 as compared
to the preceding year was due to an increase in the percentage of the parent
company's home sales which were financed through M/I Financial. In addition, M/I
Financial branch offices were opened in the Tampa and Maryland markets during
1995.
Revenue from sale of servicing and marketing gains increased 38.1% to $3.0
million in 1995. This increase was primarily due to the increase in the number
of loans originated in the current year as well as a falling interest rate
environment which increased marketing gains during the current year. While M/I
Financial's revenue increased due to the falling interest rates in the current
year, the company seeks to minimize the risks associated with a rising interest
rate market by using hedging methods whereby the Company has the option, but is
not required, to complete the hedging transaction. M/I Financial's revenue from
sale of servicing and marketing gains was also positively influenced by a
significant shift from adjustable rate loans to fixed rate loans which offer
greater income potential through larger servicing release premiums.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 21.1% to $4.5 million for the year ended December 31, 1995 as compared
to the $3.7 million recorded in 1994. This increase was primarily due to the
opening of the two new branches in 1995 as well as increases in personnel costs
related to the significant increase in loans originated.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
TOTAL REVENUE. Total revenue for the year ended December 31, 1994 was $5.3
million, a 13.9% increase over total revenue recorded for 1993. Loan origination
fees increased 27.2% from 1993 to 1994, primarily due to the 17.9% increase in
the number of loans originated as well as an increase in the average loan
amount. The increase in the number of loans originated during 1994 as compared
to the preceding year was due to an increase in the percentage of the parent
company's home sales which were financed through M/I Financial.
Revenue from sale of servicing and marketing gains increased 7.1% from 1993
to 1994. This increase was due to the increase in the number of loans
originated, partially offset by a shift in the types of loans originated from
predominately fixed rate loans to more variable rate loans which decreases the
profit potential.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 15.1% to $3.7 million for the year ended December 31, 1994 compared to
the $3.2 million recorded in 1993. This increase was primarily due to increased
personnel costs. In mid 1993, several changes were made in the management of M/I
Financial in an effort to strengthen the management team and refocus the
business to better serve its customers as well as increase profitability.
OTHER OPERATING RESULTS
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses for the year ended December 31, 1995 totaled $11.5
million, or 2.2% of total revenue, a 10.2% increase from the $10.4 million or
2.1% of total revenue, recorded for 1994. This increase was primarily due to
expenses incurred in conjunction with the Company's new office building which is
currently under construction (See Note 10 to the Consolidated Financial
Statements).
Corporate general and administrative expenses for the year ended December
31, 1994 totaled $10.4 million or 2.1% of total revenue, a 12.2% increase from
the $9.3 million or 2.1% of total revenue recorded for 1993. This increase in
general and administrative expenses primarily related to expenses incurred in
conjunction with the conversion of the Companies accounting and costing systems
to a new computer system. These costs included consulting fees, additional
personnel costs for system support as well as additional depreciation expense
related to the new hardware and software purchased in the current year. This
conversion was undertaken to increase operating efficiencies and provide
management with better information in a more timely manner.
INTEREST EXPENSE. Corporate and home-building interest for the year ended
December 31, 1995 totaled $13.8 million, a 42.8% increase over the $9.6 million
recorded for the preceding year. This increase was due to increases in the
weighted aver-
25
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
age interest rate and the average borrowings outstanding as well as a decrease
in the net amount of interest capitalized during 1995 as compared to 1994. The
interest rate on the bank borrowings is based on the prime rate of interest and
increased five times during late 1994 and once more in early 1995 as the prime
rate of interest increased. The increase in the average borrowings outstanding
was primarily used to fund the increase in inventories of both houses under
construction as well as land and lot inventories.
Corporate and home-building interest for the year ended December 31, 1994
totaled $9.6 million, relatively unchanged from the $9.7 million recorded for
the year ended December 31, 1993. Interest expense for 1993 included $616,000 of
redemption premium and write-off of unamortized debt issuance costs and original
issue discount related to the Senior Subordinated Notes which were redeemed in
December 1993. The expected decrease in interest expense was offset by an
increase in average borrowings during 1994 and a decreased portion of interest
costs being capitalized. The weighted average interest rate remained constant
from 1993 to 1994. The increase in interest rates on the Company's bank
borrowings due to increases in the prime rate of interest was offset by the
effect of paying off the 13 1/4% Senior Subordinated Notes in December 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing needs depend upon its sales volume, asset turnover,
land acquisition and inventory balances. The Company has incurred substantial
indebtedness, and expects to incur indebtedness in the future, to fund the
growth of its home-building activities. Historically, the Company's principal
sources of funds for construction and development activities has been from
internally generated cash and from bank borrowings which are primarily
unsecured.
At December 31, 1995, the Company had bank borrowings outstanding of $87.0
million under its loan agreement which permits aggregate borrowings not to
exceed the lesser of: $136.0 million in revolving credit loans and $25.0
million, including $4.0 million for joint ventures in which the Company is a
partner, in the form of letters of credit; or the Company's borrowing base which
is calculated based on specified percentages of certain types of assets held by
the Company as of each month end. The loan agreement matures September 30, 2000,
at which time the unpaid balance of the revolving credit loans outstanding shall
be due and payable. Under the terms of the loan agreement, the banks make an
annual determination as to whether or not to extend the maturity date of the
commitments by one year. Borrowings under this agreement are at the bank's prime
rate and are primarily unsecured. The loan agreement also provides for seasonal
loans of up to $30.0 million which are available from March 1st through December
31st during each year of the agreement. The loan agreement contains restrictive
covenants which require the Company, among other things, to maintain minimum net
worth and working capital amounts and to maintain certain financial ratios. The
loan agreement also places limitations on the amount of additional indebtedness
that may be incurred by the Company, the acquisition of undeveloped land, on
dividends that may be paid and on the aggregate cost of certain types of
inventory the Company can hold at any one time.
An additional $15.2 million was outstanding as of December 31, 1995 under
the M/I Financial loan agreement, which permitted borrowings of $25.0 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 to 95% of 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. Borrowings under this agreement are at the
bank's prime rate and are unsecured. The M/I Financial Loan Agreement terminates
on July 19, 1996 and the unpaid balance of such loans are payable on this date.
In addition, there were outstanding Subordinated Notes in the principal
amount of $24.5 million at December 31, 1995 and approximately $19.5 million of
completion bonds and letters of credit at December 31, 1995. At December 31,
1995, the Company had $55.5 million of unused borrowing availability under its
loan agreements.
At December 31, 1995, the Company had the right to borrow up to $157.7
million under its credit facilities, including $21.7 million under the M/I
Financial Credit Agreement (95% of the aggregate face amount of eligible
mortgage loans.) The Company also has a seasonal loan of up to $30.0 million
available from March 1st through December 31st during each year of the loan
agreement.
During the fourth quarter of 1993, the Company sold 3.3 million shares of
common stock in its initial public offering. Of the net proceeds of
approximately $42.2 million, approximately $32.2 million was used to reduce
debt, including the redemption of the outstanding Senior Subordinated Notes. The
remaining $10.0 million of the net proceeds was used to make a distribution to
the former S Corporation stockholders of previously taxed S Corporation
earnings. Net income from housing and lot and land sales are the Company's
primary sources of net cash provided by operating activities. Net cash provided
by operating activities in 1995 was $14.6 million. Net cash used by operating
activities was $19.8 million in 1994 and $10.4 million in 1993. The change from
net cash used by operating activities in 1994 to net cash provided by operating
activities in 1995 was primarily due to the change in cash used/provided by
changes in working capital components, primarily inventories, which provided
$5.8 million of cash in 1995 while using $38.8 million in the preceding year.
The Company has reached agreement with certain unrelated parties for the
development and occupancy of an approximately 85,000 square foot building. The
four current office locations in Columbus, Ohio will be consolidated into one
building in an effort to improve operating efficiencies. The building will be
built, owned and operated, by a limited liability company in which the Company
has a 1/3 interest (the "LLC"). The building will primarily be financed through
borrowings of the LLC. The LLC has obtained financing for the construction of
the building and also has obtained commitments for the permanent financing. The
Company has entered into a long-term operating lease for the premises with the
LLC. Construction of the build-
26
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
ing has commenced and is expected to be completed by the third quarter of 1996.
The Company believes that any commitments arising from this transaction would
not significantly affect its liquidity or capital resources.
Over the past several years, the Company's land development activities and
land holdings have increased significantly and the Company expects this trend to
continue into the foreseeable future. These increases are primarily due to the
shortage of qualified land developers in certain of our markets as well as the
competitive advantages that can be achieved by developing land internally rather
than purchasing lots from developers or other competing home builders. This is
particularly true for our Horizon product line where, due to the price points we
are targeting, lots are generally not available from third party developers at
economically feasible prices. The Company continues to purchase lots from
outside developers under option contracts, when possible, to limit our risk;
however, we will continue to evaluate all of our alternatives to satisfy our
demand for lots in the most cost effective manner.
In 1994, the Company entered into two land purchase contracts which require
a greater investment than the Company normally commits and could significantly
impact the Company's liquidity. On January 31, 1994, the Company closed on the
first phase of a six phase land purchase contract in the Washington, D.C.
market. This first phase was purchased for $6.6 million and was developed into
106 single-family and townhouse lots. Based on the demand for lots in this area
and the strong sales in the first phase of this development, the Company
purchased the second phase of this development through a series of three
closings in May, June and July of 1995 and expects to purchase the third phase
in the third quarter of 1996. The total purchase price for the second phase was
approximately $6.4 million and this section will be developed into 122
single-family and townhouse lots. The Company sold a portion of the developed
lots from the first phase to outside home builders and has entered into similar
contracts to sell a portion of the lots in the second phase to outside home
builders. The Company has an option to purchase each of the remaining phases. If
the Company purchases all six phases, the total purchase price will be
approximately $38.9 million and the land will be developed into approximately
710 lots.
In August 1994, the Company completed the purchase of a parcel of land in
the Columbus market for $7.5 million which will be developed into approximately
375 lots. The Company has completed development of several phases of this
project into a total of 168 lots. Model homes were opened in this development in
April 1995 and sales have remained strong.
As its capital requirements increase, the Company may increase its
borrowings under its bank line of credit. In addition, the Company continually
explores and evaluates alternative sources from which to obtain additional
capital. The Company believes that it's currently available financial resources
are sufficient to meet it's current and near-term capital requirements; however,
the extent of the Company's ability to invest in additional land and land
development activities in the long-term will be dependent on its ability to
obtain additional capital.
At December 31, 1995 mortgage notes payable outstanding were $349,000
secured by lots and land with a recorded book value of $1.2 million. The Company
does not currently have any arrangements for additional capital nor is there any
assurance that it will be able to obtain additional capital.
INTEREST RATES AND INFLATION
The Company's business is significantly affected by general economic conditions
of the United States and, particularly, by the impact of interest rates. Higher
interest rates may decrease the potential market by making it more difficult for
home buyers to qualify for mortgages or to obtain mortgages at interest rates
acceptable to them. Increases in interest rates also would increase the
Company's interest expense as the rate on the revolving loans is based upon
floating rates of interest. The weighted average interest rates on the Company's
outstanding debt were 10.1% for 1995 and 9.0% for 1994 and 1993.
In conjunction with its mortgage banking operations, the Company uses
hedging methods to reduce its exposure to interest rate fluctuations between the
commitment date of the loan and the time the loan closes. (See Note 16 to the
Consolidated Financial Statements.)
In recent years, the Company generally has been able to raise prices by
amounts at least equal to its cost increases and, accordingly, has not
experienced any detrimental effect from inflation. Where the Company develops
lots for its own use, inflation may increase the Company's profits because land
costs are fixed well in advance of sales efforts. The Company is generally able
to maintain costs with subcontractors from the date a home sales contract is
accepted; however, in certain situations unanticipated costs may occur between
the time a sales contract is executed and the time a home is constructed, which
results in lower gross profit margins.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
this annual report are forward-looking statements which involve risks and
uncertainties, including but not limited to economic, competitive and
governmental factors affecting the Company's markets, prices and other facets of
its operations.
27
9
CONSOLIDATED STATEMENTS OF INCOME
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Years Ended December 31,
(Dollars in thousands, except per share amounts) 1995 1994 1993
Revenue (Notes 1 and 4) $ 527,822 $ 491,719 $ 446,060
Costs and expenses:
Land and housing (Notes 1, 2 and 4) 431,961 403,554 365,525
General and administrative (Notes 1 and 2) 30,660 27,208 25,687
Selling (Notes 1 and 2) 34,497 31,799 26,335
Interest (Notes 1, 4, 6, 7, 8 and 9) 14,198 9,965 9,965
Total costs and expenses 511,316 472,526 427,512
Income before income taxes 16,506 19,193 18,548
Income taxes (credit) (Notes 1 and 14):
Current 8,399 8,101 3,204
Deferred (1,769) (521) (751)
Total income taxes 6,630 7,580 2,453
Net income $ 9,876 $ 11,613 $ 16,095
Pro forma net income (Note 17) (Unaudited) - - $ 11,198
Net income per common share (Note 1) $ 1.12 $ 1.32 -
Pro forma net income per common share (Note 17) (Unaudited) - - $ 1.87
Weighted average common shares outstanding 8,800,000 8,800,000 5,975,068
See Notes to Consolidated Financial Statements.
28
10
CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
December 31,
(Dollars in thousands, except par values) 1995 1994
ASSETS
Cash, including cash in escrow (Note 1) $ 8,136 $ 14,059
Receivables (Note 3) 23,612 17,347
Inventories (Notes 1, 2, 4, 5, and 7):
Single-family lots, land and land development costs 120,806 122,532
Houses under construction 86,110 85,410
Model homes and furnishings (less accumulated
depreciation: 1995 - $823; 1994 - $1,654) 20,971 19,830
Land purchase deposits 381 542
Office furnishings, transportation and
construction equipment - at cost (less accumulated
depreciation: 1995 - $6,106; 1994 - $5,705) (Note 1) 2,392 3,337
Investment in unconsolidated joint ventures and
limited partnerships (Notes 2, 4, and 5) 11,641 8,191
Other assets (Notes 1 and 14) 7,094 6,366
TOTAL $ 281,143 $ 277,614
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable banks - home-building operations (Note 6) $ 87,000 $ 97,800
Note payable bank - financial operations (Note 6) 15,200 14,630
Mortgage notes payable (Note 7) 349 335
Subordinated notes (Note 9) 24,513 24,513
Accounts payable 29,219 31,436
Accrued compensation 7,336 5,542
Income taxes payable (Notes 1 and 14) 2,771 1,169
Accrued interest, warranty and other (Note 1) 9,787 6,426
Customer deposits 5,472 6,143
TOTAL LIABILITIES $181,647 $187,994
Commitments and Contingencies (Notes 4, 6, 10, 13, 15 and 16)
Stockholders' equity (Notes 1, 2, 6, 9, 11, 12 and 13):
Preferred stock - $.01 par value; authorized 2,000,000
shares; none outstanding - -
Common stock - $.01 par value; authorized - 38,000,000
shares; issued and outstanding - 8,800,000 shares 88 88
Additional paid-in capital 50,573 50,573
Retained earnings 48,835 38,959
TOTAL STOCKHOLDERS' EQUITY 99,496 89,620
TOTAL $ 281,143 $ 277,614
See Notes to Consolidated Financial Statements.
29
11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Common Stock Additional Stockholders'
Shares Paid-in Retained Notes
(Dollars in thousands) Outstanding Amount Capital Earnings Receivable
Balance at December 31, 1992 5,400 - $ 3,323 $ 33,699 $ (192)
Net income - - - 16,095 -
Distributions to stockholders
(Note 1) - - - (6,339) -
Principal repayments (Note 2) - - - - 192
Redemption of Delaware
corporation shares (Note 12) (2,700) - - (10,000) -
Reincorporation in State
of Ohio (Note 12) 5,497,300 $55 (55) - -
Issuance of common stock,
net of costs of $3,994
(Note 12) 3,300,000 33 42,173 - -
Transfer S corporation
retained earnings to
additional paid-in capital (Note 1) - - 5,027 (5,027) -
Gain on repurchase of M/I
Financial minority interest
(Note 2) - - 105 - -
Balance at December 31, 1993 8,800,000 88 50,573 28,428 -
Net Income - - - 11,613 -
Distributions to stockholders (Note 1) - - - (1,082) -
Balance at December 31, 1994 8,800,000 88 50,573 38,959 -
Net Income - - - 9,876 -
BALANCE AT DECEMBER 31, 1995 8,800,000 $88 $50,573 $ 48,835 -
See Notes to Consolidated Financial Statements.
30
12
CONSOLIDATED STATEMENTS OF CASH FLOWS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Years Ended December 31,
(Dollars in thousands) 1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,876 $ 11,613 $ 16,095
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,754 1,647 1,586
Deferred income tax credit (1,769) (521) (751)
Decrease (increase) in receivables (6,265) 3,865 (11,513)
Decrease (increase) in inventories 5,775 (38,807) (28,444)
Decrease (increase) in other assets 861 (845) (784)
Increase (decrease) in accounts payable (2,217) 6,652 7,659
Increase (decrease) in income taxes payable 1,602 (1,453) 2,485
Increase (decrease) in accrued liabilities 5,155 (1,694) 3,392
Equity in undistributed income of
unconsolidated joint ventures and limited partnerships (132) (242) (110)
Net cash provided (used) by operating activities 14,640 (19,785) (10,385)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings, transportation
and construction equipment (691) (2,149) (1,355)
Proceeds from property disposals 335 254 1,042
Investment in unconsolidated joint ventures (10,423) (9,752) (10,515)
Distributions from unconsolidated joint ventures
and limited partnerships 1,477 823 303
Net cash used in investing activities (9,302) (10,824) (10,525)
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Cash proceeds from borrowings 396,793 438,816 350,612
Principal repayments (407,023) (403,891) (332,687)
Principal repayments of mortgage notes payable (360) (571) (2,081)
Principal repayments of senior subordinated notes - - (16,737)
Net increase (decrease)in customer deposits (671) 747 887
Proceeds from the sale of stock, net of costs of $3,994 - - 42,206
Repurchase of M/I Financial minority interest - - (281)
Principal repayments of stockholders' notes receivable - - 192
Distributions paid to former S corporation stockholders (1,082) (16,339)
Net cash provided (used) by financing activities (11,261) 34,019 25,772
Net increase (decrease) in cash (5,923) 3,410 4,862
Cash balance at beginning of year 14,059 10,649 5,787
Cash balance at end of year $ 8,136 $ 14,059 $ 10,649
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest - net of amount capitalized $ 14,007 $ 10,634 $ 8,734
Income taxes - net $ 6,797 $ 9,554 $ 719
NON-CASH TRANSACTIONS DURING THE YEAR:
Land acquired with mortgage notes payable $ 374 $ 519 $ 306
Single-family lots distributed from unconsolidated
joint ventures $ 5,628 $ 11,588 $ 6,663
See Notes to Consolidated Financial Statements.
31
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
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 wholly
owned subsidiary, M/I Financial Corp. ("M/I Financial") (see Note 2). All
significant intercompany transactions have been eliminated. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company is engaged primarily in the construction and sale of
single-family residential property in Columbus and Cincinnati Ohio; Tampa,
Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina;
Indianapolis, Indiana; and the Virginia and Maryland suburbs of Washington, D.C.
The Company designs, builds and sells single-family houses on finished lots
which it purchases ready for home construction or which it develops. The Company
also purchases undeveloped land to develop finished lots for future construction
of single-family houses and for sale to others.
The Company also conducts mortgage banking activities through M/I Financial
which originates mortgage loans primarily for purchasers of the Company's homes.
The loans and the majority of the servicing rights are sold to outside mortgage
lenders.
CASH IN ESCROW. Cash includes cash held in escrow of $407,000 and $703,000
at December 31, 1995 and 1994, respectively, pending completion of construction.
Cash was primarily held in one bank at December 31, 1995 and three banks at
December 31, 1994.
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
interest, are charged, under the specific identification method, to cost of
sales as housing sales are closed. Previously capitalized interest is included
in interest expense when the related housing sales are closed. Lot costs are
transferred to houses under construction from land costs when house construction
commences.
Depreciation on model home furnishings is recorded using an accelerated
method over the estimated useful lives of the assets.
Land and land development costs are allocated to development phases based
on relative estimated market values. 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.
INTEREST. The Company capitalizes interest during development and
construction. Capitalized interest is charged to interest expense as the related
inventory is delivered. The summary of total interest for 1995, 1994 and 1993 is
as follows:
(Dollars in thousands) 1995 1994 1993
Interest capitalized, beginning of year $ 7,322 $ 6,139 $ 4,649
Interest incurred 14,436 11,148 11,455
Interest expensed (14,198) (9,965) (9,965)
Interest capitalized, end of year $ 7,560 $ 7,322 $ 6,139
REVENUE RECOGNITION. Revenue and cost of revenue from the sale of real
estate are recognized at the time title is transferred to the buyer and the
buyer has met the minimum down payment requirement. Discounts and other sales
incentives are included as a reduction of homebuilding revenue.
Included in revenue are homebuilding sales of $505,810,000, $478,657,000
and $437,283,000 for 1995, 1994 and 1993 and revenue from lot and land sales of
$16,145,000, $8,528,000 and $4,824,000 for 1995, 1994 and 1993. Land and housing
costs related to homebuilding sales were $418,697,000, $397,063,000 and
$360,791,000 for 1995, 1994 and 1993 and costs relating to lot and land sales
were $13,264,000, $6,491,000 and $4,734,000 for 1995, 1994 and 1993. No indirect
expenses are allocated to land cost of sales.
M/I Financial recognizes revenue from application fees when received while
revenue from loan origination fees are recorded when the loan closes. M/I
Financial sells its loans and the majority of its servicing rights to outside
mortgage lenders. The revenue from these transactions is recorded when the loan
is sold. M/I Financial uses various methods to hedge the interest rate risk
related to the loans it has committed to make to home buyers (see Note 16).
Gains or losses resulting from these hedging transactions are included in
revenue when the gain or loss from the sale of the related loan is recorded.
WARRANTY COST. The Company provides a two-year limited warranty on
materials and workmanship and a twenty-year limited warranty against major
structural defects. An estimated amount of warranty cost is provided for each
house at the time of sale. Warranty expense was $4,475,000, $4,256,000 and
$3,886,000 for 1995, 1994 and 1993.
DEPRECIATION. Depreciation of 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 $1,574,000, $1,466,000 and $1,199,000 in 1995, 1994 and 1993.
AMORTIZATION. The costs incurred in connection with the issuance of the
Subordinated Notes and Exchange Subordinated Notes (see Note 9) are being
amortized over the terms of the related debt using the effective yield method.
Unamortized debt issuance costs of $798,000 and $978,000 are included in other
32
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets at December 31, 1995 and 1994.
ADVERTISING. The Company expenses advertising costs as incurred. The
Company expensed $4,963,000, $4,831,000 and $3,267,000 in 1995, 1994 and 1993,
respectively.
INCOME TAXES. Effective November 8, 1993, in conjunction with the initial
public offering (see Note 12), the Company terminated its S corporation status
and, accordingly, is fully subject to federal, state and local taxes from that
date forward. Upon termination of the Company's S corporation status, the
remaining S corporation retained earnings were transferred to additional paid-in
capital. The Company's subsidiary, M/I Financial, has been taxed as a C
corporation under the Internal Revenue Code of 1986, as amended (the "Code")
during all periods presented.
NET INCOME PER COMMON SHARE. Net income per common share is calculated
based on the weighted average shares outstanding during the period.
PROFIT SHARING. The Company has a trusteed deferred profit-sharing plan
which covers substantially all Company employees and permits members to make
contributions to the plan on a pre-tax salary reduction basis in accordance with
the provisions of Section 401(k) of the Code. Company contributions to the plan
are made at the discretion of the Board and totalled $620,000 in 1995, $715,000
in 1994 and $700,000 in 1993 (including payment of expenses incurred by the
plan).
DISTRIBUTIONS TO STOCKHOLDERS. Distributions to stockholders represent
payments by the Company to its stockholders while it was an S corporation. In
January 1994, the Company made distributions of $1,082,000 to the former S
corporation stockholders related to the Company's earnings from January 1, 1993
to November 8, 1993 (the date the Company's status as an S corporation was
terminated).
IMPACT OF ACCOUNTING STANDARDS. In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS 121 amends the impairment provisions
of the existing accounting literature which required the Company's home-building
inventories to be carried at the lower of cost or net realizable value. Under
the new provisions, if the Company's home-building inventories are determined to
be impaired, the impairment loss is measured based upon the difference between
the fair value of the asset and its carrying amount.
SFAS 121 is required to be adopted no later than the first quarter of 1996.
The Company has not completed its analysis of the impact of this new
pronouncement; however, based on preliminary estimates, the Company believes
that implementation of the provisions of this statement will not have a material
impact on the financial condition or results of operations of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires adoption no later than fiscal years beginning
after December 15, 1995.
Under SFAS 123, companies are encouraged, but not required, to adopt the
fair value method of accounting for employee stock-based transactions. Companies
are also permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but
would be required to disclose in a note to the financial statements pro forma
net income and earnings per share, as if the Company had applied the new method
of accounting. The Company has determined that it will not adopt the expense
recognition provisions of this standard; therefore, the new standard will have
no effect on the Company's financial condition or results of operations.
2. TRANSACTIONS WITH RELATED PARTIES
Related parties are entities owned by, or partially owned by, certain
stockholders of the Company or joint ventures and limited partnerships (see
Notes 4 and 5) in which investments by the Company are accounted for by the
equity method.
The Company purchased lots and undeveloped land from the joint ventures or
limited partnerships of approximately $4,286,000, $3,608,000 and $3,507,000 for
1995, 1994 and 1993. The Company received distributions of $5,628,000,
$11,588,000 and $6,663,000 in developed lots at joint venture cost in 1995, 1994
and 1993, respectively. The Company also had notes receivable from limited
partnerships (see Note 3).
Until September 1993, an officer of the Company was associated with a law
firm that provided legal services for the Company. The Company paid the firm
approximately $779,000 (of which $39,000 was paid by joint ventures and limited
partnerships) in 1993. Additionally, approximately $1,436,000 of title insurance
premiums and closing fees were paid to wholly owned subsidiaries of the firm in
1993.
Immediately prior to the consummation of the initial public offering (see
Note 12), the Company repurchased the 20.1% share of the common stock of M/I
Financial previously owned by the former controlling officers/stockholders of
the Company. These shares were repurchased for the same price at which they were
originally sold to them, resulting in a gain of $105,000 which was credited to
additional paid-in capital. The remaining balance of the related notes
receivable owed to the Company was also repaid at that time.
Eric J. Schottenstein, formerly Senior Vice President/Regional Manager -
Carolina Region, resigned his position with the Company in December 1993. Mr.
Schottenstein has agreed to serve as a consultant to the Company for a period of
three years, for which he was paid $207,000 in 1995 and $215,000 in 1994 and
will be paid approximately $200,000 in 1996.
33
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RECEIVABLES
Receivables consist of the following:
(Dollars in thousands) 1995 1994
Mortgage loans to be funded $22,797 $15,418
Notes receivable from limited partnerships 440 1,219
Accounts receivable 356 265
Accounts receivable from limited partnerships 19 445
Total receivables $23,612 $17,347
Mortgage loans to be funded relate to houses sold and closed prior to
December 31 and which were subsequently funded by unrelated lending
institutions. Notes receivable from limited partnerships represent advances from
the Company which bear interest at the prime rate plus 1/2%, total of 9.00% at
December 31, 1995 and 1994. One of the notes was paid off in 1995 and the
maturity date of the remaining note was extended to December 31, 1996 (see Note
5).
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
At December 31, 1995, the Company had interests varying from 33% to 50% in
each of 18 separate joint ventures (33%-4 and 50%-14), three formed in 1995,
three formed in 1994, four formed in 1993 and eight formed prior to 1993 that
engage in land development activities. These interests are recorded using the
equity method of accounting.
The Company receives its percentage interest share of joint venture profits
or, in the majority of the joint ventures, its percentage interest share of the
lots developed in the form of a capital distribution. The Company received
distributions of $5,628,000, $11,588,000 and $6,663,000 in developed lots at
joint venture cost in 1995, 1994 and 1993, respectively, and purchased lots
totalling $1,333,000, $1,105,000 and $589,000 in 1995, 1994 and 1993 from the
joint ventures.
Summarized condensed combined financial information for the joint ventures
as of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 is as follows:
SUMMARIZED CONDENSED COMBINED BALANCE SHEETS
December 31
(Dollars in thousands) 1995 1994
Assets:
Single family lots,
land and land development costs $ 25,173 $18,152
Other assets 1,284 1,188
Total $ 26,457 $19,340
Liabilities:
Debt $ 2,544 $ 2,510
Other liabilities 2,132 1,748
Total liabilities 4,676 4,258
Partners' equity:
Company's equity 9,890 7,043
Other 11,891 8,039
Total Partners' equity 21,781 15,082
Total $ 26,457 $19,340
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31
(Dollars in thousands) 1995 1994 1993
Revenue $ 2,335 $ 1,706 $ 1,233
Costs and expenses 2,158 1,809 1,519
Income (loss) $ 177 $ (103) $ (286)
Joint venture earnings include $45,000 and $44,000 of intercompany profit
not included in the Company's earnings for 1995 and 1994. In addition, included
in the Company's investment in the joint ventures at December 31, 1995 and 1994,
is $413,000 and $376,000 of capitalized interest and other costs relating to the
joint ventures. Letters of credit totalling approximately $3,794,000 are
outstanding at December 31, 1995, which serve as completion bonds for joint
venture development work in progress.
5. INVESTMENT IN LIMITED PARTNERSHIPS
In 1992, the Company became a limited partner in two limited partnerships
formed by affiliates to purchase and develop land and lots. The operations of
the limited partnerships have primarily been funded through advances from the
Company. The advances outstanding as of December 31, 1995 and 1994 totaled
$465,000 and $1,712,000, respectively, including $440,000 and $1,219,000 of
notes receivable which bear interest at prime plus 1/2%. Also included in these
advances are $6,000 and $48,000 of deposits for lots the Company has an option
to purchase from the limited partnerships at fair market value. The Company
purchased lots totalling $2,953,000, $2,503,000 and $2,918,000 from the limited
partnerships in 1995, 1994 and 1993, respectively.
For both limited partnerships, the land and related debt are recorded on
the limited partnerships' books and the Company is not contingently liable for
any of the limited partnerships' debt; therefore, the only amounts related to
the limited partnerships that are recorded on the Company's books are the
advances noted above, and the Company's investment in the limited partnerships
of $262,000 and $772,000 respectively at December 31, 1995 and 1994. The Company
recorded income from the limited partnerships of $85,000, $322,000 and $294,000
respectively for 1995, 1994 and 1993.
6. NOTES PAYABLE BANKS
At December 31, 1995, the Company had revolving credit loans of $87,000,000
and letters of credit totalling $14,748,000 outstanding under a loan agreement
with five banks. Borrowings under the loan agreement are at the banks' prime
rates and are primarily unsecured. This agreement provides for total borrowings
not to exceed the lesser of $136,000,000 under the revolving credit agreement
and $25,000,000, including $4,000,000 for joint ventures in which the Company is
a partner, in the form of letters of credit or the Company's borrowing base
which is calculated based on specified percentages of certain types of assets
held by the Company as of each month end. This revolving credit facility and
letter of credit commitment
34
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
will be in effect until September 30, 2000, at which time the unpaid balance of
the revolving credit loans outstanding shall be due and payable. Under the terms
of the agreement, the banks shall make an annual determination as to whether or
not to extend the maturity date of the commitment by one year. The Company is
required to pay interest at the prime rate of the banks and a commitment fee of
1/4 of 1% based upon the average daily unused portion of the note. The loan
agreement also provides for seasonal loans of up to $30,000,000 which are
available from March 1st through December 31st during each year of the agreement
The terms of the loan agreement contain restrictive covenants which require the
Company, among other things, to maintain minimum net worth and working capital
amounts and to maintain certain financial ratios. This agreement also places
limitations on the amount of additional indebtedness that may be incurred by the
Company, the acquisition of undeveloped land, on dividends that may be paid and
on the aggregate cost of certain types of inventory the Company can hold at any
one time. At December 31, 1995, approximately $7,500,000 of retained earnings
was available for cash dividends and repurchases of the Company's stock under
the terms of the loan agreement.
At December 31, 1995, $15,200,000 was outstanding under a revolving loan
agreement with a bank ("M/I Financial Loan Agreement") pursuant to which the
Company and M/I Financial were permitted to borrow up to $25,000,000 to finance
mortgage loans initially funded by M/I Financial for customers of the Company
and a limited amount for loans to others. This agreement limits the borrowings
to 95% of 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. Borrowings under this agreement are at the bank's
prime rate and are unsecured. A commitment fee of 1/4 of 1% is payable quarterly
based upon the average daily unused portion of the note. The M/I Financial Loan
Agreement terminates on July 19, 1996 and the unpaid balance of such loans are
payable on this date.
At December 31, 1995, the Company had $49,000,000 of unused borrowing
availability under its loan agreement, as well as $6,500,000 under the M/I
Financial Loan Agreement. The interest rate of the Company's bank borrowings was
8.5% at December 31, 1995 and 1994 and 6.0% at December 31, 1993.
7. MORTGAGE NOTES PAYABLE
Mortgage notes payable of $349,000 and $335,000 at December 31, 1995 and
1994, represent mortgages collateralized by land and lots (book value of
$1,162,000 and $1,184,000 at December 31, 1995 and 1994, respectively). The
notes payable outstanding at December 31, 1995 are noninterest bearing; however,
the seller of the land securing the notes will share in the profits the Company
recognizes from developing this land.
8. SENIOR SUBORDINATED NOTES
In December 1993, the Company redeemed the remaining $12,987,000 of its 13
1/4% senior subordinated notes issued in 1986 at 103% of their principal amount,
plus accrued interest. Included in interest expense in 1993 is $616,000 that
represents the write-off of unamortized issuance costs and original issue
discount and redemption premium resulting from the redemption of the Senior
Subordinated Notes.
9. SUBORDINATED NOTES
In December 1991, the Company issued $20,000,000 principal amount of 14%
Subordinated Notes and in April 1992, issued an additional $4,513,000. The
Subordinated Notes provide for semi-annual interest payments and are
subordinated to all senior indebtedness as defined in the related indenture.
Annual sinking fund payments of 15% of the aggregate amount of the Subordinated
Notes commence December 1, 1997, and a final payment of 40% of the total amount
of such notes is due at maturity on December 1, 2001. The notes are redeemable
in whole or in part at the option of the Company on or after December 1, 1996,
at 106% of the principal amount until December 1, 1997 and declining 1 1/2%
annually through 2000.
The indenture related to the Subordinated Notes restricts certain payments by
the Company, including payments for cash dividends and repurchase of the
Company's stock. The indenture also provides for mandatory redemption of 15% of
the total principal amount of the Subordinated Notes at par plus accrued
interest if the Company's consolidated net worth, as defined, is less than
$3,500,000 for two consecutive quarters. In the event of a Change of Control (as
defined in the related indenture), holders of $20,000,000 of Subordinated Notes
will be entitled to require redemption of its Subordinated Notes for the full
principal amount (plus accrued interest), but holders of the remaining Notes
will not have a similar right.
10. LEASE COMMITMENTS
The Company leases various office facilities, automobiles, model furnishings,
and model homes under operating leases with remaining terms of one to twenty
years. At December 31, 1995, the future minimum rental commitments, totalling
$29,889,000 under noncancelable operating leases with initial terms in excess of
one year are as follows: 1996 - $3,710,000; 1997 - $2,219,000; 1998 -
$1,642,000; 1999 - $1,439,000; 2000 - $1,142,000 and thereafter - $19,737,000.
Included in the amount for 1996 is $153,000 related to a lease with a related
party for approximately 27,000 square feet of office space. This lease expires
August 31, 1996 at which time the Company has the right to extend the lease on a
month-to-month basis at the current rental rate. Rental expense was $358,000 for
1995, $367,000 for 1994 and for a lesser amount of space was $262,000 for 1993
(which included operating expense increases).
In 1995, the Company became a 1/3 owner of a limited liability company (the
"LLC") formed to build, own and operate an approximately 85,000 square foot
office building in Columbus, Ohio. The Company plans to consolidate its four
Columbus locations into this building and has entered into a 20 year lease
35
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the premises with the LLC. This building is currently under construction and
the Company anticipates moving into this new facility in September 1996.
Included in the amounts above are rentals of $337,000 for 1996; $1,132,000 for
1997; $1,132,000 for 1998; $1,132,000 for 1999; $1,132,000 for 2000; and
$19,737,000 for all periods thereafter.
The Company's total rental expense was $5,023,000, $3,699,000 and $3,174,000
for 1995, 1994 and 1993, respectively.
11. PREFERRED STOCK
The Articles of Incorporation authorize the issuance of 2,000,000 shares of
preferred stock, par value $.01 per share. The Board of Directors of the Company
is authorized, without further stockholder action, to divide any or all shares
of the authorized preferred stock into series and to fix and determine the
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereon, of any series
so established, including voting powers, dividend rights, liquidation
preferences, redemption rights and conversion privileges. The Board of Directors
has not authorized any series of preferred stock and there are no plans,
agreements or understandings for the authorization or issuance of any shares of
preferred stock.
12. COMMON STOCK
In November 1993, the Company was reincorporated in Ohio and the 2,700
remaining outstanding shares of the Delaware corporation were exchanged for
5,500,000 shares of the new Ohio corporation. In November 1993, the Company sold
3,300,000 shares of common stock at $14.00 per share in its initial public
offering. The net proceeds from the sale were approximately $42,206,000.
13. STOCK INCENTIVE PLAN
In November 1993, the Company adopted the M/I Schottenstein Homes, Inc. 1993
Stock Incentive Plan. This plan includes stock option, restricted stock and
stock appreciation programs, under which an aggregate of 425,000 shares of
common stock have been reserved for issuance. No awards have been granted under
the restricted stock and stock appreciation programs. Stock options granted in
1995 were awarded 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:
Option Price
Shares Per Share
Options outstanding
January 1, 1994 - -
Granted 94,200 $16.125
Forfeited (10,000) $16.125
Options outstanding
December 31, 1994 84,200 $16.125
Granted 68,200 $6.75-$9.25
Forfeited (18,000) $6.75-$16.125
Options outstanding
December 31, 1995 134,400 $6.75-$16.125
Options exercisable at
December 31, 1995 40,920 $6.75-$16.125
In February 1996, the Company granted options for an additional 60,700 shares
with the same terms as the previous awards, at a price of $10.875 which
represents the market value at the date of grant.
14. INCOME TAXES
Effective January 1, 1991, the Company elected to be taxed as an S
corporation under the Code. Effective November 8, 1993, the Company terminated
its S corporation status. From that date forward, the Company's income was fully
subject to federal, state and local taxes. In connection with the Company's S
corporation termination, deferred income tax benefits of $475,000 were
recognized in the fourth quarter of 1993.
The provisions for income taxes consist of the following:
(Dollars in thousands) 1995 1994 1993
Federal $5,312 $6,216 $1,847
State and local 1,318 1,364 606
Total $6,630 $7,580 $2,453
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provisions for income taxes are as follows:
(Dollars in thousands) 1995 1994 1993
Federal taxes at statutory rate $5,777 $6,718 $6,306
Deduct federal tax effect of
S corporation status - - (3,823)
State taxes -
net of federal tax benefit 857 887 400
Realization of deferred tax
benefit as a result of change
from S corporation status - - (475)
Other (4) (25) 45
Total $6,630 $7,580 $2,453
36
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at December 31, 1995 and 1994 follows:
(Dollars in thousands) 1995 1994
Assets:
Warranty, insurance and other
reserves $1,855$ 846
Inventory writedowns 749 436
Inventories 584 360
State taxes 226 236
Depreciation 67 -
Other 420 306
Total deferred tax assets 3,901 2,184
Liabilities:
Prepaid expenses and deferred charges 854 854
Depreciation - 52
Total deferred tax liabilities 854 906
Net deferred tax asset $ 3,047 $1,278
15. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company had sales agreements outstanding, some of
which have open contingencies for approval of financing, to deliver 1,421 homes
with an aggregate purchase price of approximately $240,095,000. At December 31,
1995, the Company had options and contingent purchase contracts to acquire land
and developed lots with an aggregate purchase price of approximately
$145,781,000. Purchase of the properties is contingent upon satisfaction of
certain requirements by the Company and the sellers.
At December 31, 1995, the Company had outstanding approximately $19,525,000
of completion bonds and standby letters of credit, which serve as completion
bonds for development work in progress, deposits on land and lot purchase
contracts and miscellaneous deposits.
The Company is involved from time to time in routine litigation. Management
does not believe that the ultimate resolution of this litigation will be
material to the financial condition or results of operations of the Company.
16. FINANCIAL INSTRUMENTS
M/I Financial offers fixed and adjustable rate mortgage loans, primarily to
buyers of the Company's homes. At December 31, 1995, M/I Financial is committed
to fund $55.0 million in mortgage loans to home buyers. Of this total,
approximately $6.0 million are adjustable rate loans and $49.0 million are fixed
rate loan commitments. The loans are granted at current market interest rates
and the rate is guaranteed through the transfer of the title of the home to the
buyer (the "Closing"). M/I Financial uses hedging methods to reduce its exposure
to interest rate fluctuations between the commitment date of the loan and the
time the home closes. The method to be used is determined at the time of the
loan commitment based on the market conditions and alternatives available. M/I
Financial's policy requires that there be no interest rate risk on loans closed
waiting to be sold. Also according to policy, the pipeline of committed loans is
to be hedged at 70 to 95% of the committed balance which is the balance of loans
expected to be closed.
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 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.
At December 31, 1995, the Company had approximately $36.0 million of commitments
to deliver mortgage loans to outside investors.
The Company also hedges its interest rate risk using forward sales of
mortgage-backed securities. In these agreements, the Company agrees to sell and
later agrees to buy similar but not identical mortgage-backed securities.
Generally, the agreements are fixed-coupon agreements whereby the interest rate
and maturity date of both transactions are approximately the same and are
established to correspond with the closing of the fixed interest rate mortgage
loan commitments of the Company. The difference between the two values of the
mortgage-backed securities in the agreements at settlement provide a hedge on
the interest rate risk exposure in the mortgage loan commitments and is included
in the gain or loss on the sale of the loans to third party investors. At
December 31, 1995, these agreements matured within 90 to 120 days. Securities
under forward sales agreements averaged approximately $12.5 million during 1995
and the maximum amounts outstanding at any month end during 1995 was $16.0
million. Hedging gains of $456,000 were deferred at year end as the mortgage
loans and commitment contracts qualified for hedge accounting.
To reduce the credit risk associated with accounting losses, which would be
recognized if counterparties failed completely to perform as contracted, the
Company limits the entities that management can enter into a commitment with to
the primary dealers in the market. The risk of accounting loss is the difference
between the market rate at the time a counterparty fails and the rate the
Company committed to for the mortgage loans and any purchase commitments
recorded with the counterparty.
The following table presents the carrying amounts and fair values of the
Company's financial instruments and the notional amount and fair value of the
Company's unrecognized financial instruments at December 31, 1995 and 1994. 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.
37
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995 1994
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
Assets
Cash, including
cash in escrow $ 8,136 $ 8,136 $ 14,059 $ 14,059
Receivables:
Mortgage loans
to be funded 22,797 23,029 15,418 15,556
Notes receivable 440 440 1,219 1,219
Accounts
receivable 375 375 710 710
Prepaid financing
commitments 213 -- 518 268
Liabilities
Notes payable
banks 102,200 102,200 112,430 112,430
Mortgage notes
payable 349 349 335 335
Subordinated notes 24,513 23,346 24,513 23,346
Accounts payable 29,219 29,219 31,436 31,436
Other liabilities 25,366 25,366 19,280 19,280
Unrecognized Financial
Instruments:
Letters of credit -- 84 -- 90
Commitments to
extend real estate
loans -- 687 -- 605
Forward sale of
mortgage-backed
securities -- (163) -- 20
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments at December 31, 1995 and
1994:
CASH, ACCOUNTS RECEIVABLE, ACCRUED LIABILITIES AND ACCOUNTS PAYABLE. 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, 1995 and 1994 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, 1995 and 1994.
NOTES RECEIVABLES. The carrying value of notes receivable from limited
partnerships, which bear interest at the prime rate plus 1/2%, approximates
their fair value at December 31, 1995 and 1994.
PREPAID FINANCING COMMITMENTS. The estimated fair value was determined
using fees currently charged for similar commitments and by estimating the
prepaid financing commitments that will be utilized by the Company.
NOTES PAYABLE BANKS. The interest rates currently available to the Company
fluctuate with the prime rate of the lending institutions and thus their
carrying value is a reasonable estimate of fair value.
MORTGAGE NOTES PAYABLE. The estimated fair value was determined by
comparing the interest rates and terms of the note agreements to debt
instruments with similar terms and remaining maturities.
SUBORDINATED NOTES. The estimated fair value was determined using the bid
price for the debt instruments at December 31, 1995 and 1994.
LETTERS OF CREDIT. Letters of credit and outstanding completion bonds of
$19,525,000 and $19,020,000 represent potential commitments at December 31, 1995
and 1994. The letters of credit generally expire within one to two years. The
estimated fair value of letters of credit was determined using fees currently
charged for similar arrangements.
COMMITMENTS TO EXTEND REAL ESTATE LOANS AND FORWARD SALE OF MORTGAGE-BACKED
SECURITIES. The fair value of these financial instruments was determined based
upon market quotes at December 31, 1995 and 1994.
17. PRO FORMA INFORMATION (UNAUDITED)
The pro forma financial information for the year ended December 31, 1993
presents the pro forma effects on the historical financial information as if the
Company had always been taxed as a C corporation, using an effective 40% tax
rate for federal, state and local income taxes.
Pro forma net income per common share includes the shares which would have
been outstanding if the reincorporation in the state of Ohio had occurred on
January 1, 1993 and also reflects the increase in average common shares
outstanding from the 3,300,000 shares sold in the public offering.
18. BUSINESS SEGMENTS
The business segment information for 1995, 1994 and 1993 included on page
21 of this annual report is an integral part of these financial statements.
38
20
INDEPENDENT AUDITORS' REPORT
[D & T Letterhead]
To the Stockholders and Directors of
M/I Schottenstein Homes, Inc.:
We have audited the accompanying consolidated balance sheets of M/I
Schottenstein Homes, Inc. and its subsidiary as of December 31, 1995 and 1994,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of M/I Schottenstein Homes,
Inc. and its subsidiary at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 29, 1996
39
21
STOCK MARKET PRICES AND DIVIDENDS
The Company's common stock is traded on the New York Stock Exchange under
the symbol "MHO". As of March 15, 1996, there were approximately ____ record
holders of the Company's common stock. At that time there were 8,800,000 shares
issued and outstanding. The table below presents the highest and lowest prices
for the Company's common stock during each of the quarters presented:
1995 HIGH LOW
First Quarter $ 7.63 $ 6.50
Second Quarter $ 9.50 $ 6.50
Third Quarter $10.38 $ 8.75
Fourth Quarter $12.50 $ 9.38
1994 HIGH LOW
First Quarter $18.25 $14.75
Second Quarter $15.25 $10.88
Third Quarter $13.25 $10.00
Fourth Quarter $10.25 $ 6.75
No dividends have been paid in the period following the completion of the
public offering and the Company does not anticipate paying cash dividends on its
common stock in the near future. The Company's loan agreement and Subordinated
Note Indenture place limits on the amount of dividends the Company can pay (see
Footnotes 6 and 9 to the consolidated financial statements).