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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 33-44914, 33-68564
M/I SCHOTTENSTEIN HOMES, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1210837
---- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
41 S. High Street, Suite 2410, Columbus, Ohio 43215
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(614) 221-5700
--------------
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 8,800,000 shares
outstanding as of May 10, 1996
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M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1996 and
December 31, 1995 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1996 and 1995 5
Notes to Interim Consolidated Unaudited
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 8
PART II. OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------
MARCH 31 December 31
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash, including cash in escrow $ 8,356 $ 8,136
Receivables 17,963 23,612
Inventories:
Single-family lots, land and land development costs 117,291 120,806
Houses under construction 107,208 86,110
Model homes and furnishings (less accumulated depreciation:
March 31, 1996 - $837;
December 31, 1995 - $823) 20,316 20,971
Land purchase deposits 426 381
Office furnishings, transportation and construction equipment - at cost (less
accumulated depreciation:
March 31, 1996 - $6,405;
December 31, 1995 - $6,106) 2,103 2,392
Investment in unconsolidated joint ventures and limited partnerships 11,052 11,641
Other assets 7,305 7,094
- ------------------------------------------------------------------------------------------------------------------
TOTAL $292,020 $281,143
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable banks-home-building operations $103,500 $ 87,000
Note payable bank-financial operations 8,380 15,200
Mortgage notes payable 251 349
Subordinated notes 24,513 24,513
Accounts payable 34,548 29,219
Accrued compensation 1,853 7,336
Income taxes payable 464 2,771
Accrued interest, warranty and other 9,789 9,787
Customer deposits 7,903 5,472
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 191,201 181,647
- ------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none outstanding - -
Common stock - $.01 par value;
authorized 38,000,000 shares;
issued and outstanding - 8,800,000 shares 88 88
Additional paid-in capital 50,573 50,573
Retained earnings 50,158 48,835
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 100,819 99,496
- ------------------------------------------------------------------------------------------------------------------
TOTAL $292,020 $281,143
==================================================================================================================
See Notes to Interim Consolidated Unaudited Financial Statements.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
Three-Months Ended
March 31
(Dollars in thousands, except per share information) 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Revenue $ 95,858 $ 95,576
- ---------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 76,955 78,687
General and administrative 5,959 5,453
Selling 7,795 6,977
Interest 2,931 3,049
- ---------------------------------------------------------------------------------------------------------------
Total costs and expenses 93,640 94,166
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 2,218 1,410
- ---------------------------------------------------------------------------------------------------------------
Income taxes:
Current 308 613
Deferred 587 (45)
- ---------------------------------------------------------------------------------------------------------------
Total income taxes 895 568
- ---------------------------------------------------------------------------------------------------------------
Net income $ 1,323 $ 842
===============================================================================================================
Net income per common share $ 0.15 $ 0.10
===============================================================================================================
Weighted average common shares outstanding 8,800,000 8,800,000
===============================================================================================================
See Notes to Interim Consolidated Unaudited Financial Statements.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
Three-Months Ended March 31
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,323 $ 842
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 386 425
Deferred income taxes (credit) 587 (45)
Decrease in receivables 5,649 5,281
Increase in inventories (15,225) (16,743)
Decrease (increase) in other assets (843) 298
Increase in accounts payable 5,329 2,410
Decrease in income taxes payable (2,307) (451)
Decrease in accrued liabilities (5,481) (1,627)
Equity in undistributed loss (income) of
unconsolidated joint ventures and limited partnerships (32) 3
- -----------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (10,614) ( 9,607)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings,
transportation and construction equipment (83) (172)
Proceeds from property disposals 45 8
Investment in unconsolidated joint ventures (1,470) (2,773)
Distributions from unconsolidated joint ventures
and limited partnerships 329 204
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,179) (2,733)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Cash proceeds from borrowings 58,486 61,885
Principal repayments (48,806) (55,250)
Principal repayments of mortgage notes payable (98) (145)
Net increase in customer deposits 2,431 1,652
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,013 8,142
- -----------------------------------------------------------------------------------------------------------------
Net Increase (decrease) in cash 220 (4,198)
Cash balance at beginning of year 8,136 14,059
- -----------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 8,356 $ 9,861
=================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 2,214 $ (241)
Income taxes $ 2,630 $ 769
NON-CASH TRANSACTIONS DURING THE YEAR:
Land acquired with mortgage notes payable $ - $ 374
Single-family lots distributed from unconsolidated joint ventures $ 1,762 $ 1,282
=================================================================================================================
See Notes to Interim Consolidated Unaudited Financial Statements.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements and notes thereto have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for interim financial information. The results of
operations for the three months ended March 31, 1996 and 1995 are not
necessarily indicative of the results for the full year.
It is suggested that these financial statements be read in conjunction with
the financial statements, accounting policies and financial notes thereto
included in the Company's Annual Report to Shareholders for the year ended
December 31, 1995.
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair presentation of financial results
for the interim periods presented.
NOTE 2. AMENDED LOAN AGREEMENTS
On May 7, 1996, the Company amended its bank loan agreement. The amended
loan agreement provides for interest on borrowings to be at the banks' prime
rates or, at the Company's option, LIBOR plus a margin of between 1.75% and
2.5% based on the Company's ratio of Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") to consolidated interest incurred
(as defined in such amendment). The amended loan agreement contains an
additional restrictive covenant which requires the Company to maintain a
minimum ratio of EBITDA to consolidated interest incurred. The remaining
terms of the agreement remain substantially the same as those in the
agreement that it replaces.
In addition, on May 7, 1996, M/I Financial amended its bank loan agreement.
The amended loan agreement provides for interest on borrowings to be at the
banks' prime rate less 0.25%. The remaining terms of the agreement remain
substantially the same as those in the agreement that it replaces.
4NOTE 3. 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 the three months ended March
31, 1996 and 1995 is as follows:
Three Months ended March 31,
(Dollars in Thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Interest capitalized, beginning of year $ 7,560 $ 7,322
Interest incurred 3,019 3,425
Interest expensed 2,931 3,049
- ------------------------------------------------------------------------------------------------------------------
Interest capitalized, end of period $ 7,648 $ 7,698
==================================================================================================================
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NOTE 4. 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.
The Company adopted SFAS 121 during the first quarter of 1996. Based on the
Company's analysis of its home-building inventories, none were found to be
impaired and therefore, the implementation of this statement had no 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 the Company adopted during the first quarter of 1996.
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
annual 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 had no effect on the Company's
financial condition or results of operations.
NOTE 5. CONTINGENCIES
At March 31, 1996, the Company had options and contingent purchase contracts
to acquire land and developed lots with an aggregate purchase price of
approximately $153.1 million.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
FORM 10-Q PART I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
CONSOLIDATED
Total Revenue. Total revenue for the three-months ended March 31, 1996
were $95.9 million, a slight increase over the $95.6 million recorded for the
comparable period of 1995. Increases in housing revenue of approximately $1.5
million and other revenue of approximately $800,000 were partially offset by a
$2.0 million decrease in land revenue. The increase in housing revenue was
attributable to an increase in the average sales price of homes delivered as
the Company actually delivered two less homes for the first quarter of 1996 as
compared to the prior year. The increase in other income is primarily
attributable to M/I Financial where the number of loans originated increased
and the gains recognized from the sale of loans was also significantly higher
in the current year. The decrease in land revenue was primarily due to a
significant decrease in the number of lots sold during the first quarter of
1996 in comparison to the first quarter of 1995.
Income Before Income Taxes. Income before income taxes for the first
quarter of 1996 increased 57.3% from the comparable period of 1995. Income
before income taxes reached $2.2 million, a new record for the Company's first
quarter. The increase in income before income taxes primarily related to M/I
Financial, where income before income taxes increased from $350,000 to $1.0
million. This increase was primarily due to the significant increase in income
from the sale of servicing and marketing gains due to the favorable interest
rate environment during the last half of 1995 and the first quarter of 1996.
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HOME-BUILDING SEGMENT
The following table sets forth certain information related to the Company's
home-building segment:
Three Months Ended March 31,
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Revenue:
Housing Sales $92,893 $91,434
Land and Lot Sales 1,105 3,054
Other Income 203 80
- --------------------------------------------------------------------------------------------------------------------
Total Revenue $94,201 $94,568
====================================================================================================================
Revenue:
Housing Sales 98.6 % 96.7%
Land and Lot Sales 1.2 3.2
Other Income 0.2 0.1
- --------------------------------------------------------------------------------------------------------------------
Total Revenue 100.0 100.0
Land and Housing Costs 82.1 83.5
- --------------------------------------------------------------------------------------------------------------------
Gross Margin 17.9 16.5
General and Administrative Expenses 3.2 3.1
Selling Expenses 8.3 7.4
- --------------------------------------------------------------------------------------------------------------------
Operating Income 6.4 6.0
====================================================================================================================
Unit Data:
New Contracts 956 743
Homes Delivered 547 549
Backlog at end of period 1,830 1,451
Average sales price of homes in backlog $173.0 $175.2
Aggregate sales value of homes in backlog $316,511 $254,279
Number of active subdivisions 150 140
====================================================================================================================
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 the first three months of 1996, the
Company delivered 547 homes, most of which were homes under contract in Backlog
at December 31, 1995. Of the 1,421 contracts in Backlog at December 31, 1995,
10.3% have been canceled as of March 31, 1996. For homes in Backlog at December
31, 1994, 11.3% had been canceled as of March 31, 1995. For the homes in
Backlog at December 31, 1994, the final cancellation percentage was 15.6%.
Total Revenue. Total revenue for the three months ended March 31, 1996
was down slightly in relation to the comparable period in 1995. A significant
decline in land revenue was offset by a 1.6% increase in housing revenue. The
decrease in land revenue was primarily attributable to the Maryland division.
The Maryland division had significant lot sales to outside home-builders from
its Willows land
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development project in the three months ended March 31, 1995 which did not
occur in the current year. The Company is developing additional sections of
this project and has entered into contracts to sell a portion of the lots
developed to these same builders. The increase in housing revenue was due to a
2.0% increase in the average sales price of Homes Delivered. The increase in
the average sales price of Homes Delivered was due to the Orlando, Charlotte
and Palm Beach County markets. In 1995, the Company introduced a more upscale
product line in the Orlando market in order to compete more effectively in this
segment of the market. As more of these higher-priced homes have begun to
close, the average sales price of Homes Delivered has increased. The increase
in the average sales price of Homes Delivered in both the Charlotte and Palm
Beach County divisions was due to the Company beginning to close homes in new
subdivisions in more upscale areas of these markets.
During the three months ended March 31, 1996, the Company delivered
547 homes, two fewer than it delivered during the comparable period of 1995.
The number of Homes Delivered in the Columbus market actually declined 17.3%
from the first quarter of 1995 to the first quarter of 1996 due to unusually
severe winter weather conditions in this market which caused construction
delays. This decline was offset by increases in the majority of the Company's
other divisions.
Home Sales and Backlog. The Company recorded a 28.7% increase in the
number of New Contracts recorded in the first quarter of 1996 as compared to
the corresponding period of 1995. The number of New Contracts recorded in the
current year was higher in all of the Company's regions, led by the Ohio and
Indiana Region where the number of New Contracts recorded increased 41.0%. The
Company believes the increase in the number of New Contracts recorded is
primarily attributable to the more favorable interest rate environment in the
current year as compared to the first quarter of 1995. The introduction of the
Company's lower priced Horizon product line into several new markets during
1995 also had a positive impact on the number of New Contracts recorded for the
current quarter. 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 March 31, 1996, the total sales value of the Company's Backlog of
1,830 homes was approximately $316.5 million, representing a 24.5% increase in
sales value and a 26.1% increase in units from the levels reported at March 31,
1995. The average sales price of homes in Backlog decreased 1.3% from March 31,
1995 to March 31, 1996. This decline was primarily due to the introduction of
the Company's lower priced Horizon product line into several other markets in
1995. The decrease in the average sales price of homes in Backlog was partially
offset by increases in the Columbus, Charlotte and Raleigh divisions where the
Company is building in more upscale subdivisions and in the Orlando market
where the Company introduced one of its more upscale product lines in 1995 in
order to compete more effectively in this market.
Gross Margin. The overall gross margin for the home-building segment
was 17.9% for the three-month period ended March 31, 1996 compared to 16.5% for
the three-month period ended March 31, 1995. This increase was primarily due to
the increased emphasis placed on improving margins during 1995. Management
continues to focus on maintaining accurate, up-to-date costing information so
that sales prices can be set to achieve the desired margins. The Company has
also focused on acquiring or developing lots in premier locations so that it
can command higher margins. Gross margins during the first quarter of 1996 were
also higher due to the national accounts program which the Company has expanded
significantly in the past year. The Company has been able to lower costs on
many of the components used in building its homes through volume discounts and
other negotiated price reductions from its suppliers. The Company's ability to
maintain the levels of margins obtained during the first quarter of 1996 are
dependent on a number of factors, some of which are beyond the Company's
control. Due to the increased level of sales during the last quarter of 1995
and the first quarter of 1996, some of the Company's divisions are beginning to
experience shortages of qualified subcontractors in certain construction
trades. This could
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negatively impact gross margins by requiring the Company to pay premiums to
expedite construction work or delaying construction, thus delaying revenue
recognition and increasing carrying costs.
General and Administrative Expenses. General and administrative
expenses as a percentage of total revenue increased from 3.1% for the three
months ended March 31, 1995 to 3.2% for the three months ended March 31, 1996.
This increase was primarily attributable to the increase in real estate tax
expense and homeowners association dues. These expenses increased in the
current year as the Company's investment in developed lots and raw land
awaiting development increased over prior year balances.
Selling Expenses. Selling Expenses as a percentage of total revenue
increased from 7.4% for the three months ended March 31, 1995 to 8.3% for the
three months ended March 31, 1996. This increase was primarily due to increases
in sales commissions paid, to both internal salespeople and outside Realtors.
Expenses related to model homes were also higher in the current year due to an
increase in the number of model homes, as well as an increase in the number of
model homes that have been sold and are being leased back to the Company. The
Company uses model sale/leasebacks to reduce its investment in model homes and
thus its interest expense; however, by doing so, selling expenses are increased
by the rental expense incurred under these leases.
FINANCIAL SERVICES SEGMENT
The following table sets forth certain information related to the Company's
financial services segment:
Three Months Ended March 31,
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Number of Loans Originated 408 336
Revenue:
Loan Origination Fees $ 486 $ 390
Sale of Servicing and Marketing Gains 1,080 551
Other 505 381
- --------------------------------------------------------------------------------------------------------------------
Total Revenue 2,071 1,322
- --------------------------------------------------------------------------------------------------------------------
General and Administrative Expenses 1,051 950
- --------------------------------------------------------------------------------------------------------------------
Operating Income $1,020 $ 372
====================================================================================================================
Total Revenue. Total revenue for the three months ended March 31, 1996
was $2.1 million, a 56.7% increase over the $1.3 million recorded for the
comparable period of the prior year. Loan origination fees increased 24.6% from
the first quarter of 1995 to the first quarter of 1996, primarily due to the
21.4% increase in the number of loans originated as well as a 9.2% increase in
the average loan amount. The increase in the number of loans originated 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 nearly doubled from
$551,000 for the three months ended March 31, 1995 to $1.1 million for the
three months ended March 31, 1996. This increase was primarily due to the
falling interest rate environment during the last part of 1995 which increased
marketing gains on loans that closed during the first quarter of 1996. During
the second half of 1995, M/I Financial began using hedging methods whereby it
has the option, but is not required, to complete the hedging transaction. This
allowed the Company to record significant servicing and marketing gains during
the period of falling interest rates while limiting its risk of loss from a
rising interest rate market. Revenue from the sale of servicing and marketing
gains were also higher due to the increased volume of loans closed and sold
during the three months ended March 31, 1996 as compared to the comparable
period of 1995.
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General and Administrative Expenses. General and administrative
expenses for the three months ended March 31, 1996 were $1.1 million, a 10.6%
increase over the comparable period of the prior year. This increase was
primarily attributable to personnel and other variable expenses which increased
due to the significantly higher volume of loans processed during the current
year.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for the three months ended March 31, 1996 totaled $1.9
million, or 2.0% of total revenue, a 20.2% increase from the $1.6 million. or
1.7% of total revenue recorded for the comparable period of the prior year. This
increase is primarily due to higher amounts recorded for certain employee
related expenses in the current year. These expenses are generally based on
pre-tax net income of the Company which increased significantly in the current
quarter.
Interest Expense. Corporate and home-building interest expense for the
first quarter of 1996 totaled $2.9 million, a 3.9% decrease from the $3.0
million recorded for the comparable period of the prior year. Interest expense
was lower in the current year due to the decreases in the weighted average
interest rate and the average borrowings outstanding which was partially offset
by the decrease in the net amount of interest capitalized during the first
quarter of 1996 as compared to the first quarter of 1995.
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 source of funds for construction and development activities has been
from internally generated cash and from bank borrowings which are primarily
unsecured.
At March 31, 1996 the Company had bank borrowings outstanding of
$103.5 million under its loan agreement relating to its home-building
operations which permits aggregate borrowings not to exceed the lesser of:
$166.0 million in revolving credit loans, including $30.0 million of seasonal
loans which are available from March 1st through December 31st during each year
of the agreement 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. At March 31, 1996,
borrowings under the loan agreement were at the banks' prime rate and were
primarily unsecured. 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.
On May 7, 1996, the Company amended its bank loan agreement. The
amended loan agreement provides for interest on borrowings to be at the banks'
prime rates or, at the Company's option, LIBOR plus a margin of between 1.75%
and 2.5% based on the Company's ratio of EBITDA to consolidated interest
incurred (as defined in such amendment). The amended loan agreement contains an
additional
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restrictive covenant which requires the Company to maintain a minimum ratio of
EBITDA to consolidated interest incurred. The remaining terms of the agreement
remain substantially the same as those in the agreement that it replaces.
An additional $8.4 million was outstanding as of March 31, 1996 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. At March 31, 1996, borrowings under this
agreement were at the bank's prime rate and were unsecured. The M/I Financial
Loan Agreement terminates on July 19, 1996 and the unpaid balance of such loans
are payable on this date.
On May 7, 1996, M/I Financial amended its bank loan agreement. The
amended loan agreement provides for interest on borrowings to be a the banks'
prime rate less 0.25%. The remaining terms of the agreement remain
substantially the same as those in the agreement that it replaces.
At March 31, 1996, the Company had $70.6 million of unused borrowing
availability under its loan agreements. At March 31, 1996, the Company had the
right to borrow up to $182.5 million under its credit facilities, including
$30.0 million of seasonal loans, available from March 1st through December 31
during each year of the loan agreement, and $16.5 million under the M/I
Financial Loan Agreement (95% of the aggregate face amount of eligible mortgage
loans). The Company may increase its borrowings under such agreements or
otherwise.
In addition, there were outstanding 14% Subordinated Notes in the
principal amount of $24.5 million at March 31, 1996. Annual sinking fund
payments for the Subordinated Notes of approximately $3.7 million commence
December 1, 1997 with the remaining balance 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. At March 31, 1996,
mortgage notes payable outstanding were $251,000 secured by lots and land with
a recorded book value of $827,000. The Company also had approximately $20.7
million of completion bonds and letters of credit outstanding at March 31,
1996.
The $9.7 million increase in notes payable to banks from December 31,
1995 to March 31, 1996 reflects increased borrowings primarily attributable to
the seasonal increase in homes under construction and a slight increase in
single-family lots, land and land development costs. It is expected that
borrowing needs will increase as the Company continues to increase its
investment in land under development and developed lots and as its investment
in houses under construction increases due to the higher backlog.
Net income from housing and lot and land sales are the Company's
primary sources of net cash provided by operating activities. Net cash used by
operating activities in the three months ended March 31, 1996 was $10.6 million
compared to $9.6 million for the comparable period of the prior year. The
increase in net cash used by operating activities was primarily due to larger
decreases in income taxes payable and accrued liabilities partially offset by a
larger increase in accounts payable.
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
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invested $1.1 million and holds a 1/3 interest (the "LLC"). The building will
be financed primarily 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 construction financing has been
jointly and severally guaranteed by the members of the LLC. The Company has
entered into a long-term operating lease for the premises with the LLC.
Construction of the building 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 the Company's
markets as well as the competitive advantages that can be achieved by
developing land internally rather than purchasing lots from developers or other
competing homebuilders. This is particularly true for the Company's Horizon
product line where, due to the price points the Company targets, 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 its risk; however, the Company will
continue to evaluate all of its alternatives to satisfy the Company's demand
for lots in the most cost effective manner.
In 1994, the Company entered into a land purchase contract which
required 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 was
developed into 122 single-family and townhouse lots. The Company sold a portion
of the developed lots from the first phase to outside homebuilders and has
entered into similar contracts to sell a portion of the lots in the second
phase to outside homebuilders. 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.
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 its currently available financial resources
are sufficient to meet its current and near-term capital requirements.
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 for the three months ended March 31, 1996 was
10.0% as compared to 10.2% for the three months ended March 31, 1995.
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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.
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 quarterly 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. See the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 for a further discussion of these and other risks
and uncertainties applicable to the Company's business.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 8, 1996, the Company announced that Robert H. Schottenstein has
been named President and Steven Schottenstein has been named Senior Executive
Vice President. Irving E. Schottenstein will continue to serve as Chairman of
the Board and Chief Executive Officer. In addition, the Company has established
an Office of the Chairman consisting of Irving E. Schottenstein, Robert H.
Schottenstein and Steven Schottenstein. The Office of the Chairman will
formulate and review key policy of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits required to be filed herewith are set forth below. No
reports were filed on Form 8-K for the quarter for which this report is filed.
EXHIBIT
NUMBER DESCRIPTION
10.1 First Amendment to restated revolving credit loan,
seasonal loan and standby letter of credit agreement by
and among the Company, Bank One, Columbus, N.A.; The
Huntington National Bank; The First National Bank of
Chicago; National City Bank of Columbus; The First
National Bank of Boston and Bank One, Columbus, N.A. as
agent for the banks, dated May 7, 1996.
10.2 First Amendment to revolving credit agreement by and among
the Company, M/I Financial Corp. and Bank One, Columbus,
N.A., dated May 7, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
M/I Schottenstein Homes, Inc.
(Registrant)
Date: May 10, 1996 by: /s/ Irving E. Schottenstein
-- ---------------------------
Irving E. Schottenstein
Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 1996 by: /s/ Kerrii B. Anderson
-- ----------------------
Kerrii B. Anderson
Senior Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE NO.
10.1 First Amendment to restated revolving credit loan,
seasonal loan and standby letter of credit agreement by
and among the Company, Bank One, Columbus, N.A.; The
Huntington National Bank; The First National Bank of
Chicago; National City Bank of Columbus; The First
National Bank of Boston and Bank One, Columbus, N.A. as
agent for the banks, dated May 7, 1996.
10.2 First Amendment to revolving credit agreement by and
among the Company, M/I Financial Corp. and Bank One,
Columbus, N.A., dated May 7, 1996.
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