1
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 June 30, 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 August 12, 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
June 30, 1996 and
December 31, 1995 3
Consolidated Statements of Income
for the Three Months and Six Months Ended
June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 1996 and 1995 5
Notes to Interim Unaudited Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
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CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------
JUNE 30 December 31
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash, including cash in escrow $ 11,923 $ 8,136
Receivables 22,503 23,612
Inventories:
Single-family lots, land and land development costs 104,756 120,806
Houses under construction 128,788 86,110
Model homes and furnishings (less accumulated depreciation:
June 30, 1996 - $845;
December 31, 1995 - $823) 20,871 20,971
Land purchase deposits 461 381
Office furnishings, transportation and construction
equipment - at cost (less accumulated depreciation:
June 30, 1996 - $6,699;
December 31, 1995 - $6,106) 2,000 2,392
Investment in unconsolidated joint ventures and limited partnerships 14,146 11,641
Other assets 8,552 7,094
- ------------------------------------------------------------------------------------------------------------
TOTAL $314,000 $281,143
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable banks-home-building operations $103,000 $ 87,000
Note payable bank-financial operations 12,280 15,200
Mortgage notes payable 104 349
Subordinated notes 24,513 24,513
Accounts payable 43,540 29,219
Accrued compensation 4,327 7,336
Income taxes payable 1,497 2,771
Accrued interest, warranty and other 10,739 9,787
Customer deposits 9,245 5,472
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 209,245 181,647
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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 54,094 48,835
- ------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 104,755 99,496
- ------------------------------------------------------------------------------------------------------------
TOTAL $314,000 $281,143
============================================================================================================
See Notes to Interim Unaudited Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF INCOME
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Revenue $ 233,215 $ 220,881 $ 137,357 $ 125,305
- ----------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 187,930 181,186 110,975 102,499
General and administrative 13,518 12,383 7,559 6,930
Selling 16,743 15,319 8,948 8,342
Interest 6,028 6,581 3,097 3,532
- ----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 224,219 215,469 130,579 121,303
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,996 5,412 6,778 4,002
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 4,125 2,061 3,817 1,448
Deferred (388) 92 (975) 137
- ----------------------------------------------------------------------------------------------------------------------------
Total income taxes 3,737 2,153 2,842 1,585
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,259 $ 3,259 $ 3,936 $ 2,417
============================================================================================================================
Net income per common share $ 0.60 $ 0.37 $ 0.45 $ 0.27
============================================================================================================================
Weighted average common shares
outstanding 8,800,000 8,800,000 8,800,000 8,800,000
============================================================================================================================
See Notes to Interim Unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
(Unaudited)
SIX MONTHS ENDED JUNE 30
(DOLLARS IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,259 $ 3,259
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 771 859
Decrease (increase) deferred income taxes (975) 92
Decrease in receivables 1,109 2,283
Increase in inventories (24,253) (23,755)
Decrease (increase) in other assets (573) 547
Increase (decrease) in accounts payable 14,321 (2,061)
Decrease in income taxes payable (1,274) (1,425)
Decrease in accrued liabilities (2,057) (2,671)
Equity in undistributed income of
unconsolidated joint ventures and limited partnerships (84) (9)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (7,756) (22,881)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings,
transportation and construction equipment (301) (327)
Proceeds from property disposals 40 42
Investment in unconsolidated joint ventures (5,003) (4,462)
Distributions from unconsolidated joint ventures
and limited partnerships 358 361
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,906) (4,386)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Cash proceeds from borrowings 132,096 128,870
Principal repayments (119,016) (108,675)
Principal repayments of mortgage notes payable (404) (252)
Net increase in customer deposits 3,773 1,814
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,449 21,757
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 3,787 (5,510)
Cash balance at beginning of year 8,136 14,059
- ------------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 11,923 $ 8,549
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 5,229 $ 6,518
Income taxes $ 5,415 $ 3,220
NON-CASH TRANSACTIONS DURING THE YEAR:
Single-family lots distributed from unconsolidated joint ventures $ 2,224 $ 1,021
Land acquired with mortgage notes payable $ 159 $ 374
- ------------------------------------------------------------------------------------------------------------------
See Notes to Interim Unaudited Consolidated Financial Statements.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED 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 six months ended June 30, 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.
On July 19, 1996, M/I Financial entered into a new bank loan agreement. The
amount available and other terms of the new agreement remain substantially
the same as the previous agreement. The agreement was previously amended on
May 7, 1996 to provide for interest on borrowings to be at the banks' prime
rate less 0.25%. The new agreement terminates on June 20, 1997 and the unpaid
balance of such loans are payable on this date.
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NOTE 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 six and three months
ended June 30, 1996 and 1995 is as follows:
Six Months ended June 30, Three Months ended June 30,
(Dollars in Thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Interest capitalized, beginning of year $ 7,560 $ 7,322 $ 7,648 $ 7,698
Interest incurred 6,202 7,157 3,183 3,732
Interest expensed 6,028 6,580 3,097 3,531
- ---------------------------------------------------------------------------------------------------------------
Interest capitalized, end of period $ 7,734 $ 7,899 $ 7,734 $ 7,899
===============================================================================================================
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 June 30, 1996, the Company had options and contingent purchase contracts
to acquire land and developed lots with an aggregate purchase price of
approximately $172.4 million.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
FORM 10-Q - PART I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1996 AND 1995
CONSOLIDATED
Total Revenue. Total revenue for the six months ended June 30, 1996
increased $12.3 million and for the three months ended June 30, 1996 increased
$12.0 million from the comparable periods of 1995. Increases for the six-month
period in housing revenue of $14.5 million and other revenue of $1.2 million
were partially offset by a $3.4 million decrease in land revenue. Increases for
the three-month period in housing revenue of $13.0 million and other revenue of
$0.4 million were partially offset by a $1.4 million decrease in land revenue.
The increase in housing revenue for both the six and three-month periods was
attributable to an increase in the number of Homes Delivered. The Company
delivered 96 and 98 more homes during the six and three months ended June 30,
1996 than the comparable periods of 1995. For both periods, the increase in
other revenue is primarily attributable to M/I Financial where both the number
of loans originated and the gains recognized from the sale of loans increased in
the current year. The decrease in land revenue for both the six and three months
ended June 30, 1996 was primarily due to a significant decrease in the number of
lots sold to third parties from the comparable periods of 1995.
Income Before Income Taxes. Income before income taxes for the six
months ended June 30, 1996 increased 66.2% and for the three months ended June
30, 1996 increased 69.4% from the comparable periods of 1995. The increase for
the six months ended June 30, 1996 related to both housing, where income before
income taxes increased from $4.4 million to $6.9 million, and M/I Financial,
where income before income taxes increased from $1.0 million to $2.1 million.
The increase for the three months ended June 30, 1996 related to housing, where
income before income taxes increased from $3.4 million to $5.7 million. The
increase in housing for both the six and three-month periods was primarily due
to the increase in the number of Homes Delivered along with improved margins.
The increase in M/I Financial for the six months ended June 30, 1996 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 first half of 1996 as compared to the same periods of 1994
and 1995.
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HOME-BUILDING SEGMENT
The following table sets forth certain information related to the Company's
home-building segment:
Six Months Ended June 30, Three Months Ended June 30,
(Dollars in thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Revenue:
Housing Sales $224,993 $210,487 $132,100 $119,053
Land and Lot Sales 4,475 7,844 3,370 4,790
Other Income 428 281 225 201
- --------------------------------------------------------------------------------------------------------------------
Total Revenue $229,896 $218,612 $135,695 $124,044
====================================================================================================================
Revenue:
Housing Sales 97.9 % 96.3 % 97.3 % 96.0 %
Land and Lot Sales 1.9 3.6 2.5 3.8
Other Income 0.2 0.1 0.2 0.2
- --------------------------------------------------------------------------------------------------------------------
Total Revenue 100.0 100.0 100.0 100.0
Land and Housing Costs 82.2 83.2 82.2 83.0
- --------------------------------------------------------------------------------------------------------------------
Gross Margin 17.8 16.8 17.8 17.0
General and Administrative Expenses 2.7 2.8 2.3 2.5
Selling Expenses 7.3 7.0 6.6 6.7
- --------------------------------------------------------------------------------------------------------------------
Operating Income 7.8 7.0 8.9 7.8
====================================================================================================================
Unit Data:
New Contracts 1,716 1,510 760 767
Homes Delivered 1,342 1,246 795 697
Backlog at end of period 1,795 1,521 1,795 1,521
Average sales price of homes in backlog $ 179.0 $ 177.0 $ 179.0 $ 177.0
Aggregate sales value of homes in backlog $322,168 $268,610 $322,168 $268,610
Number of active subdivisions 160 150 160 150
- --------------------------------------------------------------------------------------------------------------------
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 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 six months of
1996, the Company delivered 1,342 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, 13.1% have been canceled as of June 30, 1996. For homes in Backlog at
December 31, 1994, 14.6% had been canceled as of June 30, 1995. For the homes in
Backlog at December 31, 1994, the final cancellation percentage was 15.6%.
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Total Revenue. Total revenue for the six months ended June 30, 1996
increased 5.2% and for the three months ended June 30, 1996 increased 9.4% from
the comparable periods of 1995. The increase recorded for both the six and
three-month periods resulted from significant increases in housing revenue and
was offset by decreases in lot and land sales. The increase in housing revenue
for both periods was attributable to an increase in the number of Homes
Delivered as the Company delivered 7.7% and 14.1% more homes during the six and
three months ended June 30, 1996 than the comparable periods of 1995. The impact
of Homes Delivered on total revenue for both the six and three months ended June
30, 1996 was slightly offset by decreases in the average selling prices. The
increase in Homes Delivered during the six months ended June 30, 1996 was due
primarily to increased deliveries in the Indianapolis and Cincinnati markets, in
which the introduction of the lower priced Horizon product into new areas has
had a positive impact. In addition, Orlando had a large increase in Homes
Delivered during the six months ended June 30, 1996. The increase in Homes
Delivered during the three months ended June 30, 1996 was due to increased
deliveries in the Columbus, Indianapolis and Cincinnati markets. Again, the
introduction of the lower priced Horizon product into new areas has had a
positive impact on Homes Delivered in these markets. 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 development project in the six and three months ended June 30, 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 for which the timing is different than in 1995.
Home Sales and Backlog. The number of New Contracts recorded during the
first six months of 1996 was 13.6% higher than the number recorded for the
comparable period in the prior year. New Contracts recorded for the second
quarter were 0.9% lower than the prior year's amount. New Contracts recorded in
the first six months of 1996 were higher in all of the Company's regions, led by
the Ohio and Indiana Region where the number of New Contracts recorded increased
18.6%. The Company believes the increase in the number of New Contracts recorded
is attributable to the more favorable interest rate environment in the current
year as compared to the first six months 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 year. New Contracts recorded in the Columbus market during the three
months ended June 30, 1996 actually decreased by 9.7% from the comparable period
of 1995 due primarily to a record number of New Contracts recorded in the
Columbus market in 1995. This decrease was offset by increases in the majority
of the Company's other markets. 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 June 30, 1996, the total sales value of the Company's Backlog of
1,795 homes was approximately $322.2 million, representing a 19.9% increase in
sales value and an 18.0% increase in units from the levels reported at June 30,
1995. The average sales price of homes in Backlog increased 1.1% from June 30,
1995 to June 30, 1996. The minimal increase in the average sales price was due
to the introduction of the Company's lower priced Horizon product line into
several other markets in 1995.
Gross Margin. The overall gross margin for the home-building segment
was 17.8% for both the six and three months ended June 30, 1996 as compared to
16.8% and 17.0% for the comparable periods of 1995. These increases were due to
the increased emphasis placed on improving margins during 1995 and improved
market conditions in 1996. 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 obtain higher margins. Gross
margins were also higher due to the national accounts program which the Company
has expanded significantly in the past year. Through this program, the Company
has been able to lower costs on many of
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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 six months 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 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 decreased from 2.8% and 2.5% for the
six and three months ended June 30, 1995 to 2.7% and 2.3% for the comparable
periods in the current year. These decreases were primarily attributable to the
large increases in total revenue for both periods.
Selling Expenses. Selling expenses as a percentage of total revenue
increased to 7.3% for the six months ended June 30, 1996 from 7.0% for the
comparable period of 1995, and for the three months ended June 30, 1996
decreased slightly to 6.6% of total revenue from 6.7% for the comparable period
of 1995. The increase in the six month period was primarily due to increases in
sales commissions paid to both internal salespeople and outside Realtors.
FINANCIAL SERVICES SEGMENT - M/I FINANCIAL
The following table sets forth certain information related to the Company's
financial services segment:
Six Months Ended June 30, Three Months Ended June 30,
(Dollars in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
Number of Loans Originated 1,007 764 599 428
Revenue:
Loan Origination Fees $1,223 $ 898 $ 737 $ 508
Sale of Servicing and Marketing Gains 2,042 1,268 962 716
Other 1,052 833 547 452
- ------------------------------------------------------------------------------------------------------------
Total Revenue 4,317 2,999 2,246 1,676
- ------------------------------------------------------------------------------------------------------------
General and Administrative Expenses 2,226 2,004 1,175 1,053
- ------------------------------------------------------------------------------------------------------------
Operating Income $2,091 $ 995 $1,071 $ 623
============================================================================================================
Total Revenue. Total revenue for the six and three months ended June
30, 1996 was $4.3 and $2.2 million, a 43.9% and 33.9% increase over the $3.0 and
$1.7 million recorded for the comparable periods of 1995. Loan origination fees
increased 36.2% and 45.1% in the six and three months ended June 30, 1996 from
the comparable periods of 1995, primarily due to the 31.8% and 40.0% increase in
the number of loans originated. The increase in the number of loans originated
was due to an increase in the percentage of the Company's Homes Delivered which
were financed through M/I Financial and an increase in the number of Homes
Delivered by the Company.
Revenue from sale of servicing and marketing gains increased from $1.3
and $0.7 million to $2.0 and $1.0 million from the six and three months ended
June 30, 1995 to the comparable periods of the current year. This increase was
primarily due to an increase in servicing fees due to more fixed rate mortgages
originated during the six and three months ended June 30, 1996 as compared to
the comparable periods of 1995. The Company originated primarily adjustable rate
mortgages during the first half of 1995 due to a higher interest rate
environment. The Company earns higher premiums on fixed rate mortgages as
opposed to adjustable rate mortgages. The increase was also due to the falling
interest rate environment
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during the last part of 1995 which increased marketing gains on loans that
closed during the six and three months ended June 30, 1996. Revenue from the
sale of servicing and marketing gains were also higher due to the increased
volume of loans closed and sold during the six and three months ended June 30,
1996 as compared to the same periods of 1995.
General and Administrative Expenses. General and administrative
expenses for the six and three months ended June 30, 1996 were $2.2 and $1.2
million, an 11.3% and 12.0% increase over the comparable periods 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 six and three months ended June 30, 1996 totaled
$5.2 and $3.3 million, respectively, or 2.2% and 2.4% of total revenue. This is
an increase from the $4.5 and $2.9 million, or 2.0% and 2.3% of total revenue
recorded for the comparable periods of 1995. These increases are 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 six and three months ended June 30, 1996.
Interest Expense. Corporate and home-building interest expense for the
six and three months ended June 30, 1996 decreased to $6.0 and $3.1 million from
$6.6 and $3.5 million for the comparable periods of 1995. Interest expense was
lower in the current year due to decreases in the weighted average interest rate
and the average borrowings outstanding. These decreases were partially offset by
a decrease in the net amount of interest capitalized during the six and three
months ended June 30, 1996 as compared to the same periods 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 continues to
incur 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 June 30, 1996 the Company had bank borrowings outstanding of $103.0
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. On May 7, 1996, the Company
amended its bank loan agreement to add a LIBOR borrowing feature. At June 30,
1996, borrowings under the loan agreement were at LIBOR plus a margin of between
1.75% and 2.5% based on the Company's ratio of EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) to consolidated interest incurred and
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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, to maintain a minimum ratio of EBITDA to consolidated
interest incurred and to maintain certain other 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 $12.3 million was outstanding as of June 30, 1996 under
the M/I Financial loan agreement, which permits 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. On May 7, 1996, M/I Financial amended its bank
loan agreement to lower its prime rate borrowing margin. At June 30, 1996,
borrowings under this agreement were at the bank's prime rate less 0.25% and
were unsecured.
On July 19, 1996, M/I Financial entered into a new loan agreement with
its lender. The agreement terminates on June 20, 1997 and the unpaid balance of
such borrowings are payable on this date. The remaining terms of the agreement
remain substantially the same as those in the agreement that it replaces.
At June 30, 1996, the Company had $71.4 million of unused borrowing
availability under its loan agreements. At June 30, 1996, the Company had the
right to borrow up to $186.7 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 $20.7 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 June 30, 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. The Company is currently investigating
financing which could replace the existing Subordinated Notes at a significantly
lower interest rate.
At June 30, 1996, mortgage notes payable outstanding were $104,000
secured by lots and land with a recorded book value of $314,000. The Company
also had approximately $20.3 million of completion bonds and letters of credit
outstanding at June 30, 1996.
The $13.0 million increase in notes payable to banks from December 31,
1995 to June 30, 1996 reflects increased borrowings primarily attributable to a
significant seasonal increase in homes under construction offset by a decrease
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
homes 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 six months ended June 30, 1996 was $7.8 million
compared to $22.9 million for the comparable period of the prior year. The
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decrease in net cash used by operating activities was primarily due to a large
increase in accounts payable, partially offset by a smaller decrease in
receivables.
The Company executed an 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 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 early in the fourth
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. 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. On July 1, 1996, the Company purchased the
third phase for $5.6 million which will provide an additional 95 single-family
and townhouse lots. The Company sold a portion of the developed lots from the
first and second phases to outside homebuilders and will be entering into
similar contracts to sell a portion of the lots in the third 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.
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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 six months ended June 30, 1996 was 9.8%
as compared to 10.2% for the comparable period of 1995.
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
result 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 4. Submission of Matters to a Vote of Security Holders.
On May 8, 1996, the Company held its 1996 annual meeting of
shareholders. The shareholders voted on the election of three directors to
three-year terms. The results of the voting for the directors are as follows:
1. Election of Directors
For Withheld
--- --------
Irving E. Schottenstein 7,849,949 556,259
John B. Gerlach 7,849,988 556,220
Lenore G. Schottenstein 7,849,787 556,421
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 Revolving Credit Agreement by and among the Company; M/I
Financial Corp. and Bank One, Columbus, N.A. dated July 19,
1996.
10.2 Company's 1996 Senior Vice President/Regional Manager Bonus
Program.
10.3 Company's 1996 Division Manager Bonus Program.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
M/I Schottenstein Homes, Inc.
(Registrant)
Date: August____, 1996 by: /s/ Irving E. Schottenstein
---------------------------
Irving E. Schottenstein
Chief Executive Officer
(Principal Executive Officer)
Date: August____, 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 Revolving Credit Agreement by and among the Company; M/I
Financial Corp. and Bank One, Columbus, N.A. dated July 19,
1996.
10.2 Company's 1996 Senior Vice President/Regional Manager Bonus
Program.
10.3 Company's 1996 Division Manager Bonus Program.
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