1
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
(Dollars in thousands, except per share amounts) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT: (Year Ended December 31)
Revenue $577,192 $527,822 $491,719 $446,060 $372,026
Costs and expenses 554,115 511,316 472,526 427,512 359,854
Net income before extraordinary loss (1) 14,110 9,876 11,613 11,198 7,304
Net income per common share before
extraordinary loss (1) 1.60 1.12 1.32 1.87 1.33
Dividends per common share (2) - - - - -
BALANCE SHEET: (December 31)
Total assets 305,359 281,143 277,614 227,958 172,176
Notes and mortgage notes payable 100,345 102,549 112,765 77,892 61,742
Subordinated Notes 25,000 24,513 24,513 24,513 41,177
Stockholders' equity 112,319 99,496 89,620 79,089 36,830
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Information for 1993 and 1992 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 1996, 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 1996, 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.
(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 and 1992 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).
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) 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
New contracts 716 730 760 956
Homes delivered 1,017 887 795 547
Backlog 1,337 1,638 1,795 1,830
Total revenue $187,045 $156,932 $137,357 $ 95,858
Gross margin $ 34,127 $ 29,691 $ 26,382 $ 18,903
Income before income taxes and
extraordinary loss $ 7,145 $ 6,936 $ 6,778 $ 2,218
Net income before extraordinary loss $ 4,461 $ 4,390 $ 3,936 $ 1,323
Net income per common share before
extraordinary loss $ 0.50 $ 0.50 $ 0.45 $ 0.15
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) 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
14
2
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
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 construction and sale 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 $321,000, $431,000 and
$323,000 for 1996, 1995 and 1994, 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.
Year Ended December 31,
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue:
Home-building $ 570,719 $ 522,453 $ 487,786
Financial services 9,037 7,208 5,250
Intersegment (2,564) (1,839) (1,317)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 577,192 $ 527,822 $ 491,719
==================================================================================================================================
Operating Income:
Home-building $ 45,981 $ 39,039 $ 37,712
Financial services 4,100 2,697 1,524
- ----------------------------------------------------------------------------------------------------------------------------------
Total 50,081 41,736 39,236
Corporate expenses (14,222) (11,463) (10,401)
Interest expense (12,782) (13,767) (9,642)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS $ 23,077 $ 16,506 $ 19,193
==================================================================================================================================
Identifiable Assets:
Home-building $ 253,912 $243,117 $ 244,429
Financial services 35,650 23,694 16,430
Corporate 15,797 14,332 16,755
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 305,359 $281,143 $ 277,614
==================================================================================================================================
Capital Expenditures:
Home-building $ 317 $ 363 $ 1,029
Financial services 38 19 437
Corporate 256 309 683
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 611 $ 691 $ 2,149
==================================================================================================================================
Depreciation and Amortization:
Home-building $ 494 $ 916 $ 893
Financial services 153 159 124
Corporate 730 679 630
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,377 $ 1,754 $ 1,647
==================================================================================================================================
15
3
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
RESULTS OF OPERATIONS
CONSOLIDATED
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUE. Total revenue for 1996 of $577.2 million set a new record
for the Company and represented an increase of $49.4 million over 1995.
Increases in housing revenue of $55.2 million and other revenue of $1.4 million
were partially offset by a $7.2 million decrease in land revenue. The increase
in housing revenue was attributable to an increase in the number of Homes
Delivered. The Company delivered 294 more homes in 1996 than in 1995. 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 was primarily due to
a significant decrease in the number of lots sold to third parties in the
Maryland division.
INCOME BEFORE INCOME TAXES. Income before income taxes and extraordinary
loss for 1996 increased 39.8% over 1995. This increase related to both housing,
where income before income taxes and extraordinary loss increased from $13.8 to
$19.0 million, and M/I Financial, where income before income taxes increased
from $2.7 to $4.1 million. The increase in housing was primarily due to the
increase in the number of Homes Delivered along with improved margins. Housing
margins increased 0.7% in 1996. The increase in M/I Financial was primarily due
to the significant increase in income from the sale of servicing and marketing
gains due to increased loan volume and the favorable interest rate environment
during the last half of 1995 and 1996 as compared to the same periods of 1994
and 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUE. Total revenue for 1995 of $527.8 million 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 in the Maryland division 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.
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 1996 and 1995:
Three Months Ended
- ----------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
(Dollars in thousands) 1996 1996 1996 1996
- ----------------------------------------------------------------------
Total revenue $187,045 $156,932 $137,357 $95,858
Unit Data:
New contracts 716 730 760 956
Homes delivered 1,017 887 795 547
Backlog at end
of period 1,337 1,638 1,795 1,830
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
Unit Data:
New contracts 795 811 767 743
Homes delivered 941 765 697 549
Backlog at end
of period 1,421 1,567 1,521 1,451
- ----------------------------------------------------------------------
16
4
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
HOME-BUILDING SEGMENT
The following table sets forth certain information related to the Company's
home-building segment:
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------
Revenue:
Housing sales $560,980 $505,810 $478,657
Lot and land sales 8,915 16,145 8,528
Other income 824 498 601
- --------------------------------------------------------------
Total Revenue $570,719 $522,453 $487,786
- --------------------------------------------------------------
Revenue:
Housing sales 98.3% 96.8% 98.1%
Lot and land sales 1.6 3.1 1.8
Other income 0.1 0.1 0.1
- --------------------------------------------------------------
Total Revenue 100.0 100.0 100.0
Land and housing costs 82.5 83.0 83.0
- --------------------------------------------------------------
Gross Margin 17.5 17.0 17.0
General and administrative
expenses 2.8 2.9 2.8
Selling expenses 6.6 6.6 6.5
- --------------------------------------------------------------
Operating Income 8.1% 7.5% 7.7%
- --------------------------------------------------------------
MIDWEST REGION
Unit Data:
New contracts 1,910 1,865 1,530
Homes delivered 1,939 1,696 1,640
Backlog at end of period 908 937 768
Average sales price of
homes in backlog $ 174 $ 155 $ 168
Aggregate sales value of
homes in backlog $158,000 $145,000 $129,000
Number of active
subdivisions 80 80 75
- --------------------------------------------------------------
FLORIDA REGION
Unit Data:
New contracts 663 619 653
Homes delivered 667 657 671
Backlog at end of period 221 225 263
Average sales price of
homes in backlog $ 163 $ 182 $ 163
Aggregate sales value of
homes in backlog $ 36,000 $ 41,000 $ 43,000
Number of active
subdivisions 35 35 35
- --------------------------------------------------------------
NORTH CAROLINA, VIRGINIA AND MARYLAND REGION
Unit Data:
New contracts 589 632 624
Homes delivered 640 599 679
Backlog at end of period 208 259 226
Average sales price of
homes in backlog $ 246 $ 208 $ 213
Aggregate sales value of
homes in backlog $ 51,000 $ 54,000 $ 48,000
Number of active
subdivisions 35 35 30
- --------------------------------------------------------------
TOTAL
Unit Data:
New contracts 3,162 3,116 2,807
Homes delivered 3,246 2,952 2,990
Backlog at end of period 1,337 1,421 1,257
Average sales price of
homes in backlog $ 183 $ 169 $ 176
Aggregate sales value of
homes in backlog $245,000 $240,000 $220,000
Number of active
subdivisions 150 150 140
- --------------------------------------------------------------
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
period 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 1996, the Company delivered 3,246
homes, including most of the homes under contract in Backlog at December 31,
1995. Of the 1,421 contracts in Backlog at December 31, 1995, 14% were
cancelled. The cancellation percentages were 16% and 14% for homes in Backlog as
of December 31, 1994 and December 31, 1993, respectively. Unsold speculative
homes, which are in various stages of construction, totaled 122, 150 and 143 at
December 31, 1996, 1995 and 1994, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUE. Total revenue for the home-building segment for 1996 was
$570.7 million, a 9.2% increase over total revenue recorded for 1995. This
increase was attributable to a 10.9% increase in housing revenue and was offset
by a 44.8% decrease in land revenue. The increase in housing revenue was due to
a 10.0% increase in the number of Homes Delivered. Homes Delivered in 1996 were
higher in all of the Company's regions, led by the Midwest Region where the
number of Homes Delivered increased 14.3%. The introduction of the Company's
more affordable Horizon product line into several new markets during 1995 had a
positive impact on the number of Homes Delivered in 1996.
The increase in the number of Homes Delivered during 1996 as compared to
the prior year was primarily due to the higher number of homes in backlog at
December 31, 1995 as compared to the preceding year end as well as more New
Contracts recorded during the first half of 1996. This was partially due to an
overall strong economy, low unemployment and relatively low interest rates.
The decrease in land revenue was primarily attributable to the Maryland
division. The Maryland division had significant lot sales to outside
homebuilders from its Willows land development project in 1995 which did not
occur in 1996 due to delays in development and increased competition.
17
5
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
HOME SALES AND BACKLOG. The Company recorded a 1.5% increase in the number
of New Contracts recorded in 1996 as compared to the prior year. An increase in
New Contracts recorded in both the Midwest and Florida Regions were offset by a
decrease in the North Carolina/Virginia/Maryland Region. The Company believes
the increase in the number of New Contracts is attributable to the more
favorable interest rate environment in the current year as compared to 1995. The
introduction of the Company's more affordable Horizon product line into several
new markets during 1995 also had a positive impact on the number of New
Contracts for the current year. The number of New Contracts in future periods
will be dependent on numerous factors, including future economic conditions,
timing of land development, consumer confidence and interest rates available to
potential home buyers.
At December 31, 1996, the total sales value of the Company's Backlog of
1,337 homes was approximately $245.2 million, representing a 2.1% increase over
1995. However, there was a 5.9% decrease in the number of units from the levels
reported at December 31, 1995. The average sales price of homes in Backlog
increased 8.3% from December 31, 1995 to December 31, 1996. This increase was
due to increases in the Columbus, Columbus Showcase and Charlotte divisions
where the Company is building in more upscale and certain niche subdivisions.
The decrease in units at December 31, 1996 is a result of record high deliveries
and a decrease in New Contracts recorded in the second half of 1996.
GROSS MARGIN. The overall gross margin for the home-building segment was
17.5% for 1996 and 17.0% for 1995. The gross margin from housing sales was 17.9%
in 1996 as compared to 17.2% recorded in 1995. This increase was offset by a
decrease in the gross margin from lot and land sales from 17.8% in 1995 to 15.7%
in 1996. Housing gross margins increased in 8 of the Company's 12 divisions.
This was 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 current year. Through this program, 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 these levels of margins is
dependent on a number of factors, some of which are beyond the Company's
control. Due to the increased level of sales during the first half 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. In addition, due to the competitive sales environment, the
Company is offering promotions in selected cities which could adversely impact
gross margins in the first half of 1997. The decrease in the gross margin from
lot and land sales was due to decreased lot sales in the Willows land
development project in the Maryland division due to delays in development and
increased competition. In 1995, lot sales in this project generated very high
margins.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as
a percentage of total revenue decreased from 2.9% for 1995 to 2.8% for 1996.
However, this decrease resulted primarily from an increase in total revenue.
SELLING EXPENSES. Selling expenses increased from $34.3 million for 1995 to
$37.8 million for 1996 and as a percentage of total revenue remained constant at
6.6% for 1996 and 1995. The increase was primarily due to increases in sales
commissions to internal salespeople as a result of the increase in sales volume.
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
18
6
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
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 Maryland
division. Late in 1994, the Company completed development of the first phase of
a six-phase land development project. Development was in progress on the second
phase of this project during 1995. The Company sold 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. 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 December31,1994 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 this sale, the
gross margin from land sales was actually higher in 1995 as the Company began 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 Presidents 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 individuals higher bonuses in
1995. 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 divisions in 1995. Additional expenses were also incurred in 1995
related to the opening of model homes in new subdivisions.
19
7
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & 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:
Year Ended December 31,
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------
Number of loans
originated 2,427 1,873 1,455
Revenue:
Loan origination fees $3,094 $2,258 $1,688
Sale of servicing and
marketing gains 3,550 3,047 2,207
Other 2,393 1,903 1,355
- ------------------------------------------------------------------
Total Revenue 9,037 7,208 5,250
- ------------------------------------------------------------------
General & administrative
expenses 4,937 4,511 3,726
- ------------------------------------------------------------------
Operating Income $4,100 $2,697 $1,524
- ------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUE. Total revenue for the year ended December31, 1996 was $9.0
million, a 25.4% increase over total revenue recorded for 1995. Loan origination
fees increased 37.0% from 1996 to 1995, primarily due to the 29.6% 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 1996 as compared
to the preceding year was due to an increase in the number of Homes Delivered by
the parent company. In addition, two M/I Financial branch offices were opened
during 1995 and a branch office was opened in the Raleigh market during 1996. At
December 31, 1996, M/IFinancial was operating in eight of the Company's eleven
markets. Of these eight markets, 77% of the parent Company's Homes Delivered
were financed through M/I Financial.
Revenue from sale of servicing and marketing gains increased 16.5% to $3.5
million in 1996. This increase was primarily due to the increase in the number
of loans originated in the current year as well as an increase in servicing fees
due to more fixed rate mortgages originated during 1996 as compared to 1995. In
1995, the Company originated a higher percentage of adjustable rate mortgages as
compared to 1996. The Company generally earns higher premiums on fixed rate
mortgages as opposed to adjustable rate mortgages. 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 9.4% to $4.9 million for the year ended December 31, 1996 as compared
to the $4.5 million recorded in 1995. This increase was primarily due to the
opening of two new branches in 1995 and one new branch in 1996 as well as the
closing of the Maryland branch in 1996. Also, personnel costs increased due to
the significant increase in loans originated.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUE. Total revenue for the year ended December31, 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 1995 as well as a falling interest rate environment which
increased marketing gains. 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.
OTHER OPERATING RESULTS
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses for the year ended December31, 1996 totaled $14.2
million, or 2.5% of total revenue, a 24.1% increase from the $11.5 million, or
2.2% of total revenue, recorded for 1995. This increase is primarily due to
higher amounts recorded for bonuses and commissions in the current year.
20
8
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
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 was under construction during 1995 (See Note 8 to the
Consolidated Financial Statements).
INTEREST EXPENSE. Corporate and home-building interest expense for the year
ended December 31, 1996 totaled $12.8 million, a 7.1% decrease from the $13.8
million recorded for the preceding year. Interest expense was lower in the
current year due to decreases in the weighted average interest rate and the
average borrowings outstanding as a result of more favorable terms on the
Company's credit facilities. These decreases were partially offset by a decrease
in the net amount of interest capitalized during 1996 as compared to 1995.
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 average
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.
INCOME TAXES. The effective tax rate for 1996 decreased to 38.9% from 40.2%
for 1995, primarily as a result of a significant charitable contribution of
commercial land.
The effective tax rate increased from 39.5% to 40.2% from 1994 to 1995.
EXTRAORDINARY LOSS. In December 1996, the Company redeemed all of its
outstanding 14% Subordinated Notes due December 2001 at a price of 106% of par.
The principal amount redeemed was $24.5 million and the redemption resulted in
an extraordinary loss of $1.3 million, net of income taxes of $0.8 million.
LIQUIDITY AND CAPITAL RESOURCES
NOTES PAYABLE BANKS. 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.
On December 30, 1996, the Company amended its bank loan agreement. The
limit on aggregate borrowings was increased from $166.0 million to $186.0
million, eliminating the seasonality of borrowings available. The maturity date
of the loan was extended from September 30, 2000 to September 30, 2001. Limits
on certain restrictive covenants were also increased under the amended
agreement.
At December 31, 1996, the Company had bank borrowings outstanding of $77.0
million under its loan agreement relating to its home-building operations, which
permits aggregate borrowings not to exceed the lesser of: $186.0 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, 2001, 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 December 31,
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 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 $23.3 million was outstanding as of December 31, 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. At December 31, 1996, borrowings under this
agreement were at the bank's prime rate less 0.25% and were unsecured. The
agreement terminates on June 20, 1997, and the unpaid balance of such borrowings
are payable on this date.
At December 31, 1996, the Company had the right to borrow up to $211.0
million under its credit facilities, including $25.0 million under the M/I
Financial loan agreement. At December 31,
21
9
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
1996, the Company had $110.7 million of unused borrowing availability under its
loan agreements. The Company also had approximately $21.5 million of completion
bonds and letters of credit outstanding at December 31, 1996.
On March 15, 1997, the Board of Directors of the Company authorized the
repurchase of 500,000 shares of the Company's common stock at $10.50 per share,
which represents the closing price of the Company's common stock on March 14,
1997, from the Melvin L. Schottenstein family interests. These shares will be
held as treasury shares by the Company. The total purchase price will be
$5,250,000 and will be paid from proceeds of the Company's revolving line of
credit. In conjunction with this stock transaction, Lenore S. Sagner has
resigned from the Board of Directors. Amy D. Schottenstein has been elected to
fill this vacancy.
SUBORDINATED NOTES. On December 3, 1996, the Company issued $25.0 million
in the form of a Subordinated Note with The First National Bank of Boston. The
proceeds were used to redeem the Company's 14% Subordinated Notes, in the amount
of $24.5 million, previously outstanding. The maturity date of the $25.0 million
Subordinated Note is December 15, 2001 and can be extended two additional years
at the Company's option. The Subordinated Note is redeemable, in whole or in
part, after one year without penalty or premium. Interest on the Subordinated
Note can adjust every three months and is based on LIBOR plus 3.5%. Upon the
redemption of the 14% Subordinated Notes, the Company incurred a $1.3 million
extraordinary loss, net of tax.
In compliance with the terms of the new Subordinated Note, the Company
purchased a three-year, 9% interest rate cap agreement, effective December 2,
1996 through December 2, 1999. The agreement provides that if the interest rate
in effect for each three month period is greater than the cap rate, the bank
will pay to the Company the excess interest computed.
CASH. Net income from housing and lot and land sales is the Company's
primary source of net cash provided by operating activities. Net cash provided
by operating activities in the year ended December 31, 1996 was $13.5 million
compared to $15.0 million for the prior year. The decrease in net cash provided
by operating activities was primarily due to large increases in accounts
receivable and inventories partially offset by increases in accounts payable and
accrued liabilities.
LAND AND LAND DEVELOPMENT. Over the past several years, the Company's land
development activities and land holdings have increased significantly, and the
Company expects that this trend will continue to increase in the foreseeable
future. Lots, land and land development costs increased 9.4% in the 4th quarter
of 1996 and 6.8% over December 31, 1995. The Company anticipates that its land
holdings in the Columbus market will increase 50% in 1997. 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.
The $1.9 million decrease in notes payable to banks from December 31, 1995
to December 31, 1996 reflects decreased borrowings primarily attributable to the
increase in the number of Homes Delivered in 1996 offset by an increase in
single family lots, land and land development costs. Single-family lots, land
and land development costs increased $11.1 million in the fourth quarter, and 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.
In 1994, the Company entered into a land purchase contract which required a
greater investment than the Company normally commits. On January 31, 1994, the
Company closed on the first phase of a six-phase land purchase contract in the
Maryland division. 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 has entered 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 three
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. In December 1996, the Company eliminated the seasonal aspect of the
loan agreement and increased the amount of the lines of credit by $20.0 million.
The Company executed an agreement with certain unrelated
22
10
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
parties for the development and occupancy of an approximately 85,000 square foot
building to be used as the Company's headquarters. The five office locations in
Columbus, Ohio were consolidated into one building in an effort to improve
operating efficiencies. The building was built, and is 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 construction financing was 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 was
substantially completed late in the fourth quarter of 1996. The Company believes
that any commitments arising from this transaction will not significantly affect
its liquidity or capital resources.
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 rate on the
Company's outstanding debt was 9.5%, 10.1% and 9.0% for 1996, 1995 and 1994,
respectively.
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 13 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
The Company wishes to take advantage of the safe harbor provisions included
in the Private Securities Litigation Reform Act of 1995. Accordingly, in
addition to historical information, this Management's Discussion and Analysis of
Results of Operations and Financial Condition contains certain forward-looking
statements, including, but not limited to, statements regarding the Company's
future financial performance and financial condition. These statements involve a
number of risks and uncertainties. Any forward-looking statements made by the
Company herein and in future reports and statements are not guarantees of future
performance, and actual results may differ materially from those in such
forward-looking statements as a result of various factors including, but not
limited to, those referred to below.
GENERAL REAL ESTATE, ECONOMIC AND OTHER CONDITIONS. The home-building
industry is significantly affected by changes in national and local economic and
other conditions, including employment levels, changing demographic
considerations, availability of financing, interest rates, consumer confidence
and housing demand. In addition, homebuilders are subject to various risks, many
of them outside the control of the homebuilder, including competitive
overbuilding, availability and cost of building lots, availability of materials
and labor, adverse weather conditions which can cause delays in construction
schedules, cost overruns, changes in government regulations, and increases in
real estate taxes and other local government fees. The Company has benefited
during the current fiscal year from a relatively strong national economy and
strong local economies in its markets. The Company has benefited as well from
steadily low interest rates. If such trends do not continue, the Company's
business will be adversely affected.
PRESENT AND FUTURE SUBDIVISIONS. The Company intends for its subdivisions
to be built out over time. Therefore, the medium- and long-term financial
success of the Company will be dependent on the Company's ability to develop and
market its subdivisions successfully. Acquiring land and committing the
financial and managerial resources to develop a subdivision involves significant
risks. Before a subdivision generates any revenue, material expenditures are
required for items such as acquiring land; obtaining development approvals; and
constructing project infrastructure (such as roads and utilities), model homes
and sales facilities. It generally takes several years for subdivisions to
achieve cumulative positive cash flow.
LONG-TERM NATURE OF PROJECTS; PERIOD-TO-PERIOD FLUCTUATIONS. The majority
of the Company's subdivisions are long-term projects. Sales activity at the
Company's subdivisions varies from period to period, and the ultimate success of
any subdivision cannot necessarily be judged by results in any particular period
or periods. A subdivision may generate significantly higher sales levels at
inception (whether because of local pent-up demand in the area or other reasons)
than it does during later periods over the life of the subdivision. Revenues and
earnings of the Company will also be affected by period-to-period fluctuations
in the mix of product and home closings among the Company's subdivisions.
23
11
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Management's Discussion & Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
THE COMPANY'S MARKETS. The Company's operations are concentrated in the
Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm
Beach County, Florida; Charlotte and Raleigh, North Carolina; and Virginia and
Maryland metropolitan areas. Although these are stable, established markets in
which the Company has operated successfully, there can be no assurance that the
stability of these markets or the Company's favorable results there will
continue. Adverse general economic conditions in these markets could have a
material adverse impact on the operations of the Company. For the year ended
December 31, 1996, approximately 38% of the Company's housing revenue and a
significant portion of the Company's operating income was derived from
operations in its Columbus, Ohio market. The Company's performance could be
significantly affected by changes in this market. The Company has also expanded
into a new geographic market, Phoenix, Arizona, which could reduce the Company's
dependence upon its existing markets. The Company currently has three employees
in Phoenix and is actively pursuing land positions in the Phoenix market. A
significant amount of selling and general and administrative expenses are
incurred when opening a new division, and, as a result, such expenses will
increase in 1997. However, any new markets may prove to be less stable and may
involve delays, problems and expenses not typically found by the Company in the
existing markets with which it is familiar. Such delays, problems, and expenses
would be likely to occur in any new market and may include, without limitation,
the development of relationships with local contractors and suppliers, land
acquisition and development, construction of new model homes, acquiring local
office facilities and hiring additional personnel.
COMPETITION. The home-building industry is highly competitive. The Company
competes in each of its local market areas with numerous national, regional and
local homebuilders, some of which have greater financial, marketing, land
acquisition, and sales resources than the Company. Builders of new homes compete
not only for home buyers, but also for desirable properties, financing, raw
materials and skilled subcontractors. The Company also competes with the resale
market for existing homes which provides certain attraction for home buyers over
building a new home. The Company attempts to meet this competition from the home
resale market by offering benefits which the resale market for existing homes
cannot provide: new home warranties and the flexibility to select precise
location, style and elevation, and interior and exterior finishes.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONSIDERATIONS. The home-building
industry is subject to increasing local, state and Federal statutes, ordinances,
rules and regulations concerning zoning, resource protection (preservation of
woodlands and hillside areas), building design, and construction and similar
matters, including local regulations which impose restrictive zoning and density
requirements in order to limit the number of homes that can eventually be built
within the boundaries of a particular location. Such regulation affects
construction activities, including construction materials which must be used in
certain aspects of building design, as well as sales activities and other
dealings with homebuyers. The Company must also obtain licenses, permits and
approvals from various governmental agencies for its development activities, the
granting of which are beyond the Company's control. Furthermore, increasingly
stringent requirements may be imposed on homebuilders and developers in the
future. Although the Company cannot predict the impact on the Company of
compliance with any such requirements, such requirements could result in time
consuming and expensive compliance programs.
The Company is also subject to a variety of local, state and Federal
statutes, ordinances, rules and regulations concerning the protection of health
and the environment. The particular environmental laws which apply to any given
project vary greatly according to the project site and the present and former
uses of the property. These environmental laws may result in delays, cause the
Company to incur substantial compliance costs (including substantial
expenditures for pollution and water quality control) and prohibit or severely
restrict development in certain environmentally sensitive regions. Although
there can be no assurance that it will be successful in all cases, the Company
has a general practice of requiring an environmental audit and resolution of
environmental issues prior to purchasing land in an effort to avoid major
environmental issues in the Company's developments.
In addition, the Company has been, and in the future may be, subject to
periodic delays or may be precluded from developing certain projects due to
building moratoriums. These moratoriums generally relate to insufficient water
supplies, sewage facilities, delays in utility hook-ups, or inadequate road
capacity within the specific market area or subdivision. These moratoriums can
occur prior to, or subsequent to, commencement of operations by the Company
without notice to, or recourse by, the Company. Although the Company's practice
of resolving such issues before committing to purchase property tends to reduce
the Company's exposure to financial risk as a result of such moratoriums, the
Company must utilize its resources in dealing with them.
CONSTRUCTION. The Company has from time to time experienced shortages of
materials or qualified subcontractors and volatile increases in the cost of
certain materials (particularly increases in the price of lumber and framing,
which are significant components of home construction costs), resulting in
longer than normal construction periods and increased costs not reflected in the
prices of homes. Generally, the Company's home sales contract does not contain
provisions for price increases if the Company's costs of construction increase.
24
12
[DELOITTE & TOUCHE LLP LOGO]
INDEPENDENT AUDITORS' REPORT
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, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Columbus, Ohio
February 27, 1997, except with respect to the last paragraph of Note 2, for
which the date is March 15, 1997
25
13
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Statements of Income
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
YEAR ENDED DECEMBER 31,
(Dollars in thousands, except per share amounts) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Revenue (Notes 1, 4 and 5) $ 577,192 $527,822 $491,719
- ---------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing (Notes 1, 2 and 4) 468,089 431,961 403,554
General and administrative (Notes 1 and 2) 34,980 30,660 27,208
Selling (Notes 1 and 2) 37,943 34,497 31,799
Interest (Notes 1, 4, 6 and 7) 13,103 14,198 9,965
- ---------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 554,115 511,316 472,526
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary loss 23,077 16,506 19,193
- ---------------------------------------------------------------------------------------------------------------------------
Income taxes (credit) (Note 11):
Current 11,049 8,399 8,101
Deferred (2,082) (1,769) (521)
- ---------------------------------------------------------------------------------------------------------------------------
Total income taxes 8,967 6,630 7,580
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 14,110 9,876 11,613
- ---------------------------------------------------------------------------------------------------------------------------
Extraordinary loss from extinguishment of debt,
net of income taxes of $823 (Note 7) (1,287) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 12,823 $ 9,876 $ 11,613
- ---------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary loss per common share (Note 1) $ 1.60 $ 1.12 $ 1.32
- ---------------------------------------------------------------------------------------------------------------------------
Extraordinary loss per common share (Note 7) $ (.14) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income per common share (Note 1) $ 1.46 $ 1.12 $ 1.32
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 8,800,000 8,800,000 8,800,000
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
26
14
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
DECEMBER 31,
(Dollars in thousands, except par values) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash, including cash in escrow (Note 1) $ 6,761 $ 8,136
Receivables (Note 3) 34,447 23,612
Inventories (Notes 1, 2, 4 and 5):
Single-family lots, land and land development costs 129,025 120,806
Houses under construction 89,696 86,110
Model homes and furnishings (less accumulated
depreciation: 1996 - $56; 1995 - $823) 19,482 20,971
Land purchase deposits 716 381
Office furnishings, transportation and
construction equipment - at cost (less accumulated
depreciation: 1996 - $6,668; 1995 - $6,106) (Note 1) 1,635 2,392
Investment in unconsolidated joint ventures and
limited partnerships (Notes 2, 4, 5 and 8) 12,998 11,641
Other assets (Notes 1 and 11) 10,599 7,094
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 305,359 $281,143
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable banks - home-building operations (Note 6) $ 77,000 $ 87,000
Note payable bank - financial operations (Note 6) 23,300 15,200
Subordinated notes (Note 7) 25,000 24,513
Accounts payable 32,016 29,219
Accrued compensation 11,802 7,336
Income taxes payable (Note 11) 1,502 2,771
Accrued interest, warranty and other (Note 1) 15,349 10,136
Customer deposits 7,071 5,472
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 193,040 181,647
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 4, 6, 7, 8, 10, 12 and 13)
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (Notes 1, 2, 6, 9 and 10):
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 61,658 48,835
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 112,319 99,496
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 305,359 $281,143
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
27
15
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Common Stock
---------------------------- Additional
Shares Paid-in Retained
(Dollars in thousands) Outstanding Amount Capital Earnings
- -------------------------------------------------------------------------------------------------------------------------------
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
Net income - - - 12,823
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 8,800,000 $88 $50,573 $61,658
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
28
16
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,823 $ 9,876 $ 11,613
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Extraordinary loss from extinguishment of debt 2,110 - -
Loss from property disposals 1,008 335 254
Depreciation and amortization 1,377 1,754 1,647
Deferred income tax credit (2,082) (1,769) (521)
Decrease (increase) in receivables (10,835) (6,265) 3,865
Decrease (increase) in inventories (612) 5,775 (38,807)
Decrease (increase) in other assets (1,589) 861 (845)
Increase (decrease) in accounts payable 2,797 (2,217) 6,652
Increase (decrease) in income taxes payable (1,269) 1,602 (1,453)
Increase (decrease) in accrued liabilities 9,983 5,155 (1,694)
Equity in undistributed income of
unconsolidated joint ventures and limited partnerships (223) (132) (242)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 13,488 14,975 (19,531)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings, transportation
and construction equipment (611) (691) (2,149)
Investment in unconsolidated joint ventures (12,718) (10,423) (9,752)
Distributions from unconsolidated joint ventures
and limited partnerships 871 1,477 823
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,458) (9,637) (11,078)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Cash proceeds from borrowings 422,551 396,793 438,816
Principal repayments (424,451) (407,023) (403,891)
Principal repayments of mortgage notes payable (463) (360) (571)
Proceeds from the issuance of subordinated notes 25,000 - -
Principal repayments of subordinated notes (24,513) - -
Debt issuance costs (650) - -
Subordinated notes redemption premium (1,478) - -
Net increase (decrease) in customer deposits 1,599 (671) 747
Distributions paid to former S corporation stockholders - - (1,082)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (2,405) (11,261) 34,019
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,375) (5,923) 3,410
Cash balance at beginning of year 8,136 14,059 10,649
- -------------------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 6,761 $ 8,136 $ 14,059
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest - net of amount capitalized $ 12,875 $ 14,007 $ 10,634
Income taxes - net $ 11,495 $ 6,797 $ 9,554
NON-CASH TRANSACTIONS DURING THE YEAR:
Land acquired with mortgage notes payable $ 159 $ 374 $ 519
Single-family lots distributed from unconsolidated
joint ventures $ 10,713 $ 5,628 $ 11,588
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
29
17
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
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
subsidiaries. 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; the Virginia and Maryland suburbs of Washington, D.C.
and, beginning in 1997, Phoenix, Arizona. The Company designs, builds and sells
single-family homes 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 homes 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 $393,000 and $407,000
at December 31, 1996 and 1995, respectively, pending completion of construction.
Cash was primarily held in one bank at December 31, 1996 and 1995.
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 1996, 1995 and 1994 is
as follows:
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
Interest capitalized, beginning of year $ 7,560 $ 7,322 $ 6,139
Interest incurred 12,405 14,436 11,148
Interest expensed (13,103) (14,198) (9,965)
- --------------------------------------------------------------------------
Interest capitalized, end of year $ 6,862 $ 7,560 $ 7,322
- --------------------------------------------------------------------------
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 home-building revenue.
The following table summaries both home-building and lot and land sales and
cost of sales included in revenue and cost of revenue:
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------
Home-building sales $560,980 $505,810 $478,657
Lot and land sales 8,915 16,145 8,528
Home-building cost of sales 460,573 418,697 397,063
Lot and land cost of sales 7,515 13,264 6,491
- ------------------------------------------------------------
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 13).
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 $5,492,000, $4,475,000 and
$4,256,000 for 1996, 1995 and 1994, respectively.
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 $1,193,000, $1,574,000 and $1,466,000 in 1996, 1995 and 1994, respectively.
AMORTIZATION. The costs incurred in connection with the issuance of the new
Subordinated Note, issued in 1996, (see Note7) are being amortized over the
terms of the related debt and are included in interest expense. Unamortized debt
issuance costs of $632,000 relating to the new Subordinated Note, and $798,000
relating to the 14% Subordinated Notes, are included in other assets at December
31, 1996 and 1995, respectively.
ADVERTISING. The Company expenses advertising costs as incurred. The
Company expensed $4,765,000, $4,963,000 and
30
18
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$4,831,000 in 1996, 1995 and 1994, respectively.
NET INCOME PER COMMON SHARE. Net income per common share is calculated
based on the weighted average shares outstanding during the period. The Company
has no common stock equivalents other than outstanding options, which have no
significant effect on the calculation.
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 Internal Revenue Code. Company
contributions to the plan are made at the discretion of the Board and totalled
$825,000 in 1996, $620,000 in 1995 and $715,000 in 1994 (including payment of
expenses incurred by the plan).
DISTRIBUTIONS TO STOCKHOLDERS. Distributions to stockholders represent
payments by the Company to its stockholders for income earned 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.
The Company adopted SFAS 121 during the first quarter of 1996. Based on the
Company's analysis of its home-building inventories, nothing of significance was
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". 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 are 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. See Note 10 for the required disclosure under SFAS 123.
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 and
limited liability companies or limited partnerships of approximately $1,159,000,
$4,286,000 and $3,608,000 in 1996, 1995 and 1994, respectively. The Company
received distributions of $10,713,000, $5,628,000 and $11,588,000 in developed
lots at cost in 1996, 1995 and 1994, respectively. The Company also had notes
receivable from limited partnerships in 1995 (see Note 3).
Eric J. Schottenstein, formerly Senior Vice President/Regional Manager -
Carolina Region, resigned his position with the Company in December 1993. Mr.
Schottenstein agreed to serve as a consultant to the Company for a period of
three years, for which he was paid $192,000 in 1996, $207,000 in 1995 and
$215,000 in 1994. This contract was paid in full in 1996.
On March 15, 1997, the Board of Directors of the Company authorized the
repurchase of 500,000 shares of the Company's common stock at $10.50 per share,
which represents the closing price of the Company's common stock on March 14,
1997, from the Melvin L. Schottenstein family interests. These shares will be
held as treasury shares by the Company. The total purchase price will be
$5,250,000 and will be paid from proceeds of the Company's revolving line of
credit. In conjunction with this stock transaction, Lenore S. Sagner has
resigned from the Board of Directors. Amy D. Schottenstein has been elected to
fill this vacancy.
3. RECEIVABLES
Receivables consist of the following:
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------
Mortgage loans to be funded $34,121 $22,797
Notes receivable from limited partnerships - 440
Accounts receivable 326 356
Accounts receivable from limited partnerships - 19
- -----------------------------------------------------------------
Total receivables $34,447 $23,612
- -----------------------------------------------------------------
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 an advance
from the Company which bore interest at the prime rate plus 1/2% for a total of
9.00% at December 31, 1995. The note was collected in full in 1996 (see Note 5).
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND LIMITED LIABILITY
CORPORATIONS
At December 31, 1996, 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 in 1994, and twelve prior to 1994, and five separate limited liability
corporations formed in 1996 (33% - 1 and 50% - 4) that engage in land
development activi-
31
19
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
ties. These interests are recorded using the equity method of accounting.
The Company receives its percentage interest of profits or its percentage
interest of the lots developed in the form of a capital distribution. The
Company received distributions of $10,713,000, $5,628,000 and $11,588,000 in
developed lots at cost in 1996, 1995 and 1994, respectively, and purchased lots
totalling $1,159,000, $1,333,000 and $1,105,000 in 1996, 1995 and 1994 from the
joint ventures and limited liability corporations.
Summarized condensed combined financial information for the joint ventures
and limited liability corporations as of December 31, 1996 and 1995 and for each
of the three years in the period ended December 31, 1996 is as follows:
SUMMARIZED CONDENSED COMBINED BALANCE SHEETS
- -------------------------------------------------------------------
December 31,
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------
Assets:
Single-family lots,
Land and land development costs $28,378 $25,173
Other assets 1,796 1,284
- -------------------------------------------------------------------
Total $30,174 $26,457
- -------------------------------------------------------------------
Liabilities:
Debt $ 1,081 $ 2,544
Other liabilities 3,429 2,132
- -------------------------------------------------------------------
Total liabilities 4,510 4,676
Partners' equity:
Company's equity 11,143 9,890
Other 14,521 11,891
- -------------------------------------------------------------------
Total Partners' equity 25,664 21,781
- -------------------------------------------------------------------
Total $30,174 $26,457
- -------------------------------------------------------------------
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------
Revenue $1,334 $2,335 $1,706
Costs and expenses 1,153 2,158 1,809
- -------------------------------------------------------------------
Income (loss) $ 181 $ 177 $ (103)
- -------------------------------------------------------------------
Joint venture earnings include $20,000, $45,000 and $44,000 of intercompany
profit not included in the Company's earnings for 1996, 1995 and 1994,
respectively. In addition, included in the Company's investment in the joint
ventures at December 31, 1996 and 1995, is $349,000 and $413,000 of capitalized
interest and other costs relating to the joint ventures. Letters of credit
totalling approximately $3,297,000 are outstanding at December 31, 1996, 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 has primarily been funded through advances from the
Company. In 1996, all outstanding advances and deposits were reimbursed to the
Company. The advances outstanding as of December 31, 1995 totaled $465,000,
which included $440,000 of notes receivable, which bore interest at prime plus
1/2%, and included $6,000 of deposits for lots the Company had an option to
purchase from the limited partnerships at fair market value. The Company
purchased lots totalling $2,953,000 and $2,503,000 from the limited partnerships
in 1995 and 1994, respectively. No lots were purchased from the limited
partnerships in 1996.
For both limited partnerships, the land and related debt were recorded on
the limited partnerships' books and the Company was not contingently liable for
any of the limited partnerships' debt; therefore, the only amounts related to
the limited partnerships that were recorded on the Company's books were the
advances noted above, and the Company's investment in the limited partnerships
of $0 and $262,000 at December 31, 1996 and 1995, respectively. The Company
recorded income using the equity method of accounting from the limited
partnerships of $65,000, $85,000 and $322,000 respectively for 1996, 1995 and
1994.
6. NOTES PAYABLE BANKS
At December 31, 1996, the Company had revolving credit loans of $77,000,000
and letters of credit totalling $17,048,000 outstanding under a loan agreement
with five banks. Borrowings under the loan agreement are at LIBOR plus a margin
of between 1.75% and 2.50% and are primarily unsecured. This agreement provides
for total borrowings not to exceed the lesser of $186,000,000 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 expires September 30,
2001, 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 LIBOR plus a
margin and a commitment fee of 1/4 of 1% based upon the average daily unused
portion of the note. 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, 1996, $23,300,000 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
32
20
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 less 0.25% 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 June
20, 1997 and the unpaid balance of such loans are payable on this date.
At December 31, 1996, the Company had $109,000,000 of unused borrowing
availability under its loan agreement, as well as $1,700,000 under the M/I
Financial Loan Agreement. The weighted average interest rate of the Company's
bank borrowings was 7.6% at December31,1996 and 8.5% at December 31, 1995 and
1994.
7. 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. In
December 1996, the Company redeemed all of these notes at a price of 106% of
par. The redemption resulted in an extraordinary loss of $1,287,000, net of
income taxes of $823,000.
In December 1996, the Company executed a $25,000,000 Subordinated Note
Purchase Agreement with The First National Bank of Boston. The proceeds were
used to redeem the 14% Subordinated Notes outstanding in the amount of
$24,513,000. The maturity date of the new Subordinated Note is December 15, 2001
and can be extended two additional years at the Company's option. The new
Subordinated Note is redeemable, in whole or in part, after one year without
penalty or premium. Each partial payment must be equal to or in excess of
$5,000,000. Interest on the new Subordinated Note is at LIBOR plus 3.50% and
adjusts quarterly. The new Subordinated Note limits payments for cash dividends
to $2,000,000 plus a percentage of revenues.
In compliance with the terms of the new Subordinated Note, the Company
purchased a three-year, 9% interest rate cap agreement, effective December 2,
1996 through December 2, 1999. The agreement provides that if the interest rate
in effect for each three month period is greater than the cap rate, the bank
will pay to the Company the excess interest computed.
8. 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, 1996, the future minimum rental commitments, totalling
$29,062,000, under noncancelable operating leases with initial terms in excess
of one year are as follows: 1997 - $3,363,000; 1998 - $2,290,000; 1999 -
$1,745,000; 2000 - $1,335,000; 2001 - $1,205,000; and thereafter - $19,124,000.
The Company's lease with a related party for approximately 27,000 square feet
of office space expired August 31, 1996. At this time the Company extended the
lease on a month-to-month basis at the current rental rate through February
1997. Rental expense was $347,000, $358,000 and $367,000 for 1996, 1995 and
1994, respectively.
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 consolidated its five Columbus
locations into this building and entered into a 20 year lease for the premises
with the LLC. The Company moved into this new facility in December 1996.
Included in the future minimum rental commitments above are rentals of $990,000
for 1997; $1,132,000 for 1998; $1,132,000 for 1999; $1,132,000 for 2000;
$1,132,000 for 2001; and $19,124,000 for all periods thereafter.
The Company's total rental expense was $5,048,000, $5,023,000 and $3,699,000
for 1996, 1995 and 1994, respectively.
9. 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 (excluding, under current Ohio law, voting rights) and qualifications,
limitations or restrictions thereon, of any series so established, including
dividend rights, liquidation preferences, redemption rights and conversion
privileges.
10. 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 are granted
at the market price at the close of business on the date of grant. Options
awarded vest 20% annually over five years and expire after ten years. The
following summarizes the transactions under the stock option program:
Weighted
Option Price Avg. Exercise
Shares Per Share Price
- ---------------------------------------------------------------------
Options outstanding
December 31, 1993 - - -
Granted 94,200 $16.125 $16.125
Forfeited (10,000) $16.125 $16.125
- ---------------------------------------------------------------------
Options outstanding
December 31, 1994 84,200 $16.125 $16.125
Granted 68,200 $6.75-$9.25 $6.823
Forfeited (18,000) $6.75-$16.125 $14.042
- ---------------------------------------------------------------------
Options outstanding
December 31, 1995 134,400 $6.75-$16.125 $11.684
Granted 60,700 $10.875 $10.875
Forfeited (1,250) $10.875-$16.125 $11.925
- ---------------------------------------------------------------------
Options outstanding
December 31, 1996 193,850 $6.75-$16.125 $11.429
- ---------------------------------------------------------------------
Options exercisable at
December 31, 1994 16,840 $16.125 $16.125
December 31, 1995 40,920 $6.75-$16.125 $13.208
December 31, 1996 79,590 $6.75-$16.125 $12.338
- ---------------------------------------------------------------------
33
21
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 1996, options outstanding have a weighted average remaining
contractual life of 8.9 years.
In February 1997, the Company granted options for an additional 28,600
shares with the same terms as the previous awards, at a price of $10.625 which
represents the market value at the date of grant.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 1996: expected volatility of 37.29%; risk-free interest rate of
8.50%; and expected lives of 4 years, and for grants in 1995: expected
volatility of 50.84%; risk-free interest rate of 8.88%; and expected lives of 4
years. Based on these calculations, the fair value of the stock options at the
date of grant were immaterial to the Company's financial statements at December
31, 1996 and 1995.
11. INCOME TAXES
The provision for income taxes consists of the following:
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------
Federal $7,060 $5,312 $6,216
State and local 1,907 1,318 1,364
- ------------------------------------------------------------------
Total $8,967 $6,630 $7,580
==================================================================
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provision for income taxes are as follows:
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------
Federal taxes at statutory rate $8,077 $5,777 $6,718
Deduct federal tax effect of:
Charitable contribution (414) - -
State taxes -
net of federal tax benefit 1,240 857 887
Other 64 (4) (25)
- ------------------------------------------------------------------
Total $8,967 $6,630 $7,580
==================================================================
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at December 31,1996 and 1995 are as follows:
- -------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------
Assets:
Warranty, insurance and other
reserves $3,589 $1,855
Inventory writedowns 1,107 749
Inventories 706 584
State taxes -- 226
Depreciation 147 67
Other 647 420
- -------------------------------------------------------------------
Total deferred tax assets 6,196 3,901
- -------------------------------------------------------------------
Liabilities:
Prepaid expenses and deferred charges 1,030 854
State taxes 37 --
- -------------------------------------------------------------------
Total deferred tax liabilities 1,067 854
- -------------------------------------------------------------------
Net deferred tax asset $5,129 $3,047
===================================================================
12. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company had sales agreements outstanding, some of
which have open contingencies for approval of financing, to deliver 1,337 homes
with an aggregate purchase price of approximately $245,236,000. At December 31,
1996, the Company had options and contingent purchase contracts to acquire land
and developed lots with an aggregate purchase price of approximately
$167,010,000. Purchase of the properties is contingent upon satisfaction of
certain requirements by the Company and the sellers.
At December 31, 1996, the Company had outstanding approximately $21,501,000
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 such litigation will be
material to the financial statements of the Company.
13. FINANCIAL INSTRUMENTS
M/I Financial offers fixed and adjustable rate mortgage loans, primarily to
buyers of the Company's homes. At December 31, 1996, M/I Financial is committed
to fund $79,800,000 in mortgage loans to home buyers. Of this total,
approximately $11,000,000 are adjustable rate loans and $68,800,000 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.
The Company expended $1,345,000, $898,000 and $1,406,000 in 1996, 1995 and 1994,
respectively, related to purchase commitments from outside investors to acquire
mortgage loans. Such costs are expensed as a component of cost of goods sold. At
December 31, 1996, the Company had approximately $50,700,000 of commitments to
deliver mortgage loans to outside investors.
The Company also hedges its interest rate risk using optional and mandatory
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
34
22
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 1996, these agreements matured within 90 to 120 days.
Securities under forward sales agreements averaged approximately $15,300,000
during 1996 and the maximum amount outstanding at any month end during 1996 was
$27,000,000. Hedging gains of $868,000 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 fair value of the Company's unrecognized
financial instruments at December 31, 1996 and 1995. 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.
1996 1995
------------------- ---------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------
Assets:
Cash, including
cash in escrow $ 6,761 $ 6,761 $ 8,136 $ 8,136
Mortgage loans
to be funded 34,121 34,244 22,797 23,029
Notes receivable -- -- 440 440
Accounts receivable 326 326 375 375
Prepaid financing
commitments 183 -- 213 --
Interest rate cap 73 73 -- --
Liabilities:
Notes payable
banks 100,300 100,300 102,200 102,200
Subordinated notes 25,000 25,000 24,513 23,346
Accounts payable 32,016 32,016 29,219 29,219
Other liabilities 35,724 35,724 25,715 25,715
Unrecognized Financial
Instruments:
Letters of credit -- 127 -- 84
Commitments to
extend real estate
loans -- 1,345 -- 687
Forward sale of
mortgage-backed
securities -- 187 -- (163)
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at December 31,
1996 and 1995:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND OTHER LIABILITIES. The
carrying amounts of these items are a reasonable estimate of their fair value.
MORTGAGE LOANS TO BE FUNDED. The estimated fair value of mortgage loans to
be funded at December 31, 1996 and 1995 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, 1996 and 1995.
NOTES RECEIVABLE. The carrying value of notes receivable from limited
partnerships, which bore interest at the prime rate plus 1/2%, approximates
their fair value at December 31, 1995.
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 LIBOR rate of the lending institutions and thus their
carrying value is a reasonable estimate of fair value.
SUBORDINATED NOTES. The estimated fair value was determined using the bid
price for the debt instruments at December 31, 1995.
LETTERS OF CREDIT. Letters of credit and outstanding completion bonds of
$21,501,000 and $19,525,000 represent potential commitments at December 31, 1996
and 1995. 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.
INTEREST RATE CAP, 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, 1996 and 1995.
14. BUSINESS SEGMENTS
The business segment information for 1996, 1995 and 1994 included on page
15 of this annual report is an integral part of these financial statements.
35
23
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Stock Market Prices and Dividends
- --------------------------------------------------------------------------------
The Company's common stock is traded on the New York Stock Exchange under
the symbol "MHO". As of March 14, 1997, there were approximately 298 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:
- --------------------------------------------------
1996 HIGH LOW
- --------------------------------------------------
First quarter $11.75 $9.75
Second quarter $11.00 $9.13
Third quarter $ 9.38 $8.25
Fourth quarter $10.63 $8.38
- --------------------------------------------------
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
The highest and lowest prices for the Company's common stock from January
1, 1997 through March 14, 1997 was $11.13 and $10.00.
No dividends have been paid 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 place limits on the amount of dividends the Company can
pay (see Footnotes 6 and 7 to the consolidated financial statements).
36
24
- ------------------------------------------
EXECUTIVE OFFICERS
- ------------------------------------------
IRVING E. SCHOTTENSTEIN
Chief Executive Officer
ROBERT H. SCHOTTENSTEIN
President
STEVEN SCHOTTENSTEIN
Senior Executive Vice President
KERRII B. ANDERSON
Senior Vice President,
Chief Financial Officer
- ------------------------------------------
OTHER KEY OFFICERS
- ------------------------------------------
PAUL S. COPPEL
Senior Vice President,
General Counsel
PHILLIP G. CREEK
Senior Vice President,
Treasurer
ROBERT C. MOESLE
Senior Vice President,
Regional President
LLOYD T. SIMPSON
Senior Vice President,
Regional President
RONALD G. SMITH
Senior Vice President,
Regional President
- ------------------------------------------
DIRECTORS
- ------------------------------------------
IRVING E. SCHOTTENSTEIN (1*, 2)
Chairman of the Board and
Chief Executive Officer
FRIEDRICH K.M. BOHM (2,3*)
Managing Partner and
Chief Executive Officer,
NBBJ
HOLLY S. KASTAN
Private Investor
AMY D. SCHOTTENSTEIN
Private Investor
ERIC J. SCHOTTENSTEIN
President,
The Joshua Company
ROBERT H. SCHOTTENSTEIN
President
STEVEN SCHOTTENSTEIN
Senior Executive Vice President
LEWIS R. SMOOT, SR. (1, 2*, 3)
President and
Chief Executive Officer,
The Smoot Corporation
NORMAN L. TRAEGER (2, 3)
President,
The Discovery Group
(1) Executive Committee
(2) Compensation Committee
(3) Audit Committee
* Chairman
- -------------------------------------------------------------------------------
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
3 Easton Oval
Columbus, Ohio 43219
STOCK EXCHANGE LISTING
New York Stock Exchange (MHO)
TRANSFER AGENT AND REGISTRAR
Boston EquiServe
150 Royall Street
Canton, Massachusetts 02021
ANNUAL MEETING
The Annual Meeting of Stockholders
will be held at 9:00 A.M. on
May 7, 1997, at the offices of the Company,
3 Easton Oval, Columbus, Ohio.
FORM 10-K
Stockholders may receive a copy of the Company's annual report to the
Securities and Exchange Commission on Form 10-K without charge by writing to:
Investor Relations
M/I Schottenstein Homes, Inc.
3 Easton Oval
Suite 500
Columbus, OH 43219