1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 1-12434
M/I SCHOTTENSTEIN HOMES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1210837
---- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
3 Easton Oval, Suite 500, Columbus, Ohio 43219
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(Address of principal executive offices) (Zip Code)
(614) 418-8000
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(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 8,300,000 shares
outstanding as of May 13, 1997
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M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1997 and 1996 5
Notes to Interim Consolidated Unaudited
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
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CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------
MARCH 31, December 31,
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash, including cash in escrow $ 7,474 $ 6,761
Receivables 15,754 34,447
Inventories:
Single-family lots, land and land development costs 139,969 129,025
Houses under construction 113,378 89,696
Model homes and furnishings - at cost (less accumulated depreciation:
March 31, 1997 - $58;
December 31, 1996 - $56) 17,797 19,482
Land purchase deposits 659 716
Office furnishings, transportation and construction
equipment - at cost (less accumulated depreciation:
March 31, 1997 - $3,460;
December 31, 1996 - $6,668) 8,067 1,635
Investment in unconsolidated joint ventures and limited partnerships 10,789 12,998
Other assets 8,537 10,599
- --------------------------------------------------------------------------------------------------------------
TOTAL $322,424 $305,359
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable banks - home-building operations $117,500 $ 77,000
Note payable bank - financial operations 4,070 23,300
Subordinated notes 25,000 25,000
Accounts payable 39,728 32,016
Accrued compensation 3,120 11,802
Income taxes payable 961 1,502
Accrued interest, warranty and other 13,203 15,349
Customer deposits 8,721 7,071
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 212,303 193,040
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Commitments and Contingencies
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none outstanding - -
Common stock - $.01 par value;
authorized 38,000,000 shares;
issued 8,800,000 shares, of which 500,000 shares are held in Treasury 88 88
Additional paid-in capital 50,573 50,573
Retained earnings 64,710 61,658
Treasury stock - at cost (5,250) -
- --------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 110,121 112,319
- --------------------------------------------------------------------------------------------------------------
TOTAL $322,424 $305,359
==============================================================================================================
See Notes to Interim Unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands, except per share information) 1997 1996
- -------------------------------------------------------------------------------------------------------------
Revenue $105,829 $95,858
- --------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 84,073 76,955
General and administrative 6,410 5,959
Selling 7,917 7,795
Interest 2,362 2,931
- --------------------------------------------------------------------------------------------------------------
Total costs and expenses 100,762 93,640
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Income before income taxes 5,067 2,218
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Income taxes:
Current 1,151 308
Deferred 864 587
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Total income taxes 2,015 895
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Net income $ 3,052 $ 1,323
==============================================================================================================
Net income per common share $ 0.35 $ 0.15
==============================================================================================================
Weighted average common shares outstanding 8,716,667 8,800,000
==============================================================================================================
See Notes to Interim Unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,052 $ 1,323
Adjustments to reconcile net income to net cash
used by operating activities:
Loss from property disposals 102 45
Depreciation and amortization 380 386
Deferred income taxes 864 587
Decrease in receivables 18,693 5,649
Increase in inventories (29,428) (15,225)
Decrease (increase) in other assets 1,144 (843)
Increase in accounts payable 7,712 5,329
Decrease in income taxes payable (541) (2,307)
Decrease in accrued liabilities (10,828) (5,481)
Equity in undistributed loss (income) of
unconsolidated joint ventures and limited partnerships (79) (32)
- -----------------------------------------------------------------------------------------------------------------
Net cash used by operating activities ( 8,929) ( 10,569)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings,
transportation and construction equipment (6,844) (83)
Investment in unconsolidated joint ventures (1,297) (1,470)
Distributions from unconsolidated joint ventures
and limited partnerships 113 329
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,028) (1,224)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Cash proceeds from borrowings 70,305 58,486
Principal repayments (49,035) (48,806)
Principal repayments of mortgage notes payable - (98)
Net increase in customer deposits 1,650 2,431
Payments to acquire treasury stock (5,250) -
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,670 12,013
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Net increase in cash 713 220
Cash balance at beginning of year 6,761 8,136
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Cash balance at end of period $ 7,474 $ 8,356
================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 2,182 $ 2,214
Income taxes $ 2,269 $ 2,630
NON-CASH TRANSACTIONS DURING THE YEAR:
Single-family lots distributed from unconsolidated joint ventures $ 3,473 $ 1,762
================================================================================================================
See Notes to Interim Unaudited Consolidated Financial Statements.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements and notes thereto have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for interim financial information. The results of
operations for the three months ended March 31, 1997 and 1996 are not
necessarily indicative of the results for the full year.
It is suggested that these financial statements be read in conjunction with
the financial statements, accounting policies and financial notes thereto
included in the Company's Annual Report to Shareholders for the year ended
December 31, 1996.
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair presentation of financial results
for the interim periods presented.
NOTE 2. AMENDED LOAN AGREEMENT
On May 7, 1997, the Company amended its bank loan agreement. Limits on
certain restrictive covenants were increased under the amended agreement.
The amount available and other terms of the agreement remain substantially
the same as those in the agreement that it amends.
NOTE 3. INTEREST
The Company capitalizes interest during development and construction.
Capitalized interest is charged to interest expense as the related inventory
is delivered. The summary of total interest for the three months ended March
31, 1997 and 1996 is as follows:
Three Months Ended March 31,
(Dollars in Thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
Interest capitalized, beginning of period $6,862 $ 7,560
Interest incurred 2,625 3,019
Interest expensed (2,362) (2,931)
- ------------------------------------------------------------------------------------------------------------
Interest capitalized, end of period $7,125 $ 7,648
============================================================================================================
NOTE 4. CONTINGENCIES
At March 31, 1997, the Company had options and contingent purchase contracts
to acquire land and developed lots with an aggregate purchase price of
approximately $152.8 million.
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NOTE 5. TREASURY STOCK
On March 17, 1997, the Company repurchased 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 are held as treasury shares by the Company.
The total purchase price was $5,250,000 and was paid from the Company's
general working capital.
NOTE 6. PER SHARE DATA
Per share data for the three months ended March 31, 1997 was computed using
the weighted average number of common shares outstanding during the period
of 8,716,667. The Company has no common stock equivalents other than
outstanding options, which have no significant effect on the calculation.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
per Share." SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS. This statement is effective for financial
statements for both interim and annual periods ending after December 15,
1997. The Company has determined that the new standard will have no material
impact on its EPS calculation.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
FORM 10-Q PART I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
CONSOLIDATED
Total Revenue. Total revenue for the three months ended March 31, 1997
was $105.8 million, a 10.3% increase over the $95.9 million recorded for the
comparable period of 1996. Housing, land and other revenue increased $5.8
million, $3.5 million and $0.6 million, respectively. The increase in housing
revenue was attributable to a 4.1% increase in the average sales price of Homes
Delivered as the Company delivered only ten more homes for the first quarter of
1997 as compared to the prior year. The increase in land revenue was primarily
due to a significant increase in the number of lots sold to third parties in
the Maryland division during the first quarter of 1997 in comparison to the
first quarter of 1996. The increase in other income was 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.
Income Before Income Taxes. Income before income taxes for the first
quarter of 1997 increased 128.4% over the comparable period of 1996. Income
before income taxes reached $5.1 million, a record for the Company's first
quarter. The increase related to housing and land, where income before income
taxes increased from $1.2 to $3.5 million, and M/I Financial, where income
before income taxes increased from $1.0 to $1.6 million. The increase in
housing was primarily due to the increase in the average selling price of Homes
Delivered. The average selling price increased from $170,000 for the first
quarter of 1996 to $177,000 in 1997. The increase in land was primarily due to
a significant increase in the number of lots sold to third parties at
relatively high margins in the Maryland division during the first quarter of
1997 in comparison to the first quarter of 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 1996 and the first quarter of
1997. Income before income taxes also increased due to a decrease in interest
expense from $2.9 million in the first quarter of 1996 to $2.4 million in the
comparable period of 1997. This decrease was primarily attributable to a
decrease in the weighted average interest rate as a result of more favorable
terms on the Company's line of credit facilities and due to replacing the 14%
Subordinated Notes with a new Subordinated Note at a significantly lower rate.
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HOME-BUILDING SEGMENT
The following table sets forth certain information related to the Company's
home-building segment:
Three Months Ended March 31,
(Dollars in thousands) 1997 1996
====================================================================================================================
Revenue:
Housing sales $98,680 $92,893
Land and lot sales 4,602 1,105
Other income 296 203
- --------------------------------------------------------------------------------------------------------------------
Total Revenue $103,578 $94,201
====================================================================================================================
Revenue:
Housing sales 95.3% 98.6%
Land and lot sales 4.4 1.2
Other income 0.3 0.2
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Total Revenue 100.0 100.0
Land and housing costs 81.6 82.1
- --------------------------------------------------------------------------------------------------------------------
Gross Margin 18.4 17.9
General and administrative expenses 3.5 3.2
Selling expenses 7.6 8.3
- --------------------------------------------------------------------------------------------------------------------
Operating Income 7.3 6.4
====================================================================================================================
MIDWEST REGION
Unit Data:
New contracts 587 602
Homes delivered 342 319
Backlog at end of period 1,153 1,220
Average sales price of homes in backlog $174 $161
Aggregate sales value of homes in backlog $200,000 $197,000
Number of active subdivisions 80 80
====================================================================================================================
FLORIDA REGION
Unit Data:
New contracts 172 181
Homes delivered 112 113
Backlog at end of period 281 293
Average sales price of homes in backlog $171 $172
Aggregate sales value of homes in backlog $48,000 $50,000
Number of active subdivisions 30 35
====================================================================================================================
NORTH CAROLINA, VIRGINIA AND MARYLAND REGION
Unit Data:
New contracts 148 173
Homes delivered 103 115
Backlog at end of period 253 317
Average sales price of homes in backlog $237 $219
Aggregate sales value of homes in backlog $60,000 $70,000
Number of active subdivisions 35 35
====================================================================================================================
TOTAL
Unit Data:
New contracts 907 956
Homes delivered 557 547
Backlog at end of period 1,687 1,830
Average sales price of homes in backlog $183 $173
Aggregate sales value of homes in backlog $308,000 $317,000
Number of active subdivisions 145 150
====================================================================================================================
The Phoenix division, which began operations late in 1996, had no
activity for the quarter.
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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 the first three months
of 1997, the Company delivered 557 homes, most of which were homes under
contract in Backlog at December 31, 1996. Of the 1,337 contracts in Backlog at
December 31, 1996, 8.9% have been canceled as of March 31, 1997. For homes in
Backlog at December 31, 1995, 10.3% had been canceled as of March 31, 1996. For
the homes in Backlog at December 31, 1995, the final cancellation percentage
was 14.4%. Unsold speculative homes, which are in various stages of
construction, totaled 129 and 149 at March 31, 1997 and 1996, respectively.
Total Revenue. Total revenue for the three months ended March 31, 1997
increased 10.0% compared to the three months ended March 31, 1996. This
increase was due to a 6.2% increase in housing revenue and a 316.5% increase in
land revenue. The increase in housing revenue was due to a 4.1% increase in the
average sales price of Homes Delivered. The average sales price of Homes
Delivered increased in all of the Company's markets with the exception of
Tampa, Orlando and Palm Beach County. The largest increases were 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, these two
divisions experienced significant increases in the average sales price of Homes
Delivered due to increased closings in various higher priced subdivisions. The
increase in land revenue from $1.1 million to $4.6 million was primarily
attributable to the Maryland division. The Maryland division had significant
lot sales to outside home-builders from its Willows land development project in
the three months ended March 31, 1997 which did not occur in the prior year.
The Company is developing additional sections of this project and has entered
into contracts to sell a portion of the lots developed to certain outside
homebuilders.
Home Sales and Backlog. The Company recorded a 5.1% decrease in the
number of New Contracts recorded in the first quarter of 1997 as compared to
the corresponding period of 1996. The number of New Contracts recorded in the
current year was lower in all of the Company's regions. The decrease in the
number of New Contracts recorded is primarily attributable to a record number
of New Contracts recorded in the first quarter of 1996. The number of New
Contracts recorded 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 March 31, 1997, the total sales value of the Company's Backlog of
1,687 homes was approximately $308.0 million, representing a 2.8% decrease in
sales value and a 7.8% decrease in units from the levels reported at March 31,
1996. The decrease in units at March 31, 1997 is a result of record high
deliveries in the first quarter of 1997 and a decrease in New Contracts
recorded in the second half of 1996 and first quarter of 1997. The average
sales price of homes in Backlog increased 5.8% from March 31, 1996 to March 31,
1997. This increase was primarily due to increases in the Columbus,
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Cincinnati, Charlotte and Maryland divisions where the Company is building in
more upscale and certain niche subdivisions.
Gross Margin. The overall gross margin for the home-building segment
was 18.4% for the three month period ended March 31, 1997 compared to 17.9% for
the three month period ended March 31, 1996. The gross margin from housing
sales was 18.2% in the first quarter of 1997 as compared to 18.3% in the first
quarter of 1996. The overall increase in gross margin was mainly due to lot and
land sales, where margins increased from 2.4% to 30.0%. The Maryland division
had a significant increase in the number of lots sold to outside homebuilders
from its Willows land development project. The division sold 25 lots in the
Willows in the first quarter of 1997, while there were no lots sold from this
project in the first quarter of 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. 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 strong level of sales during the last quarter of 1996 and the first quarter
of 1997, 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 by 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 1997.
General and Administrative Expenses. General and administrative
expenses as a percentage of total revenue increased from 3.2% for the three
months ended March 31, 1996 to 3.5% for the three months ended March 31, 1997.
This increase was primarily attributable to the increase in real estate tax
expense and bonuses. Real estate taxes increased in the current year as the
Company's investment in developed lots and raw land awaiting development
increased over prior year balances. More bonuses were recorded in the first
quarter of 1997 as compared to the first quarter of 1996 due to the significant
increase in net income.
Selling Expenses. Selling Expenses as a percentage of total revenue
decreased from 8.3% for the three months ended March 31, 1996 to 7.6% for the
three months ended March 31, 1997. This decrease was primarily due to decreases
in sales commissions paid to outside Realtors. During 1995, the Company had
various Realtor promotions in numerous cities on houses which closed in the
first quarter of 1996. Due to a stronger sales environment in 1996, the Company
did less of these promotions.
FINANCIAL SERVICES SEGMENT - M/I FINANCIAL
The following table sets forth certain information related to the Company's
financial services segment:
Three Months Ended March 31,
(Dollars in thousands) 1997 1996
====================================================================================================================
Number of loans originated 423 408
Revenue:
Loan origination fees $ 561 $ 486
Sale of servicing and marketing gains 1,545 1,080
Other 628 505
- --------------------------------------------------------------------------------------------------------------------
Total Revenue 2,734 2,071
- --------------------------------------------------------------------------------------------------------------------
General and administrative expenses 1,036 1,051
- --------------------------------------------------------------------------------------------------------------------
Operating Income $1,698 $1,020
====================================================================================================================
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Total Revenue. Total revenue for the three months ended March 31, 1997
was $2.7 million, a 28.6% increase over the $2.1 million recorded for the
comparable period of the prior year. Loan origination fees increased 15.4% from
the first quarter of 1996 to the first quarter of 1997, primarily due to the
Company being able to capture a greater market share of the parent Company's
business, specifically the higher end product line.
Revenue from sale of servicing and marketing gains increased 43.1%
from $1.1 million for the three months ended March 31, 1996 to $1.5 million for
the three months ended March 31, 1997. The increase in servicing fees was
primarily due to more fixed rate mortgages originated during the first three
months of 1997 as compared to the comparable period of 1996. The Company earns
higher premiums on fixed rate mortgages as opposed to adjustable rate
mortgages. The increase in marketing gains was primarily due to favorable
market conditions during the last part of 1996 and early part of 1997 which
increased marketing gains on loans that closed during the first quarter of
1997. M/I Financial uses hedging methods whereby it has the option, but is not
required, to complete the hedging transaction. This allowed the Company to
record significant servicing and marketing gains during the period of falling
interest rates while limiting its risk of loss from a rising interest rate
market.
General and Administrative Expenses. General and administrative
expenses for the three months ended March 31, 1997 were $1.0 million, a 1.4%
decrease from the comparable period of the prior year. The decrease was
primarily due to a decrease in applications received. There were 56 fewer
applications taken in the first quarter of 1997 as compared to the first
quarter of 1996.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. General and
administrative expenses remained constant at $1.9 million for the three months
ended March 31, 1997 and 1996. As a percentage of total revenue, general and
administrative expenses decreased to 1.8% for the three months ended March 31,
1997 from 2.0% for the comparable period in the prior year. This decrease
resulted from an increase in total revenue.
Interest Expense. Corporate and home-building interest expense for the
first quarter of 1997 totaled $2.4 million, a 19.4% decrease from the $2.9
million recorded for the comparable period of the prior year. Interest expense
was lower in the current year due to the decreases in the weighted average
interest rate and the increase in the net amount of interest capitalized during
the first quarter of 1997 as compared to the first quarter of 1996. The
weighted average interest rate decreased due to the Company replacing its 14%
Subordinated Notes with a new Subordinated Note at a significantly lower rate
in December of 1996. In 1996, the Company switched its bank borrowings from
prime to LIBOR plus a margin which also reduced the interest rate.
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 homebuilding activities.
Historically, the Company's principal source of funds for construction and
development activities has been from internally generated cash and from bank
borrowings, which are primarily unsecured.
At March 31, 1997, the Company had bank borrowings outstanding of
$117.5 million under its loan agreement relating to its home-building
operations, which permits aggregate borrowings not to exceed the lesser of: (A.
$186.0 million in revolving credit loans, and an additional $25.0 million in
the form of Letters
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of Credit, including $4.0 million for joint ventures in which the Company is a
partner; or B. 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 March 31, 1997, borrowings under the loan agreement
were at LIBOR plus a margin of between 1.75% and 2.50% 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.
On May 7, 1997, the Company amended its bank loan agreement. Limits on
certain restrictive covenants were increased under the amended agreement. The
amount available and other terms of the agreement remain substantially the same
as those in the agreement that it amends.
An additional $4.1 million was outstanding as of March 31, 1997 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 March 31, 1997, borrowings under this
agreement were slightly less than the bank's prime rate and were unsecured. The
agreement terminates on June 20, 1997, and the unpaid balance of such
borrowings are payable on this date.
At March 31, 1997, the Company had the right to borrow up to $200.5
million under its credit facilities, including $14.5 million under the M/I
Financial loan agreement (95% of the aggregate face amount of eligible mortgage
loans). At March 31, 1997, the Company had $78.9 million of unused borrowing
availability under its loan agreements. The Company also had approximately
$24.6 million of completion bonds and letters of credit outstanding at March
31, 1997.
Subordinated Note. In addition, there was outstanding a Subordinated
Note in the amount of $25.0 million at March 31, 1997. The maturity date 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 3.50%.
In compliance with the terms of the 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 used by
operating activities in the three months ended March 31, 1997 was $8.9 million
compared to $10.6 million for the prior year. The decrease in net cash used by
operating activities was primarily due to a large decrease in accounts
receivable and an increase in
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accounts payable. This was partially offset by an increase in inventories and a
decrease in 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 this trend will continue to increase in the foreseeable
future. Lots, land and land development costs increased 8.5% in the first
quarter of 1997 from December 31, 1996. 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 $21.3 million increase in notes payable to banks from December 31,
1996 to March 31, 1997 reflects increased borrowings primarily attributable to
the seasonal increase in homes under construction, along with an increase in
single-family lots, land and land development costs. Houses under construction
increased $23.7 million in the first quarter while single-family lots, land and
land development costs increased $10.9 million. 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. As of March
31, 1997, the Company has closed on the first three phases of a six-phase land
purchase contract in the Maryland division. The Company sold a portion of the
developed lots from the first and second phases to outside homebuilders and is
currently selling 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.
Treasury Stock. On March 17, 1997, the Company repurchased 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 are held as treasury shares by
the Company. The total purchase price was $5,250,000 and was paid from the
Company's general working capital. In conjunction with this stock transaction,
Lenore S. Sagner resigned from the Board of Directors, and Amy D. Schottenstein
was elected to fill the resulting vacancy.
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
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interest rates on the Company's outstanding debt for the three months ended
March 31, 1997 was 8.4% as compared to 10.0% for the three months ended March
31, 1996.
In conjunction with its mortgage banking operations, the Company uses
hedging methods to reduce its exposure to interest rate fluctuations between
the commitment date of the loan and the time the loan closes.
In recent years, the Company generally has been able to raise prices
by amounts at least equal to its cost increases and, accordingly, has not
experienced any detrimental effect from inflation. Where the Company develops
lots for its own use, inflation may increase the Company's profits because land
costs are fixed well in advance of sales efforts. The Company is generally able
to maintain costs with subcontractors from the date a home sales contract is
accepted; however, in certain situations, unanticipated costs may occur between
the time a sales contract is executed and the time a home is constructed, which
results in lower gross profit margins.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
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
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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.
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 three months
ended March 31, 1997, approximately 45% 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
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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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits required to be filed herewith are set forth below. No
reports were filed on Form 8-K for the quarter for which this report is filed.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Second Amendment to second restated revolving credit loan
and standby letter of credit agreement by and among the
Company, Bank One, Columbus, N.A.; The Huntington National
Bank; The First National Bank of Chicago; National City
Bank of Columbus; The First National Bank of Boston, The
Fifth Third Bank of Columbus and Bank One, Columbus, N.A.
as agent for the banks, dated May 7, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
M/I SCHOTTENSTEIN HOMES, INC.
(Registrant)
Date: May 13, 1997 by: /s/ Robert H. Schottenstein
------------------------------
Robert H. Schottenstein
President
Date: May 13, 1997 by: /s/ Kerrii B. Anderson
------------------------------
Kerrii B. Anderson
Senior Vice President,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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