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 September 30, 1997
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.
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(Exact name of registrant as specified in its charter)
Ohio 31-1210837
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(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: 7,597,561 shares
outstanding as of October 31, 1997
2
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1997 and 1996 5
Notes to Interim Unaudited Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
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CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(Unaudited)
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SEPTEMBER 30, December 31,
(Dollars in thousands) 1997 1996
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ASSETS
Cash $ 5,850 $ 6,368
Cash held in escrow 324 393
Receivables 21,583 34,447
Inventories:
Single-family lots, land and land development costs 141,793 129,025
Houses under construction 131,238 89,696
Model homes and furnishings - at cost (less accumulated depreciation:
September 30, 1997 - $65;
December 31, 1996 - $56) 20,469 19,482
Land purchase deposits 502 716
Office furnishings, transportation and construction equipment - at cost (less
accumulated depreciation:
September 30, 1997 - $4,031;
December 31, 1996 - $6,668) 8,473 1,635
Investment in unconsolidated joint ventures and limited partnerships 13,731 12,998
Other assets 10,581 10,599
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TOTAL $ 354,544 $ 305,359
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LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable banks - home-building operations $ 102,000 $ 77,000
Note payable bank - financial operations 7,335 23,300
Subordinated notes 50,000 25,000
Accounts payable 52,087 32,016
Accrued compensation 8,609 11,802
Income taxes payable 1,106 1,502
Accrued interest, warranty and other 13,980 15,349
Customer deposits 9,063 7,071
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TOTAL LIABILITIES 244,180 193,040
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Commitments and contingencies
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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 1,202,439 shares at
September 30, 1997 and 0 at December 31, 1996 are held in Treasury 88 88
Additional paid-in capital 50,573 50,573
Retained earnings 73,953 61,658
Treasury stock - at cost (14,250) --
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TOTAL STOCKHOLDERS' EQUITY 110,364 112,319
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TOTAL $ 354,544 $ 305,359
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See Notes to Interim Unaudited Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(Unaudited)
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THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars in thousands, SEPTEMBER 30, SEPTEMBER 30,
except per share information) 1997 1996 1997 1996
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Revenue $157,958 $156,932 $409,801 $390,147
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Costs and expenses:
Land and housing 127,179 127,241 328,711 315,171
General and administrative 9,818 8,973 24,616 22,491
Selling 10,220 10,192 27,757 26,935
Interest 3,012 3,590 8,073 9,618
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Total costs and expenses 150,229 149,996 389,157 374,215
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Income before income taxes 7,729 6,936 20,644 15,932
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Income taxes:
Current 3,335 2,971 7,699 7,096
Deferred (214) (425) 650 (813)
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Total income taxes 3,121 2,546 8,349 6,283
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Net income $ 4,608 $ 4,390 $ 12,295 $ 9,649
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Net income per common share $ .59 $ .50 $ 1.48 $ 1.10
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Weighted average common shares
outstanding 7,834,252 8,800,000 8,280,407 8,800,000
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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)
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NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,295 $ 9,649
Adjustments to reconcile net income to net cash
used by operating activities:
Loss from property disposals 128 95
Depreciation and amortization 1,229 1,080
Decrease (increase) in deferred income taxes 650 (813)
Decrease in cash held in escrow 69 311
Decrease (increase) in receivables 12,864 (6)
Increase in inventories (47,199) (23,980)
Increase in other assets (847) (1,576)
Increase in accounts payable 20,071 6,590
Decrease in income taxes payable (396) (2,155)
Increase (decrease) in accrued liabilities (4,562) 3,404
Equity in undistributed income of
unconsolidated joint ventures and limited partnerships (180) (113)
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Net cash used by operating activities (5,878) (7,514)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings,
transportation and construction equipment (7,974) (429)
Proceeds from property disposals -- 63
Investment in unconsolidated joint ventures and limited partnerships (9,141) (10,452)
Distributions from unconsolidated joint ventures and limited partnerships 698 671
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Net cash used in investing activities (16,417) (10,147)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Cash proceeds from borrowings 202,530 229,376
Principal repayments (193,495) (218,201)
Subordinated notes:
Cash proceeds from borrowings 50,000 --
Principal repayments (25,000) --
Principal repayments of mortgage notes payable -- (404)
Increase in customer deposits 1,992 3,803
Payments to acquire treasury stock (14,250) --
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Net cash provided by financing activities 21,777 14,574
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Net decrease in cash (518) (3,087)
Cash balance at beginning of year 6,368 7,729
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Cash balance at end of period $ 5,850 $ 4,642
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SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 7,429 $ 7,925
Income taxes $ 7,098 $ 9,318
NON-CASH TRANSACTIONS DURING THE YEAR:
Single family lots distributed from unconsolidated joint ventures $ 7,890 $ 8,333
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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 nine months ended September 30, 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. NOTES PAYABLE BANKS
On July 18, 1997, the Company and M/I Financial entered into a new $30
million bank loan agreement with the existing lender, pursuant to which the
Company and M/I Financial have the ability to borrow at (a) the prime rate
less 0.25%, or (b) LIBOR plus 1.75% or (c) a combination of (a) and (b). The
agreement was previously amended on June 20, 1997 extending the maturity
date until July 20, 1997 through a short-term note. The new agreement
terminates on June 25, 1998 at which time the unpaid balance is due.
On September 29, 1997, the Company amended its bank loan agreement. The
amended loan agreement lowered the rate to LIBOR plus a margin of between
1.60% and 2.35%. Also, the maturity date of the agreement was extended until
September 30, 2002. The remaining terms of the agreement remain
substantially the same as those in the agreement that it replaces.
NOTE 3. SUBORDINATED DEBT
On August 29, 1997, the Company entered into a Credit Agreement (the
"Subordinated Debt Facility") for $50 million of Senior Subordinated Notes.
The proceeds were used to repay outstanding amounts under the Bank Credit
Facility and the previously outstanding $25 million Subordinated Note. The
notes under the Subordinated Debt Facility bear interest at a fixed rate of
9.51% and mature on August 29, 2004.
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NOTE 4. 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 and nine months
ended September 30, 1997 and 1996 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1997 1996 1997 1996
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Interest capitalized, beginning of period $ 7,598 $ 7,734 $ 6,862 $ 7,560
Interest incurred 3,356 3,207 9,153 9,409
Interest expensed (3,012) (3,591) (8,073) (9,619)
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Interest capitalized, end of period $ 7,942 $ 7,350 $ 7,942 $ 7,350
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NOTE 5. CONTINGENCIES
At September 30, 1997, the Company had options and contingent purchase
contracts to acquire land and developed lots with an aggregate purchase
price of approximately $156.7 million.
NOTE 6. PER SHARE DATA
Per share data for the three and nine months ended September 30, 1997 and
1996 was computed using the weighted average number of common shares
outstanding during those periods. The Company has no common stock
equivalents other than outstanding options, which have no significant effect
on the calculation.
NOTE 7. ACCOUNTING STANDARDS
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.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosure about Segments of an Enterprise and Related
Information". SFAS 131 is required to be adopted for the Company's 1998
annual financial statements. The Company has not yet determined what, if
any, impact the adoption of this standard will have on its financial
statements.
NOTE 8. TREASURY STOCK
On March 15, 1997 and August 1, 1997, the Company purchased 500,000 and
702,439 shares, respectively, of the Company's common stock from the Melvin
L. Schottenstein family interests and trusts for their benefit at an average
per share price of $11.85. These shares are held as treasury shares by the
Company. The total purchase price was $14.3 million and was paid from the
Company's Bank Credit Facility.
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M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
FORM 10-Q - PART I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
CONSOLIDATED
Total Revenue. Total revenue for the three months ended September 30,
1997 increased $1.0 million and for the nine months ended September 30, 1997
increased $19.6 million from the comparable periods of 1996. Increases for the
three-month period in land revenue of $4.3 million and other revenue of $0.5
million was partially offset by a $3.8 million decrease in housing revenue. For
the nine-month period, housing revenue, land revenue and other revenue
increased $10.8 million, $7.2 million and $1.6 million, respectively. The
decrease in housing revenue for the three-month period was attributable to a
6.7% decrease in the number of Homes Delivered, partially offset by a 4.5%
increase in the average sales price of Homes Delivered. The increase in housing
revenue for the nine-month period was attributable to a 6.1% increase in the
average sales price of Homes Delivered, partially offset by a 3.1% decrease in
the number of Homes Delivered. For both periods, the increase in other revenue
is primarily attributable to financial services where the gains recognized from
the sale of loans increased in the current year. The increase in land revenue
for both the three and nine months ended September 30, 1997 was primarily due
to an increase in the number of lots sold to third parties in the Washington
D.C. market over the comparable periods of 1996.
Income Before Income Taxes. Income before income taxes for the three
months ended September 30, 1997 increased 11.4% and for the nine months ended
September 30, 1997 increased 29.6% from the comparable periods of 1996. The
increase for both the three- and nine-month periods related primarily to
housing and land. For the three months ended September 30, 1997, income before
income taxes increased from $5.7 million to $6.3 million. For the nine months
ended September 30, 1997, income before income taxes increased from $12.6
million to $16.0 million. A portion of the nine month increase was also due to
financial services, where income before income taxes increased from $3.3
million to $4.6 million. The increase in housing for the nine-month period was
primarily due to the increase in the average sales price of Homes Delivered.
The increase in land for both the three- and nine-month periods was primarily
due to a significant increase in the number of lots sold to third parties at
relatively high margins in the Washington D.C. market during both the three and
nine months ended September 30, 1997 in comparison to the comparable periods of
the prior year. The increase in financial services 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 nine months of 1997. Income before income
taxes also increased due to a decrease in interest expense from $3.6 and $9.6
million in the three and nine months ended September 30, 1996, respectively, to
$3.0 and $8.1 million in the comparable periods of 1997. These decreases were
primarily attributable to a decrease in the weighted average interest rate and
an increase in the net amount of interest capitalized. The weighted average
interest rate decreased due to more favorable terms on the Company's line of
credit facilities and retirement of the 14% Subordinated Notes and issuance of
a new Subordinated Note in December 1996 at a significantly lower rate.
Capitalized interest increased due to a significant increase in the Company's
land development activities.
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HOMEBUILDING SEGMENT
The following table sets forth certain information related to the Company's
homebuilding segment:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1997 1996 1997 1996
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Revenue:
Housing sales $149,850 $153,614 $389,438 $378,607
Land and lot sales 5,935 1,624 13,330 6,099
Other income 346 124 1,050 552
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Total Revenue $156,131 $155,362 $403,818 $385,258
================================================================================================================================
Revenue:
Housing sales 96.0 % 98.9 % 96.4 % 98.3 %
Land and lot sales 3.8 1.0 3.3 1.6
Other income 0.2 0.1 0.3 0.1
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Total Revenue 100.0 100.0 100.0 100.0
Land and housing costs 81.9 82.4 81.9 82.2
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Gross Margin 18.1 17.6 18.1 17.8
General and administrative expenses 2.8 2.6 3.0 2.7
Selling expenses 6.6 6.5 6.8 7.0
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Operating Income 8.7 % 8.5 % 8.3 % 8.1 %
================================================================================================================================
MIDWEST REGION
Unit Data:
New contracts 513 441 1,542 1,487
Homes delivered 510 538 1,316 1,336
Backlog at end of period 1,134 1,088 1,134 1,088
Average sales price of homes in backlog $176 $173 $176 $173
Aggregate sales value of homes in backlog $200,000 $188,000 $200,000 $188,000
Number of active subdivisions 75 70 75 70
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FLORIDA REGION
Unit Data:
New contracts 164 142 529 483
Homes delivered 174 157 451 437
Backlog at end of period 299 271 299 271
Average sales price of homes in backlog $188 $167 $188 $167
Aggregate sales value of homes in backlog $56,000 $45,000 $56,000 $45,000
Number of active subdivisions 30 40 30 40
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NORTH CAROLINA, VIRGINIA AND MARYLAND, AND ARIZONA REGION
Unit Data:
New contracts 146 147 427 476
Homes delivered 144 192 394 456
Backlog at end of period 241 279 241 279
Average sales price of homes in backlog $290 $242 $290 $242
Aggregate sales value of homes in backlog $70,000 $68,000 $70,000 $68,000
Number of active subdivisions 35 40 35 40
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TOTAL
Unit Data:
New contracts 823 730 2,498 2,446
Homes delivered 828 887 2,161 2,229
Backlog at end of period 1,674 1,638 1,674 1,638
Average sales price of homes in backlog $194 $184 $194 $184
Aggregate sales value of homes in backlog $326,000 $301,000 $326,000 $301,000
Number of active subdivisions 140 150 140 150
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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 periods specified. Most cancellations of contracts for homes in Backlog
occur because customers cannot qualify for financing. These cancellations
usually occur prior to the start of construction. Since the Company arranges
financing with guaranteed rates for many of its customers, the incidence of
cancellations after the start of construction is low. In the first nine months
of 1997, the Company delivered 2,161 homes. Of the 1,337 contracts in Backlog
at December 31, 1996, 14.1% have been canceled as of September 30, 1997. For
homes in Backlog at December 31, 1995, 14.4% had been canceled as of September
30, 1996 and the final cancellation percentage was 14.4%. Unsold speculative
homes, which are in various stages of construction, totaled 158 and 165 at
September 30, 1997 and 1996, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Total Revenue. Total revenue for the three months ended September 30,
1997 increased 0.5% over the three months ended September 30, 1996. This
increase was due to a 265.5% increase in land revenue and was offset by a 2.5%
decrease in housing revenue. The increase in land revenue from $1.6 million to
$5.9 million was primarily attributable to the Virginia division. The Virginia
division had significant lot sales to outside homebuilders. It continues to be
the Company's strategy to sell to third parties in this division. The decrease
in housing revenue was due to a 6.7% decrease in the number of Homes Delivered.
This decrease was primarily due to a record number of Homes Delivered in the
three months ended September 30, 1996. The decrease in housing revenue was
partially offset by a 4.5% increase in the average sales price of Homes
Delivered. The average sales price increased in eight of the Company's twelve
divisions; however, the increase was primarily due to increases in the
Columbus, Orlando and Charlotte markets where the Company is building in more
upscale and certain niche subdivisions.
Home Sales and Backlog. The Company recorded a 12.7% increase in the
number of New Contracts in the three months ended September 30, 1997 as
compared to the same period of 1996. New Contracts in the third quarter of 1997
were higher in all divisions except Charlotte, Orlando and Virginia, led by the
Horizon division where the number of New Contracts increased 44.1%. The Company
believes the increase in New Contracts was partially due to a more favorable
interest rate environment in the third quarter of 1997 as compared to the same
period 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
homebuyers.
At September 30, 1997, the total sales value of the Company's Backlog
of 1,674 homes was approximately $326.0 million, representing a 8.3% increase
in sales value and a 2.2% increase in units from the levels reported at
September 30, 1996. The increase in units at September 30, 1997 is a result of
a decrease in deliveries in the first nine months of 1997 and a record number
of New Contracts recorded in the first nine months of 1997. The average sales
price of homes in Backlog increased 5.4% from September 30, 1996 to September
30, 1997. This increase was primarily due to increases in the Columbus,
Cincinnati, Orlando and Maryland markets where the Company is building in more
upscale and certain
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niche subdivisions. The Chevy Chase subdivision in Maryland, where the Company
started selling in May of 1997, has an average selling price of over $700,000.
Gross Margin. The overall gross margin for the homebuilding segment
was 18.1% for the three months ended September 30, 1997 as compared to 17.6%
for the comparable period of 1996. The gross margin from housing sales
increased from 17.8% in the third quarter of 1996 to 18.2% in the third quarter
of 1997. This increase was due to the increased emphasis placed on improving
margins during 1997 and 1996. The increase in gross margin was partially offset
by a decrease in gross margin from lot and land sales where margins decreased
from 39.4% to 23.5%. The gross margin recorded in the current year is lower due
to the sale of a tract of commercial real estate in the third quarter of 1996
which produced a gross margin significantly higher than normal lot sales.
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 continues to expand. 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, including possible shortages of qualified subcontractors.
General and Administrative Expenses. General and administrative
expenses as a percentage of total revenue increased slightly from 2.6% for the
three months ended September 30, 1996 to 2.8% for the three months ended
September 30, 1997. This increase was primarily attributable to the increase in
real estate taxes recorded in the third quarter of 1997 as compared to the
third quarter of 1996 due to the increase in land development activities.
Additionally, the Company incurred general and administrative expenses of
approximately $200,000 in their newest market, Phoenix, Arizona.
Selling Expenses. Selling expenses as a percentage of total revenue
increased slightly to 6.6% for the three months ended September 30, 1997 from
6.5% for the comparable period of 1996. However, this increase resulted from a
minimal increase in total revenue.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Total Revenue. Total revenue for the nine months ended September 30,
1997 increased 4.8% from the nine months ended September 30, 1996. This
increase was due to a 2.9% increase in housing revenue and a 118.6% increase in
land revenue. The increase in housing revenue was due to a 6.1% increase in the
average sales price of Homes Delivered. The average sales price of Homes
Delivered increased in nine of the Company's twelve divisions; however, the
increase was primarily due to increases in the Columbus and Charlotte markets
where the Company is building in more upscale and certain niche subdivisions.
The increase in land revenue from $6.1 million to $13.3 million was primarily
attributable to the Washington D.C. market. Both the Maryland and Virginia
divisions had significant lot sales to outside homebuilders. It continues to be
the Company's strategy to sell to third parties in these divisions.
Home Sales and Backlog. The Company recorded a 2.1% increase in the
number of New Contracts in the nine months ended September 30, 1997 as compared
to the same period of 1996. The increase in New Contracts in the first nine
months of 1997 was due mainly to the Horizon division where the number of New
Contracts increased 54.6%. The lower priced Horizon division continues to
expand into desirable locations in the Columbus market. The number of New
Contracts recorded in future periods will be
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dependent on numerous factors, including future economic conditions, timing of
land development, consumer confidence and interest rates available to potential
homebuyers.
Gross Margin. The overall gross margin for the homebuilding segment
was 18.1% for the nine months ended September 30, 1997 as compared to 17.8% for
the comparable period of 1996. The gross margin from housing sales remained
constant at 18.1% for both periods. The overall increase in gross margin was
mainly due to lot and land sales, where margins increased from 18.9% to 25.8%.
Both the Maryland and Virginia divisions had significant increases in the
number of lots sold to outside homebuilders. It continues to be the Company's
strategy to sell to third parties in these divisions. 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 continues to expand. 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, including possible shortages of qualified subcontractors.
General and Administrative Expenses. General and administrative
expenses as a percentage of total revenue increased from 2.7% for the nine
months ended September 30, 1996 to 3.0% for the comparable period in the
current year. 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 land development activities increased over prior
year balances. More bonuses were recorded in the first nine months of 1997 as
compared to the first nine months of 1996 due to the significant increase in
net income. Additionally, the Company incurred general and administrative
expenses of approximately $700,000 in their newest market, Phoenix, Arizona.
Selling Expenses. Selling expenses as a percentage of total revenue
decreased to 6.8% for the nine months ended September 30, 1997 from 7.0% for
the comparable period of 1996. The decrease in the nine-month period was
primarily due to decreases in sales commissions paid to outside Realtors.
FINANCIAL SERVICES SEGMENT - M/I FINANCIAL CORP.
The following table sets forth certain information related to the Company's
financial services segment:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1997 1996 1997 1996
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Number of Loans Originated 634 659 1,624 1,666
Revenue:
Loan origination fees $ 870 $ 852 $ 2,182 $ 2,075
Sale of servicing and marketing gains 944 815 3,665 2,857
Other 776 628 2,034 1,680
Total Revenue 2,590 2,295 7,881 6,612
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General and administrative expenses 1,115 1,101 3,274 3,327
- ----------------------------------------------------------------------------------------------------------
Operating Income $1,475 $ 1,194 $ 4,607 $ 3,285
- ----------------------------------------------------------------------------------------------------------
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THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Total Revenue. Total revenue for the three months ended September 30,
1997, was $2.6 million, a 12.8% increase over the $2.3 million recorded for the
comparable period of the prior year. Loan origination fees increased 2.1% for
the third quarter of 1997 from the comparable period of 1996, even though the
number of loans originated decreased 3.8%. The increase in loan origination
fees was primarily due to higher loan amounts, based on higher sales prices of
Homes Delivered.
Revenue from the sale of servicing and marketing gains increased 15.8%
over the comparable period of the prior year. The Company originated primarily
fixed rate mortgages due to low and stable interest rates. The Company earns
higher premiums on fixed rate mortgages as opposed to adjustable rate
mortgages. Mortgage amounts increased, based on higher home prices, which
generated higher service release premiums. The Company also negotiated more
favorable terms with investors which resulted in an increase in service release
premiums.
General and Administrative Expenses. General and administrative
expenses for the three months ended September 30, 1997 remained constant at
$1.1 million as compared to the three months ended September 30, 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Total Revenue. Total revenue for the nine months ended September 30,
1997 was $7.9 million, a 19.2% increase over the $6.6 million recorded for the
comparable period of the prior year. Loan origination fees increased 5.2% in
the first nine months of 1997 over the comparable period of 1996, even though
the number of loans originated decreased 2.5%. The increase in loan origination
fees was due primarily to a higher capture rate of the Company's higher end
product lines and higher sales prices of Homes Delivered.
Revenue from the sale of servicing and marketing gains increased from
$2.9 million to $3.7 million for the nine months ended September 30, 1997. This
increase of 28.3% 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 used hedging
methods whereby it has the option, but is not required, to complete the hedging
transaction. The Company also negotiated more favorable terms with investors
which resulted in an increase in service release premiums.
Revenue from other sources increased to $2.0 million for the nine
months ended September 30, 1997 from $1.7 million for the comparable period of
1996. This increase was primarily due to earnings from the Company's 49.9%
interest in a title agency that started operations early in 1997.
General and Administrative Expenses. General and administrative
expenses for the nine months ended September 30, 1997 and 1996 were $3.3
million for both periods.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for the three and nine months ended September 30, 1997
totaled $4.4 and $9.3 million, respectively, or 2.8% and 2.3% of total revenue.
This was an increase from the $4.0 and $8.9 million, or 2.5% and 2.3% of total
revenue recorded for the comparable periods of 1996. These increases are
primarily due to
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higher bonuses recorded in the three and nine months ended September 30, 1997
as compared to the comparable periods of the prior year due to the significant
increase in net income.
Interest Expense. Corporate and homebuilding interest expense for the
three and nine months ended September 30, 1997 decreased to $3.0 and $8.0
million, respectively, from $3.5 and $9.5 million recorded for the comparable
periods of the prior year. Interest expense was lower in the current year due
to a decrease in the weighted average interest rate and an increase in the net
amount of interest capitalized during the first nine months of 1997 as compared
to the first nine months of 1996. This was partially offset by an increase in
the average borrowings outstanding. 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 May of
1996, the Company switched its bank borrowings from prime to LIBOR plus a
margin which also reduced the interest rate. Capitalized interest increased due
to a significant increase in the Company's land development activities in the
first nine months of 1997.
Income Taxes. The effective tax rate for the three and nine months
ended September 30, 1997 increased to 40.4% for both periods from 36.7% and
39.4% for the comparable periods of 1996. In the third quarter of 1996, the
Company made a significant charitable contribution of commercial land, owned
since 1986, decreasing the effective 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 has incurred substantial indebtedness, and may incur substantial
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 September 30, 1997, the Company had bank borrowings outstanding of
$102.0 million under its Bank Credit Facility, which permits aggregate
borrowings, other than for the issuance of letters of credit, not to exceed the
lesser of: (i) $186.0 million and (ii) 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, less the sum of (A) outstanding letters of
credit issued for purposes other than to satisfy bonding requirements and (B)
the aggregate amount of outstanding letters of credit, other than letters of
credit issued for the purpose of satisfying bonding requirements, for joint
ventures in which the Company is a partner and which are guaranteed by the
Company. The Bank Credit Facility matures September 30, 2002, at which time the
unpaid balance of the revolving credit loans outstanding will be due and
payable. Under the terms of the Bank Credit Facility, the banks will determine
annually whether or not to extend the maturity date of the commitments by one
year. On September 29, 1997, the Company amended its Bank Credit Facility,
which lowered the borrowing rate. At September 30, 1997, borrowings under the
Bank Credit Facility were at the prime rate or, at the Company's option, at
LIBOR plus a margin of between 1.60% and 2.35% based on the Company's ratio of
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to
consolidated interest incurred and were primarily unsecured. The Bank Credit
Facility 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 Bank Credit Facility also places
limitations on the amount of additional indebtedness that may be incurred by
the Company, the acquisition of undeveloped land, dividends that may be paid
and the aggregate cost of certain types of inventory the Company can hold at
any one time.
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An additional $7.3 million was outstanding as of September 30, 1997
under the M/I Financial loan agreement, which permits borrowings of $30.0
million to finance mortgage loans initially funded by M/I Financial for
customers of the Company and a limited amount for loans to others. The Company
and M/I Financial are co-borrowers under the M/I Financial loan agreement. This
agreement limits the borrowings to 95% of the aggregate face amount of certain
qualified mortgages and contains restrictive covenants requiring M/I Financial
to maintain minimum net worth and certain minimum financial ratios. On July 18,
1997, the Company and M/I Financial entered into a new short-term $30.0 million
replacement credit facility with the existing lender, pursuant to which the
Company and M/I Financial have the ability to borrow at (a) the prime rate less
0.25%, or (b) LIBOR plus 1.75% or (c) a combination of (a) and (b). The new
agreement terminates on June 25, 1998, at which time the unpaid balance is due.
At September 30, 1997, the Company had the right to borrow up to
$205.3 million under its credit facilities, including $19.3 million under the
M/I Financial loan agreement (95% of the aggregate face amount of eligible
mortgage loans). At September 30, 1997, the Company had $96.0 million of unused
borrowing availability under its loan agreements. The Company also had
approximately $29.6 million of completion bonds and letters of credit
outstanding at September 30, 1997.
Subordinated Note/Subordinated Debt Facility. On August 29, 1997, the
Company entered into a Credit Agreement (the "Subordinated Debt Facility") for
$50 million of Senior Subordinated Notes. The proceeds were used to repay
outstanding amounts under the Bank Credit Facility and the existing $25 million
Subordinated Note due 2001. The new notes bear interest at a fixed rate of
9.51% and mature August 29, 2004.
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 nine months ended September 30, 1997 was $5.9
million compared to $7.8 million for the prior year period. The decrease in net
cash used by operating activities was primarily due to a large increase in
accounts payable. This was partially offset by a decrease in inventories.
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 in the foreseeable future.
Single-family lots, land and land development costs increased 9.9% from
December 31, 1996 to September 30, 1997. 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
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 $9.0 million increase in notes payable to banks, along with the
$25.0 million increase in subordinated notes, from December 31, 1996 to
September 30, 1997 reflects increased borrowings primarily attributable to the
seasonal increase in houses under construction, along with an increase in
single-family lots, land and land development costs. Houses under construction
increased $41.5 million from December 31, 1996 to September 30, 1997 while
single-family lots, land and land development costs increased $12.8 million. It
is expected that borrowing needs will increase as the Company continues to
increase its investment in land under development and developed lots.
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As of September 30, 1997, the Company has closed on the first four
phases of a six-phase land purchase contract in the Maryland division. This
contract was entered into in 1994 and required a greater investment than the
Company normally commits. 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 and fourth phases to outside homebuilders. The
Company has an option to purchase each of the remaining two phases. If the
Company purchases all six phases, the total purchase price will be
approximately $39.8 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 15, 1997 and August 1, 1997, the Company
purchased 500,000 and 702,439 shares, respectively, of the Company's common
stock from the Melvin L. Schottenstein family interests and trusts for their
benefit at an average per share price of $11.85. These shares are held as
treasury shares by the Company. The total purchase price was $14.3 million and
was paid from the Company's Bank Credit Facility.
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 homebuyers 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 for the nine months ended September 30, 1997 was
8.5% as compared to 9.7% for the nine months ended September 30, 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,
resulting 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 Financial Condition and Results of Operations 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
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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, Interest Rates and Other Conditions.
The homebuilding 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
cannot predict whether interest rates will be at levels attractive to
prospective homebuyers. If interest rates increase, and in particular mortgage
interest rates, the Company's business could be adversely affected.
Land Development Activities. The Company develops the lots for a
majority of its subdivisions. Therefore, the medium- and long-term financial
success of the Company will be dependent on the Company's ability to develop
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 and constructing subdivision infrastructure
(such as roads and utilities).
The Company's Markets. The Company's operations are situated 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. 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
were derived from operations in its Columbus, Ohio market. The Company's
performance could be significantly affected by changes in this market. The
Company expanded into a new geographic market, Phoenix, Arizona, in late 1996.
A new market 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.
Competition. The homebuilding 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 homebuyers, 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
homebuyers over building a new home.
Governmental Regulation and Environmental Considerations. The
homebuilding 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
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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 or 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.
Risk of Material and Labor Shortages. The Company is presently not
experiencing any serious material or labor shortages. However, the residential
construction industry in the past has, from time to time, experienced serious
material and labor shortages in insulation, drywall, certain carpentry and
framing work and cement, as well as fluctuating lumber prices and supplies.
Delays in construction of homes due to these shortages could adversely affect
the Company's business.
Significant Voting Control by Principal Shareholders. As of October
31, 1997, members of the Melvin L. Schottenstein and Irving E. Schottenstein
families owned approximately 53% of the outstanding Common Shares. In
particular, Irving E. Schottenstein, in his own name and as trustee of trusts
for his children, had the right to vote 2,761,800 Common Shares, or 36.4% of
the outstanding Common Shares, and Melvin L. Schottenstein's children had the
right to vote in the aggregate 1,243,000 Common Shares, or 16.4% of the
outstanding Common Shares. Therefore, members of the Irving E. Schottenstein
and Melvin L. Schottenstein families have significant voting power with
respect to the election of the Board of Directors of the Company and, in
general, the determination of the outcome of the various matters submitted to
the shareholders of the Company for approval.
Dependence on Key Executives. The Company is managed by a relatively
small number of executive officers. The loss of the services of one or more of
these executive officers could have an adverse effect on the Company's business
and operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings - none.
Item 2. Changes in Securities - none.
Item 3. Defaults Upon Senior Securities - none.
Item 4. Submission of Matters to a Vote of Security Holders - none.
Item 5. Other Information - none.
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
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10.1 Third Amendment to second restated revolving credit loan and
standby letter of credit agreement by and among the Company, Bank
One, N.A.; The Huntington National Bank; The First National Bank of
Chicago; National City Bank of Columbus; BankBoston, N.A.; The
Fifth Third Bank of Columbus and Bank One, N.A. as agent for the
banks, dated September 29, 1997.
10.2 Credit Agreement between the Company and BankBoston, N.A., the
other parties which may become lenders and BankBoston, N.A. as
agent, dated August 29, 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: October 31, 1997 by: /s/ Robert H. Schottenstein
-----------------------------
Robert H. Schottenstein
President
Date: October 31, 1997 by: /s/ Kerrii B. Anderson
--------------------------
Kerrii B. Anderson
Senior Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description Page #
------ ----------- ------
10.1 Third Amendment to second restated revolving credit loan and standby
letter of credit agreement by and among the Company, Bank One, N.A.;
The Huntington National Bank; The First National Bank of Chicago;
National City Bank of Columbus; BankBoston, N.A.; The Fifth Third Bank
of Columbus and Bank One, N.A. as agent for the banks, dated September
29, 1997.
10.2 Credit Agreement between the Company and BankBoston, N.A., the other
parties which may become lenders and BankBoston, N.A. as agent, dated
August 29, 1997.
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