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, 1998
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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
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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: 8,810,961 shares
outstanding as of May 14, 1997
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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
March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1998 and 1997 5
Notes to Interim Unaudited Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
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CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31,
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash $ 906 $ 10,836
Cash held in escrow 779 2,537
Receivables 26,358 43,819
Inventories:
Single-family lots, land and land development costs 150,186 151,905
Houses under construction 130,456 100,916
Model homes and furnishings - at cost (less accumulated depreciation:
March 31, 1998 - $51;
December 31, 1997 - $47) 18,589 17,788
Land purchase deposits 1,014 645
Office furnishings, transportation and construction
equipment - at cost (less accumulated depreciation:
March 31, 1998 - $4,518;
December 31, 1997 - $4,328) 8,334 8,647
Investment in unconsolidated joint ventures and limited liability companies 14,700 15,236
Other assets 12,223 13,691
- ------------------------------------------------------------------------------------------------------------------
TOTAL $ 363,545 $ 366,020
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable banks - homebuilding operations $ 104,000 $ 78,000
Note payable bank - financial operations 9,590 30,000
Mortgage notes payable 6,292 5,950
Subordinated notes 50,000 50,000
Accounts payable 41,251 42,793
Accrued compensation 3,586 13,042
Income taxes payable 1,649 4,072
Accrued interest, warranty and other 16,364 19,103
Customer deposits 10,642 7,554
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TOTAL LIABILITIES 243,374 250,514
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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 8,813,400 shares 88 88
Additional paid-in capital 50,737 50,573
Retained earnings 83,596 79,095
Treasury stock - at cost - 1,202,439 shares are held in treasury at
March 31, 1998 and December 31, 1997 (14,250) (14,250)
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 120,171 115,506
- ------------------------------------------------------------------------------------------------------------------
TOTAL $ 363,545 $ 366,020
==================================================================================================================
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) 1998 1997
- ---------------------------------------------------------------------------------------
Revenue $117,230 $105,829
- ----------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 91,271 84,073
General and administrative 6,987 6,410
Selling 8,821 7,917
Interest 2,648 2,362
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Total costs and expenses 109,727 100,762
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Income before income taxes 7,503 5,067
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Income taxes:
Current 1,499 1,151
Deferred 1,503 864
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Total income taxes 3,002 2,015
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Net income $ 4,501 $ 3,052
========================================================================================
Per share data:
Basic $ 0.59 $ 0.35
Diluted $ 0.58 $ 0.35
========================================================================================
Weighted average shares outstanding:
Basic 7,604,132 8,716,667
Diluted 7,698,571 8,739,445
=========================================================================================
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) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,501 $ 3,052
Adjustments to reconcile net income to net cash
used by operating activities:
Loss from property disposals 50 102
Depreciation and amortization 398 380
Deferred income tax 1,503 864
Decrease (increase) in cash held in escrow 1,758 (673)
Decrease in receivables 17,461 18,693
Increase in inventories (24,646) (29,428)
Decrease (increase) in other assets (75) 1,144
Increase (decrease) in accounts payable (1,542) 7,712
Decrease in income taxes payable (2,423) (541)
Decrease in accrued liabilities (12,195) (10,809)
Equity in undistributed income of unconsolidated joint
ventures, limited liability companies and limited partnerships (57) (79)
- -----------------------------------------------------------------------------------------------------------------
Net cash used by operating activities ( 15,267) ( 9,583)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings,
transportation and construction equipment (91) (6,844)
Investment in unconsolidated joint ventures (3,843) (1,297)
Distributions from unconsolidated joint ventures, limited liability
companies and limited partnerships 87 113
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,847) (8,028)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Proceeds from borrowings 77,800 70,305
Principal repayments (72,210) (49,035)
Mortgage notes payable:
Proceeds from borrowings 342 --
Principal repayments -- (19)
Net increase in customer deposits 3,088 1,650
Proceeds from exercise of stock options 164 --
Payments to acquire treasury stock -- (5,250)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,184 17,651
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (9,930) 40
Cash balance at beginning of year 10,836 6,368
- -----------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 906 $ 6,408
=================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 2,044 $ 2,182
Income taxes $ 3,806 $ 2,269
NON-CASH TRANSACTIONS DURING THE YEAR:
Land acquired with mortgage notes payable $ 342 $ --
Single-family lots distributed from unconsolidated joint ventures and
limited liability companies $ 4,349 $ 3,473
================================================================================================================
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, 1998 and 1997 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, 1997.
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
The Company has reached an agreement in principal with its lenders to enter
into a new bank loan agreement. The new agreement will increase the amount of
credit available to the Company and modify certain covenants.
The Company expects to complete the new agreement by May 31, 1998.
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, 1998 and 1997 is as follows:
Three Months Ended March 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------
Interest capitalized, beginning of period $7,620 $ 6,862
Interest incurred 3,335 2,625
Interest expensed (2,648) (2,362)
- -----------------------------------------------------------------------------
Interest capitalized, end of period $8,307 $ 7,125
=============================================================================
NOTE 4. CONTINGENCIES
At March 31, 1998, the Company had options and contingent purchase contracts
to acquire land and developed lots with an aggregate purchase price of
approximately $152.6 million.
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NOTE 5. SALE OF TREASURY SHARES
On April 27, 1998, the Company filed a registration statement with the
Securities and Exchange Commission for up to 1,200,000 shares of common stock
of the Company. The shares were sold on May 5, 1998. The Company received
approximately $24,600,000 on May 8, 1998, which was used to repay a portion
of existing indebtedness.
NOTE 6. PER SHARE DATA
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." SFAS 128 replaced the presentation of primary and fully diluted EPS
with a presentation of basic and diluted EPS. This statement is effective for
financial statements for both interim and annual periods ending after
December 15, 1997. All EPS amounts for all periods have been presented to
conform to SFAS 128 requirements.
Basic EPS is computed by dividing net income available to common shareholders
by the weighted average number of common shares outstanding during each
period. Diluted computations include common share equivalents, when dilutive.
NOTE 7. ACCOUNTING STANDARDS
In June 1997, the 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. DIVIDENDS
On April 22, 1998, the Company paid a cash dividend of $0.05 per share, the
first cash dividend in the Company's history. On April 28, 1998, the Board of
Directors approved a $0.05 per share cash dividend payable to stockholders of
record of its common stock on July 1, 1998, payable on July 22, 1998.
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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, 1998 AND 1997
CONSOLIDATED
Total Revenue. Total revenue for the three months ended March 31, 1998
was $117.2 million, a 10.8% increase over the $105.8 million recorded for the
comparable period of 1997. Increases in housing and other revenue of $13.4
million and $0.7 million, respectively, was partially offset by a $2.7 million
decrease in land revenue. The increase in housing revenue was attributable to
both an increase in the number of Homes Delivered as the Company delivered 52
more homes for the first quarter of 1998 compared to the prior year, and a 3.9%
increase in the average sales price of Homes Delivered. 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. The decrease in land revenue for the first quarter of 1998 was
primarily due to a significant decrease from the first quarter of 1997 in the
number of lots sold to third parties in the Washington, D.C. market.
Income Before Income Taxes. Income before income taxes for the first
quarter of 1998 increased 48.1% over the comparable period of 1997. Income
before income taxes reached $7.5 million, a record for the Company's first
quarter. The increase related to housing and land, where income before income
taxes increased from $3.4 to $5.3 million, and financial services, where income
before income taxes increased from $1.7 to $2.2 million. The increase in housing
was due to the increase in the number of Homes Delivered and in the average
selling price of Homes Delivered. The average selling price increased from
$177,000 for the first quarter of 1997 to $184,000 in 1998. The increase in
housing was also due to an increase in gross margin. Housing gross margin
increased from 18.2% for the three months ended March 31, 1997 to 20.0% for the
same period of the current year. The increase in financial services was
primarily due to an increase in the number of loans originated and 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 1997 and the first quarter of 1998.
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HOME-BUILDING SEGMENT
The following table sets forth certain information related to the Company's
homebuilding segment:
Three Months Ended March 31,
(Dollars in thousands) 1998 1997
==================================================================================================================
Revenue:
Housing sales $112,123 $98,680
Land and lot sales 1,904 4,602
Other income 476 296
==================================================================================================================
Total Revenue $114,503 $103,578
==================================================================================================================
Revenue:
Housing sales 97.9 % 95.3 %
Land and lot sales 1.7 4.4
Other income 0.4 0.3
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Total Revenue 100.0 100.0
Land and housing costs 80.4 81.6
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Gross Margin 19.6 18.4
General and administrative expenses 3.5 3.3
Selling expenses 7.7 7.7
- ------------------------------------------------------------------------------------------------------------------
Operating Income 8.4 % 7.4 %
==================================================================================================================
MIDWEST REGION
Unit Data:
New contracts, net 721 587
Homes delivered 376 342
Backlog at end of period 1,402 1,153
Average sales price of homes in backlog $178 $174
Aggregate sales value of homes in backlog $250,000 $200,000
Number of active subdivisions 80 80
==================================================================================================================
FLORIDA REGION
Unit Data:
New contracts, net 193 172
Homes delivered 126 112
Backlog at end of period 322 281
Average sales price of homes in backlog $185 $171
Aggregate sales value of homes in backlog $59,000 $48,000
Number of active subdivisions 35 30
==================================================================================================================
NORTH CAROLINA, VIRGINIA AND MARYLAND, AND ARIZONA REGION
Unit Data:
New contracts, net 231 148
Homes delivered 107 103
Backlog at end of period 356 253
Average sales price of homes in backlog $305 $237
Aggregate sales value of homes in backlog $109,000 $60,000
Number of active subdivisions 40 35
==================================================================================================================
TOTAL
Unit Data:
New contracts, net 1,145 907
Homes delivered 609 557
Backlog at end of period 2,080 1,687
Average sales price of homes in backlog $201 $183
Aggregate sales value of homes in backlog $418,000 $308,000
Number of active subdivisions 155 145
==================================================================================================================
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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 a limited number of markets, contracts are
sometimes accepted contingent upon the sale of an existing home. "Homes
Delivered" represents homes 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 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 these 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 1998, the
Company delivered 609 homes, most of which were homes under contract in Backlog
at December 31, 1997. Of the 1,544 contracts in Backlog at December 31, 1997,
9.6% have been canceled as of March 31, 1998. For homes in Backlog at December
31, 1996, 8.9% had been canceled as of March 31, 1997. For the homes in Backlog
at December 31, 1996, the final cancellation percentage was 14.1%. Unsold
speculative homes, which are in various stages of construction, totaled 154 and
129 at March 31, 1998 and 1997, respectively.
Total Revenue. Total revenue for the homebuilding segment for the three
months ended March 31, 1998 increased 10.5% compared to the three months ended
March 31, 1997. This increase was due to a 13.6% increase in housing revenue and
was offset by a 58.6% decrease in land revenue. The increase in housing revenue
was partially due to a 9.3% increase in the number of Homes Delivered. Homes
Delivered were higher in all of the Company's regions, led by the Midwest Region
where the number of Homes Delivered increased 9.9%. The increase in housing
revenue was also due to a 3.9% increase in the average sales price of Homes
Delivered. Excluding the Phoenix division, which had no Homes Delivered in the
first quarter of 1997, the average sales price of Homes Delivered increased in
eight of the Company's twelve divisions led by the Columbus, Orlando and
Charlotte divisions where the Company is building in more upscale and certain
niche subdivisions. The decrease in land revenue from $4.6 million to $1.9
million was primarily attributable to the Washington, D.C. market. The Maryland
division had significant lot sales to outside homebuilders in the three months
ended March 31, 1997 which did not occur in the current year.
Home Sales and Backlog. The Company recorded a 26.2% increase in the
number of New Contracts recorded in the first quarter of 1998 compared to the
corresponding period of 1997. The number of New Contracts recorded in the
current year was higher than the prior year in nearly almost all of the
Company's markets. The Company believes the increase in New Contracts was
partially due to favorable market conditions and low interest rates. 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, 1998, the total sales value of the Company's Backlog of
2,080 homes was approximately $418.0 million, representing a 35.7% increase in
sales value and a 23.3% increase in units over the levels reported at March 31,
1997. The increase in units at March 31, 1998 is a result of record high new
contracts recorded in the first quarter of 1998. The average sales price of
homes in Backlog increased 9.8% from March 31, 1997 to March 31, 1998. This
increase was primarily due to increases in the Columbus, Orlando, Maryland and
Phoenix markets where the Company is building in more upscale and certain niche
subdivisions.
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Gross Margin. The overall gross margin for the homebuilding segment was
19.6% for the three month period ended March 31, 1998 compared to 18.4% for the
three month period ended March 31, 1997. The gross margin from housing sales was
20.0% in the first quarter of 1998 compared to 18.2% in the first quarter of
1997. The gross margin from lot and land sales decreased from 28.0% to 16.2%.
Gross margins in the current year were higher than the prior year in nearly all
of the Company's markets. 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 also focuses on acquiring or developing lots in
premier locations to 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. The
decrease in the gross margins from lot and land sales was due to the Maryland
division where there was a significant decrease in the number of lots sold to
outside homebuilders.
General and Administrative Expenses. General and administrative
expenses as a percentage of total revenue increased from 3.3% for the three
months ended March 31, 1997 to 3.5% for the three months ended March 31, 1998.
This increase was primarily attributable to the increase in real estate tax
expense, bonuses and rental expense. 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 quarter of 1998
compared to the first quarter of 1997 due to the significant increase in net
income. The increase in rent was primarily due to increased costs for office
space compared to 1997 in the Columbus market.
Selling Expenses. Selling expenses increased from $7.9 million for the
three months ended March 31, 1997 to $8.8 million for the three months ended
March 31, 1998. Selling expenses as a percentage of total revenue remained
constant at 7.7% for the three months ended March 31, 1998 compared to the same
period of the prior year. The increase in expense was primarily due to increases
in sales commissions paid to outside Realtors and internal salespeople as a
result of the increase in sales volume.
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) 1998 1997
- -------------------------------------------------------------------------------
Number of loans originated 533 423
Revenue:
Loan origination fees $ 822 $ 561
Sale of servicing and marketing gains 1,808 1,545
Other 838 628
- -------------------------------------------------------------------------------
Total Revenue 3,468 2,734
- -------------------------------------------------------------------------------
General and administrative expenses 1,251 1,036
===============================================================================
Operating Income $2,217 $1,698
===============================================================================
Total Revenue. Total revenue for the three months ended March 31, 1998
was $3.5 million, a 26.8% increase over the $2.7 million recorded for the
comparable period of the prior year. Loan origination fees increased 46.5% from
the first quarter of 1997 to the first quarter of 1998. This increase
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was due to a 26.0% increase in the number of loans originated over the
comparable period of the prior year, along with an increase in the average loan
amount.
Revenue from sale of servicing and marketing gains increased 17.0% from
$1.5 million for the three months ended March 31, 1997 to $1.8 million for the
three months ended March 31, 1998. The increase in servicing fees was primarily
due to more fixed rate mortgages originated during the first three months of
1998 as compared to the comparable period of 1997. 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 1997 and early part of 1998 which increased marketing
gains on loans that closed during the first quarter of 1998 along with an
increase in average loan amounts and a 26.0% increase in the number of loans
originated over the prior year. 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 servicing and marketing gains during a 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, 1998 were $1.3 million, a 20.7%
increase from the comparable period of the prior year. The increase was
primarily due to an increase in applications received. There were 181 more
applications taken in the first quarter of 1998 than in the first quarter of
1997.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. General and
administrative expenses decreased from $2.0 million for the three months ended
March 31, 1997 to $1.7 million for the three months ended March 31, 1998. As a
percentage of total revenue, general and administrative expenses decreased to
1.5% for the three months ended March 31, 1998 from 1.9% for the comparable
period in the prior year. This decrease was partially due to less contributions
expensed in 1998, along with minor decreases in a number of general and
administrative accounts.
Interest Expense. Corporate and homebuilding interest expense for the
first quarter of 1998 totaled $2.6 million, a 13.0% increase from the $2.3
million recorded for the comparable period of the prior year. Interest expense
was higher in the current year due to a slight increase in the weighted average
interest rate and an increase in the average borrowings outstanding. This
increase was partially offset by an increase in the net amount of interest
capitalized during the first quarter of 1998 compared to the first quarter of
1997. The weighted average interest rate increased due to the Company replacing
its $25 million Subordinated Note with a new $50 million Subordinated Note at a
slightly higher fixed rate in August of 1997. Average borrowings outstanding and
capitalized interest increased due to a significant increase in the Company's
land development activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing needs depend upon its sales volume, asset
turnover, land acquisition and inventory balances. The Company has incurred
substantial indebtedness, and may incur substantial indebtedness in the future,
to fund the growth of its homebuilding activities. 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.
Notes Payable Banks. At March 31, 1998, the Company had bank borrowings
outstanding of $104.0 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
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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. At March 31, 1998, borrowings under the Bank Credit Facility were at the
prime rate or, at the Company's option, 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.
The Company has reached an agreement in principal with its lenders to
enter into a new bank loan agreement. The new agreement will increase the amount
of credit available to the Company and modify certain covenants. The Company
expects to complete the new agreement by May 31, 1998.
An additional $9.6 million was outstanding as of March 31, 1998 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. At March 31, 1998,
borrowings under this agreement were at (a) the prime rate less 0.25%, (b) LIBOR
plus 1.60% or (c) a combination of (a) and (b). The agreement terminates on June
25, 1998, at which time the unpaid balance is due. The Company expects to enter
into a new agreement prior to termination of the existing agreement.
At March 31, 1998, the Company had the right to borrow up to $210.3
million under its credit facilities, including $24.3 million under the M/I
Financial loan agreements (95% of the aggregate face amount of eligible mortgage
loans). At March 31, 1998, the Company had $96.7 million of unused borrowing
availability under its loan agreements. The Company also had approximately $27.8
million of completion bonds and letters of credit outstanding at March 31, 1998.
Subordinated Notes. At March 31, 1998, there was outstanding $50.0
million of Senior Subordinated Notes. The notes bear interest at a fixed rate of
9.51% and mature August 29, 2004.
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 increased 7.3% from March 31, 1997
to March 31, 1998. These increases are primarily due to the shortage of
qualified land developers in certain of the Company's markets as well as the
Company developing more land due to 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, in which lots are generally not available from
third party developers at economically feasible prices due to the price points
the Company targets. The Company continues to purchase lots from outside
developers under option
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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 $25.0 million increase in subordinated notes, partially offset by
the $13.5 million decrease in notes payable banks - homebuilding operations,
from March 31, 1997 to March 31, 1998 reflects increased borrowings primarily
attributable to the increase in houses under construction, along with an
increase in single-family lots, land and land development costs. Houses under
construction increased $17.1 million from March 31, 1997 to March 31, 1998, and
single-family lots, land and land development costs increased $10.2 million. It
is expected that borrowing needs will increase as the Company continues to
increase its investment in land under development and developed lots.
As of March 31, 1998, the Company had closed on 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
generally commits. It has been the Company's policy to sell a portion of these
lots to outside homebuilders. The Company closed on the fifth phase of this
project on April 30, 1998 and has an option to purchase the remaining phase.
At March 31, 1998, mortgage notes payable outstanding were $6.3
million, secured by lots and land with a recorded book value of $9.8 million.
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.
Sale of Treasury Shares. On April 27, 1998, the Company filed
a registration statement with the Securities and Exchange Commission for up to
1,200,000 shares of common stock of the Company. The shares were sold on May 5,
1998. The Company received approximately $24,600,000 on May 8, 1998, which was
used to repay a portion of existing indebtedness.
Year 2000 Compliance. The Company is currently in the process of
modifying or replacing certain management information systems to address issues
regarding the year 2000. In accordance with current accounting guidance,
modification costs for the year 2000 will be charged to expense as incurred
while replacement costs will be capitalized and amortized over the asset's
useful life. It is not presently believed that these changes will have an
adverse impact on operations or that the expenditures related thereto will be
material to the Company's financial position or results of operations in any
given year.
INTEREST RATES AND INFLATION
The Company's business is significantly affected by general economic
conditions of the United States and, particularly, by the impact of interest
rates. Higher interest rates may decrease the potential market by making it more
difficult for home buyers to qualify for mortgages or to obtain mortgages at
interest rates acceptable to them. Increases in interest rates also would
increase the Company's interest expense as the rate on the revolving loans is
based upon floating rates of interest. The weighted average interest rate on the
Company's outstanding debt for the three months ended March 31, 1998 was 8.6%
compared to 8.4% for the three months ended March 31, 1997.
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.
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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 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 home buyers.
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 concentrated in the
Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm
Beach County, Florida; Charlotte and Raleigh, North Carolina; Virginia and
Maryland metropolitan areas; and Phoenix, Arizona. 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, 1998,
approximately 45% 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.
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
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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 attractions for home
buyers 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 home buyers. The Company
must also obtain licenses, permits and approvals from various governmental
agencies for its development activities, the granting of which are beyond the
Company's control. Furthermore, increasingly stringent requirements may be
imposed on homebuilders and developers in the future. Although the Company
cannot predict the impact on the Company of compliance with any such
requirements, such requirements could result in time consuming and expensive
compliance programs.
The Company is also subject to a variety of local, state and Federal
statutes, ordinances, rules and regulations concerning the protection of health
and the environment. The particular environmental laws which apply to any given
project vary greatly according to the project site and the present and former
uses of the property. These environmental laws may result in delays, cause the
Company to incur substantial compliance costs (including substantial
expenditures for pollution and water quality control) and prohibit or severely
restrict development in certain environmentally sensitive regions. Although
there can be no assurance that it will be successful in all cases, the Company
has a general practice of requiring an environmental audit and resolution of
environmental issues prior to purchasing land in an effort to avoid major
environmental issues in the Company's developments.
In addition, the Company has been, and in the future may be, subject to
periodic delays or may be precluded from developing certain projects due to
building moratoriums. These moratoriums generally relate to insufficient water
supplies, sewage facilities, delays in utility hook-ups, or inadequate road
capacity within the specific market area or subdivision. These moratoriums can
occur prior to, or subsequent to, commencement of operations by the Company
without notice to, or recourse by, the Company.
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 March 31,
1998, members of the Irving E. Schottenstein family owned approximately 36% of
the outstanding Common Shares of the Company (31% after the sale of treasury
shares). In particular, Irving E. Schottenstein, in his own name and as trustee
of trust for his children, had the right to vote 2,761,800 Common Shares.
Therefore, members of the Irving E. Schottenstein family 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 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
- ------ -----------
10.1 Underwriting Agreement between the Company and Smith Barney Inc. for
the issuance and sale of 1,200,000 shares of common stock dated May 5,
1998.
10.2 Company's 1998 President and Senior Executive Vice President Bonus
Program.
10.3 Company's 1998 Senior Vice President and Chief Financial Officer Bonus
Program.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
M/I Schottenstein Homes, Inc.
-----------------------------
(Registrant)
Date: May 14, 1998 by: /s/ ROBERT H. SCHOTTENSTEIN
---------------------------
Robert H. Schottenstein
President
Date: May 14, 1998 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 Underwriting Agreement between the Company and Smith Barney Inc. for
the issuance and sale of 1,200,000 shares of common stock dated May 5,
1998.
10.2 Company's 1998 President and Senior Executive Vice President Bonus
Program.
10.3 Company's 1998 Senior Vice President and Chief Financial Officer Bonus
Program.
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