<PAGE> 1
As filed with the Securities and Exchange Commission on October 16, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
M/I SCHOTTENSTEIN HOMES, INC.
(Exact name of Registrant as specified in its charter)
---------------
OHIO 31-1210837
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3 EASTON OVAL, SUITE 500
COLUMBUS, OHIO 43219
(614) 418-8000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
---------------
PAUL S. COPPEL
M/I SCHOTTENSTEIN HOMES, INC.
3 EASTON OVAL , SUITE 500
COLUMBUS, OHIO 43219
(614) 418-8000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
RONALD A. ROBINS, JR. JOHN SCHUSTER
VORYS, SATER, SEYMOUR AND PEASE CAHILL GORDON & REINDEL
52 EAST GAY STREET 80 PINE STREET
COLUMBUS, OHIO 43215 NEW YORK, NEW YORK 10005
(614) 464-6400 (212) 701-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED (1) OFFERING PRICE PER UNIT(2) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value...... 2,610,000 shares $15.8125 $41,270,625 $12,555
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<FN>
(1) Includes 300,000 shares of Common Stock which the Underwriters have an
option to purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED OCTOBER 16, 1997
PROSPECTUS
2,310,000 SHARES
[M/I LOGO]
M/I SCHOTTENSTEIN HOMES, INC.
COMMON STOCK
---------------
Of the 2,310,000 shares of Common Stock, offered hereby (the
"Offering"), 2,000,000 shares are being sold by M/I Schottenstein Homes, Inc.
(the "Company") and 310,000 shares are being sold by certain shareholders of the
Company (the "Selling Shareholders"). See "Principal and Selling Shareholders."
The Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders.
The Common Stock is listed on the New York Stock Exchange under the
symbol "MHO." The last reported sale price of the Common Stock on the New York
Stock Exchange Composite Tape was $16.125 per share on October 14, 1997. See
"Price Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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======================================= ==================== ==================== ==================== ===================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS (3)
- --------------------------------------- -------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
- --------------------------------------- -------------------- -------------------- -------------------- -------------------
Total (4)........................... $ $ $ $
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<FN>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting estimated expenses of $250,000, payable by the Company,
and the underwriting discounts and commissions of the Selling Shareholders
of $ .
(3) Excludes underwriting discounts and commissions, which are being paid by
the Company, and expenses of $18,600, payable by the Selling Shareholders.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. See "Underwriting." If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ , $ ,
and $ , respectively.
</TABLE>
---------------
The shares of Common Stock are being offered by the several
Underwriters named herein, subject to prior sale, when, as and if delivered to
and accepted by them and subject to certain conditions. It is expected that the
shares of Common Stock offered hereby will be available for delivery on or about
, 1997, at the office of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001, or through the facilities of The Depositary Trust Company.
---------------
SMITH BARNEY INC.
SALOMON BROTHERS INC
SOUTHEAST RESEARCH
PARTNERS, INC.
, 1997.
<PAGE> 3
The following legend shall run sideways down the front cover of the Prospectus:
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
[Appearing on page 2 and the inside back cover of the prospectus will be
4-color pictures of homes offered by the Company in several of the Company's
markets and a map showing such markets]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
SAFE HARBOR STATEMENT
---------------------
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 Prospectus 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 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 under "Risk Factors" herein.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
included elsewhere in this Prospectus or incorporated by reference herein.
Unless the context indicates otherwise, all references in this Prospectus to the
"Company" refer collectively to M/I Schottenstein Homes, Inc., its predecessor
entities and its subsidiaries, including M/I Financial Corp. ("M/I Financial").
Unless otherwise indicated, information set forth herein assumes no exercise of
the Underwriters' over-allotment option.
THE COMPANY
M/I Schottenstein Homes, Inc. is one of the nation's leading
homebuilders. The Company sells and constructs single-family homes to the entry
level, move-up and empty nester buyer under the Horizon, M/I Homes and Showcase
Homes tradenames. In 1996, the Company was the fourteenth largest U.S.
single-family homebuilder (based on total revenue) as ranked by Builder
Magazine. The Company sells its homes in eleven geographic markets including
Columbus and Cincinnati, Ohio; Tampa, Orlando and Palm Beach County, Florida;
Charlotte and Raleigh, North Carolina; Indianapolis, Indiana; Virginia, Maryland
and, recently, Phoenix, Arizona. The Company currently offers seven distinct
lines of single-family homes ranging in price from approximately $80,000 to
$750,000 with an average sales price in 1996 of $173,000. During the year ended
December 31, 1996, the Company delivered a record 3,246 homes and had revenues
of $577.2 million and net income of $12.8 million, the highest in the Company's
history. The Company has experienced a compound annual growth rate over the
five-year period from 1992 through 1996 with respect to its revenues and net
income of 11.6% and 15.1% (17.9% excluding extraordinary items), respectively.
The Company is the leading homebuilder in the Columbus, Ohio market and
has been the number one builder of single-family detached homes in this market
for each of the past eight years. In addition, the Company is currently one of
the top ten homebuilders in each of its Ohio, Florida, Indiana and North
Carolina markets and believes it is well positioned to further penetrate these
and its other markets. The Company's growth strategy targets both product line
expansion and geographical diversification. With respect to geographical
diversification, the Company has expanded into new markets through the opening
of new divisions rather than through acquisitions. To complement its M/I Homes
($115,000 - $230,000 sales price range) and Showcase Homes ($180,000 - $400,000
sales price range) lines, the affordably priced Horizon line ($80,000 - $140,000
sales price range), which appeals to the first time homebuyer, was introduced by
the Company in 1993 and has been very successful. The Company has expanded this
entry level product into a majority of its other markets.
The Company believes it distinguishes itself from competitors by
offering homes located in selective areas that have a higher level of design and
construction quality within a given price range and by providing superior
customer service. The Company also believes that by offering homes at a variety
of price points, the Company attracts a wide range of buyers, many of whom were
previous Horizon, M/I or Showcase homeowners. The Company supports its
homebuilding operations by providing mortgage financing services through M/I
Financial as well as title-related services.
BUSINESS STRATEGY
The Company's business strategy emphasizes the following key
objectives:
Focus on profitability. The Company focuses on improving profitability
while maintaining the high quality of its homes and of its customer service. The
Company focuses on gross margins by stressing the features, benefits, quality
and design of its homes in the sale process and by minimizing speculative
building. The Company also value engineers its homes by working with its
sub-contractors and suppliers to provide attractive home features while
minimizing raw material and construction costs.
Maintain conservative and selective land policies. The Company's
profitability is largely dependent on the quality of its subdivision locations;
therefore, the Company focuses on locating and controlling land in the most
desirable areas of its markets. The Company is very conservative in its land
acquisition policies and only purchases land already zoned and serviceable by
utilities. The Company seeks to control a three- to five-year supply of land in
each of its markets. The Company believes its expertise in developing land gives
the Company a competitive advantage in controlling attractive locations at
competitive costs, and, as a result, developed
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approximately 50% of its communities as of December 31, 1996. The Company
focuses on inventory management and maintains conservative accounting policies.
At December 31, 1996, the Company owned 5,705 lots and controlled an additional
7,951 pursuant to contracts.
Maintain or increase market position in current markets. The Company
has been the leading builder of single-family detached homes in the Columbus
market for the last eight years. The Company seeks to maintain its leading
position by continuing to provide high quality homes and superior customer
service. The Company believes there are significant opportunities to profitably
expand in each of its other markets, by increasing its product offerings,
continuing to acquire land in desirable locations and constructing and selling
homes with the same commitment to customer service that has accounted for the
Company's historical success. In addition, the Company continues to explore
expanding into new markets through either internal growth (such as the expansion
into Phoenix, Arizona late in 1996) or acquisitions.
Provide superior customer service. The overriding Company philosophy is
to provide superior service to its customers. The Company offers a wide array of
functional and innovative designs and involves the customer in virtually every
phase of its operations from the beginning of the selling process through
construction, closing and service after delivery. The Company's selling process
focuses on the homes' features, benefits, quality and design as opposed to
merely price and square footage. In certain markets, the Company utilizes design
centers to enhance the selling process and increase the sale of optional
features which typically carry higher margins. In addition, the Company assists
many of its customers with financing and provides attractive warranties. As a
result, based on the responses to the Company's customer questionnaire, for the
sixth year in a row, approximately 95% of the Company's customers would
recommend the Company to a potential buyer.
Offer product breadth and innovative design. The Company devotes
significant resources to the research and design of its homes to better meet the
needs of its customers. The Company offers seven distinct product lines and more
than 200 different floor plans and elevations. In addition to providing
customers with a wide variety of choices, the Company believes it offers a
higher level of design and construction quality within a given price range. In
addition, the Company has introduced and utilized innovative design concepts,
such as themed communities, rear garages and rear alley access.
Maintain decentralized operations with experienced management. The
Company believes that each of its markets has unique characteristics and,
therefore, is managed locally with dedicated, on-site management personnel. Each
of the Company's managers possesses intimate knowledge of his or her particular
market and is encouraged to be entrepreneurial in order to best meet the needs
of such market. The Company's incentive compensation structure rewards each
manager based on financial performance and income growth, as well as customer
satisfaction.
The Company maintains its executive offices at 3 Easton Oval, Suite
500, Columbus, Ohio 43219 and its telephone number is (614) 418-8000.
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THE OFFERING
Common Stock offered by:
The Company...................... 2,000,000 shares
The Selling Shareholders......... 310,000 shares (1)
----------------
Total Common Stock
offered.............. 2,310,000 shares
Common Stock to be outstanding after
the Offering......................... 9,597,561 shares (2)
New York Stock Exchange Symbol............ MHO
Use of proceeds........................... The net proceeds to the Company
from the Offering will be used
to reduce indebtedness under
revolving credit facilities and
for general corporate purposes.
The Company will not receive
any proceeds from the sale of
Common Stock by the Selling
Shareholders. The Company has
agreed to reimburse the Selling
Shareholders for all
underwriting discounts and
commissions.
- -------------
(1) In addition, Robert H. Schottenstein and Steven Schottenstein have agreed
to purchase an aggregate of 50,000 shares of Common Stock from certain of
the Selling Shareholders at the price to public set forth on the cover page
of this Prospectus immediately after the consummation of the Offering.
(2) Does not include 214,450 additional shares of Common Stock subject to
outstanding options as of September 30, 1997, of which options to purchase
76,040 shares were exercisable on that date.
RISK FACTORS
Investment in the Common Stock involves certain risks discussed under
"Risk Factors" that should be considered by prospective investors.
5
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
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1992 1993 1994 1995 1996 1996 1997
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INCOME STATEMENT DATA:
Revenue....................... $ 372,026 $ 446,060 $491,719 $ 527,822 $577,192 $233,215 $ 251,843
Gross profit (1).............. 64,563 80,535 88,165 95,861 109,103 45,285 50,311
Operating income (2).......... 21,069 28,513 29,158 30,704 36,180 15,024 17,976
Income before income taxes
and extraordinary loss.... 12,172 18,548 19,193 16,506 23,077 8,996 12,915
Net income (3)................ $ 7,304 $ 11,198 $ 11,613 $ 9,876 $ 12,823 $ 5,259 $ 7,687
Net income per share (3)...... $ 1.33 $ 1.87 $ 1.32 $ 1.12 $ 1.46 $ 0.60 $ 0.90
Weighted average number of
shares outstanding (in
thousands)................ 5,500 5,975 8,800 8,800 8,800 8,800 8,507
Supplemental net income per
share (4)................. $ 1.41 $ 0.84
Weighted average number of
shares used in computing
supplemental net income
per share (in
thousands) (4)............ 9,598 9,598
OPERATING DATA:
Gross profit margin........... 17.4% 18.1% 17.9% 18.2% 18.9% 19.4% 20.0%
Units:
New contracts, net......... 2,788 3,222 2,807 3,116 3,162 1,716 1,675
Homes delivered (5)........ 2,546 2,926 2,990 2,952 3,246 1,342 1,333
Backlog at end of period... 1,144 1,440 1,257 1,421 1,337 1,795 1,679
Backlog at end of period ..... $ 170,000 $ 228,000 $220,000 $ 240,000 $245,000 $322,000 $ 319,000
Avg. sales price of homes in
Backlog $ 149 $ 158 $ 176 $ 169 $ 183 $ 179 $ 190
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
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AS
ACTUAL ADJUSTED (6)
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BALANCE SHEET DATA:
Cash........................................................................................... $ 11,124 $ 11,124
Homebuilding inventories....................................................................... 281,636 281,636
Total assets................................................................................... 349,228 349,228
Total debt, excluding financial operations..................................................... 154,000
Notes payable banks - financial operations..................................................... 9,580 9,580
Stockholders' equity........................................................................... 114,756
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<FN>
(1) Gross profit represents revenue less land and housing costs.
(2) Operating income represents gross profit less selling, general and
administrative expenses.
(3) Information for 1992 and 1993 includes adjustments to reflect taxation of
the Company as a C corporation using a 40% combined tax rate for federal,
state and local income taxes. Pro forma information is not provided for
1994, 1995 and 1996, as the Company was taxed as a C corporation during
those periods. Information for the year ended December 31, 1996 includes an
extraordinary loss in the amount of $1.3 million, net of tax, or $0.14 per
share, related to early extinguishment of debt in connection with the
redemption of $24.5 million aggregate principal amount of the 14%
Subordinated Notes.
(4) Assumes that on January 1, 1996, the Company repurchased 1,202,439 shares
of Common Stock at an average price per share of $11.85 and issued
2,000,000 shares of Common Stock, including such 1,202,439 shares which
were held in treasury, at an offering price of $16.125 per share and used
the net proceeds to pay down the notes payable banks - homebuilding
operations. See note 6 of notes to consolidated financial statements.
Supplemental net income per share for fiscal 1996 and the six-month period
ended June 30, 1997, is calculated based upon net income adjusted for a
reduction in after-tax interest expense of $0.7 million and $0.4 million,
respectively, relating to the paydown of such debt. See "Use of Proceeds."
(5) Homes delivered represents units for which the closing of sale has occurred
and title has transferred to the buyer. Revenue from the sale is recognized
upon the closing of the sale.
(6) As adjusted to reflect the sale of 2,000,000 shares of Common Stock being
offered by the Company and the application of the net proceeds therefrom to
reduce indebtedness under the Bank Credit Facility.
</TABLE>
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RISK FACTORS
In addition to the other information contained or incorporated by
reference in this Prospectus, prospective investors should carefully consider
the factors set forth below before purchasing any shares of Common Stock offered
hereby.
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 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
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density requirements in order to limit the number of homes that can eventually
be built within the boundaries of a particular location. Such regulation affects
construction activities, including construction materials which must be used in
certain aspects of building design, as well as sales activities and other
dealings with homebuyers. The Company must also obtain licenses, permits and
approvals from various governmental agencies for its development activities, the
granting of which are beyond the Company's control. Furthermore, increasingly
stringent requirements may be imposed on homebuilders and developers in the
future. Although the Company cannot predict the impact on the Company of
compliance with any such requirements, such requirements could result in time
consuming and expensive compliance programs.
The Company is also subject to a variety of local, state and Federal
statutes, ordinances, rules and regulations concerning the protection of health
and the environment. The particular environmental laws which apply to any given
project vary greatly according to the project site and the present and former
uses of the property. These environmental laws may result in delays, cause the
Company to incur substantial compliance costs (including substantial
expenditures for pollution and water quality control) and prohibit or severely
restrict development in certain environmentally sensitive regions. Although
there can be no assurance that it will be successful in all cases, the Company
has a general practice of requiring an environmental audit and resolution of
environmental issues prior to purchasing land in an effort to avoid major
environmental issues in the Company's developments.
In addition, the Company has been, and in the future may be, subject to
periodic delays or may be precluded from developing certain projects due to
building moratoriums. These moratoriums generally relate to insufficient water
supplies 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, including
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
Following the closing of the Offering, members of the Irving E.
Schottenstein family will beneficially own approximately 29.3% of the
outstanding Common Stock. In particular, Irving E. Schottenstein, in his own
name and as trustee of trusts for his children, will have the right to vote
2,678,300 shares of Common Stock, or 27.9% of the outstanding shares. Therefore,
Irving E. Schottenstein and other members of his family will continue to 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.
See "Management."
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SHARES ELIGIBLE FOR FUTURE SALE
The shares of Common Stock offered hereby will be freely tradable by
persons who are not affiliates of the Company without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). All of the other outstanding shares of Common Stock, other than shares
held by affiliates of the Company, are freely tradable. After the Offering,
affiliates of the Company will beneficially own approximately 2,829,500 shares
in the aggregate. Shares of Common Stock held by affiliates of the Company are
subject to limitations on the volume that may be sold other than sales pursuant
to a registration statement under the Securities Act or an applicable exemption
from registration thereunder. The Company, its directors and executive officers,
the Selling Shareholders and certain other shareholders have agreed not to sell,
transfer or otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for shares of Common Stock
without the consent of Smith Barney Inc. for a period of 90 days after the date
of this Prospectus, subject to certain limited exceptions, including, but not
limited to grants of awards under the Company's existing employee benefit plans
or issuances of Common Stock upon the exercise of outstanding stock options.
Sales of substantial amounts of Common Stock in the public market following the
Offering could adversely affect the market price for the Common Stock.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock in the Offering are estimated to be approximately $29.9 million ($34.4
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to use the net proceeds from the Offering to reduce indebtedness
under its existing revolving credit facility for homebuilding operations (the
"Bank Credit Facility") and for general corporate purposes. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources." The Bank Credit Facility bore
interest at a weighted average interest rate of 7.6% and had an outstanding
balance of $129.0 million as of June 30, 1997, and matures September 30, 2002.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Shareholders. The Company has agreed to pay
approximately $ of the underwriting discounts and commissions of the Selling
Shareholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on the New York Stock Exchange
under the symbol "MHO." The following table sets forth the high and low sale
prices for the Common Stock for the periods indicated, as reported on the New
York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
1997
1995 1996 (THROUGH OCTOBER 14)
---------------------- ------------------ ---------------------
HIGH LOW HIGH LOW HIGH LOW
--------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended March 31................ $ 7.63 $ 6.50 $ 11.75 $ 9.75 $ 11.13 $ 10.00
Quarter ended June 30................. 9.50 6.50 11.00 9.13 11.50 10.13
Quarter ended September 30............ 10.38 8.75 9.38 8.25 15.50 11.25
Quarter ended December 31............. 12.50 9.38 11.00 8.38 16.56 15.50
</TABLE>
As of March 14, 1997, there were approximately 300 holders of record of
the Common Stock. On October 14, 1997, the last sale price reported on the New
York Stock Exchange Composite Tape for the Common Stock was $16.125.
The Company has not paid dividends on its Common Stock since prior to
its initial public offering in November 1993, prior to which time the Company
had elected S Corporation status under the Internal Revenue Code of 1986, as
amended. The Company does not currently anticipate paying cash dividends on its
Common Stock in the foreseeable future. The payment of any future dividends will
be subject to the discretion of the Board of Directors of the Company and will
depend on the Company's results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, if any, legal restrictions on the payment of dividends and other
factors the Board of Directors deems relevant. The Bank Credit
9
<PAGE> 11
Facility and the Subordinated Debt Facility (as defined herein) each currently
limits the ability of the Company to pay cash dividends on its Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and notes 6 and 7 to the Company's
consolidated financial statements.
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
June 30, 1997, and (ii) the capitalization of the Company as adjusted to reflect
the issuance and sale of the Common Stock offered hereby and the application of
the net proceeds therefrom, as described under "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes payable:
Notes payable banks - homebuilding operations ................. $ 129,000 $
Notes payable banks - financial operations..................... 9,580
Subordinated Note Due 2001..................................... 25,000
----------- -----------
Total notes payable...................................... 163,580
----------- -----------
Stockholders' equity:
Preferred Stock, par value $.01 per share,
2,000,000 shares authorized, none outstanding............... -- --
Common Stock, par value $.01 per share,
38,000,000 shares authorized; 8,300,000 shares
issued and outstanding; 9,597,561 shares issued and
outstanding, as adjusted (2)................................ 88
Treasury stock - at cost (500,000 shares, 0 shares as adjusted)(3) (5,250)
Additional paid-in-capital..................................... 50,573
Retained earnings.............................................. 69,345
----------- -----------
Total stockholders' equity.................................. 114,756
----------- -----------
Total capitalization.............................................. $ 278,336 $
=========== ===========
- --------------
<FN>
(1) As adjusted to reflect the sale of 2,000,000 shares of Common Stock
(including 1,202,439 treasury shares) being offered by the Company and the
application of the net proceeds therefrom to reduce indebtedness under the
Bank Credit Facility.
(2) Excludes 214,450 additional shares of Common Stock subject to outstanding
options, of which options to purchase 76,040 shares were exercisable on
June 30, 1997.
(3) On March 15, 1997, and August 1, 1997, the Company purchased 500,000 shares
of Common Stock and 702,439 shares of Common Stock, respectively, from
members of the Melvin L. Schottenstein family and trusts for their benefit
at an average per share price of $11.85. These 1,202,439 shares were held
in treasury.
</TABLE>
10
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected consolidated financial and operating data of the
Company were derived from the Company's audited consolidated financial
statements as of and for the years ended December 31, 1992 through 1996 and from
unaudited interim consolidated financial statements as of and for the six months
ended June 30, 1996 and 1997. The unaudited interim consolidated financial
statements reflect all adjustments consisting only of normal recurring accruals,
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods. Results for interim periods are not necessarily
indicative of full-year results. The information presented below should be read
in conjunction with the Company's consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus or incorporated by
reference herein.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- ---------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue....................... $ 372,026 $ 446,060 $491,719 $ 527,822 $ 577,192 $ 233,215 $ 251,843
Gross profit (1).............. 64,563 80,535 88,165 95,861 109,103 45,285 50,311
Operating income (2).......... 21,069 28,513 29,158 30,704 36,180 15,024 17,976
Income before income taxes
and extraordinary loss.... 12,172 18,548 19,193 16,506 23,077 8,996 12,915
Net income (3)................ $ 7,304 $ 11,198 $ 11,613 $ 9,876 $ 12,823 $ 5,259 $ 7,687
Net income per share (3)...... $ 1.33 $ 1.87 $ 1.32 $ 1.12 $ 1.46 $ 0.60 $ 0.90
Weighted average number of
shares outstanding (in
thousands)................ 5,500 5,975 8,800 8,800 8,800 8,800 8,507
Supplemental net income per
share (4) ................ $ 1.41 $ 0.84
Weighted averaged number of
shares used in computing
supplemental net income
per share (in
thousands) (4)............ 9,598 9,598
OPERATING DATA:
Gross profit margin........... 17.4% 18.1% 17.9% 18.2% 18.9% 19.4% 20.0%
Units:
New contracts, net......... 2,788 3,222 2,807 3,116 3,162 1,716 1,675
Homes delivered (5)........ 2,546 2,926 2,990 2,952 3,246 1,342 1,333
Backlog at end of period... 1,144 1,440 1,257 1,421 1,337 1,795 1,679
Backlog at end of period ..... $ 170,000 $ 228,000 $220,000 $ 240,000 $ 245,000 $ 322,000 $ 319,000
Avg. sales price of homes in
Backlog.................... $ 149 $ 158 $ 176 $ 169 $ 183 $ 179 $ 190
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------------------- JUNE 30,
BALANCE SHEET DATA: 1992 1993 1994 1995 1996 1997
--------- ---------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash.......................... $ 5,787 $ 10,649 $ 14,059 $ 8,136 $ 6,761 $ 11,124
Homebuilding inventories...... 142,375 177,554 228,314 228,268 238,919 281,636
Total assets.................. 172,176 227,958 277,614 281,143 305,359 349,228
Total debt, excluding
financial operations....... 94,842 87,018 122,313 111,513 102,000 154,000
Notes payable banks -
financial operations....... 5,915 15,000 14,630 15,200 23,300 9,580
Stockholders' equity.......... 36,830 79,089 89,620 99,496 112,319 114,756
- ----------------------
<FN>
(1) Gross profit represents revenue less land and housing costs.
(2) Operating income represents gross profit less selling, general and
administrative expenses.
(3) Information for 1992 and 1993 includes adjustments to reflect taxation of
the Company as a C corporation using a 40% combined tax rate for federal,
state and local income taxes. Pro forma information is not provided for
1994, 1995 and 1996, as the Company was taxed as a C corporation during
those periods. Information for the year ended December 31, 1996 includes
</TABLE>
11
<PAGE> 13
an extraordinary loss in the amount of $1.3 million, net of tax, or $0.14
per share, related to early extinguishment of debt in connection with the
redemption of $24.5 million aggregate principal amount of the 14%
Subordinated Notes.
(4) Assumes that on January 1, 1996, the Company repurchased 1,202,439 shares
of Common Stock at an average price per share of $11.85 and issued
2,000,000 shares of Common Stock, including such 1,202,439 shares which
were held in treasury, at an offering price of $16.125 per share and used
the net proceeds to pay down the notes payable banks - homebuilding
operations. See note 6 of notes to consolidated financial statements.
supplemental net income per share for fiscal 1996 and the six-month period
ended June 30, 1997, is calculated based upon net income adjusted for a
reduction in after-tax interest expense of $0.7 million and $0.4 million,
respectively, relating to the paydown of such debt. See "Use of Proceeds."
(5) Homes delivered represents units for which the closing of sale has occurred
and title has transferred to the buyer. Revenue from the sale is recognized
upon the closing of the sale.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of
operations is based upon and should be read in conjunction with the Company's
consolidated financial statements and notes thereto, the Selected Consolidated
Financial and Operating Data included elsewhere in this Prospectus or
incorporated by reference herein.
OVERVIEW AND SEGMENT INFORMATION
The business segments of the Company are defined as homebuilding and
financial services. The homebuilding operations include the development of land
and the sale and construction of single-family attached and detached houses. The
financial services operations include the origination of mortgage loans,
primarily for purchasers of the Company's homes. The loans and the majority of
servicing rights are sold to outside mortgage lenders.
Intersegment revenue represents the elimination of revenue included in
financial services revenue for fees paid by the homebuilding operations.
Corporate expenses include salaries and other administrative expenses which are
not identifiable with a specific segment. Interest expense excludes interest
expense related to the financial services segment of $321,000, $431,000 and
$323,000 for 1996, 1995 and 1994, respectively, and $37,000 and $86,000 for the
six months ended June 30, 1997 and 1996, respectively, which is included in the
determination of financial services operating income. Corporate assets consist
primarily of cash, deferred taxes and other assets not associated with a
specific business segment.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- -----------------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Homebuilding ............. $ 247,687 $ 229,896 $ 570,719 $ 522,453 $ 487,786
Financial services ....... 5,291 4,317 9,037 7,208 5,250
Intersegment ............. (1,135) (998) (2,564) (1,839) (1,317)
--------- --------- --------- --------- ---------
Total revenue ......... $ 251,843 $ 233,215 $ 577,192 $ 527,822 $ 491,719
========= ========= ========= ========= =========
Operating Income:
Homebuilding ............. $ 19,768 $ 17,811 $ 45,981 $ 39,039 $ 37,712
Financial services ....... 3,132 2,090 4,100 2,697 1,524
--------- --------- --------- --------- ---------
Total ................. 22,900 19,901 50,081 41,736 39,236
Corporate expenses ....... (4,961) (4,963) (14,222) (11,463) (10,401)
Interest expense ......... (5,024) (5,942) (12,782) (13,767) (9,642)
--------- --------- --------- --------- ---------
Income before income taxes
and extraordinary loss $ 12,915 $ 8,996 $ 23,077 $ 16,506 $ 19,193
========= ========= ========= ========= =========
Net income ................... $ 7,687 $ 5,259 $ 12,823 $ 9,876 $ 11,613
========= ========= ========= ========= =========
Identifiable Assets:
Homebuilding ............. $ 291,218 $ 276,030 $ 253,912 $ 243,117 $ 244,429
Financial services ....... 27,458 23,320 35,650 23,694 16,430
Corporate ................ 30,552 14,650 15,797 14,332 16,755
--------- --------- --------- --------- ---------
Total ................. $ 349,228 $ 314,000 $ 305,359 $ 281,143 $ 277,614
========= ========= ========= ========= =========
Capital Expenditures:
Homebuilding ............. $ 1,220 $ 113 $ 317 $ 363 $ 1,029
Financial services ....... 153 15 38 19 437
Corporate ................ 5,956 173 256 309 683
--------- --------- --------- --------- ---------
Total ................. $ 7,329 $ 301 $ 611 $ 691 $ 2,149
========= ========= ========= ========= =========
Depreciation and Amortization:
Homebuilding ............. $ 240 $ 285 $ 494 $ 916 $ 893
Financial services ....... 83 76 153 159 124
Corporate ................ 451 410 730 679 630
--------- --------- --------- --------- ---------
Total ................. $ 774 $ 771 $ 1,377 $ 1,754 $ 1,647
========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 15
RESULTS OF OPERATIONS (CONSOLIDATED)
Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30,
1996
Total Revenue. Total revenue for the six months ended June 30, 1997
increased $18.6 million from the comparable period of 1996. For the six-month
period, housing revenue, other revenue and land revenue increased $14.6 million,
$1.1 million and $2.9 million, respectively. The increase in housing revenue was
attributable to an increase in the average sales price of Homes Delivered of
7.2%. For the period, 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 the six months ended June
30, 1997 was primarily due to an increase in the number of lots sold to third
parties in the Maryland division over the comparable period of 1996.
Income Before Income Taxes. Income before income taxes for the six
months ended June 30, 1997 increased 43.6% from the comparable period of 1996.
The increase for the six months ended June 30, 1997 related primarily to housing
and land, where income before income taxes increased from $6.9 million to $9.8
million and financial services, where income before income taxes increased from
$2.1 million to $3.1 million. The increase in housing was primarily due to the
increase in the average sales price of Homes Delivered. The increase in land for
the six month period was primarily due to a significant increase in the number
of lots sold to third parties at relatively high margins in the Maryland
division during the first half of 1997 in comparison to the first half of 1996.
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 half of 1997. Income before income taxes also increased due to a
decrease in interest expense from $6.0 million in the six months ended June 30,
1996, to $5.1 million in the comparable period of 1997. This decrease was
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 and land holdings in the first half of 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total Revenue. Total revenue for 1996 of $577.2 million set a new
record for the Company and represented an increase of $49.4 million over 1995.
Increases in housing revenue of $55.2 million and other revenue of $1.4 million
were partially offset by a $7.2 million decrease in land revenue. The increase
in housing revenue was attributable to an increase in the number of Homes
Delivered. The Company delivered 294 more homes in 1996 than in 1995. The
increase in other revenue is primarily attributable to M/I Financial, where both
the number of loans originated and the gains recognized from the sale of loans
increased in the current year. The decrease in land revenue was primarily due to
a significant decrease in the number of lots sold to third parties in the
Maryland division.
Income Before Income Taxes. Income before income taxes and
extraordinary loss for 1996 increased 39.8% over 1995. This increase related to
both housing, where income before income taxes and extraordinary loss increased
from $13.8 to $19.0 million, and M/I Financial, where income before income taxes
increased from $2.7 to $4.1 million. The increase in housing was primarily due
to the increase in the number of Homes Delivered along with improved margins.
Housing margins increased 0.7% in 1996. The increase in M/I Financial was
primarily due to the significant increase in income from the sale of servicing
and marketing gains due to increased loan volume and the favorable interest rate
environment during the last half of 1995 and 1996 as compared to the same
periods of 1994 and 1995.
14
<PAGE> 16
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total Revenue. Total revenue for 1995 of $527.8 million represented a
7.3% increase over the $491.7 million reported for 1994. This increase was
primarily attributable to higher housing revenue, which increased 5.7% to $505.8
million for 1995. This increase was due to a 7.0% increase in the average
selling price of Homes Delivered, partially offset by a 1.3% decline in the
number of Homes Delivered. Land revenue also increased significantly as the
number of lots developed for sale to third parties in the Maryland division
significantly increased during 1995.
Income Before Income Taxes. Income before income taxes decreased to
$16.5 million for 1995 from $19.2 million for the preceding year. This decline
was due to the increase in interest expense, which increased from $10.0 million
in 1994 to $14.2 million in 1995. This increase was primarily attributable to an
increase in the weighted average interest rate, due to the increases in the
prime rate of interest in late 1994 and early 1995, as well as an increase in
the average borrowings outstanding.
15
<PAGE> 17
Seasonality and Variability in Quarterly Results
The Company has experienced, and expects to continue to experience,
significant seasonality and quarter-to-quarter variability in homebuilding
activity levels. In general, the number of Homes Delivered increases
substantially in the third and fourth quarters. The Company believes that this
seasonality reflects the tendency of homebuyers to shop for a new home in the
spring with the goal of closing in the fall or winter, as well as the scheduling
of construction to accommodate seasonal weather conditions. The following tables
reflect this cycle for the Company for the first and second quarters of 1997 and
the four quarters of 1996 and 1995:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1996 1996 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenue ........ $146,014 $105,829 $187,045 $156,932 $137,357 $ 95,858
Gross profit ......... 28,555 21,756 34,127 29,691 26,382 18,903
Income before
income taxes and
extraordinary loss. 7,848 5,067 7,145 6,936 6,778 2,218
Net income before
extraordinary loss. 4,635 3,052 4,461 4,390 3,936 1,323
Net income ........... $ 4,635 $ 3,052 $ 3,174 $ 4,390 $ 3,936 $ 1,323
Net income before
extraordinary loss
per share ......... $ 0.56 $ 0.35 $ 0.50 $ 0.50 $ 0.45 $ 0.15
Net income per share.. $ 0.56 $ 0.35 $ 0.36 $ 0.50 $ 0.45 $ 0.15
In units:
New contracts, net . 768 907 716 730 760 956
Homes Delivered .... 776 557 1,017 887 795 547
Backlog (end of
period) ........... 1,679 1,687 1,337 1,638 1,795 1,830
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenue ........ $169,849 $137,092 $125,305 $ 95,576
Gross profit ......... 31,343 24,823 22,806 16,889
Income before
income taxes and
extraordinary loss. 26,800 4,294 4,002 842
Net income before
extraordinary loss. 4,042 2,575 2,417 842
Net income ........... $ 4,042 $ 2,575 $ 2,417 $ 842
Net income before
extraordinary loss
per share ......... $ 0.46 $ 0.29 $ 0.27 $ 0.10
Net income per share.. $ 0.46 $ 0.29 $ 0.27 $ 0.10
In units:
New contracts, net . 795 811 767 743
Homes Delivered .... 941 765 697 549
Backlog (end of
period) ........... 1,830 1,421 1,567 1,521
</TABLE>
16
<PAGE> 18
RESULTS OF OPERATIONS (HOMEBUILDING SEGMENT)
The following table sets forth certain information related to the
Company's homebuilding segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Housing sales .............. $239,588 $224,993 $560,980 $505,810 $478,657
Lot and land sales ......... 7,395 4,475 8,915 16,145 8,528
Other income ............... 704 428 824 498 601
-------- -------- -------- -------- --------
Total revenue ................. $247,687 $229,896 $570,719 $522,453 $487,786
======== ======== ======== ======== ========
Revenue:
Housing sales .............. 96.7% 97.9% 98.3% 96.8% 98.1%
Lot and land sales ......... 3.0 1.9 1.6 3.1 1.8
Other income ............... 0.3 0.2 0.1 0.1 0.1
-------- -------- -------- -------- --------
Total revenue ................. 100.0 100.0 100.0 100.0 100.0
Land and housing costs ........ 81.8 82.2 82.5 83.0 83.0
-------- -------- -------- -------- --------
Gross margin ............... 18.2 17.8 17.5 17.0 17.0
General and administrative
expenses ................... 3.1 2.7 2.8 2.9 2.8
Selling expenses .............. 7.1 7.3 6.6 6.6 6.5
-------- -------- -------- -------- --------
Operating income .............. 8.0% 7.8% 8.1% 7.5% 7.7%
======== ======== ======== ======== ========
MIDWEST REGION
Unit data:
New contracts, net ......... 1,029 1,046 1,910 1,865 1,530
Homes delivered ............ 806 798 1,939 1,696 1,640
Backlog at end of period ... 1,131 1,185 908 937 768
Average sales price of homes
in Backlog ................. $ 177 $ 168 $ 174 $ 155 $ 168
Aggregate sales value of
homes in Backlog ........... $200,000 $198,000 $158,000 $145,000 $129,000
Number of active subdivisions . 75 85 80 80 75
FLORIDA REGION
Unit data:
New contracts, net ......... 365 341 663 619 653
Homes delivered ............ 277 280 667 657 671
Backlog at end of period ... 309 286 221 225 263
Average sales price of homes
in Backlog ................. $ 181 $ 171 $ 163 $ 182 $ 163
Aggregate sales value of
homes in Backlog ........... $ 56,000 $ 49,000 $ 36,000 $ 41,000 $ 43,000
Number of active subdivisions . 35 40 35 35 35
NORTH CAROLINA, VIRGINIA AND
MARYLAND REGION
Unit data:
New contracts, net ......... 281 329 589 632 624
Homes delivered ............ 250 264 640 599 679
Backlog at end of period ... 239 324 208 259 226
Average sales price of homes
in Backlog ................. $ 263 $ 230 $ 246 $ 208 $ 213
Aggregate sales value of
homes in Backlog ........... $ 63,000 $ 75,000 $ 51,000 $ 54,000 $ 48,000
Number of active subdivisions . 35 35 35 35 30
TOTAL
Unit data:
New contracts, net ......... 1,675 1,716 3,162 3,116 2,807
Homes delivered ............ 1,333 1,342 3,246 2,952 2,990
Backlog at end at period ... 1,679 1,795 1,337 1,421 1,257
Average sales price of homes
in Backlog ................. $ 190 $ 179 $ 183 $ 169 $ 176
Aggregate sales value of
homes in Backlog ........... $319,000 $322,000 $245,000 $240,000 $220,000
Number of active subdivisions . 145 160 150 150 140
</TABLE>
17
<PAGE> 19
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 six months of
1997, the Company delivered 1,333 homes, most of which were homes under contract
in Backlog at December 31, 1996. Of the 1,337 contracts in Backlog at December
31, 1996, 12.3% had been canceled as of June 30, 1997. For homes in Backlog at
December 31, 1995, 13.1% had been canceled as of June 30, 1996. For the homes in
Backlog at December 31, 1995, the final cancellation percentage was 14.4%.
Unsold speculative homes, which are in various stages of construction, totaled
131 and 145 at June 30, 1997 and 1996, respectively.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total Revenue. Total revenue for the six months ended June 30, 1997
increased 7.7% from the comparable period of 1996. The increase resulted from
significant increases in both housing revenue and lot and land sales. The
increase in housing revenue was attributable to a 7.2% increase in the average
sales price of Homes Delivered. The average sales price of Homes Delivered
increased in all of the Company's markets with the exception of Raleigh, Orlando
and Palm Beach County; however, the increase was primarily due to increases in
the Columbus, Cincinnati and Charlotte markets where the Company is building in
more upscale and certain niche subdivisions. The increase in land revenue from
$4.5 million to $7.4 million was primarily attributable to the Maryland
division. The Maryland division had significant lot sales to outside
home-builders from its Willows land development project in the six months ended
June 30, 1997 which did not occur in the prior year. The Company is developing
additional sections of this project and has entered into contracts to sell a
portion of the lots developed to certain outside home-builders.
Home Sales and Backlog. The number of New Contracts recorded during the
first six months of 1997 was 2.4% lower than the number recorded for the
comparable period in the prior year. New Contracts recorded in the first six
months of 1997 were lower in all of the Company's regions, except the Florida
region. The decrease in the number of New Contracts recorded is primarily
attributable to a record number of New Contracts recorded in the first six
months of 1996. The number of New Contracts recorded in future periods will be
dependent on future economic conditions, timing of land development, consumer
confidence and interest rates available to potential home buyers.
Gross Margin. The overall gross margin for the home-building segment
was 18.2% for the six months ended June 30, 1997 as compared to 17.8% for the
comparable period of 1996. The gross margin from housing sales was 18.1% in the
first half of 1997 as compared to 18.2% in the first half of 1996. The overall
increase in gross margin was mainly due to lot and land sales, where margins
increased from 11.4% to 27.7%. The Maryland division had a significant increase
in the number of lots sold to outside home-builders from its Willows land
development project. The division sold thirty lots in the Willows in the six
months ended June 30, 1997 as compared to fourteen lots in the six months ended
June 30, 1996. Management continues to focus on maintaining accurate, up-to-date
costing information so that sales prices can be set to achieve the desired
margins. The Company has also focused on acquiring or developing lots in premier
locations so that it can obtain higher margins. The Company's ability to
maintain these levels of margins is dependent on a number of factors, some of
which are beyond the Company's control. Due to the strong level of sales during
the last quarter of 1996 and the first six months of 1997, some of the Company's
divisions are beginning to experience shortages of qualified subcontractors in
certain construction trades. This could negatively impact gross margins by
requiring the
18
<PAGE> 20
Company to pay premiums to expedite construction work or by delaying
construction, thus delaying revenue recognition and increasing carrying costs.
In addition, due to the competitive sales environment, the Company is offering
promotions in selected cities which could adversely impact gross margins in
1997.
General and Administrative Expenses. General and administrative
expenses as a percentage of total revenue increased from 2.7% for the six months
ended June 30, 1996 to 3.1% 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 developed lots and raw land awaiting development increased over
prior year balances. More bonuses were recorded in the first six months of 1997
as compared to the first six months of 1996 due to the significant increase in
net income.
Selling Expenses. Selling expenses as a percentage of total revenue
decreased to 7.1% for the six months ended June 30, 1997 from 7.3% for the
comparable period of 1996. The decrease in the six month period was primarily
due to decreases in sales commissions paid to outside realtors.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total Revenue. Total revenue for the homebuilding segment for 1996 was
$570.7 million, a 9.2% increase over total revenue recorded for 1995. This
increase was attributable to a 10.9% increase in housing revenue and was offset
by a 44.8% decrease in land revenue. The increase in housing revenue was due to
a 10.0% increase in the number of Homes Delivered. The number of Homes Delivered
in 1996 was higher in all of the Company's regions, led by the Midwest Region
where the number of Homes Delivered increased 14.3%. The introduction of the
Company's more affordable Horizon product line into several new markets during
1995 had a positive impact on the number of Homes Delivered in 1996.
The increase in the number of Homes Delivered during 1996 as compared
to the prior year was primarily due to the higher number of homes in Backlog at
December 31, 1995 as compared to the preceding year end as well as more New
Contracts recorded during the first half of 1996. This was partially due to an
overall strong economy, low unemployment and relatively low interest rates.
The decrease in land revenue was primarily attributable to the Maryland
division. The Maryland division had significant lot sales to outside
homebuilders from its Willows land development project in 1995 which did not
occur in 1996 due to delays in development and increased competition.
Home Sales and Backlog. The Company recorded a 1.5% increase in the
number of New Contracts recorded in 1996 as compared to the prior year. An
increase in the number of New Contracts recorded in both the Midwest and Florida
Regions was offset by a decrease in the North Carolina/Virginia/Maryland Region.
The Company believes the increase in the number of New Contracts was
attributable to the more favorable interest rate environment in 1996 as compared
to 1995. The introduction of the Company's more affordable Horizon product line
into several new markets during 1995 also had a positive impact on the number of
New Contracts for the current year. The number of New Contracts in future
periods will be dependent on numerous factors, including future economic
conditions, timing of land development, consumer confidence and interest rates
available to potential home buyers.
At December 31, 1996, the total sales value of the Company's Backlog of
1,337 homes was approximately $245.2 million, representing a 2.1% increase over
1995. However, there was a 5.9% decrease in the number of units from the levels
reported at December 31, 1995. The average sales price of homes in Backlog
increased 8.3% from December 31, 1995 to December 31, 1996. This increase was
due to increases in the Columbus, Columbus Showcase and Charlotte divisions
where the Company is building in more upscale and certain niche subdivisions.
The decrease in units at December 31, 1996 was a result of record high
deliveries in 1996 and a decrease in the number of New Contracts recorded in the
second half of 1996.
Gross Margin. The overall gross margin for the homebuilding segment was
17.5% for 1996 and 17.0% for 1995. The gross margin from housing sales was 17.9%
in 1996 as compared to 17.2% recorded in 1995. This
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<PAGE> 21
increase was offset by a decrease in the gross margin from lot and land sales
from 17.8% in 1995 to 15.7% in 1996. Housing gross margins increased in 8 of the
Company's 12 divisions. This was due to the increased emphasis placed on
improving margins during 1995 and improved market conditions in 1996. Management
continues to focus on maintaining accurate, up-to-date cost information so that
sales prices can be set to achieve the desired margins. The Company has also
focused on acquiring or developing lots in premier locations so that it can
obtain higher margins. Gross margins were also higher due to the national
accounts program, which the Company has expanded significantly in the current
year. Through this program, the Company has been able to lower costs on many of
the components used in building its homes through volume discounts and other
negotiated price reductions from its suppliers. The decrease in the gross margin
from lot and land sales was due to decreased lot sales in the Willows land
development project in the Maryland division due to delays in development and
increased competition. In 1995, lot sales in this project generated very high
margins.
General and Administrative Expenses. General and administrative
expenses as a percentage of total revenue decreased from 2.9% for 1995 to 2.8%
for 1996. However, this decrease resulted primarily from an increase in total
revenue.
Selling Expenses. Selling expenses increased from $34.3 million for
1995 to $37.8 million for 1996 and as a percentage of total revenue remained
constant at 6.6% for 1996 and 1995. The increase was primarily due to increases
in sales commissions to internal salespeople as a result of the increase in
sales volume.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total Revenue. Total revenue for the homebuilding segment for 1995 was
$522.5 million, a 7.1% increase over total revenue recorded for 1994. This
increase was primarily attributable to the 5.7% increase in housing revenue as
well as a significant increase in land revenue. The increase in housing revenue
was due to a 7.0% increase in the average sales price of Homes Delivered,
partially offset by a 1.3% decrease in the number of Homes Delivered. The
increase in the average sales price of Homes Delivered was primarily due to the
increase in the number of Homes Delivered in the Columbus Showcase and Maryland
divisions, where the average sales prices are significantly higher than the
Company's average due to the types of product offered. In addition, the Maryland
and Palm Beach County divisions experienced significant increases in the average
sales price of Homes Delivered. In Maryland, the increase was primarily due to
the opening of the Willows subdivision where the average sales price is
significantly higher than the division's average and where sales were
particularly strong in 1995. In Palm Beach County, the Company expanded the
product lines offered to include higher priced homes, allowing the division to
build in more upscale areas of the market.
The decrease in the number of Homes Delivered during 1995 as compared
to the prior year was primarily due to the lower number of homes in Backlog at
December 31, 1994 as compared to the preceding year end as well as lower New
Contracts recorded during the first quarter of 1995. The Company believes the
number of New Contracts recorded during the first quarter of 1995 was adversely
affected by consumer uncertainty regarding the overall strength of the economy
and how it might affect their future.
The Company also recorded a significant increase in revenue from lot
and land sales, which increased to $16.1 million for 1995 from $8.5 million for
the preceding year. This increase was primarily attributable to the Maryland
division. Late in 1994, the Company completed development of the first phase of
a six-phase land development project. Development was in progress on the second
phase of this project during 1995. The Company sold a portion of the lots
developed in both of these phases to outside homebuilders. The Company believes
that lot and land revenue will remain at relatively high levels for the next few
years in comparison to historical amounts as the Company continues to develop
this and other projects where a portion of the lots will be sold to outside home
builders.
Home Sales and Backlog. The Company recorded an 11.0% increase in the
number of New Contracts recorded in 1995 as compared to the prior year. This
increase was primarily attributable to the Columbus Horizon, Indianapolis,
Cincinnati and Raleigh divisions. The Company's lower priced Horizon line of
homes was first introduced in Columbus in May 1993 and sales have continued to
increase as new locations have been opened.
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<PAGE> 22
Late in 1994, the Company introduced its Horizon line of homes in both
Indianapolis and Cincinnati, where it has found strong acceptance among
first-time home buyers. The Raleigh division was able to increase the number of
New Contracts recorded in 1995 primarily due to the opening of new subdivisions
in more desirable locations.
At December 31, 1995, the total sales value of the Company's Backlog of
1,421 homes was approximately $240.1 million, representing an 8.3% increase in
sales value and a 13.0% increase in units from the levels reported at December
31, 1994. The average sales price of homes in Backlog decreased 4.2% from
December 31, 1994 to December 31, 1995. This decline was primarily due to the
introduction of the Company's lower priced Horizon line into several markets in
1995 as well as a significant increase in the Backlog for the Columbus Horizon
division, whose average sales price is significantly below the Company's
average.
Gross Margin. The overall gross margin for the housing segment was
17.0% for both 1995 and 1994. A slight increase in housing gross margins was
partially offset by a decrease in gross margins from lot and land sales. The
increase in housing gross margins was primarily due to the Columbus Horizon,
Columbus Showcase and Maryland divisions where the Company began closing homes
in subdivisions which are in more desirable locations. The decrease in gross
margins from lot and land sales was primarily due to the sale of a tract of
commercial real estate in 1994, which produced a gross margin significantly
higher than normal lot sales. The Company recorded an after-tax gain of
approximately $425,000 from this sale. Excluding the effects of this sale, the
gross margin from land sales was actually higher in 1995 as the Company began to
develop lots in certain areas specifically for sale to third parties where gross
margins would be expected to be higher than on other lot sales where the Company
will sometimes accept lower gross margins in order to reduce inventory levels.
General and Administrative Expenses. General and administrative
expenses as a percentage of total revenue increased from 2.8% for 1994 to 2.9%
for 1995. This increase was primarily due to two factors. Bonus expense for
Regional and Division Presidents increased approximately $1.1 million from 1994
to 1995. These bonuses are based on customer satisfaction ratings, net income
and increases in net income over prior year amounts for the individual's
division or region. While net income for the Company as a whole actually
decreased from 1994 to 1995, the net income of certain individual divisions and
regions increased significantly in 1995, earning these individuals higher
bonuses in 1995. In addition, real estate tax expense and homeowners association
dues increased approximately $890,000 in 1995 as the Company's investment in
developed lots and raw land awaiting development increased over amounts held
during 1994.
Selling Expenses. Selling expenses increased from $31.6 million for
1994 to $34.3 million for 1995, and as a percentage of total revenue increased
from 6.5% for 1994 to 6.6% for 1995. In terms of actual dollars spent, a portion
of the increase was due to the 5.7% increase in housing revenue which caused a
corresponding increase in variable selling expenses. In addition, bonus expense
recorded for 1995 for both sales managers and individual salespersons was higher
due to the increase in the number of New Contracts recorded in 1995 as well as
new bonus plans for individual salespersons which were adopted in several
divisions in 1995. Additional expenses were also incurred in 1995 related to the
opening of model homes in new subdivisions.
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<PAGE> 23
RESULTS OF OPERATIONS (FINANCIAL SERVICES SEGMENT)
The following table sets forth certain information related to the Company's
financial services segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ --------------------------------------------
1997 1996 1996 1995 1994
-------------- ------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Number of loans originated....... 990 1,007 2,427 1,873 1,455
Revenue:
Loan origination fees......... $ 1,312 $ 1,223 $ 3,094 $ 2,258 $ 1,688
Sale of servicing and market-
ing gains.................. 2,721 2,042 3,550 3,047 2,207
Other......................... 1,258 1,052 2,393 1,903 1,355
---------- ---------- ---------- ---------- ----------
Total revenue.................... 5,291 4,317 9,037 7,208 5,250
General and administrative
expenses...................... 2,159 2,226 4,937 4,511 3,726
---------- ---------- ---------- ---------- ----------
Operating income................. $ 3,132 $ 2,091 $ 4,100 $ 2,697 $ 1,524
========== ========== ========== ========== ==========
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total Revenue. Total revenue for the six months ended June 30, 1997 was
$5.3 million, a 22.6% increase over the $4.3 million recorded for the comparable
period of 1996. Loan origination fees increased 7.3% in the six months ended
June 30, 1997 from the comparable period of 1996, even though the number of
loans originated decreased 17 units from the comparable period of 1996. This was
primarily due to a higher capture rate of the Company's higher end product line
and higher loan amounts.
Revenue from the sale of servicing and marketing gains increased $0.7
million to $2.7 million in the six months ended June 30, 1997 from the
comparable period of 1996. The increase in marketing gains was primarily due to
favorable market conditions during the last part of 1996 and early part of 1997
which increased marketing gains on loans that closed during the second half of
1997. M/I Financial used hedging methods whereby it has the option, but is not
required, to complete the hedging transaction. This allowed the Company to
record significant servicing and marketing gains during the period of falling
interest rates while limiting its risk of loss from a rising interest rate
market.
Revenue from other sources increased from $1.1 million to $1.3 million
in the six months ended June 30, 1997 from the comparable period of 1996. The
increase was primarily due to income received from a 49.9% interest in a title
agency that started operations during the first half of 1997.
General and Administrative Expenses. General and administrative expenses
for the six months ended June 30, 1997 were $2.2 million, a 3.0% decrease from
the comparable period of 1996. This decrease was primarily attributable to lower
interest expenses and tighter cost controls over variable expenses. There were
also no new branches opened during 1997. In addition, there were 65 fewer
applications taken in the six months ended June 30, 1997 as compared to the six
months ended June 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total Revenue. Total revenue for the year ended December 31, 1996 was
$9.0 million, a 25.4% increase over total revenue recorded for 1995. Loan
origination fees increased 37.0% from 1995 to 1996, primarily due to the 29.6%
increase in the number of loans originated as well as an increase in the average
loan amount. The increase in the number of loans originated during 1996 as
compared to the preceding year was due to an increase in the number of Homes
Delivered by the Company. In addition, two M/I Financial branch offices were
opened during 1995, and a branch office was opened in the Raleigh market during
1996. At December 31, 1996, M/I
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<PAGE> 24
Financial was operating in eight of the Company's eleven markets. In these eight
markets, 77% of the Company's Homes Delivered were financed through M/I
Financial.
Revenue from sale of servicing and marketing gains increased 16.5% to
$3.5 million in 1996. This increase was primarily due to the increase in the
number of loans originated in 1996 as well as an increase in servicing fees due
to more fixed rate mortgages originated during 1996 as compared to 1995. In
1995, the Company originated a higher percentage of adjustable rate mortgages as
compared to 1996. M/I Financial's revenue from sale of servicing and marketing
gains was also positively influenced by a significant shift from adjustable rate
loans to fixed rate loans, which offer greater income potential through larger
servicing release premiums.
General and Administrative Expenses. General and administrative
expenses increased 9.4% to $4.9 million for the year ended December 31, 1996 as
compared to $4.5 million recorded in 1995. This increase was primarily due to
the opening of two new branches in 1995 and one new branch in 1996 as well as
the closing of the Maryland branch in 1996. Also, personnel costs increased due
to the significant increase in loans originated.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total Revenue. Total revenue for the year ended December 31, 1995 was
$7.2 million, a 37.3% increase over total revenue recorded for 1994. Loan
origination fees increased 33.8% from 1994 to 1995, primarily due to the 28.7%
increase in the number of loans originated as well as an increase in the average
loan amount. The increase in the number of loans originated during 1995 as
compared to the preceding year was due to an increase in the percentage of the
Company's home sales which were financed through M/I Financial. In addition, M/I
Financial branch offices were opened in the Tampa and Maryland markets during
1995.
Revenue from sale of servicing and marketing gains increased 38.1% to
$3.0 million in 1995. This increase was primarily due to the increase in the
number of loans originated in 1995 as well as a falling interest rate
environment which increased marketing gains during 1995. While M/I Financial's
revenue increased due to the falling interest rates in 1995, M/I Financial's
revenue from sale of servicing and marketing gains was also positively
influenced by a significant shift from adjustable rate loans to fixed rate loans
which offer greater income potential through larger servicing release premiums.
General and Administrative Expenses. General and administrative
expenses increased 21.1% to $4.5 million for the year ended December 31, 1995 as
compared to the $3.7 million recorded in 1994. This increase was primarily due
to the opening of the two new branches in 1995 as well as increases in personnel
costs related to the significant increase in loans originated.
OTHER OPERATING RESULTS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Corporate General and Administrative Expenses. Corporate general and
administrative expenses remained constant at $4.9 million for the six months
ended June 30, 1997 and 1996. As a percentage of total revenue, general and
administrative expenses for the six months ended June 30, 1997 decreased to 1.9%
from 2.1% for the comparable period in the 1996. This decrease resulted from an
increase in total revenue.
Interest Expense. Corporate and home-building interest expense for the
six months ended June 30, 1997 decreased to $5.0 million from $5.9 million
recorded for the comparable period of 1996. Interest expense was lower in the
1997 period due to a decrease in the weighted average interest rate and an
increase in the net amount of interest capitalized during the first half of 1997
as compared to the first half 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
Subordinated Note (the "Subordinated Note due 2001") at a significantly lower
rate in December 1996. In May 1996, the Company switched its bank borrowings
from
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<PAGE> 25
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 and land holdings in the first half of 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for the year ended December 31, 1996 totaled $14.2
million or 2.5% of total revenue, a 24.1% increase from the $11.5 million, or
2.2% of total revenue, recorded for 1995. This increase is primarily due to
higher amounts recorded for bonuses and commissions in the current year.
Interest Expense. Corporate and homebuilding interest expense for the
year ended December 31, 1996 totaled $12.8 million, a 7.1% decrease from the
$13.8 million recorded for the preceding year. Interest expense was lower in
1996 due to decreases in the weighted average interest rate and the average
borrowings outstanding as a result of more favorable terms on the Company's
credit facilities. These decreases were partially offset by a decrease in the
net amount of interest capitalized during 1996 as compared to 1995.
Income Taxes. The effective tax rate for 1996 decreased to 38.9% from
40.2% for 1995, primarily as a result of a significant charitable contribution
of commercial land.
Extraordinary Loss. In December 1996, the Company redeemed all of its
outstanding 14% Subordinated Notes due December 2001 at a price of 106% of par.
The principal amount redeemed was $24.5 million and the redemption resulted in
an extraordinary loss of $1.3 million, net of income taxes of $0.8 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for the year ended December 31, 1995 totaled $11.5
million, or 2.2% of total revenue, a 10.2% increase from the $10.4 million or
2.1% of total revenue, recorded for 1994. This increase was primarily due to
expenses incurred in conjunction with the Company's new office building which
was then under construction. See Note 8 to the Company's consolidated financial
statements included elsewhere herein.
Interest Expense. Corporate and homebuilding interest for the year
ended December 31, 1995 totaled $13.8 million, a 42.8% increase over the $9.6
million recorded for the preceding year. This increase was due to increases in
the weighted average interest rate and the average borrowings outstanding as
well as a decrease in the net amount of interest capitalized during 1995 as
compared to 1994. The interest rate on the bank borrowings is based on the prime
rate of interest and increased five times during late 1994 and once more in
early 1995 as the prime rate of interest increased. The increase in the average
borrowings outstanding was primarily used to fund the increase in inventories of
both houses under construction as well as land and lot inventories.
Income Taxes. The effective rate increased from 39.5% to 40.2% from
1994 to 1995.
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 June 30, 1997, the Company had bank borrowings outstanding of $129.0
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
24
<PAGE> 26
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, 2001, 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 June 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 1.75% and 2.50% 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.
On May 7, 1997, the Company amended its Bank Credit Facility. Limits on
certain restrictive covenants were increased under the amended agreement. The
amount available and other terms of the agreement remain substantially the same
as those in the agreement that it amends.
An additional $9.6 million was outstanding as of June 30, 1997 under
the M/I Financial loan agreement, which permits borrowings of $25.0 million to
finance mortgage loans initially funded by M/I Financial for customers of the
Company and a limited amount for loans to others. 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 June 30, 1997,
borrowings under this agreement accrued interest at a rate slightly less than
the lenders' prime rate and were unsecured. 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 June 30, 1997, the Company had the right to borrow up to $209.9
million under its credit facilities, including $23.9 million under the M/I
Financial loan agreement (95% of the aggregate face amount of eligible mortgage
loans). At June 30, 1997, the Company had $71.3 million of unused borrowing
availability under its loan agreements. The Company also had approximately $27.0
million of completion bonds and letters of credit outstanding at June 30, 1997.
Subordinated Note/Subordinated Debt Facility. In addition, the Company
had outstanding a Subordinated Note due 2001 in the amount of $25.0 million at
June 30, 1997, which was held by First National Bank of Boston. The maturity
date was December 15, 2001 and could be extended two additional years at the
Company's option. The Subordinated Note due 2001 was redeemable, in whole or in
part, after December 15, 1997, and in certain circumstances prior to such time,
without penalty or premium. Interest on the Subordinated Note due 2001 accrued
at LIBOR plus 3.50% and adjusted quarterly.
On August 29, 1997, the Company entered into a Credit Agreement (the
"Subordinated Debt Facility") with BankBoston, N.A. to issue $50 million of
Senior Subordinated Notes. The proceeds were used to repay outstanding amounts
under the Bank Credit Facility and the $25 million Subordinated Note due 2001
described above. The notes under the Subordinated Debt Facility bear interest at
a fixed rate of 9.51% and mature on 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 six months ended June 30, 1997 was $19.2 million
compared to $7.7 million for the prior year period. The increase in net cash
used by operating
25
<PAGE> 27
activities was primarily due to a large increase in inventories and a decrease
in accrued liabilities. This was partially offset by a decrease in accounts
receivable.
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 8.3% from December
31, 1996 to June 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 other competing
home-builders. 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 $38.3 million increase in notes payable to banks from December 31,
1996 to June 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 $29.7 million from December 31, 1996 to June 30, 1997 while
single-family lots, land and land development costs increased $10.7 million. It
is expected that borrowing needs will increase as the Company continues to
increase its investment in land under development and developed lots and as its
investment in houses under construction increases.
As of June 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 August 1, 1997, the Company repurchased 702,439
shares of the Company's Common Stock at $12.8125 per share, which represents the
closing price of the Company's Common Stock on July 30, 1997, from the Melvin L.
Schottenstein family interests. These shares are held as treasury shares by the
Company. The total purchase price was $9,000,000 and was paid from the Company's
Bank Credit Facility. In conjunction with this stock repurchase, Eric J.
Schottenstein, Holly S. Kastan and Amy D. Schottenstein resigned from the Board
of Directors. See "Principal and Selling Shareholders."
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 six months ended June 30, 1997 was 8.4% as
compared to 9.8% for the six months ended June 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.
26
<PAGE> 28
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 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 a lower gross profit margin.
BUSINESS
M/I Schottenstein Homes, Inc. is one of the nation's leading
homebuilders. The Company sells and constructs single-family homes to the entry
level, move-up and empty nester buyer under the Horizon, M/I Homes and Showcase
Homes tradenames. In 1996, the Company was the fourteenth largest U.S.
single-family homebuilder (based on total revenue) as ranked by Builder
Magazine. The Company sells its homes in eleven geographic markets including
Columbus and Cincinnati, Ohio; Tampa, Orlando and Palm Beach County, Florida;
Charlotte and Raleigh, North Carolina; Indianapolis, Indiana; Virginia, Maryland
and, recently, Phoenix, Arizona. The Company currently offers seven distinct
lines of single-family homes ranging in price from approximately $80,000 to
$750,000 with an average sales price in 1996 of $173,000. During the year ended
December 31, 1996, the Company delivered a record 3,246 homes and had revenues
of $577.2 million and net income of $12.8 million, the highest in the Company's
history. The Company has experienced a compound annual growth rate over the
five-year period from 1992 through 1996 with respect to its revenues and net
income of 11.6% and 15.1% (17.9% excluding extraordinary items), respectively.
The Company is the leading homebuilder in the Columbus, Ohio market and
has been the number one builder of single-family detached homes in this market
for each of the past eight years. In addition, the Company is currently one of
the top ten homebuilders in each of its Ohio, Florida, Indiana and North
Carolina markets and believes it is well positioned to further penetrate these
and its other markets. The Company's growth strategy targets both product line
expansion and geographical diversification. With respect to geographical
diversification, the Company has expanded into new markets through the opening
of new divisions rather than through acquisitions. To complement its M/I Homes
($115,000 - $230,000 sales price range) and Showcase Homes ($180,000 - $400,000
sales price range) lines, the affordably priced Horizon line ($80,000 - $140,000
sales price), which appeals to the first time homebuyer, was introduced to the
Columbus market in 1993 and has been very successful. The Company has expanded
this entry level product into a majority of its other markets.
The Company believes it distinguishes itself from competitors by
offering homes located in selective areas that have a higher level of design and
construction quality within a given price range and by providing superior
customer service. The Company also believes that by offering homes at a variety
of price points, the Company attracts a wide range of buyers, many of whom were
previous Horizon, M/I or Showcase homeowners. The Company supports its
homebuilding operations by providing mortgage financing services through M/I
Financial as well as title-related services.
The Company's business strategy emphasizes the following key
objectives:
Focus on profitability. The Company focuses on improving profitability
while maintaining the high quality of its homes and of its customer service. The
Company focuses on gross margins by stressing the features, benefits, quality
and design of its homes in the sale process and by minimizing speculative
building. The Company also value engineers its homes by working with its
sub-contractors and suppliers to provide attractive home features while
minimizing raw material and construction costs.
Maintain conservative and selective land policies. The Company's
profitability is largely dependent on the quality of its subdivision locations;
therefore, the Company focuses on locating and controlling land in the most
desirable areas of its markets. The Company is very conservative in its land
acquisition policies and only purchases land already zoned and serviceable by
utilities. The Company seeks to control a three-to five-year supply of land in
each of its markets. The Company believes its expertise in developing land gives
the Company a competitive advantage in controlling attractive locations at
competitive costs, and, as a result, developed
27
<PAGE> 29
approximately 50% of its communities as of December 31, 1996. The Company
focuses on inventory management and maintains conservative accounting policies.
At December 31, 1996, the company owned 5,705 lots and controlled an additional
7,951 pursuant to contracts.
Maintain or increase market position in current markets. The Company
has been the leading builder of single-family detached homes in the Columbus
market for the last eight years. The Company seeks to maintain its leading
position by continuing to provide high quality homes and superior customer
service. The Company believes there are significant opportunities to profitably
expand in each of its other markets, by increasing its product offerings,
continuing to acquire land in desirable locations and constructing and selling
homes with the same commitment to customer service that has accounted for the
Company's historical success. In addition, the Company continues to explore
expanding into new markets through either internal growth (such as the expansion
into Phoenix, Arizona late in 1996) or acquisitions.
Provide superior customer service. The overriding Company philosophy is
to provide superior service to its customers. The Company offers a wide array of
functional and innovative designs and involves the customer in virtually every
phase of its operations from the beginning of the selling process through
construction, closing and service after delivery. The Company's selling process
focuses on the homes' features, benefits, quality and design as opposed to
merely price and square footage. In certain markets, the Company utilizes design
centers to enhance the selling process and increase the sale of optional
features which typically carry higher margins. In addition, the Company assists
many of its customers with financing and provides attractive warranties. As a
result, based on the responses to the Company's customer questionnaire, for the
sixth year in a row, approximately 95% of the Company's customers would
recommend the Company to a potential buyer.
Offer product breadth and innovative design. The Company devotes
significant resources to the research and design of its homes to better meet the
needs of its customers. The Company offers seven distinct product lines and more
than 200 different floor plans and elevations. In addition to providing
customers with a wide variety of choices, the Company believes it offers a
higher level of design and construction quality within a given price range. In
addition, the Company has introduced and utilized innovative design concepts,
such as themed communities, rear garages and rear alley access.
Maintain decentralized operations with experienced management. The
Company believes that each of its markets has unique characteristics and,
therefore, is managed locally with dedicated, on-site management personnel. Each
of the Company's managers possesses intimate knowledge of his or her particular
market and is encouraged to be entrepreneurial in order to best meet the needs
of such market. The Company's incentive compensation structure rewards each
manager based on financial performance and income growth, as well as customer
satisfaction.
SALES AND MARKETING
The Company markets and sells its homes under the Horizon, M/I and
Showcase tradenames. Home sales are conducted from on-site sales offices in
furnished model homes by the Company's own sales personnel. Each sales
consultant is trained and equipped to fully explain the features and benefits of
the Company's homes, to determine which home best suits each customer's needs,
to explain the construction process and to assist the customer in choosing the
best financing. Significant attention is paid to the training and re-training of
all sales personnel to assure the highest levels of professionalism and product
knowledge. Overall, the Company currently employs more than 120 sales
consultants and operates approximately 160 model homes.
The Company advertises in newspapers and in magazines, by direct mail,
on billboards and on radio and television, although the particular marketing
medium used differs from division to division based upon marketing demographics
and other competitive factors. In addition, the Company welcomes independent
broker participation and, from time to time, utilizes various promotions and
sales incentives to attract interest from these brokers. The Company's
commitment to quality design and construction and reputation for customer
service has also resulted in a strong referral base and a significant number of
repeat buyers.
To enhance the selling process, the Company operates design centers in
the Cincinnati and Columbus markets. The design centers are staffed with
interior design specialists who assist Columbus and Cincinnati
28
<PAGE> 30
customers in selecting interior and exterior colors as well as standard options
and upgrades. In its other markets, the color selection and option/upgrade
process is handled directly by the Company's sales consultants. The Company also
offers financing to its customers through its wholly owned subsidiary, M/I
Financial, which now has branches in all markets in which the Company operates
except Virginia and Maryland. M/I Financial originates loans, primarily for
purchasers of the Company's homes, which are then sold, along with the majority
of the servicing rights, to outside mortgage lenders.
The Company generally does not commence construction of its homes until
it obtains a sales contract and preliminary oral advice from the customer's
lender that financing will be approved. However, in certain markets, contracts
are sometimes accepted contingent upon the sale of an existing home and
construction is authorized through a certain stage prior to satisfaction of that
contingency. In addition, in all divisions a limited, strictly controlled,
number of "spec" homes (i.e., homes started in the absence of an executed
contract) are built in order to permit construction and delivery of homes on an
immediate-need basis and to provide presentation of new products. In determining
the number of spec homes to be started, the Company has traditionally adopted
what it believes to be a very conservative approach, with the unit number
determined after consultation with the respective regional and division
presidents.
The Company's sales and marketing efforts are further enhanced by the
Company's inspection and warranty programs. Through these programs, the Company
offers a 2-year limited warranty on materials and workmanship and a 20-year
limited warranty against major structural defects. To increase the value of
these warranties, both are transferable in the event of the sale of the home.
Immediately prior to closing and three months after a home is delivered, the
Company inspects each home with the customer to determine if any repairs are
required. At the customer's written request, the Company will also provide a
free one year inspection and again make any necessary repairs. The Company also
passes along to its customers all warranties provided by manufacturers or
suppliers of components installed in each home. The Company's warranty expense
was less than 1.0% of total costs and expenses for the six months ended June 30,
1997, and each of the years ended December 31, 1994, 1995 and 1996.
DESIGN AND CONSTRUCTION
The Company devotes significant resources to the research, design and
development of its homes in order to better meet the needs of the various
housing markets in which the Company operates. Virtually all of the Company's
floor plans and elevations are designed by an experienced in-house staff of
qualified professionals using modern computer-aided design technology. The
Company offers more than 200 different floor plans and elevations, and these
designs may differ significantly from market to market.
The construction of each home is supervised by a construction
supervisor who reports to a production manager, both of whom are employees of
the Company. Customers are introduced to their construction supervisor prior to
commencement of home construction at a pre-construction "buyer/builder"
conference. In addition to introducing customers to their construction
supervisor, the purpose of the "buyer/builder" conference is to review with the
customers the home plans and all relevant construction details and to explain
the construction process and schedule to the customers. Every customer is given
a hard hat at the "buyer/builder" conference as an open invitation to visit the
site at any time during the course of construction. The Company wants customers
to become involved and better understand the construction of their home and to
see the quality being built into their home. All of this is part of the
Company's philosophy to "put the customer first" and enhance the total
homebuilding experience.
Homes generally are constructed according to standardized designs and
meet applicable Federal Housing Authority ("FHA") and Veterans Administration
("VA") requirements. To allow maximum design flexibility, the Company limits the
use of pre-assembled building components and pre-fabricated structural
assemblies. The efficiency of the building process is enhanced by the Company's
use of standardized materials available from a variety of sources. The Company
has, from time to time, experienced construction delays due to shortages of
materials or subcontractors. Such construction delays may, in turn, delay the
delivery of homes, thereby extending the period of time between the signing of a
purchase contract with respect to a home and the receipt of revenue by
29
<PAGE> 31
the Company; however, the Company cannot predict the extent to which shortages
of necessary materials or labor may occur in the future. The Company employs
independent subcontractors for the installation of site improvements and the
construction of its homes. Subcontractors are supervised by the Company's
on-site construction supervisors. All subcontractor work is performed pursuant
to written agreements with the Company. Such agreements are generally
short-term, with terms from six to twelve months, provide for a fixed price for
labor and materials and are structured so as to allow for price protection for
the Company's Backlog. The Company seeks to build in large volume with a view
toward reducing the per unit cost of the homes which it sells due to advantages
achieved by lower unit prices paid to subcontractors for labor and materials.
MARKETS
The Company's operations are organized into geographic regions in order
to maximize management and operating efficiencies. Each geographic region
comprises one or more operating divisions for a particular major metropolitan
area. The Company's present divisional operating structure is as follows:
<TABLE>
<CAPTION>
Year
Operations
Region Division Commenced
------ -------- ---------
<S> <C> <C>
Ohio........................... Columbus - Hallmark/Heritage/Regency 1976
Columbus - Showcase 1988
Columbus - Horizon 1994
Cincinnati 1988
Indiana........................ Indianapolis 1988
Florida........................ Tampa 1981
Orlando 1984
Palm Beach County 1984
North Carolina................. Charlotte 1985
Raleigh 1986
Washington D. C................ Virginia 1991
Maryland 1991
Arizona........................ Phoenix 1996
</TABLE>
Ohio and Indiana Region. The Company began its operations in the
Columbus, Ohio market in 1976 and expanded into both Cincinnati, Ohio and
Indianapolis, Indiana in 1988. These markets accounted for approximately 60% of
the Company's deliveries in 1996.
Columbus is the capital of Ohio, with federal, state and local
governments providing significant and stable employment. Columbus has been a
stable market, with diverse economic and employment bases. In 1996, Columbus'
unemployment rate was approximately 3%, significantly below the national rate of
5.4%. Columbus is also the home of The Ohio State University, one of the largest
universities in the world, with an annual budget exceeding $1 billion. The
Company offers all product lines in Columbus, with prices ranging from
approximately $80,000 to approximately $400,000 through three operating
divisions. The Company is the leading homebuilder in Columbus, having built and
delivered more single-family detached homes in this market than any other
homebuilder during each of the last eight years. In 1996, the Company had
approximately a 25% market share in the Columbus market.
Cincinnati, like Columbus, is characterized by a stable economic
environment and diverse employment base. Employers include Proctor & Gamble,
Kroger and General Electric. In 1994, the Company introduced its
30
<PAGE> 32
Horizon product line in this market and continues to focus on more affordable
communities. In 1996, the Company was ranked the number two homebuilder in
Cincinnati, excluding the Northern Kentucky market in which the Company does not
participate.
Indianapolis is a growth market noted for its excellent transportation
system and relatively young population. 1996 was the fifth consecutive year of
record single-family housing permits, likely due in part to Indianapolis' low
unemployment rate of 2.6%. A $1 billion aircraft maintenance hub for United
Airlines has recently begun operations, and a $62 million express mail sorting
facility for the U.S. Postal Service has recently been completed. In 1995, the
Company introduced its Horizon product line in this market, and the Company
continues to focus on premier locations with more affordable price points. The
Company is also currently introducing new home designs in the $125,000 to
$175,000 price range. 1996 was the best financial performance in the division's
history.
Florida Region. The Company entered the Florida market in 1981, when it
opened its Tampa division. In 1984, the Company opened additional divisions in
Orlando and Palm Beach County. In 1996, home deliveries from this region
represented approximately 20% of the Company's total deliveries.
Tampa's housing market is strong, buoyed by financial services, tourism
and conventions. Business relocation has continued, especially in banking,
insurance and telecommunications. Tampa's economy continues to grow, as 1996
employment levels increased by 3.1%. Market-specific product, including the
Horizon series, has been very successful for the Company in Tampa with 1996
resulting in the highest financial performance in its history.
In 1996, Orlando's economy expanded at a healthy pace, with job growth
increasing 5%. Growth was led by improved tourism (both domestic and foreign),
strong in-migration and business expansion/relocation due primarily to lower
business costs. The Company has been a top 10 builder in Orlando since the late
1980s and continues to produce solid results.
Palm Beach County is one of the more affluent markets in the United
States. Recent job gains have been in the construction, wholesale trade and
service sectors. Population growth in the 1990s has been twice the national
average. The Company has been introducing a more affordable product in Palm
Beach, along with offering the Company's upscale Showcase line.
The North Carolina and Metropolitan Washington, D.C. Region. In 1985,
the Company entered Charlotte and a year later opened in Raleigh-Durham. In
1991, the Company expanded into both Virginia and Maryland. In 1996, these
markets represented approximately 20% of the Company's total deliveries.
Charlotte, which is home to two of the fastest growing firms in the
banking industry, continues to grow as a financial center. The Company expects
this market to continue to gain administrative and back-office jobs as these
firms pursue growth outside the region. In addition, Charlotte is establishing
itself as a transportation hub with its manufacturing base. Given this strong
industry presence, Charlotte is ranked above average for long-term employment
growth.
Raleigh-Durham is well situated to take advantage of the explosive
growth in high-tech firms with a well-educated workforce and the recently
completed North Carolina telecommunications highway. The Company expects the
housing market in this area to continue to exhibit strong growth.
The Company believes that the Washington, D.C. market will remain very
competitive. The Washington, D.C. region historically has been dominated by
Federal Government employment. However, there has been an increasing trend
toward private sector jobs, especially in the high-technology area. The
Company's current operations in the Washington, D.C. region are located
primarily in Fairfax, Prince William and Loudoun Counties in Virginia and Prince
Georges, Montgomery and Anne Arundel Counties in Maryland. The Company has
experienced tremendous success in its Willows subdivision near the Potomac River
in Maryland. The Company will continue to focus on geographic, product and
pricing niches in the Washington, D.C. market.
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<PAGE> 33
The Arizona Region. The Company entered the Phoenix market in November
1996. The Phoenix housing market is one of the most active in the United States,
generating over 25,000 permits annually in each of the last three years. Phoenix
is a national leader in employment growth and has a very diverse economy. As
commonly occurs in the homebuilding industry, it has been the Company's
experience that it incurs losses in a new market for at least the first full
year of operations. The Company initially expects to incur losses in its Phoenix
division as a result of its expense policy relating to start-ups, which the
Company believes to be conservative.
The following tables set forth information relating to New Contracts
and Homes Delivered for the six months ended June 30, 1997 and 1996 and for the
years ended December 31, 1996 and 1995, respectively, for each of the Company's
regions (other than Arizona, where the Company had no operating results as of
June 30, 1997):
<TABLE>
<CAPTION>
NEW CONTRACTS NEW CONTRACTS
----------------------------- -----------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------- -----------------------
1997 1996 1996 1995
---- ---- ------- -------
<S> <C> <C> <C> <C>
Ohio & Indiana..... 1,029 1,046 1,910 1,865
Florida............ 365 341 663 619
NC, VA & MD........ 281 329 589 632
---- ---- ---- ---
TOTAL 1,675 1,716 3,162 3,116
===== ===== ----- =====
</TABLE>
<TABLE>
<CAPTION>
HOMES DELIVERED HOMES DELIVERED
----------------------------- -----------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ------------------------
1997 1996 1996 1995
------ ------ ------- ------
<S> <C> <C> <C> <C>
Ohio & Indiana..... 806 798 1,939 1,696
Florida............ 277 280 667 657
NC, VA & MD........ 250 264 640 599
---- ---- --- ----
TOTAL 1,333 1,342 3,246 2,952
----- ----- ===== =====
</TABLE>
The following table sets forth Backlog information as of June 30, 1997
and 1996, respectively, for each of the Company's regions (other than Arizona,
where the Company had no operating results as of June 30, 1997):
<TABLE>
<CAPTION>
BACKLOG
-----------------------------------------------------------------------------------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
DOLLARS AVERAGE DOLLARS AVERAGE
UNITS (MILLIONS) SALES PRICE UNITS (MILLIONS) SALES PRICE
----- ---------- ----------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ohio & Indiana..... 1,131 $200 $177,000 908 $158 $174,000
Florida............ 309 56 181,000 221 36 163,000
NC, VA & MD........ 239 63 263,000 208 51 246,000
------ ------ ------- ------ ------- ---------
TOTAL 1,679 $319 $190,000 1,337 $245 $183,000
===== ==== ======== ===== ==== ========
</TABLE>
The homebuilding industry is highly competitive. The Company competes
in each of the geographic areas in which it operates with numerous other
homebuilders, ranging from small local to larger regional and national builders
and developers. The Company continually evaluates its markets, focusing on key
data such as population trends, job formation, income levels, housing demand and
supply and homebuilding competition.
PRODUCT LINES
The Company, on a regional basis, offers homes ranging in price from
approximately $80,000 to approximately $750,000 and ranging in square footage
from approximately 1,100 to 4,200 square feet. There are more than 200 different
floor plans and elevations across all product lines. By offering a wide range of
homes, the Company is able to attract first-time homebuyers, move-up buyers and
empty-nesters.
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<PAGE> 34
In the Columbus market, which is the Company's largest market, the
Company offers all of its seven distinct product lines. In addition, the Company
offers a select number of its product lines in its divisions outside of
Columbus. The price range and average square footage for these product lines in
Columbus are shown below:
<TABLE>
<CAPTION>
AVERAGE
PRODUCT LINE PRICE RANGE SQUARE FOOTAGE
------------ ----------- --------------
<S> <C> <C> <C>
Horizon $80,000 - $140,000 1,400
M/I Homes
Heritage $115,000 - $165,000 1,500
Hallmark $140,000 - $205,000 2,000
Regency $165,000 - $230,000 2,450
Showcase Homes
Signature $190,000 - $230,000 2,500
Hampsted $180,000 - $300,000 2,600
Classic $205,000 - $400,000 2,800
</TABLE>
In addition, the Company offers a line of attached townhomes in the
Maryland and Virginia markets. These homes are marketed primarily to first-time
buyers and range from 1,400 to 2,300 square feet of living space. These homes
utilize wood frame construction and feature exteriors of aluminum with brick
fronts. In Maryland, Virginia and Phoenix, the Company also offers additional
homes with up to 4,200 square feet of living space for prices ranging up to
$750,000.
In all of the Company's lines of homes, certain options are available
to the purchaser for an additional charge. Major options include fireplaces,
additional bathrooms, and higher quality carpeting, cabinets and appliances. The
options typically are more numerous and significant on the more expensive homes.
In offering its various products, the Company attempts to maintain substantially
the same ratio of revenue to costs and expenses for each of its product lines.
LAND DEVELOPMENT ACTIVITIES
The Company's land development activities and land holdings have
increased significantly in the past few years, and the Company expects land
holdings to continue to increase. The Company continues to purchase lots from
outside developers under option contracts, when possible, to limit the Company's
risk; however, the Company continues to evaluate all of its alternatives to
satisfy its need for lots in the most cost effective manner. The Company
develops its own lots where it can gain a competitive advantage by doing so or
where shortages of qualified land developers make it impractical to purchase the
required lots from outside sources. The Company seeks to limit its investment in
undeveloped land and lots to the amount reasonably expected to be sold in the
next three to five years. Although the Company purchases land and engages in
land development activities primarily for the purpose of furthering its own
homebuilding activities, in certain markets, the Company has developed land with
the intention of selling a portion of the lots to outside homebuilders.
To limit its risk in connection with raw land development, the Company
has primarily acquired land through the use of contingent purchase contracts.
All such contracts require the internal approval of the Company's land
committee. These contracts condition the Company's obligation to purchase land
upon the Company's review and approval of zoning, utilities, soil and subsurface
conditions, environmental and wetland conditions, levels of taxation, traffic
patterns, development costs, title matters and other property-related criteria.
In addition, careful attention is paid to the quality of the public school
system. Only after this thorough evaluation has been completed does the Company
make a commitment to purchase undeveloped land. To further reduce its risk when
evaluating the acquisition of raw land, the Company generally does not commence
development and engineering plans or surveys until all necessary zoning
approvals are obtained.
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<PAGE> 35
The Company from time to time enters into joint ventures, generally
with other homebuilders. At June 30, 1997, the Company had interests varying
from 33% to 50% in each of 18 joint ventures and nine limited liability
companies ("LLCs"). These joint ventures and LLCs develop land into lots and,
generally, the Company receives its percentage interest in the form of a
distribution of developed lots. These joint ventures and LCCs pay to the
managing partner or manager certain fees for accounting, administrative and
construction supervision services performed by the managing partner or manager
in addition to its percentage interest as a partner in the profits of the joint
venture or LLC. The Company currently is responsible for the management of seven
of these 18 joint ventures and five of the nine LLCs. These joint ventures and
LLCs are equity financed, except where seller financing is available on
attractive terms.
In developing lots and land, the Company is required by some
municipalities and other governmental authorities to provide completion bonds
for sewer, streets and other improvements. The Company generally provides
letters of credit in lieu of these completion bonds. At June 30, 1997, $9.9
million of letters of credit were outstanding for these purposes, as well as
$9.1 million of completion bonds.
AVAILABLE LOTS AND LAND
The Company seeks to balance the economic risk of owning lots and land
with the necessity of having lots available for its homes. At December 31, 1996,
the Company had in inventory 2,003 developed lots and 979 lots under
development. The Company also owned raw land expected to be developed into
approximately 1,269 lots.
In addition, at December 31, 1996, the Company's interest in lots held
by its joint ventures and LLCs consisted of 6 developed lots and 421 lots under
development. The Company also owns interests in raw land held by its joint
ventures and LLCs zoned for 1,027 lots. It is anticipated that some of the lots
owned by the Company and the joint ventures and LLCs will be sold to others.
At December 31, 1996, the Company had options and purchase contracts,
which expire over the next three years, to acquire 3,184 developed lots and land
to be developed into approximately 4,767 lots, for a total of 7,951 lots, with
an aggregate current purchase price of approximately $167.0 million. Purchase of
these properties is contingent upon satisfaction of certain requirements by the
Company and the sellers, such as zoning approval. The majority of these lot
purchase agreements provide for periodic escalation of the purchase price which,
the Company believes, reflects the developers' carrying cost of the lots. The
following table sets forth the Company's land position in lots (including the
Company's interest in joint ventures) by region in which the Company operated at
December 31, 1996:
<TABLE>
<CAPTION>
OWNED LOTS
-------------------------------------
Under To Be Lots under
Region Developed Development Developed Option Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ohio and Indiana 857 992 1,575 5,195 8,619
Florida 717 123 106 1,432 2,378
Carolina 195 129 152 779 1,255
Washington, D.C. 240 156 463 545 1,404
---------------------------------------------------------------------------------
Total 2,009 1,400 2,296 7,951 13,656
=================================================================================
</TABLE>
FINANCIAL SERVICES
Through its wholly-owned subsidiary M/I Financial, the Company offers
fixed and adjustable rate mortgage loans, primarily to buyers of the Company's
homes. M/I Financial has branches in all of the Company's housing markets, with
the exception of Virginia, Maryland and Arizona. Of the 2,985 Homes Delivered in
1996
34
<PAGE> 36
in the markets in which M/I Financial operates, M/I Financial provided financing
for 2,309 of these homes representing approximately $304.7 million of mortgage
loans originated and sold. M/I Financial issues commitments to customers and
closes both conventional and government-insured loans in its own name. However,
in an effort to minimize the risk of financing activities, M/I Financial
generally sells the loans it originates to the secondary market which provides
the funding within several days thereafter. The Company retains a small
servicing portfolio which it currently sub-services with a financial
institution.
At December 31, 1996, the Company was committed to fund $79.8 million
in mortgage loans to homebuyers. Of this total, approximately $11.0 million were
adjustable rate loans and $68.8 million were fixed rate loan commitments. The
loans are granted at current market interest rates and the rate is guaranteed
through the transfer of the title of the home to the buyer. The Company uses
hedging methods to reduce its exposure to interest rate fluctuations between the
commitment date of the loan and the time the home closes. The method to be used
is determined at the time of the loan commitment based on the market conditions
and alternatives available. The Company's policy requires that there be no
interest rate risk on loans closed waiting to be sold. Also according to the
policy, the pipeline of committed loans is to be hedged at 70 to 95% of the
committed balance which represents the percentage of loans expected to be
closed.
One of the methods the Company uses to hedge the interest rate risk
relative to unclosed loans is to purchase commitments from outside investors to
acquire the loans at the interest rate at which the loan will be closed. The
cost of these purchase commitments is recorded as an asset and is expensed as
loans are closed under the related commitments. Any remaining unused balance is
expensed when the commitment expires or earlier, if the Company determines that
it will be unable to use the entire commitment prior to its expiration date. At
December 31, 1996, the Company had approximately $50.7 million of commitments to
deliver mortgage loans to outside investors.
Another method utilized by the Company to hedge its interest rate risk
is the use of forward sales of mortgage-backed securities whereby the Company
agrees to sell and later repurchase similar but not identical mortgage-backed
securities. Generally, the agreements are fixed-coupon agreements whereby the
interest rate and maturity date of both transactions are approximately the same
and are established to correspond with the closing of the fixed interest rate
mortgage loan commitments of the Company. The difference between the two values
of the mortgage-backed securities in the agreements at settlement provide a
hedge on the interest rate risk exposure in the mortgage loan commitments and is
included in the gain or loss on the sale of the loans to third party investors.
At December 31, 1996, these agreements matured within 90 to 120 days. Securities
under forward sales agreements averaged approximately $15.3 million during 1996
and the maximum amounts outstanding at any month end during 1996 was $27.0
million, the balance at December 31, 1996. Hedging gains of $0.9 million were
deferred at year end as the mortgage loans and commitment contracts qualified
for hedge accounting.
To reduce the credit risk associated with accounting losses, which
would be recognized if the counterparties failed completely to perform as
contracted, the Company limits the entities that management can enter into a
commitment with to the primary dealers in the market. The risk of accounting
loss is the difference between the market rate at the time a counterparty fails
and the rate the Company committed to for the mortgage loans and any purchase
commitments recorded with the counterparty.
M/I Financial has been approved by the Department of Housing and Urban
Development and the VA to originate loans insured by the FHA and the VA,
respectively, and has been approved by the Federal Home Loan Mortgage
Corporation ("FHLMC") and by the Federal National Mortgage Association ("FNMA")
as a seller and servicer of mortgages sold to FHLMC and FNMA.
REGULATION AND ENVIRONMENTAL MATTERS
The homebuilding industry, including the Company, is subject to various
local, state and federal (including FHA and VA) statutes, ordinances, rules and
regulations concerning zoning, building, design, construction, sales and similar
matters. Such regulation affects construction activities, including types of
construction materials which may be used, certain aspects of building design, as
well as sales activities and other
35
<PAGE> 37
dealings with consumers. The Company also must obtain certain licenses, permits
and approvals from various governmental authorities for its development
activities. In many areas, the Company is subject to local regulations which
impose restrictive zoning and density requirements in order to limit the number
of houses within the boundaries of a particular locality. The Company seeks to
reduce the risk from restrictive zoning and density requirements by the use of
contingent land purchase contracts which require that the land to be purchased
by the Company meet various requirements, including zoning.
The Company may be subject to periodic delays or may be precluded
entirely from developing projects due to building moratoriums, particularly in
Florida. Generally, such moratoriums relate to insufficient water or sewage
facilities or inadequate road capacity within specific market areas or
subdivisions. Moratoriums experienced by the Company have not been of long
duration and have not had a material effect on the Company's business.
Each of the states in which the Company operates has adopted a wide
variety of environmental protection laws. These laws generally regulate
developments of substantial size and which are in or near certain specified
geographic areas. Furthermore, these laws impose requirements for development
approvals which are more stringent than those which land developers would have
to meet outside of these geographic areas.
Increasingly stringent requirements may be imposed on homebuilders and
developers in the future which may have a significant impact on the Company and
the industry. Although the Company cannot predict the effect of these
requirements, such requirements could result in time-consuming and expensive
compliance programs. In addition, the continued effectiveness of licenses or
permits already granted or development approvals already obtained is dependent
upon many factors, some of which are beyond the Company's control.
EMPLOYEES
At March 14, 1997, the Company employed 732 people (including part-time
employees), of which 179 were employed in sales, 303 in construction and 250 in
management, administrative and clerical positions. The Company considers its
employee relations to be excellent. No employees are represented by a collective
bargaining agreement.
PROPERTIES
The Company leases all of its offices, including the corporate and
division locations.
Due to the nature of the Company's business, a substantial amount of
property is held as inventory in the ordinary course of business. See "--
Available Lots and Land."
LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to its
business. The Company does not believe that any of this litigation is material
to the financial condition or the results of operations of the Company.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The following table sets forth certain information as of October 12,
1997, regarding each of the Company's executive officers, directors and other
key employees:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Irving E. Schottenstein (1)................ 68 Chairman of the Board and Chief
Executive Officer
Robert H. Schottenstein (1)................ 45 President and Director
Steven Schottenstein (1)................... 41 Senior Executive Vice President and Director
Kerrii B. Anderson......................... 40 Senior Vice President and Chief Financial Officer
Friedrich K. M. Bohm (2)(3)................ 55 Director
Lewis R. Smoot, Sr. (1)(2)(3).............. 63 Director
Norman L. Traeger (2)(3)................... 58 Director
Paul S. Coppel............................. 39 Senior Vice President, General Counsel and
Secretary
Phillip G. Creek........................... 45 Senior Vice President and Treasurer
Gary A. Haarer............................. 54 President - Arizona Region
Robert C. Moesle........................... 46 President - Washington, D.C. Region
Lloyd T. Simpson........................... 52 President - Columbus Region
- -------------
<FN>
(1) Member of the Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
</TABLE>
Irving E. Schottenstein is the father of Steven Schottenstein and
Robert H. Schottenstein.
EXECUTIVE OFFICERS
Irving E. Schottenstein has been Chief Executive Officer since August
1986, and a Director of the Company or its predecessors since 1973. He was
President of the Company or its predecessors from 1973 until 1996. He was also
the Chairman of the Board or President of M/I Financial Corp., from 1983 until
August 1995. He was a Director of M/I Financial Corp. from 1983 until August
1995.
Robert H. Schottenstein has been President since May 1996, an Assistant
Secretary since March 1991 and a Director since 1993. He served as an Executive
Vice President from February 1994 until May 1996, as a Senior Vice President
from September 1993 until February 1994 and became a Vice President of the
Company in March 1991. He became the Regional Manager for the Cincinnati
Division in April 1994 and for the Midwest Land Operations in January 1993. He
began his service with the Company in field operations and has been responsible
for the Ohio Land Division since November 1992. He was a Director of the
Company's predecessor from 1980 until August 1986. From 1977 to 1991, he was
engaged in the private practice of law with Schottenstein, Zox & Dunn Co.,
L.P.A. and was of counsel to that firm until September 1993. He currently serves
as a Director of Huntington Bancshares Incorporated.
Steven Schottenstein has been a Senior Executive Vice President since
May 1996, an Assistant Secretary since April 1992 and a Director since 1993. He
served as an Executive Vice President from February 1994 until May 1996, as a
Senior Vice President from September 1993 until February 1994 and was a Vice
President from June 1990 until September 1993. He became a Regional Manager for
the Washington, D.C. Region in December 1990, Regional Manager for the Indiana
Region in April 1992 and Regional Manager for the Carolina Region in
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<PAGE> 39
February 1994 and served in such positions until May 1996. From 1984 to June
1990, he was Vice President/Division Manager-Orlando Division. He was a Director
of the Company's predecessor from 1980 until August 1986.
Kerrii B. Anderson is Senior Vice President, Chief Financial Officer
and Assistant Secretary of the Company. She became a Senior Vice President in
September 1993 and has been Chief Financial Officer since 1988. She was also
made a Vice President in 1988 and has been Chief Financial Officer of M/I
Financial since 1988.
DIRECTORS
Friedrich K. M. Bohm has been the Managing Partner and Chief Executive
Officer of NBBJ, the second largest architectural firm in the United States,
since 1987. He is a Director, and currently serves as a member of the executive
committee of the Board of Directors, of Huntington National Bank, a subsidiary
of Huntington Bancshares Incorporated, and as a Director of The Daimler Group
and 55 Restaurants, Inc.
Lewis R. Smoot, Sr. has been the President and Chief Executive Officer
of The Smoot Corporation, a real estate construction and management concern,
since 1987. He currently serves as a Director of Huntington Bancshares
Incorporated.
Norman L. Traeger founded United Skates of America, a chain of family
fun centers, in 1971 and The Discovery Group, a venture capital firm, in 1983.
Mr. Traeger currently owns and manages industrial, commercial and office real
estate and is Vice Chairman of the Board of Trustees of Prescott College. He has
been a Director of the Company since February 1997.
OTHER KEY EMPLOYEES
Paul S. Coppel joined the Company in January 1994 as Senior Vice
President/General Counsel. Mr. Coppel became the Secretary in February 1995. He
became the Secretary of M/I Financial in August 1995. Prior to joining the
Company, Mr. Coppel was engaged in the private practice of law with Vorys,
Sater, Seymour and Pease, Columbus, Ohio from April 1993 until December 1993;
and Schwartz, Kelm, Warren & Rubenstein, Columbus, Ohio from September 1986
until April 1993.
Phillip G. Creek joined the Company in January 1993 as Vice President
and Treasurer and became a Senior Vice President in September 1993. He became
the Vice President of M/I Financial in August 1995. From 1978 to 1993, Mr. Creek
was employed with The Ryland Group, Inc., a national homebuilder.
Gary A. Haarer joined the Company in November 1996 as President of the
Arizona Region. Prior to joining the Company, Mr. Haarer was employed with UDC
Homes, Inc., a national homebuilder with operations concentrated in Phoenix, for
more than 20 years, most recently as its Executive Vice President.
Robert C. Moesle joined the Company in December 1990 as Division
Manager of the Washington, D.C. division and became Vice President/Regional
Manager-Washington, D.C. Region in September 1991 and President of the
Washington, D.C. Region in November 1996. He became a Senior Vice President in
September 1993. Prior to joining the Company, Mr. Moesle was employed with NVR,
Inc. and The Ryland Group, Inc., both national homebuilders.
Lloyd T. Simpson joined the Company in 1984 and has been President of
the Columbus Region since November 1996 and was Vice President/Regional
Manager-Columbus Region from February 1996 through November 1996. From 1984
until February 1996, he was the Vice President/Regional Manager-Ohio Region. He
became a Senior Vice President in September 1993 and assumed division manager
responsibilities for the Columbus Division in April 1994.
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<PAGE> 40
Directors of the Company are elected annually. Officers of the Company
are elected annually and serve at the discretion of the Board of Directors.
As a result of the resignations of Holly S. Kastan, Amy D.
Schottenstein and Eric J. Schottenstein on August 1, 1997, in connection with
the repurchase of 702,439 shares of Common Stock from members of the Melvin L.
Schottenstein family, there are three open seats on the Board of Directors, one
in each of the three classes. The Company currently intends to fill at least two
of such seats at or prior to the Company's 1998 annual meeting of shareholders.
39
<PAGE> 41
PRINCIPAL AND SELLING SHAREHOLDERS
The following table and accompanying footnotes set forth certain
information with respect to beneficial ownership of the Company's Common Stock
as of October 14, 1997, and as adjusted to reflect the sale of the 2,000,000
shares of Common Stock by the Company and 310,000 shares of Common Stock by the
Selling Shareholders in the Offering, by: (i) each of the Company's directors;
(ii) each of the Company's "named executive officers" included in the
compensation table of the Company's proxy statement; (iii) all directors and
officers as a group; (iv) each person who is known by the Company to
beneficially own five percent or more of any class of the Company's voting
securities; and (v) the Selling Shareholders.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
-------------------------- NUMBER OF ----------------------------
SHARES TO BE
DIRECTORS AND NUMBER OF PERCENT OF SOLD IN THE NUMBER PERCENT OF
NAMED EXECUTIVE OFFICERS (1) SHARES CLASS OFFERING (2) OF SHARES (2) CLASS (2)
---------------------------- ------ ----- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Friedrich K. M. Bohm........................ 5,000 * -- 5,000 *
Irving E. Schottenstein (3)................. 529,300 7.0% -- 529,300 5.5%
Robert H. Schottenstein (4)................. 575,200 7.6% -- 600,200 6.3%
Steven Schottenstein (5).................... 524,200 6.9% 549,200 5.7%
Lewis R. Smoot, Sr.......................... 2,000 * -- 2,000 *
Norman L. Traeger........................... 1,500 * -- 1,500 *
Kerrii B. Anderson (6)...................... 9,200 * -- 9,200 *
All directors and executive officers as a group
(7 persons).............................. 1,646,400 21.6% -- 1,696,400 17.6%
PRINCIPAL AND SELLING SHAREHOLDERS
FMR Corp. (7)............................... 868,600 11.4% -- 868,600 9.1%
82 Devonshire Street
Boston, MA 02109
Linda S. Fisher (8)......................... 569,300 7.5% -- 569,300 5.9%
11221 Grandon Ridge Circle
Cincinnati, OH 45249
Holly S. Kastan (9)......................... 363,620 4.8% 125,000 238,620 2.5%
2355 Commonwealth South
Columbus, OH 43209
Julie S. Saar (10).......................... 379,900 5.0% 125,000 254,900 2.7%
Ha Shfela 2/5
Kfar Saba Israel
Amy D. Schottenstein........................ 379,403 5.0% 60,000 319,403 3.3%
1615 10th Street West
Kirkland, WA 98033
Gary L. Schottenstein (12).................. 563,800 7.4% -- 563,800 5.9%
2077 Parkhill Drive
Columbus, OH 43209
- ---------------
<FN>
* Less than 1%
(1) The address of each of the directors and named executive officers is c/o
M/I Schottenstein Homes, Inc., 3 Easton Oval, Columbus, Ohio 43219.
(2) Does not give effect to any exercise of the Underwriters' over-allotment
option to purchase up to 300,000 additional shares from the Company. In
addition, Robert H. Schottenstein and Steven Schottenstein have agreed to
purchase an aggregate of 50,000 shares of Common Stock from certain of the
Selling Shareholders at
</TABLE>
40
<PAGE> 42
the price to public on the front cover of this Prospectus immediately
after the consummation of the Offering.
(3) Irving E. Schottenstein is the trustee of (i) the Irving and Frankie
Schottenstein Trust which holds 478,300 shares and (ii) the Steven
Schottenstein Descendants Trust which holds 51,000 shares, and exercises
all rights with regard to such shares. Does not include an aggregate of
2,149,000 shares which are held in trust by Mr. Schottenstein, as trustee,
pursuant to trust agreements dated August 1986, as amended, for the benefit
of Mr. Schottenstein's four children: Robert H. Schottenstein (550,000
shares), Steven Schottenstein (499,000 shares), Gary L. Schottenstein
(550,000 shares) and Linda S. Fisher (550,000 shares). As trustee, Mr.
Schottenstein is empowered to exercise all rights with regard to such
shares, revoke each trust and, with the agreement of each beneficiary,
amend each trust.
(4) 550,000 of these shares are held in trust by Irving E. Schottenstein in
accordance with note 3 above. 2,800 of these shares are held by Robert H.
Schottenstein, individually. 16,500 of these shares are held in trust by
Robert H. Schottenstein, as trustee, for the benefit of his children
pursuant to trust agreements dated December 22, 1994. As trustee, Robert H.
Schottenstein is empowered to exercise all rights with regard to such
shares and may be deemed the beneficial owner of such shares. Includes
5,900 shares of Common Stock that underlie exercisable stock options.
(5) 499,000 of these shares are held in trust by Irving E. Schottenstein in
accordance with note 3 above. 2,800 of these shares are held by Steven
Schottenstein, individually. 16,500 of these shares are held in trust by
Steven Schottenstein, as trustee, for the benefit of his children pursuant
to trust agreements dated December 22, 1994. As trustee, Steven
Schottenstein is empowered to exercise all rights with regard to such
shares and may be deemed the beneficial owner of such shares. Includes
5,900 shares of Common Stock that underlie exercisable stock options.
(6) Includes 5,800 shares of Common Stock that underlie exercisable stock
options.
(7) Based on information set forth in a Schedule 13G dated February 14, 1997,
which was filed on behalf of FMR Corp. and certain other Fidelity entities.
(8) 550,000 of these shares are held in trust by Irving E. Schottenstein in
accordance with note 3 above. 2,800 of these shares are held by Linda S.
Fisher, individually. 16,500 of these shares are held in trust by Mrs.
Fisher, as trustee, for the benefit of her children pursuant to trust
agreements dated December 22, 1994. As trustee, Mrs. Fisher is empowered to
exercise all rights with regard to such shares and may be deemed the
beneficial owner of such shares.
(9) 243,620 of these shares are held in trust by Holly S. Kastan, as trustee.
80,000 of these shares are held in a trust for the benefit of Mrs. Kastan's
children, the trustee of which is David J. Kastan, Mrs. Kastan's
brother-in-law. 40,000 of these shares are held by Mrs. Kastan's husband.
(10) 311,168 of these shares are held in trust by Julie S. Saar, as trustee, and
68,732 shares are held in a family trust of which Mrs. Saar's husband is
trustee.
(11) 5,104 of these shares are owned by Eric J. Schottenstein as custodian for
his minor children.
(12) 550,000 of these shares are held in trust by Irving E. Schottenstein in
accordance with note 3 above. 2,800 of these shares are held by Gary L.
Schottenstein, individually. 11,000 of these shares are held in trust by
Gary L. Schottenstein, as trustee, for the benefit of his children pursuant
to trust agreements dated December 22, 1994. As trustee, Gary L.
Schottenstein is empowered to exercise all rights with regard to such
shares and may be deemed the beneficial owner of such shares.
41
<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 38,000,000 shares of
common stock, par value $.01 per share (the "Common Stock") and 2,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"). As of
October 14, 1997, 7,597,561 shares of Common Stock were issued and outstanding.
There are no shares of Preferred Stock issued and outstanding.
The following summary description does not purport to be complete and
is qualified in its entirety by reference to the Amended and Restated Articles
of Incorporation (the "Articles") and Regulations of the Company, which are
incorporated herein by reference.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share on all
matters to be voted upon by shareholders generally, including the election of
directors. Holders of Common Stock have no cumulative voting rights and no
preemptive rights to purchase or subscribe for any Common Stock or other
securities, and there are no conversion rights or redemption or sinking fund
provisions with respect to the Common Stock. The holders of Common Stock are not
subject to further calls or assessments by the Company. Subject to the rights of
the holders of any shares of Preferred Stock which may be outstanding, and
subject to the applicable debt instruments of the Company, each holder of Common
Stock on the applicable record date is entitled to receive dividends, pro rata
according to the number of shares of Common Stock held, when and if declared by
the Board of Directors out of legally available funds therefor, and, in the
event of liquidation, to share pro rata in any distribution of the Company's
assets after payment or provision for payment of liabilities and the liquidation
preference of any shares of Preferred Stock which may be outstanding. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further shareholder
action, to divide any or all shares of the authorized Preferred Stock into
series and to fix and determine the designations, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions thereon, of any series so established, including dividend
rights, liquidation preferences, redemption rights and conversion rights, but
excluding, under current applicable law, voting rights. Any series of Preferred
Stock so issued would have priority over the Common Stock with respect to
dividend or liquidation rights or both.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston
Equiserve.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED CAPITAL STOCK
The authorized but unissued shares of Common Stock and Preferred Stock
will be available for future issuance without shareholder approval. These
additional shares may be utilized for a variety of corporate purposes, including
future public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
The existence of authorized but unissued and unreserved Common Stock
and Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy contest, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management.
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<PAGE> 44
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES AND
REGULATIONS
Certain provisions of the Articles and Regulations of the Company
summarized in the following paragraphs may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
shareholders.
Classified Board of Directors
The Regulations provide for the Board of Directors to be divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year. In
addition, the Regulations provide that the number of directors in each class and
the total number of directors of the Company may only be changed by the
affirmative vote of a majority of the directors or the holders of record of at
least 75% of the voting power of the Company. However, under the Ohio General
Corporation Law, shareholders of record of at least a majority of the voting
power of the Company may remove any or all of the directors without assigning
cause and may fill the resulting vacancy or vacancies.
Limited Shareholder Action by Written Consent
Section 1701.54 of the Ohio General Corporation Law requires that an
action by written consent of the shareholders in lieu of a meeting be unanimous,
except that, pursuant to Section 1701.11, the code of regulations may be amended
by an action by written consent of holders of shares entitling them to exercise
two-thirds of the voting power of the corporation or, if the articles of
incorporation or code of regulations otherwise provide, such greater or lesser
amount, but not less than a majority. This provision may have the effect of
delaying, deferring or preventing a tender offer or takeover attempt that a
shareholder might consider in its best interest.
SHARES ELIGIBLE FOR FUTURE SALE
The Company estimates that, other than the Common Stock offered hereby
and the 3,300,000 shares sold in the Company's November 1993 initial public
offering, as well as approximately 287,000 shares issued prior to the initial
public offering that have been resold in the public market, the remaining
4,010,144 outstanding shares, of which 310,000 shares are being offered hereby,
are currently not able to be sold in the public market without restriction.
However, beginning on November 14, 1997, and assuming the consummation of the
Offering, 888,244 of such shares of Common Stock held by members of Melvin L.
Schottenstein's family will be eligible to be resold in the public market
pursuant to the provisions of Rule 144(k) under the Securities Act. The Selling
Shareholders, who will own 762,923 of such 888,244 shares have agreed that,
without the prior written consent of Smith Barney Inc., they will not offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock for a
period of 90 days after the date of this Prospectus.
Upon the closing of the Offering, the Company estimates that no more
than an additional 2,829,500 "restricted shares" as defined in Rule 144 or
shares held by persons who could be deemed to be an "affiliate" of the Company
will be outstanding and will be available for sale in the public market pursuant
to the volume and other limitations of Rule 144 or, depending on the facts and
circumstances, without restriction pursuant to Rule 144(k). All of such shares
are beneficially owned by members of the Irving E. Schottenstein family and the
executive officers and directors of the Company. See "Principal and Selling
Shareholders."
In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted shares from the
Company or from any "affiliate" of the Company, the acquirer or subsequent
holder thereof is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Company's Common Stock (approximately 96,000 shares upon the closing of the
Offering) and the average weekly trading volume of the Company's Common Stock
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission (the "Commission"). Such sales
under Rule 144 are also subject to certain manner of sales provisions, notice
requirements and the availability of current public information about the
Company. If two years
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<PAGE> 45
have elapsed since the later of the date of acquisition of restricted shares
from the Company and from any affiliate of the Company, and the acquirer or
subsequent holder thereof is deemed not to have been an affiliate of the Company
at any time during the 90 days preceding a sale, such person would be entitled
to sell such shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information requirements
or notice requirements.
In addition to the Selling Shareholders, each of the Company, the
Company's executive officers and directors and the members of the Irving E.
Schottenstein family has agreed that, without the prior written consent of Smith
Barney Inc., it will not offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 90 days after the date of this
Offering, subject to certain limited exceptions, including, but not limited to,
grants of awards under the Company's existing employee benefit plans or
issuances of Common Stock upon the exercise of outstanding stock options and
offerings made on Form S-4. See "Underwriting."
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each of the underwriters (the "Underwriters")
named below has severally agreed to purchase, and the Company and the Selling
Shareholders have agreed to sell to such Underwriter, the number of shares of
Common Stock set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
<S> <C>
Smith Barney Inc.............................................
Salomon Brothers Inc.........................................
Southeast Research Partners, Inc.............................
----------------
Total............................................... 2,310,000
================
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters propose to offer part of the shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part of the shares to certain dealers at a price which represents
a concession not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the initial offering of the
shares to the public, the public offering price and such concessions may be
changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus, to purchase up to an aggregate of
300,000 additional shares of Common Stock at the price to public set forth on
the cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the offering of the shares
offered hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
Each of the Company, the Company's executive officers and directors,
the Selling Shareholders and certain other shareholders has agreed that, for a
period of 90 days from the date of this Prospectus, it will not, in each case
without the prior consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of, any shares of Common Stock of the Company or any
securities convertible into, or exercisable or exchangeable for,
44
<PAGE> 46
Common Stock of the Company, except for grants of awards under the Company's
existing employee benefit plans or issuances of Common Stock upon the exercise
of outstanding stock options and offerings made pursuant to Form S-4.
The Company, the Selling Stockholders and the Underwriters have agreed
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Exchange Act. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids for and purchases of the Common Stock so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of the Common Stock in the open market
in order to cover syndicate short positions. Penalty bids permit the
Underwriters to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
stabilizing transaction or syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the Common Stock to be higher than it
would otherwise be in the absence of such transactions. These transactions may
be effected on The New York Stock Exchange or otherwise and, if commenced, may
be discontinued at any time.
LEGAL MATTERS
Certain legal matters relating to the validity of issuance of the
Common Stock being offered hereby will be passed upon for the Company by Vorys,
Sater, Seymour and Pease, Columbus, Ohio. Certain legal matters relating to the
Offering will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
EXPERTS
The consolidated financial statements and the related consolidated
financial statement schedules as of December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996; included and incorporated
by reference in this Prospectus included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports, which are included and incorporated by reference herein and have
been so included and incorporated in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison, 14th
Floor, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission also maintains a World Wide Web site
on the Internet at http://www.sec.gov that contains reports and other
information regarding registrants that file electronically with the Commission.
Such material should also be available at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed a registration statement on Form S-2 (together
with all amendments and exhibits thereto, the "Registration Statement") under
the Securities Act. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement and the exhibits
filed as part thereof. Statements contained herein are qualified in their
entirety by reference to the Registration Statement and such exhibits.
45
<PAGE> 47
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996; the Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1997 and June 30, 1997, and pages two through six
("Election of Directors" through "Certain Transactions") and pages 11 through 17
("Executive Compensation") contained in the Company's Proxy Statement dated
April 1, 1997 relating to the 1997 Annual Meeting of Shareholders are
incorporated herein by reference. All documents filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the Offering shall be deemed to
be incorporated by reference into this Prospectus and to be a part hereof from
the date of filing such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus.
The Company will provide without charge to each person to whom a copy
of this Prospectus is delivered, upon the request of any such person, a copy of
all of the documents which are incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Requests should be directed to M/I
Schottenstein Homes, Inc., 3 Easton Oval, Suite 500, Columbus, Ohio 43219,
Attention: Phillip G. Creek, Senior Vice President and Treasurer, telephone
number (614) 418-8000.
46
<PAGE> 48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report......................................... F-2
Consolidated Statements of Income -
Years Ended December 31, 1996, 1995 and 1994.................. F-3
Consolidated Balance Sheets -
December 31, 1996 and 1995.................................... F-4
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1996, 1995 and 1994.................. F-5
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and 1994.................. F-6
Notes to Consolidated Financial Statements........................... F-7
Unaudited Interim Consolidated Balance Sheet -
June 30, 1997................................................. F-13
Unaudited Interim Consolidated Statements of Income -
Six Months Ended June 30, 1997 and 1996....................... F-14
Unaudited Interim Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996....................... F-15
Notes to Interim Unaudited Consolidated Financial Statements......... F-16
F-1
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of
M/I Schottenstein Homes, Inc.:
We have audited the accompanying consolidated balance sheets of M/I
Schottenstein Homes, Inc. and its subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of M/I Schottenstein Homes,
Inc. and its subsidiary at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
February 27, 1997, except with respect to the last paragraph of
Note 2, for which the date is March 15, 1997
F-2
<PAGE> 50
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Statements of Income
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(Dollars in thousands, except per share amounts) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue (Notes 1, 4 and 5) $ 577,192 $527,822 $491,719
- ---------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing (Notes 1, 2 and 4) 468,089 431,961 403,554
General and administrative (Notes 1 and 2) 34,980 30,660 27,208
Selling (Notes 1 and 2) 37,943 34,497 31,799
Interest (Notes 1, 4, 6 and 7) 13,103 14,198 9,965
- ---------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 554,115 511,316 472,526
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary loss 23,077 16,506 19,193
- ---------------------------------------------------------------------------------------------------------------------------
Income taxes (credit) (Note 11):
Current 11,049 8,399 8,101
Deferred (2,082) (1,769) (521)
- ---------------------------------------------------------------------------------------------------------------------------
Total income taxes 8,967 6,630 7,580
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 14,110 9,876 11,613
- ---------------------------------------------------------------------------------------------------------------------------
Extraordinary loss from extinguishment of debt,
net of income taxes of $823 (Note 7) (1,287) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 12,823 $ 9,876 $ 11,613
- ---------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary loss per common share (Note 1) $ 1.60 $ 1.12 $ 1.32
- ---------------------------------------------------------------------------------------------------------------------------
Extraordinary loss per common share (Note 7) $ (.14) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income per common share (Note 1) $ 1.46 $ 1.12 $ 1.32
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 8,800,000 8,800,000 8,800,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 51
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in thousands, except par values) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash, including cash in escrow (Note 1) $ 6,761 $ 8,136
Receivables (Note 3) 34,447 23,612
Inventories (Notes 1, 2, 4 and 5):
Single-family lots, land and land development costs 129,025 120,806
Houses under construction 89,696 86,110
Model homes and furnishings (less accumulated
depreciation: 1996 - $56; 1995 - $823) 19,482 20,971
Land purchase deposits 716 381
Office furnishings, transportation and
construction equipment - at cost (less accumulated
depreciation: 1996 - $6,668; 1995 - $6,106) (Note 1) 1,635 2,392
Investment in unconsolidated joint ventures and
limited partnerships (Notes 2, 4, 5 and 8) 12,998 11,641
Other assets (Notes 1 and 11) 10,599 7,094
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 305,359 $281,143
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable banks - home-building operations (Note 6) $ 77,000 $ 87,000
Note payable bank - financial operations (Note 6) 23,300 15,200
Subordinated notes (Note 7) 25,000 24,513
Accounts payable 32,016 29,219
Accrued compensation 11,802 7,336
Income taxes payable (Note 11) 1,502 2,771
Accrued interest, warranty and other (Note 1) 15,349 10,136
Customer deposits 7,071 5,472
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 193,040 181,647
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 4, 6, 7, 8, 10, 12 and 13)
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (Notes 1, 2, 6, 9 and 10):
Preferred stock - $.01 par value; authorized -
2,000,000 shares; none outstanding - -
Common stock - $.01 par value; authorized - 38,000,000
shares; issued and outstanding - 8,800,000 shares 88 88
Additional paid-in capital 50,573 50,573
Retained earnings 61,658 48,835
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 112,319 99,496
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 305,359 $281,143
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 52
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Common Stock
---------------------------- Additional
Shares Paid-in Retained
(Dollars in thousands) Outstanding Amount Capital Earnings
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 8,800,000 $88 $50,573 $28,428
Net income - - - 11,613
Distributions to stockholders (Note 1) - - - (1,082)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 8,800,000 88 50,573 38,959
Net income - - - 9,876
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 8,800,000 88 50,573 48,835
Net income - - - 12,823
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 8,800,000 $88 $50,573 $61,658
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 53
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,823 $ 9,876 $ 11,613
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Extraordinary loss from extinguishment of debt 2,110 - -
Loss from property disposals 1,008 335 254
Depreciation and amortization 1,377 1,754 1,647
Deferred income tax credit (2,082) (1,769) (521)
Decrease (increase) in receivables (10,835) (6,265) 3,865
Decrease (increase) in inventories (612) 5,775 (38,807)
Decrease (increase) in other assets (1,589) 861 (845)
Increase (decrease) in accounts payable 2,797 (2,217) 6,652
Increase (decrease) in income taxes payable (1,269) 1,602 (1,453)
Increase (decrease) in accrued liabilities 9,983 5,155 (1,694)
Equity in undistributed income of
unconsolidated joint ventures and limited partnerships (223) (132) (242)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 13,488 14,975 (19,531)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings, transportation
and construction equipment (611) (691) (2,149)
Investment in unconsolidated joint ventures (12,718) (10,423) (9,752)
Distributions from unconsolidated joint ventures
and limited partnerships 871 1,477 823
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,458) (9,637) (11,078)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Cash proceeds from borrowings 422,551 396,793 438,816
Principal repayments (424,451) (407,023) (403,891)
Principal repayments of mortgage notes payable (463) (360) (571)
Proceeds from the issuance of subordinated notes 25,000 - -
Principal repayments of subordinated notes (24,513) - -
Debt issuance costs (650) - -
Subordinated notes redemption premium (1,478) - -
Net increase (decrease) in customer deposits 1,599 (671) 747
Distributions paid to former S corporation stockholders - - (1,082)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (2,405) (11,261) 34,019
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,375) (5,923) 3,410
Cash balance at beginning of year 8,136 14,059 10,649
- -------------------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 6,761 $ 8,136 $ 14,059
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest - net of amount capitalized $ 12,875 $ 14,007 $ 10,634
Income taxes - net $ 11,495 $ 6,797 $ 9,554
NON-CASH TRANSACTIONS DURING THE YEAR:
Land acquired with mortgage notes payable $ 159 $ 374 $ 519
Single-family lots distributed from unconsolidated
joint ventures $ 10,713 $ 5,628 $ 11,588
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 54
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of M/I Schottenstein Homes, Inc. and its
subsidiaries. All significant intercompany transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company is engaged primarily in the construction and sale of
single-family residential property in Columbus and Cincinnati, Ohio; Tampa,
Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina;
Indianapolis, Indiana; the Virginia and Maryland suburbs of Washington, D.C.
and, beginning in 1997, Phoenix, Arizona. The Company designs, builds and sells
single-family homes on finished lots, which it purchases ready for home
construction or which it develops. The Company also purchases undeveloped land
to develop finished lots for future construction of single-family homes and for
sale to others.
The Company also conducts mortgage banking activities through M/I
Financial, which originates mortgage loans primarily for purchasers of the
Company's homes. The loans and the majority of the servicing rights are sold to
outside mortgage lenders.
CASH IN ESCROW. Cash includes cash held in escrow of $393,000 and $407,000
at December 31, 1996 and 1995, respectively, pending completion of construction.
Cash was primarily held in one bank at December 31, 1996 and 1995.
INVENTORIES. Inventories are recorded at cost which is not in excess of net
realizable value. Houses under construction include lot costs, construction
costs, capitalized interest and indirect costs. These costs, other than
interest, are charged, under the specific identification method, to cost of
sales as housing sales are closed. Previously capitalized interest is included
in interest expense when the related housing sales are closed. Lot costs are
transferred to houses under construction from land costs when house construction
commences.
Depreciation on model home furnishings is recorded using an accelerated
method over the estimated useful lives of the assets.
Land and land development costs are allocated to development phases based
on relative estimated market values. Development costs, capitalized interest and
real estate taxes incurred during land development are allocated to each
residential lot in a development phase based on relative estimated market
values.
INTEREST. The Company capitalizes interest during development and
construction. Capitalized interest is charged to interest expense as the related
inventory is delivered. The summary of total interest for 1996, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Interest capitalized, beginning of year $ 7,560 $ 7,322 $ 6,139
Interest incurred 12,405 14,436 11,148
Interest expensed (13,103) (14,198) (9,965)
- --------------------------------------------------------------------------
Interest capitalized, end of year $ 6,862 $ 7,560 $ 7,322
- --------------------------------------------------------------------------
</TABLE>
REVENUE RECOGNITION. Revenue and cost of revenue from the sale of real
estate are recognized at the time title is transferred to the buyer and the
buyer has met the minimum down payment requirement. Discounts and other sales
incentives are included as a reduction of home-building revenue.
The following table summaries both home-building and lot and land sales and
cost of sales included in revenue and cost of revenue:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
Home-building sales $560,980 $505,810 $478,657
Lot and land sales 8,915 16,145 8,528
Home-building cost of sales 460,573 418,697 397,063
Lot and land cost of sales 7,515 13,264 6,491
- ------------------------------------------------------------
</TABLE>
M/I Financial recognizes revenue from application fees when received, while
revenue from loan origination fees are recorded when the loan closes. M/I
Financial sells its loans and the majority of its servicing rights to outside
mortgage lenders. The revenue from these transactions is recorded when the loan
is sold. M/I Financial uses various methods to hedge the interest rate risk
related to the loans it has committed to make to home buyers (see Note 13).
Gains or losses resulting from these hedging transactions are included in
revenue when the gain or loss from the sale of the related loan is recorded.
WARRANTY COST. The Company provides a two-year limited warranty on
materials and workmanship and a twenty-year limited warranty against major
structural defects. An estimated amount of warranty cost is provided for each
house at the time of sale. Warranty expense was $5,492,000, $4,475,000 and
$4,256,000 for 1996, 1995 and 1994, respectively.
DEPRECIATION. Depreciation of office furnishings, transportation and
construction equipment is computed using both straight-line and accelerated
methods based on the estimated useful lives of the assets. Depreciation expense
was $1,193,000, $1,574,000 and $1,466,000 in 1996, 1995 and 1994, respectively.
AMORTIZATION. The costs incurred in connection with the issuance of the new
Subordinated Note, issued in 1996, (see Note 7) are being amortized over the
terms of the related debt and are included in interest expense. Unamortized debt
issuance costs of $632,000 relating to the new Subordinated Note, and $798,000
relating to the 14% Subordinated Notes, are included in other assets at December
31, 1996 and 1995, respectively.
ADVERTISING. The Company expenses advertising costs as incurred. The
Company expensed $4,765,000, $4,963,000 and
F-7
<PAGE> 55
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$4,831,000 in 1996, 1995 and 1994, respectively.
NET INCOME PER COMMON SHARE. Net income per common share is calculated
based on the weighted average shares outstanding during the period. The Company
has no common stock equivalents other than outstanding options, which have no
significant effect on the calculation.
PROFIT SHARING. The Company has a trusteed deferred profit-sharing plan
which covers substantially all Company employees and permits members to make
contributions to the plan on a pre-tax salary reduction basis in accordance with
the provisions of Section 401(k) of the Internal Revenue Code. Company
contributions to the plan are made at the discretion of the Board and totalled
$825,000 in 1996, $620,000 in 1995 and $715,000 in 1994 (including payment of
expenses incurred by the plan).
DISTRIBUTIONS TO STOCKHOLDERS. Distributions to stockholders represent
payments by the Company to its stockholders for income earned while it was an S
corporation. In January 1994, the Company made distributions of $1,082,000 to
the former S corporation stockholders related to the Company's earnings from
January 1, 1993 to November 8, 1993 (the date the Company's status as an S
corporation was terminated).
IMPACT OF ACCOUNTING STANDARDS. In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS 121 amends the impairment provisions
of the existing accounting literature which required the Company's home-building
inventories to be carried at the lower of cost or net realizable value. Under
the new provisions, if the Company's home-building inventories are determined to
be impaired, the impairment loss is measured based upon the difference between
the fair value of the asset and its carrying amount.
The Company adopted SFAS 121 during the first quarter of 1996. Based on the
Company's analysis of its home-building inventories, nothing of significance was
found to be impaired and therefore the implementation of this statement had no
impact on the financial condition or results of operations of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". Under SFAS 123, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but are required to disclose in a note to the financial statements
pro forma net income and earnings per share, as if the Company had applied the
new method of accounting. The Company has determined that it will not adopt the
expense recognition provisions of this standard; therefore, the new standard
will have no effect on the Company's financial condition or results of
operations. See Note 10 for the required disclosure under SFAS 123.
2. TRANSACTIONS WITH RELATED PARTIES
Related parties are entities owned by, or partially owned by, certain
stockholders of the Company or joint ventures and limited partnerships (see
Notes 4 and 5) in which investments by the Company are accounted for by the
equity method.
The Company purchased lots and undeveloped land from the joint ventures and
limited liability companies or limited partnerships of approximately $1,159,000,
$4,286,000 and $3,608,000 in 1996, 1995 and 1994, respectively. The Company
received distributions of $10,713,000, $5,628,000 and $11,588,000 in developed
lots at cost in 1996, 1995 and 1994, respectively. The Company also had notes
receivable from limited partnerships in 1995 (see Note 3).
Eric J. Schottenstein, formerly Senior Vice President/Regional Manager -
Carolina Region, resigned his position with the Company in December 1993. Mr.
Schottenstein agreed to serve as a consultant to the Company for a period of
three years, for which he was paid $192,000 in 1996, $207,000 in 1995 and
$215,000 in 1994. This contract was paid in full in 1996.
On March 15, 1997, the Board of Directors of the Company authorized the
repurchase of 500,000 shares of the Company's common stock at $10.50 per share,
which represents the closing price of the Company's common stock on March 14,
1997, from the Melvin L. Schottenstein family interests. These shares will be
held as treasury shares by the Company. The total purchase price will be
$5,250,000 and will be paid from proceeds of the Company's revolving line of
credit. In conjunction with this stock transaction, Lenore S. Sagner has
resigned from the Board of Directors. Amy D. Schottenstein has been elected to
fill this vacancy.
3. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Mortgage loans to be funded $34,121 $22,797
Notes receivable from limited partnerships - 440
Accounts receivable 326 356
Accounts receivable from limited partnerships - 19
- -----------------------------------------------------------------
Total receivables $34,447 $23,612
- -----------------------------------------------------------------
</TABLE>
Mortgage loans to be funded relate to houses sold and closed prior to
December 31 and which were subsequently funded by unrelated lending
institutions. Notes receivable from limited partnerships represent an advance
from the Company which bore interest at the prime rate plus 1/2% for a total of
9.00% at December 31, 1995. The note was collected in full in 1996 (see Note 5).
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND LIMITED LIABILITY
CORPORATIONS
At December 31, 1996, the Company had interests varying from 33% to 50% in
each of 18 separate joint ventures (33% - 4 and 50% - 14), three formed in 1995,
three in 1994, and twelve prior to 1994, and five separate limited liability
corporations formed in 1996 (33% - 1 and 50% - 4) that engage in land
development activi-
F-8
<PAGE> 56
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
ties. These interests are recorded using the equity method of accounting.
The Company receives its percentage interest of profits or its percentage
interest of the lots developed in the form of a capital distribution. The
Company received distributions of $10,713,000, $5,628,000 and $11,588,000 in
developed lots at cost in 1996, 1995 and 1994, respectively, and purchased lots
totalling $1,159,000, $1,333,000 and $1,105,000 in 1996, 1995 and 1994 from the
joint ventures and limited liability corporations.
Summarized condensed combined financial information for the joint ventures
and limited liability corporations as of December 31, 1996 and 1995 and for each
of the three years in the period ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SUMMARIZED CONDENSED COMBINED BALANCE SHEETS
- -------------------------------------------------------------------
December 31,
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Assets:
Single-family lots,
Land and land development costs $28,378 $25,173
Other assets 1,796 1,284
- -------------------------------------------------------------------
Total $30,174 $26,457
- -------------------------------------------------------------------
Liabilities:
Debt $ 1,081 $ 2,544
Other liabilities 3,429 2,132
- -------------------------------------------------------------------
Total liabilities 4,510 4,676
Partners' equity:
Company's equity 11,143 9,890
Other 14,521 11,891
- -------------------------------------------------------------------
Total Partners' equity 25,664 21,781
- -------------------------------------------------------------------
Total $30,174 $26,457
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $1,334 $2,335 $1,706
Costs and expenses 1,153 2,158 1,809
- -------------------------------------------------------------------
Income (loss) $ 181 $ 177 $ (103)
- -------------------------------------------------------------------
</TABLE>
Joint venture earnings include $20,000, $45,000 and $44,000 of intercompany
profit not included in the Company's earnings for 1996, 1995 and 1994,
respectively. In addition, included in the Company's investment in the joint
ventures at December 31, 1996 and 1995, is $349,000 and $413,000 of capitalized
interest and other costs relating to the joint ventures. Letters of credit
totalling approximately $3,297,000 are outstanding at December 31, 1996, which
serve as completion bonds for joint venture development work in progress.
5. INVESTMENT IN LIMITED PARTNERSHIPS
In 1992, the Company became a limited partner in two limited partnerships
formed by affiliates to purchase and develop land and lots. The operations of
the limited partnerships has primarily been funded through advances from the
Company. In 1996, all outstanding advances and deposits were reimbursed to the
Company. The advances outstanding as of December 31, 1995 totaled $465,000,
which included $440,000 of notes receivable, which bore interest at prime plus
1/2%, and included $6,000 of deposits for lots the Company had an option to
purchase from the limited partnerships at fair market value. The Company
purchased lots totalling $2,953,000 and $2,503,000 from the limited partnerships
in 1995 and 1994, respectively. No lots were purchased from the limited
partnerships in 1996.
For both limited partnerships, the land and related debt were recorded on
the limited partnerships' books and the Company was not contingently liable for
any of the limited partnerships' debt; therefore, the only amounts related to
the limited partnerships that were recorded on the Company's books were the
advances noted above, and the Company's investment in the limited partnerships
of $0 and $262,000 at December 31, 1996 and 1995, respectively. The Company
recorded income using the equity method of accounting from the limited
partnerships of $65,000, $85,000 and $322,000 respectively for 1996, 1995 and
1994.
6. NOTES PAYABLE BANKS
At December 31, 1996, the Company had revolving credit loans of $77,000,000
and letters of credit totalling $17,048,000 outstanding under a loan agreement
with five banks. Borrowings under the loan agreement are at LIBOR plus a margin
of between 1.75% and 2.50% and are primarily unsecured. This agreement provides
for total borrowings not to exceed the lesser of $186,000,000 under the
revolving credit agreement and $25,000,000, including $4,000,000 for joint
ventures in which the Company is a partner, in the form of letters of credit; or
the Company's borrowing base, which is calculated based on specified percentages
of certain types of assets held by the Company as of each month end. This
revolving credit facility and letter of credit commitment expires September 30,
2001, at which time the unpaid balance of the revolving credit loans outstanding
shall be due and payable. Under the terms of the agreement, the banks shall make
an annual determination as to whether or not to extend the maturity date of the
commitment by one year. The Company is required to pay interest at LIBOR plus a
margin and a commitment fee of 1/4 of 1% based upon the average daily unused
portion of the note. The terms of the loan agreement contain restrictive
covenants which require the Company, among other things, to maintain minimum net
worth and working capital amounts and to maintain certain financial ratios. This
agreement also places limitations on the amount of additional indebtedness that
may be incurred by the Company, the acquisition of undeveloped land, on
dividends that may be paid and on the aggregate cost of certain types of
inventory the Company can hold at any one time.
At December 31, 1996, $23,300,000 was outstanding under a revolving loan
agreement with a bank ("M/I Financial Loan Agreement") pursuant to which the
Company and M/I Financial were permitted to borrow up to $25,000,000 to finance
mortgage loans initially funded by M/I Financial for customers of the Company
and a limited amount for loans to others. This agreement limits the borrowings
to 95% of the aggregate face amount of the
F-9
<PAGE> 57
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
mortgages and contains restrictive covenants requiring M/I Financial to maintain
minimum net worth and certain minimum financial ratios. Borrowings under this
agreement are at the bank's prime rate less 0.25% and are unsecured. A
commitment fee of 1/4 of 1% is payable quarterly based upon the average daily
unused portion of the note. The M/I Financial Loan Agreement terminates on June
20, 1997 and the unpaid balance of such loans are payable on this date.
At December 31, 1996, the Company had $109,000,000 of unused borrowing
availability under its loan agreement, as well as $1,700,000 under the M/I
Financial Loan Agreement. The weighted average interest rate of the Company's
bank borrowings was 7.6% at December31,1996 and 8.5% at December 31, 1995 and
1994.
7. SUBORDINATED NOTES
In December 1991, the Company issued $20,000,000 principal amount of 14%
Subordinated Notes and in April 1992, issued an additional $4,513,000. In
December 1996, the Company redeemed all of these notes at a price of 106% of
par. The redemption resulted in an extraordinary loss of $1,287,000, net of
income taxes of $823,000.
In December 1996, the Company executed a $25,000,000 Subordinated Note
Purchase Agreement with The First National Bank of Boston. The proceeds were
used to redeem the 14% Subordinated Notes outstanding in the amount of
$24,513,000. The maturity date of the new Subordinated Note is December 15, 2001
and can be extended two additional years at the Company's option. The new
Subordinated Note is redeemable, in whole or in part, after one year without
penalty or premium. Each partial payment must be equal to or in excess of
$5,000,000. Interest on the new Subordinated Note is at LIBOR plus 3.50% and
adjusts quarterly. The new Subordinated Note limits payments for cash dividends
to $2,000,000 plus a percentage of revenues.
In compliance with the terms of the new Subordinated Note, the Company
purchased a three-year, 9% interest rate cap agreement, effective December 2,
1996 through December 2, 1999. The agreement provides that if the interest rate
in effect for each three month period is greater than the cap rate, the bank
will pay to the Company the excess interest computed.
8. LEASE COMMITMENTS
The Company leases various office facilities, automobiles, model furnishings,
and model homes under operating leases with remaining terms of one to twenty
years. At December 31, 1996, the future minimum rental commitments, totalling
$29,062,000, under noncancelable operating leases with initial terms in excess
of one year are as follows: 1997 - $3,363,000; 1998 - $2,290,000; 1999 -
$1,745,000; 2000 - $1,335,000; 2001 - $1,205,000; and thereafter - $19,124,000.
The Company's lease with a related party for approximately 27,000 square feet
of office space expired August 31, 1996. At this time the Company extended the
lease on a month-to-month basis at the current rental rate through February
1997. Rental expense was $347,000, $358,000 and $367,000 for 1996, 1995 and
1994, respectively.
In 1995, the Company became a 1/3 owner of a limited liability company (the
"LLC") formed to build, own and operate an approximately 85,000 square foot
office building in Columbus, Ohio. The Company consolidated its five Columbus
locations into this building and entered into a 20 year lease for the premises
with the LLC. The Company moved into this new facility in December 1996.
Included in the future minimum rental commitments above are rentals of $990,000
for 1997; $1,132,000 for 1998; $1,132,000 for 1999; $1,132,000 for 2000;
$1,132,000 for 2001; and $19,124,000 for all periods thereafter.
The Company's total rental expense was $5,048,000, $5,023,000 and $3,699,000
for 1996, 1995 and 1994, respectively.
9. PREFERRED STOCK
The Articles of Incorporation authorize the issuance of 2,000,000 shares of
preferred stock, par value $.01 per share. The Board of Directors of the Company
is authorized, without further stockholder action, to divide any or all shares
of the authorized preferred stock into series and to fix and determine the
designations, preferences and relative, participating, optional or other special
rights (excluding, under current Ohio law, voting rights) and qualifications,
limitations or restrictions thereon, of any series so established, including
dividend rights, liquidation preferences, redemption rights and conversion
privileges.
10. STOCK INCENTIVE PLAN
In November 1993, the Company adopted the M/I Schottenstein Homes, Inc. 1993
Stock Incentive Plan. This plan includes stock option, restricted stock and
stock appreciation programs, under which an aggregate of 425,000 shares of
common stock have been reserved for issuance. No awards have been granted under
the restricted stock and stock appreciation programs. Stock options are granted
at the market price at the close of business on the date of grant. Options
awarded vest 20% annually over five years and expire after ten years. The
following summarizes the transactions under the stock option program:
<TABLE>
<CAPTION>
Weighted
Option Price Avg. Exercise
Shares Per Share Price
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
December 31, 1993 - - -
Granted 94,200 $16.125 $16.125
Forfeited (10,000) $16.125 $16.125
- ---------------------------------------------------------------------
Options outstanding
December 31, 1994 84,200 $16.125 $16.125
Granted 68,200 $6.75-$9.25 $6.823
Forfeited (18,000) $6.75-$16.125 $14.042
- ---------------------------------------------------------------------
Options outstanding
December 31, 1995 134,400 $6.75-$16.125 $11.684
Granted 60,700 $10.875 $10.875
Forfeited (1,250) $10.875-$16.125 $11.925
- ---------------------------------------------------------------------
Options outstanding
December 31, 1996 193,850 $6.75-$16.125 $11.429
- ---------------------------------------------------------------------
Options exercisable at
December 31, 1994 16,840 $16.125 $16.125
December 31, 1995 40,920 $6.75-$16.125 $13.208
December 31, 1996 79,590 $6.75-$16.125 $12.338
- ---------------------------------------------------------------------
</TABLE>
F-10
<PAGE> 58
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 1996, options outstanding have a weighted average remaining
contractual life of 8.9 years.
In February 1997, the Company granted options for an additional 28,600
shares with the same terms as the previous awards, at a price of $10.625 which
represents the market value at the date of grant.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 1996: expected volatility of 37.29%; risk-free interest rate of
8.50%; and expected lives of 4 years, and for grants in 1995: expected
volatility of 50.84%; risk-free interest rate of 8.88%; and expected lives of 4
years. Based on these calculations, the fair value of the stock options at the
date of grant were immaterial to the Company's financial statements at December
31, 1996 and 1995.
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
Federal $7,060 $5,312 $6,216
State and local 1,907 1,318 1,364
- ------------------------------------------------------------------
Total $8,967 $6,630 $7,580
==================================================================
</TABLE>
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and consolidated provision for income taxes are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
Federal taxes at statutory rate $8,077 $5,777 $6,718
Deduct federal tax effect of:
Charitable contribution (414) - -
State taxes -
net of federal tax benefit 1,240 857 887
Other 64 (4) (25)
- ------------------------------------------------------------------
Total $8,967 $6,630 $7,580
==================================================================
</TABLE>
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at December 31,1996 and 1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Assets:
Warranty, insurance and other
reserves $3,589 $1,855
Inventory writedowns 1,107 749
Inventories 706 584
State taxes -- 226
Depreciation 147 67
Other 647 420
- -------------------------------------------------------------------
Total deferred tax assets 6,196 3,901
- -------------------------------------------------------------------
Liabilities:
Prepaid expenses and deferred charges 1,030 854
State taxes 37 --
- -------------------------------------------------------------------
Total deferred tax liabilities 1,067 854
- -------------------------------------------------------------------
Net deferred tax asset $5,129 $3,047
===================================================================
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company had sales agreements outstanding, some of
which have open contingencies for approval of financing, to deliver 1,337 homes
with an aggregate purchase price of approximately $245,236,000. At December 31,
1996, the Company had options and contingent purchase contracts to acquire land
and developed lots with an aggregate purchase price of approximately
$167,010,000. Purchase of the properties is contingent upon satisfaction of
certain requirements by the Company and the sellers.
At December 31, 1996, the Company had outstanding approximately $21,501,000
of completion bonds and standby letters of credit, which serve as completion
bonds for development work in progress, deposits on land and lot purchase
contracts and miscellaneous deposits.
The Company is involved from time to time in routine litigation. Management
does not believe that the ultimate resolution of such litigation will be
material to the financial statements of the Company.
13. FINANCIAL INSTRUMENTS
M/I Financial offers fixed and adjustable rate mortgage loans, primarily to
buyers of the Company's homes. At December 31, 1996, M/I Financial is committed
to fund $79,800,000 in mortgage loans to home buyers. Of this total,
approximately $11,000,000 are adjustable rate loans and $68,800,000 are fixed
rate loan commitments. The loans are granted at current market interest rates
and the rate is guaranteed through the transfer of the title of the home to the
buyer (the "Closing"). M/I Financial uses hedging methods to reduce its exposure
to interest rate fluctuations between the commitment date of the loan and the
time the home closes. The method to be used is determined at the time of the
loan commitment based on the market conditions and alternatives available. M/I
Financial's policy requires that there be no interest rate risk on loans closed
waiting to be sold. Also according to policy, the pipeline of committed loans is
to be hedged at 70 to 95% of the committed balance, which is the balance of
loans expected to be closed.
One of the methods that M/I Financial uses to hedge the interest rate risk
relative to unclosed loans is to purchase commitments from outside investors to
acquire the loans at the interest rate at which the loan will be closed. The
cost of these purchase commitments is recorded as an asset and is expensed as
loans are closed under the related commitments. Any remaining unused balance is
expensed when the commitment expires, or earlier if the Company determines that
they will be unable to use the entire commitment prior to its expiration date.
The Company expended $1,345,000, $898,000 and $1,406,000 in 1996, 1995 and 1994,
respectively, related to purchase commitments from outside investors to acquire
mortgage loans. Such costs are expensed as a component of cost of goods sold. At
December 31, 1996, the Company had approximately $50,700,000 of commitments to
deliver mortgage loans to outside investors.
The Company also hedges its interest rate risk using optional and mandatory
forward sales of mortgage-backed securities. In these agreements, the Company
agrees to sell and later agrees to buy similar but not identical mortgage-backed
securities. Generally, the agreements are fixed-coupon agreements whereby
F-11
<PAGE> 59
1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
the interest rate and maturity date of both transactions are approximately the
same and are established to correspond with the closing of the fixed interest
rate mortgage loan commitments of the Company. The difference between the two
values of the mortgage-backed securities in the agreements at settlement provide
a hedge on the interest rate risk exposure in the mortgage loan commitments and
is included in the gain or loss on the sale of the loans to third party
investors. At December 31, 1996, these agreements matured within 90 to 120 days.
Securities under forward sales agreements averaged approximately $15,300,000
during 1996 and the maximum amount outstanding at any month end during 1996 was
$27,000,000. Hedging gains of $868,000 were deferred at year end as the mortgage
loans and commitment contracts qualified for hedge accounting.
To reduce the credit risk associated with accounting losses, which would be
recognized if counterparties failed completely to perform as contracted, the
Company limits the entities that management can enter into a commitment with to
the primary dealers in the market. The risk of accounting loss is the difference
between the market rate at the time a counterparty fails and the rate the
Company committed to for the mortgage loans and any purchase commitments
recorded with the counterparty.
The following table presents the carrying amounts and fair values of the
Company's financial instruments and the fair value of the Company's unrecognized
financial instruments at December 31, 1996 and 1995. SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments", defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale.
<TABLE>
<CAPTION>
1996 1995
------------------- ---------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash, including
cash in escrow $ 6,761 $ 6,761 $ 8,136 $ 8,136
Mortgage loans
to be funded 34,121 34,244 22,797 23,029
Notes receivable -- -- 440 440
Accounts receivable 326 326 375 375
Prepaid financing
commitments 183 -- 213 --
Interest rate cap 73 73 -- --
Liabilities:
Notes payable
banks 100,300 100,300 102,200 102,200
Subordinated notes 25,000 25,000 24,513 23,346
Accounts payable 32,016 32,016 29,219 29,219
Other liabilities 35,724 35,724 25,715 25,715
Unrecognized Financial
Instruments:
Letters of credit -- 127 -- 84
Commitments to
extend real estate
loans -- 1,345 -- 687
Forward sale of
mortgage-backed
securities -- 187 -- (163)
</TABLE>
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at December 31,
1996 and 1995:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND OTHER LIABILITIES. The
carrying amounts of these items are a reasonable estimate of their fair value.
MORTGAGE LOANS TO BE FUNDED. The estimated fair value of mortgage loans to
be funded at December 31, 1996 and 1995 includes the estimated gains and
servicing rights which will be realized when the loans are sold. The estimated
fair value was determined based on market quotes at December 31, 1996 and 1995.
NOTES RECEIVABLE. The carrying value of notes receivable from limited
partnerships, which bore interest at the prime rate plus 1/2%, approximates
their fair value at December 31, 1995.
PREPAID FINANCING COMMITMENTS. The estimated fair value was determined
using fees currently charged for similar commitments and by estimating the
prepaid financing commitments that will be utilized by the Company.
NOTES PAYABLE BANKS. The interest rates currently available to the Company
fluctuate with the LIBOR rate of the lending institutions and thus their
carrying value is a reasonable estimate of fair value.
SUBORDINATED NOTES. The estimated fair value was determined using the bid
price for the debt instruments at December 31, 1995.
LETTERS OF CREDIT. Letters of credit and outstanding completion bonds of
$21,501,000 and $19,525,000 represent potential commitments at December 31, 1996
and 1995. The letters of credit generally expire within one to two years. The
estimated fair value of letters of credit was determined using fees currently
charged for similar arrangements.
INTEREST RATE CAP, COMMITMENTS TO EXTEND REAL ESTATE LOANS AND FORWARD SALE
OF MORTGAGE-BACKED SECURITIES. The fair value of these financial instruments was
determined based upon market quotes at December 31, 1996 and 1995.
14. BUSINESS SEGMENTS
The business segment information for 1996, 1995 and 1994 included on page
15 of the Company's 1996 Annual Report, incorporated herein by reference, is an
integral part of these financial statements.
F-12
<PAGE> 60
CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
JUNE 30,
(Dollars in thousands) 1997
- ----------------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash, including cash in escrow $ 11,124
Receivables 25,697
Inventories:
Single-family lots, land and land development costs 139,697
Houses under construction 119,430
Model homes and furnishings - at cost (less accumulated
depreciation: $61) 21,909
Land purchase deposits 600
Office furnishings, transportation and construction
equipment - at cost (less accumulated depreciation:
$3,693) 8,185
Investment in unconsolidated joint ventures and limited partnerships 12,828
Other assets 9,758
- ----------------------------------------------------------------------------------------
TOTAL $ 349,228
- ----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable banks - home-building operations $ 129,000
Note payable bank - financial operations 9,580
Subordinated notes 25,000
Accounts payable 42,137
Accrued compensation 5,941
Income taxes payable 1,162
Accrued interest, warranty and other 12,555
Customer deposits 9,097
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES 234,472
- ----------------------------------------------------------------------------------------
Commitments and Contingencies
- ----------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none outstanding -
Common stock - $.01 par value;
authorized 38,000,000 shares;
issued 8,800,000 shares, of which 500,000 shares are held in Treasury 88
Additional paid-in capital 50,573
Retained earnings 69,345
Treasury stock - at cost (5,250)
- -----------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 114,756
- ----------------------------------------------------------------------------------------
TOTAL $ 349,228
- ----------------------------------------------------------------------------------------
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
F-13
<PAGE> 61
CONSOLIDATED STATEMENTS OF INCOME
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(Dollars in thousands, except per share information) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $251,843 $233,215
- -----------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 201,532 187,930
General and administrative 14,798 13,518
Selling 17,537 16,743
Interest 5,061 6,028
- -----------------------------------------------------------------------------------------------------------------
Total costs and expenses 238,928 224,219
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 12,915 8,996
- -----------------------------------------------------------------------------------------------------------------
Income taxes:
Current 4,364 4,125
Deferred 864 (388)
- -----------------------------------------------------------------------------------------------------------------
Total income taxes 5,228 3,737
- -----------------------------------------------------------------------------------------------------------------
Net income $ 7,687 $ 5,259
- -----------------------------------------------------------------------------------------------------------------
Net income per common share $ 0.90 $ 0.60
- -----------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 8,507,182 8,800,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
F-14
<PAGE> 62
CONSOLIDATED STATEMENTS OF CASH FLOWS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,687 $ 5,259
Adjustments to reconcile net income to net cash
used by operating activities:
Loss from property disposals 121 40
Depreciation and amortization 774 771
Decrease (increase) deferred income taxes 864 (975)
Decrease in receivables 8,750 1,109
Increase in inventories (38,242) (24,253)
Increase in other assets (132) (573)
Increase in accounts payable 10,121 14,321
Decrease in income taxes payable (340) (1,274)
Decrease in accrued liabilities (8,655) (2,057)
Equity in undistributed income of
unconsolidated joint ventures and limited partnerships (151) (84)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (19,203) (7,716)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to model and office furnishings,
transportation and construction equipment (7,329) (301)
Investment in unconsolidated joint ventures (4,680) (5,003)
Distributions from unconsolidated joint ventures
and limited partnerships 519 358
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,490) (4,946)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Cash proceeds from borrowings 131,490 132,096
Principal repayments (93,210) (119,016)
Principal repayments of mortgage notes payable - (404)
Net increase in customer deposits 2,026 3,773
Payments to acquire treasury stock (5,250) -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 35,056 16,449
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash 4,363 3,787
Cash balance at beginning of period 6,761 8,136
- -------------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 11,124 $ 11,923
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 4,555 $ 5,229
Income taxes $ 4,810 $ 5,415
NON-CASH TRANSACTIONS DURING THE YEAR:
Single-family lots distributed from unconsolidated joint ventures $ 4,482 $ 2,224
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
F-15
<PAGE> 63
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 six months ended June 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. AMENDED LOAN AGREEMENTS
On May 7, 1997, the Company amended its bank loan agreement. Limits on
certain restrictive covenants were increased under the amended agreement. The
amount available and other terms of the agreement remain substantially the
same as those in the agreement that it amends.
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.
NOTE 3. SUBORDINATED DEBT
On August 29, 1997, the Company entered into a Credit Agreement (the
"Subordinated Debt Facility") with BankBoston, N.A. to issue $50 million of
Senior Subordinated Notes. The proceeds were used to repay outstanding
amounts under the Bank Credit Facility and the $25 million Subordinated Note
due 2001 described above. The notes under the Subordinated Debt Facility bear
interest at a fixed rate of 9.51% and mature on August 29, 2004.
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 six months
ended June 30, 1997 and 1996 is as follows:
F-16
<PAGE> 64
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Interest capitalized, beginning of period $ 6,862 $ 7,560
Interest incurred 5,797 6,202
Interest expensed (5,061) (6,028)
- -------------------------------------------------------------------------
Interest capitalized, end of period $ 7,598 $ 7,734
========================================================================
</TABLE>
NOTE 5. CONTINGENCIES
At June 30, 1997, the Company had options and contingent purchase contracts
to acquire land and developed lots with an aggregate purchase price of
approximately $154.9 million.
NOTE 6. PER SHARE DATA
Per share data for the six months ended June 30, 1997 and 1996 was computed
using the weighted average number of shares of common stock outstanding
during the period of 8,507,182 shares and 8,800,000, respectively. 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, the Financial Accounting Standards Board (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 August 1, 1997, the Company repurchased 702,439 shares of the Company's
common stock at $12.8125 per share, which represents the closing price of the
Company's common stock on July 30, 1997, from the Melvin L. Schottenstein
family interests. These shares are held as treasury shares by the Company.
The total purchase price was $9,000,000 and was paid with funds from the
Company's bank credit facility.
F-17
<PAGE> 65
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................................
Risk Factors.........................................
Use of Proceeds......................................
Price Range of Common Stock and Dividend Policy......
Capitalization.......................................
Selected Consolidated Financial and Operating Data...
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................
Business.............................................
Management...........................................
Principal and Selling Shareholders...................
Description of Capital Stock.........................
Shares Eligible for Future Sale......................
Underwriting.........................................
Legal Matters........................................
Experts..............................................
Available Information................................
Incorporation by Reference...........................
Index to Consolidated Financial Statements........... F-1
================================================================================
================================================================================
2,310,000 SHARES
M/I SCHOTTENSTEIN
HOMES, INC.
COMMON STOCK
[M/I LOGO]
____________
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
SALOMON BROTHERS INC
SOUTHEAST RESEARCH
PARTNERS, INC.
================================================================================
<PAGE> 66
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities
and Exchange Commission and National Association of Securities Dealers, Inc.
registration fees) fees and expenses payable by the Company in connection with
the distribution of the Common Stock:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee $ 12,555
National Association of Securities Dealers, Inc. registration fee 4,627
Printing and engraving costs 75,000
Legal fees and expenses 70,000
Accountants' fees and expenses 70,000
Blue sky qualification fees and expenses 10,000
Transfer agent fees 1,000
Miscellaneous 6,818
--------
Total $250,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article EIGHTH of the Company's Amended and Restated Articles of
Incorporation provides that:
The provisions of Section 1701.13(E)(5)(a) of the Ohio Revised
Code or any statute of like tenor or effect which is hereafter
enacted shall not apply to the corporation. The corporation
shall, to the fullest extent not prohibited by any provision
of applicable law other than Section 1701.13(E)(5)(a) of the
Ohio Revised Code or any statute of like tenor or effect which
is hereafter enacted, indemnify each director and officer
against any and all costs and expenses (including attorney
fees, judgments, fines, penalties, amounts paid in settlement,
and other disbursements) actually and reasonably incurred or
imposed upon such person in connection with any action, suit,
investigation or proceeding (or any claim or matter therein),
whether civil, criminal, administrative or otherwise in
nature, including any settlements thereof or any appeals
therein, with respect to which such person is named or
otherwise becomes or is threatened to be made a party by
reason of being or at any time having been a director or
officer of the corporation, or by any reason of being or at
any time having been, while such a director or officer, an
employee or other agent of the corporation or, at the
direction or request of the corporation, a director, trustee,
officer, administrator, manager, employee, adviser or other
agent of or fiduciary for any other corporation, partnership,
trust, venture or other entity or enterprise including any
employee benefit plan.
The corporation shall indemnify any other person to the extent
such person shall be entitled to indemnification under Ohio
law by reason of being successful on the merits or otherwise
in defense of an action to which such person is named a party
by reason of being an employee or other agent of the
corporation, and the corporation may further indemnify any
such person if it is determined on a case by case basis by the
Board of Directors that indemnification is proper in the
specific case.
II-1
<PAGE> 67
Notwithstanding anything to the contrary in these Articles of
Incorporation, no person shall be indemnified to the extent,
if any, it is determined by the Board of Directors or by
written opinion of legal counsel designated by the Board of
Directors for such purpose that indemnification is contrary to
applicable law.
Article VIII of the Company's Regulations further provides:
Directors and officers of the corporation shall be indemnified
against all expenses, judgments, settlements, fines and
penalties actually and reasonably incurred in connection with
any actual or threatened civil, criminal, administrative or
investigative action, suit or proceeding (whether brought by
or in the name of the corporation or otherwise) arising out of
their service to the corporation or to another organization at
the request of the corporation, provided the Director or
officer acted in good faith and in a manner which the Director
of [sic] officer reasonably believed to be in, and not opposed
to, the best interest of the Corporation. Expenses incurred by
a Director or an officer in defending a civil or criminal
action, suit or proceeding shall be paid by the corporation in
advance of the final disposition of such suit, action or
proceeding upon receipt by the corporation of an undertaking
by or on behalf of such Director or officer to repay such
amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in
this Section. The corporation may purchase and maintain
insurance to protect itself and any such Director or officer
against any liability asserted against him and incurred by him
in respect of such service whether or not the corporation
would have the power to indemnify him against such liability
by law or under the provisions of this Section and the proper
officer of the corporation, without further authorization by
the Board of Directors, may in their discretion purchase and
maintain insurance on behalf of any person who is or was a
Director, officer, employee or agent of the corporation, or is
or was serving at the request of another corporation,
partnership, joint venture, trust or other enterprise, against
any liability. The provisions of this Section shall be
applicable to actions, suits or proceedings commenced after
the adoption hereof, and shall also apply to Directors or
officers who have ceased to render such service to the
corporation, and shall inure to the benefit of the heirs,
executors and administrators of the Directors and officers
referred to in this Section. Each person (including a director
or officer of any other corporation) who, at the request of
the corporation, acts as a director or officer of any other
corporation in which the corporation owns shares or of which
it is a creditor, may, by action of the Board of Directors, be
indemnified by the corporation to the same extent that
Directors and officers of the corporation are indemnified by
this Section.
Reference is also made to Section __ of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying directors and officers of the
Company against certain liabilities.
In addition, the Registrant has purchased insurance coverage under
policies issued by Federal Insurance Company (Chubb) which insure directors and
officers against certain liabilities which might be incurred by them in such
capacity.
ITEM 16. EXHIBITS
1.1* Form of Underwriting Agreement
5.1 Opinion of Vorys, Sater, Seymour and Pease as to
the validity of the Common Stock being offered
II-2
<PAGE> 68
10.1 Executive Deferred Compensation Plan, hereby
incorporated by reference to Exhibit 10(e) of
the Predecessor's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989
10.2 Amendments to the Predecessor's Executive
Deferred Compensation Plan dated March 29, 1991
and June 24, 1992, hereby incorporated by
reference to Exhibit 19(a) of the Predecessor's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992
10.3 The Predecessor's Amended and Restated 401(K)
Profit Sharing Plan, consisting of a savings
plan adoption agreement, savings plan and
savings plan trust, hereby incorporated by
reference to Exhibit 10(cc) of the Predecessor's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1991
10.4 P.L. 1992 Limited Partnership Certificate and
Agreement of Limited Partnership dated March 25,
1992, hereby incorporated by reference to
Exhibit 10(vv) of the Predecessor's Registration
Statement on Form S-4, Commission File No.
33-44914
10.5 Master Lease Agreement between the Predecessor
and M/I Office Development Company dated August
7, 1992, hereby incorporated by reference to
Exhibit 19(c) of the Predecessor's Quarterly
Report on Form 10-Q for the quarter ended June
30, 1992
10.6 First Amendment to Master Lease Agreement
between the Predecessor and M/I Office
Development Company dated September 9, 1992,
hereby incorporated by reference to Exhibit
19(b) of the Predecessor's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1992
10.7 Second Amendment to Master Lease Agreement
between the Predecessor and M/I Office
Development Company dated October 30, 1992,
hereby incorporated by reference to Exhibit
19(c) of the Predecessor's Quarterly Report for
the quarter ended September 30, 1992
10.8 Third Amendment to Master Lease Agreement
between the Predecessor and M/I Office
Development Company dated March 4, 1996, hereby
incorporated by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995
10.9 Cascades 1992 Limited Partnership Certificate
and Agreement of Limited Partnership dated July
20, 1992, hereby incorporated by reference to
Exhibit 10(cc) of the Predecessor's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1992
10.10 Revolving credit loan, seasonal loan and standby
letter of credit agreement by and among the
Company, Bank One, Columbus, N.A.; The
Huntington National Bank; NBD Bank; National
City Bank, Columbus; The First National Bank of
Boston and Bank One, Columbus, N.A., as agent
for the banks, dated September 29, 1995, hereby
incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995
10.11 Amendment No. 1 to revolving credit loan,
seasonal loan and standby letter of credit
agreement by and among the Company, Bank One,
Columbus, N.A.; The Huntington National Bank;
The First National Bank of Chicago; National
City Bank of Columbus; The First National Bank
of Boston and Bank One, Columbus, N.A., as agent
for the banks, dated May 7, 1996, hereby
incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on form 10-Q for the
quarter ended March 31, 1996
10.12 Second restated revolving credit loan and
standby letter of credit agreement by and among
the Company, Bank One, Columbus, N.A.; The
Huntington National Bank; The First National
Bank of Chicago; National City Bank of Columbus;
The First National Bank of Boston; The Fifth
Third Bank of Columbus and Bank One, Columbus,
N.A., as agent for the banks, dated December 30,
1996, hereby
II-3
<PAGE> 69
incorporated by reference to Exhibit 10.12 of
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996
10.13 Amendment No. 1 to second restated revolving
credit loan and standby letter of credit
agreement by and among the Company, Bank One,
Columbus, N.A.; The Huntington National Bank;
The First National Bank of Chicago; National
City Bank of Columbus; The First National Bank
of Boston; The Fifth Third Bank of Columbus and
Bank One, Columbus, N.A., as agent for the
banks, dated March 14, 1997, hereby incorporated
by reference to Exhibit 10.13 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1996
10.14 Second Amendment to second restated revolving
credit loan and standby letter of credit
agreement by and among the Company, Bank One,
Columbus, N.A.; The Huntington National Bank;
The First National Bank of Chicago; National
City Bank of Columbus; The First National Bank
of Boston, The Fifth Third Bank of Columbus and
Bank One, Columbus, N.A. as agent for the banks,
dated May 7, 1997, hereby incorporated by
reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997
10.15 Promissory Note by and among the Company, M/I
Financial Corp. and Bank One, Columbus, N.A.,
dated November 5, 1993, hereby incorporated by
reference to Exhibit 19(d) of the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993
10.16 Revolving Credit Agreement by and among the
Company; M/I Financial Corp. and Bank One,
Columbus, N.A., dated August 10, 1994, hereby
incorporated by reference to Exhibit 10(b) of
the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994
10.17 Revolving Credit Agreement by and among the
Company; M/I Financial Corp. and Bank One,
Columbus, N.A. dated August 7, 1995, hereby
incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995
10.18 First Amendment to revolving credit agreement by
and among the Company, M/I Financial Corp. and
Bank One, Columbus, N.A., dated May 7, 1996,
hereby incorporated by reference to Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996
10.19 Revolving Credit Agreement by and among the
Company; M/I Financial Corp. and Bank One,
Columbus, N.A. dated July 19, 1996, hereby
incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996
10.20 Revolving Credit Agreement by and among the
Company; M/I Financial Corp. and Bank One
Columbus, N.A. dated July 18, 1997, hereby
incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997
10.21 1993 Stock Incentive Plan of the Company, hereby
incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form S-8,
Commission File No. 33-76518
10.22 Melvin and Irving Schottenstein Family Agreement
by and among the Predecessor, the Company and
its then shareholders of record dated October 7,
1993, hereby incorporated by reference to
Exhibit 10(ww) of the Company's Registration
Statement on Form S-1, Commission File No.
33-68564
10.23 First Amendment to Melvin and Irving
Schottenstein Family Agreement by and among the
Company dated March 17, 1997, hereby
incorporated by reference to Exhibit 10.20 of
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996
II-4
<PAGE> 70
10.24 Company's 1994 President and Chief Executive
Officer Bonus Program, hereby incorporated by
reference to Exhibit 10.55 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993
10.25 Company's 1994 Corporate Executive Vice
President Bonus Program, hereby incorporated by
reference to Exhibit 10.56 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993
10.26 Company's Amended 1994 Corporate Executive Vice
President Bonus Program, hereby incorporated by
reference to Exhibit 10.60 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1994
10.27 Company's 1994 Senior Vice President and Chief
Financial Officer Bonus Program, hereby
incorporated by reference to Exhibit 10.57 of
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993
10.28 Company's 1994 Senior Vice President and
Treasurer Bonus Program, hereby incorporated by
reference to Exhibit 10.58 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993
10.29 Company's 1994 Senior Vice President/General
Counsel Bonus Program, hereby incorporated by
reference to Exhibit 19.1 of the Company's
Quarterly Report on Form 10-Q for the fiscal
year ended March 31, 1994
10.30 Company's 1994 Senior Vice President/Regional
Manager Bonus Program, hereby incorporated by
reference to Exhibit 10.59 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1993
10.31 Company's 1994 Division Manager Bonus Program,
hereby incorporated by reference to Exhibit
10.60 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993
10.32 Consulting and Separation Agreement between the
Company and Eric J. Schottenstein, dated January
5, 1994, hereby incorporated by reference to
Exhibit 10.61 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1993
10.33 Executive Employment Agreement by and among the
Company and Irving E. Schottenstein dated August
9, 1994, hereby incorporated by reference to
Exhibit 10(c) of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994
10.34 Company's 1995 President and Chief Executive
Officer Bonus Program, hereby incorporated by
reference to Exhibit 10.29 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1994
10.35 Company's 1995 Corporate Executive Vice
President Bonus Program, hereby incorporated by
reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995
10.36 Company's 1995 Senior Vice President and Chief
Financial Officer Bonus Program, hereby
incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995
10.37 Company's 1995 Senior Vice President and General
Counsel Bonus Program, hereby incorporated by
reference to Exhibit 10.3 of the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995
10.38 Company's 1995 Senior Vice President and
Treasurer Bonus Program, hereby incorporated by
reference to Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995
10.39 Company's 1995 Senior Vice President/Regional
Manager Bonus Program, hereby incorporated by
reference to Exhibit 10.69 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994
II-5
<PAGE> 71
10.40 Company's 1995 Division Manager Bonus Program,
hereby incorporated by reference to Exhibit
10.70 of the Company's Annual Report on Form
10-K for the year ended December 31, 1994
10.41 Company's 1996 President and Chief Executive
Officer Bonus Program, hereby incorporated by
reference to Exhibit 10.45 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995
10.42 Company's 1996 Corporate Executive Vice
President Bonus Program, hereby incorporated by
reference to Exhibit 10.46 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995
10.43 Company's 1996 Senior Vice President and Chief
Financial Officer Bonus Program, hereby
incorporated by reference to Exhibit 10.47 of
the Company's Annual Report on Form 10-K for the
year ended December 31, 1995
10.44 Company's 1996 Senior Vice President and General
Counsel Bonus Program, hereby incorporated by
reference to Exhibit 10.48 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995
10.45 Company's 1996 Senior Vice President and
Treasurer Bonus Program, hereby incorporated by
reference to Exhibit 10.49 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995
10.46 Investment Home Compensation Plan dated
September 1, 1995, hereby incorporated by
reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995
10.47 Limited Liability Company Agreement of Northeast
Office Venture, Limited Liability Company dated
November 17, 1995, hereby incorporated by
reference to Exhibit 10.51 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995
10.48 Lease Agreement by and between the Company and
Northeast Office Venture, Limited Liability
Company dated November 17, 1995, hereby
incorporated by reference to Exhibit 10.52 of
the Company's Annual Report on Form 10-K for the
year ended December 31, 1995
10.49 Company's 1997 President and Senior Executive
Vice President Bonus Program, hereby
incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997
10.50 Company's 1997 Senior Vice President and Chief
Financial Officer Bonus Program, hereby
incorporated by reference to Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997
10.51 Company's Director Deferred Compensation Plan,
hereby incorporated by reference to Exhibit 10.4
of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997
10.52 Termination Agreement dated July 31, 1997
between the Company and parties to the Melvin
and Irving Schottenstein Family Agreement,
hereby incorporated by reference to Exhibit 10.5
of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997
10.53 Note Purchase Agreement between the Company and
The First National Bank of Boston, dated
September 30, 1996, hereby incorporated by
reference to Exhibit 10.1 of the Company's
Quarterly Report on form 10-Q for the quarter
ended September 30, 1996
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Vorys, Sater, Seymour and Pease
(included in Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)
- -------------
* To be filed by amendment.
II-6
<PAGE> 72
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 15
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted against the registrant by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(2) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Columbus, State of Ohio, on October 15, 1997.
M/I SCHOTTENSTEIN HOMES, INC.
By: /s/ Robert H. Schottenstein
---------------------------------------
ROBERT H. SCHOTTENSTEIN
President
POWER OF ATTORNEY
We, the undersigned directors and officers of M/I Schottenstein Homes,
Inc. (the "Company") and each of us, do hereby constitute and appoint Irving E.
Schottenstein, Paul S. Coppel and Kerrii B. Anderson, or any of them, the
Company's true and lawful attorneys and agents, each with power of substitution,
to do any and all acts and things in our names and on our behalf in our
capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorneys or
agents, or any of them, may deem necessary or advisable to enable the Company to
comply with the Securities Act of 1933, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission, in connection with
the filing of this Registration Statement on Form S-2 in connection with the
public offering of the Common Stock of the Company, including specifically but
without limitation, power and authority to sign for us or any of us in the
capacities indicated below, any and all amendments (including post-effective
amendments) to such Registration Statement; and we do hereby ratify and confirm
all that the said attorneys and agents, or their substitute or substitutes, or
either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND TITLE DATE NAME AND TITLE DATE
-------------- ---- -------------- ----
<S> <C> <C> <C>
/s/ Irving E. Schottenstein /s/ Kerrii B. Anderson
- ----------------------------------------- ---------------------------------------
IRVING E. SCHOTTENSTEIN 10/15/97 KERRII B. ANDERSON 10/15/97
Chairman of the Board and Chief Executive Senior Vice President and Chief
Officer(Principal Executive Officer) Financial Officer(Principal Financial
and Accounting Officer)
/s/ Friedrich K. M. Bohm /s/ Robert H. Schottenstein
- ----------------------------------------- ---------------------------------------
FRIEDRICH K. M. BOHM 10/15/97 ROBERT H. SCHOTTENSTEIN 10/15/97
Director Director
/s/ Steven Schottenstein /s/ Lewis R. Smoot, Sr.
- ----------------------------------------- ---------------------------------------
STEVEN SCHOTTENSTEIN 10/15/97 LEWIS R. SMOOT, SR. 10/15/97
Director Director
/s/ Norman L. Traeger
- -----------------------------------------
NORMAN L. TRAEGER 10/15/97
Director
</TABLE>
II-8
<PAGE> 74
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXH. NO. NAME OF EXHIBIT PAGE NO.
<S> <C> <C>
1.1* Form of Underwriting Agreement
5.1 Opinion of Vorys, Sater, Seymour and Pease as to the validity of
the Common Stock being offered
10.1 Executive Deferred Compensation Plan, hereby incorporated by
reference to Exhibit 10(e) of the Predecessor's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989
10.2 Amendments to the Predecessor's Executive Deferred Compensation
Plan dated March 29, 1991 and June 24, 1992, hereby incorporated
by reference to Exhibit 19(a) of the Predecessor's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992
10.3 The Predecessor's Amended and Restated 401(K) Profit Sharing Plan,
consisting of a savings plan adoption agreement, savings plan and
savings plan trust, hereby incorporated by reference to Exhibit
10(cc) of the Predecessor's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991
10.4 P.L. 1992 Limited Partnership Certificate and Agreement of Limited
Partnership dated March 25, 1992, hereby incorporated by reference
to Exhibit 10(vv) of the Predecessor's Registration Statement on
Form S-4, Commission File No.
33-44914
10.5 Master Lease Agreement between the Predecessor and M/I Office
Development Company dated August 7, 1992, hereby incorporated by
reference to Exhibit 19(c) of the Predecessor's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
10.6 First Amendment to Master Lease Agreement between the Predecessor
and M/I Office Development Company dated September 9, 1992, hereby
incorporated by reference to Exhibit 19(b) of the Predecessor's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1992
10.7 Second Amendment to Master Lease Agreement between the Predecessor
and M/I Office Development Company dated October 30, 1992, hereby
incorporated by reference to Exhibit 19(c) of the Predecessor's
Quarterly Report for the quarter ended September 30, 1992
10.8 Third Amendment to Master Lease Agreement between the Predecessor
and M/I Office Development Company dated March 4, 1996, hereby
incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995
10.9 Cascades 1992 Limited Partnership Certificate and Agreement of
Limited Partnership dated July 20, 1992, hereby incorporated by
reference to Exhibit 10(cc) of the Predecessor's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992
10.10 Revolving credit loan, seasonal loan and standby letter of credit
agreement by and among the Company, Bank One, Columbus, N.A.; The
Huntington National Bank; NBD Bank; National City Bank, Columbus;
The First National Bank of Boston and Bank One, Columbus, N.A., as
agent for the banks, dated September 29, 1995, hereby incorporated
by reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995
10.11 Amendment No. 1 to revolving credit loan, seasonal loan and
standby letter of credit agreement by and among the Company, Bank
One, Columbus, N.A.; The Huntington National Bank; The First
National Bank of Chicago; National City Bank of Columbus; The
First National Bank of Boston and Bank One, Columbus, N.A., as
agent for the banks, dated May 7, 1996, hereby
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incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on form 10-Q for the quarter ended March 31, 1996
10.12 Second restated revolving credit loan and standby letter of credit
agreement by and among the Company, Bank One, Columbus, N.A.; The
Huntington National Bank; The First National Bank of Chicago;
National City Bank of Columbus; The First National Bank of Boston;
The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as
agent for the banks, dated December 30, 1996, hereby incorporated
by reference to Exhibit 10.12 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996
10.13 Amendment No. 1 to second restated revolving credit loan and
standby letter of credit agreement by and among the Company, Bank
One, Columbus, N.A.; The Huntington National Bank; The First
National Bank of Chicago; National City Bank of Columbus; The
First National Bank of Boston; The Fifth Third Bank of Columbus
and Bank One, Columbus, N.A., as agent for the banks, dated March
14, 1997, hereby incorporated by reference to Exhibit 10.13 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996
10.14 Second Amendment to second restated revolving credit loan and
standby letter of credit agreement by and among the Company, Bank
One, Columbus, N.A.; The Huntington National Bank; The First
National Bank of Chicago; National City Bank of Columbus; The
First National Bank of Boston, The Fifth Third Bank of Columbus
and Bank One, Columbus, N.A. as agent for the banks, dated May 7,
1997, hereby incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997
10.15 Promissory Note by and among the Company, M/I Financial Corp. and
Bank One, Columbus, N.A., dated November 5, 1993, hereby
incorporated by reference to Exhibit 19(d) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993
10.16 Revolving Credit Agreement by and among the Company; M/I Financial
Corp. and Bank One, Columbus, N.A., dated August 10, 1994, hereby
incorporated by reference to Exhibit 10(b) of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994
10.17 Revolving Credit Agreement by and among the Company; M/I Financial
Corp. and Bank One, Columbus, N.A. dated August 7, 1995, hereby
incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995
10.18 First Amendment to revolving credit agreement by and among the
Company, M/I Financial Corp. and Bank One, Columbus, N.A., dated
May 7, 1996, hereby incorporated by reference to Exhibit 10.2 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996
10.19 Revolving Credit Agreement by and among the Company; M/I Financial
Corp. and Bank One, Columbus, N.A. dated July 19, 1996, hereby
incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
10.20 Revolving Credit Agreement by and among the Company; M/I Financial
Corp. and Bank One Columbus, N.A. dated July 18, 1997, hereby
incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997
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10.21 1993 Stock Incentive Plan of the Company, hereby incorporated by
reference to Exhibit 4.4 of the Company's Registration Statement
on Form S-8, Commission File No. 33-76518
10.22 Melvin and Irving Schottenstein Family Agreement by and among the
Predecessor, the Company and its then shareholders of record dated
October 7, 1993, hereby incorporated by reference to Exhibit
10(ww) of the Company's Registration Statement on Form S-1,
Commission File No. 33-68564
10.23 First Amendment to Melvin and Irving Schottenstein Family
Agreement by and among the Company dated March 17, 1997, hereby
incorporated by reference to Exhibit 10.20 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
10.24 Company's 1994 President and Chief Executive Officer Bonus
Program, hereby incorporated by reference to Exhibit 10.55 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993
10.25 Company's 1994 Corporate Executive Vice President Bonus Program,
hereby incorporated by reference to Exhibit 10.56 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993
10.26 Company's Amended 1994 Corporate Executive Vice President Bonus
Program, hereby incorporated by reference to Exhibit 10.60 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994
10.27 Company's 1994 Senior Vice President and Chief Financial Officer
Bonus Program, hereby incorporated by reference to Exhibit 10.57
of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993
10.28 Company's 1994 Senior Vice President and Treasurer Bonus Program,
hereby incorporated by reference to Exhibit 10.58 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993
10.29 Company's 1994 Senior Vice President/General Counsel Bonus
Program, hereby incorporated by reference to Exhibit 19.1 of the
Company's Quarterly Report on Form 10-Q for the fiscal year ended
March 31, 1994
10.30 Company's 1994 Senior Vice President/Regional Manager Bonus
Program, hereby incorporated by reference to Exhibit 10.59 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993
10.31 Company's 1994 Division Manager Bonus Program, hereby incorporated
by reference to Exhibit 10.60 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993
10.32 Consulting and Separation Agreement between the Company and Eric
J. Schottenstein, dated January 5, 1994, hereby incorporated by
reference to Exhibit 10.61 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993
10.33 Executive Employment Agreement by and among the Company and Irving
E. Schottenstein dated August 9, 1994, hereby incorporated by
reference to Exhibit 10(c) of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994
10.34 Company's 1995 President and Chief Executive Officer Bonus
Program, hereby incorporated by reference to Exhibit 10.29 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994
10.35 Company's 1995 Corporate Executive Vice President Bonus Program,
hereby incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
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10.36 Company's 1995 Senior Vice President and Chief Financial Officer
Bonus Program, hereby incorporated by reference to Exhibit 10.2 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995
10.37 Company's 1995 Senior Vice President and General Counsel Bonus
Program, hereby incorporated by reference to Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995
10.38 Company's 1995 Senior Vice President and Treasurer Bonus Program,
hereby incorporated by reference to Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
10.39 Company's 1995 Senior Vice President/Regional Manager Bonus
Program, hereby incorporated by reference to Exhibit 10.69 of the
Company's Annual Report on Form 10-K for the year ended December
31, 1994
10.40 Company's 1995 Division Manager Bonus Program, hereby incorporated
by reference to Exhibit 10.70 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994
10.41 Company's 1996 President and Chief Executive Officer Bonus
Program, hereby incorporated by reference to Exhibit 10.45 of the
Company's Annual Report on Form 10-K for the year ended December
31, 1995
10.42 Company's 1996 Corporate Executive Vice President Bonus Program,
hereby incorporated by reference to Exhibit 10.46 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
10.43 Company's 1996 Senior Vice President and Chief Financial Officer
Bonus Program, hereby incorporated by reference to Exhibit 10.47
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1995
10.44 Company's 1996 Senior Vice President and General Counsel Bonus
Program, hereby incorporated by reference to Exhibit 10.48 of the
Company's Annual Report on Form 10-K for the year ended December
31, 1995
10.45 Company's 1996 Senior Vice President and Treasurer Bonus Program,
hereby incorporated by reference to Exhibit 10.49 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
10.46 Investment Home Compensation Plan dated September 1, 1995, hereby
incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995
10.47 Limited Liability Company Agreement of Northeast Office Venture,
Limited Liability Company dated November 17, 1995, hereby
incorporated by reference to Exhibit 10.51 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995
10.48 Lease Agreement by and between the Company and Northeast Office
Venture, Limited Liability Company dated November 17, 1995, hereby
incorporated by reference to Exhibit 10.52 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1995
10.49 Company's 1997 President and Senior Executive Vice President Bonus
Program, hereby incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997
10.50 Company's 1997 Senior Vice President and Chief Financial Officer
Bonus Program, hereby incorporated by reference to Exhibit 10.3 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997
10.51 Company's Director Deferred Compensation Plan, hereby incorporated
by reference to Exhibit 10.4 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997
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10.52 Termination Agreement dated July 31, 1997 between the Company and
parties to the Melvin and Irving Schottenstein Family Agreement,
hereby incorporated by reference to Exhibit 10.5 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997
10.53 Note Purchase Agreement between the Company and The First National
Bank of Boston, dated September 30, 1996, hereby incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on
form 10-Q for the quarter ended September 30, 1996
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Vorys, Sater, Seymour and Pease (included in Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)
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<FN>
* To be filed by amendment.
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<PAGE> 1
Exhibit 5.1
(614) 464-6400
October 16, 1997
Board of Directors
M/I Schottenstein Homes, Inc.
3 Easton Oval
Suite 500
Columbus, Ohio 43219
Gentlemen:
We are familiar with the proceedings taken and proposed to be taken by M/I
Schottenstein Homes, Inc., an Ohio corporation (the "Company"), in connection
with the sale of up to 2,610,000 shares of the Company's common stock, par value
of $.01 per share (the "Common Stock") of which 2,300,000 shares are newly
issued or previously issued and now held in treasury and proposed to be sold by
the Company and 310,000 shares are now outstanding and proposed to be sold by
the holders thereof (the "Selling Stockholders").
We have collaborated in the preparation of the Registration Statement on
Form S-2 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission on the date hereof for the registration of the sale of
such Common Stock under the Securities Act of 1933, as amended. In connection
therewith, we have examined, among other things, such records and documents as
we have deemed necessary in order to express the opinions hereinafter set forth.
Based upon the foregoing, we are of the opinion that the Company is a duly
incorporated and legally existing corporation under the laws of the State of
Ohio. We are also of the opinion, based upon the foregoing and assuming
compliance with applicable federal and state securities laws, that (i) when the
shares of Common Stock to be issued and sold by the Company have been delivered
by the Company against payment of the purchase price therefor, as specified in
the Registration Statement when it shall become effective, said Common Stock
will be validly issued and outstanding, fully paid and non-assessable and (ii)
the shares of Common Stock to be
<PAGE> 2
Board of Directors
M/I Schottenstein Homes, Inc.
October 16, 1997
Page 2
delivered by the Selling Stockholders against payment of the purchase price
therefor, as specified in the Registration Statement when it shall become
effective, are validly issued and outstanding, fully paid and non-assessable.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Registration Statement.
Very truly yours,
VORYS, SATER, SEYMOUR AND PEASE
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of M/I Schottenstein Homes,
Inc. on Form S-2 of our reports dated February 27, 1997, except with respect to
the last paragraph of Note 2, for which the date is March 15, 1997, included and
incorporated by reference in the Annual Report on Form 10-K of M/I Schottenstein
Homes, Inc. for the year ended December 31, 1996, and to the use of our report
dated February 27, 1997, except with respect to the last paragraph of Note 2,
for which the date is March 15, 1997, appearing in the Prospectus, which is part
of this Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
October 16, 1997
