<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 1-12434
M/I SCHOTTENSTEIN HOMES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1210837
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(State of incorporation) (I.R.S. Employer Identification No.)
3 Easton Oval, Suite 500, Columbus, Ohio 43219
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(Address of principal executive offices) (Zip Code)
(614) 418-8000
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(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 8,813,061 shares
outstanding as of November 13, 1998
<PAGE> 2
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
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<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended
September 30, 1998 5
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1998 and 1997 6
Notes to Interim Unaudited Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
</TABLE>
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<PAGE> 3
CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
==================================================================================================================
SEPTEMBER 30, December 31,
(Dollars in thousands, except par values) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash $ 233 $ 10,836
Cash held in escrow 503 2,537
Receivables 30,203 43,819
Inventories:
Single-family lots, land and land development costs 173,886 151,905
Houses under construction 163,596 100,916
Model homes and furnishings - at cost (less accumulated depreciation:
September 30, 1998 - $45;
December 31, 1997 - $47) 17,985 17,788
Land purchase deposits 1,292 645
Building, model and office furnishings, transportation and construction
equipment - at cost (less accumulated depreciation:
September 30, 1998 - $4,653;
December 31, 1997 - $4,328) 20,253 8,647
Investment in unconsolidated joint ventures and limited liability companies 13,329 15,236
Other assets 12,644 13,691
- ------------------------------------------------------------------------------------------------------------------
TOTAL $433,924 $366,020
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable banks - homebuilding operations $ 94,000 $ 78,000
Note payable bank - financial operations 12,225 30,000
Mortgage notes payable 17,772 5,950
Subordinated notes 50,000 50,000
Accounts payable 56,441 42,793
Accrued compensation 11,373 13,042
Income taxes payable 1,783 4,072
Accrued interest, warranty and other 18,638 19,103
Customer deposits 12,927 7,554
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 275,159 250,514
- ------------------------------------------------------------------------------------------------------------------
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 and outstanding - 8,813,061 shares at September 30, 1998;
issued - 8,800,000 shares at December 31, 1997 88 88
Additional paid-in capital 61,067 50,573
Retained earnings 97,610 79,095
Treasury stock - at cost - 1,202,439 shares held in treasury at
December 31, 1997 - (14,250)
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 158,765 115,506
- ------------------------------------------------------------------------------------------------------------------
TOTAL $433,924 $366,020
==================================================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
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<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
=============================================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands, except per share information) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $208,794 $157,958 $501,630 $409,801
- -----------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 166,493 127,179 398,071 328,711
General and administrative 12,405 9,818 28,886 24,616
Selling 12,781 10,220 33,178 27,757
Interest 3,355 3,012 9,014 8,073
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 195,034 150,229 469,149 389,157
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,760 7,729 32,481 20,644
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 5,642 3,335 11,711 7,699
Deferred (92) (214) 1,434 650
- -----------------------------------------------------------------------------------------------------------------------------
Total income taxes 5,550 3,121 13,145 8,349
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 8,210 $ 4,608 $ 19,336 $12,295
=============================================================================================================================
Per share data:
Basic $ .93 $ .59 $ 2.34 $ 1.48
Diluted $ .92 $ .59 $ 2.32 $ 1.48
=============================================================================================================================
Weighted average shares outstanding:
Basic 8,812,102 7,834,252 8,250,853 8,280,407
Diluted 8,909,013 7,884,022 8,347,284 8,313,383
=============================================================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
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<PAGE> 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
=================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------------------------------------------
Common Stock
------------ Additional
Shares Paid-In Retained Treasury
(Dollars in thousands) Outstanding Amount Capital Earnings Stock
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 7,597,561 $88 $50,573 $79,095 ($14,250)
Net income - - - 19,336 -
Stock options exercised 15,500 - 185 - -
Dividends to stockholders - - - (821) -
Sale of treasury shares, net of
expenses 1,200,000 - 10,338 - 14,221
Retirement of treasury shares - - (29) - 29
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 8,813,061 $88 $61,067 $97,610 -
=================================================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
-5-
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,336 $ 12,295
Adjustments to reconcile net income to net cash
used in operating activities:
Loss from property disposals 130 128
Depreciation and amortization 1,232 1,229
Deferred income tax 1,434 650
Decrease in cash held in escrow 2,034 69
Decrease in receivables 13,616 12,864
Increase in inventories (72,759) (47,199)
Increase in other assets (565) (847)
Increase in accounts payable 13,648 20,071
Decrease in income taxes payable (2,289) (396)
Decrease in other accrued liabilities (2,134) (4,533)
Equity in undistributed income of unconsolidated joint
ventures, limited liability companies and limited partnerships (1,375) (180)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (27,692) (5,849)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to building, model and office furnishings,
transportation and construction equipment (966) (7,974)
Purchase of 100% of LLC (2,500) -
Investment in unconsolidated joint ventures and limited liability companies (11,528) (9,141)
Distributions from unconsolidated joint ventures, limited liability companies
and limited partnerships 1,073 698
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (13,921) (16,417)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable banks:
Proceeds from borrowings 245,775 202,530
Principal repayments (247,550) (193,495)
Mortgage notes payable:
Proceeds from borrowings 3,831 -
Principal repayments (342) (29)
Subordinated notes:
Proceeds from borrowings - 50,000
Principal repayments - (25,000)
Dividends paid (821) -
Proceeds from exercise of stock options 185 -
Proceeds from sale of treasury shares - net of expenses 24,559 -
Net increase in customer deposits 5,373 1,992
Payments to acquire treasury stock - (14,250)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 31,010 21,748
- --------------------------------------------------------------------------------------------------------------------
Net decrease in cash (10,603) (518)
Cash balance at beginning of year 10,836 6,368
- --------------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 233 $ 5,850
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 8,172 $ 7,429
Income taxes $ 13,889 $ 7,098
NON-CASH TRANSACTIONS DURING THE YEAR:
Property acquired with mortgage notes payable $ 12,164 $ -
Single-family lots distributed from unconsolidated joint ventures and
limited liability companies $ 13,088 $ 7,890
====================================================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
-6-
<PAGE> 7
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements and notes thereto have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for interim financial information. The results of
operations for the nine months ended September 30, 1998 and 1997 are not
necessarily indicative of the results for the full year.
It is suggested that these financial statements be read in conjunction with
the financial statements, accounting policies and financial notes thereto
included in the Company's Annual Report to Shareholders for the year ended
December 31, 1997.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting only of normal recurring accruals) which
are necessary for a fair presentation of financial results for the interim
periods presented.
NOTE 2. AMENDED LOAN AGREEMENTS
On February 26, 1998 and September 23, 1998 the Company entered into $50
million and $25 million interest rate SWAP agreements with a bank. The SWAP
agreements expire February 26, 2001 and September 25, 2000, respectively, and
require the Company to make fixed interest rate payments to the bank in
return for variable payments. During the three and nine months ended
September 30, 1998, these agreements resulted in a decrease of interest
expense of $20,041 and $45,920, respectively.
NOTE 3. INTEREST
The Company capitalizes interest during development and construction.
Capitalized interest is charged to interest expense as the related inventory
is delivered. The summary of total interest for the three and nine months
ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest capitalized, beginning of period $ 8,895 $ 7,598 $ 7,620 $ 6,862
Interest incurred 3,490 3,356 10,424 9,153
Interest expensed (3,355) (3,012) (9,014) (8,073)
- --------------------------------------------------------------------------------------------------------------
Interest capitalized, end of period $ 9,030 $ 7,942 $ 9,030 $ 7,942
==============================================================================================================
</TABLE>
NOTE 4. CONTINGENCIES
At September 30, 1998, the Company had options and contingent purchase
contracts to acquire land and developed lots with an aggregate purchase price
of approximately $181.4 million.
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<PAGE> 8
NOTE 5. PER SHARE DATA
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share" (EPS). SFAS 128 required the replacement of the presentation of
primary and fully diluted EPS with a presentation of basic and diluted EPS.
All EPS amounts for all periods have been presented to conform to SFAS 128
requirements.
Basic EPS is computed by dividing net income available to common shareholders
by the weighted average number of common shares outstanding during each
period. Diluted computations include common share equivalents, when dilutive.
NOTE 6. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Disclosure
about Segments of an Enterprise and Related Information". SFAS 133 is
required to be adopted for the Company's annual financial statements for the
year ended December 31, 2000. The Company has not yet determined what, if
any, impact the adoption of this standard will have on its financial
statements.
NOTE 7. SALE OF TREASURY SHARES
On April 27, 1998, the Company filed a registration statement with the
Securities and Exchange Commission for up to 1,200,000 shares of common stock
of the Company. All such shares were sold on May 5, 1998. The Company
received approximately $24.6 million from the sale, which was used to repay a
portion of existing indebtedness.
NOTE 8. DIVIDENDS
On April 22, 1998, the Company paid to the shareholders of record on April 1,
1998 the first cash dividend in the Company's history of $0.05 per share
(aggregate dividends paid of $380,000). On April 28, 1998, the Board of
Directors approved a $0.05 per share cash dividend payable to shareholders of
record of its common stock on July 1, 1998, which was paid on July 22, 1998
(aggregate dividends paid of $441,000). On August 12, 1998, the Board of
Directors approved a $0.05 per share cash dividend payable to shareholders of
record of its common stock on October 1, 1998, which was paid on October 22,
1998 (aggregate dividends paid of $441,000).
-8-
<PAGE> 9
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
FORM 10-Q - PART I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
CONSOLIDATED
Total Revenue. Total revenue for the three months ended September 30,
1998 increased $50.8 million and for the nine months ended September 30, 1998
increased $91.8 million over the comparable periods of 1997. For the three-month
period, housing revenue, other revenue and land revenue increased $44.7 million,
$1.0 million and $5.1 million, respectively. For the nine-month period, housing
revenue, other revenue and land revenue increased $85.5 million, $2.2 million
and $4.1 million, respectively. The increase in housing revenue for both the
three- and nine-month periods was attributable to an increase in the number of
Homes Delivered of 180 and 332, respectively, and an increase in the average
sales price of Homes Delivered of 6.6% and 5.7%, respectively. For both periods,
the increase in other revenue is primarily attributable to financial services
where both the number of loans originated and the gains recognized from the sale
of loans increased in the current year. The increase in land revenue for the
three months ended September 30, 1998 was primarily due to an increase in the
number of lots sold to third parties in the Washington, D.C. market from the
comparable period of 1997. The increase in land revenue for the nine months
ended September 30, 1998 was primarily due to an increase in the number of lots
sold to third parties in the Washington, D.C. and Charlotte markets over the
comparable period of 1997.
Income Before Income Taxes. Income before income taxes for the three
months ended September 30, 1998 increased 78.0% and for the nine months ended
September 30, 1998 increased 57.3% over the comparable periods of 1997. The
increase for the three months ended September 30, 1998 related primarily to
housing, for which income before income taxes increased from $6.2 million to
$11.3 million and financial services, for which income before income taxes
increased from $1.5 million to $2.5 million. The increase for the nine months
ended September 30, 1998 also related primarily to housing, for which income
before income taxes increased from $16.0 million to $25.7 million and financial
services, for which income before income taxes increased from $4.6 million to
$6.8 million. The increase in housing for both the three- and nine-month periods
was due to the increase in the number of Homes Delivered and an increase in the
average sales price of Homes Delivered. The increase in housing was also due to
an increase in gross margin. Housing gross margin increased from 18.2% and 18.1%
for the three and nine months ended September 30, 1997 to 19.2% and 19.3% for
the three and nine months ended September 30, 1998. The increase in financial
services was primarily due to an increase in the number of loans originated and
the significant increase in income from the sale of servicing and marketing
gains due to increased loan volume and the favorable interest rate environment
during the first nine months of 1998.
-9-
<PAGE> 10
HOMEBUILDING SEGMENT
The following table sets forth certain information related to the Company's
homebuilding segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Housing sales $194,532 $149,850 $474,988 $389,438
Land and lot sales 11,089 5,935 17,444 13,330
Other income 251 346 814 1,050
- --------------------------------------------------------------------------------------------------------------------
Total Revenue $205,872 $156,131 $493,246 $403,818
====================================================================================================================
Revenue:
Housing sales 94.5 % 96.0 % 96.3 % 96.4 %
Land and lot sales 5.4 3.8 3.5 3.3
Other income 0.1 0.2 0.2 0.3
- --------------------------------------------------------------------------------------------------------------------
Total Revenue 100.0 100.0 100.0 100.0
Land and housing costs 81.4 81.9 81.2 81.9
- --------------------------------------------------------------------------------------------------------------------
Gross Margin 18.6 18.1 18.8 18.1
General and administrative expenses 2.9 2.8 3.0 3.0
Selling expenses 6.2 6.6 6.7 6.8
- --------------------------------------------------------------------------------------------------------------------
Operating Income 9.5 % 8.7 % 9.1 % 8.3 %
====================================================================================================================
MIDWEST REGION
Unit Data:
New contracts, net 582 513 1,929 1,542
Homes delivered 622 510 1,533 1,316
Backlog at end of period 1,453 1,134 1,453 1,134
Average sales price of homes in Backlog $181 $176 $181 $176
Aggregate sales value of homes in Backlog $264,000 $200,000 $264,000 $200,000
Number of active subdivisions 75 75 75 75
- --------------------------------------------------------------------------------------------------------------------
FLORIDA REGION
Unit Data:
New contracts, net 146 164 534 529
Homes delivered 171 174 479 451
Backlog at end of period 310 299 310 299
Average sales price of homes in Backlog $194 $188 $194 $188
Aggregate sales value of homes in Backlog $60,000 $56,000 $60,000 $56,000
Number of active subdivisions 30 30 30 30
- --------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA, VIRGINIA AND MARYLAND, AND ARIZONA REGION
Unit Data:
New contracts, net 198 146 647 427
Homes delivered 215 144 481 394
Backlog at end of period 398 241 398 241
Average sales price of homes in Backlog $351 $290 $351 $290
Aggregate sales value of homes in Backlog $140,000 $70,000 $140,000 $70,000
Number of active subdivisions 35 35 35 35
- --------------------------------------------------------------------------------------------------------------------
TOTAL
Unit Data:
New contracts, net 926 823 3,110 2,498
Homes delivered 1,008 828 2,493 2,161
Backlog at end of period 2,161 1,674 2,161 1,674
Average sales price of homes in Backlog $214 $194 $214 $194
Aggregate sales value of homes in Backlog $464,000 $326,000 $464,000 $326,000
Number of active subdivisions 140 140 140 140
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 11
A home is included in "New Contracts" when the Company's standard sales
contract, which requires a deposit and generally has no contingencies other than
for buyer financing, is executed. In a limited number of markets, contracts are
sometimes accepted contingent upon the sale of an existing home. "Homes
Delivered" represents 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 closing.
"Backlog" represents homes for which the Company's standard sales
contract has been executed, but which are not included in Homes Delivered
because closings for these homes have not yet occurred as of the end of the
periods specified. Most cancellations of contracts for homes in Backlog occur
because customers cannot qualify for financing. These cancellations usually
occur prior to the start of construction. Since the Company arranges financing
with guaranteed rates for many of its customers, the incidence of cancellations
after the start of construction is low. In the first nine months of 1998, the
Company delivered 2,493 homes. Of the 1,544 contracts in Backlog at December 31,
1997, 12.8% have been canceled as of September 30, 1998. For homes in Backlog at
December 31, 1996, 14.1% had been canceled as of September 30, 1997 and the
final cancellation percentage was 14.1%. Unsold speculative homes, which are in
various stages of construction, totaled 183 and 158 at September 30, 1998 and
1997, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total Revenue. Total revenue for the homebuilding segment for the three
months ended September 30, 1998 increased 31.9% over the three months ended
September 30, 1997. The increase was due to a 29.8% increase in housing revenue
and a 86.8% increase in land revenue. The increase in housing revenue was
partially due to a 21.7% increase in the number of Homes Delivered. Homes
Delivered were higher in all of the Company's markets with the exception of
Orlando. The increase in housing revenue was also due to a 6.6% increase in the
average sales price of Homes Delivered. The average sales price of Homes
Delivered increased in nearly all of the Company's markets due to product mix
and higher land and regulatory costs which have been passed on to the home
buyer. The increase in land revenue from $5.9 million to $11.1 million was
primarily attributable to the Washington, D.C. market. The Virginia and Maryland
divisions had significant increases in lot sales to outside homebuilders in the
three months ended September 30, 1998 over the same period of the prior year.
Home Sales and Backlog. The Company recorded a 12.5% increase in the
number of New Contracts in the three months ended September 30, 1998 compared to
the corresponding period of 1997. New Contracts recorded in the third quarter of
1998 were higher due to significant increases in the Columbus, Indianapolis and
Washington, D.C. markets. The Company believes the increase in New Contracts was
partially due to favorable market conditions and low interest rates. The number
of New Contracts recorded in future periods will be dependent on numerous
factors, including future economic conditions, timing of land development,
consumer confidence and interest rates available to potential home buyers.
At September 30, 1998, the total sales value of the Company's Backlog
of 2,161 homes was approximately $464.0 million, representing a 42.3% increase
in sales value and a 29.1% increase in units over the levels reported at
September 30, 1997. The increase in units at September 30, 1998 is a result of
record high new contracts recorded in the first nine months of 1998. The average
sales price of homes in Backlog increased 10.3% from September 30, 1997 to
September 30, 1998. This increase was primarily due to increases in the
Maryland, Virginia and Phoenix markets where the Company is building in more
upscale and certain niche subdivisions.
-11-
<PAGE> 12
Gross Margin. The overall gross margin for the homebuilding segment was
18.6% for the three months ended September 30, 1998 compared to 18.1% for the
three months ended September 30, 1997. The gross margin from housing sales was
19.2% in the third quarter of 1998 as compared to 18.2% in the third quarter of
1997. The gross margin from lot and land sales decreased from 23.5% to 16.0%.
Lot and land gross margins can vary significantly depending on the sales price
and the cost of the subdivision and the phase in which the sale takes place.
Gross margins for the current year were higher than the prior year in nearly all
of the Company's markets. Management continues to focus on maintaining accurate,
up-to-date costing information so that sales prices can be set to achieve the
desired margins. The Company 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, including possible shortages of
qualified subcontractors.
General and Administrative Expenses. General and administrative
expenses increased from $4.4 million for the three months ended September 30,
1997 to $6.0 million for the three months ended September 30, 1998. General and
administrative expenses as a percentage of total revenue increased from 2.8% for
the three months ended September 30, 1997 to 2.9% for the three months ended
September 30, 1998. The increase in expense was primarily attributable to the
increase in incentive compensation recorded in the third quarter of 1998
compared to the third quarter of 1997 due to the significant increase in net
income.
Selling Expenses. Selling expenses increased from $10.2 million for the
three months ended September 30, 1997 to $12.8 million for the three months
ended September 30, 1998. However, selling expenses as a percentage of total
revenue decreased from 6.6% for the three months ended September 30, 1997 to
6.2% for the three months ended September 30, 1998. The increase in expense was
primarily due to increases in sales commissions paid to outside Realtors and
internal salespeople as a result of the increase in sales volume. There were
also increases in advertising, model and sales incentive expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total Revenue. Total revenue for the nine months ended September 30,
1998 increased 22.1% from the comparable period of 1997. This increase was due
to a 22.0% increase in housing revenue and a 30.9% increase in land revenue. The
increase in housing revenue was partially due to an 15.4% increase in the number
of Homes Delivered. Homes Delivered were higher in all of the Company's markets
with the exception of Orlando and Charlotte. The increase in housing revenue was
also due to a 5.7% increase in the average sales price of Homes Delivered. The
average sales price of Homes Delivered increased in nearly all of the Company's
markets due to product mix and higher land and regulatory costs which have been
passed on to the home buyer. The increase in land revenue from $13.3 million to
$17.4 million was primarily attributable to the Washington, D.C. and Charlotte
markets. The Maryland, Virginia and Charlotte divisions had significant
increases in lot sales to outside homebuilders in the nine months ended
September 30, 1998 over the same period of the prior year.
Home Sales and Backlog. The Company recorded a 24.5% increase in the
number of New Contracts recorded in the first nine months of 1998 compared to
the corresponding period of 1997. New Contracts recorded in the current year
were higher than the prior year in nearly all of the Company's markets. The
Company believes the increase in New Contracts was partially due to favorable
market conditions and low interest rates. The number of New Contracts recorded
in future periods will be dependent on numerous factors, including future
economic conditions, timing of land development, consumer confidence and
interest rates available to potential home buyers.
-12-
<PAGE> 13
Gross Margin. The overall gross margin for the homebuilding segment was
18.8% for the nine months ended September 30, 1998 compared to 18.1% for the
comparable period of 1997. The gross margin from housing sales was 19.3% in the
first nine months of 1998 compared to 18.1% in the first nine months of 1997.
The gross margin from lot and land sales decreased from 25.8% to 15.5%.
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, including possible shortages of qualified subcontractors.
The decrease in gross margin from lot and land sales was primarily due to the
Washington, D.C. market. The Maryland division had significant lot sales to
outside homebuilders in the first nine months of 1997 at very high margins which
did not occur in the current year. Lot and land gross margins can vary
significantly depending on the sales price and the cost of the subdivision and
the phase in which the sale takes place.
General and Administrative Expenses. General and administrative
expenses increased from $12.0 million for the nine months ended September 30,
1997 to $14.6 million for the nine months ended September 30, 1998. However,
general and administrative expenses as a percentage of total revenue remained
constant at 3.0% for the nine months ended September 30, 1997 and 1998. The
increase in expense was primarily attributable to the increase in real estate
tax expense, incentive compensation and rent expense. Real estate taxes
increased in the current year as the Company's investment in land development
activities increased over prior year balances. More incentive compensation was
recorded in the first nine months of 1998 compared to the first nine months of
1997 due to the significant increase in net income. The increase in rent was
primarily due to increased costs for office space compared to 1997 in the
Columbus market.
Selling Expenses. Selling expenses increased from $27.7 million for the
nine months ended September 30, 1997 to $33.2 million for the nine months ended
September 30, 1998. However, selling expenses as a percentage of total revenue
decreased from 6.8% for the nine months ended September 30, 1997 to 6.7% for the
nine months ended September 30, 1998. The increase in expense was primarily due
to increases in sales commissions paid to outside Realtors and internal
salespeople as a result of the increase in sales volume. There were also
increases in advertising, model and sales incentive expenses.
FINANCIAL SERVICES SEGMENT - M/I FINANCIAL
The following table sets forth certain information related to the Company's
financial services segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of loans originated 829 634 2,074 1,624
Revenue:
Loan origination fees $1,121 $ 870 $ 2,942 $ 2,182
Sale of servicing and marketing gains 1,639 944 4,886 3,665
Other 1,160 776 3,180 2,034
Total Revenue 3,920 2,590 11,008 7,881
- -------------------------------------------------------------------------------------------------------------
General and administrative expenses 1,439 1,115 4,204 3,274
- -------------------------------------------------------------------------------------------------------------
Operating Income $2,481 $1,475 $ 6,804 $ 4,607
=============================================================================================================
</TABLE>
-13-
<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total Revenue. Total revenue for the three months ended September 30,
1998 was $3.9 million, a 51.4% increase over the $2.6 million recorded for the
comparable period of 1997. Loan origination fees increased 28.9% from $0.9
million for the three months ended September 30, 1997 to $1.1 million for the
three months ended September 30, 1998. The increase was due to a 30.8% increase
in the number of loans originated over the comparable period of the prior year,
along with an increase in the average loan amount.
Revenue from the sale of servicing and marketing gains increased 73.6%
from $0.9 million for the three months ended September 30, 1997 to $1.6 million
for the three months ended September 30, 1998. The increase was primarily due to
more mortgages originated during the third quarter of 1998 as compared to the
comparable period of 1997. The increase can also be attributed to favorable
market conditions. Loan originations increased 30.8% during the period over the
number of loans originated during the prior year.
Revenue from other sources increased 49.5% from $0.8 million for the
three months ended September 30, 1997 to $1.2 million for the three months ended
September 30, 1998. The increase was partially due to earnings from the
Company's interest in a limited liability company that provides title services
and expanded into Florida late in 1997. Revenue from the title company increased
120.7% for the three months ended September 30, 1998 over the comparable period
of the prior year. Interest income also increased due to more mortgages
originated over the comparable period of the prior year.
General and administrative expenses. General and administrative
expenses for the three months ended September 30, 1998 were $1.4 million, a
29.1% increase from the comparable period of the prior year. Bank interest
expense increased because of more mortgages originated over the prior year.
Incentive compensation increased due to significant increase in net income.
General and administrative expenses also increased because of expenses related
to the expansion of title services into Florida late in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total Revenue. Total revenue for the nine months ended September 30,
1998 was $11.0 million, a 39.7% increase over the $7.9 million recorded for the
comparable period of 1997. Loan origination fees increased 34.8% from $2.2
million for the nine months ended September 30, 1997 to $2.9 million for the
nine months ended September 30, 1998. This increase was due to a 27.7% increase
in the number of loans originated over the comparable period of the prior year,
along with an increase in the average loan amount.
Revenue from the sale of servicing and marketing gains increased 33.3%
from $3.7 million for the nine months ended September 30, 1997 to $4.9 million
for the nine months ended September 30, 1998. The increase was primarily due to
more mortgages originated during the first nine months of 1998 compared to the
first nine months of 1997. Loan originations increased 27.7% during the period
over the number of loans originated during the prior year. The increase in
servicing fees was due to more fixed rate mortgages originated during the nine
months ended September 30, 1998 from the comparable period of 1997. The company
earns higher premiums on fixed rate mortgages as opposed to adjustable rate
mortgages. The increase in marketing gains was primarily due to favorable market
conditions during the last part of 1997 and early part of 1998 that increased
marketing gains on loans that closed during the first quarter of 1998. The
increase in marketing and service fees was also due to an increase in average
loan amounts. M/I Financial uses hedging methods whereby it has the option, but
is not required, to
-14-
<PAGE> 15
complete the hedging transaction. This allowed the Company to record servicing
and marketing gains during a period of falling interest rates while limiting its
risk of loss from a rising interest rate market.
Revenue from other sources increased 56.3% from $2.0 million for the
nine months ended September 30, 1997 to $3.2 million for the nine months ended
September 30, 1998. The increase was partially due to earnings from the
Company's interest in a limited liability company that provides title services
and expanded into Florida late in 1997. Revenue from other sources also
increased because of an increase in loan application fees received during the
period over the number received during the prior year. There were 436 more
applications taken in the first nine months of 1998 over the comparable period
of a year ago. Interest income increased due to more mortgages originated over
the period of a year ago.
General and administrative expenses. General and administrative
expenses for the nine months ended September 30, 1998 were $4.2 million, a 28.4%
increase over the comparable period of the prior year. Loan application expenses
increased because of more loan applications taken during the year. There were
436 more applications taken in the first nine months of 1998 over the comparable
period of a year ago. Bank interest expense increased because of more mortgages
originated over the period of a year ago. Incentive compensation increased due
to a significant increase in net income. General and administrative expenses
also increased because of expenses related to the expansion of title services
into Florida late in 1997.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. Corporate general and
administrative expenses increased to $5.1 million and $10.3 million for the
three and nine months ended September 30, 1998, respectively, from $4.4 million
and $9.4 million recorded for the comparable periods of 1997. However, as a
percentage of total revenue, general and administrative expenses for the three
and nine months ended September 30, 1998 decreased to 2.4% and 2.1%,
respectively, from 2.8% and 2.3% for the comparable periods in the prior year.
The increases in expense were primarily attributable to increases in profit
sharing and charitable contributions expensed in the current year due to the
significant increase in net income.
Interest Expense. Corporate and homebuilding interest expense for the
three and nine months ended September 30, 1998 increased to $3.2 and $8.8
million, respectively, from $3.0 and $8.0 million recorded for the comparable
periods of the prior year. Interest expense was higher in the current year due
to an increase in the average borrowings outstanding during the first nine
months of 1998 compared to the first nine months of 1997. This was partially
offset by an increase in the net amount of interest capitalized. Average
borrowings outstanding and capitalized interest increased due to a significant
increase in the Company's backlog and land development activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing needs depend upon its sales volume, asset
turnover, land acquisition and inventory balances. The Company has incurred
substantial indebtedness, and may incur substantial indebtedness in the future,
to fund the growth of its homebuilding activities. The Company's principal
source of funds for construction and development activities has been from
internally generated cash and from bank borrowings, which are primarily
unsecured. Additionally, in May 1998, the Company sold treasury shares and
received approximately $24.6 million.
-15-
<PAGE> 16
Notes Payable Banks. At September 30, 1998, the Company had bank
borrowings outstanding of $94.0 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) $204.5 million and (ii) the Company's borrowing
base, which is calculated based on specified percentages of certain types of
assets held by the Company as of each month end, less the sum of (A) outstanding
letters of credit issued for purposes other than to satisfy bonding requirements
and (B) the aggregate amount of outstanding letters of credit, other than
letters of credit issued for the purpose of satisfying bonding requirements, for
joint ventures in which the Company is a partner and which are guaranteed by the
Company. The Bank Credit Facility matures September 30, 2003, 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 September 30, 1998, borrowings under the Bank Credit Facility were at
the prime rate or, at the Company's option, LIBOR plus a margin of between 1.60%
and 2.35% based on the Company's ratio of Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") to consolidated interest incurred and
were primarily unsecured. The Bank Credit Facility contains restrictive
covenants which require the Company, among other things, to maintain minimum net
worth and working capital amounts, to maintain a minimum ratio of EBITDA to
consolidated interest incurred and to maintain certain other financial ratios.
The Bank Credit Facility also places limitations on the amount of additional
indebtedness that may be incurred by the Company, the acquisition of undeveloped
land, dividends that may be paid and the aggregate cost of certain types of
inventory the Company can hold at any one time.
On February 26, 1998 and September 23, 1998 the Company entered into
$50 million and $25 million interest rate SWAP agreements with a bank. The SWAP
agreements expire February 26, 2001 and September 25, 2000, respectively, and
require the Company to make fixed interest rate payments to the bank in return
for variable payments. During the three and nine months ended September 30,
1998, these agreements resulted in a decrease of interest expense of $20,041 and
$45,920, respectively.
An additional $12.2 million was outstanding as of September 30, 1998
under the M/I Financial loan agreement, which permits borrowings of $30.0
million to finance mortgage loans initially funded by M/I Financial for
customers of the Company and a limited amount for loans to others. The Company
and M/I Financial are co-borrowers under the M/I Financial loan agreement. This
agreement limits the borrowings to 95% of the aggregate face amount of certain
qualified mortgages and contains restrictive covenants requiring M/I Financial
to maintain minimum net worth and certain minimum financial ratios. At September
30, 1998, borrowings under the M/I Financial loan agreement were at (a) the
prime rate less 0.50%, or (b) LIBOR plus 1.60% or (c) a combination of (a) and
(b). The agreement terminates on June 22, 2001, at which time the unpaid balance
is due.
At September 30, 1998, the Company had the right to borrow up to $232.3
million under its credit facilities, including $27.8 million under the M/I
Financial loan agreements (95% of the aggregate face amount of certain qualified
mortgages). At September 30, 1998, the Company had $126.1 million of unused
borrowing availability under its loan agreements. The Company also had
approximately $32.5 million of completion bonds and letters of credit
outstanding at September 30, 1998.
Subordinated Notes. At September 30, 1998, there was outstanding $50.0
million of Senior Subordinated Notes. The notes bear interest at a fixed rate of
9.51% and mature August 29, 2004.
Land and Land Development. Over the past several years, the Company's
land development activities and land holdings have increased significantly, and
the Company believes this trend will continue in the foreseeable future.
Single-family lots, land and land development increased 14.5% from
-16-
<PAGE> 17
December 31, 1997 to September 30, 1998. These increases are primarily due to
the shortage of qualified land developers in certain of the Company's markets as
well as the Company developing more land due to the competitive advantages that
can be achieved by developing land internally rather than purchasing lots from
developers or competing homebuilders. This is particularly true for the
Company's Horizon product line, in which lots are generally not available from
third party developers at economically feasible prices due to the price points
the Company targets. The Company continues to purchase lots from outside
developers under option contracts, when possible, to limit its risk; however,
the Company will continue to evaluate all of its alternatives to satisfy its
demand for lots in the most cost effective manner.
The $16.0 million increase in notes payable banks - homebuilding
operations, from December 31, 1997 to September 30, 1998 reflects increased
borrowings primarily attributable to the increase in houses under construction,
along with an increase in single-family lots, land and land development costs.
Houses under construction increased $62.7 million from December 31, 1997 to
September 30, 1998, and single-family lots, land and land development costs
increased $22.0 million. It is expected that borrowing needs will increase as
the Company continues to increase its investment in land under development and
developed lots.
As of September 30, 1998, the Company had closed on five phases of a
six-phase land purchase contract in the Maryland division. This contract was
entered into in 1994 and required a greater investment than the Company
generally commits. It has been the Company's policy to sell a portion of these
lots to outside homebuilders.
The Company has an option to purchase the remaining phase.
At September 30, 1998, mortgage notes payable outstanding were $17.8
million, secured by a building, lots and land with a recorded book value of
$25.7 million.
As its capital requirements increase, the Company may increase its
borrowings under its bank line of credit. In addition, the Company continually
explores and evaluates alternative sources from which to obtain additional
capital.
Sale of Treasury Shares. On April 27, 1998, the Company filed
a registration statement with the Securities and Exchange Commission for up to
1,200,000 shares of common stock of the Company. All of such shares were sold on
May 5, 1998. The Company received approximately $24.6 million, which was used to
repay a portion of existing indebtedness.
Year 2000 Compliance. The Company is currently in the process of
modifying or replacing certain management information systems to address issues
regarding the year 2000. In accordance with current accounting guidance,
modification costs for the year 2000 will be charged to expense as incurred
while replacement costs will be capitalized and amortized over the asset's
useful life. It is not presently believed that these changes will have an
adverse impact on operations or that the expenditures related thereto will be
material to the Company's financial position or results of operations in any
given year.
The "Year 2000" problem arises as a result of many automated
calculations being written in computer code which does not properly recognize
dates after 1999. Problems associated with this issue can occur not only on
"mainframe" applications, but also with such devices as personal computers,
telecommunication equipment and programmable logic controllers associated with
certain manufacturing equipment. Without correction, it is possible that
business and operational functions that rely on this improper code could fail
and cause significant business disruption and loss.
-17-
<PAGE> 18
The manner of resolving the identified Year 2000 shortcomings has
included strategies such as implementing Year 2000 compliant versions of third
party software, modifying portions of existing software and replacing
non-compliant business systems with new third party software. A combination of
internal and external resources is being used to help identify, implement and
test solutions associated with Year 2000 issues. Management believes that
quantifying the extent to which the Company's Year 2000 remediation efforts are
complete is not practicable and could be potentially misleading. However, based
on existing plans, it is anticipated that the Company's ongoing efforts to
remediate data processing systems to be Year 2000 compliant will be completed by
the middle of calendar 1999.
Another risk presented by the Year 2000 issue is that significant
customers and suppliers of the Company could fail to become fully Year 2000
compliant. This failure, in turn, could result in a significant adverse effect
to the Company's operations. The Company is in the process of making inquiries
of its significant suppliers as to the state of their Year 2000 readiness. It is
believed that these inquiries will become increasingly more meaningful as the
year 2000 approaches. Regardless, there can be no assurance that the data
processing and non-information technology systems utilized by these other
companies will become Year 2000 compliant on a timely basis. The impact of
noncompliance is not currently estimable.
Taken together, the Company believes that its substantial past and
current investments in these information technology initiatives will provide the
foundation necessary to support and enhance operations in the years to come.
Nevertheless, achieving Year 2000 compliance is dependent on many factors, some
of which are not completely within the Company's control. Should either the
Company's internal systems or the internal systems of one or more significant
vendors or suppliers fail to achieve Year 2000 compliance, the Company's
business and its results of operations could be adversely affected.
INTEREST RATES AND INFLATION
The Company's business is significantly affected by general economic
conditions of the United States and, particularly, by the impact of interest
rates. Higher interest rates may decrease the potential market by making it more
difficult for home buyers to qualify for mortgages or to obtain mortgages at
interest rates acceptable to them. Increases in interest rates also would
increase the Company's interest expense as the rate on the revolving loans is
based upon floating rates of interest. The weighted average interest rate on the
Company's outstanding debt was 8.5% for the nine months ended September 30, 1998
and 1997.
In conjunction with its mortgage banking operations, the Company uses
hedging methods to reduce its exposure to interest rate fluctuations between the
commitment date of the loan and the time the loan closes.
In recent years, the Company generally has been able to raise prices by
amounts at least equal to its cost increases and, accordingly, has not
experienced any detrimental effect from inflation. Where the Company develops
lots for its own use, inflation may increase the Company's profits because land
costs are fixed well in advance of sales efforts. The Company is generally able
to maintain costs with subcontractors from the date a home sales contract is
accepted; however, in certain situations, unanticipated costs may occur between
the time a sales contract is executed and the time a home is constructed, which
results in lower gross profit margins.
-18-
<PAGE> 19
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the safe harbor provisions
included in the Private Securities Litigation Reform Act of 1995. Accordingly,
in addition to historical information, this Management's Discussion and Analysis
of Results of Operations and Financial Condition contains certain
forward-looking statements, including, but not limited to, statements regarding
the Company's future financial performance and financial condition. These
statements involve a number of risks and uncertainties. Any forward-looking
statements made by the Company herein and in future reports and statements are
not guarantees of future performance, and actual results may differ materially
from those in such forward-looking statements as a result of various factors
including, but not limited to, those referred to below.
General Real Estate, Economic and Other Conditions. The homebuilding
industry is significantly affected by changes in national and local economic and
other conditions, including employment levels, changing demographic
considerations, availability of financing, interest rates, consumer confidence
and housing demand. In addition, homebuilders are subject to various risks, many
of them outside the control of the homebuilder, including competitive
overbuilding, availability and cost of building lots, availability of materials
and labor, adverse weather conditions which can cause delays in construction
schedules, cost overruns, changes in government regulations, and increases in
real estate taxes and other local government fees. The Company cannot predict
whether interest rates will be at levels attractive to prospective home buyers.
If interest rates increase, and in particular mortgage interest rates, the
Company's business could be adversely affected.
Land Development Activities. The Company develops the lots for a
majority of its subdivisions. Therefore, the medium- and long-term financial
success of the Company will be dependent on the Company's ability to develop its
subdivisions successfully. Acquiring land and committing the financial and
managerial resources to develop a subdivision involves significant risks. Before
a subdivision generates any revenue, material expenditures are required for
items such as acquiring land and constructing subdivision infrastructure (such
as roads and utilities).
The Company's Markets. The Company operates in the Columbus and
Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm Beach County,
Florida; Charlotte and Raleigh, North Carolina; Virginia and Maryland
metropolitan areas; and Phoenix, Arizona. Adverse general economic conditions in
these markets could have a material adverse impact on the operations of the
Company. For the nine months ended September 30, 1998, approximately 42% of the
Company's housing revenue and a significant portion of the Company's operating
income were derived from operations in its Columbus, Ohio market. The Company's
performance could be significantly affected by changes in this market.
Competition. The homebuilding industry is highly competitive. The
Company competes in each of its local market areas with numerous national,
regional and local homebuilders, some of which have greater financial,
marketing, land acquisition, and sales resources than the Company. Builders of
new homes compete not only for home buyers, but also for desirable properties,
financing, raw materials and skilled subcontractors. The Company also competes
with the resale market for existing homes which provides certain attractions for
home buyers over building a new home.
Governmental Regulation and Environmental Considerations. The
homebuilding industry is subject to increasing local, state and Federal
statutes, ordinances, rules and regulations concerning zoning, resource
protection (preservation of woodlands and hillside areas), building design and
construction, and similar matters, including local regulations which impose
restrictive zoning and density requirements in
-19-
<PAGE> 20
order to limit the number of homes that can eventually be built within the
boundaries of a particular location. Such regulation affects construction
activities, including construction materials which must be used in certain
aspects of building design, as well as sales activities and other dealings with
home buyers. The Company must also obtain licenses, permits and approvals from
various governmental agencies for its development activities, the granting of
which are beyond the Company's control. Furthermore, increasingly stringent
requirements may be imposed on homebuilders and developers in the future.
Although the Company cannot predict the impact on the Company of compliance with
any such requirements, such requirements could result in time consuming and
expensive compliance programs.
The Company is also subject to a variety of local, state and Federal
statutes, ordinances, rules and regulations concerning the protection of health
and the environment. The particular environmental laws which apply to any given
project vary greatly according to the project site and the present and former
uses of the property. These environmental laws may result in delays, cause the
Company to incur substantial compliance costs (including substantial
expenditures for pollution and water quality control) and prohibit or severely
restrict development in certain environmentally sensitive regions. Although
there can be no assurance that it will be successful in all cases, the Company
has a general practice of requiring an environmental audit and resolution of
environmental issues prior to purchasing land in an effort to avoid major
environmental issues in the Company's developments.
In addition, the Company has been, and in the future may be, subject to
periodic delays or may be precluded from developing certain projects due to
building moratoriums. These moratoriums generally relate to insufficient water
supplies, sewage facilities, delays in utility hook-ups, or inadequate road
capacity within the specific market area or subdivision. These moratoriums can
occur prior to, or subsequent to, commencement of operations by the Company
without notice to, or recourse by, the Company.
Risk of Material and Labor Shortages. The Company is presently not
experiencing any serious material or labor shortages. However, the residential
construction industry in the past has, from time to time, experienced serious
material and labor shortages in insulation, drywall, certain carpentry and
framing work and cement, as well as fluctuating lumber prices and supplies.
Delays in construction of homes due to these shortages could adversely affect
the Company's business.
Significant Voting Control by Principal Shareholders. As of September
30, 1998, members of the Irving E. Schottenstein family owned approximately 31%
of the outstanding Common Shares of the Company. Therefore, members of the
Irving E. Schottenstein family have significant voting power with respect to the
election of the Board of Directors of the Company and, in general, the
determination of the outcome of various matters submitted to the shareholders of
the Company for approval.
Dependence on Key Executives. The Company is managed by a relatively
small number of executive officers. The loss of the services of one or more of
these executive officers could have an adverse effect on the Company's business
and operations.
-20-
<PAGE> 21
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings - none.
- --------------------------
Item 2. Changes in Securities - none.
- ------------------------------
Item 3. Defaults Upon Senior Securities - none.
- ----------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - none.
- -----------------------------------------------------------
Item 5. Other Information - none.
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The exhibits required to be filed herewith are set forth below. No reports were
filed on Form 8-K for the quarter for which this report is filed.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
-21-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
M/I Schottenstein Homes, Inc.
-----------------------------
(Registrant)
Date: November 13, 1998 by: /s/ Robert H. Schottenstein
---------------------------
Robert H. Schottenstein
President
Date: November 13, 1998 by: /s/ Kerrii B. Anderson
----------------------
Kerrii B. Anderson
Senior Vice President,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
-22-
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE #
------ ----------- ------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS THEN ENDED OF M/I SCHOTTENSTEIN HOMES,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 736
<SECURITIES> 0
<RECEIVABLES> 30,203
<ALLOWANCES> 0
<INVENTORY> 356,759
<CURRENT-ASSETS> 387,698
<PP&E> 24,906
<DEPRECIATION> 4,653
<TOTAL-ASSETS> 433,924
<CURRENT-LIABILITIES> 101,162
<BONDS> 17,772
0
0
<COMMON> 88
<OTHER-SE> 158,677
<TOTAL-LIABILITY-AND-EQUITY> 433,924
<SALES> 492,432
<TOTAL-REVENUES> 501,630
<CGS> 398,071
<TOTAL-COSTS> 398,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,014
<INCOME-PRETAX> 32,481
<INCOME-TAX> 13,145
<INCOME-CONTINUING> 19,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,336
<EPS-PRIMARY> 2.34
<EPS-DILUTED> 2.32
</TABLE>
