<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 March 31, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 1-12434
M/I SCHOTTENSTEIN HOMES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1210837
---- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
3 Easton Oval, Suite 500, Columbus, Ohio 43219
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(Address of principal executive offices) (Zip Code)
(614) 418-8000
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(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 8,796,461 shares
outstanding as of May 14, 1999
<PAGE> 2
<TABLE>
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
-----
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1999 and 1998 4
Consolidated Statement of Stockholders'
Equity for Three Months Ended
March 31, 1999 5
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1999 and 1998 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 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item. 5 Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
</TABLE>
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<PAGE> 3
<TABLE>
CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
<CAPTION>
==========================================================================================================
MARCH 31, December 31,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash $ 4,202 $ 10,068
Cash held in escrow 1,621 870
Receivables 26,691 42,361
Inventories:
Single-family lots, land and land development costs 179,032 170,115
Houses under construction 173,259 136,965
Model homes and furnishings - at cost (less accumulated depreciation:
March 31, 1999 - $46;
December 31, 1998 - $45) 15,414 15,054
Land purchase deposits 2,047 1,366
Building, office furnishings, transportation and construction
equipment - at cost (less accumulated depreciation:
March 31, 1999 - $5,308;
December 31, 1998 - $4,962) 19,854 20,015
Investment in unconsolidated joint ventures and limited liability companies 15,997 17,850
Other assets 11,902 12,483
- ----------------------------------------------------------------------------------------------------------
TOTAL $450,019 $ 427,147
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable banks - homebuilding operations $111,000 $ 70,000
Note payable bank - financial services operations 6,495 23,500
Mortgage notes payable 11,762 11,793
Senior subordinated notes 50,000 50,000
Accounts payable 52,569 51,364
Accrued compensation 4,952 18,131
Income taxes payable 6,733 4,380
Accrued interest, warranty and other 18,115 19,430
Customer deposits 14,664 11,909
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 276,290 260,507
- ----------------------------------------------------------------------------------------------------------
Commitments and Contingencies
- ----------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - $.01 par value;
authorized 2,000,000 shares;
none outstanding -- --
Common stock - $.01 par value;
authorized 38,000,000 shares;
issued 8,813,061 shares 88 88
Additional paid-in capital 61,067 61,067
Retained earnings 112,714 105,485
Treasury stock - at cost - 7,900 shares held in treasury at
March 31, 1999 (140) --
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 173,729 166,640
- ----------------------------------------------------------------------------------------------------------
TOTAL $450,019 $ 427,147
==========================================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
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<PAGE> 4
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
<CAPTION>
================================================================================
Three Months Ended March 31,
(Dollars in thousands, except per share information) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 148,824 $ 117,230
- --------------------------------------------------------------------------------
Costs and expenses:
Land and housing 114,589 91,271
General and administrative 8,100 6,987
Selling 10,323 8,821
Interest 3,136 2,648
- --------------------------------------------------------------------------------
Total costs and expenses 136,148 109,727
- --------------------------------------------------------------------------------
Income before income taxes 12,676 7,503
- --------------------------------------------------------------------------------
Income taxes:
Current 3,782 1,499
Deferred 1,225 1,503
- --------------------------------------------------------------------------------
Total income taxes 5,007 3,002
- --------------------------------------------------------------------------------
Net income $ 7,669 $ 4,501
================================================================================
Per share data:
Basic $ 0.87 $ 0.59
Diluted $ 0.86 $ 0.58
================================================================================
Weighted average shares outstanding:
Basic 8,812,283 7,604,132
Diluted 8,897,079 7,698,571
================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
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<PAGE> 5
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
============================================================================================
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
- --------------------------------------------------------------------------------------------
Common Stock
-------------------- Additional
(Dollars in thousands, except Shares Paid-In Retained Treasury
per share information) Outstanding Amount Capital Earnings Stock
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 8,813,061 $88 $61,067 $105,485 --
Net income -- -- -- 7,669 --
Dividends to stockholders,
$0.05 per common share -- -- -- (440) --
Purchase of treasury shares (7,900) -- -- -- $(140)
- --------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 8,805,161 $88 $61,067 $112,714 $(140)
============================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
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<PAGE> 6
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
<CAPTION>
=======================================================================================================
Three Months Ended March 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,669 $ 4,501
Adjustments to reconcile net income to net cash
used in operating activities:
Loss from property disposals -- 50
Depreciation and amortization 508 398
Deferred income taxes 1,225 1,503
Decrease (increase) in cash held in escrow (751) 1,758
Decrease in receivables 15,670 17,461
Increase in inventories (40,049) (24,646)
Increase in other assets (684) (75)
Increase (decrease) in accounts payable 1,205 (1,542)
Increase (decrease) in income taxes payable 2,353 (2,423)
Decrease in accrued liabilities (14,494) (12,195)
Equity in undistributed income of unconsolidated joint
ventures and limited liability companies (140) (57)
- -------------------------------------------------------------------------------------------------------
Net cash used in operating activities (27,488) (15,267)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (306) (91)
Investment in unconsolidated joint ventures and
limited liability companies (4,386) (3,843)
Distributions from unconsolidated joint ventures and
limited liability companies 175 87
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,517) (3,847)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments 23,995 5,590
Mortgage notes payable:
Proceeds from borrowings -- 342
Principal repayments (31) --
Dividends paid (440) --
Net increase in customer deposits 2,755 3,088
Proceeds from exercise of stock options -- 164
Payments to acquire treasury stock (140) --
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,139 9,184
- -------------------------------------------------------------------------------------------------------
Net decrease in cash (5,866) (9,930)
Cash balance at beginning of year 10,068 10,836
- -------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 4,202 $ 906
=======================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $ 2,887 $ 2,044
Income taxes $ 5,121 $ 3,806
NON-CASH TRANSACTIONS DURING THE YEAR:
Land acquired with mortgage notes payable $ -- $ 342
Single-family lots distributed from unconsolidated joint ventures and
limited liability companies $ 6,080 $ 4,349
=======================================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
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<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 three months ended March 31, 1999 and 1998 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, 1998.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (consisting only of normal recurring accruals) which
are necessary for a fair presentation of financial results for the interim
periods presented.
NOTE 2. AMENDED LOAN AGREEMENT
On April 20, 1999, the Company amended its bank loan agreement. The amended
loan agreement modified certain covenants. The remaining terms of the
agreement remain substantially the same as those in the agreement that it
replaces.
NOTE 3. INTEREST
The Company capitalizes interest during development and construction.
Capitalized interest is charged to interest expense as the related inventory
is delivered. The summary of total interest for the three months ended March
31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Interest capitalized, beginning of period $ 7,957 $ 7,620
Interest incurred 3,236 3,335
Interest expensed (3,136) (2,648)
- ------------------------------------------------------------------------------
Interest capitalized, end of period $ 8,057 $ 8,307
=============================================================================
</TABLE>
NOTE 4. CONTINGENCIES
At March 31, 1999, the Company had options and contingent purchase contracts
to acquire land and developed lots with an aggregate purchase price of
approximately $183.9 million.
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<PAGE> 8
NOTE 5. PER SHARE DATA
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 issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is required to be adopted for
the Company's 2000 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 7. DIVIDENDS
On April 22, 1999, the Company paid to the shareholders of record on April 1,
1999 a cash dividend of $0.05 per share (aggregate dividends paid of
$439,658). On April 22, 1999, the Board of Directors approved a $0.05 per
share cash dividend payable to stockholders of record of its common stock on
July 1, 1999, payable on July 22, 1999.
-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 ENDED MARCH 31, 1999 AND 1998
CONSOLIDATED
Total Revenue. Total revenue for the three months ended March 31, 1999
was $148.8 million, a 27.0% increase over the $117.2 million recorded for the
comparable period of 1998. Homebuilding revenue increased $29.5 million and
financial services increased $2.0 million. The increase in homebuilding was
attributable to a housing revenue increase of $28.5 million and a land revenue
increase of $1.2 million. The increase in housing revenue was attributable to
both an increase in the number of Homes Delivered as the Company delivered 80
more homes for the first quarter of 1999 compared to the prior year, and a 10.8%
increase in the average sales price of Homes Delivered. The increase in land
revenue for the first quarter of 1999 was primarily due to an increase over the
first quarter of 1998 in the number of lots sold to third parties in the
Washington, D.C., Columbus and Phoenix markets. The increase in financial
services revenue was primarily attributable to increases in the number of loans
originated and the gains recognized from the sale of loans.
Income Before Income Taxes. Income before income taxes for the first
quarter of 1999 increased 68.9% over the comparable period of 1998. Income
before income taxes reached $12.7 million, a record for the Company's first
quarter. The increase related to homebuilding, where income before income taxes
increased from $3.0 to $5.3 million, and financial services, where income before
income taxes increased from $2.2 to $4.1 million. The increase in homebuilding
was due to the increase in the number of Homes Delivered and in the average
selling price of Homes Delivered. The average selling price increased from
$184,000 for the first quarter of 1998 to $204,000 in 1999. The increase in
income before income taxes in homebuilding was also due to an increase in gross
margin. Homebuilding gross margin increased from 19.5% for the three months
ended March 31, 1998 to 19.8% for the same period of the current year. The
increase in financial services was primarily due to an increase in the number of
loans originated and the significant increase in income from the sale of
servicing and marketing gains due to increased loan volume and the favorable
interest rate environment during the last half of 1998 and the first quarter of
1999.
The information below is presented in conformity with SFAS 131
"Disclosure about Segments of an Enterprise and Related Information" for all
periods presented.
<TABLE>
<CAPTION>
March 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Homebuilding $144,152 $114,638
Financial services 5,499 3,468
Intersegment (827) (876)
- --------------------------------------------------------------------------------
TOTAL REVENUE $148,824 $117,230
- --------------------------------------------------------------------------------
Income Before Income Taxes:
Homebuilding $ 5,325 $ 3,000
Financial Services 4,100 2,192
Unallocated amounts 3,251 2,311
- --------------------------------------------------------------------------------
TOTAL INCOME BEFORE INCOME TAXES $ 12,676 $ 7,503
- --------------------------------------------------------------------------------
</TABLE>
-9-
<PAGE> 10
HOME-BUILDING SEGMENT
The following table sets forth certain information related to the Company's
homebuilding segment:
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Dollars in thousands) 1999 1998
========================================================================================
<S> <C> <C>
Revenue:
Housing Sales $140,576 $112,123
Land and lot sales 3,116 1,904
Other income 460 611
- ----------------------------------------------------------------------------------------
Total Revenue $144,152 $114,638
========================================================================================
Revenue:
Housing sales 97.5% 97.8%
Land and lot sales 2.2 1.7
Other income 0.3 0.5
- ----------------------------------------------------------------------------------------
Total Revenue 100.0 100.0
Land and housing costs 80.2 80.5
- ----------------------------------------------------------------------------------------
Gross Margin 19.8 19.5
General and administrative expenses 3.5 3.6
Selling expenses 7.2 7.7
- ----------------------------------------------------------------------------------------
Operating Income 9.1 8.2
Allocated expenses 5.4 5.6
- ----------------------------------------------------------------------------------------
Income before income taxes 3.7% 2.6%
========================================================================================
MIDWEST REGION
Unit data:
New contracts, net 755 721
Homes delivered 429 376
Backlog at end of period 1,648 1,402
Average sales price of homes in backlog $ 185 $ 178
Aggregate sales value of homes in backlog $305,000 $250,000
Number of active subdivisions 73 80
========================================================================================
FLORIDA REGION
Unit data:
New contracts, net 175 193
Homes delivered 117 126
Backlog at end of period 391 322
Average sales price of homes in backlog $ 198 $ 185
Aggregate sales value of homes in backlog $ 77,000 $ 59,000
Number of active subdivisions 25 35
========================================================================================
NORTH CAROLINA, VIRGINIA AND MARYLAND, AND ARIZONA REGION
Unit data:
New contracts, net 237 231
Homes delivered 143 107
Backlog at end of period 462 356
Average sales price of homes in backlog $ 344 $ 305
Aggregate sales value of homes in backlog $159,000 $109,000
Number of active subdivisions 40 40
========================================================================================
TOTAL
Unit data:
New contracts, net 1,167 1,145
Homes delivered 689 609
Backlog at end of period 2,501 2,080
Average sales price of homes in backlog $ 216 $ 201
Aggregate sales value of homes in backlog $541,000 $418,000
Number of active subdivision 138 155
========================================================================================
</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 homes for which the closing of the sale has occurred and
title has transferred to the buyer. Revenue and cost of revenue for a home sale
are recognized at the time of closing.
"Backlog" represents homes for which the Company's standard sales
contract has been executed, but which are not included in Homes Delivered
because closings for these homes have not yet occurred as of the end of the
period specified. Most cancellations of contracts for homes in Backlog occur
because customers cannot qualify for financing. These cancellations usually
occur prior to the start of construction. Since the Company arranges financing
with guaranteed rates for many of its customers, the incidence of cancellations
after the start of construction is low. In the first three months of 1999, the
Company delivered 689 homes, most of which were homes under contract in Backlog
at December 31, 1998. Of the 2,023 contracts in Backlog at December 31, 1998,
10.5% have been canceled as of March 31, 1999. For homes in Backlog at December
31, 1997, 9.6% had been canceled as of March 31, 1998. For the homes in Backlog
at December 31, 1997, the final cancellation percentage was 12.8%. Unsold
speculative homes, which are in various stages of construction, totaled 130 and
154 at March 31, 1999 and 1998, respectively.
Total Revenue. Total revenue for the homebuilding segment for the three
months ended March 31, 1999 was $144.2 million, a 25.7% increase over 1998. This
increase was due to a 25.4% increase in housing revenue and a 63.7% increase in
land revenue. The increase in housing revenue was partially due to a 13.1%
increase in the number of Homes Delivered. Homes Delivered were higher in all of
the Company's markets with the exception of Cincinnati, Orlando and Raleigh. The
increase in housing revenue was also due to a 10.8% increase in the average
sales price of Homes Delivered. The increase in the average sales price of Homes
Delivered was primarily due to increased closings in the Washington, D.C. and
Phoenix markets. The average sales price in these markets is substantially
higher than the Company's average sales price. The increase in land revenue from
$1.9 million to $3.1 million was primarily attributable to the Washington, D.C.,
Columbus and Phoenix markets. These markets had an increase in lot sales to
outside homebuilders in the three months ended March 31, 1999.
Home Sales and Backlog. The Company recorded a 1.9% increase in the
number of New Contracts recorded in the first quarter of 1999 compared to the
corresponding period of 1998. New Contracts recorded in the current year were
higher due to significant increases in the Charlotte, Indianapolis and
Cincinnati markets. The Company believes the increase in New Contracts was
partially due to favorable market conditions and low interest rates. The number
of New Contracts recorded in future periods will be dependent on numerous
factors, including future economic conditions, timing of land development,
consumer confidence and interest rates available to potential home buyers.
At March 31, 1999, the total sales value of the Company's Backlog of
2,501 homes was approximately $541.0 million, representing a 29.4% increase in
sales value and a 20.2% increase in units over the levels reported at March 31,
1998. The increase in units at March 31, 1999 is a result of record high New
Contracts recorded in the first quarter of 1999. The average sales price of
homes in Backlog increased 7.5% from March 31, 1998 to March 31, 1999. This
increase was primarily due to increases in the Washington, D.C. and Phoenix
markets where the Company is building in more upscale and certain niche
subdivisions.
Gross Margin. The overall gross margin for the homebuilding segment was
19.8% for the three month period ended March 31, 1999 compared to 19.5% for the
three month period ended March 31,
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<PAGE> 12
1998. The gross margin from housing sales was 20.5% in the first quarter of 1999
compared to 20.0% in the first quarter of 1998. The gross margin from lot and
land sales decreased from 16.2% to 11.4%. The increase in margin is attributable
to favorable market conditions and management's continued 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 to obtain higher margins. The decrease in
gross margin from lot and land sales was due to the Virginia division where
there were lot sales to outside homebuilders at lower margins in the first
quarter of 1999 than in the first quarter of 1998. Lot and land gross margins
can vary significantly depending on the sales price, the cost of the subdivision
and the phase in which the sale takes place.
General and Administrative Expenses. General and administrative
expenses increased from $4.1 million for the three months ended March 31, 1998
to $5.0 million for the three months ended March 31, 1999. However, general and
administrative expenses as a percentage of total revenue decreased from 3.6% for
the three months ended March 31, 1998 to 3.5% for the three months ended March
31, 1999. The increase in expenses was primarily attributable to the increase in
payroll expense and miscellaneous other expenses related to the increase in
revenues.
Selling Expenses. Selling expenses increased from $8.8 million for the
three months ended March 31, 1998 to $10.3 million for the three months ended
March 31, 1999. However, selling expenses as a percentage of total revenue
decreased from 7.7% to 7.2%. The increase in expenses 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 and model 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 March 31,
(Dollars in thousands) 1998 1999
====================================================================================
<S> <C> <C>
Number of loans originated 568 533
Revenue:
Loan origination fees $ 797 $ 822
Sale of servicing and marketing gains 3,602 1,808
Other 1,100 838
- ------------------------------------------------------------------------------------
Total Revenue 5,499 3,468
- ------------------------------------------------------------------------------------
General and administrative expenses 1,399 1,276
- ------------------------------------------------------------------------------------
Operating Income $4,100 $2,192
====================================================================================
</TABLE>
Total Revenue. Total revenue for the three months ended March 31, 1999
was $5.5 million, a 58.6% increase over the $3.5 million recorded for the
comparable period of the prior year. Loan origination fees decreased 3.0% from
the first quarter of 1998 to the first quarter of 1999. This decrease was due to
special financing programs that reduced loan origination fees collected on each
loan.
Revenue from the sale of servicing and marketing gains increased 99.2%
from $1.8 million for the three months ended March 31, 1998 to $3.6 million for
the three months ended March 31, 1999. The increase in marketing gains was
primarily due to favorable market conditions during the last part of 1998 and
early part of 1999 which increased marketing gains on loans that sold during the
first quarter of 1999. The Company uses hedging methods whereby it has the
option, but is not required, to complete the hedging transaction. The Company
also concentrated on the securitization of loans with FNMA and FHLMC and
separated the sale of loans and servicing into two transactions on this product.
This change,
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<PAGE> 13
along with more favorable terms negotiated with investors, resulted in an
increase in servicing release premiums.
Revenue from other sources increased 31.3% from $0.8 million for the three
months ended March 31, 1998 to $1.1 million for the three months ended March 31,
1999. This was primarily due to increased earnings from title services. The
Company also expanded into the Washington, D.C. title agency market in early
1999.
General and Administrative Expenses. General and administrative
expenses for the three months ended March 31, 1999 were $1.4 million, a 9.6%
increase over the comparable period of the prior year. This increase was mainly
due to payroll expense, which increased due to a significant increase in volume
related to originations, loan closings and title services.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. General and
administrative expenses increased from $1.6 million for the three months ended
March 31, 1998 to $1.8 million for the three months ended March 31, 1999. As a
percentage of total revenue, general and administrative expenses decreased to
1.2% for the three months ended March 31, 1999 from 1.4% for the comparable
period in the prior year. The increase in expenses was partially due to more
charitable contributions in 1999.
Interest Expense. Corporate and homebuilding interest expense for the
first quarter of 1999 totaled $3.1 million, a 19.2% increase from the $2.6
million recorded for the comparable period of the prior year. Interest expense
was higher due to the Company experiencing less of an increase in capitalized
interest in the first three months of 1999 compared to 1998 as a result of an
increase in the proportion of raw land and developed lots to total inventory.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing needs are dependant on 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 bank borrowings, which are primarily unsecured.
Notes Payable Banks. On April 20, 1999, the Company amended its bank loan
agreement. The amended loan agreement modified certain covenants. The remaining
terms of the agreement remain substantially the same as those in the agreement
that it replaces.
At March 31, 1999, the Company had bank borrowings outstanding of $111.0
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 March 31, 1999,
borrowings under the Bank Credit Facility were at the prime
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<PAGE> 14
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
$50.0 million and $25.0 million interest rate SWAP agreements with certain
banks. 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 months ended March
31, 1999, these agreements resulted in an increase in interest expense of
$33,000.
An additional $6.5 million was outstanding as of March 31, 1999 under
the M/I Financial loan agreement, which permits borrowings of $30.0 million to
finance mortgage loans initially funded by M/I Financial for customers of the
Company and a limited amount for loans to others. The Company and M/I Financial
are co-borrowers under the M/I Financial loan agreement. This agreement limits
the borrowings to 95% of the aggregate face amount of certain qualified
mortgages and contains restrictive covenants requiring M/I Financial to maintain
minimum net worth and certain minimum financial ratios. At March 31, 1999,
borrowings under the M/I Financial loan agreement were at (a) the prime rate
less 0.50%, and/or (b) LIBOR plus 1.60% or (c) a combination of (a) and (b). The
agreement terminates on June 20, 2001, at which time the unpaid balance is due.
At March 31, 1999, the Company had the right to borrow up to $229.1
million under its credit facilities, including $24.6 million under the M/I
Financial loan agreements (95% of the aggregate face amount of certain qualified
mortgages). At March 31, 1999, the Company had $111.6 million of unused
borrowing availability under its loan agreements. The Company also had
approximately $33.4 million of completion bonds and letters of credit
outstanding at March 31, 1999.
Subordinated Notes. At March 31, 1999, there was $50.0 million of
Senior Subordinated Notes outstanding. The notes bear interest at a fixed rate
of 9.51% and mature August 29, 2004.
Land and Land Development. Over the past several years, the Company's
land development activities and land holdings have increased significantly, and
the Company expects this trend will continue in the foreseeable future.
Single-family lots, land and land development increased 5.2% from December 31,
1998 to March 31, 1999. 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 the
Company's demand for lots in the most cost effective manner.
The $41.0 million increase in notes payable banks - homebuilding
operations, from December 31, 1998 to March 31, 1999 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 $36.3 million from December 31, 1998 to
March 31, 1999, while single-family lots,
-14-
<PAGE> 15
land and land development costs increased $8.9 million. It is expected that
borrowing needs will increase as the Company continues to increase its
investment in land under development and developed lots.
At March 31, 1999, mortgage notes payable outstanding were $11.8
million, secured by a building, lots and land with a recorded book value of
$15.5 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.
Purchase of Treasury Shares. On February 16, 1999, the Board of
Directors approved the repurchase of up to 500,000 shares of the Company's
outstanding common stock. The purchases may occur in the open market and/or in
privately negotiated transactions as market conditions warrant. As of March 31,
1999 the Company has purchased 7,900 shares at an average price of $17.71.
Impact of New Accounting Standards. In June, 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 is required to be adopted for the Company's 2000 annual
financial statements. The Company has not yet determined what, if any, impact
the adoption of this standard will have on its financial statements.
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 are charged to expense as incurred while
replacement costs are 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.
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 last half of 1999.
Another risk presented by the Year 2000 issue is that significant
customers, regulatory agencies 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
-15-
<PAGE> 16
companies will become Year 2000 compliant on a timely basis. The impact of
noncompliance cannot currently be estimated.
Worst case scenarios are being evaluated in relation to the Company's
key business needs. The Company has not yet adopted a formal contingency plan to
address the possibility that internal, customer, or supplier systems may not
become Year 2000 compliant. Management will develop such plans which may be
required as Fiscal 1999 evolves and the risk of such exposure, if any, becomes
better clarified. Specific timetables and phases will be established for these
contingency plans. The Company cannot currently estimate the cost, if any,
associated with contingency planning efforts that may be necessary to complete
the Year 2000 efforts.
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 for the three months ended March 31, 1999 was 8.3%
compared to 8.6% for the three months ended March 31, 1998.
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's sales contract is
accepted to the date of close. However, in certain situations, unanticipated
costs may occur between the time a sales contract is executed and the time a
home is constructed, resulting in lower gross profit margins.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the safe harbor provisions
included in the Private Securities Litigation Reform Act of 1995. Accordingly,
in addition to historical information, this Management's Discussion & 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
-16-
<PAGE> 17
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 short- 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).
Concentration of the Company's Markets. The Company's operations are in
Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm
Beach County, Florida; Charlotte and Raleigh, North Carolina; the Virginia and
Maryland suburbs of Washington, D.C., and Phoenix, Arizona. Adverse general
economic conditions in these markets could have a material adverse impact on the
operations of the Company. For the three months ended March 31, 1999,
approximately 45% of the Company's housing revenue and a significant portion of
the Company's operating income were derived from operations in its Columbus,
Ohio market. The Company's performance could be significantly affected by
changes in this market.
Competition. The homebuilding industry is highly competitive. The
Company competes in each of its local market areas with numerous national,
regional and local homebuilders, some of which have greater financial,
marketing, land acquisition, and sales resources than the Company. Builders of
new homes compete not only for home buyers, but also for desirable properties,
financing, raw materials and skilled subcontractors. The Company also competes
with the resale market for existing homes which provides certain attractions for
home buyers over building a new home.
Governmental Regulation and Environmental Considerations. The
homebuilding industry is subject to increasing local, state and Federal
statutes, ordinances, rules and regulations concerning zoning, resource
protection (preservation of woodlands and hillside areas), building design, and
construction and similar matters, including local regulations which impose
restrictive zoning and density requirements in order to limit the number of
homes that can eventually be built within the boundaries of a particular
location. Such regulation affects construction activities, including
construction materials which must be used in certain aspects of building design,
as well as sales activities and other dealings with home buyers. The Company
must also obtain licenses, permits and approvals from various governmental
agencies for its development activities, the granting of which are beyond the
Company's control. Furthermore, increasingly stringent requirements may be
imposed on homebuilders and developers in the future. Although the Company
cannot predict the impact on the Company of compliance with any such
requirements, such requirements could result in time consuming and expensive
compliance programs.
-17-
<PAGE> 18
The Company is also subject to a variety of local, state and Federal
statutes, ordinances, rules and regulations concerning the protection of health
and the environment. The particular environmental laws which apply to any given
project vary greatly according to the project site and the present and former
uses of the property. These environmental laws may result in delays, cause the
Company to incur substantial compliance costs (including substantial
expenditures for pollution and water quality control) and prohibit or severely
restrict development in certain environmentally sensitive regions. Although
there can be no assurance that it will be successful in all cases, the Company
has a general practice of requiring an environmental audit and resolution of
environmental issues prior to purchasing land in an effort to avoid major
environmental issues in the Company's developments.
In addition, the Company has been, and in the future may be, subject to
periodic delays or may be precluded from developing certain projects due to
building moratoriums. These moratoriums generally relate to insufficient water
supplies or sewage facilities, delays in utility hook-ups or inadequate road
capacity within the specific market area or subdivision. These moratoriums can
occur prior to, or subsequent to, commencement of operations by the Company
without notice to, or recourse by, the Company.
Risk of Material and Labor Shortages. The Company is presently not
experiencing any serious material or labor shortages. However, the residential
construction industry in the past has, from time to time, experienced serious
material and labor shortages in insulation, drywall, certain carpentry and
framing work and cement, as well as fluctuating lumber prices and supplies.
Delays in construction of homes due to these shortages could adversely affect
the Company's business.
Significant Voting Control by Principal Shareholders. As of March 31,
1999, members of the Irving E. Schottenstein family owned approximately 31% of
the outstanding Common Shares of the Company. In particular, Irving E.
Schottenstein, in his own name and as trustee of trusts for his children, had
the right to vote 2,678,300 Common Shares. Therefore, members of the Irving E.
Schottenstein family have significant voting power with respect to the election
of the Board of Directors of the Company and, in general, the determination of
the outcome of various matters submitted to the shareholders of the Company for
approval.
Quantitative and Qualitative Disclosures about Market Risk. The
Company's primary market risk results from fluctuations in interest rates. The
Company is exposed to interest rate risk through its borrowings under its
unsecured revolving credit facility which permits borrowings up to $234.5
million. In order to minimize the effect of the interest rate fluctuation, the
Company has entered into two interest rate swap arrangements with a major bank
for a total notional amount of $75.0 million. Under these agreements the company
pays a fixed rate of 5.10% on $25.0 million and 5.50% on $50.0 million.
Assuming a hypothetical 20% change in short-term interest rates,
interest expense would not change significantly, as the interest rate swap
agreements would partially offset the impact.
Additionally, M/I Financial offers fixed and adjustable rate mortgage
loans, primarily to buyers of the Company's homes. The loans are granted at
current market interest rates which are guaranteed from the loan commitment date
through the transfer of the title of the home to the buyer (the "Closing"). M/I
Financial hedges its interest rate risk using optional and mandatory forward
sales to hedge risk from the loan commitment date generally to the date a sale
commitment is entered into. At March 31, 1999, the notional principal amount
under these forward sales agreements was approximately $124.0 million and the
related fair value of these agreements was approximately $0.2 million. The
hedging agreements outstanding at March 31, 1999 mature within 90-120 days.
Gains or losses on these agreements are recognized at the time the loan is sold.
-18-
<PAGE> 19
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>
10.1 First Amendment to Fourth Restated Revolving Credit Loan,
Swingline Loan and Standby Letter of Credit Agreement by
and among the Company and M/I Homes, Inc.; Bank One, NA;
The Huntington National Bank; National City Bank;
BankBoston, N.A.; The Fifth Third Bank of Columbus;
Suntrust Bank, Central Florida, N.A.; AmSouth Bank and Bank
One, NA as agent for the banks, dated April 20, 1999.
27 Financial Data Schedule.
</TABLE>
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
M/I Schottenstein Homes, Inc.
------------------------------------
(Registrant)
Date: May 14, 1999 by: /s/ Robert H. Schottenstein
------------------------------------
Robert H. Schottenstein
Vice Chairman,
President
Date: May 14, 1999 by: /s/ Kerrii B. Anderson
------------------------------------
Kerrii B. Anderson
Senior Vice President,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
-20-
<PAGE> 21
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE #
- -------------- ------------------------------------------------- ------
10.1 First Amendment to Fourth Restated Revolving
Credit Loan, Swingline Loan and Standby Letter of
Credit Agreement by and among the Company and M/I
Homes, Inc.; Bank One, NA; The Huntington
National Bank; National City Bank; BankBoston,
N.A.; The Fifth Third Bank of Columbus; Suntrust
Bank, Central Florida, N.A.; AmSouth Bank and
Bank One, NA as agent for the banks, dated April
20, 1999.
27 Financial Data Schedule.
-21-
<PAGE> 1
FIRST AMENDMENT TO FOURTH RESTATED REVOLVING CREDIT LOAN,
---------------------------------------------------------
SWINGLINE LOAN AND STANDBY LETTER OF CREDIT AGREEMENT
-----------------------------------------------------
This First Amendment to Fourth Restated Revolving Credit Loan,
Swingline Loan and Standby Letter Of Credit Agreement (this "Amendment") is made
to be effective as of April 20, 1999, by and among M/I SCHOTTENSTEIN HOMES,
INC., an Ohio corporation ("M/I") and M/I Homes, Inc., an Arizona corporation
and a wholly-owned Subsidiary of M/I ("M/I Homes") (M/I and M/I Homes are,
jointly, severally and jointly and severally, "Borrower"), BANK ONE, NA, a
national banking association ("Bank One"), THE HUNTINGTON NATIONAL BANK, a
national banking association ("HNB"), NATIONAL CITY BANK, a national banking
association ("NCB"), BANKBOSTON, N.A., a national banking association, ("BKB"),
THE FIFTH THIRD BANK OF COLUMBUS, an Ohio banking corporation ("Fifth Third"),
SUNTRUST BANK, CENTRAL FLORIDA, N.A., a national banking association ("STB") and
AMSOUTH BANK, an Alabama corporation ("ASB") (Bank One, HNB, NCB, BKB, Fifth
Third, STB and ASB is each a "Bank" and are, collectively, "Banks"), and BANK
ONE, NA, a national banking association, as agent for Banks ("Agent"). For
valuable consideration, the receipt of which is hereby acknowledged, Borrower,
Banks and Agent, each intending to be legally bound, hereby recite and agree as
follows:
BACKGROUND INFORMATION
----------------------
A. Borrower, Bank One, HNB, NCB, BKB, Fifth Third, STB, ASB and
Agent are parties to a certain Fourth Restated Revolving Credit Loan, Swingline
Loan and Standby Letter of Credit Agreement effective as of December 31, 1998
(the "Credit Agreement").
B. Borrower has requested that the Credit Agreement be amended in
certain respects and the Banks and Agent are prepared to do so on and subject to
the terms hereof.
AGREEMENT
---------
1. Definitions. Except as otherwise defined in this Amendment,
terms defined in the Credit Agreement are used herein as defined therein.
2. Amendments. Subject to the satisfaction of the terms and
conditions of this Amendment and of the Credit Agreement, as amended hereby, the
Credit Agreement shall be amended as follows:
<PAGE> 2
2.1. The definition of "Borrowing Base" in Subsection 1.1 of the
Credit Agreement is hereby amended to read in its entirety as follows:
"Borrowing Base" shall mean, as of any date of determination, an amount
equal to the sum of:
(a) the amount calculated by multiplying .90 by
the value of Eligible Production Inventory; plus
(b) the amount calculated by multiplying .85 by
the aggregate value of Eligible Model Houses which are not over two (2)
years old (as measured from the date of the completion of construction);
plus
(c) the amount calculated by multiplying .75 by
the aggregate value of Eligible Model Houses which are over two (2)
years old (as measured from the date of the completion of construction);
plus
(d) the amount calculated by multiplying .80 by
the value of Eligible Developed Lots Sold; plus
(e) the amount calculated by multiplying .50 by
the value of Eligible Developed Lots Unsold; plus
(f) the amount calculated by multiplying .25 by
the value of Eligible Raw Land and Land Under Development; plus
(g) the amount calculated by multiplying .25 by
the value of Investments in Joint Ventures;
less the sum of (i) the aggregate amount of Customer Deposits then held
by Borrower and (ii) the aggregate outstanding amount of Liens incurred
by Borrower and permitted by subsection 7.2(i) hereof. In calculating
the "Borrowing Base", the "value" of each component of the Borrowing
Base set forth in clauses (a) through (g) above (and any subcomponent
thereof) shall not exceed the amount thereof permitted under Section 7
of this Agreement (including amounts permitted pursuant to any waiver of
any provision of said Section that is consented to by the Banks in
accordance with Subsection 11.1 of this Agreement)."
2.2. The definition of "Eligible Model Houses" in Subsection 1.1
of the Credit Agreement is hereby amended to read in its entirety as follows:
"Eligible Model Houses" shall mean (a) all completed
detached or attached single family houses (including townhouse
condominiums and condominiums) which are being used by Borrower
or any Subsidiary as sales models, and the lots on
2
<PAGE> 3
which such houses are located and (b) detached or attached
(including townhouse condominiums and condominiums) single family
houses for which there has been a Start of Construction which
upon completion will be used by Borrower or any Subsidiary as
sales models, and the lots on which such houses are located. The
value of Eligible Model Houses shall be calculated in accordance
with GAAP and shall include all associated costs required to be
capitalized under GAAP except for the costs of any furnishings,
but shall be reduced by the then outstanding aggregate amount of
Indebtedness secured by any Eligible Model Houses and permitted
by subsection 7.1(d) hereof."
2.3. Subsection 7.8 of the Credit Agreement is hereby amended to
read in its entirety as follows:
"7.8 Limitation on Speculative Houses and Eligible Model
Houses. Permit the aggregate cost, as determined in accordance
with GAAP on a consolidated basis, of (a) Speculative Houses
owned by Borrower and Borrower's Subsidiaries to exceed
$32,000,000 at any one time outstanding, of which not more than
$10,000,000 in the aggregate may consist of attached (including
townhouse condominiums and condominiums) single family homes in
the Washington, D.C. Market and in Florida, provided that (i) not
more than $5,000,000 of which may be located in the Washington,
D.C. Market and (ii) not more than $5,000,000 of which may be
located in Florida or (b) Eligible Model Houses owned by Borrower
and Borrower's Subsidiaries to exceed $30,000,000 at any one time
outstanding, of which not more than $6,000,000 in the aggregate
may consist of attached (including townhouse condominiums and
condominiums) single family homes in the Washington, D.C. Market
and in Florida, provided that (i) not more than $3,000,000 of
which may be located in the Washington, D.C. Market and (ii) not
more than $3,000,000 of which may be located in Florida. "
2.4. Subsection 7.10 of the Credit Agreement is hereby amended to
read in its entirety as follows:
"7.10 Limitation on Operating Leases. Enter into or renew
any Operating Lease if as a result thereof: (a) the aggregate
rentals payable by Borrower and all of Borrower's Subsidiaries
under all Operating Leases on a consolidated basis, except for
any Operating Lease with respect to the Office Building, would
exceed in any period of 12 consecutive months the aggregate
amount of $5,000,000; or (b) the term of (i) any Operating Lease
with respect to Eligible Model Houses and furnishings for
Eligible Model Houses would exceed three years, and (ii) any
other Operating Lease, except for any Operating Lease with
respect to the Office Building, would exceed five years, provided
that so long as the initial term or any renewal of an Operating
Lease included within this clause (b) does not exceed five years
or three years, as appropriate, the aggregate of the initial term
and all renewals of such Operating Lease may exceed five years or
three years, as appropriate, if any
3
<PAGE> 4
right of renewal is solely at the option of the Borrower or
Borrower's Subsidiaries; or (c) the aggregate rentals payable by
Borrower and all of Borrower's Subsidiaries under all Operating
Leases with respect to the Office Building would exceed, for the
periods set forth below, the amounts that correspond to such
periods, as set forth below:
<TABLE>
<CAPTION>
Aggregate
Year of the Operating Lease Rentals Per
--------------------------- Lease Year
----------
<S> <C>
Beginning with Lease Year 1 $1,131,576.00
Through and including Lease Year 5
Beginning with Lease Year 6 $1,217,693.00
Through and including Lease Year 10
Beginning with Lease Year 11 $1,275,104.00
Through and including Lease Year 15
Beginning with Lease Year 16 Through and $1,303,810.00"
including Lease Year 20
</TABLE>
2.5. Subsection 7.17 of the Credit Agreement is hereby amended to
read in its entirety as follows:
"7.17 Limitation on Location of Attached Houses.
Construct or make investments in construction of any attached
(including townhouse condominiums and condominiums) single family
houses in any area outside of the Washington, D.C. Market and
Florida."
3. Representations and Warranties. In order to induce Banks and
Agent to enter into this Amendment, Borrower hereby represents and warrants to
each Bank and to Agent that on the date hereof:
(a) it has the corporate power and authority to make,
deliver and perform this Amendment and to borrow under the Credit
Agreement as amended by this Amendment and has taken all
corporate action necessary to be taken by it to authorize the
borrowings on the terms and conditions of the Credit Agreement as
amended by this Amendment and to authorize the execution,
delivery and performance of the Credit Agreement as amended by
this Amendment;
(b) each of Borrower's Subsidiaries has the corporate or
limited liability company power and authority to make, deliver
and
4
<PAGE> 5
perform its Guarantor's Consent and Reaffirmation of Guaranties
attached to this Amendment and has taken all corporate or limited
liability company action necessary to authorize the execution,
delivery and performance of such Guarantor's Consent and
Reaffirmation of Guaranties; and
(c) each of Borrower and Borrower's Subsidiaries (i) is
duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or formation, as
appropriate, (ii) has the corporate or limited liability company
power and authority to conduct the business in which it is
currently engaged, (iii) is qualified as a foreign corporation or
limited liability company under the laws of any jurisdiction
where the failure to so qualify would have a material adverse
effect on the business of Borrower and Borrower's Subsidiaries
taken as a whole, and (iv) is in compliance with all Requirements
of Law except to the extent that the failure to comply therewith
would not, in the aggregate, have a material adverse effect on
the business, operations, property or financial or other
condition of Borrower and Borrower's Subsidiaries taken as a
whole and would not materially and adversely affect the ability
of Borrower to perform its obligations under this Agreement and
the Notes.
4. Full Force and Effect. The Credit Agreement, including without
limitation Borrower's representations, warranties and covenants, as amended by
this Amendment, shall remain in full force and effect in accordance with its
terms as amended hereby, and upon the effective date of this Amendment, the
terms "Agreement" and "this Agreement" shall mean the Credit Agreement as
amended by this Amendment.
5. Conditions Precedent. The obligations of Agent and Banks
pursuant to this Amendment are subject to the satisfaction of the following
conditions precedent prior to the effective date of this Amendment:
5.1. Execution of Amendment. This Amendment shall have
been executed by Borrower, Required Banks and Agent.
5.2. Execution of Guarantor Consents. Each Guarantor's
Consent and Reaffirmation of Guaranties attached to this
Amendment shall have been duly executed and delivered.
5.3. No Default or Event of Default. No Default or Event
of Default shall have occurred and be continuing under the Credit
Agreement as of the effective date of this Amendment.
5
<PAGE> 6
6. Miscellaneous. This Amendment may be executed by one or more
of the parties to this Amendment on any number of separate counterparts and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument. This Amendment shall be governed by, and construed in
accordance with, the local laws of the State of Ohio.
IN WITNESS WHEREOF, Borrower, Banks and Agent have caused this
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
BORROWER
--------
M/I SCHOTTENSTEIN HOMES, INC.
Executed at Columbus, Ohio By
----------------------------------
Robert H. Schottenstein
Title: President and Assistant
Secretary
M/I HOMES, INC.
Executed at Scottsdale, Arizona By
----------------------------------
Robert H. Schottenstein
Title: Vice Chairman
6
<PAGE> 7
BANKS
-----
BANK ONE, NA,
as Agent and as a Bank
By
----------------------------------
Thomas D. Igoe
Title: Senior Vice President
THE HUNTINGTON NATIONAL BANK
By
----------------------------------
R. H. Friend
Title: Vice President
NATIONAL CITY BANK
By
----------------------------------
Ralph A. Kaparos
Title: Senior Vice President
BANKBOSTON, N.A.
By
----------------------------------
Daniel L. Silbert
Title: Vice President
THE FIFTH THIRD BANK OF COLUMBUS
By
----------------------------------
Mark E. Ransom
Title: Vice President
7
<PAGE> 8
SUNTRUST BANK, CENTRAL FLORIDA, N.A.
By
----------------------------------
Title:
----------------
AMSOUTH BANK
By
----------------------------------
Ronny Hudspeth
Title: Senior Vice President
8
<PAGE> 9
GUARANTOR'S CONSENT AND REAFFIRMATION OF GUARANTIES
---------------------------------------------------
The undersigned Guarantor hereby (a) acknowledges that it has
read the foregoing First Amendment to Fourth Restated Revolving Credit Loan,
Swingline Loan and Standby Letter of Credit Agreement, effective as of April 20,
1999 (the "First Amendment"), and (b) agrees that the undersigned Guarantor's
Guaranties dated as of December 31, 1998 of the obligations of M/I Schottenstein
Homes, Inc. and M/I Homes, Inc. pursuant to the Fourth Restated Revolving Credit
Loan, Swingline Loan and Standby Letter of Credit Agreement as amended by the
First Amendment and all representations, warranties and covenants in each of
such Guaranties continue in full force and effect notwithstanding the First
Amendment.
M/I FINANCIAL CORP., an Ohio corporation
By:
----------------------------------
Paul S. Rosen
President
9
<PAGE> 10
GUARANTOR'S CONSENT AND REAFFIRMATION OF GUARANTIES
---------------------------------------------------
The undersigned Guarantor hereby (a) acknowledges that it has
read the foregoing First Amendment to Fourth Restated Revolving Credit Loan,
Swingline Loan and Standby Letter of Credit Agreement, effective as of April 20,
1999 (the "First Amendment"), and (b) agrees that the undersigned Guarantor's
Guaranties dated as of December 31, 1998 of the obligations of M/I Schottenstein
Homes, Inc. and M/I Homes, Inc. pursuant to the Fourth Restated Revolving Credit
Loan, Swingline Loan and Standby Letter of Credit Agreement as amended by the
First Amendment and all representations, warranties and covenants in each of
such Guaranties continue in full force and effect notwithstanding the First
Amendment.
M/I HOMES CONSTRUCTION, INC., an
Arizona corporation
Executed at Scottsdale, Arizona By
----------------------------------
Robert H. Schottenstein, Vice Chairman
of M/I Homes Construction, Inc.
10
<PAGE> 11
GUARANTOR'S CONSENT AND REAFFIRMATION OF GUARANTIES
---------------------------------------------------
Each of the undersigned Guarantors hereby (a) acknowledges that
it has read the foregoing First Amendment to Fourth Restated Revolving Credit
Loan, Swingline Loan and Standby Letter of Credit Agreement, effective as of
April 20, 1999 (the "First Amendment"), and (b) agrees that each of the
undersigned Guarantor's Guaranties dated as of December 31, 1998 of the
obligations of M/I Schottenstein Homes, Inc. and M/I Homes, Inc. pursuant to the
Fourth Restated Revolving Credit Loan, Swingline Loan and Standby Letter of
Credit Agreement as amended by the First Amendment and all representations,
warranties and covenants in each of such Guaranties continue in full force and
effect notwithstanding the First Amendment.
NORTHEAST OFFICE VENTURE LIMITED
LIABILITY COMPANY, a Delaware limited
liability company, by M/I
Schottenstein Homes, Inc., its sole
member
601RS, LLC, an Ohio limited
liability company, by M/I
Schottenstein Homes, Inc., its sole
member
M/I SCHOTTENSTEIN HOMES SERVICE
CORP., an Ohio corporation
Executed at Columbus, Ohio By
----------------------------------
Robert H. Schottenstein
President and Assistant Secretary of
M/I Schottenstein Homes, Inc.
President of M/I Schottenstein Homes
Service Corp.
MHO, LLC, an Arizona limited liability
company, by M/I Homes, Inc., its sole
member
Executed at Scottsdale, Arizona By
----------------------------------
Robert H. Schottenstein
Vice Chairman of M/I Homes, Inc.
11
<PAGE> 12
GUARANTOR'S CONSENT AND REAFFIRMATION OF GUARANTIES
---------------------------------------------------
Each of the undersigned Guarantors hereby (a) acknowledges that
it has read the foregoing First Amendment to Fourth Restated Revolving Credit
Loan, Swingline Loan and Standby Letter of Credit Agreement, effective as of
April 20, 1999 (the "First Amendment"), and (b) agrees that each of the
undersigned Guarantor's Guaranties dated as of December 31, 1998 of the
obligations of M/I Schottenstein Homes, Inc. and M/I Homes, Inc. pursuant to the
Fourth Restated Revolving Credit Loan, Swingline Loan and Standby Letter of
Credit Agreement as amended by the First Amendment and all representations,
warranties and covenants in each of such Guaranties continue in full force and
effect notwithstanding the First Amendment.
MANOR ROAD - 1997, L.L.C., a Virginia
limited liability company
CHEVY CHASE VILLAS, L.L.C., a
Virginia limited company, by Manor
Road - 1997, L.L.C., its 99% Member
By
----------------------------------
Paul S. Coppel, Manager of Manor
Road - 1997, L.L.C.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE THREE 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,823
<SECURITIES> 0
<RECEIVABLES> 26,691
<ALLOWANCES> 0
<INVENTORY> 369,752
<CURRENT-ASSETS> 402,266
<PP&E> 25,162
<DEPRECIATION> 5,308
<TOTAL-ASSETS> 450,019
<CURRENT-LIABILITIES> 97,033
<BONDS> 11,762
0
0
<COMMON> 88
<OTHER-SE> 173,641
<TOTAL-LIABILITY-AND-EQUITY> 450,019
<SALES> 143,692
<TOTAL-REVENUES> 148,824
<CGS> 114,589
<TOTAL-COSTS> 114,589
<OTHER-EXPENSES> 18,423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,136
<INCOME-PRETAX> 12,676
<INCOME-TAX> 5,007
<INCOME-CONTINUING> 7,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,669
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.86
</TABLE>
