<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, 2000
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
(Address of principal executive offices) (Zip Code)
(614) 418-8000
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share: 7,659,517 shares
outstanding as of November 14, 2000
<PAGE> 2
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 2000 (Unaudited) and
December 31, 1999 3
Unaudited Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 2000 and 1999 4
Unaudited Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 2000 5
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and 1999 6
Notes to Interim Unaudited Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
</TABLE>
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<PAGE> 3
CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
2000 1999
(Dollars in thousands, except par values (UNAUDITED)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 9,684 $ 5,665
Cash held in escrow 594 828
Receivables 42,090 39,988
Inventories:
Single-family lots, land and land development costs 272,039 254,385
Houses under construction 201,380 163,266
Model homes and furnishings - at cost (less accumulated depreciation:
September 30, 2000 - $46; December 31, 1999 - $41) 11,589 12,349
Land purchase deposits 2,234 2,702
Building, office furnishings, transportation and construction equipment - at
cost (less accumulated depreciation:
September 30, 2000 - $7,088; December 31, 1999 - $5,733) 18,472 19,368
Investment in unconsolidated joint ventures and limited liability companies 26,357 20,238
Other assets 15,020 12,773
--------------------------------------------------------------------------------------------------------------------
TOTAL $599,459 $531,562
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable banks - homebuilding operations $162,600 $132,000
Note payable bank - financial services operations 18,475 15,400
Mortgage notes payable 16,259 14,675
Senior subordinated notes 50,000 50,000
Accounts payable 76,230 63,198
Accrued compensation 10,929 18,244
Accrued interest, warranty and other 25,538 23,827
Customer deposits 16,328 13,706
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TOTAL LIABILITIES 376,359 331,050
--------------------------------------------------------------------------------------------------------------------
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 62,807 62,282
Retained earnings 176,120 145,337
Treasury stock - at cost - 1,056,561 and 496,221 shares, respectively,
held in treasury at September 30, 2000 and December 31, 1999 (15,915) (7,195)
--------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 223,100 200,512
--------------------------------------------------------------------------------------------------------------------
TOTAL $599,459 $531,562
====================================================================================================================
</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 amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 245,582 $ 235,106 $ 654,166 $ 597,443
--------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 193,040 184,799 514,333 466,600
General and administrative 13,497 12,762 34,154 32,347
Selling 14,014 14,091 39,693 38,183
Interest 4,817 3,383 13,754 10,091
--------------------------------------------------------------------------------------------------------------------
Total costs and expenses 225,368 215,035 601,934 547,221
--------------------------------------------------------------------------------------------------------------------
Income before income taxes 20,214 20,071 52,232 50,222
--------------------------------------------------------------------------------------------------------------------
Income tax expense (credit):
Current 8,694 8,823 21,611 19,137
Deferred (861) (895) (1,371) 702
--------------------------------------------------------------------------------------------------------------------
Total income tax expense 7,833 7,928 20,240 19,839
--------------------------------------------------------------------------------------------------------------------
Net income $ 12,381 $ 12,143 $ 31,992 $ 30,383
====================================================================================================================
Net income per common share:
Basic $ 1.59 $ 1.38 $ 4.02 $ 3.45
Diluted $ 1.56 $ 1.36 $ 3.94 $ 3.41
====================================================================================================================
Weighted average shares outstanding (in thousands):
Basic 7,769 8,782 7,964 8,797
Diluted 7,955 8,915 8,123 8,921
===================================================================================================================
</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>
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NINE MONTHS ENDED SEPTEMBER 30, 2000
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Common Stock Additional
(Dollars in thousands, except Shares Paid-In Retained Treasury
per share amounts) Outstanding Amount Capital Earnings Stock
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 8,316,840 $88 $62,282 $145,337 $ (7,195)
Net income - - - 31,992 -
Dividends to stockholders,
$0.15 per common share - - - (1,209) -
Purchase of treasury shares (599,750) - - - (9,239)
Stock options exercised 34,900 - (143) - 453
Deferral of executive and
director stock - - 732 -
Executive deferred stock
distributions 4,510 - (64) - 66
--------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000 7,756,500 $88 $62,807 $176,120 $(15,915)
====================================================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
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<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
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NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,992 $ 30,383
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss from property disposals 53 12
Depreciation and amortization 1,577 1,623
Deferred income taxes (credit) (1,371) 702
Decrease (increase) in cash held in escrow 234 (89)
(Increase) decrease in receivables (2,102) 4,068
Increase in inventories (35,877) (93,282)
Increase in other assets (2.368) (1,177)
Increase in accounts payable 13,032 20,672
Decrease in accrued liabilities (3,501) (5,022)
Equity in undistributed income of unconsolidated joint
ventures and limited liability companies (555) (409)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,114 (42,519)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (607) (1,317)
Investment in unconsolidated joint ventures and limited liability companies (19,604) (15,838)
Distributions from unconsolidated joint ventures and limited liability companies 679 615
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,532) (16,540)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments 33,675 51,600
Principal repayments of mortgage notes payable (3,724) (94)
Net increase in customer deposits 2,622 4,842
Dividends paid (1,209) (1,320)
Proceeds from exercise of stock options 312 143
Payments to acquire treasury shares (9,239) (957)
--------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,437 54,214
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 4,019 (4,845)
Cash balance at beginning of year 5,665 10,068
--------------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 9,684 $ 5,223
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $ 13,291 $ 9,271
Income taxes $ 21,415 $ 20,600
NON-CASH TRANSACTIONS DURING THE PERIOD:
Land acquired with mortgage notes payable - net $ 5,308 $ 3,031
Single-family lots distributed from unconsolidated joint ventures and
limited liability companies $ 13,361 $ 15,140
Deferral of executive and director stock $ 732 $ 1,287
Executive deferred stock distributions $ (64) $ -
====================================================================================================================
</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 nine months ended September 30, 2000 and 1999 are not
necessarily indicative of the results for the full year.
It is suggested that these consolidated 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, 1999.
In the opinion of management, the accompanying consolidated 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. LOAN AGREEMENTS
On August 23, 2000 the Company entered into a new bank loan agreement. The
new agreement increased the amount of credit, extended the term of the loan,
added one additional lender and made certain minor modifications to the
covenants.
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, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest capitalized, beginning of period $ 9,643 $ 8,388 $ 8,886 $ 7,957
Interest incurred 5,192 4,007 14,886 11,146
Interest expensed (4,817) (3,383) (13,754) (10,091)
-----------------------------------------------------------------------------------------------------------------
Interest capitalized, end of period $ 10,018 $ 9,012 $ 10,018 $ 9,012
=================================================================================================================
</TABLE>
NOTE 4. CONTINGENCIES
At September 30, 2000, the Company had options and contingent purchase
contracts to acquire land and developed lots with an aggregate purchase price
of approximately $139 million.
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<PAGE> 8
NOTE 5. PER SHARE DATA
Per share data is calculated based on the weighted average number of common
shares outstanding during each period. The difference between basic and
diluted shares outstanding is due to the effect of dilutive stock options and
deferred stock. There are no adjustments to net income necessary in the
calculation of basic and diluted earnings per share.
NOTE 6. ACCOUNTING STANDARDS
The Securities and Exchange Commission published Staff Accounting Bulletin
No. 101 (SAB 101), "Revenue Recognition in Financial Statements," SAB 101A
and SAB 101B in December 1999, March 2000 and June 2000, respectively. These
bulletins summarize certain of the Commission's views on applying accounting
principles generally accepted in the United States of America to revenue
recognition in financial statements. The bulletins are effective no later
than the fourth fiscal quarter of the fiscal year beginning after December
15, 1999. Management believes that these bulletins will have no material
impact on the Company's financial statements and disclosures.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four
areas causing difficulties in implementation. The amendment included
expanding the normal purchase and sale exemption for supply contracts,
permitting the offsetting of certain intercompany foreign currency
derivatives and thus reducing the number of third party derivatives,
permitting hedge accounting for foreign-currency denominated assets and
liabilities, and redefining interest rate risk to reduce sources of
ineffectiveness. We have appointed a team to implement SFAS 133 for the
Company. This team has been implementing an SFAS 133 compliant risk
management information system, educating both financial and non-financial
personnel, inventorying embedded derivatives and addressing various other
SFAS 133 related issues. We will adopt SFAS 133 and the corresponding
amendments under SFAS 138 on January 1, 2001. SFAS 133, as amended by SFAS
138, is not expected to have a material impact on our consolidated results of
operations, financial position or cash flows.
NOTE 7. DIVIDENDS
On July 21, 2000, the Company paid to the stockholders of record on July 3,
2000, a cash dividend of $0.05 per share. On August 15, 2000, the Board of
Directors approved a $0.05 per share cash dividend payable to stockholders of
record of its common stock on October 2, 2000, which was paid on October 23,
2000. Total dividends paid in 2000 through October 23 were $1.6 million.
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<PAGE> 9
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
FORM 10-Q - PART I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
CONSOLIDATED
Total Revenue. Total revenue for the three months ended September 30, 2000
increased $10.5 million and for the nine months ended September 30, 2000
increased $56.7 million over the respective periods in 1999. For the three-month
period, homebuilding revenue increased $9.7 million and financial services
revenue increased $0.6 million. For the nine-month period, homebuilding revenue
increased $56.4 million and financial services revenue increased $0.2 million.
The increase in homebuilding for the three-month period consisted of an increase
in housing revenue of $10.2 million offset by a decrease in land revenue of $0.3
million. The increase for the nine-month period consisted of an increase in
housing revenue of $53.3 million and an increase in land revenue of $3.6
million. The increase in housing revenue for the three-month period was
attributable to an increase in the average sales price of Homes Delivered of
6.3% offset by 19 fewer Homes Delivered. For the nine-month period, the increase
in housing revenue was attributable to an increase in the average sales price of
Homes Delivered of 6.4% in addition to 74 more Homes Delivered. The increase in
land revenue for the nine months ended September 30, 2000 was primarily due to
increased lots sold in the Washington, D.C. region offset slightly by lot sales
in the Phoenix market in the first nine months of 1999 that did not occur in
2000. The increase in financial services revenue for the three months was
attributable to increases in loan origination fees, revenue earned from the sale
of loans due to an increase in the number of loans sold, and title services. For
the nine months, the increase in financial services revenue was related to an
increase in loan origination fees and title services, partially offset by a
decrease in revenue earned from the sale of loans.
Income Before Income Taxes. Income before income taxes increased 0.7% for
the three months ended September 30, 2000 and 4.0% for the nine months ended
September 30, 2000 over the respective periods in 1999. The increase for the
three months consisted of an increase in financial services net income before
tax of 23.5% offset by a decrease in homebuilding net income before tax of
12.1%. The increase for the nine months consisted of a 2.7% increase in
financial services net income before tax offset by a 1.2% decrease in
homebuilding net income before tax. The homebuilding decrease for the
three-month period was the result of a decrease in the number of Homes Delivered
offset by increases in the average sales price of Homes Delivered and in gross
margin. The homebuilding decrease for the nine-month period was the result of a
decrease in gross margin offset by increases in the number of Homes Delivered
and in the average selling price. Unallocated amounts include interest from
other segments along with salaries and other administrative expenses that are
not identifiable with a specific segment.
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<PAGE> 10
SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Homebuilding $ 242,745 $ 233,087 $ 643,748 $ 587,329
Financial services 4,193 3,561 13,721 13,519
Intersegment (1,356) (1,542) (3,303) (3,405)
----------------------------------------------------------------------------------------------
Total Revenue $ 245,582 $ 235,106 654,166 $ 597,443
----------------------------------------------------------------------------------------------
Income Before Income Taxes:
Homebuilding $ 14,281 $ 16,240 $ 33,904 $ 34,315
Financial services 2,572 2,084 9,034 8,799
Unallocated amounts 3,361 1,747 9,294 7,108
----------------------------------------------------------------------------------------------
Total Income Before Income Taxes $ 20,214 $ 20,071 $ 52,232 $ 50,222
==============================================================================================
</TABLE>
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<PAGE> 11
HOMEBUILDING SEGMENT
The following table sets forth certain information related to the homebuilding
segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Housing sales $237,573 $227,387 $628,238 $574,966
Land and lot sales 4,876 5,181 14,629 11,034
Other income 296 519 881 1,329
-------------------------------------------------------------------------------------------------------
Total Revenue $242,745 $233,087 $643,748 $587,329
=======================================================================================================
Revenue:
Housing sales 97.9% 97.6% 97.6% 97.9%
Land and lot sales 2.0 2.2 2.3 1.9
Other income 0.1 0.2 0.1 0.2
-------------------------------------------------------------------------------------------------------
Total Revenue 100.0 100.0 100.0 100.0
Land and Housing Costs 80.9 80.3 80.8 80.5
-------------------------------------------------------------------------------------------------------
Gross Margin 19.1 19.7 19.2 19.5
General and Administrative Expenses 3.0 2.9 2.8 2.9
Selling Expenses 5.9 6.0 6.2 6.5
-------------------------------------------------------------------------------------------------------
Operating Income 10.2 10.8 10.2 10.1
Allocated Expenses 4.3 3.8 4.9 4.3
-------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5.9% 7.0% 5.3% 5.8%
=======================================================================================================
Midwest Region
Unit Data:
New contracts, net 598 478 1,929 1,993
Homes delivered 707 683 1,812 1,730
Backlog at end of period 1,508 1,585 1,508 1,585
Average sales price of homes in backlog $ 205 $ 188 $ 205 $ 188
Aggregate sales value of homes in backlog $310,000 $298,000 $310,000 $298,000
Number of active subdivisions 82 75 82 75
=======================================================================================================
Florida Region
Unit Data:
New contracts, net 235 161 641 521
Homes delivered 178 176 500 466
Backlog at end of period 508 388 508 388
Average sales price of homes in backlog $ 209 $ 214 $ 209 $ 214
Aggregate sales value of homes in backlog $106,000 $ 83,000 $106,000 $ 83,000
Number of active subdivisions 28 25 28 25
=======================================================================================================
North Carolina, Virginia, Maryland and Arizona Region
Unit Data:
New contracts, net 147 180 543 670
Homes delivered 193 238 549 591
Backlog at end of period 390 447 390 447
Average sales price of homes in backlog $ 346 $ 356 $ 346 $ 356
Aggregate sales value of homes in backlog $135,000 $159,000 $135,000 $159,000
Number of active subdivisions 32 35 32 35
=======================================================================================================
Total
Unit Data:
New contracts, net 980 819 3,113 3,184
Homes delivered 1,078 1,097 2,861 2,787
Backlog at end of period 2,406 2,420 2,406 2,420
Average sales price of homes in backlog $ 229 $ 223 $ 229 $ 223
Aggregate sales value of homes in backlog $551,000 $540,000 $551,000 $540,000
Number of active subdivisions 142 135 142 135
=======================================================================================================
</TABLE>
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<PAGE> 12
A home is included in "New Contracts" when our standard sales contract is
executed. "Homes Delivered" represents homes for which the closing of the sale
has occurred and title has transferred to the buyer.
"Backlog" represents homes for which the 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 and usually occur prior to the start of construction.
Because we arrange financing with guaranteed rates for many of our customers,
the incidence of cancellations after the start of construction is low. In the
first nine months of 2000, we delivered 2,861 homes. The cancellation rate of
homes in Backlog at December 31, 1999 and 1998 was 12% and 11% as of September
30, 2000 and 1999, respectively. For the homes in Backlog at December 31, 1998,
the final cancellation percentage was 11%. Unsold speculative homes, which are
in various stages of construction, totaled 122 and 134 at September 30, 2000 and
1999, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Total Revenue. Total revenue for the homebuilding segment for the quarter
ended September 30, 2000 was $242.7 million, a 4.1% increase over 1999's third
quarter. The increase consisted of an increase in housing revenue of $10.2
million offset by a decrease in land revenue of $0.3 million. The increase in
housing revenue consisted of a 6.3% increase in the average sales price of Homes
Delivered offset by a 1.7% decrease in the number of Homes Delivered. The
average sales price increased in all markets with the exception of Cincinnati
and Maryland. These increases are attributed to product mix and higher land and
regulatory costs that were passed on to the home buyer. The number of Homes
Delivered increased in our Midwest, Florida, and Phoenix markets but decreased
significantly in our North Carolina and Washington, D.C. markets.
Home Sales and Backlog. New Contracts in the third quarter of 2000
increased 19.7% from 1999's third quarter. This consisted of increases in New
Contracts in all of our markets except Virginia and Raleigh. New Contracts
recorded in October 2000 were 11% higher than New Contracts recorded in October
1999. 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, number of subdivisions and interest rates
available to potential home buyers.
At September 30, 2000, our Backlog consisted of 2,406 homes with an
approximate sales value of $551.0 million. This represents a 0.6% decrease in
units and a 2.0% increase in sales value in comparison to the third quarter of
1999. The average sales price of homes in backlog increased by 2.6% with
increases occurring in virtually all of our markets. These sales price increases
are the result of building in more upscale and niche subdivisions as well as
increases to cover higher material and labor costs.
Gross Margin. The overall gross margin for the homebuilding segment was
19.1% for the three- month period ended September 30, 2000 compared to 19.7% for
the three-month period ended September 30, 1999. Housing gross margin increased
from 20.2% to 20.4% and land gross margin decreased by approximately $1 million,
from 37.2% to 19.5%. The decrease in land gross margin was primarily the result
of land sold at a high margin in Maryland in the third quarter of 1999 which did
not occur in 2000.
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<PAGE> 13
General and Administrative Expenses. General and administrative expenses
increased by $0.4 million from 2.9% of revenue for the third quarter of 1999 to
3.0% of revenue for the third quarter of 2000. The increase in dollars was
primarily attributable to real estate taxes. Real estate taxes increased as a
result of our increased investment in land.
Selling Expenses. Selling expense dollars increased 2.0%, from $14.0
million for the third quarter of 1999 to $14.3 million for the third quarter of
2000. As a percentage of revenue, selling expenses decreased from 6.0% of
revenue to 5.9% of revenue for the respective periods. The increase in dollars
related primarily to additional sales commissions paid to outside Realtors and
internal salespeople resulting from the increase in the average selling price of
Homes Delivered.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Total Revenue. Total revenue for the homebuilding segment for the nine
months ended September 30, 2000 was $643.7 million, a 9.6% increase over the
same period in 1999. The increase consisted of an increase in housing revenue of
9.3% and an increase in land revenue of 32.6%. The housing increase resulted
from a 2.7% increase in Homes Delivered. Homes Delivered increased in the
Midwest, Florida and Phoenix markets and decreased in the Washington, D.C. and
North Carolina markets. The increase in housing revenue was also due to a 6.4%
increase in the average sales price of Homes Delivered. The average sales price
of Homes Delivered increased in all regions due to product mix and higher land
and regulatory costs that were passed on to the home buyer. The increase in land
revenue from $11.0 million to $14.6 million was primarily attributable to
increased lots sold in the Washington, D.C. market offset slightly by lot sales
in the Phoenix market in the first nine months of 1999 that did not occur in
2000.
Home Sales and Backlog. New Contracts in the first nine months of 2000
decreased 2.2% from the same period in 1999. An increase in New Contracts for
the Florida region was offset by decreases for our other regions. We believe the
decrease was primarily attributable to increases in sales prices to cover
increased material and labor costs, and four increases in the prime lending rate
during the last twelve months. 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, number of
subdivisions and interest rates available to potential home buyers.
Gross Margin. The overall gross margin for the homebuilding segment was
19.2% for the nine-month period ended September 30, 2000 compared to 19.5% for
the nine-month period ended September 30, 1999. Housing gross margin decreased
slightly from 20.3% to 20.1% and land gross margin decreased from 22.5% to 16.1%
in comparison to 1999's first nine months. The decrease in land gross margin was
the result of land sold at a high margin in Maryland in the third quarter of
1999 which did not occur in 2000. This was offset by additional volume and sales
prices of lots sold in the Virginia market in comparison to the first nine
months of 1999.
General and Administrative Expenses. General and administrative expense
dollars increased to $17.9 million for the nine months ended September 30, 2000
compared to $16.9 million for the same period in 1999. As a percentage of
revenue, general and administrative expenses decreased to 2.8% of revenue for
the nine months ended September 30, 2000 from 2.9% of revenue for the same
period in 1999. The increase in dollars was primarily attributable to real
estate taxes. Real estate taxes increased as a result of our increased
investment in land.
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<PAGE> 14
Selling Expenses. Selling expense dollars increased 5.2%, from $38.0
million for the third quarter of 1999 to $40.0 million for the third quarter of
2000. As a percentage of revenue, selling expenses decreased from 6.5% to 6.2%
of revenue for the respective periods. The increase in dollars related primarily
to additional sales commissions paid to outside Realtors and internal
salespeople resulting from the increase in Homes Delivered. Model expenses also
increased slightly.
FINANCIAL SERVICES SEGMENT - M/I FINANCIAL
The following table sets forth certain information related to the financial
services segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of Loans Originated 868 852 2,260 2,245
Revenue:
Loan origination fees $ 1,379 $ 1,273 $ 3,537 $ 3,318
Sale of servicing and marketing gains 1,241 878 6,019 6,289
Other 1,573 1,410 4,165 3,912
-------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 4,193 3,561 13,721 13,519
-------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES 1,621 1,477 4,687 4,721
-------------------------------------------------------------------------------------------------------------
Operating Income $ 2,572 $ 2,084 $ 9,034 $ 8,799
=============================================================================================================
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Total Revenue. Total revenue for the three months ended September 30, 2000
was $4.2 million, a 17.7% increase over the $3.6 million recorded for the
comparable period of 1999. Loan origination fees increased 8.3% from $1.3
million for the three months ended September 30, 1999 to $1.4 million for the
three months ended September 30, 2000. The increase was due to a 1.9% 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 loans increased 41.3%, from $0.9 million for the
three months ended September 30, 1999 to $1.2 million for the three months ended
September 30, 2000. The increase was primarily due to unfavorable market
conditions, specifically an increase in mortgage rates, beginning in the second
quarter of 1999. The increase in rates resulted in reduced marketing gains on
loans that closed in the third quarter of 1999.
Revenue from other sources increased 11.6%, from $1.4 million for the
three months ended September 30, 1999 to $1.6 million for the three months ended
September 30, 2000. This was primarily due to increased earnings from title
services as a result of an increase in the number of homes delivered.
General and administrative expenses. General and administrative expenses
for the three months ended September 30, 2000 were $1.6 million, a 9.7% increase
from the comparable period of the prior year. This increase was mainly due to
higher incentive compensation expense, resulting from an increase in revenues
over the comparable period of a year ago.
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<PAGE> 15
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Total Revenue. Total revenue for the nine months ended September 30, 2000
was $13.7 million, a 1.5% increase over the $13.5 million recorded for the
comparable period of 1999. Loan origination fees increased 6.6% from $3.3
million for the nine months ended September 30, 1999 to $3.5 million for the
nine months ended September 30, 2000. This increase was due to an increase in
the average loan amount along with special financing programs that reduced loan
origination fees in the first quarter of 1999.
Revenue from the sale of loans decreased 4.3% from $6.3 million for the
nine months ended September 30, 1999 to $6.0 million for the nine months ended
September 30, 2000. This was primarily due to a shift from fixed rate mortgages
to adjustable rate mortgages in the first half of 2000. This was the result of
increasing interest rates and caused lower servicing release premiums from
investors.
Revenue from other sources increased 6.5% from $3.9 million for the nine
months ended September 30, 1999 to $4.2 million for the nine months ended
September 30, 2000. This was primarily due to increased earnings from title
services as a result of an increase in the number of homes delivered.
General and administrative expenses. General and administrative expenses
for the nine months ended September 30, 2000 were $4.7 million. There was no
significant change in expenses from the comparable period of the prior year.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. Corporate general and
administrative expenses increased from $4.5 million for the three months ended
September 30, 1999 to $4.7 million for the three months ended September 30,
2000. As a percentage of total revenue, corporate general and administrative
expenses remained constant at 1.9%. Corporate general and administrative
expenses increased from $10.8 million for the nine months ended September 30,
1999 to $11.7 million for the nine months ended September 30, 2000. As a
percentage of total revenue, corporate general and administrative expenses
remained constant at 1.8%. The increase in dollars was a result of various
general and administrative expenses increasing as a result of an increase in
profitability.
Interest Expense. Corporate and homebuilding interest expense for the
three and nine months ended September 30, 2000 increased to $4.7 and $13.7
million, respectively, from $3.3 and $9.9 million for the comparable periods of
the prior year. Interest expense for the three and nine months ended September
30, 2000 was higher due to an increase in the average borrowings outstanding and
an increase in the weighted average interest rate. Average borrowings
outstanding for both periods increased due to a significant increase in land
development activities.
Income Taxes. The effective tax rate for the three and nine months ended
September 30, 2000 decreased to 38.8% for both periods from 39.5% for the
comparable periods of 1999. The decrease is primarily attributable to lower
state taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our financing needs depend on sales volume, asset turnover, land
acquisition and inventory balances. We have incurred substantial indebtedness,
and may incur substantial indebtedness in the future, to fund the growth of our
homebuilding activities. Our principal source of funds for construction and
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<PAGE> 16
development activities has been from internally generated cash and from bank
borrowings, which are primarily unsecured.
Notes Payable Banks. At September 30, 2000, we had bank borrowings
outstanding of $163 million under our Bank Credit Facility. The Bank Credit
Facility permits aggregate borrowings, other than for the issuance of letters of
credit, not to exceed the lesser of: (i) $280 million and (ii) our borrowing
base. Under the terms of the Bank Credit Facility, the banks will determine
annually whether to extend the maturity date of the commitment. The Bank Credit
Facility matures September 30, 2004.
We entered into a new bank loan agreement on August 23, 2000. The new
agreement increased the amount of credit from $250 million to $280 million,
extended the term of the loan by one year, added one additional lender and made
certain minor modifications to the covenants.
An additional $18 million was outstanding as of September 30, 2000 under
the M/I Financial loan agreement which permits borrowings of $30 million to
finance mortgage loans initially funded by M/I Financial for our customers 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.
The agreement terminates on June 22, 2001, at which time the unpaid balance is
due.
At September 30, 2000, we had the right to borrow up to $310 million under
our credit facilities, including $30 million under the M/I Financial loan
agreement. At September 30, 2000, we had $129 million of unused borrowing
availability under our loan agreements. We also had approximately $52 million of
completion bonds and letters of credit outstanding at September 30, 2000.
Subordinated Notes. At September 30, 2000, there was $50 million of Senior
Subordinated Notes outstanding. The notes bear interest at a fixed rate and
mature August 29, 2004.
Land and Land Development. Over the past several years we have increased
our land development activities and land holdings. Single-family lots, land and
land development costs increased 6.9% from December 31, 1999 to September 30,
2000. This increase was primarily due to our continued growth, the shortage of
qualified land developers in certain markets and the competitive advantages that
can be achieved by developing land internally rather than purchasing lots from
developers or competing homebuilders. We continue to purchase some lots from
outside developers under option contracts. We will continue to evaluate all of
the alternatives available to satisfy our increasing demand for lots in the most
cost effective manner.
The $31 million increase in notes payable banks - homebuilding operations,
from December 31, 1999 to September 30, 2000 is the result of 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 $38 million from December 31, 1999 to
September 30, 2000, while single-family lots land and land development increased
$18 million. Borrowing needs may continue to increase as we invest in land under
development and developed lots, depending upon the market and competition.
At September 30, 2000, mortgage notes payable outstanding were $16
million, secured by an office building, lots, and land with a recorded book
value of $22 million.
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<PAGE> 17
Purchase of Treasury Shares. On February 15, 2000, our Board of Directors
authorized the repurchase of up to 2 million shares of outstanding common stock.
The purchases may occur in the open market and/or in privately negotiated
transactions as market conditions warrant. As of September 30, 2000 we had
purchased 1.1 million shares at an average price of approximately $15.
INTEREST RATES AND INFLATION
Our 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
that are acceptable to them. Increases in interest rates would also increase our
interest expense because the rate on the revolving loans is based on floating
rates of interest. The weighted average interest rate for our outstanding debt
for the nine months ended September 30, 2000 and 1999 was 8.3% and 8.1%,
respectfully.
In conjunction with our mortgage banking operations, hedging methods are
used to reduce our exposure to interest rate fluctuations between the commitment
date of the loan and the time the loan closes.
In recent years, we have generally been able to raise prices by amounts at
least equal to our cost increases and, accordingly, have not experienced any
detrimental effect from inflation. When we develop lots for our own use,
inflation may increase our profits because land costs are fixed well in advance
of sales efforts. We are generally able to maintain costs with subcontractors
from the date a home is started through the date of close. However, in certain
situations, unanticipated costs may occur between the time of start 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
We wish 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 Financial
Condition and Results of Operations contains certain forward-looking statements,
including, but not limited to, statements regarding our future financial
performance and financial condition. These statements involve a number of risks
and uncertainties. Any forward-looking statements that we make 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. Many of these conditions are beyond our control. These
conditions include employment levels, changing demographics, availability of
financing, consumer confidence and housing demand. In addition, homebuilders are
subject to risks related to 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. Interest rate increases also adversely affect the industry as
it is impossible to predict whether rates will be at levels that are attractive
to prospective home buyers. The prime lending rate increased four times in the
last twelve months. This caused mortgage interest rates to increase, and we
believe as a result, sales have decreased. If mortgage interest rates continue
to increase, our business could be adversely affected.
Land Development Activities. We develop the lots for a majority of our
subdivisions. Therefore, our short- and long-term financial success will be
dependent upon our ability to develop these subdivisions
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<PAGE> 18
successfully. Acquiring land and committing the financial and managerial
resources to develop a subdivision involves significant risks. Before a
subdivision generates any revenue, we must make material expenditures for items
such as acquiring land and constructing subdivision infrastructure (such as
roads and utilities).
The Company's Markets. We have operations 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 our operations. For the
nine months ended September 30, 2000, approximately 40% of our housing revenue
and a significant portion of our operating income were derived from operations
in the Columbus market.
Competition. The homebuilding industry is highly competitive. We compete
in each of our local market areas with numerous national, regional and local
homebuilders, some of which have greater financial, marketing, land acquisition,
and sales resources than we do. Builders of new homes compete not only for home
buyers, but also for desirable properties, financing, raw materials and skilled
subcontractors. We also compete with the resale market for existing homes which
provides certain attractions for home buyers over the new home market.
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. This includes 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. We must also obtain licenses, permits and approvals
from various governmental agencies for our development activities, the granting
of which are beyond our control. Furthermore, increasingly stringent
requirements may be imposed on homebuilders and developers in the future.
Although we cannot predict the impact on us to comply with any such
requirements, such requirements could result in time consuming and expensive
compliance programs.
We are 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 us 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 we will be successful in all cases, we have 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 our
developments.
In addition, we have 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 our operations without notice or
recourse.
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<PAGE> 19
Risk of Material and Labor Shortages. The residential construction
industry has, from time to time, experienced significant material and labor
shortages in insulation, drywall, brick, cement and certain areas of carpentry
and framing, as well as fluctuations in lumber prices and supplies. Recently, we
experienced shortages in certain areas such as brick material and framing labor.
Continued shortages in these areas could delay construction of homes which could
adversely affect our business; however, at this time, we do not anticipate a
material effect for fiscal year 2000.
Significant Voting Control by Principal Shareholders. As of September 30,
2000, members of the Irving E. Schottenstein family owned approximately 36% of
our outstanding common shares. Therefore, members of the Irving E. Schottenstein
family have significant voting power.
Quantitative and Qualitative Disclosures about Market Risk. Our primary
market risk results from fluctuations in interest rates. We are exposed to
interest rate risk through the borrowings under our unsecured revolving credit
facilities which permit borrowings up to $310 million. To minimize the effect of
the interest rate fluctuation, we have three interest rate swap arrangements
with certain banks for a total notional amount of $75 million. Under these
agreements we pay fixed rates of interest.
Assuming a hypothetical 10% 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 to buyers of our homes. The loans are granted at current market interest
rates which are guaranteed from the loan lock date through the transfer of the
title of the home to the buyer. M/I Financial hedges its interest rate risk
using optional and mandatory forward sales to hedge risk from the loan lock date
generally to the date a loan is closed. At September 30, 2000, the notional
principal amount under these forward sales agreements was approximately $146
million and the related fair value of these agreements was a loss of
approximately $0.5 million. The hedging agreements outstanding at September 30,
2000 mature within 90-120 days. Gains or losses on these agreements are
recognized at the time the loan is sold.
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<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - none.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - none.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - none.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - none.
ITEM 5. OTHER INFORMATION - none.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits required to be filed herewith are set forth below. No reports
were filed on Form 8-K for the quarter for which this report is filed.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 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; Suntrust Bank; Firstar Bank, NA;
AmSouth Bank; Fifth Third Bank, Central Ohio; Comercia
Bank; Fleet National Bank; and PNC Bank, National
Association as Banks and Bank One, NA, as Agent for the
banks and Banc One Capital Markets, as Lead Arranger and
Book Manager dated August 23, 2000.
27 Financial Data Schedule.
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<PAGE> 21
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 14, 2000 by: /s/ ROBERT H. SCHOTTENSTEIN
-------------------------------------
Robert H. Schottenstein
President and Director
Date: November 14, 2000 by: /s/ PHILLIP G. CREEK
-------------------------------------
Phillip G. Creek
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE #
------- ----------- ------
<S> <C> <C>
10.1 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; Suntrust Bank; Firstar Bank, NA;
AmSouth Bank; Fifth Third Bank, Central Ohio; Comercia
Bank; Fleet National Bank; and PNC Bank, National
Association as Banks and Bank One, NA, as Agent for the
banks and Banc One Capital Markets, as Lead Arranger and
Book Manager dated August 23, 2000.
27 Financial Data Schedule.
</TABLE>
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