<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 JUNE 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: 7,765,338 shares
outstanding as of August 11, 2000
<PAGE> 2
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 (Unaudited) and
December 31, 1999 3
Unaudited Consolidated Statements of Income
for the Three Months and Six Months Ended
June 30, 2000 and 1999 4
Unaudited Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 2000 5
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended June 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
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<PAGE> 3
CONSOLIDATED BALANCE SHEETS
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
JUNE 30, December 31,
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUES) 2000 1999
---------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash $ 11,850 $ 5,665
Cash held in escrow 1,117 828
Receivables 41,859 39,988
Inventories:
Single-family lots, land and land development costs 268,075 254,385
Houses under construction 204,346 163,266
Model homes and furnishings - at cost (less accumulated depreciation:
June 30, 2000 - $43;
December 31, 1999 - $41) 13,047 12,349
Land purchase deposits 2,265 2,702
Building, office furnishings, transportation and construction equipment - at
cost (less accumulated depreciation:
June 30, 2000 - $6,653;
December 31, 1999 - $5,733) 18,670 19,368
Investment in unconsolidated joint ventures and limited liability companies 25,656 20,238
OTHER ASSETS 12,922 12,773
--------------------------------------------------------------------------------------------------------------
TOTAL $599,807 $531,562
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable banks - homebuilding operations $177,000 $132,000
Note payable bank - financial services operations 15,500 15,400
Mortgage notes payable 17,359 14,675
Senior subordinated notes 50,000 50,000
Accounts payable 80,476 63,198
Accrued compensation 6,645 18,244
Accrued interest, warranty and other 22,652 23,827
CUSTOMER DEPOSITS 17,843 13,706
--------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 387,475 331,050
--------------------------------------------------------------------------------------------------------------
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 62,908 62,282
Retained earnings 164,130 145,337
Treasury stock - at cost - 995,618 and 496,221 shares, respectively,
HELD IN TREASURY AT JUNE 30, 2000 AND DECEMBER 31, 1999 (14,794) (7,195)
---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 212,332 200,512
--------------------------------------------------------------------------------------------------------------
TOTAL $599,807 $531,562
==============================================================================================================
</TABLE>
See Notes to Interim Unaudited Consolidated Financial Statements.
-3-
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE $234,728 $213,513 $408,584 $362,337
---------------------------------------------------------------------------------------------------------------
Costs and expenses:
Land and housing 185,458 167,212 321,293 281,801
General and administrative 11,728 11,485 20,657 19,585
Selling 14,287 13,769 25,679 24,092
INTEREST 4,753 3,572 8,937 6,708
---------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 216,226 196,038 376,566 332,186
---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 18,502 17,475 32,018 30,151
---------------------------------------------------------------------------------------------------------------
Income taxes (credit):
Current 8,714 6,532 12,917 10,314
DEFERRED (1,544) 372 (510) 1,597
---------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAXES 7,170 6,904 12,407 11,911
---------------------------------------------------------------------------------------------------------------
Net income $ 11,332 $ 10,571 $ 19,611 $ 18,240
===============================================================================================================
Net income per common share:
Basic $ 1.43 $ 1.20 $ 2.43 $ 2.07
Diluted $ 1.40 $ 1.18 $ 2.39 $ 2.04
===============================================================================================================
Weighted average shares outstanding (in thousands):
Basic 7,950 8,796 8,063 8,804
Diluted 8,118 8,938 8,209 8,928
===============================================================================================================
</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)
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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 - - - 19,611 -
Dividends to stockholders,
$0.10 per common share - - - (818) -
Purchase of treasury shares (519,500) - - - (7,895)
Stock options exercised 18,900 - (61) - 278
Deferral of Executive and Director
stock - - 705 - -
Executive deferred stock
distributions 1,203 - (18) - 18
-------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 7,817,443 $88 $62,908 $164,130 $(14,794)
==============================================================================================================
</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>
SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $19,611 $18,240
Adjustments to reconcile net income to net cash
used in operating activities:
Loss from property disposals 48 7
Depreciation and amortization 1,060 1,050
Deferred income taxes (credit) (510) 1,597
Increase in cash held in escrow (289) (374)
(Increase) decrease in receivables (1,871) 2,646
Increase in inventories (40,687) (75,312)
Increase in other assets (230) (138)
Increase in accounts payable 17,278 12,872
Decrease in accrued liabilities (11,559) (11,239)
Equity in undistributed income of unconsolidated joint
ventures and limited liability companies (343) (305)
-------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (17,492) (50,956)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (327) (733)
Investment in unconsolidated joint ventures and limited liability companies (14,869) (7,092)
Distributions from unconsolidated joint ventures and limited liability companies 438 443
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,758) (7,382)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments 45,100 56,210
Principal repayments of mortgage notes payable (2,306) (62)
Net increase in customer deposits 4,137 4,981
Dividends paid (818) (880)
Proceeds from exercise of stock options 217 73
Payments to acquire treasury shares (7,895) (398)
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 38,435 59,924
------------------------------------------------------------------------------------------------------------------
Net increase in cash 6,185 1,586
Cash balance at beginning of year 5,665 10,068
------------------------------------------------------------------------------------------------------------------
Cash balance at end of period $11,850 $ 11,654
==================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $ 8,255 $ 5,926
Income taxes $ 12,363 $ 12,417
NON-CASH TRANSACTIONS DURING THE PERIOD:
Land acquired with mortgage notes payable - net $ 4,990 $ -
Single-family lots distributed from unconsolidated joint ventures and
limited liability companies $ 9,356 $ 10,207
Deferral of Executive and Director stock $ 705 $ 1,287
Executive deferred stock distributions $ 18 $ -
==================================================================================================================
</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 six months ended June 30, 2000 and 1999 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, 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
The Company has reached an agreement in principal with its lenders to enter
into a new bank loan agreement. The new agreement will increase the amount of
credit, extend the term of the loan, add one additional lender and make
certain minor modifications to the covenants. The Company expects to execute
the new agreement in the third quarter.
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 six months
ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest capitalized, beginning of period $9,314 $8,057 $8,886 $7,957
Interest incurred 5,082 3,903 9,694 7,139
Interest expensed (4,753) (3,572) (8,937) (6,708)
-------------------------------------------------------------------------------------------------------------
Interest capitalized, end of period $9,643 $8,388 $9,643 $8,388
=============================================================================================================
</TABLE>
NOTE 4. CONTINGENCIES
At June 30, 2000, the Company had options and contingent purchase contracts
to acquire land and developed lots with an aggregate purchase price of
approximately $144.5 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 in 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 has not yet completed its analysis of these bulletins
and their impact on the Company's financial statements and disclosures.
NOTE 7. DIVIDENDS
On April 21, 2000, the Company paid to the stockholders of record on April 3,
2000, a cash dividend of $0.05 per share. On April 19, 2000, the Board of
Directors approved a $0.05 per share cash dividend payable to stockholders of
record of its common stock on July 3, 2000, which was paid on July 21, 2000.
Total dividends paid in 2000 through July 21 were $1.2 million.
-8-
<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 SIX MONTHS ENDED JUNE 30, 2000 AND 1999
CONSOLIDATED
Total Revenue. Total revenue for the three months ended June 30, 2000
increased $21.2 million and for the six months ended June 30, 2000 increased
$46.2 million over the comparable periods of 1999. For the three-month period,
homebuilding revenue increased $21.4 million and financial services revenue
decreased $0.1 million. For the six-month period, homebuilding revenue increased
$46.8 million and financial services revenue decreased $0.4 million. The
increases in homebuilding for both the three- and six-month periods consisted of
housing revenue increases of $19.3 million and $43.1 million, respectively, and
land revenue increases of $2.3 million and $3.9 million, respectively. The
increases in housing revenue for both the three- and six-month periods were
attributable to increases in the number of Homes Delivered of 39 and 93 units,
respectively, and increases in the average sales price of Homes Delivered of
5.2% and 6.5%, respectively. The increases in land revenue for the three and six
months ended June 30, 2000 were primarily due to an increase in the sales price
of lots sold in the Virginia division from the comparable periods of 1999. The
decrease in financial services revenue for the six months was primarily
attributable to decreases in revenue earned from the sale of loans.
Income Before Income Taxes. Income before income taxes increased 5.9%
for the three months ended June 30, 2000 and 6.2% for the six months ended June
30, 2000 over the comparable periods of 1999. The increase for the three months
ended June 30, 2000 related primarily to homebuilding, where income before
income taxes increased from $12.7 million to $14.2 million. Income before income
taxes for financial services remained constant at $2.7 million. The increase for
the six months ended June 30, 2000 also related primarily to homebuilding, where
income before income taxes increased from $18.1 million to $19.6 million. This
was slightly offset by a decrease in income before income taxes for financial
services from $6.7 million to $6.5 million. The increase in homebuilding for
both the three- and six-month periods was due to the increase in the number of
Homes Delivered and an increase in the average sales price of Homes Delivered.
The increase was offset by a decrease in housing gross margin from 20.5% for
both the three and six months ended June 30, 1999 to 19.9% for both the three
and six months ended June 30, 2000. Unallocated amounts include interest from
other segments along with salaries and other administrative expenses which are
not identifiable with a specific segment.
-9-
<PAGE> 10
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>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Homebuilding $231,494 $210,090 $401,003 $354,242
Financial services 4,348 4,460 9,528 9,959
Intersegment (1,114) (1,037) (1,947) (1,864)
-------------------------------------------------------------------------------------------------------------------
Total Revenue $234,728 $213,513 $408,584 $362,337
===================================================================================================================
Income Before Income Taxes:
Homebuilding $ 14,182 $ 12,749 $ 19,623 $18,074
Financial Services 2,729 2,667 6,462 6,714
Unallocated amounts 1,591 2,059 5,933 5,363
-------------------------------------------------------------------------------------------------------------------
Total Income Before Income Taxes $ 18,502 $ 17,475 $ 32,018 $30,151
===================================================================================================================
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in thousands) 2000 1999 2000 1999
====================================================================================================================
<S> <C> <C> <C> <C>
Revenue:
Housing sales $226,336 $207,003 $390,665 $347,579
Land and lot sales 4,994 2,737 9,753 5,853
Other income 164 350 585 810
-------------------------------------------------------------------------------------------------------------------
Total Revenue $231,494 $210,090 $401,003 $354,242
===================================================================================================================
Revenue:
Housing sales 97.8% 98.5% 97.4% 98.1%
Land and lot sales 2.1 1.3 2.4 1.7
Other income 0.1 0.2 0.2 0.2
-------------------------------------------------------------------------------------------------------------------
Total Revenue 100.0 100.0 100.0 100.0
Land and housing costs 80.7 80.8 80.7 80.5
-------------------------------------------------------------------------------------------------------------------
Gross Margin 19.3 19.2 19.3 19.5
General and administrative expenses 2.4 2.4 2.6 2.9
Selling expenses 6.2 6.5 6.4 6.8
-------------------------------------------------------------------------------------------------------------------
Operating Income 10.7 10.3 10.3 9.8
Allocated expenses 4.6 4.2 5.4 4.7
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 6.1 6.1 4.9 5.1
===================================================================================================================
MIDWEST REGION
Unit Data:
New contracts, net 606 760 1,331 1,515
Homes delivered 644 618 1,105 1,047
Backlog at end of period 1,617 1,790 1,617 1,790
Average sales price of homes in backlog $ 201 $ 184$ 201 $ 184
Aggregate sales value of homes in backlog $325,000 $330,000 $325,000 $330,000
Number of active subdivisions 80 75 80 75
===================================================================================================================
FLORIDA REGION
Unit Data:
New contracts, net 224 185 406 360
Homes delivered 186 173 322 290
Backlog at end of period 451 403 451 403
Average sales price of homes in backlog $ 212 $ 202 $ 212 $ 202
Aggregate sales value of homes in backlog $ 96,000 $ 82,000 $ 96,000 $ 82,000
Number of active subdivisions 28 27 28 27
===================================================================================================================
NORTH CAROLINA, VIRGINIA, MARYLAND AND ARIZONA REGION
Unit Data:
New contracts, net 197 253 396 490
Homes delivered 210 210 356 353
Backlog at end of period 436 505 436 505
Average sales price of homes in backlog $ 355 $ 335 $ 355 $ 335
Aggregate sales value of homes in backlog $ 155,000 $169,000 $155,000 $169,000
Number of active subdivisions 32 38 32 38
===================================================================================================================
TOTAL
Unit Data:
New contracts, net 1,027 1,198 2,133 2,365
Homes delivered 1,040 1,001 1,783 1,690
Backlog at end of period 2,504 2,698 2,504 2,698
Average sales price of homes in backlog $ 230 $ 215 $ 230 $ 215
Aggregate sales value of homes in backlog $576,000 $581,000 $576,000 $581,000
Number of active subdivisions 140 140 140 140
===================================================================================================================
</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 six months of 2000, we delivered 1,783 homes, most of which
were homes under contract in Backlog at December 31, 1999. The cancellation rate
of homes in Backlog at December 31, 1999 and 1998 was 10.9% and 11.5% as of June
30, 2000 and 1999, respectively. For the homes in Backlog at December 31, 1998,
the final cancellation percentage was 11.1%. Unsold speculative homes, which are
in various stages of construction, totaled 122 and 121 at June 30, 2000 and
1999, respectively.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Total Revenue. Total revenue for the homebuilding segment for the
quarter ended June 30, 2000 was $231.5 million, a 10.2% increase over 1999's
second quarter. The increase consisted of an increase in housing revenue of 9.3%
and an increase in land revenue of 82.5%. Housing revenue increased as a result
of a 3.9% increase in Homes Delivered. Homes Delivered were higher in all of our
regions with the exception of Washington, D.C. where Homes Delivered were flat
compared to a year ago. The increase in housing revenue was also due to a 5.2%
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 which were passed on to the home buyer. The Phoenix market
had the most significant impact on the increase due to an increase in the number
of Homes Delivered and a substantially higher average sales price. The increase
in land revenue from $2.7 million to $5.0 million was primarily attributable to
higher volume and sales prices of lots sold in the Virginia division in
comparison to the second quarter of 1999. There were 29 more lots sold at an
average sales price which was significantly higher than last year's second
quarter.
Home Sales and Backlog. New Contracts in the second quarter of 2000
decreased 14.3% from 1999's second quarter. 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 six increases in the prime lending rate
during the last twelve months. New Contracts recorded in July 2000 were 26%
higher than New Contracts recorded in July 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 June 30, 2000, our Backlog consisted of 2,504 homes with an
approximate sales value of $576.0 million. This represents a 7.2% decrease in
units and a 0.9% decrease in sales value in comparison to the second quarter of
1999. The average sales price of homes in backlog increased by 7.0% with
increases occurring in virtually all of our markets. Sales price increases are
the result of building in more upscale and niche subdivisions as well as
increases to cover increased material and labor costs.
Gross Margin. The overall gross margin for the homebuilding segment was
19.3% for the three month period ended June 30, 2000 compared to 19.2% for the
three month period ended June 30, 1999. Housing gross margin decreased from
20.5% to 19.9% and land gross margin increased from 7.4% to 17.4% compared to
1999's second quarter. The decrease in housing gross margin was the result of
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<PAGE> 13
increases in material costs and higher closing costs due to fees paid to extend
loans beyond their original term caused by a delay in the delivery of homes. We
also deferred a portion of gross profit relating to models sold and leased back.
The increase in land gross margin was the result of lots sold at significantly
higher sales prices in our Virginia division.
General and Administrative Expenses. General and administrative
expenses increased to $5.5 million, or 2.4% of revenue, for the three months
ended June 30, 2000 compared to $5.1 million, or 2.4% 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 an increase in our
investment in land.
Selling Expenses. Selling expenses increased 3.9%, from $13.7 million,
or 6.5% of revenue, for the second quarter of 1999 to $14.3 million, or 6.2% of
revenue, for the second quarter of 2000. The increase in dollars primarily
related to additional sales commissions paid to outside Realtors and internal
salespeople resulting from the increase in Homes Delivered. Model expenses also
increased slightly.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Total Revenue. Total revenue for the homebuilding segment for the six
months ended June 30, 2000 was $401.0 million, a 13.2% increase over the same
period in 1999. The increase consisted of an increase in housing revenue of
12.4% and an increase in land revenue of 66.6%. Housing revenue increased as a
result of a 5.5% increase in Homes Delivered. Homes Delivered were higher in all
of our regions. The increase in housing revenue was also due to a 6.5% 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 which were passed on to the home buyer. The Phoenix market had
the most significant impact on the increase due to an increase in the number of
Homes Delivered and a substantially higher average sales price. The increase in
land revenue from $5.9 million to $9.8 million was primarily attributable to
higher volume and sales prices of lots sold in the Virginia division in
comparison to the first six months of 1999. There were 47 more lots sold at an
average sales price which was significantly higher than last year's first six
months.
Home Sales and Backlog. New Contracts in the first six months of 2000
decreased 9.8% 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 six 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
19.3% for the six month period ended June 30, 2000 compared to 19.5% for the six
month period ended June 30, 1999. Housing gross margin decreased from 20.5% to
19.9% and land gross margin increased from 9.6% to 14.4% from 1999's first six
months. The decrease in housing gross margin was the result of increases in
material costs and higher closing costs due to fees paid to extend loans beyond
their original term caused by a delay in the delivery of homes. We also deferred
a portion of gross profit relating to models sold and leased back. The increase
in land gross margin was the result of lots sold at significantly higher sales
prices in our Virginia division.
General and Administrative Expenses. General and administrative
expenses increased to $10.6 million, or 2.6% of revenue, for the six months
ended June 30, 2000 compared to $10.1 million, or 2.9% of revenue, for the same
period in 1999. The increase in dollars was primarily attributable to increases
in
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<PAGE> 14
payroll and related costs that were required to support the growth in revenue
and operations. Real estate taxes also increased as a result of an increase in
our investment in land.
Selling Expenses. Selling expenses increased 7.1%, from $24.1 million,
or 6.8% of revenue, for the first six months of 1999 to $25.8 million, or 6.4%
of revenue, for the first six months of 2000. The increase primarily related 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 our financial
services segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of loans originated 805 825 1,392 1,393
Revenue:
Loan origination fees $1,251 $ 1,248 $2,158 $2,045
Sale of servicing and marketing gains 1,699 1,810 4,778 5,412
Other 1,398 1,402 2,592 2,502
----------------------------------------------------------------------------------------------------------
Total Revenue 4,348 4,460 9,528 9,959
----------------------------------------------------------------------------------------------------------
General and administrative expenses 1,619 1,793 3,066 3,245
----------------------------------------------------------------------------------------------------------
Operating Income $2,729 $ 2,667 $6,462 $6,714
==========================================================================================================
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Total Revenue. Total revenue for the three months ended June 30, 2000
was $4.3 million, a 2.5% decrease from the $4.5 million recorded for the
comparable period of 1999. Loan origination fees remained constant at $1.2
million for the three months ended June 30, 2000 as compared to the three months
ended June 30, 1999.
Revenue from the sale of loans decreased 6.1% from $1.8 million for the
three months ended June 30, 1999 to $1.7 million for the three months ended June
30, 2000. The decrease was primarily due to a shift from fixed rate to
adjustable rate mortgages as a result of increasing interest rates, causing
lower servicing release premiums from investors.
Revenue from other sources remained unchanged at $1.4 million for the
three months ended June 30, 2000 as compared to the three months ended June 30,
1999.
General and Administrative Expenses. General and administrative
expenses for the three months ended June 30, 2000 were $1.6 million, a 9.7%
decrease from the comparable period of the prior year. This decrease was due to
lower expenses related to the decrease in revenue.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Total Revenue. Total revenue for the six months ended June 30, 2000 was
$9.5 million, a 4.3% decrease from the $10.0 million recorded for the comparable
period of 1999. Loan origination fees increased 5.5% from $2.0 million for the
six months ended June 30, 1999 to $2.2 million for the six months ended June 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
six months of 1999.
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<PAGE> 15
Revenue from the sale of loans decreased 11.7% from $5.4 million for
the six months ended June 30, 1999 to $4.8 million for the six months ended June
30, 2000. This was primarily due to a shift from fixed rate mortgages to
adjustable rate mortgages as a result of increasing interest rates, causing
lower servicing release premiums from investors.
Revenue from other sources increased 3.6% from $2.5 million for the six
months ended June 30, 1999 to $2.6 million for the six months ended June 30,
2000. This was primarily due to increased earnings from title services as a
result of the increase in Homes Delivered.
General and Administrative Expenses. General and administrative
expenses for the six months ended June 30, 2000 were $3.1 million, a 5.5%
decrease from the comparable period of the prior year. This decrease was due to
lower expenses related to the decrease in revenue.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for the three months ended June 30, 2000 remained flat
at $4.6 million compared to the same period in the prior year. As a percentage
of total revenue, corporate general and administrative expenses for the three
months ended June 30, 2000 decreased to 2.0% from 2.2% from the comparable
period in the prior year. Corporate general and administrative expenses
increased from $6.3 million for the six months ended June 30, 1999 to $6.9
million for the six months ended June 30, 2000. However, as a percentage of
total revenue, corporate general and administrative expenses remained flat at
1.7%. 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 six months ended June 30, 2000 increased to $4.8 and $9.0 million,
respectively, from $3.5 and $6.6 million recorded for the comparable periods of
the prior year. Interest expense was higher in the current year due to an
increase in the average borrowings outstanding. Average borrowings outstanding
increased due to a significant increase in houses under construction and land
development activities. Borrowings were also higher due to the purchase of
treasury shares of approximately $15.0 million.
Income Taxes. The effective tax rate for the three and six months ended
June 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
development activities has been from internally generated cash and from bank
borrowings, which are primarily unsecured.
Notes Payable Banks. At June 30, 2000, we had bank borrowings
outstanding of $177.0 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) $250.0 million and (ii) our borrowing
base. 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. 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.
-15-
<PAGE> 16
The Company has reached an agreement in principal with its lenders to
enter into a new bank loan agreement. The new agreement will increase the amount
of credit, extend the term of the loan, add one additional lender and make
certain minor modifications to the covenants. The Company expects to execute the
new agreement in the third quarter.
An additional $15.5 million was outstanding as of June 30, 2000 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 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 June 30, 2000, we had the right to borrow up to $280.0 million under
our credit facilities, including $30.0 million under the M/I Financial loan
agreement. At June 30, 2000, we had $87.5 million of unused borrowing
availability under our loan agreements. We also had approximately $57.6 million
of completion bonds and letters of credit outstanding at June 30, 2000.
Subordinated Notes. At June 30, 2000, 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 we have
increased our land development activities and land holdings. Single-family lots,
land and land development costs increased 5.4% from December 31, 1999 to June
30, 2000. This increase was primarily due to the shortage of qualified land
developers in certain markets. Additionally, we developed more land due to 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, when
possible; however, we will continue to evaluate all of our alternatives to
satisfy our increasing demand for lots in the most cost effective manner.
The $45.0 million increase in notes payable banks - homebuilding
operations, from December 31, 1999 to June 30, 2000 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 $41.1 million from December 31, 1999 to June
30, 2000, while single-family lots, land and land development increased $13.7
million. Borrowing needs may continue to increase as we invest in land under
development and developed lots, depending upon the market and competition.
At June 30, 2000, mortgage notes payable outstanding were $17.4
million, secured by an office building, lots and land with a recorded book value
of $22.8 million.
Purchase of Treasury Shares. On February 15, 2000, our Board of
Directors authorized the repurchase of up to 2,000,000 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 June 30, 2000 we had
purchased 1,028,500 shares at an average price of $14.90.
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
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<PAGE> 17
rate on the revolving loans is based upon floating rates of interest. The
weighted average interest rate for our outstanding debt for the six months ended
June 30, 2000 and 1999 was 8.2%.
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 six 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 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
six months ended June 30, 2000 approximately 40% of our housing revenue and a
significant portion of our operating income were derived from operations in the
Columbus market.
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<PAGE> 18
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.
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 June 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 $280.0 million. To minimize the effect
of the interest rate fluctuation, we have three interest rate swap arrangements
with certain banks for
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<PAGE> 19
a total notional amount of $75.0 million. Under these agreements we pay a
fixed rate of 5.10% on $25.0 million and 6.25% on $50.0 million.
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 June 30, 2000, the notional principal
amount under these forward sales agreements was approximately $149.0 million and
the related fair value of these agreements was a loss of approximately $0.6
million. The hedging agreements outstanding at June 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
On April 19, 2000, the Company held its 2000 annual meeting of
shareholders. The shareholders voted on the election of three directors to
three-year terms and whether to ratify the appointment of Deloitte & Touche LLP
as the independent accountants and auditors for fiscal year 2000. The results of
the voting are as follows:
1. ELECTION OF DIRECTORS
FOR WITHHELD
Thomas D. Igoe 7,716,209 49,970
Steven Schottenstein 7,725,846 40,333
Lewis R. Smoot, Sr. 7,709,008 57,171
2. TO RATIFY THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE INDEPENDENT
---------------------------------------------------------------------
ACCOUNTANTS AND AUDITORS FOR FISCAL YEAR 2000
---------------------------------------------
For 7,762,389
Against 1,401
Abstain 2,389
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
------ -----------
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: August 11, 2000 by: /S/ Robert H. Schottenstein
---------------------------
Robert H. Schottenstein
President and Director
Date: August 11, 2000 by: /S/ Kerrii B. Anderson
----------------------
Kerrii B. Anderson
Senior Vice President,
Chief Financial Officer, Assistant
Secretary and Director
(Principal Financial and Accounting
Officer)
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<PAGE> 22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
27 Financial Data Schedule.
-22-
