1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 -------------- 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: 7,615,867 shares outstanding as of May 11, 2001
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 March 31, 2001 (Unaudited) and December 31, 2000 3 Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2001 and 2000 4 Unaudited Consolidated Statement of Shareholders' Equity for the Three Months Ended March 31, 2001 5 Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 6 Notes to Interim Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Exhibit Index 19 </TABLE> -2-
3 CONSOLIDATED BALANCE SHEETS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, (Dollars in thousands, except par values) 2001 2000 - ---------------------------------------------------------------------------------------------------------------- (UNAUDITED) <S> <C> <C> ASSETS Cash $ 7,769 $ 8,555 Cash held in escrow 2,258 1,710 Receivables 36,633 49,959 Inventories: Single-family lots, land and land development costs 293,773 286,461 Houses under construction 178,846 152,184 Model homes and furnishings - at cost (less accumulated depreciation: March 31, 2001 - $40; December 31, 2000 - $35) 7,070 7,684 Land purchase deposits 2,627 3,105 Building, office furnishings, transportation and construction equipment - at cost (less accumulated depreciation: March 31, 2001 - $7,486; December 31, 2000 - $7,353) 17,931 18,165 Investment in unconsolidated joint ventures and limited liability companies 23,311 23,086 Other assets 15,829 16,733 - ---------------------------------------------------------------------------------------------------------------- TOTAL $586,047 $567,642 - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable banks - homebuilding operations $147,800 $115,800 Note payable bank - financial services operations 13,300 26,700 Mortgage notes payable 14,875 16,719 Senior subordinated notes 50,000 50,000 Accounts payable 65,041 67,344 Accrued compensation 4,152 17,542 Other liabilities 48,842 44,648 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 344,010 338,753 - ---------------------------------------------------------------------------------------------------------------- Commitments and Contingencies - ---------------------------------------------------------------------------------------------------------------- Shareholders' 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 63,182 62,747 Retained earnings 200,052 188,184 Treasury stock - at cost - 1,272,394 and 1,322,894 shares, respectively, held in treasury at March 31, 2001 and December 31, 2000 (21,285) (22,130) - ---------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 242,037 228,889 - ---------------------------------------------------------------------------------------------------------------- TOTAL $586,047 $567,642 - ---------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Interim Unaudited Consolidated Financial Statements. -3-
4 CONSOLIDATED STATEMENTS OF INCOME M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (Dollars in thousands, except per share amounts) 2001 2000 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Revenue $178,155 $173,856 - -------------------------------------------------------------------------------------------------------------- Costs and expenses: Land and housing 137,422 135,835 General and administrative 9,666 8,929 Selling 12,373 11,392 Interest 3,115 4,184 - -------------------------------------------------------------------------------------------------------------- Total costs and expenses 162,576 160,340 - -------------------------------------------------------------------------------------------------------------- Income before income taxes 15,579 13,516 - -------------------------------------------------------------------------------------------------------------- Income tax expense: Current 5,260 4,203 Deferred 756 1,034 - -------------------------------------------------------------------------------------------------------------- Total income tax expense 6,016 5,237 - -------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 9,563 8,279 Cumulative effect of change in accounting principle - net of income taxes 2,681 - - ----------------------------------------------------------------------------------------------------------------- Net income $ 12,244 $ 8,279 - ----------------------------------------------------------------------------------------------------------------- Earnings per common share - basic: Income before cumulative effect of change in accounting principle $ 1.27 $ 1.01 Cumulative effect of change in accounting principle - net of income taxes .36 - Net income $ 1.63 $ 1.01 - -------------------------------------------------------------------------------------------------------------- Earnings per common share - diluted: Income before cumulative effect of change in accounting principle $ 1.23 $ 1.00 Cumulative effect of change in accounting principle - net of income taxes .35 - Net income $ 1.58 $ 1.00 - -------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding (in thousands): Basic 7,513 8,176 Diluted 7,756 8,302 - -------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Interim Unaudited Consolidated Financial Statements. -4-
5 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2001 - ------------------------------------------------------------------------------------------------------------- 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, 2000 7,490,167 $88 $62,747 $188,184 $(22,130) Net income - - - 12,244 - Dividends to shareholders, $0.05 per common share - - - (376) - Stock options exercised 50,500 - (239) - 845 Deferral of executive and director stock - - 674 - - - ------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 2001 7,540,667 $88 $63,182 $200,052 $(21,285) - -------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Interim Unaudited Consolidated Financial Statements. -5-
6 CONSOLIDATED STATEMENTS OF CASH FLOWS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES (UNAUDITED) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED MARCH 31, (Dollars in thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,244 $ 8,279 Adjustments to reconcile net income to net cash used in operating activities: (Gain) loss from property disposals (4) 40 Depreciation 446 535 Deferred income taxes 756 1,034 (Increase) decrease in cash held in escrow (548) 76 Decrease in receivables 13,326 11,380 Increase in inventories (31,081) (32,283) Decrease in other assets 148 1,236 (Decrease) increase in accounts payable (2,303) 4,887 Decrease in other liabilities (8,522) (13,330) Equity in undistributed income of unconsolidated joint ventures and limited liability companies (227) (189) - ------------------------------------------------------------------------------------------------------------------ Net cash used in operating activities (15,765) (18,335) - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (203) (148) Investment in unconsolidated joint ventures and limited liability companies (2,044) (11,666) Distributions from unconsolidated joint ventures and limited liability companies 240 211 - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (2,007) (11,603) - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank borrowings - net of repayments 18,600 36,670 Principal repayments of mortgage notes payable (1,844) (510) Dividends paid (376) (416) Proceeds from exercise of stock options and deferred stock 606 3 Payments to acquire treasury shares - (3,801) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 16,986 31,946 - ------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash (786) 2,008 Cash balance at beginning of year 8,555 5,665 - ------------------------------------------------------------------------------------------------------------------ Cash balance at end of period $ 7,769 $ 7,673 - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for: Interest - net of amount capitalized $ 2,603 $ 3,829 Income taxes $ 4,778 $ 2,681 NON-CASH TRANSACTIONS DURING THE PERIOD: Land and lots acquired with mortgage notes payable $ - $ 738 Distribution of single-family lots from unconsolidated joint ventures and limited liability companies $ 1,806 $ 6,279 Deferral of executive and director stock $ 674 $ 679 - ---------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Interim Unaudited Consolidated Financial Statements. -6-
7 M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information. The results of operations for the three months ended March 31, 2001 and 2000 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, 2000. 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 AGREEMENT On May 3, 2001, the Company and M/I Financial Corp., our wholly-owned subsidiary, entered into a new bank loan agreement with a new lender, replacing the previous loan agreement in its entirety. The Company and M/I Financial have the ability to borrow up to $30 million at a rate of interest based on the prime rate or the Eurodollar rate. This new agreement terminates on May 2, 2002. NOTE 3. INTEREST The Company capitalizes interest during development and construction. Capitalized interest is charged to interest expense as the related inventory is delivered. The summary of total interest for the three months ended March 31, 2001 and 2000 is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- (Dollars in thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> Interest capitalized, beginning of period $10,337 $8,886 Interest incurred 4,409 4,612 Interest expensed (3,115) (4,184) - ------------------------------------------------------------------------------------------------------------- Interest capitalized, end of period $11,631 $9,314 ============================================================================================================ </TABLE> NOTE 4. CONTINGENCIES At March 31, 2001, the Company had options and contingent purchase contracts to acquire land and developed lots with an aggregate purchase price of approximately $130 million. -7-
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 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." The statement, as amended and interpreted, became effective for the Company's fiscal 2001 first quarter financial statements. In January 2001 the Company recorded a cumulative transition adjustment of approximately $2.7 million (net of taxes of $1.6 million) to earnings, primarily related to the recognition of certain loan commitments and forward sales of mortgage backed securities as derivative instruments. The loan commitments and forward sales of mortgage backed securities are recorded at fair value in other assets and other liabilities, respectively. Changes in fair value are recorded in revenue. NOTE 7. DIVIDENDS On April 20, 2001, the Company paid to the shareholders of record on April 2, 2001 a cash dividend of $0.05 per share. On April 19, 2001, the Board of Directors approved a $0.05 per share cash dividend payable to shareholders of record of its common stock on July 2, 2001, payable on July 26, 2001. -8-
9 M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES FORM 10-Q PART I ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 CONSOLIDATED Total Revenue. Total revenue for the three months ended March 31, 2001 was $178.2 million, a 2.5% increase over the $173.9 million recorded for the comparable period of 2000. This was the result of an increase in homebuilding revenue of $4.2 million and an increase in financial services revenue of $0.2 million. The increase in homebuilding revenue consisted of an increase in housing revenue of $4.5 million and a decrease in land revenue of $0.2 million. The increase in housing revenue for the first quarter of 2001 over the same period during the prior year was attributable to 34 additional Homes Delivered. Income Before Income Taxes. Income before income taxes for the first quarter of 2001 was a record $15.6 million, a $2.1 million increase over the comparable period of 2000. The increase was primarily the result of an increase in homebuilding income of 57.1% over 2000 as a result of a higher number of Homes Delivered and an increase in gross profit from 19.2% to 20.8%. Unallocated amounts include interest from other segments along with salaries and other administrative expenses which are not identifiable with a specific segment. Income before income taxes increased for the financial services segment due to increased loan origination fees. The cumulative effect of a change in accounting principle was an increase in income of approximately $2.7 million, net of income taxes, for the three months ended March 31, 2001. This accounting change is the result of the January 1, 2001 adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires recording the value of certain loan commitments and forward sales of mortgage backed securities at fair value. 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 MARCH 31, (Dollars in thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Revenue: Homebuilding $173,707 $169,509 Financial services 5,400 5,180 Intersegment (952) (833) - ------------------------------------------------------------------------------------------------------------- TOTAL REVENUE $178,155 $173,856 - ------------------------------------------------------------------------------------------------------------- Income Before Income: Homebuilding $ 8,546 $ 5,441 Financial services 3,821 3,759 Unallocated amounts 3,212 4,316 - ------------------------------------------------------------------------------------------------------------- TOTAL INCOME BEFORE INCOME TAXES $ 15,579 $ 13,516 - ------------------------------------------------------------------------------------------------------------- </TABLE> -9-
10 HOMEBUILDING SEGMENT The following table sets forth certain information related to our homebuilding segment: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, (Dollars in thousands) 2001 2000 - ------------------------------------------------------------------------------------------ <S> <C> <C> Revenue: Housing sales $168,823 $164,329 Land and lot sales 4,530 4,759 Other income 354 421 - ------------------------------------------------------------------------------------------ Total revenue $173,707 $169,509 ========================================================================================== Revenue: Housing sales 97.2% 96.9% Land and lot sales 2.6 2.9 Other income 0.2 0.2 - ------------------------------------------------------------------------------------------ Total revenue 100.0 100.0 Land and housing costs 79.2 80.8 - ------------------------------------------------------------------------------------------ Gross margin 20.8 19.2 General and administrative expenses 3.1 3.0 Selling expenses 7.1 6.8 - ------------------------------------------------------------------------------------------ Operating income 10.6 9.4 Allocated expenses 5.7 6.2 - ------------------------------------------------------------------------------------------ Income before income taxes 4.9% 3.2% ========================================================================================== OHIO AND INDIANA REGION Unit data: New contracts, net 910 725 Homes delivered 440 461 Backlog at end of period 1,775 1,655 Average sales price of homes in Backlog $ 204 $ 197 Aggregate sales value of homes in Backlog $363,000 $325,000 Number of active subdivisions 85 80 - ------------------------------------------------------------------------------------------ FLORIDA REGION Unit data: New contracts, net 252 182 Homes delivered 196 136 Backlog at end of period 548 413 Average sales price of homes in Backlog $ 209 $ 213 Aggregate sales value of homes in Backlog $115,000 $88,000 Number of active subdivisions 28 26 - ------------------------------------------------------------------------------------------ NORTH CAROLINA, VIRGINIA AND MARYLAND, AND ARIZONA REGION Unit data: New contracts, net 214 199 Homes delivered 141 146 Backlog at end of period 387 449 Average sales price of homes in Backlog $ 380 $ 351 Aggregate sales value of homes in Backlog $147,000 $158,000 Number of active subdivisions 32 36 - ------------------------------------------------------------------------------------------ TOTAL Unit data: New contracts, net 1,376 1,106 Homes delivered 777 743 Backlog at end of period 2,710 2,517 Average sales price of homes in Backlog $ 230 $ 227 Aggregate sales value of homes in Backlog $625,000 $571,000 Number of active subdivisions 145 142 - -------------------------------------------------------------------------------------- </TABLE> -10-
11 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 period 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. Since 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 three months of 2001, the Company delivered 777 homes, most of which were homes under contract in Backlog at December 31, 2000. The cancellation rate of homes in Backlog at December 31, 2000 and 1999 was 9% and 8% as of March 31, 2001 and 2000, respectively. For homes in Backlog at December 31, 1999, the final cancellation percentage was 12%. Unsold speculative homes, which are in various stages of construction, totaled 97 and 129 at March 31, 2001 and 2000, respectively. Total Revenue. Total revenue for the homebuilding segment for the quarter ended March 31, 2001 was $173.7 million, a 2.5% increase over 2000's first quarter. The increase primarily consisted of an increase in housing revenue of $4.5 million offset by a decrease in land revenue of $0.2 million. Housing revenue increased as a result of a 4.6% increase in Homes Delivered. The increase in Homes Delivered was primarily the result of a significant increase in the Tampa market. The decrease in land revenue was primarily attributable to fewer lot sales in the Washington, D.C. market in comparison to the first quarter of 2000. Home Sales and Backlog. New Contracts in the first quarter of 2001 increased 24.4% from 2000's first quarter. New Contracts were higher in all of the Company's markets with the exception of Raleigh, Phoenix and Washington D.C. We believe the increase was primarily attributable to favorable market conditions and lower interest rates. New Contracts recorded in April 2001 were 22% higher than New Contracts recorded in April 2000. 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 March 31, 2001, the total sales value of our Backlog of 2,710 homes was approximately $625 million. This represents a 7.7% increase in units and a 9.4% increase in sales value in comparison to the first quarter of 2000. The average sales price of homes in backlog increased by 1.6% with increases occurring in virtually all of our markets. Sales price increases are partially 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 20.8% for the three month period ended March 31, 2001 compared to 19.2% for the three month period ended March 31, 2000. Housing gross margin increased from 19.9% to 21.0% and land gross margin decreased from 11.2% to 9.7% from 2000's first quarter. The increase in housing gross margin was partially due to decreases in lumber and drywall material costs. The decrease in the land gross margin was the result of fewer lots sold in the Washington, D.C. market. General and Administrative Expenses. General and administrative expenses increased to $5.4 million, or 3.1% of revenue, for the first three months of 2001 compared to $5.1 million, or 3.0% of revenue, for the first three months of 2000. The increase was primarily attributable to an increase in real estate taxes as a result of an increase in our investment in land development activities. Selling Expenses. Selling expenses increased 7.3%, from $11.5 million, or 6.8% of revenue, for the first quarter of 2000 to $12.3 million, or 7.1% of revenue, for the first quarter of 2001. The increase primarily related to additional sales commissions paid to outside Realtors resulting from the increase in Homes Delivered. Model expenses also increased slightly. -11-
12 FINANCIAL SERVICES SEGMENT - M/I FINANCIAL The following table sets forth certain information related to the financial services segment: THREE MONTHS ENDED MARCH 31, (Dollars in thousands) 2001 2000 - -------------------------------------------------------------------------------- Number of loans originated 620 587 Revenue: Loan origination fees $1,010 $ 907 Sale of loans 3,012 3,079 Other 1,378 1,194 - -------------------------------------------------------------------------------- Total Revenue 5,400 5,180 - -------------------------------------------------------------------------------- General and administrative expenses 1,579 1,421 - -------------------------------------------------------------------------------- Operating Income $3,821 $3,759 ================================================================================ Total Revenue. Total revenue for the three months ended March 31, 2001 was $5.4 million, a 4.2% increase from the $5.2 million recorded for the comparable period of the prior year. Loan origination fees increased 11.4% from the first quarter of 2000 compared to the first quarter of 2001. This increase was due to a 5.6% increase in loans originated along with an increase in the average loan amount. Revenue from the sale of loans decreased 2.2% from $3.1 million for the three months ended March 31, 2000 to $3.0 million for the three months ended March 31, 2001. Revenue from other sources increased 15.4% from $1.2 million for the three months ended March 31, 2000 to $1.4 million for the three months ended March 31, 2001. 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 three months ended March 31, 2001 and 2000 were $1.6 million and $1.4 million, respectively. This increase was due to increased loan applications and closings. OTHER OPERATING RESULTS Corporate General and Administrative Expenses. Corporate general and administrative expenses increased from $2.4 million for the three months ended March 31, 2000 to $2.8 million for the three months ended March 31, 2001. As a percentage of total revenue, general and administrative expenses increased to 1.6% for the three months ended March 31, 2001 from 1.4% for the comparable period in the prior year. The increase 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 first quarter of 2001 totaled $3.1 million, a 26.5% decrease from the $4.2 million recorded for the comparable period of the prior year. Interest expense was lower due to a decrease in the average borrowings outstanding and an increase in capitalized interest due to an increase in land under development costs. Income Taxes. The effective tax rate for the three months ended March 31, 2001 decreased to 38.6% from 38.8% for the comparable period of 2000. The decrease is primarily attributable to lower state taxes. -12-
13 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 March 31, 2001, we had bank borrowings outstanding of approximately $148 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 or (ii) our borrowing base. The Bank Credit Facility matures September 30, 2004. We also had approximately $13 million outstanding as of March 31, 2001 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. On May 3, 2001, the Company and M/I Financial entered into a new bank agreement with a new lender, replacing the previous loan agreement in its entirety. This new agreement terminates on May 2, 2002. At March 31, 2001, 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 March 31, 2001, we had $149 million of unused borrowing availability under our credit facilities. We also had approximately $48 million of completion bonds and letters of credit outstanding at March 31, 2001. Subordinated Notes. At March 31, 2001, there was outstanding $50 million of Senior Subordinated Notes. 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 2.6% from December 31, 2000 to March 31, 2001. 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 our alternatives to satisfy our increasing demand for lots in the most cost effective manner. The $32 million increase in notes payable banks - homebuilding operations from December 31, 2000 to March 31, 2001 reflects increased borrowings primarily attributable to increases in houses under construction and single-family lots, land and land development costs. Houses under construction increased $27 million from December 31, 2000 to March 31, 2001, and single-family lots, land and land development costs increased $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 March 31, 2001, mortgage notes payable outstanding were $15 million, secured by an office building, lots and land with a recorded book value of $20 million. Purchase of Treasury Shares. On February 15, 2000, our Board of Directors authorized the repurchase of up to 2 million of our outstanding common shares. The purchases may occur in the open -13-
14 market and/or in privately negotiated transactions as market conditions warrant. As of March 31, 2001 we had purchased 1.4 million shares at an average price of $17. 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 upon floating rates of interest. The weighted average interest rate for our outstanding debt for the three months ended March 31, 2001 was 8.8% compared to 8.2% for the three months ended March 31, 2000. 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 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. If mortgage interest rates 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 (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 -14-
15 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 three months ended March 31, 2001 approximately 40% of our housing revenue was 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. 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. 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 2001. Significant Voting Control by Principal Shareholders. As of March 31, 2001, members of the Irving E. Schottenstein family owned approximately 35% of our outstanding common shares. Therefore, members of the Irving E. Schottenstein family have significant voting power. -15-
16 ITEM 3: 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 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. At March 31, 2001, the notional principal amount under these loan commitments was $153 million and the related fair value of these agreements was approximately $0.9 million. 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 March 31, 2001, the notional principal amount under these forward sales agreements was approximately $153 million and the related fair value of these agreements was a loss of approximately $0.6 million. The hedging agreements outstanding at March 31, 2001 mature within 90-120 days. These agreements are recorded at fair value on the balance sheet and any gains or losses are recorded in revenue. -16-
17 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 Agreement by and among M/I Financial Corp., the Company and Guaranty Bank dated May 3, 2001. 10.2 Company's 2001 Chief Executive Officer Bonus Program. 10.3 Company's 2001 President Bonus Program. 10.4 Company's 2001 Chief Operating Officer Bonus Program. 10.5 Company's 2001 Chief Financial Officer Bonus Program. 10.6 Amended and Restated Executives' Deferred Compensation Plan. -17-
18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. M/I Schottenstein Homes, Inc. -------------------------------- (Registrant) Date: May 11, 2001 by: /s/ Robert H. Schottenstein --------------------------- Robert H. Schottenstein President and Director Date: May 11, 2001 by: /s/ Phillip G. Creek --------------------------- Phillip G. Creek Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) -18-
19 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE # - -------------- ----------- ------ 10.1 Revolving Credit Agreement by and among M/I Financial Corp., the Company and Guaranty Bank dated May 3, 2001. 10.2 Company's 2001 Chief Executive Officer Bonus Program. 10.3 Company's 2001 President Bonus Program. 10.4 Company's 2001 Chief Operating Officer Bonus Program. 10.5 Company's 2001 Chief Financial Officer Bonus Program. 10.6 Amended and Restated Executives' Deferred Compensation Plan. -19-