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, 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: 7,625,067 shares outstanding as of August 13, 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 June 30, 2001 (Unaudited) and December 31, 2000 3 Unaudited Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2001 and 2000 4 Unaudited Consolidated Statement of Shareholders' Equity for the Six Months Ended June 30, 2001 5 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 Exhibit Index 21 </TABLE> -2-
3 CONSOLIDATED BALANCE SHEETS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES <TABLE> <CAPTION> ========================================================================================================================== JUNE 30, December 31, (Dollars in thousands, except par values) 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) ASSETS <S> <C> <C> Cash $ 7,590 $ 8,555 Cash held in escrow 1,850 1,710 Receivables 44,895 49,959 Inventories: Single-family lots, land and land development costs 283,378 286,461 Houses under construction 217,356 152,184 Model homes and furnishings - at cost (less accumulated depreciation: June 30, 2001 - $35; December 31, 2000 - $35) 7,428 7,684 Land purchase deposits 2,547 3,105 Building, office furnishings, transportation and construction equipment - at cost (less accumulated depreciation: June 30, 2001 - $7,903; December 31, 2000 - $7,353) 17,568 18,165 Investment in unconsolidated joint ventures and limited liability companies 21,266 23,086 Other assets 16,358 16,733 - -------------------------------------------------------------------------------------------------------------------------- TOTAL $620,236 $567,642 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable banks - homebuilding operations $146,000 $115,800 Note payable bank - financial services operations 22,850 26,700 Mortgage notes payable 13,552 16,719 Senior subordinated notes 50,000 50,000 Accounts payable 76,471 67,344 Accrued compensation 7,189 17,542 Other liabilities 48,106 44,648 - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 364,168 338,753 - -------------------------------------------------------------------------------------------------------------------------- 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 62,952 62,747 Retained earnings 212,936 188,184 Treasury stock - at cost - 1,190,094 and 1,322,894 shares, respectively, held in treasury at June 30, 2001 and December 31, 2000 (19,908) (22,130) - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 256,068 228,889 - ------------------------------------------------------------------------------------------------------------------------- TOTAL $620,236 $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 SIX MONTHS ENDED JUNE 30, JUNE 30, (Dollars in thousands, except per share amounts) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue $222,377 $234,728 $400,532 $408,584 - ----------------------------------------------------------------------------------------------------------------- Costs and expenses: Land and housing 170,255 185,458 307,677 321,293 General and administrative 12,214 11,728 21,880 20,657 Selling 14,790 14,287 27,163 25,679 Interest 3,711 4,753 6,826 8,937 - ----------------------------------------------------------------------------------------------------------------- Total costs and expenses 200,970 216,226 363,546 376,566 - ----------------------------------------------------------------------------------------------------------------- Income before income taxes 21,407 18,502 36,986 32,018 - ----------------------------------------------------------------------------------------------------------------- Income taxes (credit): Current 8,074 8,714 13,334 12,917 Deferred 72 (1,544) 828 (510) - ----------------------------------------------------------------------------------------------------------------- Total income taxes 8,146 7,170 14,162 12,407 - ----------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 13,261 11,332 22,824 19,611 Cumulative effect of change in accounting principle - net of income taxes - - 2,681 - - ----------------------------------------------------------------------------------------------------------------- Net income $ 13,261 $ 11,332 $ 25,505 $ 19,611 - ----------------------------------------------------------------------------------------------------------------- Earnings per common share - basic: Income before cumulative effect of change in accounting principle $ 1.75 $ 1.43 $ 3.02 $ 2.43 Cumulative effect of change in accounting principle - net of income taxes - - .36 - Net income $ 1.75 $ 1.43 $ 3.38 $ 2.43 - ----------------------------------------------------------------------------------------------------------------- Earnings per common share - diluted: Income before cumulative effect of change in accounting principle $ 1.69 $ 1.40 $ 2.92 $ 2.39 Cumulative effect of change in accounting principle - net of income taxes - - .35 - Net income $ 1.69 $ 1.40 $ 3.27 $ 2.39 - ----------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding (in thousands): Basic 7,597 7,950 7,556 8,063 Diluted 7,833 8,118 7,804 8,209 - ----------------------------------------------------------------------------------------------------------------- </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> ================================================================================================================== SIX MONTHS ENDED JUNE 30, 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 - - - 25,505 - Dividends to shareholders, $0.10 per common share - - - (753) - Stock options exercised 132,800 - (528) - 2,222 Deferral of executive and director stock - - 733 - - - ------------------------------------------------------------------------------------------------------------------ BALANCE AT JUNE 30, 2001 7,622,967 $88 $62,952 $212,936 $(19,908) - ------------------------------------------------------------------------------------------------------------------ </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> =================================================================================================================== SIX MONTHS ENDED JUNE 30, (Dollars in thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $25,505 $19,611 Adjustments to reconcile net income to net cash used in operating activities: Loss from property disposals 9 48 Depreciation 895 1,060 Deferred income taxes (credit) 828 (510) Increase in cash held in escrow (140) (289) Decrease (increase) in receivables 5,064 (1,871) Increase in inventories (55,346) (40,687) Increase in other assets (453) (230) Increase in accounts payable 9,127 17,278 Decrease in other liabilities (6,162) (7,422) Equity in undistributed income of unconsolidated joint ventures and limited liability companies (422) (343) - ------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (21,095) (13,355) - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (306) (327) Investment in unconsolidated joint ventures and limited liability companies (4,534) (14,869) Distributions from unconsolidated joint ventures and limited liability companies 846 438 - ------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,994) (14,758) - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank borrowings - net of repayments 26,350 45,100 Principal repayments of mortgage notes payable (3,167) (2,306) Dividends paid (753) (818) Proceeds from exercise of stock options and deferred stock 1,694 217 Payments to acquire treasury shares - (7,895) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 24,124 34,298 - ------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (965) 6,185 Cash balance at beginning of year 8,555 5,665 - ------------------------------------------------------------------------------------------------------------------- Cash balance at end of period $ 7,590 $11,850 - ------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for: Interest - net of amount capitalized $ 6,603 $ 8,255 Income taxes $ 16,355 $12,363 NON-CASH TRANSACTIONS DURING THE PERIOD: Land and lots acquired with mortgage notes payable $ - $ 4,990 Distribution of single-family lots from unconsolidated joint ventures and limited liability companies $ 5,930 $ 9,356 Deferral of executive and director stock $ 733 $ 705 Executive deferred stock distributions $ - $ 18 - ------------------------------------------------------------------------------------------------------------------- </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 six months ended June 30, 2001 and 2000 are not necessarily indicative of the results for the full year. It is suggested that these financial statements be read in conjunction with the consolidated 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 AGREEMENTS 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, as co-borrowers, 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 and six months ended June 30, 2001 and 2000 is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, (Dollars in thousands) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest capitalized, beginning of period $11,631 $9,314 $10,337 $8,886 Interest incurred 4,718 5,082 9,127 9,694 Interest expensed (3,711) (4,753) (6,826) (8,937) - --------------------------------------------------------------------------------------------------------------- Interest capitalized, end of period $12,638 $9,643 $12,638 $9,643 =============================================================================================================== </TABLE> NOTE 4. CONTINGENCIES At June 30, 2001, the Company had options and contingent purchase contracts to acquire land and developed lots with an aggregate purchase price of approximately $166 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. In July 2001, the FASB issued SFAS 141, "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The Company does not believe that the adoption of SFAS 142 will have a significant impact on its financial statements. 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, which was paid on July 26, 2001. Total dividends paid in 2001 through July 26 were $1.1 million. -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 AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 CONSOLIDATED Total Revenue. Total revenue for the three months ended June 30, 2001 decreased $12.4 million and for the six months ended June 30, 2001 decreased $8.1 million from the comparable periods of 2000. For the three-month period, homebuilding revenue decreased $13.6 million and financial services revenue increased $1.3 million. For the six-month period, homebuilding revenue decreased $9.4 million and financial services revenue increased $1.5 million. The decrease in homebuilding for the three-month period consisted of a housing revenue decrease of $14.9 million offset by a land revenue increase of $1.0 million. The decrease in homebuilding for the six-month period consisted of a housing revenue decrease of $10.4 million offset by a land revenue increase of $0.8 million. The decrease in housing revenue for the three- and six-month period was attributable to a decrease in the number of Homes Delivered of 60 and 26 units, respectively, and a decrease in the average sales price of Homes Delivered of .8% and 1.2%, respectively. The increase in land revenue for the three and six months ended June 30, 2001 was primarily due to an increase in the number of lots sold in the Columbus and Phoenix markets. This was partially offset by a decrease in the number of lots sold in the Virginia market. The increase in financial services revenue for the three and six months ended June 30, 2001 was primarily attributable to increases in revenue earned from the sale of loans. Income Before Income Taxes. Income before income taxes increased 15.7% for the three months ended June 30, 2001 and 15.5% for the six months ended June 30, 2001 over the comparable periods of 2000. The increase for the three months ended June 30, 2001 was the result of an increase in homebuilding income before income taxes from $14.2 million to $14.9 million. In addition, income before income taxes for financial services increased from $2.8 million to $3.5 million. The increase for the six months ended June 30, 2001 was also the result of an increase in homebuilding income before income taxes from $19.6 million to $23.5 million. In addition, income before income taxes for financial services increased from $6.6 million to $7.4 million. The increase in homebuilding for the three-month period was due to the increase in housing gross margin from 19.9% to 22.1%. The increase in homebuilding for the six months ended June 30, 2001 was due to the increase in housing gross margin from 19.9% to 21.6%. Unallocated amounts include interest from other segments along with salaries and other administrative expenses which are not identifiable with a specific segment. 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 six months ended June 30, 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. -9-
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) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Revenue: Homebuilding $217,863 $231,494 $391,570 $401,003 Financial services 5,631 4,348 11,031 9,528 Intersegment (1,117) (1,114) (2,069) (1,947) - ------------------------------------------------------------------------------------------------------------------ Total Revenue $222,377 $234,728 $400,532 $408,584 - ------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes: Homebuilding $ 14,909 $ 14,182 $ 23,455 $ 19,623 Financial services 3,538 2,844 7,359 6,603 Unallocated amounts 2,960 1,476 6,172 5,792 - ------------------------------------------------------------------------------------------------------------------ Total Income Before Income Taxes $ 21,407 $ 18,502 $ 36,986 $ 32,018 ================================================================================================================== </TABLE> -10-
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) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Housing sales $211,481 $226,336 $380,304 $390,665 Land and lot sales 6,031 4,994 10,561 9,753 Other income 351 164 705 585 - ----------------------------------------------------------------------------------------------------------------- Total revenue $217,863 $231,494 $391,570 $401,003 ================================================================================================================= Revenue: Housing sales 97.1% 97.8% 97.1% 97.4% Land and lot sales 2.8 2.1 2.7 2.4 Other income 0.1 0.1 0.2 0.2 - ----------------------------------------------------------------------------------------------------------------- Total revenue 100.0 100.0 100.0 100.0 Land and housing costs 78.8 80.7 79.0 80.7 - ----------------------------------------------------------------------------------------------------------------- Gross margin 21.2 19.3 21.0 19.3 General and administrative expenses 2.6 2.4 2.8 2.6 Selling expenses 6.8 6.2 6.9 6.4 - ----------------------------------------------------------------------------------------------------------------- Operating income 11.8 10.7 11.3 10.3 Allocated expenses 5.0 4.6 5.3 5.4 - ----------------------------------------------------------------------------------------------------------------- Income before income taxes 6.8% 6.1% 6.0% 4.9% ================================================================================================================= OHIO AND INDIANA REGION Unit Data: New contracts, net 792 606 1,702 1,331 Homes delivered 624 644 1,064 1,105 Backlog at end of period 1,943 1,617 1,943 1,617 Average sales price of homes in backlog $ 206 $ 201 $ 206 $ 201 Aggregate sales value of homes in backlog $400,000 $325,000 $400,000 $325,000 Number of active subdivisions 85 80 85 80 ================================================================================================================= FLORIDA REGION Unit Data: New contracts, net 227 224 479 406 Homes delivered 228 186 424 322 Backlog at end of period 547 451 547 451 Average sales price of homes in backlog $ 214 $ 212 $ 214 $ 212 Aggregate sales value of homes in backlog $117,000 $ 96,000 $117,000 $ 96,000 Number of active subdivisions 28 28 28 28 ================================================================================================================= NORTH CAROLINA, VIRGINIA, MARYLAND AND ARIZONA REGION Unit Data: New contracts, net 195 197 409 396 Homes delivered 128 210 269 356 Backlog at end of period 454 436 454 436 Average sales price of homes in backlog $ 387 $ 355 $ 387 $ 355 Aggregate sales value of homes in backlog $176,000 $155,000 $176,000 $155,000 Number of active subdivisions 32 32 32 32 ================================================================================================================= TOTAL Unit Data: New contracts, net 1,214 1,027 2,590 2,133 Homes delivered 980 1,040 1,757 1,783 Backlog at end of period 2,944 2,504 2,944 2,504 Average sales price of homes in backlog $ 235 $ 230 $ 235 $ 230 Aggregate sales value of homes in backlog $693,000 $576,000 $693,000 $576,000 Number of active subdivisions 145 140 145 140 ================================================================================================================= </TABLE> -11-
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. 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 six months of 2001, we delivered 1,757 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 13% and 11% as of June 30, 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 122 at June 30, 2001 and 2000, respectively. THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Total Revenue. Total revenue for the homebuilding segment for the quarter ended June 30, 2001 was $217.9 million, a 5.9% decrease from 2000's second quarter. The decrease consisted of a decrease in housing revenue of 6.6%, offset by an increase in land revenue of 20.8%. Housing revenue decreased as a result of a 5.8% decrease in Homes Delivered. Homes Delivered were down in all of our markets with the exception of Indianapolis, Tampa, Orlando and West Palm Beach. The decrease in housing revenue was also due to a .8% decrease in the average sales price of Homes Delivered. The decrease in the average sales price of Homes Delivered was the result of decreases in our Cincinnati, Tampa and Raleigh markets due to product mix and our focus on delivering more affordable price points in these markets. The increase in land revenue from $5.0 million to $6.0 million was primarily attributable to an increase in the number of lots sold in the Columbus and Phoenix markets, partially offset by a decrease in the number of lots sold in the Virginia market. Home Sales and Backlog. New Contracts in the second quarter of 2001 increased 18.2% from 2000's second quarter. New Contracts were higher in all of our markets except Tampa, Charlotte and Phoenix. We believe the increase was primarily attributable to lower interest rates. New Contracts recorded in July 2001 were slightly higher than New Contracts recorded in July 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 June 30, 2001, our Backlog consisted of 2,944 homes, with an approximate sales value of $693 million. This represents a 17.6% increase in units and a 20.3% increase in sales value in comparison to the second quarter of 2000. The average sales price of homes in backlog increased by 2.2%, with increases occurring in the majority of our markets. Sales price increases are the result of increases to cover increased material and labor costs. Gross Margin. The overall gross margin for the homebuilding segment was 21.2% for the three-month period ended June 30, 2001 compared to 19.3% for the three-month period ended June 30, 2000. Housing gross margin increased from 19.9% to 22.1% and land gross margin decreased from 17.4% to 9.9% compared to 2000's second quarter. The increase in housing gross margin was the result of improved operating efficiencies. We have also focused on acquiring or developing lots in premier locations to obtain higher margins. The decrease in land gross margin was primarily the result of decreased quantity and profit from lots sold in the Virginia division compared to the second three months of 2000. General and Administrative Expenses. General and administrative expenses increased to $5.6 million, or 2.6% of revenue, for the three months ended June 30, 2001 compared to $5.5 million, or 2.4 % -12-
13 of revenue, for the same period in 2000. The increase in dollars was primarily attributable to additional real estate taxes paid as a result of an increase in our investment in land development activities. Selling Expenses. Selling expenses increased from $14.3 million, or 6.2% of revenue, for the second quarter of 2000 to $14.7 million, or 6.8% of revenue, for the second quarter of 2001. The increase in dollars primarily related to an increase in model expenses. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Total Revenue. Total revenue for the homebuilding segment for the six months ended June 30, 2001 was $391.6 million, a 2.4% decrease from the same period in 2000. The decrease consisted of a decrease in housing revenue of 2.7%, offset by an increase in land revenue of 8.3%. Housing revenue decreased as a result of a 1.5% decrease in Homes Delivered. Homes Delivered were down in the majority of our markets. The decrease in housing revenue was also due to a 1.2% decrease in the average sales price of Homes Delivered. The decrease in the average sales price of Homes Delivered was the result of decreases in our Cincinnati, Tampa, Raleigh and Virginia markets due to product mix and our focus on delivering more affordable price points in these markets. The increase in land revenue from $9.8 million to $10.6 million was primarily attributable to lots sold in the Columbus and Phoenix markets, partially offset by a decrease in the number of lots sold in the Virginia market. Home Sales and Backlog. New Contracts in the first six months of 2001 increased 21.4% from the same period in 2000. Increases occurred in virtually all of our markets. We believe the increase was primarily attributable to lower interest rates. The number of New Contracts recorded in future periods will be dependent on numerous factors, including future economic conditions, timing of land development, consumer confidence, number of subdivisions and interest rates available to potential home buyers. Gross Margin. The overall gross margin for the homebuilding segment was 21.0% for the six month period ended June 30, 2001 compared to 19.3% for the six month period ended June 30, 2000. Housing gross margin increased from 19.9% to 21.6% and land gross margin decreased from 14.4% to 9.8% from 2000's first six months. The increase in housing gross margin was the result of improved operating efficiencies. We have also focused on acquiring or developing lots in premier locations to obtain higher margins. The decrease in land gross margin was the result of decreased quantity and profit from lots sold in the Virginia division compared to the first six months of 2000. General and Administrative Expenses. General and administrative expenses increased to $11.0 million, or 2.8% of revenue, for the six months ended June 30, 2001 compared to $10.6 million, or 2.7% of revenue, for the same period in 2000. The increase in dollars was primarily attributable to additional real estate taxes as a result of an increase in our investment in land development activities. Selling Expenses. Selling expenses increased from $25.8 million, or 6.4% of revenue, for the first six months of 2000 to $27.0 million, or 6.9% of revenue, for the first six months of 2001. The increase primarily related to an increase in model expenses. -13-
14 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) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Number of loans originated 809 805 1,429 1,392 Revenue: Loan origination fees $1,303 $1,251 $2,313 $2,158 Sale of loans 2,734 1,699 5,746 4,778 Other 1,594 1,398 2,972 2,592 - --------------------------------------------------------------------------------------------------------------- Total Revenue 5,631 4,348 11,031 9,528 - --------------------------------------------------------------------------------------------------------------- General and administrative expenses 2,093 1,504 3,672 2,925 - --------------------------------------------------------------------------------------------------------------- Operating Income $3,538 $2,844 $7,359 $6,603 =============================================================================================================== </TABLE> THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Total Revenue. Total revenue for the three months ended June 30, 2001 was $5.6 million, a 29.5% increase from the $4.3 million recorded for the comparable period of 2000. Loan origination fees remained constant at $1.3 million for the three months ended June 30, 2001 as compared to the three months ended June 30, 2000. Revenue from the sale of loans increased 60.9% from $1.7 million for the three months ended June 30, 2000 to $2.7 million for the three months ended June 30, 2001. The increase was due to lower interest rates beginning in the fourth quarter of 2000 that resulted in a majority of fixed rate mortgages. We entered into an agreement in late 2000 for the sale of servicing on fixed rate mortgages that locked in favorable servicing released premiums. Revenue from other sources increased 14.0% to $1.6 million for the three months ended June 30, 2001 compared to $1.4 million for the three months ended June 30, 2000. This was due to increased earnings from title services and an increase in loan application revenue. General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2001 were $2.1 million, a 39.2% increase from the comparable period of the prior year. This increase was due to higher expenses related to the increase in revenue and an increase in loan application expenses. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Total Revenue. Total revenue for the six months ended June 30, 2001 was $11.0 million, a 15.8% increase from the $9.5 million recorded for the comparable period of 2000. Loan origination fees increased 7.2% from $2.2 million for the six months ended June 30, 2000 to $2.3 million for the six months ended June 30, 2001. This increase was due to a 2.7% increase in loan originations along with an increase in average loan amounts. Revenue from the sale of loans increased 20.3% from $4.8 million for the six months ended June 30, 2000 to $5.7 million for the six months ended June 30, 2001. The increase was due to lower interest rates beginning in the fourth quarter of 2000 that resulted in a majority of fixed rate mortgages. We entered into an agreement in late 2000 for the sale of servicing on fixed rate mortgages that locked in favorable servicing released premiums. -14-
15 Revenue from other sources increased 14.7% from $2.6 million for the six months ended June 30, 2000 to $3.0 million for the six months ended June 30, 2001. This was due to increased earnings from title services and an increase in loan application revenue. General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2001 were $3.7 million, a 25.5% increase from the comparable period of the prior year. This increase was due to higher expenses related to the increase in revenue and an increase in loan application expenses. OTHER OPERATING RESULTS Corporate General and Administrative Expenses. Corporate general and administrative expenses for the three months ended June 30, 2001 decreased from $4.7 million to $4.6 million. As a percentage of total revenue, corporate general and administrative expenses for the three months ended June 30, 2001 increased to 2.1% from 2.0% from the comparable period in the prior year. Corporate general and administrative expenses increased from $7.1 million, or 1.7% of total revenue for the six months ended June 30, 2000 to $7.4 million, or 1.9% of total revenue, for the six months ended June 30, 2001. 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 three and six months ended June 30, 2001 decreased to $3.6 and $6.6 million, respectively, from $4.8 and $9.0 million recorded for the comparable periods of the prior year. Interest expense was lower in the current year due to a decrease in the average borrowings outstanding and an increase in capitalized interest due a significant increase in houses under construction and land development activities. Income Taxes. The effective tax rate for the three and six months ended June 30, 2001 decreased to 38.1% and 38.3%, respectively from 38.8% for the comparable periods of 2000. The decrease is primarily attributable to lower state taxes as a percentage of revenue. 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, 2001, we had bank borrowings outstanding of approximately $146 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 $23 million outstanding as of June 30, 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. 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. -15-
16 At June 30, 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 June 30, 2001, we had $141 million of unused borrowing availability under our credit facilities. We also had approximately $53 million of completion bonds and letters of credit outstanding at June 30, 2001. Subordinated Notes. At June 30, 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 decreased slightly from December 31, 2000 to June 30, 2001. 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 $30 million increase in notes payable banks - homebuilding operations from December 31, 2000 to June 30, 2001 reflects increased borrowings primarily attributable to the increase in houses under construction. Houses under construction increased $65 million from December 31, 2000 to June 30, 2001. 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, 2001, mortgage notes payable outstanding were $14 million, secured by an office building, lots and land with a recorded book value of $18 million. Purchase of Treasury Shares. On February 15, 2000, our Board of Directors authorized the repurchase of up to 2 million shares of outstanding common shares. The purchases may occur in the open market and/or in privately negotiated transactions as market conditions warrant. As of June 30, 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 six months ended June 30, 2001 and 2000 was 8.6% and 8.2%, respectively. 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 -16-
17 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. - We are particularly susceptible to changes in the economy and to interest rate fluctuation. - We must risk significant capital to maintain our desired land position. - Our operations are located in various markets throughout the United States, however, a significant portion of our revenues were derived from operations in the Columbus market. - We face significant competition for home sales, building materials and skilled subcontractors. - Increased levels of zoning, environmental and other regulatory initiatives can adversely affect our profitability. - Periodic material and labor shortages can adversely affect our sales and profitability. - Our principle shareholders can exercise significant control over shareholder matters. 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 $310 million. To minimize the effect of the interest rate fluctuation, we have 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 June 30, 2001, the notional principal amount under these loan commitments was $179 million and the related fair value of these agreements was a loss of approximately $1.6 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 June 30, 2001, the notional principal amount under these forward sales agreements was approximately $183 million and the related fair value of these agreements was approximately $0.5 million. The hedging agreements outstanding at June 30, 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. -17-
18 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, 2001, the Company held its 2001 annual meeting of shareholders. The shareholders voted on the election of three directors to three-year terms, a proposal to adopt an amendment to Article I(f) of the Company's Amended and Restated Code of Regulations and a proposal to ratify the appointment of Deloitte & Touche LLP as the independent accountants and auditors for fiscal year 2001. The results of the voting are as follows: 1. Election of Directors <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> Friedrich K.M. Bohm 7,318,944 14,894 Jeffrey H. Miro 7,318,984 14,854 Robert H. Schottenstein 7,072,265 261,573 </TABLE> All three directors were re-elected 2. To adopt an amendment to Article I(f) of the M/I Schottenstein Homes, Inc. Amended and Restated Code of Regulations to permit shareholders to appoint proxies in any manner permitted by Ohio law <TABLE> <S> <C> For 7,308,370 Against 20,417 Abstain 5,051 </TABLE> The proposal was approved 3. To ratify the appointment of Deloitte & Touche LLP as the independent accountants and auditors for fiscal year 2001 <TABLE> <S> <C> For 7,320,706 Against 10,253 Abstain 2,879 </TABLE> The proposal was approved Item 5. Other Information - none. -18-
19 Item 6. Exhibits and Reports on Form 8-K The exhibits required to be filed herewith are set forth below. No reports were filed on Form 8-K for the quarter for which this report is filed. <TABLE> <CAPTION> Exhibit Number Description - ------ ----------- <S> <C> 3.1 (a) Amended and Restated Regulations of the Company, hereby incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 3.1 (b) Amendment to Article I(f) of the Company's Amended and Restated Code of Regulations to permit shareholders to appoint proxies in any manner permitted by Ohio law. </TABLE> -19-
20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. M/I Schottenstein Homes, Inc. -------------------------------------- (Registrant) Date: August 13, 2001 by: /s/ Robert H. Schottenstein -------------------------------- Robert H. Schottenstein President and Director Date: August 13, 2001 by: /s/ Phillip G. Creek -------------------------------- Phillip G. Creek Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) -20-
21 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION PAGE NO. ------ ----------- -------- <S> <C> <C> 3.1 (a) Amended and Restated Regulations of the Company, hereby incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 3.1 (b) Amendment to Article I(f) of the Company's Amended and Restated Code of Regulations to permit shareholders to appoint proxies in any manner permitted by Ohio law. </TABLE> -21-