1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1995 ------------------ 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 33-44914, 33-68564 ------------------ 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.) 41 S. High Street, Suite 2410, Columbus, Ohio 43215 --------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (614) 221-5700 -------------- (Telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, par value $.01 per share: 8,800,000 shares outstanding as of November 6, 1995 -1-
2 M/I SCHOTTENSTEIN HOMES, INC. FORM 10-Q INDEX ----- <TABLE> <CAPTION> PAGE PART I. FINANCIAL INFORMATION NUMBER <S> <C> <C> Item 1. Financial Statements Consolidated Balance Sheets September 30, 1995 and December 31, 1994 3 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1995 and 1994 4 Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 1995 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994 6 Notes to Interim Consolidated Unaudited Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 </TABLE> -2-
3 CONSOLIDATED BALANCE SHEETS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY <TABLE> <CAPTION> ============================================================================================================ SEPTEMBER 30 DECEMBER 31 (DOLLARS IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------------------------------------------ (UNAUDITED) <S> <C> <C> ASSETS Cash (including cash in escrow: September 30, 1995 - $82; $ 10,589 $ 14,059 December 31, 1994 - $703) Receivables 16,930 17,347 Inventories: Single-family lots, land and land development costs 120,556 122,532 Houses under construction 116,492 85,410 Model homes and furnishings (less accumulated depreciation: September 30, 1995 - $1,258; December 31, 1994 - $1,654) 21,807 19,830 Land purchase deposits 758 542 Office furnishings, transportation and construction equipment - at cost (less accumulated depreciation: September 30, 1995 - $6,744; December 31, 1994 - $5,705) 2,742 3,337 Investment in unconsolidated joint ventures and limited partnerships 11,981 8,191 Other assets 5,778 6,366 - ---------------------------------------------------------------------------------------------------------- TOTAL $ 307,633 $ 277,614 ========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable banks-home-building operations $ 116,500 $ 97,800 Note payable bank-financial operations 9,675 14,630 Mortgage notes payable 349 335 Subordinated notes 24,513 24,513 Accounts payable 39,553 31,436 Accrued compensation 5,378 5,542 Income taxes payable 7 1,169 Accrued interest, warranty and other 8,053 6,426 Customer deposits 8,151 6,143 - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 212,179 187,994 - ---------------------------------------------------------------------------------------------------------- Commitments and Contingencies - ---------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock - $.01 par value; authorized 2,000,000 shares; none outstanding - - Common stock - $.01 par value; authorized 38,000,000 shares; issued and outstanding - 8,800,000 shares 88 88 Additional paid-in capital 50,573 50,573 Retained earnings 44,793 38,959 - ---------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 95,454 89,620 - ---------------------------------------------------------------------------------------------------------- TOTAL $ 307,633 $ 277,614 ========================================================================================================== </TABLE> See Notes to Interim Consolidated Unaudited Financial Statements -3-
4 CONSOLIDATED STATEMENTS OF INCOME M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY (Unaudited) <TABLE> <CAPTION> ========================================================================================================== NINE-MONTHS ENDED THREE-MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (DOLLARS IN THOUSANDS) 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue $357,973 $346,107 $137,092 $131,819 - ---------------------------------------------------------------------------------------------------------- Costs and expenses: Land and housing 293,455 283,077 112,269 108,013 General and administrative 20,371 19,752 7,988 7,115 Selling 24,007 23,003 8,688 8,319 Interest 10,434 6,540 3,853 2,801 - ---------------------------------------------------------------------------------------------------------- Total costs and expenses 348,267 332,372 132,798 126,248 - ---------------------------------------------------------------------------------------------------------- Income before income taxes 9,706 13,735 4,294 5,571 - ---------------------------------------------------------------------------------------------------------- Income taxes: Current 3,842 5,482 1,781 2,317 Deferred 30 48 (62) (157) - ----------------------------------------------------------------------------------------------------------- Total income taxes 3,872 5,530 1,719 2,160 - ---------------------------------------------------------------------------------------------------------- Net income $ 5,834 $ 8,205 $ 2,575 $ 3,411 ========================================================================================================== Net income per common share $ .66 $ .93 $ .29 $ .39 ========================================================================================================== Weighted average common shares outstanding 8,800,000 8,800,000 8,800,000 8,800,000 ========================================================================================================== </TABLE> See Notes to Interim Consolidated Unaudited Financial Statements. -4-
5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY (Unaudited) <TABLE> <CAPTION> ============================================================================================================= Nine Months Ended September 30, 1995 - ------------------------------------------------------------------------------------------------------------- Common Stock ------------ Shares Additional Issued and Paid-In Retained (Dollars in thousands) Outstanding Amount Capital Earnings - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance, December 31, 1994 8,800,000 $88 $50,573 $38,959 Net income - - - 5,834 - ------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1995 8,800,000 $88 $50,573 $44,793 ============================================================================================================= </TABLE> See Notes to Interim Consolidated Unaudited Financial Statements. -5-
6 CONSOLIDATED STATEMENTS OF CASH FLOWS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY (Unaudited) <TABLE> <CAPTION> ====================================================================================================================== Nine-Months Ended September 30 (Dollars in thousands) 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 5,834 $ 8,205 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 1,306 1,161 Deferred income taxes 30 48 Decrease in receivables 417 6,842 Increase in inventories (28,808) (50,817) Decrease (Increase) in other assets 423 (467) Increase in accounts payable 8,117 9,169 Decrease in income taxes payable (1,162) (1,175) Increase (decrease) in accrued liabilities 1,463 (3,632) Equity in undistributed income of unconsolidated joint ventures and limited partnerships (31) (177) - ---------------------------------------------------------------------------------------------------------------------- Net cash used by operating activities (12,411) (30,843) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to model and office furnishings, transportation and construction equipment (526) (1,761) Proceeds from property disposals 60 251 Investment in unconsolidated joint ventures and limited partnerships (6,802) (8,583) Distributions from unconsolidated joint ventures and limited partnerships 816 604 - ---------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (6,452) (9,489) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable banks: Cash proceeds from borrowings 206,485 368,116 Principal repayments (192,740) (328,206) Principal repayments of mortgage notes payable (360) (321) Net increase in customer deposits 2,008 2,063 Distributions paid to former S Corporation stockholders -- (1,082) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 15,393 40,570 - ---------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (3,470) 238 Cash balance at beginning of year 14,059 10,649 - ---------------------------------------------------------------------------------------------------------------------- Cash balance at end of period $ 10,589 $ 10,887 ====================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 9,418 $ 6,483 Income taxes $ 4,764 $ 6,657 NON-CASH TRANSACTIONS DURING THE YEAR: Single-family lots distributed from unconsolidated joint ventures $ 2,227 $ 7,879 Land acquired with mortgage notes payable $ 374 $ 519 ====================================================================================================================== </TABLE> See Notes to Interim Consolidated Unaudited Financial Statements. -6-
7 M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY NOTES TO INTERIM CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information. The results of operations for the nine months ended September 30, 1995 and 1994 are not necessarily indicative of the results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company's Annual Report to Shareholders for the year ended December 31, 1994. In the opinion of management, the accompanying consolidated unaudited financial statements reflect all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of financial results for the interim periods presented. NOTE 2. NOTES PAYABLE BANKS On August 7, 1995, M/I Financial entered into a new loan agreement with its lender. The amount available and other terms of the new agreement remain substantially the same as the previous agreement. This agreement terminates on July 19, 1996 and the unpaid balance of such loans are payable on this date. On September 29, 1995, the Company restructured its lines of credit, entering into a new loan agreement which permits aggregate borrowings not to exceed the lesser of: $166.0 million in revolving credit and seasonal loans and $25.0 million, including $4.0 million for joint ventures in which the Company is a partner, in the form of letters of credit; or the Company's borrowing base which is calculated based on specified percentages of certain types of assets held by the Company as of each month end. Included in the $166.0 million available under the new loan agreement are $30.0 million of seasonal loans which are only available between March 1 and December 31 during the term of the agreement. The maturity date was extended to September 30, 2000 and the remaining terms and restrictive covenants are substantially the same as the previous agreement. NOTE 3. CONTINGENCIES At September 30, 1995, the Company had options and contingent purchase contracts to acquire land and developed lots with an aggregate purchase price of approximately $ 132.4 million. -7-
8 M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY FORM 10-Q - PART I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, total revenue and certain items from the consolidated statements of income, including costs and expenses, as percentages of such total revenue: <TABLE> <CAPTION> NINE-MONTHS ENDED THREE-MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ 1995 1994 1995 1994 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> Revenue: Housing Sales . . . . . . . . . . . . . . . . $ 342,234 $ 337,654 $ 131,748 $ 129,096 Lot and Land Sales . . . . . . . . . . . . . . 11,549 5,003 3,704 1,623 Other Income . . . . . . . . . . . . . . . . . 4,190 3,450 1,640 1,100 ----------- ----------- ---------- ---------- Total Revenue . . . . . . . . . . . . . . . $ 357,973 $ 346,107 $ 137,092 $ 131,819 =========== =========== =========== =========== Revenue: Housing sales . . . . . . . . . . . . . . . . 95.6% 97.6% 96.1% 97.9% Lot and land sales . . . . . . . . . . . . . . 3.2 1.4 2.7 1.2 Other income . . . . . . . . . . . . . . . . . 1.2 1.0 1.2 0.9 ----------- ----------- ----------- ----------- Total revenue . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 Land and housing costs . . . . . . . . . . . . . . 82.0 81.8 81.9 82.0 ----------- ----------- ----------- ----------- Gross margin . . . . . . . . . . . . . . . . . 18.0 18.2 18.1 18.0 General and administrative . . . . . . . . . . . . 5.7 5.7 5.8 5.4 Selling . . . . . . . . . . . . . . . . . . . . . . 6.7 6.6 6.4 6.3 ----------- ----------- ----------- ----------- Operating income . . . . . . . . . . . . . . . 5.6 5.9 5.9 6.3 Interest expense . . . . . . . . . . . . . . . . . 2.9 1.9 2.8 2.1 ----------- ----------- ----------- ----------- Income before income taxes . . . . . . . . . . . . 2.7% 4.0% 3.1% 4.2% =========== =========== =========== =========== </TABLE> Variations in income from lot and land sales have had a significant impact on net income as reflected in the revenue and gross profit from lot and land sales shown below: <TABLE> <CAPTION> NINE-MONTHS ENDED THREE-MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ 1995 1994 1995 1994 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> Revenue . . . . . . . . . . . . . . . . . . . . . . $11,549 $ 5,003 $ 3,704 $ 1,623 Gross profit . . . . . . . . . . . . . . . . . . . $ 1,829 $ 1,432 $ 449 $ 256 Gross margin . . . . . . . . . . . . . . . . . . . 15.8% 28.6% 12.1% 15.8% </TABLE> The gross margin on lot and land sales varies significantly from property to property depending upon the Company's cost of the particular property and the buyer's intended use of such property. -8-
9 The following table sets forth New Contracts (net of cancellations), Homes Delivered, and period-end Backlog: <TABLE> <CAPTION> NINE-MONTHS ENDED THREE-MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ 1995 1994 1995 1994 ---- ---- ---- ---- <S> <C> <C> <C> <C> (In units) New Contracts . . . . . . . . . . . . . . 2,321 2,130 811 576 Homes Delivered . . . . . . . . . . . . . 2,011 2,133 765 778 Backlog . . . . . . . . . . . . . . . . . 1,567 1,437 1,567 1,437 Approximate total sales value of Backlog (in thousands) . . . . . . . . . . . $ 272,000 $ 247,000 $ 272,000 $ 247,000 Average sales price of homes in Backlog . . . . . . . . $ 173,700 $ 171,700 $ 173,700 $ 171,700 </TABLE> A home is included in "New Contracts" when the Company's standard sales contract, which requires a deposit and generally has no contingencies other than for buyer financing, is executed. In the Midwest Region contracts are sometimes accepted contingent upon the sale of an existing home. "Homes Delivered" represents units for which the closing of the sale has occurred and title has transferred to the buyer. Revenue and cost of revenue for a home sale are recognized at the time of such closing. "Backlog" represents homes for which the Company's standard sales contract has been executed, but which are not included in Homes Delivered because closings for the sale of such 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. These cancellations usually occur prior to the start of construction. Since the Company arranges financing with guaranteed rates for many of its customers, the incidence of cancellations after the start of construction is low. In the first nine months of 1995, the Company delivered 2,011 homes. Of the contracts in Backlog at December 31, 1994, 15.5% have been canceled as of September 30, 1995. This compared with a 14.0% cancellation rate for the comparable period in 1994 for the Homes in Backlog as of December 31, 1993. For homes in Backlog at December 31, 1993, the final cancellation percentage was 14.0%. At September 30, 1995, the total sales value of the Company's Backlog of 1,567 homes was approximately $272,000,000, representing a 10.1% increase in the sales value and a 9.0% increase in units from the levels reported at September 30, 1994. NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1994 Total revenue for the nine months ended September 30, 1995 increased 3.4% compared to the nine months ended September 30, 1994. This increase was primarily due to a significant increase in revenue from lot and land sales as well as a 1.4% increase in housing revenue. The increase in lot and land revenue is primarily attributable to the Washington, D.C. market. Late in 1994, the Company completed development of the first phase of a six-phase land development project. Development is currently in progress on the second phase of this project. The Company has entered into contracts to sell a portion of the lots developed in both of these phases to outside home builders. The Company believes that lot and land revenue -9-
10 will remain at relatively high levels for the next few years in comparison to historical amounts as the Company continues to develop this and possibly other projects where a portion of the lots will be sold to outside home builders. The increase in housing revenue was due to a 7.5% increase in the average sales price of Homes Delivered, partially offset by a 5.7% decrease in the number of Homes Delivered. The increase in the average sales price of Homes Delivered was primarily attributable to the Maryland, Virginia and Palm Beach County markets. In Palm Beach County, the Company has expanded the product lines offered to include higher priced homes, allowing the division to build in more upscale areas of the market. In Maryland, the increase was primarily due to the opening of a new subdivision where the average sales price is significantly higher than the division's average and where sales have been particularly strong in 1995. The increase in Virginia was due to a change in the product mix. In the prior year, the Company closed more attached townhomes which have lower average sales prices than detached homes. The decrease in the number of Homes Delivered was primarily due to the lower number of homes in Backlog at the beginning of the quarter and year due to lower New Contracts recorded in the last half of 1994 and the first half of 1995. The Company recorded a 9.0% increase in the number of New Contracts recorded in the nine months ended September 30, 1995 compared to the same period of 1994. The increase in New Contracts was primarily attributable to the Columbus, Cincinnati, Indianapolis and Raleigh markets. The Company believes that New Contracts recorded during the second half of 1994 and first quarter of 1995 were adversely affected by higher interest rates available to potential home buyers. In the second and third quarters of 1995, falling interest rates brought more potential customers back into the market. The number of New Contracts recorded was also positively impacted by new subdivisions opened in the current year and the introduction of our more affordable Horizon product line in several of our other markets. The overall gross margin was 18.0% and 18.2% for the nine months ended September 30, 1995 and 1994, respectively. The gross margin from housing sales for the nine months ended September 30, 1995 was 17.1%, down slightly from the 17.2% recorded for the comparable period in the prior year. The gross margin from lot and land sales was significantly lower in the current year as compared to the same period in the prior year. The gross margin recorded in the prior year was unusually high due to the sale of a tract of commercial real estate which produced a gross margin significantly higher than normal lot sales. General and administrative expenses as a percentage of total revenue remained constant at 5.7% for the nine months ended September 30, 1995 and 1994. For the same time period, actual general and administrative expenses increased approximately $600,000. This increase was primarily attributable to higher personnel costs. In the current year, the Company held a mid-year contest for the first time in an effort to stimulate sales. In addition, the Company has accrued additional amounts in the third quarter of 1995 for the annual year end contest trip based on an increase in the number of employees expected to qualify for the trip in the current year as compared to 1994. The Company has also increased staffing in certain areas based on anticipated increases in production and closing activities in the fourth quarter. Selling expenses as a percentage of total revenue increased slightly to 6.7% for the nine months ended September 30, 1995 from 6.6% for the nine months ended September 30, -10-
11 1994. Additional costs incurred in connection with opening more new model homes in the current year were partially offset by lower outside Realtor commissions incurred. Interest expense for the nine months ended September 30, 1995 increased to $10.4 million from $6.5 million for the comparable period of the prior year. The increase in 1995 resulted from an increase in the weighted average interest rate and an increase in the average balance outstanding as well as a decreased portion of interest costs being capitalized. The increase in the weighted average interest rate was due to increases in the prime rate of interest on which interest on the notes payable banks is based. The increase in the average balance outstanding related to the notes payable banks which increased primarily to fund the increase in houses under construction and single family lots, land and land development costs. THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1994 Total revenue for the three months ended September 30, 1995 increased 4.0% compared to the three months ended September 30, 1994. This increase was primarily due to a significant increase in revenue from lot and land sales as well as a 2.1% increase in housing revenue. The increase in lot and land revenue is primarily attributable to a land development project in the Washington, D.C. market where there have been significant sales of developed lots to outside home builders. The increase in housing revenue was due to a 3.8% increase in the average sales price of Homes Delivered, partially offset by a 1.7% decrease in the number of Homes Delivered. The increase in the average sales price of Homes Delivered was primarily due to the Virginia and Maryland divisions where new subdivisions were opened in which average sales prices are significantly higher than these divisions' averages. The Company recorded a 40.8% increase in the number of New Contracts recorded in the three months ended September 30, 1995 as compared to the same period of 1994. New Contracts recorded in the third quarter of 1995 were higher in all divisions except Tampa and Palm Beach County, which experienced significant decreases, and Charlotte, which recorded the same number of contracts for the third quarter in both 1995 and 1994. The Company believes the significant increase in New Contracts recorded was primarily due to the more favorable interest rates available to home buyers in the current year as well as the introduction of our Horizon product line in several of our other markets and new subdivisions opened in the current year. The overall gross margin increased slightly to 18.1% for the three months ended September 30, 1995 from 18.0% for the three months ended September 30, 1994. The gross margin from housing sales decreased slightly from 17.4% for the three months ended September 30, 1994 to 17.3% for the comparable period in the current year. The gross margin for lot and land sales was 12.1% for the three months ended September 30, 1995 as compared to 15.8% for the comparable period of the prior year. This decline was primarily due to the Company's decision to accept lower margins on certain older inventory lots to reduce inventory levels in selected areas. The increase in the overall gross margin % was due to the $540,000 increase in other income which was primarily attributable to an increase in revenue for M/I Financial. -11-
12 General and administrative expenses as a percentage of total revenue increased from 5.4% for the three months ended September 30, 1994 to 5.8% for the comparable period of 1995. This increase was primarily attributable to higher personnel costs. In the current year, the Company held a mid-year contest for the first time in an effort to stimulate sales. In addition, the Company has accrued additional amounts in the third quarter of 1995 for the annual year end contest trip based on an increase in the number of employees expected to qualify for the trip in the current year as compared to 1994. The Company has also increased staffing in certain areas based on anticipated increases in production and closing activities in the fourth quarter. Selling expenses as a percentage of total revenue increased slightly to 6.4% for the three months ended September 30, 1995 from 6.3% for the comparable period of the prior year. Additional costs incurred related to additional model homes and the mid-year and annual contest trips (see above) were partially offset by lower internal sales commissions and outside Realtor commissions. Interest expense for the three months ended September 30, 1995 increased to $3.9 million from $2.8 million for the comparable period of the prior year. The increase in 1995 resulted from an increase in the weighted average interest rate and an increase in the average balance outstanding as well as a decreased portion of interest costs being capitalized in 1995. The increase in the weighted average interest rate was due to increases in the prime interest rate on which interest on the notes payable banks is based. The increase in the average balance outstanding related to the notes payable banks which increased primarily to fund the increased investment in houses under construction and single-family lots, land and land development costs. LIQUIDITY AND CAPITAL RESOURCES The Company's financing needs depend upon its sales volume, asset turnover, land acquisitions and inventory balances. The Company has incurred substantial indebtedness, and expects to incur indebtedness in the future, to fund the growth of its home-building activities. Historically, the Company's principal source of funds for construction and development activities has been from internally generated cash and from bank borrowings which are primarily unsecured. On September 29, 1995, the Company entered into a new loan agreement with its lenders which permits aggregate borrowings not to exceed the lesser of: $166.0 million in revolving credit loans, including $30.0 million of seasonal loans which are available from March 1 through December 31 during each year of the agreement and $25.0 million, including $4.0 million for joint ventures in which the Company is a partner, in the form of letters of credit; or the Company's borrowing base which is calculated based on specified percentages of certain types of assets held by the Company as of each month end. The loan agreement matures September 30, 2000, at which time the unpaid balance of the revolving credit loans outstanding shall be due and payable. Under the terms of the loan agreement, the banks make an annual determination as to whether or not to extend the maturity date of the commitments by one year. The loan agreement contains restrictive covenants which require the Company, among other things, to maintain minimum net worth and working capital amounts and to maintain certain financial ratios. The loan agreement also places limitations on the amount of additional indebtedness that may be incurred by the Company, the acquisition of undeveloped land, on dividends that may be paid and on the aggregate cost of -12-
13 certain types of inventory the Company can hold at any one time. At September 30, 1995, $116.5 million was outstanding under this loan agreement. On August 7, 1995, M/I Financial entered into a new loan agreement with its lender which permits borrowings of $25.0 million to finance mortgage loans initially funded by M/I Financial, up to $5.0 million of which can be used to fund loans for borrowers other than customers of the Company's home-building operations. The agreement limits the borrowings to 95% of the aggregate face amount of the mortgages and contains restrictive covenants requiring M/I Financial to maintain certain minimum net worth and financial ratios. Borrowings under the agreement are at the lender's prime rate and are unsecured. The agreement terminates on July 19, 1996 and the unpaid balance of such borrowings are payable on this date. At September 30, 1995, $9.7 million was outstanding under this loan agreement. In addition, there were outstanding Subordinated Notes in the principal amount of $24.5 million at September 30, 1995 and approximately $20.1 million of completion bonds and letters of credit at September 30, 1995. Annual sinking fund payments for the Subordinated Notes of approximately $3.7 million commence December 1, 1997 with the remaining balance due at maturity on December 1, 2001. The Notes are redeemable in whole or in part at the option of the Company on or after December 1, 1996 at 106% of the principal amount until December 1, 1997 and declining 1 1/2% annually through 2000. At September 30, 1995, the Company had $54.8 million of unused borrowing availability under its loan agreements. At September 30, 1995, the Company had the right to borrow up to $181.0 million under its credit facilities, including $30.0 million of seasonal loans, available from March 1st through December 31 during each year of the loan agreement, and $15.0 million under the M/I Financial credit agreement (95% of the aggregate face amount of eligible mortgage loans). The Company believes that such bank borrowings, together with internally generated funds, will be adequate for the Company's foreseeable needs for operations, limited expansion, land investment and interest obligations of outstanding debt. The $13.7 million increase in notes payable to banks from December 31, 1994 to September 30, 1995 reflects increased borrowings primarily attributable to the seasonal increase in homes under construction. It is expected that borrowing needs will increase as the Company continues to expand its home building operations and increase its investment in land under development and developed lots. Net income from housing and lot and land sales are the Company's primary sources of net cash provided by operating activities. Net cash used by operating activities in the nine months ended September 30, 1995 was $12.4 million compared to $30.8 million for the comparable period of the prior year. The decrease in net cash used by operating activities was primarily due to a smaller increase in inventories. The Company has reached agreement with certain unrelated parties for the construction of an approximately 85,000 square foot building. The four current office locations in Columbus, Ohio will be consolidated into one building in an effort to improve operating efficiencies. The building will be built, owned and operated, by a limited liability company in which the Company has a 1/3 interest (the "LLC"). The building will primarily be financed through borrowings of the LLC. The LLC has obtained financing for the construction of the building and also has obtained commitments for the permanent financing. The Company has reached an agreement in principal for a long-term operating lease for the premises. The -13-
14 building is expected to be completed by the third quarter of 1996. The Company believes that any commitments arising from this transaction would not significantly affect its liquidity or capital resources. Due to the current lending environment, developers from whom the Company customarily obtains lots under either an option or commitment contract are experiencing continuing difficulty in obtaining land acquisition and development financing. Consequently, the Company's land development activities and land holdings have increased. In 1994, the Company entered into two land purchase contracts which require a greater investment than the Company normally commits and could significantly impact the Company's liquidity. On January 31, 1994, the Company closed on the first phase of a six phase land purchase contract in the Washington, D.C. market. This first phase was purchased for $6.6 million and was developed into 106 single-family and townhouse lots. Based on the demand for lots in this area and the strong sales in the first phase of this development, the Company purchased the second phase of this development through a series of three closings in May, June and July of 1995. The total purchase price for this phase was approximately $6.4 million and this section will be developed into 122 single-family and townhouse lots. The Company sold a portion of the developed lots from the first phase to outside home builders and has entered into similar contracts to sell a portion of the lots in the second phase to outside home builders. The Company has an option to purchase each of the remaining phases. If the Company purchases all six phases, the total purchase price will be approximately $38.9 million and the land will be developed into approximately 710 lots. In August 1994, the Company completed the purchase of a parcel of land in the Columbus market for $7.5 million which will be developed into approximately 375 lots. The Company has completed development of several phases of this project into a total of 129 lots. Model homes were opened in this development in April 1995 and sales have remained strong. The extent of the Company's ability to invest in land development will be dependent upon its ability to obtain increases in its borrowing availability from its banks or from other sources. Investment in additional land will result in increased interest expense being incurred by the Company and slower turnover of inventory. To finance land purchases, the Company may also increase its use of secured purchase money mortgages. At September 30, 1995 mortgage notes payable outstanding were $349,000 secured by lots and land with a recorded book value of $1.2 million. The Company does not currently have any arrangements for additional capital nor is there any assurance that it will be able to obtain additional capital. In the event that additional capital is not obtained, the Company anticipates that it will need to curtail its land development activities. INTEREST RATES AND INFLATION The Company's business is significantly affected by general economic conditions of the United States and, particularly, by the impact of interest rates. Higher interest rates may decrease the potential market by making it more difficult for home buyers to qualify for mortgages or to obtain mortgages at interest rates acceptable to them. Increases in interest rates also would increase the Company's interest expense as the rate on the revolving loans is based upon floating rates of interest. The weighted average interest rates on the Company's outstanding debt for the nine months ended September 30, 1995 was 10.2% as compared to 8.4% for the nine months ended September 30, 1994. -14-
15 In conjunction with its mortgage banking operations, the Company uses hedging methods to reduce its exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. In recent years, the Company generally has been able to raise prices by amounts at least equal to its cost increases and, accordingly, has not experienced any detrimental effect from inflation. Where the Company develops lots for its own use, inflation may increase the Company's profits because land costs are fixed well in advance of sales efforts. The Company is generally able to maintain costs with subcontractors from the date a home sales contract is accepted; however, in certain situations unanticipated costs may occur between the time a sales contract is executed and the time a home is constructed, which result in lower gross profit margins. PART II - OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The exhibits required to be filed herewith are set forth below. No reports were filed on Form 8-K for the quarter for which this report is filed. <TABLE> <CAPTION> Exhibit Number Description - ------ ----------- <S> <C> 10.1 Revolving credit loan, seasonal loan and standby letter of credit agreement by and among the Company, Bank One, Columbus, N.A.; The Huntington National Bank; NBD Bank; National City Bank, Columbus; The First National Bank of Boston and Bank One, Columbus, N.A., as agent for the banks, dated September 29, 1995. 10.2 Investment Home Compensation Plan dated September 1, 1995. 27 Financial Data Schedule </TABLE> -15-
16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. M/I Schottenstein Homes, Inc. ----------------------------- (Registrant) Date: November 9, 1995 by: /s/ Irving E. Schottenstein --------------------------- Irving E. Schottenstein President & Chief Executive Officer Date: November 9, 1995 by: /s/ Kerrii B. Anderson --------------------------- Kerrii B. Anderson Senior Vice President, Chief Financial Officer -16-
17 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------ ----------- <S> <C> 10.1 Revolving credit loan, seasonal loan and standby letter of credit agreement by and among the Company, Bank One, Columbus, N.A.; The Huntington National Bank; NBD Bank; National City Bank, Columbus; The First National Bank of Boston and Bank One, Columbus, N.A., as agent for banks, dated September 29, 1995. 10.2 Investment Home Compensation Plan dated September 1, 1995. 27 Financial data Schedule </TABLE> -27-