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, 1998 ------------------ 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: 8,813,061 shares outstanding as of November 13, 1998
2 M/I SCHOTTENSTEIN HOMES, INC. FORM 10-Q INDEX ----- <TABLE> <CAPTION> PAGE PART I. FINANCIAL INFORMATION NUMBER <S> <C> <C> <C> Item 1. Financial Statements Consolidated Balance Sheets September 30, 1998 and December 31, 1997 3 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1998 and 1997 4 Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 1998 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 6 Notes to Interim Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Exhibit Index 23 </TABLE> -2-
3 CONSOLIDATED BALANCE SHEETS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES <TABLE> <CAPTION> ================================================================================================================== SEPTEMBER 30, December 31, (Dollars in thousands, except par values) 1998 1997 - ------------------------------------------------------------------------------------------------------------------ (UNAUDITED) <S> <C> <C> ASSETS Cash $ 233 $ 10,836 Cash held in escrow 503 2,537 Receivables 30,203 43,819 Inventories: Single-family lots, land and land development costs 173,886 151,905 Houses under construction 163,596 100,916 Model homes and furnishings - at cost (less accumulated depreciation: September 30, 1998 - $45; December 31, 1997 - $47) 17,985 17,788 Land purchase deposits 1,292 645 Building, model and office furnishings, transportation and construction equipment - at cost (less accumulated depreciation: September 30, 1998 - $4,653; December 31, 1997 - $4,328) 20,253 8,647 Investment in unconsolidated joint ventures and limited liability companies 13,329 15,236 Other assets 12,644 13,691 - ------------------------------------------------------------------------------------------------------------------ TOTAL $433,924 $366,020 ================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes payable banks - homebuilding operations $ 94,000 $ 78,000 Note payable bank - financial operations 12,225 30,000 Mortgage notes payable 17,772 5,950 Subordinated notes 50,000 50,000 Accounts payable 56,441 42,793 Accrued compensation 11,373 13,042 Income taxes payable 1,783 4,072 Accrued interest, warranty and other 18,638 19,103 Customer deposits 12,927 7,554 - ------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 275,159 250,514 - ------------------------------------------------------------------------------------------------------------------ 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 - 8,813,061 shares at September 30, 1998; issued - 8,800,000 shares at December 31, 1997 88 88 Additional paid-in capital 61,067 50,573 Retained earnings 97,610 79,095 Treasury stock - at cost - 1,202,439 shares held in treasury at December 31, 1997 - (14,250) - ------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 158,765 115,506 - ------------------------------------------------------------------------------------------------------------------ TOTAL $433,924 $366,020 ================================================================================================================== </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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Dollars in thousands, except per share information) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue $208,794 $157,958 $501,630 $409,801 - ----------------------------------------------------------------------------------------------------------------------------- Costs and expenses: Land and housing 166,493 127,179 398,071 328,711 General and administrative 12,405 9,818 28,886 24,616 Selling 12,781 10,220 33,178 27,757 Interest 3,355 3,012 9,014 8,073 - ----------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 195,034 150,229 469,149 389,157 - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 13,760 7,729 32,481 20,644 - ----------------------------------------------------------------------------------------------------------------------------- Income taxes: Current 5,642 3,335 11,711 7,699 Deferred (92) (214) 1,434 650 - ----------------------------------------------------------------------------------------------------------------------------- Total income taxes 5,550 3,121 13,145 8,349 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 8,210 $ 4,608 $ 19,336 $12,295 ============================================================================================================================= Per share data: Basic $ .93 $ .59 $ 2.34 $ 1.48 Diluted $ .92 $ .59 $ 2.32 $ 1.48 ============================================================================================================================= Weighted average shares outstanding: Basic 8,812,102 7,834,252 8,250,853 8,280,407 Diluted 8,909,013 7,884,022 8,347,284 8,313,383 ============================================================================================================================= </TABLE> See Notes to Interim Unaudited Consolidated Financial Statements. -4-
5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES (Unaudited) <TABLE> <CAPTION> ================================================================================================================= NINE MONTHS ENDED SEPTEMBER 30, 1998 - ----------------------------------------------------------------------------------------------------------------- Common Stock ------------ Additional Shares Paid-In Retained Treasury (Dollars in thousands) Outstanding Amount Capital Earnings Stock - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at December 31, 1997 7,597,561 $88 $50,573 $79,095 ($14,250) Net income - - - 19,336 - Stock options exercised 15,500 - 185 - - Dividends to stockholders - - - (821) - Sale of treasury shares, net of expenses 1,200,000 - 10,338 - 14,221 Retirement of treasury shares - - (29) - 29 - ----------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1998 8,813,061 $88 $61,067 $97,610 - ================================================================================================================= </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> ==================================================================================================================== NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,336 $ 12,295 Adjustments to reconcile net income to net cash used in operating activities: Loss from property disposals 130 128 Depreciation and amortization 1,232 1,229 Deferred income tax 1,434 650 Decrease in cash held in escrow 2,034 69 Decrease in receivables 13,616 12,864 Increase in inventories (72,759) (47,199) Increase in other assets (565) (847) Increase in accounts payable 13,648 20,071 Decrease in income taxes payable (2,289) (396) Decrease in other accrued liabilities (2,134) (4,533) Equity in undistributed income of unconsolidated joint ventures, limited liability companies and limited partnerships (1,375) (180) - -------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (27,692) (5,849) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to building, model and office furnishings, transportation and construction equipment (966) (7,974) Purchase of 100% of LLC (2,500) - Investment in unconsolidated joint ventures and limited liability companies (11,528) (9,141) Distributions from unconsolidated joint ventures, limited liability companies and limited partnerships 1,073 698 - -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (13,921) (16,417) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable banks: Proceeds from borrowings 245,775 202,530 Principal repayments (247,550) (193,495) Mortgage notes payable: Proceeds from borrowings 3,831 - Principal repayments (342) (29) Subordinated notes: Proceeds from borrowings - 50,000 Principal repayments - (25,000) Dividends paid (821) - Proceeds from exercise of stock options 185 - Proceeds from sale of treasury shares - net of expenses 24,559 - Net increase in customer deposits 5,373 1,992 Payments to acquire treasury stock - (14,250) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 31,010 21,748 - -------------------------------------------------------------------------------------------------------------------- Net decrease in cash (10,603) (518) Cash balance at beginning of year 10,836 6,368 - -------------------------------------------------------------------------------------------------------------------- Cash balance at end of period $ 233 $ 5,850 ==================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 8,172 $ 7,429 Income taxes $ 13,889 $ 7,098 NON-CASH TRANSACTIONS DURING THE YEAR: Property acquired with mortgage notes payable $ 12,164 $ - Single-family lots distributed from unconsolidated joint ventures and limited liability companies $ 13,088 $ 7,890 ==================================================================================================================== </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 nine months ended September 30, 1998 and 1997 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, 1997. In the opinion of management, the accompanying 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. AMENDED LOAN AGREEMENTS On February 26, 1998 and September 23, 1998 the Company entered into $50 million and $25 million interest rate SWAP agreements with a bank. The SWAP agreements expire February 26, 2001 and September 25, 2000, respectively, and require the Company to make fixed interest rate payments to the bank in return for variable payments. During the three and nine months ended September 30, 1998, these agreements resulted in a decrease of interest expense of $20,041 and $45,920, respectively. NOTE 3. INTEREST The Company capitalizes interest during development and construction. Capitalized interest is charged to interest expense as the related inventory is delivered. The summary of total interest for the three and nine months ended September 30, 1998 and 1997 is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Dollars in thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest capitalized, beginning of period $ 8,895 $ 7,598 $ 7,620 $ 6,862 Interest incurred 3,490 3,356 10,424 9,153 Interest expensed (3,355) (3,012) (9,014) (8,073) - -------------------------------------------------------------------------------------------------------------- Interest capitalized, end of period $ 9,030 $ 7,942 $ 9,030 $ 7,942 ============================================================================================================== </TABLE> NOTE 4. CONTINGENCIES At September 30, 1998, the Company had options and contingent purchase contracts to acquire land and developed lots with an aggregate purchase price of approximately $181.4 million. -7-
8 NOTE 5. PER SHARE DATA In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share" (EPS). SFAS 128 required the replacement of the presentation of primary and fully diluted EPS with a presentation of basic and diluted EPS. All EPS amounts for all periods have been presented to conform to SFAS 128 requirements. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period. Diluted computations include common share equivalents, when dilutive. NOTE 6. ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Disclosure about Segments of an Enterprise and Related Information". SFAS 133 is required to be adopted for the Company's annual financial statements for the year ended December 31, 2000. The Company has not yet determined what, if any, impact the adoption of this standard will have on its financial statements. NOTE 7. SALE OF TREASURY SHARES On April 27, 1998, the Company filed a registration statement with the Securities and Exchange Commission for up to 1,200,000 shares of common stock of the Company. All such shares were sold on May 5, 1998. The Company received approximately $24.6 million from the sale, which was used to repay a portion of existing indebtedness. NOTE 8. DIVIDENDS On April 22, 1998, the Company paid to the shareholders of record on April 1, 1998 the first cash dividend in the Company's history of $0.05 per share (aggregate dividends paid of $380,000). On April 28, 1998, the Board of Directors approved a $0.05 per share cash dividend payable to shareholders of record of its common stock on July 1, 1998, which was paid on July 22, 1998 (aggregate dividends paid of $441,000). On August 12, 1998, the Board of Directors approved a $0.05 per share cash dividend payable to shareholders of record of its common stock on October 1, 1998, which was paid on October 22, 1998 (aggregate dividends paid of $441,000). -8-
9 M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES FORM 10-Q - PART I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 CONSOLIDATED Total Revenue. Total revenue for the three months ended September 30, 1998 increased $50.8 million and for the nine months ended September 30, 1998 increased $91.8 million over the comparable periods of 1997. For the three-month period, housing revenue, other revenue and land revenue increased $44.7 million, $1.0 million and $5.1 million, respectively. For the nine-month period, housing revenue, other revenue and land revenue increased $85.5 million, $2.2 million and $4.1 million, respectively. The increase in housing revenue for both the three- and nine-month periods was attributable to an increase in the number of Homes Delivered of 180 and 332, respectively, and an increase in the average sales price of Homes Delivered of 6.6% and 5.7%, respectively. For both periods, the increase in other revenue is primarily attributable to financial services where both the number of loans originated and the gains recognized from the sale of loans increased in the current year. The increase in land revenue for the three months ended September 30, 1998 was primarily due to an increase in the number of lots sold to third parties in the Washington, D.C. market from the comparable period of 1997. The increase in land revenue for the nine months ended September 30, 1998 was primarily due to an increase in the number of lots sold to third parties in the Washington, D.C. and Charlotte markets over the comparable period of 1997. Income Before Income Taxes. Income before income taxes for the three months ended September 30, 1998 increased 78.0% and for the nine months ended September 30, 1998 increased 57.3% over the comparable periods of 1997. The increase for the three months ended September 30, 1998 related primarily to housing, for which income before income taxes increased from $6.2 million to $11.3 million and financial services, for which income before income taxes increased from $1.5 million to $2.5 million. The increase for the nine months ended September 30, 1998 also related primarily to housing, for which income before income taxes increased from $16.0 million to $25.7 million and financial services, for which income before income taxes increased from $4.6 million to $6.8 million. The increase in housing for both the three- and nine-month periods was due to the increase in the number of Homes Delivered and an increase in the average sales price of Homes Delivered. The increase in housing was also due to an increase in gross margin. Housing gross margin increased from 18.2% and 18.1% for the three and nine months ended September 30, 1997 to 19.2% and 19.3% for the three and nine months ended September 30, 1998. The increase in financial services was primarily due to an increase in the number of loans originated and the significant increase in income from the sale of servicing and marketing gains due to increased loan volume and the favorable interest rate environment during the first nine months of 1998. -9-
10 HOMEBUILDING SEGMENT The following table sets forth certain information related to the Company's homebuilding segment: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Dollars in thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Housing sales $194,532 $149,850 $474,988 $389,438 Land and lot sales 11,089 5,935 17,444 13,330 Other income 251 346 814 1,050 - -------------------------------------------------------------------------------------------------------------------- Total Revenue $205,872 $156,131 $493,246 $403,818 ==================================================================================================================== Revenue: Housing sales 94.5 % 96.0 % 96.3 % 96.4 % Land and lot sales 5.4 3.8 3.5 3.3 Other income 0.1 0.2 0.2 0.3 - -------------------------------------------------------------------------------------------------------------------- Total Revenue 100.0 100.0 100.0 100.0 Land and housing costs 81.4 81.9 81.2 81.9 - -------------------------------------------------------------------------------------------------------------------- Gross Margin 18.6 18.1 18.8 18.1 General and administrative expenses 2.9 2.8 3.0 3.0 Selling expenses 6.2 6.6 6.7 6.8 - -------------------------------------------------------------------------------------------------------------------- Operating Income 9.5 % 8.7 % 9.1 % 8.3 % ==================================================================================================================== MIDWEST REGION Unit Data: New contracts, net 582 513 1,929 1,542 Homes delivered 622 510 1,533 1,316 Backlog at end of period 1,453 1,134 1,453 1,134 Average sales price of homes in Backlog $181 $176 $181 $176 Aggregate sales value of homes in Backlog $264,000 $200,000 $264,000 $200,000 Number of active subdivisions 75 75 75 75 - -------------------------------------------------------------------------------------------------------------------- FLORIDA REGION Unit Data: New contracts, net 146 164 534 529 Homes delivered 171 174 479 451 Backlog at end of period 310 299 310 299 Average sales price of homes in Backlog $194 $188 $194 $188 Aggregate sales value of homes in Backlog $60,000 $56,000 $60,000 $56,000 Number of active subdivisions 30 30 30 30 - -------------------------------------------------------------------------------------------------------------------- NORTH CAROLINA, VIRGINIA AND MARYLAND, AND ARIZONA REGION Unit Data: New contracts, net 198 146 647 427 Homes delivered 215 144 481 394 Backlog at end of period 398 241 398 241 Average sales price of homes in Backlog $351 $290 $351 $290 Aggregate sales value of homes in Backlog $140,000 $70,000 $140,000 $70,000 Number of active subdivisions 35 35 35 35 - -------------------------------------------------------------------------------------------------------------------- TOTAL Unit Data: New contracts, net 926 823 3,110 2,498 Homes delivered 1,008 828 2,493 2,161 Backlog at end of period 2,161 1,674 2,161 1,674 Average sales price of homes in Backlog $214 $194 $214 $194 Aggregate sales value of homes in Backlog $464,000 $326,000 $464,000 $326,000 Number of active subdivisions 140 140 140 140 - -------------------------------------------------------------------------------------------------------------------- </TABLE> -10-
11 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 a limited number of markets, 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 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 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. 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 1998, the Company delivered 2,493 homes. Of the 1,544 contracts in Backlog at December 31, 1997, 12.8% have been canceled as of September 30, 1998. For homes in Backlog at December 31, 1996, 14.1% had been canceled as of September 30, 1997 and the final cancellation percentage was 14.1%. Unsold speculative homes, which are in various stages of construction, totaled 183 and 158 at September 30, 1998 and 1997, respectively. THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Total Revenue. Total revenue for the homebuilding segment for the three months ended September 30, 1998 increased 31.9% over the three months ended September 30, 1997. The increase was due to a 29.8% increase in housing revenue and a 86.8% increase in land revenue. The increase in housing revenue was partially due to a 21.7% increase in the number of Homes Delivered. Homes Delivered were higher in all of the Company's markets with the exception of Orlando. The increase in housing revenue was also due to a 6.6% increase in the average sales price of Homes Delivered. The average sales price of Homes Delivered increased in nearly all of the Company's markets due to product mix and higher land and regulatory costs which have been passed on to the home buyer. The increase in land revenue from $5.9 million to $11.1 million was primarily attributable to the Washington, D.C. market. The Virginia and Maryland divisions had significant increases in lot sales to outside homebuilders in the three months ended September 30, 1998 over the same period of the prior year. Home Sales and Backlog. The Company recorded a 12.5% increase in the number of New Contracts in the three months ended September 30, 1998 compared to the corresponding period of 1997. New Contracts recorded in the third quarter of 1998 were higher due to significant increases in the Columbus, Indianapolis and Washington, D.C. markets. The Company believes the increase in New Contracts was partially due to favorable market conditions and low 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 and interest rates available to potential home buyers. At September 30, 1998, the total sales value of the Company's Backlog of 2,161 homes was approximately $464.0 million, representing a 42.3% increase in sales value and a 29.1% increase in units over the levels reported at September 30, 1997. The increase in units at September 30, 1998 is a result of record high new contracts recorded in the first nine months of 1998. The average sales price of homes in Backlog increased 10.3% from September 30, 1997 to September 30, 1998. This increase was primarily due to increases in the Maryland, Virginia and Phoenix markets where the Company is building in more upscale and certain niche subdivisions. -11-
12 Gross Margin. The overall gross margin for the homebuilding segment was 18.6% for the three months ended September 30, 1998 compared to 18.1% for the three months ended September 30, 1997. The gross margin from housing sales was 19.2% in the third quarter of 1998 as compared to 18.2% in the third quarter of 1997. The gross margin from lot and land sales decreased from 23.5% to 16.0%. Lot and land gross margins can vary significantly depending on the sales price and the cost of the subdivision and the phase in which the sale takes place. Gross margins for the current year were higher than the prior year in nearly all of the Company's markets. Management continues to focus on maintaining accurate, up-to-date costing information so that sales prices can be set to achieve the desired margins. The Company has also focused on acquiring or developing lots in premier locations so that it can obtain higher margins. The Company's ability to maintain these levels of margins is dependent on a number of factors, some of which are beyond the Company's control, including possible shortages of qualified subcontractors. General and Administrative Expenses. General and administrative expenses increased from $4.4 million for the three months ended September 30, 1997 to $6.0 million for the three months ended September 30, 1998. General and administrative expenses as a percentage of total revenue increased from 2.8% for the three months ended September 30, 1997 to 2.9% for the three months ended September 30, 1998. The increase in expense was primarily attributable to the increase in incentive compensation recorded in the third quarter of 1998 compared to the third quarter of 1997 due to the significant increase in net income. Selling Expenses. Selling expenses increased from $10.2 million for the three months ended September 30, 1997 to $12.8 million for the three months ended September 30, 1998. However, selling expenses as a percentage of total revenue decreased from 6.6% for the three months ended September 30, 1997 to 6.2% for the three months ended September 30, 1998. The increase in expense was primarily due to increases in sales commissions paid to outside Realtors and internal salespeople as a result of the increase in sales volume. There were also increases in advertising, model and sales incentive expenses. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Total Revenue. Total revenue for the nine months ended September 30, 1998 increased 22.1% from the comparable period of 1997. This increase was due to a 22.0% increase in housing revenue and a 30.9% increase in land revenue. The increase in housing revenue was partially due to an 15.4% increase in the number of Homes Delivered. Homes Delivered were higher in all of the Company's markets with the exception of Orlando and Charlotte. The increase in housing revenue was also due to a 5.7% increase in the average sales price of Homes Delivered. The average sales price of Homes Delivered increased in nearly all of the Company's markets due to product mix and higher land and regulatory costs which have been passed on to the home buyer. The increase in land revenue from $13.3 million to $17.4 million was primarily attributable to the Washington, D.C. and Charlotte markets. The Maryland, Virginia and Charlotte divisions had significant increases in lot sales to outside homebuilders in the nine months ended September 30, 1998 over the same period of the prior year. Home Sales and Backlog. The Company recorded a 24.5% increase in the number of New Contracts recorded in the first nine months of 1998 compared to the corresponding period of 1997. New Contracts recorded in the current year were higher than the prior year in nearly all of the Company's markets. The Company believes the increase in New Contracts was partially due to favorable market conditions and low 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 and interest rates available to potential home buyers. -12-
13 Gross Margin. The overall gross margin for the homebuilding segment was 18.8% for the nine months ended September 30, 1998 compared to 18.1% for the comparable period of 1997. The gross margin from housing sales was 19.3% in the first nine months of 1998 compared to 18.1% in the first nine months of 1997. The gross margin from lot and land sales decreased from 25.8% to 15.5%. Management continues to focus on maintaining accurate, up-to-date costing information so that sales prices can be set to achieve the desired margins. The Company has also focused on acquiring or developing lots in premier locations so that it can obtain higher margins. The Company's ability to maintain these levels of margins is dependent on a number of factors, some of which are beyond the Company's control, including possible shortages of qualified subcontractors. The decrease in gross margin from lot and land sales was primarily due to the Washington, D.C. market. The Maryland division had significant lot sales to outside homebuilders in the first nine months of 1997 at very high margins which did not occur in the current year. Lot and land gross margins can vary significantly depending on the sales price and the cost of the subdivision and the phase in which the sale takes place. General and Administrative Expenses. General and administrative expenses increased from $12.0 million for the nine months ended September 30, 1997 to $14.6 million for the nine months ended September 30, 1998. However, general and administrative expenses as a percentage of total revenue remained constant at 3.0% for the nine months ended September 30, 1997 and 1998. The increase in expense was primarily attributable to the increase in real estate tax expense, incentive compensation and rent expense. Real estate taxes increased in the current year as the Company's investment in land development activities increased over prior year balances. More incentive compensation was recorded in the first nine months of 1998 compared to the first nine months of 1997 due to the significant increase in net income. The increase in rent was primarily due to increased costs for office space compared to 1997 in the Columbus market. Selling Expenses. Selling expenses increased from $27.7 million for the nine months ended September 30, 1997 to $33.2 million for the nine months ended September 30, 1998. However, selling expenses as a percentage of total revenue decreased from 6.8% for the nine months ended September 30, 1997 to 6.7% for the nine months ended September 30, 1998. The increase in expense was primarily due to increases in sales commissions paid to outside Realtors and internal salespeople as a result of the increase in sales volume. There were also increases in advertising, model and sales incentive expenses. FINANCIAL SERVICES SEGMENT - M/I FINANCIAL The following table sets forth certain information related to the Company's financial services segment: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Dollars in thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Number of loans originated 829 634 2,074 1,624 Revenue: Loan origination fees $1,121 $ 870 $ 2,942 $ 2,182 Sale of servicing and marketing gains 1,639 944 4,886 3,665 Other 1,160 776 3,180 2,034 Total Revenue 3,920 2,590 11,008 7,881 - ------------------------------------------------------------------------------------------------------------- General and administrative expenses 1,439 1,115 4,204 3,274 - ------------------------------------------------------------------------------------------------------------- Operating Income $2,481 $1,475 $ 6,804 $ 4,607 ============================================================================================================= </TABLE> -13-
14 THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Total Revenue. Total revenue for the three months ended September 30, 1998 was $3.9 million, a 51.4% increase over the $2.6 million recorded for the comparable period of 1997. Loan origination fees increased 28.9% from $0.9 million for the three months ended September 30, 1997 to $1.1 million for the three months ended September 30, 1998. The increase was due to a 30.8% increase in the number of loans originated over the comparable period of the prior year, along with an increase in the average loan amount. Revenue from the sale of servicing and marketing gains increased 73.6% from $0.9 million for the three months ended September 30, 1997 to $1.6 million for the three months ended September 30, 1998. The increase was primarily due to more mortgages originated during the third quarter of 1998 as compared to the comparable period of 1997. The increase can also be attributed to favorable market conditions. Loan originations increased 30.8% during the period over the number of loans originated during the prior year. Revenue from other sources increased 49.5% from $0.8 million for the three months ended September 30, 1997 to $1.2 million for the three months ended September 30, 1998. The increase was partially due to earnings from the Company's interest in a limited liability company that provides title services and expanded into Florida late in 1997. Revenue from the title company increased 120.7% for the three months ended September 30, 1998 over the comparable period of the prior year. Interest income also increased due to more mortgages originated over the comparable period of the prior year. General and administrative expenses. General and administrative expenses for the three months ended September 30, 1998 were $1.4 million, a 29.1% increase from the comparable period of the prior year. Bank interest expense increased because of more mortgages originated over the prior year. Incentive compensation increased due to significant increase in net income. General and administrative expenses also increased because of expenses related to the expansion of title services into Florida late in 1997. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Total Revenue. Total revenue for the nine months ended September 30, 1998 was $11.0 million, a 39.7% increase over the $7.9 million recorded for the comparable period of 1997. Loan origination fees increased 34.8% from $2.2 million for the nine months ended September 30, 1997 to $2.9 million for the nine months ended September 30, 1998. This increase was due to a 27.7% increase in the number of loans originated over the comparable period of the prior year, along with an increase in the average loan amount. Revenue from the sale of servicing and marketing gains increased 33.3% from $3.7 million for the nine months ended September 30, 1997 to $4.9 million for the nine months ended September 30, 1998. The increase was primarily due to more mortgages originated during the first nine months of 1998 compared to the first nine months of 1997. Loan originations increased 27.7% during the period over the number of loans originated during the prior year. The increase in servicing fees was due to more fixed rate mortgages originated during the nine months ended September 30, 1998 from the comparable period of 1997. The company earns higher premiums on fixed rate mortgages as opposed to adjustable rate mortgages. The increase in marketing gains was primarily due to favorable market conditions during the last part of 1997 and early part of 1998 that increased marketing gains on loans that closed during the first quarter of 1998. The increase in marketing and service fees was also due to an increase in average loan amounts. M/I Financial uses hedging methods whereby it has the option, but is not required, to -14-
15 complete the hedging transaction. This allowed the Company to record servicing and marketing gains during a period of falling interest rates while limiting its risk of loss from a rising interest rate market. Revenue from other sources increased 56.3% from $2.0 million for the nine months ended September 30, 1997 to $3.2 million for the nine months ended September 30, 1998. The increase was partially due to earnings from the Company's interest in a limited liability company that provides title services and expanded into Florida late in 1997. Revenue from other sources also increased because of an increase in loan application fees received during the period over the number received during the prior year. There were 436 more applications taken in the first nine months of 1998 over the comparable period of a year ago. Interest income increased due to more mortgages originated over the period of a year ago. General and administrative expenses. General and administrative expenses for the nine months ended September 30, 1998 were $4.2 million, a 28.4% increase over the comparable period of the prior year. Loan application expenses increased because of more loan applications taken during the year. There were 436 more applications taken in the first nine months of 1998 over the comparable period of a year ago. Bank interest expense increased because of more mortgages originated over the period of a year ago. Incentive compensation increased due to a significant increase in net income. General and administrative expenses also increased because of expenses related to the expansion of title services into Florida late in 1997. OTHER OPERATING RESULTS Corporate General and Administrative Expenses. Corporate general and administrative expenses increased to $5.1 million and $10.3 million for the three and nine months ended September 30, 1998, respectively, from $4.4 million and $9.4 million recorded for the comparable periods of 1997. However, as a percentage of total revenue, general and administrative expenses for the three and nine months ended September 30, 1998 decreased to 2.4% and 2.1%, respectively, from 2.8% and 2.3% for the comparable periods in the prior year. The increases in expense were primarily attributable to increases in profit sharing and charitable contributions expensed in the current year due to the significant increase in net income. Interest Expense. Corporate and homebuilding interest expense for the three and nine months ended September 30, 1998 increased to $3.2 and $8.8 million, respectively, from $3.0 and $8.0 million recorded for the comparable periods of the prior year. Interest expense was higher in the current year due to an increase in the average borrowings outstanding during the first nine months of 1998 compared to the first nine months of 1997. This was partially offset by an increase in the net amount of interest capitalized. Average borrowings outstanding and capitalized interest increased due to a significant increase in the Company's backlog and land development activities. LIQUIDITY AND CAPITAL RESOURCES The Company's financing needs depend upon its sales volume, asset turnover, land acquisition and inventory balances. The Company has incurred substantial indebtedness, and may incur substantial indebtedness in the future, to fund the growth of its homebuilding activities. 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. Additionally, in May 1998, the Company sold treasury shares and received approximately $24.6 million. -15-
16 Notes Payable Banks. At September 30, 1998, the Company had bank borrowings outstanding of $94.0 million under its Bank Credit Facility, which permits aggregate borrowings, other than for the issuance of letters of credit, not to exceed the lesser of: (i) $204.5 million and (ii) 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, less the sum of (A) outstanding letters of credit issued for purposes other than to satisfy bonding requirements and (B) the aggregate amount of outstanding letters of credit, other than letters of credit issued for the purpose of satisfying bonding requirements, for joint ventures in which the Company is a partner and which are guaranteed by the Company. The Bank Credit Facility matures September 30, 2003, at which time the unpaid balance of the revolving credit loans outstanding will be due and payable. Under the terms of the Bank Credit Facility, the banks will determine annually whether or not to extend the maturity date of the commitments by one year. At September 30, 1998, borrowings under the Bank Credit Facility were at the prime rate or, at the Company's option, LIBOR plus a margin of between 1.60% and 2.35% based on the Company's ratio of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to consolidated interest incurred and were primarily unsecured. The Bank Credit Facility contains restrictive covenants which require the Company, among other things, to maintain minimum net worth and working capital amounts, to maintain a minimum ratio of EBITDA to consolidated interest incurred and to maintain certain other financial ratios. The Bank Credit Facility also places limitations on the amount of additional indebtedness that may be incurred by the Company, the acquisition of undeveloped land, dividends that may be paid and the aggregate cost of certain types of inventory the Company can hold at any one time. On February 26, 1998 and September 23, 1998 the Company entered into $50 million and $25 million interest rate SWAP agreements with a bank. The SWAP agreements expire February 26, 2001 and September 25, 2000, respectively, and require the Company to make fixed interest rate payments to the bank in return for variable payments. During the three and nine months ended September 30, 1998, these agreements resulted in a decrease of interest expense of $20,041 and $45,920, respectively. An additional $12.2 million was outstanding as of September 30, 1998 under the M/I Financial loan agreement, which permits borrowings of $30.0 million to finance mortgage loans initially funded by M/I Financial for customers of the Company and a limited amount for loans to others. The Company and M/I Financial are co-borrowers under the M/I Financial loan agreement. This agreement limits the borrowings to 95% of the aggregate face amount of certain qualified mortgages and contains restrictive covenants requiring M/I Financial to maintain minimum net worth and certain minimum financial ratios. At September 30, 1998, borrowings under the M/I Financial loan agreement were at (a) the prime rate less 0.50%, or (b) LIBOR plus 1.60% or (c) a combination of (a) and (b). The agreement terminates on June 22, 2001, at which time the unpaid balance is due. At September 30, 1998, the Company had the right to borrow up to $232.3 million under its credit facilities, including $27.8 million under the M/I Financial loan agreements (95% of the aggregate face amount of certain qualified mortgages). At September 30, 1998, the Company had $126.1 million of unused borrowing availability under its loan agreements. The Company also had approximately $32.5 million of completion bonds and letters of credit outstanding at September 30, 1998. Subordinated Notes. At September 30, 1998, there was outstanding $50.0 million of Senior Subordinated Notes. The notes bear interest at a fixed rate of 9.51% and mature August 29, 2004. Land and Land Development. Over the past several years, the Company's land development activities and land holdings have increased significantly, and the Company believes this trend will continue in the foreseeable future. Single-family lots, land and land development increased 14.5% from -16-
17 December 31, 1997 to September 30, 1998. These increases are primarily due to the shortage of qualified land developers in certain of the Company's markets as well as the Company developing more land due to the competitive advantages that can be achieved by developing land internally rather than purchasing lots from developers or competing homebuilders. This is particularly true for the Company's Horizon product line, in which lots are generally not available from third party developers at economically feasible prices due to the price points the Company targets. The Company continues to purchase lots from outside developers under option contracts, when possible, to limit its risk; however, the Company will continue to evaluate all of its alternatives to satisfy its demand for lots in the most cost effective manner. The $16.0 million increase in notes payable banks - homebuilding operations, from December 31, 1997 to September 30, 1998 reflects increased borrowings primarily attributable to the increase in houses under construction, along with an increase in single-family lots, land and land development costs. Houses under construction increased $62.7 million from December 31, 1997 to September 30, 1998, and single-family lots, land and land development costs increased $22.0 million. It is expected that borrowing needs will increase as the Company continues to increase its investment in land under development and developed lots. As of September 30, 1998, the Company had closed on five phases of a six-phase land purchase contract in the Maryland division. This contract was entered into in 1994 and required a greater investment than the Company generally commits. It has been the Company's policy to sell a portion of these lots to outside homebuilders. The Company has an option to purchase the remaining phase. At September 30, 1998, mortgage notes payable outstanding were $17.8 million, secured by a building, lots and land with a recorded book value of $25.7 million. As its capital requirements increase, the Company may increase its borrowings under its bank line of credit. In addition, the Company continually explores and evaluates alternative sources from which to obtain additional capital. Sale of Treasury Shares. On April 27, 1998, the Company filed a registration statement with the Securities and Exchange Commission for up to 1,200,000 shares of common stock of the Company. All of such shares were sold on May 5, 1998. The Company received approximately $24.6 million, which was used to repay a portion of existing indebtedness. Year 2000 Compliance. The Company is currently in the process of modifying or replacing certain management information systems to address issues regarding the year 2000. In accordance with current accounting guidance, modification costs for the year 2000 will be charged to expense as incurred while replacement costs will be capitalized and amortized over the asset's useful life. It is not presently believed that these changes will have an adverse impact on operations or that the expenditures related thereto will be material to the Company's financial position or results of operations in any given year. The "Year 2000" problem arises as a result of many automated calculations being written in computer code which does not properly recognize dates after 1999. Problems associated with this issue can occur not only on "mainframe" applications, but also with such devices as personal computers, telecommunication equipment and programmable logic controllers associated with certain manufacturing equipment. Without correction, it is possible that business and operational functions that rely on this improper code could fail and cause significant business disruption and loss. -17-
18 The manner of resolving the identified Year 2000 shortcomings has included strategies such as implementing Year 2000 compliant versions of third party software, modifying portions of existing software and replacing non-compliant business systems with new third party software. A combination of internal and external resources is being used to help identify, implement and test solutions associated with Year 2000 issues. Management believes that quantifying the extent to which the Company's Year 2000 remediation efforts are complete is not practicable and could be potentially misleading. However, based on existing plans, it is anticipated that the Company's ongoing efforts to remediate data processing systems to be Year 2000 compliant will be completed by the middle of calendar 1999. Another risk presented by the Year 2000 issue is that significant customers and suppliers of the Company could fail to become fully Year 2000 compliant. This failure, in turn, could result in a significant adverse effect to the Company's operations. The Company is in the process of making inquiries of its significant suppliers as to the state of their Year 2000 readiness. It is believed that these inquiries will become increasingly more meaningful as the year 2000 approaches. Regardless, there can be no assurance that the data processing and non-information technology systems utilized by these other companies will become Year 2000 compliant on a timely basis. The impact of noncompliance is not currently estimable. Taken together, the Company believes that its substantial past and current investments in these information technology initiatives will provide the foundation necessary to support and enhance operations in the years to come. Nevertheless, achieving Year 2000 compliance is dependent on many factors, some of which are not completely within the Company's control. Should either the Company's internal systems or the internal systems of one or more significant vendors or suppliers fail to achieve Year 2000 compliance, the Company's business and its results of operations could be adversely affected. 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 rate on the Company's outstanding debt was 8.5% for the nine months ended September 30, 1998 and 1997. 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 results in lower gross profit margins. -18-
19 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company wishes to take advantage of the safe harbor provisions included in the Private Securities Litigation Reform Act of 1995. Accordingly, in addition to historical information, this Management's Discussion and Analysis of Results of Operations and Financial Condition contains certain forward-looking statements, including, but not limited to, statements regarding the Company's future financial performance and financial condition. These statements involve a number of risks and uncertainties. Any forward-looking statements made by the Company herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various factors including, but not limited to, those referred to below. General Real Estate, Economic and Other Conditions. The homebuilding industry is significantly affected by changes in national and local economic and other conditions, including employment levels, changing demographic considerations, availability of financing, interest rates, consumer confidence and housing demand. In addition, homebuilders are subject to various risks, many of them outside the control of the homebuilder, including competitive overbuilding, availability and cost of building lots, availability of materials and labor, adverse weather conditions which can cause delays in construction schedules, cost overruns, changes in government regulations, and increases in real estate taxes and other local government fees. The Company cannot predict whether interest rates will be at levels attractive to prospective home buyers. If interest rates increase, and in particular mortgage interest rates, the Company's business could be adversely affected. Land Development Activities. The Company develops the lots for a majority of its subdivisions. Therefore, the medium- and long-term financial success of the Company will be dependent on the Company's ability to develop its subdivisions successfully. Acquiring land and committing the financial and managerial resources to develop a subdivision involves significant risks. Before a subdivision generates any revenue, material expenditures are required for items such as acquiring land and constructing subdivision infrastructure (such as roads and utilities). The Company's Markets. The Company operates in the Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; Virginia and Maryland metropolitan areas; and Phoenix, Arizona. Adverse general economic conditions in these markets could have a material adverse impact on the operations of the Company. For the nine months ended September 30, 1998, approximately 42% of the Company's housing revenue and a significant portion of the Company's operating income were derived from operations in its Columbus, Ohio market. The Company's performance could be significantly affected by changes in this market. Competition. The homebuilding industry is highly competitive. The Company competes in each of its local market areas with numerous national, regional and local homebuilders, some of which have greater financial, marketing, land acquisition, and sales resources than the Company. Builders of new homes compete not only for home buyers, but also for desirable properties, financing, raw materials and skilled subcontractors. The Company also competes with the resale market for existing homes which provides certain attractions for home buyers over building a new home. Governmental Regulation and Environmental Considerations. The homebuilding industry is subject to increasing local, state and Federal statutes, ordinances, rules and regulations concerning zoning, resource protection (preservation of woodlands and hillside areas), building design and construction, and similar matters, including local regulations which impose restrictive zoning and density requirements in -19-
20 order to limit the number of homes that can eventually be built within the boundaries of a particular location. Such regulation affects construction activities, including construction materials which must be used in certain aspects of building design, as well as sales activities and other dealings with home buyers. The Company must also obtain licenses, permits and approvals from various governmental agencies for its development activities, the granting of which are beyond the Company's control. Furthermore, increasingly stringent requirements may be imposed on homebuilders and developers in the future. Although the Company cannot predict the impact on the Company of compliance with any such requirements, such requirements could result in time consuming and expensive compliance programs. The Company is also subject to a variety of local, state and Federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws which apply to any given project vary greatly according to the project site and the present and former uses of the property. These environmental laws may result in delays, cause the Company to incur substantial compliance costs (including substantial expenditures for pollution and water quality control) and prohibit or severely restrict development in certain environmentally sensitive regions. Although there can be no assurance that it will be successful in all cases, the Company has a general practice of requiring an environmental audit and resolution of environmental issues prior to purchasing land in an effort to avoid major environmental issues in the Company's developments. In addition, the Company has been, and in the future may be, subject to periodic delays or may be precluded from developing certain projects due to building moratoriums. These moratoriums generally relate to insufficient water supplies, sewage facilities, delays in utility hook-ups, or inadequate road capacity within the specific market area or subdivision. These moratoriums can occur prior to, or subsequent to, commencement of operations by the Company without notice to, or recourse by, the Company. Risk of Material and Labor Shortages. The Company is presently not experiencing any serious material or labor shortages. However, the residential construction industry in the past has, from time to time, experienced serious material and labor shortages in insulation, drywall, certain carpentry and framing work and cement, as well as fluctuating lumber prices and supplies. Delays in construction of homes due to these shortages could adversely affect the Company's business. Significant Voting Control by Principal Shareholders. As of September 30, 1998, members of the Irving E. Schottenstein family owned approximately 31% of the outstanding Common Shares of the Company. Therefore, members of the Irving E. Schottenstein family have significant voting power with respect to the election of the Board of Directors of the Company and, in general, the determination of the outcome of various matters submitted to the shareholders of the Company for approval. Dependence on Key Executives. The Company is managed by a relatively small number of executive officers. The loss of the services of one or more of these executive officers could have an adverse effect on the Company's business and operations. -20-
21 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings - none. - -------------------------- Item 2. Changes in Securities - none. - ------------------------------ Item 3. Defaults Upon Senior Securities - none. - ---------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders - none. - ----------------------------------------------------------- Item 5. Other Information - none. - -------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- The exhibits required to be filed herewith are set forth below. No reports were filed on Form 8-K for the quarter for which this report is filed. <TABLE> <CAPTION> Exhibit Number Description - ------ ----------- <S> <C> 27 Financial Data Schedule </TABLE> -21-
22 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 13, 1998 by: /s/ Robert H. Schottenstein --------------------------- Robert H. Schottenstein President Date: November 13, 1998 by: /s/ Kerrii B. Anderson ---------------------- Kerrii B. Anderson Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) -22-
23 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION PAGE # ------ ----------- ------ <S> <C> <C> 27 Financial Data Schedule </TABLE> -23-