Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
-------------
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: 15,167,455 shares
outstanding as of August 13, 2002
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001 3
Unaudited Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 2002 and 2001 4
Unaudited Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 2002 5
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 6
Notes to Interim Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
-2-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
JUNE 30, December 31,
2002 2001
(Dollars in thousands, except par values) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 15,571 $ 9,988
Cash held in escrow 917 560
Receivables 54,668 55,013
Inventories:
Single-family lots, land and land development costs 260,171 287,110
Houses under construction 212,736 181,742
Model homes and furnishings - at cost (less accumulated depreciation:
June 30, 2002 - $43; December 31, 2001 - $49) 4,711 7,761
Land purchase deposits 1,633 2,623
Building,office furnishings, transportation and construction equipment - at
cost (less accumulated depreciation: June 30, 2002 - $8,032;
December 31, 2001 - $7,453) 21,241 22,276
Investment in unconsolidated joint ventures and limited liability companies 22,229 22,457
Other assets 24,098 22,580
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $617,975 $612,110
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Notes payable banks - homebuilding operations $ 80,000 $100,000
Note payable bank - financial services operations 12,500 30,000
Mortgage notes payable 14,210 14,227
Senior subordinated notes 50,000 50,000
Accounts payable 73,566 55,656
Accrued compensation 10,223 20,789
Customer deposits 19,500 18,487
Other liabilities 43,478 43,060
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 303,477 332,219
- ----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
- ----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY: (1)
Preferred stock - $.01 par value; authorized 2,000,000 shares;
none outstanding - -
Common stock - $.01 par value; authorized 38,000,000 shares;
issued 17,626,122 shares 176 88
Additional paid-in capital 63,374 62,954
Retained earnings 273,934 241,956
Treasury stock - at cost - 2,461,002 and 2,688,116 shares, respectively,
held in treasury at June 30, 2002 and December 31, 2001 (22,986) (25,107)
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 314,498 279,891
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $617,975 $612,110
- ----------------------------------------------------------------------------------------------------------------
See Notes to Interim Unaudited Consolidated Financial Statements.
(1) Shares issued and in treasury for the prior period have been adjusted for
the 2-for-1 stock split effective June 19, 2002.
-3-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
(In thousands, except per share amounts) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
Revenue $258,439 $222,377 $474,001 $400,532
Costs and expenses:
Land and housing 195,972 170,255 357,600 307,677
General and administrative 15,422 12,214 26,148 21,880
Selling 15,896 14,790 29,893 27,163
Interest 3,894 3,711 7,430 6,826
- -----------------------------------------------------------------------------------------------------------------
Total costs and expenses 231,184 200,970 421,071 363,546
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 27,255 21,407 52,930 36,986
- -----------------------------------------------------------------------------------------------------------------
Income taxes (credit):
Current 11,276 8,074 20,983 13,334
Deferred (919) 72 (870) 828
- ----------------------------------------------------------------------------------------------------------------
Total income taxes 10,357 8,146 20,113 14,162
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 16,898 13,261 32,817 22,824
Cumulative effect of change in accounting
principle - net of income taxes - - - 2,681
- -----------------------------------------------------------------------------------------------------------------
Net income $ 16,898 $ 13,261 $ 32,817 $ 25,505
- -----------------------------------------------------------------------------------------------------------------
Earnings per common share - basic: (1)
Income before cumulative effect of
change in accounting principle $ 1.12 $ 0.87 $ 2.18 $ 1.51
Cumulative effect of change in accounting
principle - net of income taxes - - - 0.18
- -----------------------------------------------------------------------------------------------------------------
Net income $ 1.12 $ 0.87 $ 2.18 $ 1.69
- -----------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted: (1)
Income before cumulative effect of
change in accounting principle $ 1.09 $ 0.85 $ 2.12 $ 1.46
Cumulative effect of change in accounting
principle - net of income taxes - - - 0.17
- -----------------------------------------------------------------------------------------------------------------
Net income $ 1.09 $ 0.85 $ 2.12 $ 1.63
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding: (1)
Basic 15,142 15,194 15,087 15,111
Diluted 15,524 15,665 15,501 15,607
- -----------------------------------------------------------------------------------------------------------------
See Notes to Interim Unaudited Consolidated Financial Statements.
(1) Shares outstanding and per share data for prior periods have been adjusted
for the 2-for-1 stock split effective June 19, 2002.
-4-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
================================================================================
SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
Common Stock (1)
---------------- Additional
(Dollars in thousands, except Shares Paid-In Retained Treasury
per share amounts) Outstanding Amount Capital Earnings Stock
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 14,938,006 $ 88 $62,954 $241,956 $(25,107)
Net income - - - 32,817 -
Stock split, par value unchanged - 88 - (88) -
Dividends to shareholders,
$0.05 per common share - - - (751) -
Stock options exercised 156,140 - 252 - 1,458
Deferral of executive and
director stock - - 976 - -
Executive and director deferred
stock distributions 70,975 - (808) - 663
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 15,165,121 $176 $63,374 $273,934 $(22,986)
- -------------------------------------------------------------------------------------------------------------------
See Notes to Interim Unaudited Consolidated Financial Statements.
(1) Shares outstanding at December 31, 2001 and dividend per share amount have
been adjusted for the 2-for-1 stock split effective June 19, 2002.
-5-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
SIX MONTHS ENDED JUNE 30,
2002 2001
(In thousands) (UNAUDITED) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,817 $ 25,505
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Loss from property disposals 28 9
Depreciation 1,101 895
Deferred income taxes (credit) (870) 828
Increase in cash held in escrow (357) (140)
Decrease in receivables 345 5,064
Decrease (increase) in inventories 4,441 (55,346)
Increase in other assets (648) (453)
Increase in accounts payable 17,910 9,127
Increase in customer deposits 1,013 6,178
Decrease in other liabilities (9,172) (12,340)
Equity in undistributed income of unconsolidated joint ventures and
limited liability companies (580) (422)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 46,028 (21,095)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (81) (306)
Investment in unconsolidated joint ventures and limited liability companies (4,334) (4,534)
Distributions from unconsolidated joint ventures and limited liability companies 673 846
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,742) (3,994)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments (37,500) 26,350
Principal repayments of mortgage notes payable (17) (3,167)
Dividends paid (751) (753)
Proceeds from exercise of stock options and deferred stock 1,565 1,694
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (36,703) 24,124
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 5,583 (965)
Cash balance at beginning of year 9,988 8,555
- -------------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 15,571 $ 7,590
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $ 7,435 $ 6,603
Income taxes $ 21,161 $ 16,355
NON-CASH TRANSACTIONS DURING THE PERIOD:
Distribution of single-family lots from unconsolidated joint ventures and
limited liability companies $ 4,469 $ 5,930
Deferral of executive and director stock $ 976 $ 733
Executive and director deferred stock distributions $ 808 $ -
- -------------------------------------------------------------------------------------------------------------------
See Notes to Interim Unaudited Consolidated Financial Statements.
-6-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of M/I Schottenstein Homes,
Inc. and its subsidiaries ("the Company") and notes thereto have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information. The results of operations for the
three months and six months ended June 30, 2002 and 2001 are not necessarily
indicative of the results for the full year.
In the opinion of management, the accompanying consolidated financial statements
reflect all adjustments (all of which are normal and recurring in nature)
necessary for a fair presentation of financial results for the interim periods
presented. It is suggested that these unaudited consolidated financial
statements be read in conjunction with the consolidated financial statements,
accounting policies and financial notes thereto included in the Company's Annual
Report to Shareholders for the year ended December 31, 2001.
NOTE 2. LOAN AGREEMENTS
On May 2, 2002, the Company and M/I Financial Corp., a wholly-owned subsidiary,
amended their bank loan agreement. The Company and M/I Financial have the
ability to borrow up to $30 million at a rate of interest based on the prime or
Eurodollar rate. This agreement terminates in May 2003.
NOTE 3. INTEREST
The Company capitalizes interest during land development and home construction.
Capitalized interest is charged to interest expense as the related inventory is
delivered to a third party. The summary of total interest is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Interest capitalized, beginning of period $12,378 $11,631 $12,187 $10,337
Interest incurred 3,382 4,718 7,109 9,127
Interest expensed (3,894) (3,711) (7,430) (6,826)
- -------------------------------------------------------------------------------------------------------------------
Interest capitalized, end of period $11,866 $12,638 $11,866 $12,638
- -------------------------------------------------------------------------------------------------------------------
NOTE 4. CONTINGENCIES
At June 30, 2002, the Company had options and contingent purchase contracts to
acquire land and developed lots with an aggregate purchase price of
approximately $164 million.
NOTE 5. PER SHARE DATA
Per share data is calculated based on the weighted average number of common
shares outstanding during each period. The difference between basic and diluted
shares outstanding is the effect of dilutive stock
-7-
options and deferred stock. There are no adjustments to net income necessary in
the calculation of basic or diluted earnings per share. All share and per share
amounts have been adjusted for the 2-for-1 stock split effective June 19, 2002.
NOTE 6. ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4, 44,
and 64, Amendment of FASB Statement 13, and Technical Corrections." This
statement rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of that statement, SFAS 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS
44, "Accounting for Intangible Assets of Motor Carriers." This statement amends
SFAS 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This statement is
effective for the first quarter in the year ended December 31, 2003. The Company
does not believe the adoption of SFAS 145 will have a significant impact on the
consolidated financial statements.
NOTE 7. DIVIDENDS
On April 25, 2002, the Company paid to shareholders of record of its common
stock on April 2, 2002, a cash dividend of $0.025 per share. On April 18, 2002,
the Board of Directors approved a $0.025 per share cash dividend payable to
shareholders of record on July 1, 2002, which was paid on July 25, 2002. Total
dividends paid in 2002 through July 25 were approximately $1.1 million.
NOTE 8. UNIVERSAL SHELF REGISTRATION
On April 5, 2002, the Company filed a $150 million universal shelf registration
statement with the Securities and Exchange Commission. Pursuant to the filing,
the Company may, from time to time over an extended period, offer new debt
and/or equity securities. Of the equity shares, up to 1,000,000 common shares
may be sold by certain shareholders who are considered selling shareholders.
This shelf registration should allow the Company to expediently access capital
markets in the future. The timing and amount of offerings, if any, will depend
on market and general business conditions.
-8-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
CONSOLIDATED
Total Revenue. Total revenue for the three months ended June 30, 2002
was $258.4 million, a 16% increase over the $222.4 million recorded for the
comparable period in 2001. Total revenue for the six months ended June 30, 2002
was $474.0 million, an 18% increase over the $400.5 million recorded for the
comparable period in 2001. For the three-month period, homebuilding revenue
increased $36.3 million while financial services revenue decreased slightly from
prior year's second quarter to $5.4 million. For the six-month period,
homebuilding revenue increased $73.5 million and financial services revenue
increased $1.3 million. The increase in homebuilding revenue for the three-month
period consisted primarily of a housing revenue increase of $33.9 million and a
land revenue increase of $2.5 million. The increase in homebuilding revenue for
the six-month period consisted of a housing revenue increase of $68.8 million
and a land revenue increase of $3.8 million. The increase in housing revenue for
the three- and six-month periods were attributable to an increase in the number
of Homes Delivered of 60 and 129 units, respectively, and an increase in the
average sales price of Homes Delivered of 9% and 10%, respectively. The increase
in land revenue for the three and six months ended June 30, 2002 was primarily
due to an increase in the number of lots sold in the Orlando, Virginia and
Phoenix markets. This was partially offset by a decrease in the number of lots
sold in the Columbus and Raleigh markets. The increase in financial services
revenue for the six months ended June 30, 2002 was primarily attributable to
increases in revenue earned from the sale of loans.
Income Before Income Taxes. Income before income taxes increased 27%
for the three months ended June 30, 2002 and 43% for the six months ended June
30, 2002 over the comparable periods in 2001. The increase for the three months
ended June 30, 2002 was the result of an increase in homebuilding income before
income taxes from $14.9 million to $23.5 million. Income before income taxes for
financial services remained constant at $3.5 million. The increase for the six
months ended June 30, 2002 was the result of an increase in homebuilding income
before income taxes from $23.5 million to $39.3 million. In addition, income
before income taxes for financial services increased from $7.4 million to $8.7
million. The increase in homebuilding for the three-month period was primarily
due to the increase in housing gross margin from 22.1% to 23.2%. The increase in
homebuilding for the six months ended June 30, 2002 was primarily due to the
increase in housing gross margin from 21.6% to 23.1%. The increase in financial
services for the six months ended June 30, 2002 was the result of increased loan
origination fees. Unallocated amounts include interest from other segments along
with salaries and other administrative expenses, which are not identifiable with
a specific segment.
For the six months ended June 30, 2001, the cumulative effect of a
change in accounting principle resulted in an increase in income of
approximately $2.7 million, net of income taxes. This accounting change was the
result of the January 1, 2001 adoption of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires us to record the value of
interest rate swaps, certain loan commitments and forward sales of
mortgage-backed securities at fair value. No such cumulative adjustment was
recorded for the six months ended June 30, 2002.
-9-
The information below is presented in conformity with SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information," for all
periods presented.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------
Revenue:
Homebuilding $ 254,156 $ 217,863 $ 465,025 $ 391,570
Financial services 5,423 5,631 12,330 11,031
Intersegment (1,140) (1,117) (3,354) (2,069)
- ----------------------------------------------------------------------------------------------------
Total revenue $ 258,439 $ 222,377 $ 474,001 $ 400,532
- ----------------------------------------------------------------------------------------------------
Income Before Income Taxes:
Homebuilding $ 23,459 $ 14,909 $ 39,278 $ 23,455
Financial services 3,481 3,538 8,738 7,359
Unallocated amounts 315 2,960 4,914 6,172
- ----------------------------------------------------------------------------------------------------
Total income before income taxes $ 27,255 $ 21,407 $ 52,930 $ 36,986
- ----------------------------------------------------------------------------------------------------
-10-
HOMEBUILDING SEGMENT
The following table sets forth certain information related to the homebuilding
segment:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Revenue:
Housing $245,424 $211,481 $449,111 $380,304
Land and lot 8,568 6,031 14,398 10,561
Other 164 351 1,516 705
- ----------------------------------------------------------------------------------------------------------------------
Total revenue $254,156 $217,863 $465,025 $391,570
- ----------------------------------------------------------------------------------------------------------------------
Revenue:
Housing 96.6% 97.1% 96.6% 97.1%
Land and lot 3.3 2.8 3.1 2.7
Other 0.1 0.1 0.3 0.2
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0 100.0
Land and housing costs 77.9 78.8 77.8 79.0
- ----------------------------------------------------------------------------------------------------------------------
Gross margin 22.1 21.2 22.2 21.0
General and administrative expenses 2.5 2.6 2.7 2.8
Selling expenses 6.2 6.8 6.3 6.9
- ----------------------------------------------------------------------------------------------------------------------
Operating income 13.4 11.8 13.2 11.3
Allocated expenses 4.2 5.0 4.7 5.3
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 9.2% 6.8% 8.5% 6.0%
- ----------------------------------------------------------------------------------------------------------------------
OHIO AND INDIANA REGION
Unit Data:
New contracts, net 685 792 1,423 1,702
Homes delivered 668 624 1,195 1,064
Backlog at end of period 1,814 1,943 1,814 1,943
Average sales price of homes in Backlog $ 223 $ 206 $ 223 $ 206
Aggregate sales value of homes in Backlog $405,000 $400,000 $405,000 $400,000
Number of active subdivisions 87 85 87 85
- ----------------------------------------------------------------------------------------------------------------------
FLORIDA REGION
Unit Data:
New contracts, net 242 227 440 479
Homes delivered 222 228 419 424
Backlog at end of period 507 547 507 547
Average sales price of homes in Backlog $ 214 $ 214 $ 214 $ 214
Aggregate sales value of homes in Backlog $108,000 $117,000 $108,000 $117,000
Number of active subdivisions 25 28 25 28
- ----------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA, VIRGINIA, MARYLAND AND ARIZONA REGION
Unit Data:
New contracts, net 154 195 301 409
Homes delivered 150 128 272 269
Backlog at end of period 288 454 288 454
Average sales price of homes in Backlog $ 376 $ 387 $ 376 $ 387
Aggregate sales value of homes in Backlog $108,000 $176,000 $108,000 $176,000
Number of active subdivisions 32 32 32 32
- ----------------------------------------------------------------------------------------------------------------------
TOTAL
Unit Data:
New contracts, net 1,081 1,214 2,164 2,590
Homes delivered 1,040 980 1,886 1,757
Backlog at end of period 2,609 2,944 2,609 2,944
Average sales price of homes in Backlog $ 238 $ 235 $ 238 $ 235
Aggregate sales value of homes in Backlog $621,000 $693,000 $621,000 $693,000
Number of active subdivisions 144 145 144 145
- ----------------------------------------------------------------------------------------------------------------------
-11-
A home is included in "New Contracts" when our standard sales contract
is executed. "Homes Delivered" represents homes for which the closing of the
sale has occurred and title has transferred to the buyer. "Backlog" represents
homes for which the standard sales contract has been executed, but which are not
included in Homes Delivered because closings for these homes have not yet
occurred as of the end of the period specified. Most cancellations of contracts
for homes in Backlog occur because customers cannot qualify for financing and
usually occur prior to the start of construction. Because we arrange financing
with guaranteed rates for many of our customers, the incidence of cancellations
after the start of construction is low. The cancellation rate for the quarter
ended June 30, 2002 and June 30, 2001 was 20% and 21%, respectively. Unsold
speculative homes, which are in various stages of construction, totaled 100 and
97 at June 30, 2002 and 2001, respectively.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Total Revenue. Total revenue for the homebuilding segment for the
quarter ended June 30, 2002 was $254.2 million, a 17% increase from 2001's
second quarter. The increase consisted of an increase in housing revenue of 16%
and an increase in land revenue of 42%. Housing revenue increased as a result of
a 6% increase in Homes Delivered. Homes Delivered increased in all of our
markets with the exception of Indianapolis, Tampa and Charlotte. The increase in
housing revenue was also due to a 9% increase in the average sales price of
Homes Delivered. The increase in the average sales price of Homes Delivered was
the result of increases in all of our markets with the exception of Cincinnati
and Orlando. The increase in land revenue from $6.0 million to $8.6 million was
primarily attributable to an increase in the number of lots sold in the Orlando,
Virginia and Phoenix markets, partially offset by a decrease in the number of
lots sold in the Columbus market.
Home Sales and Backlog. New Contracts in the second quarter of 2002
decreased 11% from 2001's second quarter. New Contracts decreased in all of our
markets except Tampa, Raleigh and Virginia. This is primarily the result of soft
economic conditions in the Midwest. However, New Contracts recorded in July 2002
were 20% higher than New Contracts recorded in July 2001. The number of New
Contracts recorded in future periods will be dependent on numerous factors,
including future economic conditions, timing of land development, consumer
confidence, number of subdivisions and interest rates available to potential
homebuyers.
At June 30, 2002, our Backlog consisted of 2,609 homes with an
approximate sales value of $621 million. This represents an 11% decrease in
units and a 10% decrease in sales value in comparison to June 30, 2001. The
average sales price of homes in backlog increased slightly, with increases
occurring in virtually all of our markets.
Gross Margin. The overall gross margin for the homebuilding segment was
22.1% for the three- month period ended June 30, 2002 compared to 21.2% for the
three-month period ended June 30, 2001. Housing gross margin increased from
22.1% to 23.2% and land gross margin increased from 9.9% to 13.6% compared to
2001's second quarter. The increase in housing gross margin was the result of
selling prices increasing at a higher rate than housing costs, improved
operating efficiencies and our focus on acquiring or developing lots in premier
locations to obtain higher margins. The increase in land gross margin was
primarily the result of increased lot sales in our Phoenix division compared to
the second three months of 2001.
General and Administrative Expenses. General and administrative
expenses increased to $6.2 million, or 2.5% of revenue, for the three months
ended June 30, 2002 compared to $5.6 million, or 2.6% of revenue, for the same
period in 2001. The increase in dollars was primarily attributable to increases
in real estate taxes and various other accounts.
-12-
Selling Expenses. Selling expenses increased from $14.7 million, or
6.8% of revenue, for the second quarter of 2001 to $15.8 million, or 6.2% of
revenue, for the second quarter of 2002. The increase in dollars primarily
related to additional sales commissions paid to outside realtors and internal
salespeople as a result of the increase in the number and average sales price of
Homes Delivered.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Total Revenue. Total revenue for the homebuilding segment for the six
months ended June 30, 2002 was $465.0 million, a 19% increase over the same
period in 2001. The increase consisted of an increase in housing revenue of 18%,
and an increase in land revenue of 36%. Housing revenue increased as a result of
a 7% increase in Homes Delivered. Homes Delivered increased in all of our
markets with the exception of Indianapolis, Tampa and Charlotte. The increase in
housing revenue was also due to a 10% increase in the average sales price of
Homes Delivered. The average sales price of Homes Delivered increased in all our
markets with the exception of Cincinnati and Orlando. The increase in land
revenue from $10.6 million to $14.4 million was primarily attributable to an
increase in the number of lot sales in our Orlando, Virginia and Phoenix
markets, partially offset by a decrease in the number of lots sold in the
Columbus and Raleigh markets.
Home Sales and Backlog. New Contracts in the first six months of 2002
decreased 16% from the same period in 2001. Decreases occurred in all of our
markets with the exception of Raleigh and Virginia. This is a result of soft
economic conditions, particularly in the Midwest.
Gross Margin. The overall gross margin for the homebuilding segment was
22.2% for the six month period ended June 30, 2002 compared to 21.0% for the six
month period ended June 30, 2001. Housing gross margin increased from 21.6% to
23.1% and land gross margin increased from 9.8% to 15.4% from 2001's first six
months. The increase in housing gross margin was the result of selling prices
increasing at a higher rate than housing costs, improved operating efficiencies
and our focus on acquiring or developing lots in premier locations to obtain
higher margins. The increase in land gross margin was primarily the result of
increased quantity and profit from lots sold in the Phoenix division compared to
the first six months of 2001.
General and Administrative Expenses. General and administrative
expenses increased to $12.6 million, or 2.7% of revenue, for the six months
ended June 30, 2002 compared to $11.0 million, or 2.8% of revenue, for the same
period in 2001. The increase in dollars was primarily attributable to additional
homeowners association expenses and real estate taxes.
Selling Expenses. Selling expenses increased from $27.0 million, or
6.9% of revenue, for the first six months of 2001 to $29.4 million, or 6.3% of
revenue, for the first six months of 2002. The increase in dollars primarily
related to additional sales commissions paid to outside realtors and internal
sales people as a result of the increase in the number and average sales price
of Homes Delivered.
-13-
FINANCIAL SERVICES SEGMENT
The following table sets forth certain information related to our financial
services segment:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Number of loans originated 843 809 1,529 1,429
Revenue:
Loan origination fees $1,455 $1,303 $2,642 $2,313
Sale of loans 2,137 2,734 6,256 5,746
Other 1,831 1,594 3,432 2,972
- --------------------------------------------------------------------------------------------------------------
Total revenue 5,423 5,631 12,330 11,031
- --------------------------------------------------------------------------------------------------------------
General and administrative expenses 1,942 2,093 3,592 3,672
- --------------------------------------------------------------------------------------------------------------
Operating income $3,481 $3,538 $8,738 $7,359
- --------------------------------------------------------------------------------------------------------------
Financial services consist primarily of originating mortgages for our
homebuyers, processing and selling these mortgages and the related servicing
rights on the secondary market, and providing title services.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Total Revenue. Total revenue for the three months ended June 30, 2002
was $5.4 million, a 3.7% decrease from the $5.6 million recorded for the
comparable period of 2001. Loan origination fees increased 11.7% from $1.3
million for the three months ended June 30, 2001 to $1.5 for the three months
ended June 30, 2002. This increase was due to a 4.2% increase in loans
originated, along with an increase in the average loan amount.
Revenue from the sale of loans decreased 21.8% from $2.7 million for
the three months ended June 30, 2001 to $2.1 million for the three months ended
June 30, 2002. The decrease was due to a changing market valuation of servicing
values, which resulted in reduced servicing premiums.
Revenue from other sources increased 14.9% to $1.8 million for the
three months ended June 30, 2002 compared to $1.6 million for the three months
ended June 30, 2001. This was due to increased earnings from title services as a
result of the increase in the number of Homes Delivered.
General and Administrative Expenses. General and administrative
expenses for the three months ended June 30, 2002 were $1.9 million, a 7.2%
decrease from the comparable period of the prior year. This was due to a
decrease in incentive compensation due to a decrease in net income.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Total Revenue. Total revenue for the six months ended June 30, 2002 was
$12.3 million, a 11.8% increase from the $11.0 million recorded for the
comparable period of 2001. Loan origination fees increased 14.2% from $2.3
million for the six months ended June 30, 2001 to $2.6 million for the six
months ended June 30, 2002. This increase was due to a 7.0% increase in loans
originated along with an increase in the average loan amount.
-14-
Revenue from the sale of loans increased 8.9% from $5.7 million for the
six months ended June 30, 2001 to $6.3 million for the six months ended June 30,
2002. This was primarily the result of an increase in loans originated and an
increase in the average loan amount.
Revenue from other sources increased 15.5% from $3.0 million for the
six months ended June 30, 2001 to $3.4 million for the six months ended June 30,
2002. This was due to increased earnings from title services as a result of the
increase in the number of Homes Delivered.
General and Administrative Expenses. General and administrative
expenses for the six months ended June 30, 2002 were $3.6 million, a 2.2%
decrease from the comparable period of the prior year. This decrease was a
result of various general and administrative expenses decreasing as a result of
improved cost controls.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for the three months ended June 30, 2002 increased from
$4.6 million to $7.5 million. As a percentage of total revenue, corporate
general and administrative expenses for the three months ended June 30, 2002
increased to 2.9% from 2.1% from the comparable period in the prior year.
Corporate general and administrative expenses increased from $7.4 million, or
1.9% of total revenue for the six months ended June 30, 2001 to $10.1 million,
or 2.1% of total revenue, for the six months ended June 30, 2002. The increase
was partially due to an increase in insurance expense and an increase in
incentive compensation as a result of an increase in profitability.
Interest Expense. Corporate and homebuilding interest expense for the
three and six months ended June 30, 2002 increased to $3.8 and $7.3 million,
respectively, from $3.6 and $6.6 million recorded for the comparable periods of
the prior year. Interest expense was higher in the current year due to a
decrease in capitalized interest resulting from the decrease in land under
development and backlog.
Income Taxes. The effective tax rate for the three and six months ended
June 30, 2002 decreased to 38.0% from 38.1% and 38.3%, respectively for the
comparable periods of 2001. The decrease is primarily attributable to lower
state taxes as a percentage of revenue.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
policies generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. On an on-going basis,
management evaluates such estimates and judgments and makes adjustments as
deemed necessary. Actual results could differ from these estimates using
different estimates and assumptions, or if conditions are significantly
different in the future.
Estimates and judgments are inherent in calculations relating to
inventory valuation; property and equipment depreciation; valuation of
derivative financial instruments; accounts payable on inventory; reserves for
costs to complete, warranty, self-insurance on general liability, litigation,
health care and
-15-
workers' compensation, executive employment agreements, and financial services;
income taxes, and contingencies. Other items that could have a significant
impact on the financial statements include the risks and uncertainties listed in
the "Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995" below.
LIQUIDITY AND CAPITAL RESOURCES
Our financing needs depend on sales volume, asset turnover, land
acquisition and inventory balances. We have incurred substantial indebtedness,
and may incur substantial indebtedness in the future, to fund the growth of our
homebuilding operations. Our principal source of funds for construction and
development activities has been from internally generated cash and from bank
borrowings, which are primarily unsecured. See Safe Harbor Statement for further
discussion of factors that could impact our source of funds.
Notes Payable Banks. At June 30, 2002, we had bank borrowings
outstanding of $80 million under our Bank Credit Facility. The Bank Credit
Facility permits borrowing base indebtedness not to exceed the lesser of $315
million or our borrowing base. The Bank Credit Facility matures in March 2006.
We also had approximately $13 million outstanding at June 30, 2002
under the M/I Financial loan agreement which permits borrowings of $30 million
to finance mortgage loans initially funded by M/I Financial for our customers.
The Company and M/I Financial are co-borrowers under the M/I Financial loan
agreement. This agreement limits the borrowings to 95% of the aggregate face
amount of certain qualified mortgages. On May 2, 2002, the Company and M/I
Financial amended the bank agreement to extend the termination date to May 2003.
At June 30, 2002, we had the right to borrow up to $345 million under
our credit facilities, including $30 million under the M/I Financial loan
agreement. We had approximately $237 million of unused borrowing availability
under our credit facilities and approximately $51 million of completion bonds
and letters of credit outstanding at June 30, 2002.
Subordinated Notes. At June 30, 2002, there was outstanding $50 million
of Senior Subordinated Notes. The notes bear interest at a fixed rate and mature
in August 2006.
Mortgage Notes Payable. At June 30, 2002, mortgage notes payable
outstanding were approximately $14 million, secured by an office building, lots
and land with a recorded book value of approximately $22 million.
Land and Land Development. Single-family lots, land and land
development costs decreased slightly from December 31, 2001 to June 30, 2002. We
continue to purchase some lots from outside developers under contracts. We will
continue to evaluate all of our alternatives to satisfy our increasing demand
for lots in the most cost effective manner.
Universal Shelf Registration. In April 2002, we filed a $150 million
universal shelf registration statement with the Securities and Exchange
Commission. Pursuant to the filing, we may, from time to time over an extended
period, offer new debt and/or equity securities. Of the equity shares, up to
1,000,000 common shares may be sold by certain shareholders who are considered
selling shareholders. This shelf registration should allow us to expediently
access capital markets in the future. The timing and amount of offerings, if
any, will depend on market and general business conditions.
-16-
Purchase of Treasury Shares. We are authorized to repurchase up to 4.0
million shares (as adjusted for the 2-for-1 stock split) of our outstanding
common shares. The purchases may occur on the open market and/or in privately
negotiated transactions as market conditions warrant. As of June 30, 2002, we
had purchased a total of 3.1 million shares at an average price of $9. No shares
were purchased during the first six months of 2002.
INTEREST RATES AND INFLATION
Our business is significantly affected by general economic conditions
of the United States of America and, particularly, by the impact of interest
rates. Higher interest rates may decrease our potential market by making it more
difficult for homebuyers to qualify for mortgages or to obtain mortgages at
interest rates that are acceptable to them. Increases in interest rates would
also increase our interest expense because the rate on the revolving loans is
based on floating rates of interest. The weighted average interest rate for our
outstanding debt for the six months ended June 30, 2002 and 2001 was 8.5% and
8.6%, respectively.
In conjunction with our mortgage-banking operations, hedging methods
are used to reduce our exposure to interest rate fluctuations between the
commitment date of the loan and the time the loan closes.
In recent years, we have generally been able to raise prices by amounts
at least equal to our cost increases and, accordingly, have not experienced any
detrimental effect from inflation. When we develop lots for our own use,
inflation may increase our profits because land costs are fixed well in advance
of sales efforts. We are generally able to maintain costs with subcontractors
from the date construction is started on a home through the delivery date.
However, in certain situations, unanticipated costs may occur between the time
of start and the delivery date, resulting in lower gross profit margins.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In addition to historical information, this Management's Discussion and
Analysis of Financial Condition and Results of Operations contains certain
forward-looking statements including, but not limited to, statements regarding
our future financial performance and financial condition. These statements
involve a number of risks and uncertainties. Any forward-looking statements that
we make herein and in future reports and statements are not guarantees of future
performance, and actual results may differ materially from those in such
forward-looking statements as a result of various factors including, but not
limited to, those referred to below.
- We are particularly susceptible to changes in the economy and to
interest rate fluctuations as well as to the effect that each of
these has on consumer confidence.
- We must risk significant capital to maintain our desired land
position.
- Our operations are located in various markets throughout the
United States of America. However, a significant portion of our
operating income is derived from operations in the Columbus
market.
- We face significant competition for home sales, properties,
financing, building materials and skilled subcontractors.
- Increased levels of zoning, environmental and other regulatory
initiatives can adversely affect our profitability.
-17-
- Periodic material and labor shortages can adversely affect our
sales and profitability.
- Our principle shareholders can exercise significant control over
shareholder matters.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk results from fluctuations in interest rates. We
are exposed to interest rate risk through the borrowings under our unsecured
revolving credit facilities which permit borrowings up to $345 million. To
minimize the effects of interest rate fluctuations, we have interest rate swap
agreements with certain banks for a total notional amount of $225 million, of
which $150 million are intended to offset each other. Under the remaining $75
million, we pay fixed rates of interest. Assuming a hypothetical 10% change in
short-term interest rates, our interest expense would not change significantly
as the interest rate swap agreements would partially offset the impact.
Additionally, M/I Financial offers fixed and adjustable rate mortgage
loans to buyers of our homes. The loans are granted at current market interest
rates, which are guaranteed from the loan lock date through the transfer of the
title of the home to the buyer. At June 30, 2002, the notional principal amount
under these loan commitments was approximately $180 million and the related fair
value was a loss of approximately $0.1 million.
M/I Financial hedges its interest rate risk using optional and
mandatory forward sales to hedge risk from the loan lock date generally to the
date a loan is closed. At June 30, 2002, the notional principal amount under
these forward sales agreements was approximately $184 million and the related
fair value of these agreements was a loss of approximately $1.8 million. The
hedging agreements outstanding at June 30, 2002 mature within 90-120 days. These
agreements are recorded at fair value on the balance sheet and any gains or
losses are recorded in revenue. We recorded fair value losses of $0.6 million
and $1.1 million for the six months ended June 30, 2002 and June 30, 2001,
respectively, related to loan commitments, forward sales of mortgage-backed
securities and interest rate swaps.
-18-
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings - none.
- --------------------------
Item 2. Changes in Securities and Use of Proceeds - none.
- -------------------------------------------------
Item 3. Defaults upon Senior Securities - none.
- ---------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On April 18, 2002, the Company held its 2002 annual meeting of
shareholders. The shareholders voted on the election of three directors to
three-year terms and a proposal to ratify the appointment of Deloitte & Touche
LLP as the independent accountants and auditors for fiscal year 2002. The
results of the voting are as follows:
1. Election of Directors
---------------------
For Withheld
--- --------
Phillip G. Creek 6,806,645 470,033
Irving E. Schottenstein 6,480,179 796,499
Norman L. Traeger 7,241,218 35,360
All three directors were re-elected.
2. To ratify the appointment of Deloitte & Touche LLP as the
---------------------------------------------------------
independent accountants and auditors for fiscal year 2002
---------------------------------------------------------
For 7,248,489
Against 28,023
Abstain 166
The proposal was approved.
Item 5. Other Information - none.
- --------------------------
-19-
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The exhibits required to be filed herewith are set forth below. No
reports were filed on Form 8-K for the quarter for which this report is filed.
Exhibit
Number Description
- ------ -----------
10.1 Second Amendment to the Executives' Deferred Compensation Plan dated
June 19, 2002.
10.2 Second Amendment to the Company's 1993 Stock Incentive Plan as Amended
dated February 13, 2001.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
M/I Schottenstein Homes, Inc.
------------------------------------
(Registrant)
Date: August 13, 2002 by: /s/ Robert H. Schottenstein
-------------------------------
Robert H. Schottenstein
President and Director
Date: August 13, 2002 by: /s/ John A. Wilt
-------------------------------
John A. Wilt
Corporate Controller
(Principal Accounting Officer)
-21-
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
10.1 Second Amendment to the Executives' Deferred Compensation Plan dated June 19,
2002.
10.2 Second Amendment to the Company's 1993 Stock Incentive Plan as Amended dated
February 13, 2001.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-22-