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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, 2002
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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
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(State of incorporation) (I.R.S. Employer Identification No.)
3 Easton Oval, Suite 500, Columbus, Ohio 43219
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(Address of Principal Executive Offices) (Zip Code)
(614) 418-8000
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(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
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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: 15,172,519 shares
outstanding as of November 13, 2002
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001 3
Unaudited Consolidated Statements of Income for the
Three Months and Nine Months Ended September 30, 2002
and 2001 4
Unaudited Consolidated Statement of Shareholders' Equity
for the Nine Months Ended September 30, 2002 5
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 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
Item 4. Controls and Procedures 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 19
Signatures 20
Certifications 21
Exhibit Index 23
-2-
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
2002 2001
(Dollars in thousands, except par values) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 6,130 $ 9,988
Cash held in escrow 695 560
Receivables 55,259 55,013
Inventories:
Single-family lots, land and land development costs 266,294 287,110
Houses under construction 216,833 181,742
Model homes and furnishings - at cost (less accumulated depreciation:
September 30, 2002 - $51; December 31, 2001 - $49) 5,509 7,761
Land purchase deposits 1,812 2,623
Building,office furnishings, transportation and construction equipment - at
cost (less accumulated depreciation: September 30, 2002 - $8,581;
December 31, 2001 - $7,453) 21,239 22,276
Investment in unconsolidated joint ventures and limited liability companies 23,439 22,457
Other assets 26,711 22,580
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $623,921 $612,110
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 73,376 $ 55,656
Accrued compensation 16,996 20,789
Customer deposits 19,307 18,487
Other liabilities 45,419 43,060
Notes payable banks - homebuilding operations 45,000 100,000
Note payable bank - financial services operations 29,000 30,000
Mortgage notes payable 12,699 14,227
Senior subordinated notes 50,000 50,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 291,797 332,219
- ----------------------------------------------------------------------------------------------------------------
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 63,409 62,954
Retained earnings 291,456 241,956
Treasury stock - at cost - 2,453,604 and 2,688,116 shares, respectively,
held in treasury at September 30, 2002 and December 31, 2001 (22,917) (25,107)
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 332,124 279,891
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $623,921 $612,110
- ----------------------------------------------------------------------------------------------------------------
See Notes to Interim Unaudited Consolidated Financial Statements.
(1) Common 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
(In thousands, except per share amounts) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
Revenue $261,509 $266,834 $735,510 $667,366
Costs and expenses:
Land and housing 197,117 207,268 554,717 514,945
General and administrative 16,746 14,977 42,894 36,857
Selling 15,972 15,972 45,865 43,135
Interest 2,802 4,411 10,232 11,237
- -----------------------------------------------------------------------------------------------------------------
Total costs and expenses 232,637 242,628 653,708 606,174
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 28,872 24,206 81,802 61,192
- -----------------------------------------------------------------------------------------------------------------
Income taxes (credit):
Current 12,040 11,450 33,023 24,784
Deferred (1,069) (2,256) (1,939) (1,428)
- ------------------------------------------------------------------------------- ---------------------------------
Total income taxes 10,971 9,194 31,084 23,356
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 17,901 15,012 50,718 37,836
Cumulative effect of change in accounting
principle - net of income taxes - - - 2,681
- -----------------------------------------------------------------------------------------------------------------
Net income $ 17,901 $ 15,012 $ 50,718 $ 40,517
- -----------------------------------------------------------------------------------------------------------------
Earnings per common share - basic: (1)
Income before cumulative effect of
change in accounting principle $ 1.18 $ 0.99 $ 3.36 $ 2.50
Cumulative effect of change in accounting
principle - net of income taxes - - - 0.17
- -----------------------------------------------------------------------------------------------------------------
Net income $ 1.18 $ 0.99 $ 3.36 $ 2.67
- -----------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted: (1)
Income before cumulative effect of
change in accounting principle $ 1.15 $ 0.96 $ 3.27 $ 2.42
Cumulative effect of change in accounting
principle - net of income taxes - - - 0.17
- -----------------------------------------------------------------------------------------------------------------
Net income $ 1.15 $ 0.96 $ 3.27 $ 2.59
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding: (1)
Basic 15,168 15,224 15,114 15,149
Diluted 15,530 15,712 15,519 15,644
- -----------------------------------------------------------------------------------------------------------------
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
NINE MONTHS ENDED SEPTEMBER 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 - - - 50,718 -
Stock split, par value unchanged - 88 - (88) -
Dividends to shareholders,
$0.075 per common share - - - (1,130) -
Stock options exercised 156,140 - 107 - 1,458
Deferral of executive and
director stock - - 1,080 - -
Executive and director deferred
stock distributions 78,373 - (732) - 732
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 15,172,519 $176 $63,409 $291,456 $(22,917)
- -------------------------------------------------------------------------------------------------------------------
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
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
(In thousands) (UNAUDITED) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $50,718 $40,517
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Loss from property disposals 28 20
Depreciation 1,658 1,412
Deferred income tax credit (1,939) (1,428)
Increase in cash held in escrow (135) (60)
(Increase) decrease in receivables (246) 268
Increase in inventories (1,549) (70,896)
Increase in other assets (2,192) (1,468)
Increase in accounts payable 17,720 9,960
Increase in customer deposits 820 6,712
(Decrease) increase in other liabilities (354) 3,274
Equity in undistributed income of unconsolidated joint ventures and
limited liability companies (771) (678)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 63,758 (12,367)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (628) (6,063)
Investment in unconsolidated joint ventures and limited liability companies (11,320) (7,840)
Distributions from unconsolidated joint ventures and limited liability
companies 1,425 1,259
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,523) (12,644)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments (56,000) 29,400
Principal repayments of mortgage notes payable (1,528) (3,875)
Dividends paid (1,130) (1,133)
Proceeds from exercise of stock options and deferred stock 1,565 1,721
Payments to acquire treasury shares - (3,977)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (57,093) 22,136
- -------------------------------------------------------------------------------------------------------------------
Net decrease in cash (3,858) (2,875)
Cash balance at beginning of year 9,988 8,555
- -------------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 6,130 $ 5,680
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $10,362 $10,671
Income taxes $32,157 $26,166
NON-CASH TRANSACTIONS DURING THE PERIOD:
Distribution of single-family lots from unconsolidated joint ventures and
limited liability companies $ 9,684 $ 9,786
Non-monetary exchange of fixed assets $ - $ 4,096
Deferral of executive and director stock $ 1,080 $ 796
Executive and director deferred stock distributions $ 732 $ -
- -------------------------------------------------------------------------------------------------------------------
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 nine months ended September 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. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(In thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Interest capitalized, beginning of period $11,866 $12,638 $12,187 $ 10,337
Interest incurred 3,147 4,928 10,256 14,055
Interest expensed (2,802) (4,411) (10,232) (11,237)
- -------------------------------------------------------------------------------------------------------------------
Interest capitalized, end of period $12,211 $13,155 $12,211 $13,155
- -------------------------------------------------------------------------------------------------------------------
NOTE 3. CONTINGENCIES
At September 30, 2002, the Company had options and contingent purchase contracts
to acquire land and developed lots with an aggregate purchase price of
approximately $202 million.
NOTE 4. 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 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.
-7-
NOTE 5. 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities included in
restructurings. This Statement eliminates the definition and requirements for
recognition of exit costs as defined in EITF Issue 94-3, and requires that
liabilities for exit activities be recognized when incurred instead of at the
exit activity commitment date. This Statement is effective for exit or disposal
activities initiated after December 31, 2002.
NOTE 6. DIVIDENDS
On July 25, 2002, the Company paid to shareholders of record of its common stock
on July 1, 2002, a cash dividend of $0.025 per share. On August 14, 2002, the
Board of Directors approved a $0.025 per share cash dividend payable to
shareholders of record on October 1, 2002, which was paid on October 24, 2002.
Total dividends paid in 2002 through October 24 were approximately $1.5 million.
-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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
CONSOLIDATED
TOTAL REVENUE. Total revenue for the three months ended September 30,
2002 was $261.5 million, a 2% decrease from the $266.8 million recorded for the
comparable period in 2001. Total revenue for the nine months ended September 30,
2002 was $735.5 million, a 10% increase over the $667.4 million recorded for the
comparable period in 2001. For the three-month period, homebuilding revenue
decreased $5.8 million and financial services revenue increased by $0.5 million
over prior year's third quarter. For the nine-month period, homebuilding revenue
increased $67.6 million and financial services revenue increased $1.8 million.
The decrease in homebuilding revenue for the three-month period consisted
primarily of a housing revenue decrease of $8.6 million offset by a land revenue
increase of $2.7 million. The increase in homebuilding revenue for the
nine-month period consisted of a housing revenue increase of $60.2 million and a
land revenue increase of $6.6 million. The decrease in housing revenue for the
three months ended September 30, 2002 was attributable to a decrease in the
number of Homes Delivered of 100 units offset by a 6% increase in the average
sales price of Homes Delivered. The increase in housing revenue for the
nine-month period was attributable to an increase in the number of Homes
Delivered of 29 units and an 8% increase in the average sales price of Homes
Delivered. The increase in land revenue for the three and nine months ended
September 30, 2002 was primarily due to an increase in the number of lots sold
in our Virginia and Phoenix markets. The increase in financial services revenue
for the three and nine months ended September 30, 2002 was primarily
attributable to increases in revenue earned from the sale of loans.
INCOME BEFORE INCOME TAXES. Income before income taxes increased 19%
for the three months ended September 30, 2002 and 34% for the nine months ended
September 30, 2002 over the comparable periods in 2001. The increase for the
three months ended September 30, 2002 was the result of an increase in
homebuilding income before income taxes from $20.1 million to $20.9 million.
Income before income taxes for financial services increased from $3.2 million to
$3.7 million. The increase for the nine months ended September 30, 2002 was the
result of an increase in homebuilding income before income taxes from $43.5
million to $60.2 million. In addition, income before income taxes for financial
services increased from $10.6 million to $12.5 million. The increase in
homebuilding for the three-month period was primarily due to the increase in
housing gross margin from 21.6% to 23.5%. The increase in homebuilding for the
nine months ended September 30, 2002 was primarily due to the increase in
housing gross margin from 21.6% to 23.2%. The increase in financial services for
the three and nine months ended September 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 nine months ended September 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 nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Homebuilding $256,997 $262,831 $722,022 $654,401
Financial services 5,770 5,289 18,100 16,320
Intersegment (1,258) (1,286) (4,612) (3,355)
- -------------------------------------------------------------------------------------------------------------------
Total revenue $261,509 $266,834 $735,510 $667,366
- -------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes:
Homebuilding $ 20,895 $ 20,067 $ 60,173 $ 43,522
Financial services 3,714 3,245 12,452 10,604
Unallocated amounts 4,263 894 9,177 7,066
- -------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 28,872 $ 24,206 $ 81,802 $ 61,192
- -------------------------------------------------------------------------------------------------------------------
-10-
HOMEBUILDING SEGMENT
The following table sets forth certain information related to the homebuilding
segment:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Housing $250,492 $259,075 $699,603 $639,379
Land and lot 6,249 3,519 20,647 14,080
Other 256 237 1,772 942
- -------------------------------------------------------------------------------------------------------------------
Total revenue $256,997 $262,831 $722,022 $654,401
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Housing 97.5% 98.6% 96.9% 97.7%
Land and lot 2.4 1.3 2.9 2.2
Other 0.1 0.1 0.2 0.1
- -------------------------------------------------------------------------------------------------------------------
Total revenue 100.00 100.00 100.00 100.00
Land and housing costs 78.5 79.2 78.1 79.1
- -------------------------------------------------------------------------------------------------------------------
Gross margin 21.5 20.8 21.9 20.9
General and administrative expenses 3.0 2.7 2.8 2.8
Selling expenses 6.2 6.0 6.3 6.5
- -------------------------------------------------------------------------------------------------------------------
Operating income 12.3 12.1 12.8 11.6
Allocated expenses 4.2 4.5 4.5 4.9
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 8.1 %7.6% 8.3% 6.7%
- -------------------------------------------------------------------------------------------------------------------
OHIO AND INDIANA REGION
Unit Data:
New contracts, net 668 610 2,091 2,312
Homes delivered 725 750 1,920 1,814
Backlog at end of period 1,757 1,803 1,757 1,803
Average sales price of homes in Backlog $ 228 $ 212 $ 228 $ 212
Aggregate sales value of homes in Backlog $401,000 $383,000 $401,000 $383,000
Number of active subdivisions 90 87 90 87
- -------------------------------------------------------------------------------------------------------------------
FLORIDA REGION
Unit Data:
New contracts, net 268 214 708 693
Homes delivered 210 228 629 652
Backlog at end of period 565 533 565 533
Average sales price of homes in Backlog $ 219 $ 216 $ 219 $ 216
Aggregate sales value of homes in Backlog $124,000 $ 115,000 $124,000 $115,000
Number of active subdivisions 28 28 28 28
- -------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA, VIRGINIA, MARYLAND AND ARIZONA REGION
Unit Data:
New contracts, net 123 82 424 491
Homes delivered 132 189 404 458
Backlog at end of period 279 347 279 347
Average sales price of homes in Backlog $ 362 $ 430 $ 362 $ 430
Aggregate sales value of homes in Backlog $101,000 $150,000 $101,000 $150,000
Number of active subdivisions 28 30 28 30
- -------------------------------------------------------------------------------------------------------------------
TOTAL
Unit Data:
New contracts, net 1,059 906 3,223 3,496
Homes delivered 1,067 1,167 2,953 2,924
Backlog at end of period 2,601 2,683 2,601 2,683
Average sales price of homes in Backlog $ 241 $ 241 $ 241 $ 241
Aggregate sales value of homes in Backlog $626,000 $648,000 $626,000 $648,000
Number of active subdivisions 146 145 146 145
- -------------------------------------------------------------------------------------------------------------------
-11-
A home is included in "New Contracts" when our standard sales contract
is executed. "Homes Delivered" represent 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 September 30, 2002 and September 30, 2001 was 21% and 27%, respectively.
Unsold speculative homes, which are in various stages of construction, totaled
102 and 132 at September 30, 2002 and 2001, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
TOTAL REVENUE. Total revenue for the homebuilding segment for the
quarter ended September 30, 2002 was $257.0 million, a 2% decrease from 2001's
third quarter. The decrease consisted of a decrease in housing revenue of 3%
offset slightly by an increase in land revenue of 78%. Housing revenue decreased
as a result of a 9% decrease in Homes Delivered. Homes Delivered decreased in
all of our markets with the exception of Columbus, Orlando and Raleigh. The
decrease in housing revenue was partially offset by a 6% increase in the average
sales price of Homes Delivered. The average sales price of Homes Delivered
increased in all of our markets. The increase in land revenue from $3.5 million
to $6.2 million was primarily attributable to an increase in the number of lots
sold in our Virginia and Phoenix markets.
HOME SALES AND BACKLOG. New Contracts in the third quarter of 2002
increased 17% from 2001's third quarter. New Contracts increased in all of our
markets except West Palm Beach and Maryland. The number of New Contracts
recorded in future periods will be dependent on numerous factors, including
future economic conditions, timing of land development, consumer confidence,
number of subdivisions and interest rates available to potential home buyers.
At September 30, 2002, our Backlog consisted of 2,601 homes with an
approximate sales value of $626 million. This represents a 3% decrease in units
and sales value in comparison to September 30, 2001. The average sales price of
homes in Backlog remained consistent with the prior year.
GROSS MARGIN. The overall gross margin for the homebuilding segment was
21.5% for the three- month period ended September 30, 2002 compared to 20.8% for
the three-month period ended September 30, 2001. Housing gross margin increased
from 21.6% to 23.5% compared to 2001's third 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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by $0.6 million to $7.7 million, or 3.0% of revenue, for the
three months ended September 30, 2002 compared to $7.1 million, or 2.7% of
revenue, for the same period in 2001. The increase in dollars was primarily
attributable to increases in incentive compensation due to record results.
SELLING EXPENSES. Selling expenses remained flat at $15.9 million and
increased from 6.0% to 6.2% of revenue for the third quarter of 2002 over this
period in 2001.
-12-
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
TOTAL REVENUE. Total revenue for the homebuilding segment for the nine
months ended September 30, 2002 was $722.0 million, a 10% increase over the same
period in 2001. The increase consisted of an increase in housing revenue of 9%
and an increase in land revenue of 47%. Housing revenue increased as a result of
a slight 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 an 8% increase in the average sales price of
Homes Delivered. The average sales price of Homes Delivered increased in all our
markets except Orlando. The increase in land revenue from $14.1 million to $20.6
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 Indianapolis markets.
HOME SALES AND BACKLOG. New Contracts in the first nine months of 2002
decreased 8% from the same period in 2001. Decreases occurred in all of our
markets with the exception of Tampa, Orlando, 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
21.9% for the nine month period ended September 30, 2002 compared to 20.9% for
the nine month period ended September 30, 2001. Housing gross margin increased
from 21.6% to 23.2% over 2001's first nine 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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $20.3 million, or 2.8% of revenue, for the nine months
ended September 30, 2002 compared to $18.1 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 $42.9 million, or
6.5% of revenue, for the first nine months of 2001 to $45.3 million, or 6.3% of
revenue, for the first nine 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.
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FINANCIAL SERVICES SEGMENT
The following table sets forth certain information related to our financial
services segment:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 2002 2001 2002 2001
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Number of loans originated 888 978 2,417 2,407
Revenue:
Loan origination fees $1,557 $1,522 $ 4,199 $ 3,835
Sale of loans 2,261 1,977 8,517 7,723
Other 1,952 1,790 5,384 4,762
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Total revenue 5,770 5,289 18,100 16,320
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General and administrative expenses 2,056 2,044 5,648 5,716
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Operating income $3,714 $3,245 $12,452 $10,604
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Financial services consist primarily of originating mortgages for our
home buyers, processing and selling these mortgages and the related servicing
rights on the secondary market, and providing title services.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
TOTAL REVENUE. Total revenue for the three months ended September 30,
2002 was $5.8 million, a 9% increase from the $5.3 million recorded for the
comparable period of 2001. Loan origination fees increased 2% from $1.5 million
for the three months ended September 30, 2001 to $1.6 for the three months ended
September 30, 2002. This increase was due to an increase in average loan amount.
Revenue from the sale of loans increased 14% from $2.0 million for the
three months ended
September 30, 2001 to $2.3 million for the three months ended September 30,
2002. The increase was due to an increase in the average loan amount and a
falling interest rate market.
Revenue from other sources increased 9% to $2.0 million for the three
months ended September 30, 2002 compared to $1.8 million for the three months
ended September 30, 2001. This was due to better terms negotiated with
investors for closing fees on the sale of loans.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the three months ended September 30, 2002 remained fairly
consistent with prior years third quarter at $2.1 million.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
TOTAL REVENUE. Total revenue for the nine months ended September 30,
2002 was $18.1 million, an 11% increase from the $16.3 million recorded for the
comparable period of 2001. Loan origination fees increased 9% from $3.8 million
for the nine months ended September 30, 2001 to $4.2 million for the nine months
ended September 30, 2002. This increase was due to an increase in the average
loan amount.
Revenue from the sale of loans increased 10% from $7.7 million for the
nine months ended
September 30, 2001 to $8.5 million for the nine months ended September 30, 2002.
This was due to an increase in the average loan amount and a falling interest
rate market.
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Revenue from other sources increased 13% from $4.8 million for the nine
months ended
September 30, 2001 to $5.4 million for the nine months ended September 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 nine months ended September 30, 2002 were $5.6 million, a 1%
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 September 30, 2002 increased
to $6.4 million from $6.0 million for the comparable period in the prior year.
As a percentage of total revenue, corporate general and administrative expenses
for the three months ended September 30, 2002 increased to 2.5% from 2.2% for
the comparable period in the prior year. Corporate general and administrative
expenses increased from $13.4 million, or 2.0% of total revenue for the nine
months ended September 30, 2001 to $16.5 million, or 2.2% of total revenue, for
the nine months ended September 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 nine months ended September 30, 2002 decreased to $2.7 and $9.9
million, respectively, from $4.3 and $10.9 million recorded for the comparable
periods of the prior year. Interest expense was lower in the current year due to
a decrease in bank borrowings.
INCOME TAXES. The effective tax rate for both the three and nine months
ended September 30, 2002 was 38.0% compared to 38.0% and 38.2%, respectively,
for these periods in 2001. The slight decrease for the nine months was 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 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
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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 September 30, 2002, we had bank borrowings
outstanding of $45 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 $29 million outstanding at September 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. The loan agreement terminates in May 2003.
At September 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 $258 million of unused borrowing availability
under our credit facilities and approximately $52 million of completion bonds
and letters of credit outstanding at September 30, 2002.
SUBORDINATED NOTES. At September 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 September 30, 2002, mortgage notes payable
outstanding were approximately $13 million, secured by an office building, lots
and land with a recorded book value of approximately $16 million.
LAND AND LAND DEVELOPMENT. Single-family lots, land and land
development costs decreased slightly from December 31, 2001 to September 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.
PURCHASE OF TREASURY SHARES. We are authorized to repurchase up to 4
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 September 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 nine months of 2002.
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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. The weighted average interest rate
for our outstanding debt for the nine months ended September 30, 2002 and 2001
was 8.6% and 8.5%, 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.
- Periodic material and labor shortages can adversely affect our sales
and profitability.
- Our principle shareholders can exercise significant control over
shareholder matters.
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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 September 30, 2002, the notional principal
amount under these loan commitments was approximately $166 million and the
related fair value was a gain of approximately $2.1 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 September 30, 2002, the notional principal amount
under these forward sales agreements was approximately $163 million and the
related fair value of these agreements was a loss of approximately $1.7 million.
The hedging agreements outstanding at September 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 gains of $1.0
million and $0.6 million for the nine months ended September 30, 2002 and
September 30, 2001, respectively, related to loan commitments, forward sales of
mortgage-backed securities and interest rate swaps.
ITEM 4: CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures:
The Company's chief executive officer and chief financial officer
evaluated the Company's disclosure controls and procedures within 90 days of the
filing of this report. Their evaluation concluded that the disclosure controls
and procedures are effective and designed to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to them.
B. Changes in Internal Controls:
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any significant deficiencies or material
weaknesses of internal controls that would require corrective action.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings - none.
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Item 2. Changes in Securities and Use of Proceeds - none.
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Item 3. Defaults upon Senior Securities - none.
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Item 4. Submission of Matters to a Vote of Security Holders - none.
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Item 5. Other Information - none.
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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 Amendment Number 1 to the M/I Schottenstein Homes, Inc. 401(k) Profit
Sharing Plan for the Economic Growth and Tax Relief Reconciliation Act of
2001 dated November 12, 2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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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, 2002 by: /s/ Robert H. Schottenstein
----------------------------------
Robert H. Schottenstein
President and Director
Date: November 13, 2002 by: /s/ John A. Wilt
----------------------------------
John A. Wilt
Corporate Controller
(Principal Accounting Officer)
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CERTIFICATIONS
I, Irving E. Schottenstein certify that:
1. I have reviewed this quarterly report on Form 10-Q of M/I Schottenstein
Homes, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report:
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Irving E. Schottenstein
----------------------------------------------
Irving E. Schottenstein
Chairman and Chief Executive Officer
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CERTIFICATIONS
I, Phillip G. Creek certify that:
1. I have reviewed this quarterly report on Form 10-Q of M/I Schottenstein
Homes, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report:
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Phillip G. Creek
--------------------------------------------
Phillip G. Creek
Senior Vice President, Chief Financial
Officer and Treasurer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
10.1 Amendment Number 1 to the M/I Schottenstein Homes, Inc. 401(k)
Profit Sharing Plan for the Economic Growth and Tax Relief
Reconciliation Act of 2001 dated November 12, 2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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