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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 March 31, 2003
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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
---- ----------
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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: 14,340,303 shares
outstanding as of May 7, 2003
M/I SCHOTTENSTEIN HOMES, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. M/I Schottenstein Homes, Inc. and Subsidiaries
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2003 and 2002 4
Unaudited Condensed Consolidated Statement of Shareholders'
Equity for the Three Months Ended March 31, 2003 5
Unaudited Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2003 and 2002 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Certifications 26
Exhibit Index 28
2
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31,
2003 2002
(Dollars in thousands, except par values) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 7,055 $ 953
Cash held in escrow 1,669 381
Receivables 48,198 56,159
Inventories:
Single-family lots, land and land development costs 259,460 269,863
Houses under construction 196,852 177,225
Model homes and furnishings - at cost (less accumulated depreciation:
March 31, 2003 - $75; December 31, 2002 - $66) 2,219 1,948
Land purchase deposits 2,293 2,181
Building, office furnishings, transportation and construction equipment - at
cost (less accumulated depreciation:
March 31, 2003 - $8,345; December 31, 2002 - $7,798) 21,135 20,813
Investment in unconsolidated joint ventures and limited liability companies 19,517 20,333
Other assets 28,387 28,602
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 586,785 $ 578,458
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 65,386 $ 58,187
Accrued compensation 7,313 23,213
Customer deposits 18,819 17,089
Other liabilities 51,091 48,782
Notes payable banks - homebuilding operations 17,000 -
Note payable bank - financial services operations 19,700 28,800
Mortgage notes payable 12,616 12,658
Senior subordinated notes 50,000 50,000
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 241,925 238,729
- -------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
- -------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value; authorized 2,000,000 shares; none outstanding - -
Common stock - $.01 par value; authorized 38,000,000 shares; issued 17,626,123 shares 176 176
Additional paid-in capital 65,583 65,079
Retained earnings 324,474 306,970
Treasury stock - at cost - 3,290,620 and 2,834,704 shares, respectively,
held in treasury at March 31, 2003 and December 31, 2002 (45,373) (32,496)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 344,860 339,729
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 586,785 $ 578,458
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2003 2002
(In thousands, except per share amounts) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
Revenue $209,009 $215,562
Costs and expenses:
Land and housing 152,345 161,628
General and administrative 11,795 10,726
Selling 13,318 13,997
Interest 2,250 3,536
- -----------------------------------------------------------------------------------------------------------------
Total costs and expenses 179,708 189,887
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 29,301 25,675
- ------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 9,817 9,707
Deferred 1,610 49
- -----------------------------------------------------------------------------------------------------------------
Total income taxes 11,427 9,756
- -----------------------------------------------------------------------------------------------------------------
Net income $ 17,874 $ 15,919
- -------------------------------------------------------------------------------------------------------------------
Net income per common share: (1)
Basic $ 1.23 $ 1.06
Diluted $ 1.20 $ 1.03
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding : (1)
Basic 14,558 15,032
Diluted 14,901 15,499
- -----------------------------------------------------------------------------------------------------------------
See Notes to Unaudited Condensed Consolidated Financial Statements.
(1) Shares outstanding and per share data for the prior period have been
adjusted for the 2-for-1 stock split effective June 19, 2002.
4
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------------- Additional
(Dollars in thousands, except Shares Paid-In Retained Treasury
per share amounts) Outstanding Amount Capital Earnings Stock
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 14,791,419 $ 176 $ 65,079 $ 306,970 $ (32,496)
Net income - - - 17,874 -
Dividends to shareholders,
$0.025 per common share - - - (370) -
Income tax effect of stock options and
executive deferred stock distributions - - 344 - -
Purchase of treasury shares (506,300) - - - (13,528)
Stock options exercised 7,700 - (8) - 93
Deferral of executive and
director stock - - 726 - -
Executive and director deferred
stock distributions 42,684 - (558) - 558
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2003 14,335,503 $ 176 $ 65,583 $ 324,474 $ (45,373)
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2003 2002
(In thousands) (UNAUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,874 $ 15,919
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from property disposals - 19
Depreciation 561 561
Deferred income taxes 1,610 49
Income tax benefit from stock transactions 344 -
Increase in cash held in escrow (1,288) (992)
Decrease in receivables 7,961 9,627
Increase in inventories (6,437) (3,392)
Decrease (increase) in other assets (1,395) 414
Increase in accounts payable 7,199 4,326
Increase in customer deposits 1,730 915
Decrease in other liabilities (12,865) (12,823)
Equity in undistributed income of unconsolidated joint ventures and
limited liability companies (209) (303)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,085 14,320
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (874) (36)
Investment in unconsolidated joint ventures and limited liability companies (2,404) (2,703)
Distributions from unconsolidated joint ventures and limited liability companies 250 285
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,028) (2,454)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings - net of repayments 7,900 (11,600)
Principal repayments of mortgage notes payable (42) 22
Dividends paid (370) (374)
Proceeds from exercise of stock options and deferred stock 85 1,460
Payments to acquire treasury shares (13,528) -
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,955) (10,492)
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash 6,102 1,374
Cash balance at beginning of period 953 9,988
- --------------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 7,055 $ 11,362
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest - net of amount capitalized $ 2,259 $ 3,779
Income taxes $ 4,304 $ 4,749
NON-CASH TRANSACTIONS DURING THE PERIOD:
Distribution of single-family lots from unconsolidated joint ventures and
limited liability companies $ 3,179 $ 2,824
Deferral of executive and director stock $ 726 $ 898
Executive and director deferred stock distributions $ 558 $ 469
- --------------------------------------------------------------------------------------------------------------------
See Notes to Unaudited Condensed Consolidated Financial Statements.
6
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements (the
"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 Financial Statements reflect the elimination of
significant intercompany transactions. Results for the interim period are not
necessarily indicative of results for a full year. In the opinion of management,
the accompanying 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. These Financial Statements should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
included in the Company's Annual Report to Shareholders incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during that period.
Actual results could differ from those estimates and have a significant impact
of the financial condition and results of operations and cash flows. With regard
to the Company, estimates and assumptions 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 these estimates and assumptions include the risks and
uncertainties listed in the "Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995" contained within the Management's Discussion and
Analysis of Financial Condition and Results of Operation.
NOTE 2. STOCK-BASED COMPENSATION.
The Company accounts for its stock-based employee compensation plan under the
recognition and measurement principles of Accounting Principle Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees", and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation", to stock-based employee compensation.
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------
Net income, as reported $ 17,874 $ 15,919
Deduct: Total stock-based employee compensation
expense determined under fair value based methods for
all awards, net of related tax effects (1,308) (1,034)
- ------------------------------------------------------------------------------------------------------
Pro forma net income $ 16,566 $ 14,885
- ------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 1.23 $ 1.06
Basic - pro forma $ 1.14 $ .99
Diluted - as reported $ 1.20 $ 1.03
Diluted - pro forma $ 1.11 $ .96
- ------------------------------------------------------------------------------------------------------
7
NOTE 3. IMPACT OF NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 adoption of SFAS 145 has not had a significant impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 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 Emerging Issues Task Force ("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. The
adoption of SFAS 146 has not had a significant impact on the Company's financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also includes more
detailed disclosures with respect to guarantees. FIN 45 is effective for
guarantees issued or modified starting January 1, 2003 and required additional
disclosures for the year ended December 31, 2002. The application of the
provisions of FIN 45 has not had a significant impact on the Company's financial
condition or results of operations. The Company has provided the disclosure
required by FIN 45 in Note 6.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The transition provisions and the disclosure
requirements of this statement were effective for fiscal years ending after
December 15, 2002. The Company will continue to apply the intrinsic value-based
method to account for stock options and has complied with the new quarterly
disclosure requirements, included in Note 2 for the period ended March 31, 2003.
In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of
Variable Interest Entities"("FIN 46"). FIN 46 requires an investor with a
majority of the variable interests in a variable interest entity ("VIE") to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A VIE is an entity in which
the equity investors do not have a controlling interest, or the equity
investment at risk is insufficient to finance the entity's activities without
receiving additional subordinated financial support from other parties. For
arrangements entered into with VIEs created prior to January 31, 2003, the
provisions of FIN 46 are required to be adopted at the beginning of the first
interim or annual period beginning after June 15, 2003. The Company is currently
reviewing its investments and other arrangement to determine whether any of its
investments in joint ventures and limited liability companies should be
consolidated VIEs within the context of FIN 46. FIN 46 requires certain
disclosures with respect to VIEs in interim and annual financial statements if
it is reasonably possible that an enterprise will consolidate or disclose
information about VIEs under this interpretation. The Company has disclosed this
information in Note 5. The provisions of FIN 46 may also apply to certain option
contracts to acquire land. The Company believes that many of these investments
in entities will not be consolidated and may not even fall within the provisions
of FIN 46, but the Company may be required to make additional disclosures. The
Company cannot make any definitive determination until June 2003 when it expects
to complete its evaluation of such contracts. The provisions of FIN 46 are
effective immediately for all arrangements entered into with new VIEs created
after January 31, 2003. The Company did not invest in any new VIEs during the
three-month period ended March 31, 2003.
8
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities for decisions made by the FASB as part of the Derivative
Implementation Group. This statement is generally effective for contracts
entered into or modified after June 30, 2003. The Company has not completed its
evaluation of SFAS 149 but does not believe it will have a material impact of
the Company's financial condition or results of operations.
NOTE 4. 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 MARCH 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------
Interest capitalized, beginning of period $11,475 $12,187
Interest incurred 2,673 3,727
Interest expensed (2,250) (3,536)
- --------------------------------------------------------------------------------------------
Interest capitalized, end of period $11,898 $12,378
- --------------------------------------------------------------------------------------------
NOTE 5. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES AND LIMITED LIABILITY
COMPANIES
At March 31, 2003, the Company had interests varying from 33% to 50% in joint
ventures and limited liability companies ("Company VIEs") that engage in land
development activities for the purpose of developed lot distribution to the
Company and its partners in the entity. The Company receives its percentage
interest in the lots developed in the form of a capital distribution. These
interests are recorded using the equity method of accounting.
These Company VIEs have assets and other liabilities totaling approximately
$42.0 million and $3.3 million, respectively at March 31, 2003. These Company
VIEs generally do not hold debt securities, except for seller requested
financing arrangements upon purchasing land for the Company VIE. The Company's
maximum exposure related to any investment that may be determined to be in a
Company VIE is limited to the amount invested of $ 19.5 million plus letters of
credit of $2.9 million that serve as completion bonds for the Company VIEs
development work in progress.
The Company also owns 49.9% interest in two unconsolidated title insurance
agencies that engage in closing services for M/I Financial. These investments
are accounted for under the equity method of accounting. The Company's maximum
exposure related to these investments is limited to the amount invested of
approximately $100,000.
NOTE 6. GUARANTEES AND INDEMNIFICATIONS
Warranty
The Company provides a two-year limited warranty on materials and workmanship
and a thirty-year limited warranty against major structural defects. Warranty
amounts are reserved as homes close to homebuyers and cover estimated material
and outside labor costs incurred during the warranty period. The reserve amounts
are based upon historical experience and geographic location. The summary of
warranty activity is as follows:
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------
Warranty reserves, beginning of period $ 7,233 $ 7,250
Warranty expense 1,166 1,462
Payments made (1,407) (1,741)
- ------------------------------------------------------------------------------------------------
Warranty reserves, end of period $ 6,992 $ 6,971
- ------------------------------------------------------------------------------------------------
9
Guarantees
In the ordinary course of business, M/I Financial Corp. ("M/I Financial"), a
wholly-owned subsidiary of the Company, enters into agreements that contain
standard guarantees whereby M/I Financial guarantees purchasers of its mortgage
loans that M/I Financial will re-purchase certain loans should the mortgagee not
meet certain conditions of the loan, generally within a specified time period.
The maximum potential amount of future payments that M/I Financial could be
required to pay under these guarantees varies and is offset by the value of the
underlying asset and related insurance recoveries, as most loans are insured.
In addition to the above guarantees, the Company has guaranteed the
collectibility of certain loans to a third party insurer of those loans for
periods ranging from 5 years to 30 years. The maximum potential amount of future
payments is equal to the outstanding loan value less the value of the underlying
asset plus administrative costs incurred related to foreclosure on the loans,
should this event occur. The Company has accrued management's best estimate of
the potential loss on these loans as of March 31, 2003.
NOTE 7. COMMITMENTS AND CONTINGENCIES
At March 31, 2003, the Company had sales agreements outstanding, some of which
have contingencies for financing approvals, to deliver 2,662 homes with an
aggregate sales price of $657 million. At March 31, 2003, the Company had
options and contingent purchase contracts to acquire land and developed lots
with an aggregate purchase price of approximately $214 million. Purchase of
properties is contingent upon satisfaction of certain requirements by the
Company and the sellers.
At March 31, 2003, the Company had outstanding approximately $46 million of
completion bonds and standby letters of credit, which serve as completion bonds
for development work in progress, deposits on land and lot purchase contracts,
and miscellaneous deposits that expire through August 2007.
The Company is involved from time to time in routine litigation. Management does
not believe that the ultimate resolution of this litigation will be material to
the results of operations of the Company.
NOTE 8. 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.
NOTE 9. PURCHASE OF TREASURY SHARES
The Company obtained authorization pursuant to action taken on December 11,
2002, to repurchase up to $50 million worth of shares of its outstanding common
shares. The purchases may occur on the open market and/or in privately
negotiated transactions as market conditions warrant. During the three-month
period ended March 31, 2003, the Company repurchased 506,300 shares at an
average price of $27. As of March 31, 2003, the Company had purchased a total of
4 million shares at an average price of $13. The Company had approximately $36
million available to repurchase outstanding common shares from the original
Board approval at March 31, 2003.
NOTE 10. DIVIDENDS
On April 24, 2003, the Company paid to shareholders of record of its common
stock on April 1, 2003, a cash dividend. Total dividends paid in 2003 through
April 24, 2003 were approximately $730,000.
10
On April 22, 2003, the Board of Directors approved a $0.025 per share cash
dividend payable to shareholders of record on July 1, 2003, payable on July 24,
2003.
NOTE 11. SUBSEQUENT EVENT
On May 1, 2003, the Company and M/I Financial amended its $30 million Revolving
Credit (the "Agreement"). The second amendment to the original Agreement, dated
May 3, 2001, extended the Agreement to April 29, 2004.
11
M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Our reportable segments are strategic business units that offer
different products and services. The business segments are defined as
homebuilding and financial services. The homebuilding operations include the
development and sale of land and the construction and sale of single-family
attached and detached homes. The homebuilding segment includes similar
operations in several geographic regions that have been aggregated for segment
reporting purposes. The financial services operations include the origination of
mortgage loans and title services for purchasers of the Company's homes. The
loans and servicing rights are sold to outside mortgage lenders.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies included in the Company's
Annual Report to Shareholders. Intersegment revenue primarily represents the
elimination of revenue included in financial services revenue for fees paid by
the homebuilding operations to lock in interest rates. Fees paid by the
homebuilding segment to the financial services segment were at market prices for
the services provided. Homebuilding income before taxes includes an interest
charge on the Company's net investment in the segment at the Company's overall
cost of capital as well as an allocation for programs and services administered
centrally. Unallocated income before income taxes includes intercompany interest
income, intercompany profit and cost eliminations from other segments and
miscellaneous income offset by salaries and other administrative expenses that
are not identifiable with a specific segment.
In conformity with "Statement of Financial Accounting Standards ("SFAS 131"),
"Disclosure about Segments of an Enterprise and Related Information", the
Company's segment information is presented on the basis that management uses
internally in evaluating segment performance.
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------
Revenue:
Homebuilding $204,821 $210,869
Financial services 6,998 6,907
Intersegment (2,810) (2,214)
- ---------------------------------------------------------------------------------------------------
Total revenue $209,009 $215,562
- ---------------------------------------------------------------------------------------------------
Income before income taxes:
Homebuilding $ 17,852 $ 15,819
Financial services 5,180 5,257
Unallocated amounts 6,269 4,599
- ---------------------------------------------------------------------------------------------------
Total income before income taxes $ 29,301 $ 25,675
- ---------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
CONSOLIDATED
Total Revenue. Total revenue for the three months ended March 31, 2003
was $209.0 million, a 3% decrease from the $215.6 million recorded for the
comparable period in 2002. The decrease was primarily the result of a decrease
in homebuilding revenue of $6.0 million caused by a decrease in housing revenue
of $13.9 million offset by an increase in land revenue of $7.1 million and an
increase in other revenue of $.8 million. Housing revenue decreased as a result
of the 5% decrease in Homes Delivered. The increase in land revenue was
primarily attributable to lot sales related to the exit from our Phoenix market
that did not occur in 2002's first quarter.
12
Income Before Income Taxes. Income before income taxes for the first
quarter of 2003 was $29.3 million, a $3.6 million increase over 2002's first
quarter. The increase was due primarily to an increase in homebuilding income
before income taxes of 12.9% resulting primarily from an increase in gross
profit from 22.3% to 23.4%.
HOMEBUILDING SEGMENT
The following table sets forth certain information related to our homebuilding
segment:
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------
Revenue:
Housing $189,746 $203,687
Land and lot 12,883 5,830
Other 2,192 1,352
- ---------------------------------------------------------------------------------------------------
Total revenue $204,821 $210,869
- ---------------------------------------------------------------------------------------------------
Revenue:
Housing 92.6% 96.6%
Land and lot 6.3 2.8
Other 1.1 0.6
- ---------------------------------------------------------------------------------------------------
Total revenue 100.0 100.0
Land and housing costs 76.6 77.7
- ---------------------------------------------------------------------------------------------------
Gross margin 23.4 22.3
General and administrative expenses 3.3 3.1
Selling expenses 6.4 6.5
- ---------------------------------------------------------------------------------------------------
Operating income 13.7 12.7
Allocated expenses 5.0 5.2
- ---------------------------------------------------------------------------------------------------
Income before income taxes 8.7% 7.5%
- ---------------------------------------------------------------------------------------------------
OHIO AND INDIANA REGION
Unit data:
New contracts, net 789 738
Homes delivered 487 527
Backlog at end of period 1,825 1,797
Average sales price of homes in Backlog $ 235 $ 222
Aggregate sales value of homes in Backlog $428,000 $398,000
Number of active subdivisions 88 85
- ---------------------------------------------------------------------------------------------------
FLORIDA REGION
Unit data:
New contracts, net 248 198
Homes delivered 214 197
Backlog at end of period 575 487
Average sales price of homes in Backlog $ 236 $ 214
Aggregate sales value of homes in Backlog $136,000 $104,000
Number of active subdivisions 30 25
- ---------------------------------------------------------------------------------------------------
NORTH CAROLINA, VIRGINIA, MARYLAND AND ARIZONA REGION
Unit data:
New contracts, net 104 147
Homes delivered 99 122
Backlog at end of period 262 284
Average sales price of homes in Backlog $ 354 $ 379
Aggregate sales value of homes in Backlog $ 93,000 $108,000
Number of active subdivisions 25 30
- ---------------------------------------------------------------------------------------------------
TOTAL
Unit data:
New contracts, net 1,141 1,083
Homes delivered 800 846
Backlog at end of period 2,662 2,568
Average sales price of homes in Backlog $ 247 $ 238
Aggregate sales value of homes in Backlog $657,000 $610,000
Number of active subdivisions 143 140
- ---------------------------------------------------------------------------------------------------
13
Total Revenue. Total revenue for the homebuilding segment for the
quarter ended March 31, 2003 was $204.8 million, a 2.9% decrease from 2002's
first quarter. The decrease was primarily the result of a decrease in housing
revenue of $13.9 million offset by an increase in land revenue of $7.1 million.
Housing revenue decreased as a result of the 5% decrease in Homes Delivered.
Homes Delivered decreased in all of our markets except Tampa, Orlando, Charlotte
and Raleigh. The increase in land revenue was primarily attributable to lot
sales related to our exit from the Phoenix market that did not occur in the
first quarter of 2002.
Home Sales and Backlog. New Contracts in the first quarter of 2003
increased 5% from 2002's first quarter. New Contracts increased in all of the
Company's markets with the exception of Indianapolis, Charlotte, Raleigh and
Washington D.C. The number of New Contracts recorded in future periods will be
dependent on numerous factors, including future economic conditions, timing of
land acquisitions and development, consumer confidence, number of subdivisions
and interest rates available to potential homebuyers.
At March 31, 2003, our Backlog consisted of 2,662 homes with an
approximate sales value of $657 million. This represents a 4% increase in units
and an 8% increase in sales value compared to the first quarter of 2002. The
average sales price of homes in Backlog increased by 4% with increases occurring
in nearly all of our markets.
Other Financial Information. A home is included in "New Contracts" when
our standard sales contract is executed. New Contracts are shown net of
cancellations. "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
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
March 31, 2003 and March 31, 2002 was 20% and 22%, respectively. Unsold
speculative homes, which are in various stages of construction, totaled 94 and
106 at March 31, 2003 and March 31, 2002, respectively.
Gross Margin. The overall gross margin for the homebuilding segment was
23.4% for the three-month period ended March 31, 2003 compared to 22.3% for the
three-month period ended March 31, 2002. Housing gross margin increased from
23.0% to 25.1% and land gross margin increased from 18.0% to 20.8 % from 2002's
first quarter. The increase in housing's gross margin was the result of
acquiring and developing lots in premier locations, favorable housing economic
conditions including low mortgage rates and improved operating efficiencies. The
increase in land and lot sales' gross margin was due primarily to lots sold
related to our exit from the Phoenix market. Lot and land gross margins can vary
significantly depending on the sales price, the cost of the subdivision and the
stage of development in which the sale takes place.
General and Administrative Expenses. General and administrative
expenses increased to $6.8 million for the first three months of 2003 compared
to $6.5 million for the first three months of 2002. As a percentage of revenue,
general and administrative expenses increased from 3.1% to 3.3%, respectively.
The increase in dollars was primarily due to commission expenses relating to our
exit from the Phoenix market that did not occur in 2002's first quarter.
Selling Expenses. Selling expenses decreased to $13.1 million, or 6.4%
of revenue, for the first quarter of 2003 from $13.6 million, or 6.5% of
revenue, for the first quarter of 2002. The decrease primarily related to lower
sales commissions paid to outside realtors and internal sales people due to the
decrease in the number and average sales price of Homes Delivered.
14
FINANCIAL SERVICES SEGMENT
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.
The following table sets forth certain information related to the financial
services segment:
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Number of loans originated 650 686
Revenue
Loan origination fees $1,155 $1,187
Sale of loans 4,236 4,119
Other 1,607 1,601
- -------------------------------------------------------------------------------------------------------------------
Total revenue 6,998 6,907
- -------------------------------------------------------------------------------------------------------------------
General and administrative expenses 1,818 1,650
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes $5,180 $5,257
- -------------------------------------------------------------------------------------------------------------------
Total Revenue. Total revenue for the three months ended March 31, 2003
was $7.0 million, a 1.3% increase over the $6.9 million recorded for the
comparable period in 2002. Loan origination fees decreased 2.7% compared to the
first quarter of 2002 due to a 5.2% decrease in loans originated.
Revenue from the sale of loans increased 2.8% from $4.1 million for the
three months ended March 31, 2002 to $4.2 million for the three months ended
March 31, 2002. This was primarily the result of favorable market conditions
during the period.
Revenue from other sources, primarily loan application fees and title
fees, for the three months ended March 31, 2003 and 2002 remained constant at
$1.6 million.
General and Administrative Expenses. General and administrative
expenses increased 10.2% from $1.6 million for the three months ended March 31,
2002 to $1.8 million for the three months ended March 31, 2003. This was
primarily due to an increase in loan applications.
OTHER OPERATING RESULTS
Corporate General and Administrative Expenses. Corporate general and
administrative expenses increased from $2.7 million for the three months ended
March 31, 2002 to $3.2 million for the three months ended March 31, 2003. As a
percentage of total revenue, general and administrative expenses increased to
1.5% for the three months ended March 31, 2003 from 1.2% for the comparable
period in the prior year. The increase was primarily due to an increase in
incentive compensation accruals due to increased profitability.
Interest Expense. Corporate and homebuilding interest expense, net of
amounts capitalized into inventory, for the first quarter of 2003 totaled $2.2
million, a 36.4% decrease from the $3.5 million recorded for the comparable
period of the prior year. Interest expense was lower due to a decrease in total
average borrowings from $174 million to $84 million partially offset by a higher
average borrowing rate, which includes the effects of our interest rate swaps.
Income Taxes. The effective tax rate for the three months ended March
31, 2003 increased to 39% from 38% for the first quarter of 2002 due to a
greater percentage of the Company's profits being generated in higher tax
states.
15
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. Items that could have a significant impact on estimates
and assumptions, and therefore, the financial statements include risk and
uncertainties listed in the "Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995" below.
Inventories. Inventories are recorded at cost that is not in excess of
net realizable value. In addition to the costs of direct land acquisition, land
development and home construction, inventory costs include capitalized interest,
real estate taxes and indirect costs incurred during development and home
construction. Those costs, other than capitalized interest, are charged to cost
of sales as housing sales are closed. Capitalized interest is included in
interest expense when the respective housing sales are closed. We assess these
assets for recoverability in accordance with the provisions of SFAS 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. These evaluations for
impairment are significantly impacted by estimates of revenues, costs and
expenses and other factors. If these assets are considered to be impaired, the
impairment loss to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Revenue Recognition. Revenue from the sale of a home is recognized when
the closing has occurred and the risk of ownership is transferred to the buyer.
All associated homebuilding costs are charged to costs of sales in the period
when the revenues from home closings are recognized. Homebuilding costs include
land and land development costs, home construction costs (including an estimate
of the costs to complete home construction), previously capitalized indirect
costs and estimated warranty costs. Sales commissions are included in selling,
expense when the closing has occurred. All other costs are expensed as incurred.
We recognize financial services revenues associated with our title
operations as homes are closed, closing services are rendered and title
insurance policies are issued, all of which generally occur simultaneously as
each home is closed. We recognize the majority of the revenues associated with
our mortgage loan operations when the mortgage loans and related servicing
rights are sold to third-party investors. We recognize mortgage loan origination
fees when we close and fund the loans associated with the homes financed. All of
the financial services mortgage loans and related servicing rights are sold to
third-party investors. All of the underwriting risk associated with title
insurance policies is transferred to third-party insurers.
Self-insurance. Self-insurance accruals are made for certain claims
associated with employee health care, workers' compensation and general
liability insurance. These accruals include management's estimates that may be
based on historical loss development factors. Differences in estimates and
assumptions could result in an accrual requirement materially different from the
calculated accrual.
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 on Page 19
for further discussion of factors that could impact our source of funds.
16
Notes Payable Banks. At March 31, 2003, we had bank borrowings
outstanding of $17 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 $19.7 million outstanding at March 31, 2003 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 was amended on May 3, 2003. The
amendment extended the agreement to April 29, 2004. See Note 11 to the Unaudited
Condensed Consolidated Financial Statements.
At March 31, 2003, we had approximately $298 million of unused
borrowing availability under our credit facilities, including $10 million under
the M/I Financial loan agreement. At March 31, 2003, the Company had
approximately $46 million of completion bonds and letters of credit outstanding.
Subordinated Notes. At March 31, 2003, there was outstanding $50
million of Senior Subordinated Notes. The notes bear interest at a fixed rate
and mature in August 2006.
Weighted Average Interest Rate. At March 31, 2003, the weighted average
interest rate for our outstanding debt for the three months ended March 31, 2003
and 2002 was 12.7% and 8.6%, including the cost of the Company's interest rate
swaps, respectively. The increase in this rate from 2002 is primarily due to a
greater percentage of the Company's average outstanding borrowings during the
period being higher rate subordinated debt than in 2002.
Mortgage Notes Payable. At March 31, 2003, mortgage notes payable
outstanding were approximately $12.6 million, secured by an office building,
lots and land with a recorded book value of approximately $18.4 million.
Land and Land Development. Single-family lots, land and land
development costs decreased slightly from December 31, 2002 to March 31, 2003.
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. We have interest in joint
ventures and limited liability companies that in engage in land development
activities and are recorded using the equity method of accounting. These
entities have no debt on their balance sheets.
Purchase of Treasury Shares. The Company obtained authorization
pursuant to action taken on December 11, 2002, to repurchase up to $50 million
worth of shares of its outstanding common shares. The purchases may occur on the
open market and/or in privately negotiated transactions as market conditions
warrant. During the three-month period ended March 31, 2003, the Company
repurchased 506,300 shares at an average price of $27. As of March 31, 2003, the
Company had purchased a total of 4 million shares at an average price of $13.
The Company had approximately $36 million available to repurchase outstanding
common shares from the original Board approval at March 31, 2003.
Commitments and Contingencies. At March 31, 2003, the Company had sales
agreements outstanding, some of which have contingencies for financing
approvals, to deliver 2,662 homes with an aggregate sales price of $657 million.
At March 31, 2003, the Company had options and contingent purchase contracts to
acquire land and developed lots with an aggregate purchase price of
approximately $214 million. Purchase of properties is contingent upon
satisfaction of certain requirements by the Company and the sellers.
At March 31, 2003, the Company had outstanding approximately $46
million of completion bonds and standby letters of credit, which serve as
completion bonds for development work in progress, deposits on land and lot
purchase contracts and miscellaneous deposits that expire through August 2007.
The Company is involved from time to time in routine litigation.
Management does not believe that the ultimate resolution of this litigation will
be material to the results of operations of the Company.
17
IMPACT OF NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 adoption of SFAS 145 has not had a significant impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 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 Emerging Issues Task
Force ("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. The adoption of SFAS 146 has not had a significant impact on the
Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also includes more
detailed disclosures with respect to guarantees. FIN 45 is effective for
guarantees issued or modified starting January 1, 2003 and required additional
disclosures for the year ended December 31, 2002. The application of the
provisions of FIN 45 has not had a significant impact on the Company's financial
condition or results of operations. The Company has provided the disclosure
required by FIN 45 in Note 6.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The transition provisions and the disclosure
requirements of this statement were effective for fiscal years ending after
December 15, 2002. The Company will continue to apply the intrinsic value-based
method to account for stock options and has complied with the new quarterly
disclosure requirements, included in Note 2 for the period ended March 31, 2003.
In January 2003, the FASB issued FASB Interpretation 46,
"Consolidation of Variable Interest Entities"("FIN 46"). FIN 46 requires an
investor with a majority of the variable interests in a variable interest entity
("VIE") to consolidate the entity and also requires majority and significant
variable interest investors to provide certain disclosures. A VIE is an entity
in which the equity investors do not have a controlling interest, or the equity
investment at risk is insufficient to finance the entity's activities without
receiving additional subordinated financial support from other parties. For
arrangements entered into with VIEs created prior to January 31, 2003, the
provisions of FIN 46 are required to be adopted at the beginning of the first
interim or annual period beginning after June 15, 2003. The Company is currently
reviewing its investments and other arrangement to determine whether any of its
investments in joint ventures and limited liability companies should be
consolidated VIEs within the context of FIN 46. FIN 46 requires certain
disclosures with respect to VIEs in interim and annual financial statements if
it is reasonably possible that an enterprise will consolidate or disclose
information about VIEs under this interpretation. The Company has disclosed this
information in Note 5. The provisions of FIN 46 may also apply to certain option
contracts to acquire land. The Company believes that many of these investments
in entities will not be consolidated and may not even fall within the provisions
of FIN 46, but the Company may be required to make additional disclosures. The
Company cannot make any definitive determination until it completes its
evaluation. The provisions of FIN 46 are effective immediately for all
arrangements entered into with new VIEs created after January 31, 2003. The
Company did not invest in any new VIEs during the three-month period ended March
31, 2003.
18
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities for decisions made by the FASB as part of the Derivative
Implementation Group. This statement is generally effective for contracts
entered into or modified after June 30, 2003. The Company has not completed its
evaluation of SFAS 149 but does not believe it will have a material impact of
the Company's financial condition or results of operations.
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.
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 a cost 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.
General Real Estate, Economic and Other Conditions. The homebuilding
industry is significantly affected by changes in national and local economic and
other conditions. Many of these conditions are beyond our control. These
conditions include employment levels, changing demographics, availability of
financing, consumer confidence and housing demand. In addition, homebuilders are
subject to risks related to competitive overbuilding, availability and cost of
building lots, availability of materials and labor, adverse weather conditions
which can cause delays in construction schedules, cost overruns, changes in
government regulations and increases in real estate taxes and other local
government fees. Interest rate increases also adversely affect the industry, as
it is impossible to predict whether rates will be at levels that are attractive
to prospective homebuyers. Mortgage rates are currently at historically low
levels. If mortgage interest rates increase, our business could be adversely
affected.
Land Development Activities. We develop the lots for a majority of our
subdivisions. Therefore, our short and long-term financial success will be
dependent upon our ability to develop these subdivisions successfully. Acquiring
land and committing the financial and managerial resources to develop a
subdivision involves significant risks. Before a subdivision generates any
revenue, we may make material expenditures for items such as acquiring land and
constructing subdivision infrastructure (roads and utilities).
The Company's Markets. We have operations in Columbus and Cincinnati,
Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm Beach County, Florida;
Charlotte and Raleigh, North Carolina; and the Virginia and Maryland suburbs of
Washington, D.C. Adverse general economic conditions in these markets could have
a material impact on our operations. In 2002, approximately 40% of our operating
income was derived from operations in the Columbus market.
Competition. The homebuilding industry is highly competitive. We
compete in each of our local market areas with numerous national, regional and
local homebuilders, some of which have greater financial, marketing,
19
land acquisition, and sales resources than we do. Builders of new homes compete
not only for homebuyers, but also for desirable properties, financing, raw
materials and skilled subcontractors. We also compete with the resale market for
existing homes that provides certain attractions for homebuyers over the new
home market.
Governmental Regulation and Environmental Considerations. The
homebuilding industry is subject to increasing local, state and Federal
statutes, ordinances, rules and regulations concerning zoning, resource
protection, building design, and construction and similar matters. This includes
local regulations that impose restrictive zoning and density requirements in
order to limit the number of homes that can eventually be built within the
boundaries of a particular location. Such regulation also affects construction
activities, including construction materials that must be used in certain
aspects of building design, as well as sales activities and other dealings with
homebuyers. We must also obtain licenses, permits and approvals from various
governmental agencies for our development activities, the granting of which are
beyond our control. Furthermore, increasingly stringent requirements may be
imposed on homebuilders and developers in the future. Although we cannot predict
the impact on us to comply with any such requirements, such requirements could
result in time-consuming and expensive compliance programs.
We are also subject to a variety of local, state and Federal statutes,
ordinances, rules and regulations concerning the protection of health and the
environment. The particular environmental laws, which apply to any given
project, vary greatly according to the project site and the present and former
uses of the property. These environmental laws may result in delays, cause us to
incur substantial compliance costs (including substantial expenditures for
pollution and water quality control) and prohibit or severely restrict
development in certain environmentally sensitive regions. Although there can be
no assurance that we will be successful in all cases, we have a general practice
of requiring an environmental audit and resolution of environmental issues prior
to purchasing land in an effort to avoid major environmental issues in our
developments.
In addition, we have been, and in the future may be, subject to
periodic delays or may be precluded from developing certain projects due to
building moratoriums. These moratoriums generally relate to insufficient water
supplies or sewage facilities, delays in utility hookups or inadequate road
capacity within the specific market area or subdivision. These moratoriums can
occur prior to, or subsequent to, commencement of our operations without notice
or recourse.
Risk of Material and Labor Shortages. The residential construction
industry has, from time to time, experienced significant material and labor
shortages in insulation, drywall, brick, cement and certain areas of carpentry
and framing, as well as fluctuations in lumber prices and supplies. Continued
shortages in these areas could delay construction of homes that could adversely
affect our business. At this time, we are not experiencing any significant
material or labor shortages and, therefore, do not anticipate a material effect
for fiscal year 2002.
Significant Voting Control by Principal Shareholders. As of March 31,
2003, members of the Irving E. Schottenstein family, including the Chief
Executive Officer, President and Chief Operating Officer, owned approximately
27.3% of the Company's outstanding common shares. Therefore, members of the
Schottenstein family have significant voting power.
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 that 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 $125 million, of
which $50 million 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 March 31, 2003, the notional principal amount
under these loan commitments was approximately $163 million. The fair value
adjustment related to these commitments as of March 31, 2003 was $1 million
unfavorable and is recorded on the Company's balance sheet.
20
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 March 31, 2003, the notional principal amount under
these forward sales agreements was approximately $166 million and the related
fair value adjustment was approximately $1 million unfavorable. This adjustment
is reflected on the Company's balance sheet. The hedging agreements outstanding
at March 31, 2003 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.
The Company recorded net fair value adjustments of approximately $.5 million
for the three months ended March 31, 2003 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:
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
management, including our Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation,
the Chief Executive Officer, along with our Chief Financial Officer, concluded
that the disclosure controls and procedures are effective in timely alerting
management to material information relating the Company (including all
consolidated subsidiaries) required to be included in our periodic SEC reports.
It should be noted that the design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote. In addition, a
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Therefore, the Company does not expect these disclosure controls to
prevent all error and all fraud.
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.
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 22, 2003, the Company held its 2003 annual meeting of
shareholders. The shareholders voted on the following proposals:
1) to elect three directors to serve three-year terms
2) to approve the restructuring of the Company's corporate structure into
a holding company structure by transferring the Company's operating
assets and certain associated liabilities to wholly-owned subsidiaries
of the Company, and
21
3) to ratify the appointment of Deloitte & Touche LLP as the Company's
independent accountants and auditors for the 2003 fiscal year.
The results of the voting are as follows:
1. Election of Directors
For Withheld
Thomas D. Igoe 13,528,553 27,002
Steven Schottenstein 12,726,982 828,573
Lewis R. Smoot, Sr. 13,528,555 27,000
All three directors were re-elected.
2. Restructuring of the Company's corporate structure
For 11,592,770
Against 25,470
Abstain 2,311
No Vote 1,935,456
The proposal was approved.
3. To ratify the appointment of Deloitte & Touche LLP as the
independent accountants and auditors for fiscal year 2003
For 13,512,770
Against 42,635
Abstain 150
The proposal was approved.
22
Item 5. Other Information
- -------------------------
On April 22, 2003, the Board of Directors approved a $0.025 per
share cash dividend payable to shareholders of record on July 1, 2003, payable
on July 24, 2003.
The following information is being provided pursuant to SEC Release
Nos. 33-8048, 34-45189, "Disclosure of Equity Compensation Plan Information"
(December 21, 2002). This information was inadvertently omitted from the
Company's 2003 Annual Report on Form 10-K previously filed with the Securities
and Exchange Commission and is being filed with this Quarterly Report on Form
10-Q and is as of December 31, 2002.
- ---------------------------------------------------------------------------------------------------
(a) (b) (c)
- ---------------------------------------------------------------------------------------------------
Plan Category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a)
- ---------------------------------------------------------------------------------------------------
532,960 $18.92 213,940
Equity compensation
plans approved by
security holders
- ---------------------------------------------------------------------------------------------------
242,908 $12.10 857,092
Equity compensation
plans not approved by
security holders
- ---------------------------------------------------------------------------------------------------
775,868 $16.79 1,071,032
Total
- ---------------------------------------------------------------------------------------------------
Following is a description of the Equity Compensation Plans that have
not been approved by the Company's security holders:
Directors Deferred Compensation Plan. The Directors Deferred
Compensation Plan provides each of our directors with the opportunity to defer
the payment of all or none of the fees received for serving as a director. The
deferred fees are allocated to the participant's deferred compensation account
where the fees are converted into that number of whole phantom stock units
determined by dividing the amount of the deferred fees by the closing sales
price of our common shares on the New York Stock Exchange ("NYSE") on the last
business day of the month in which the allocation is made. Each participant's
deferred compensation account is credited in an amount equivalent to the cash
dividends actually declared and paid on our common shares based on the phantom
stock units held by the participant under the Directors Deferred Compensation
Plan at the time the cash dividends are declared. The amount credited to the
participant's deferred compensation account based on cash dividends on our
common shares is also converted into phantom stock units. The phantom stock
units held by a participant under the Directors Deferred Compensation Plan are
distributed in the form of whole common shares of the Company within sixty days
of the date specified by the participant in his or her deferral notice or the
date the participant no longer serves as a director (in which case the
participant also receives any remaining cash balance in his or her deferred
compensation account).
23
Executives' Deferred Compensation Plan. Subject to certain minimum and
maximum deferral amounts set forth therein, the Executives' Deferred
Compensation Plan (1) requires eligible employees to defer the payment of a
minimum portion of their respective annual cash bonus and (2) provides eligible
employees with the opportunity to defer the payment of an additional portion of
their respective annual cash bonus. The deferred amount is allocated to the
participant's deferred compensation account where the deferred amount is
converted into that number of whole phantom stock units determined by dividing
the deferred amount by the average of the closing sales price of our common
shares on the NYSE on the last business day of each of the last four fiscal
quarters. Each participant's deferred compensation account is credited in an
amount equivalent to the cash dividends actually declared and paid on our common
shares based on the phantom stock units held by the participant under the
Executives' Deferred Compensation Plan at the time the cash dividends are
declared. The amount credited to the participant's deferred compensation account
based on cash dividends on our common shares is also converted into phantom
stock units. The phantom stock units held by a participant under the Executives'
Deferred Compensation Plan are distributed in the form of whole common shares of
the Company within sixty days of the date specified by the participant in his or
her deferral notice or the date the participant no longer serves as an employee
(in which case the participant also receives any remaining cash balance in his
or her deferred compensation account).
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
Two Form 8-Ks were filed subsequent to the first quarter. The first dated April
10, 2003 related to the public release of the Company's unit information as of
and for the three month period ended March 31, 2003. The second, dated April 21,
2003 related to the public release of the Company's earnings information for
the three months ended March 31, 2003.
The exhibits required to be filed herewith are set forth below.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 Second Amendment to Revolving Credit Agreement by and among M/I
Financial Corp., the Company and Guaranty Bank dated May 1, 2003.
10.2 Company's 2003 Chief Executive Officer Bonus Program.
10.3 Company's 2003 President Bonus Program.
10.4 Company's 2003 Chief Operating Officer Bonus Program.
10.5 Company's 2003 Chief Financial Officer Bonus Program.
99.1 Certification by Irving E. Schottenstein, Chief Executive Officer,
pursuant to 10 U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. A signed original of this written
statement required by Section 906 has been provided to M/I
Schottenstein Homes, Inc. and will be retained by M/I Schottenstein
Homes, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
99.2 Certification by Phillip G. Creek, Chief Financial Officer, pursuant to
10 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. A signed original of this written statement
required by Section 906 has been provided to M/I Schottenstein Homes,
Inc. and will be retained by M/I Schottenstein Homes, Inc. and
furnished to the Securities and Exchange Commission or its staff upon
request.
24
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: May 15, 2003 by: /s/ Robert H. Schottenstein
---------------------------------
Robert H. Schottenstein
President and Director
Date: May 15, 2003 by: /s/ Ann Marie Hunker
---------------------------------
Ann Marie Hunker
Corporate Controller
(Principal Accounting Officer)
25
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 ninety 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 functions):
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: May 15, 2003 /s/ Irving E. Schottenstein
-----------------------------------------
Irving E. Schottenstein
Chairman and Chief Executive Officer
26
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:
1. 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;
2. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within ninety days prior to
the filing date of this quarterly report (the "Evaluation Date");
and
3. 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 functions):
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: May 15, 2003 /s/Phillip G. Creek
----------------------------------------
Phillip G. Creek
Senior Vice President, Chief Financial
Officer and Treasurer
27
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE #
- -------------- -------------------------------------------------------------- -----------
10.1 Second Amendment to Revolving Credit Agreement by and among
M/I Financial Corp., the Company and Guaranty Bank dated May
1, 2003. 29
10.2 Company's 2003 Chief Executive Officer Bonus Program. 40
10.3 Company's 2003 President Bonus Program. 41
10.4 Company's 2003 Chief Operating Officer Bonus Program. 42
10.5 Company's 2003 Chief Financial Officer Bonus Program. 43
99.1 Certification by Irving E. Schottenstein, Chief Executive
Officer, pursuant to 10 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A
signed original of this written statement required by Section
906 has been provided to M/I Schottenstein Homes, Inc. and
will be retained by M/I Schottenstein Homes, Inc. and
furnished to the Securities and Exchange Commission or its
staff upon request. 44
99.2 Certification by Phillip G. Creek, Chief Financial Officer,
pursuant to 10 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. A signed
original of this written statement required by Section 906 has
been provided to M/I Schottenstein Homes, Inc. and will be
retained by M/I Schottenstein Homes, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request. 45
28