-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GYAnJx8UV0/sMhnauGf8zaOcDLGlF76qtzMa+hAZ1NCOt6WXXDLJ53vX6yS55Um9 JFXfjJcvgvikFXHrCaPq8Q== 0000950152-98-002604.txt : 19980330 0000950152-98-002604.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950152-98-002604 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: M I SCHOTTENSTEIN HOMES INC CENTRAL INDEX KEY: 0000799292 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 311210837 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12434 FILM NUMBER: 98576533 BUSINESS ADDRESS: STREET 1: 3 EASTON OVAL STE 500 CITY: COLUMBUS STATE: OH ZIP: 43219 BUSINESS PHONE: 6144188000 FORMER COMPANY: FORMER CONFORMED NAME: MI SCHOTTENSTEIN HOMES INC DATE OF NAME CHANGE: 19920703 10-K 1 M/I SCHOTTENSTEIN HOMES, INC. FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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 No. 1-12434 M/I SCHOTTENSTEIN HOMES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 31-1210837 -------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 Easton Oval, Suite 500 Columbus, Ohio 43219 -------------------- (Address of principal executive offices)(zip code) Registrant's telephone number, including area code: (614) 418-8000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange on Title of Each Class Which Registered ---------------------------- ------------------------ Common Stock, par value $.01 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None ---------------- (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 2, 1998, the aggregate market value of voting common stock held by non-affiliates of the registrant (4,823,261 shares) was approximately $108,825,000. The number of shares of common stock of M/I Schottenstein Homes, Inc., outstanding on March 2, 1998 was 7,602,161. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1997 (Part I, II and IV) Portions of the registrant's Definitive Proxy Statement for the 1998 Annual Meeting of Shareholders filed pursuant to Regulation 14A (Part III) 2 PART I ITEM 1. BUSINESS COMPANY M/I Schottenstein Homes, Inc. was reincorporated in Ohio in 1993. Prior to that date, the Company was a Delaware Corporation. M/I Schottenstein Homes, Inc. was incorporated, through predecessor entities, in 1973 and commenced its homebuilding activities in 1976. M/I Schottenstein Homes, Inc. and its subsidiaries (the "Company") is one of the nation's leading homebuilders. The Company constructs and sells single-family homes to the entry level, move-up and empty nester buyer under the Horizon, M/I Homes and Showcase Homes tradenames. In 1996, the latest year for which information is available, the Company was the fourteenth largest U.S. single-family homebuilder (based on total revenue) as ranked by Builder Magazine. The Company sells its homes in eleven geographic markets including Columbus and Cincinnati, Ohio; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; Indianapolis, Indiana; Virginia, Maryland and, recently, Phoenix, Arizona. The Company currently offers seven distinct lines of single-family homes ranging in base sales price from approximately $80,000 to $860,000 with an average sales price in 1997 of $183,000. During the year ended December 31, 1997, the Company delivered 3,152 homes and had revenues of $614.0 million and net income of $17.4 million, the highest in the Company's history. The Company is the leading homebuilder in the Columbus, Ohio market and has been the number one builder of single-family detached homes in this market for each of the past nine years. In addition, the Company is currently one of the top ten homebuilders in each of its Ohio, Florida, Indiana and North Carolina markets and believes it is well positioned to further penetrate these and its other markets. The Company's growth strategy targets both product line expansion and geographical diversification. With respect to geographical diversification, the Company has expanded into new markets through the opening of new divisions rather than through acquisitions. To complement its M/I Homes ($120,000 - $230,000 base sales price range) and Showcase Homes ($180,000 - $340,000 base sales price range) lines, the affordably priced Horizon line ($95,000 - $145,000 base sales price range), which appeals to the first time home buyer, was introduced to the Columbus market in 1993 and has been very successful. The Company has expanded this entry level product into a majority of its other markets. The Company believes it distinguishes itself from competitors by offering homes located in selective areas that have a higher level of design and construction quality within a given price range and by providing superior customer service. The Company also believes that by offering homes at a variety of price points, it attracts a wide range of buyers, many of whom were previous Horizon, M/I or Showcase homeowners. The Company supports its homebuilding operations by providing mortgage financing services through M/I Financial, and also provides title-related services through joint ventures. The Company's business strategy emphasizes the following key objectives: Focus on profitability. The Company focuses on improving profitability while maintaining the high quality of both its homes and its customer service. The Company focuses on gross margins by stressing the features, benefits, quality and design of its homes in the sale process and by minimizing speculative building. The Company also value engineers its homes by working with its subcontractors and suppliers to provide attractive home features while minimizing raw material and construction costs. Maintain conservative and selective land policies. The Company's profitability is largely dependent on the quality of its subdivision locations; therefore, the Company focuses on locating and controlling land in the most desirable areas of its markets. The Company is very conservative in its land acquisition policies and only purchases land already zoned and serviceable by utilities. The Company seeks to control a three- to five-year supply of land in each of its markets. The Company believes its expertise in developing land gives the Company a competitive advantage in controlling attractive locations at competitive costs, and, as a result, developed approximately 50% of its communities as of December 31, 1997. At December 31, 1997, the company owned 6,835 lots and controlled an additional 9,187 lots pursuant to contracts. Maintain or increase market position in current markets. The Company has been the leading builder of single-family detached homes in the Columbus market for the last nine years. The Company seeks to maintain its leading position by continuing to provide high quality homes and superior customer service. The Company believes there are 2 3 significant opportunities to profitably expand in each of its other markets, by increasing its product offerings, continuing to acquire land in desirable locations and constructing and selling homes with the same commitment to customer service that has accounted for the Company's historical success. In addition, the Company continues to explore expanding into new markets through either internal growth (such as the expansion into Phoenix, Arizona late in 1996) or acquisitions. Provide superior customer service. The overriding Company philosophy is to provide superior service to its customers. The Company offers a wide array of functional and innovative designs and involves the customer in virtually every phase of its operations from the selling process through construction, closing and service after delivery. The Company's selling process focuses on the homes' features, benefits, quality and design as opposed to merely price and square footage. In certain markets, the Company utilizes design centers to enhance the selling process and increase the sale of optional features which typically carry higher margins. In addition, the Company assists many of its customers with financing and provides attractive warranties. As a result, based on the responses to the Company's customer questionnaire, for the seventh year in a row, more than 95% of the Company's customers would recommend the Company to a potential buyer. Offer product breadth and innovative design. The Company devotes significant resources to the research and design of its homes to better meet the needs of its customers. The Company offers seven distinct product lines and more than 300 different floor plans and elevations. In addition to providing customers with a wide variety of choices, the Company believes it offers a higher level of design and construction quality within a given price range. In addition, the Company has introduced and utilized innovative design concepts, such as themed communities, rear garages and rear alley access. Maintain decentralized operations with experienced management. The Company believes that each of its markets has unique characteristics and, therefore, is managed locally with dedicated, on-site management personnel. The Company's managers possess intimate knowledge of their particular market and are encouraged to be entrepreneurial in order to best meet the needs of such market. The Company's incentive compensation structure rewards each manager based on financial performance, income growth and customer satisfaction. SALES AND MARKETING The Company markets and sells its homes under the Horizon, M/I and Showcase tradenames. Home sales are conducted from on-site sales offices in furnished model homes by the Company's own sales personnel. Each sales consultant is trained and equipped to fully explain the features and benefits of the Company's homes, to determine which home best suits each customer's needs, to explain the construction process and to assist the customer in choosing the best financing. Significant attention is paid to the training and re-training of all sales personnel to assure the highest levels of professionalism and product knowledge. Overall, the Company currently employs more than 136 sales consultants and operates approximately 150 model homes. The Company advertises in newspapers and magazines, by direct mail, on billboards and on radio and television, although the particular marketing medium used differs from division to division based upon marketing demographics and other competitive factors. In addition, the Company welcomes independent broker participation and, from time to time, utilizes various promotions and sales incentives to attract interest from these brokers. The Company's commitment to quality design and construction and reputation for customer service has resulted in a strong referral base and a significant number of repeat buyers. To enhance the selling process, the Company operates design centers in the Cincinnati, Columbus, and most recently, Tampa markets. The design centers are staffed with interior design specialists who assist customers in selecting interior and exterior colors as well as standard options and upgrades. In its other markets, the color selection and option/upgrade process is handled directly by the Company's sales consultants. The Company also offers financing to its customers through its wholly-owned subsidiary, M/I Financial, which now has branches in all markets in which the Company operates except Virginia, Maryland and Phoenix. M/I Financial originates loans primarily for purchasers of the Company's homes. The loans are then sold, along with the majority of the servicing rights, to outside mortgage lenders. 3 4 The Company generally does not commence construction of its homes until it obtains a sales contract and preliminary oral advice from the customer's lender that financing will be approved. However, in certain markets, contracts are sometimes accepted contingent upon the sale of an existing home and construction is authorized through a certain stage prior to satisfaction of that contingency. In addition, in all divisions, a limited, strictly controlled number of "spec" homes (i.e., homes started in the absence of an executed contract) are built in order to permit construction and delivery of homes on an immediate-need basis and to provide presentation of new products. In determining the number of spec homes to be started, the Company has traditionally adopted what it believes to be a very conservative approach, with the unit number determined after consultation with the respective region and division presidents. The Company's sales and marketing efforts are further enhanced by the Company's inspection and warranty programs. Through these programs, the Company offers a 2-year limited warranty on materials and workmanship and a 20-year limited warranty against major structural defects. To increase the value of these warranties, both are transferable in the event of the sale of the home. Immediately prior to closing and three months after a home is delivered, the Company inspects each home with the customer to determine if any repairs are required. At the customer's written request, the Company will also provide a free 1-year inspection and again make any necessary repairs. The Company also passes along to its customers all warranties provided by manufacturers or suppliers of components installed in each home. The Company's warranty expense was approximately 1.0% of total costs and expenses for each of the years ended December 31, 1997, 1996 and 1995. DESIGN AND CONSTRUCTION The Company devotes significant resources to the research, design and development of its homes in order to better meet the needs of the various home buyers in housing markets in which the Company operates. Virtually all of the Company's floor plans and elevations are designed by an experienced, in-house staff of qualified professionals using modern computer-aided design technology. The Company offers more than 300 different floor plans and elevations which may differ significantly from market to market. The construction of each home is supervised by a construction supervisor who reports to a production manager, both of whom are employees of the Company. Customers are introduced to their construction supervisor prior to commencement of home construction at a pre-construction "buyer/builder" conference. In addition to introducing customers to their construction supervisor, the purpose of this conference is to review with the customers the home plans and all relevant construction details and to explain the construction process and schedule to the customers. Every customer is given a hard hat at the "buyer/builder" conference as an open invitation to visit the site at any time during the course of construction. The Company wants customers to become involved, to better understand the construction of their home and to see the quality being built into their home. All of this is part of the Company's philosophy to "put the customer first" and enhance the total homebuilding experience. Homes generally are constructed according to standardized designs and meet applicable Federal Housing Authority ("FHA") and Veterans Administration ("VA") requirements. To allow maximum design flexibility, the Company limits the use of pre-assembled building components and pre-fabricated structural assemblies. The efficiency of the building process is enhanced by the Company's use of standardized materials available from a variety of sources. The Company has, from time to time, experienced construction delays due to shortages of materials or subcontractors. Such construction delays may, in turn, delay the delivery of homes, thereby extending the period of time between the signing of a purchase contract with respect to a home and the receipt of revenue by the Company; however, the Company cannot predict the extent to which shortages of necessary materials or labor may occur in the future. The Company employs independent subcontractors for the installation of site improvements and the construction of its homes. Subcontractors are supervised by the Company's on-site construction supervisors. All subcontractor work is performed pursuant to written agreements with the Company. Such agreements are generally short-term, with terms from six to twelve months, provide for a fixed price for labor and materials and are structured to allow for price protection for the Company's Backlog. The Company seeks to build in large volume to reduce the per unit cost of the homes which it sells due to advantages achieved by lower unit prices paid to subcontractors for labor and materials. 4 5 MARKETS The Company's operations are organized into geographic regions in order to maximize management and operating efficiencies. Each geographic region is comprised of one or more operating divisions in a particular major metropolitan area. The Company's present divisional operating structure is as follows: Year Operations Region Division Commenced ------ -------- --------- Ohio........................... Columbus 1976 Columbus - Showcase 1988 Columbus - Horizon 1994 Cincinnati 1988 Indiana........................ Indianapolis 1988 Florida........................ Tampa 1981 Orlando 1984 Palm Beach County 1984 North Carolina................. Charlotte 1985 Raleigh 1986 Washington D.C. ............... Virginia 1991 Maryland 1991 Arizona........................ Phoenix 1996 Ohio and Indiana Region. The Company began its operations in the Columbus, Ohio market in 1976 and expanded into both Cincinnati, Ohio and Indianapolis, Indiana in 1988. These markets accounted for approximately 60% of the Company's deliveries in 1997. Columbus is the capital of Ohio, with federal, state and local governments providing significant and stable employment. Columbus has been a stable market with diverse economic and employment bases. In 1997, Columbus' unemployment rate was approximately 3%, significantly below the national rate of 5.4%. Columbus is also the home of The Ohio State University, one of the largest universities in the world, with an annual budget exceeding $1 billion. The Company offers all product lines in Columbus, with base sales prices ranging from approximately $95,000 to $340,000 through three operating divisions. The Company is the leading homebuilder in Columbus, having built and delivered more single-family detached homes in this market than any other homebuilder during each of the last nine years. In 1997, the Company had approximately a 22% market share in the Columbus market. Cincinnati, like Columbus, is characterized by both a stable economic environment and a diverse employment base. Employers include Proctor & Gamble, Kroger and General Electric. Also, the Cincinnati International Airport serves as a regional hub for Delta Airlines. The Company continues to expand its Horizon product line in this market and focuses on more affordable communities. In 1997, the Company was ranked the number two homebuilder in Cincinnati, excluding the Northern Kentucky market in which the Company does not participate. Indianapolis is a growth market noted for its excellent transportation system and relatively young population. 1997 was the sixth consecutive year of record single-family housing permits, due in part to the low unemployment rate of 3%. A large aircraft maintenance hub for United Airlines and a $62 million express mail sorting facility for the U.S. Postal Service have recently begun operations in Indianapolis. The Company continues to expand its Horizon product line in this market by introducing 40 foot lots. The Company continues to focus on premier locations with more affordable price points. 5 6 Florida Region. The Company entered the Florida market in 1981, when it opened its Tampa division. In 1984, the Company opened additional divisions in Orlando and Palm Beach County. In 1997, home deliveries in this region represented approximately 20% of the Company's total deliveries. Tampa's housing market is strong, buoyed by financial services, tourism and conventions. Business relocation has continued, especially in the banking, insurance and telecommunications industries. Tampa's economy continues to grow; 1997 employment levels increased by 4%. Market-specific products, including the Horizon series, have been very successful for the Company in Tampa. In 1997, Orlando's economy grew at a healthy pace, with job growth increasing by 5%. Growth was led by improved tourism (both domestic and foreign), strong in-migration and business expansion/relocation due primarily to lower business costs. Substantial employment growth in the tourism industry is expected to continue. Palm Beach County is one of the more affluent markets in the United States. Recent job gains have been experienced in the construction, wholesale trade and service sectors. Population growth in the 1990s has been at a rate of twice the national average. The Company is concentrating on offering a good mix of product, for both the first-time and move-up home buyer. The North Carolina and Metropolitan Washington, D.C. Region. In 1985, the Company entered Charlotte and a year later began building in Raleigh-Durham. In 1991, the Company expanded into both Virginia and Maryland. In 1997, these markets represented approximately 20% of the Company's total deliveries. Charlotte, which is home to fast-growing firms in the banking industry, continues to prosper as a financial center. The Company expects this market to continue to gain administrative and back-office jobs as these firms pursue growth outside the region. In addition, Charlotte is establishing itself as a transportation hub with its manufacturing base. Due to this strong industry presence and the addition of professional sports teams, Charlotte is ranked at an above average level for long-term employment growth. Raleigh-Durham is well situated to take advantage of the explosive growth in high-tech firms with a well-educated workforce and the recently completed North Carolina telecommunications highway. The Company expects the housing market in this area to continue to exhibit strong growth. The Company believes that the Washington, D.C. market will remain very competitive. Historically, the Washington, D.C. region has been dominated by Federal Government employment. However, there has been an increasing trend toward private sector jobs, especially in the high-technology area. The Company's current operations in the Washington, D.C. region are located primarily in Fairfax, Prince William and Loudoun Counties in Virginia and Prince Georges, Montgomery and Anne Arundel Counties in Maryland. The Company will continue to focus on geographic, product and pricing niches in this market. The Arizona Region. The Company entered the Phoenix market in November 1996. The Phoenix housing market is one of the most active in the United States, generating over 25,000 permits annually in each of the last four years. Phoenix is a national leader in employment growth and has a very diverse economy. Additionally, in 1997, the Phoenix metropolitan area's unemployment rate was 2.4%. As commonly occurs in the homebuilding industry, it has been the Company's experience that it incurs losses in a new market, as it expenses all start-up costs. In 1997, the Company incurred a $1.4 million loss in its Phoenix division. PRODUCT LINES The Company, on a regional basis, offers homes ranging in base sales price from approximately $80,000 to $860,000 and ranging in square footage from approximately 1,100 to 4,700 square feet. There are more than 300 different floor plans and elevations across all product lines. By offering a wide range of homes, the Company is able to attract first-time home buyers, move-up home buyers and empty nesters. It is a Company goal to sell more than one home to our customers. 6 7 In the Columbus market, which is the Company's largest market, the Company offers all of its seven distinct product lines. In addition, the Company offers a select number of its product lines in its divisions outside of Columbus. The base sales price range and average square footage for these product lines in Columbus are shown below: BASE SALES AVERAGE PRODUCT LINE PRICE RANGE SQUARE FOOTAGE ------------ ----------- -------------- Horizon $95,000 - $145,000 1,400 M/I Homes Heritage $120,000 - $170,000 1,500 Hallmark $145,000 - $210,000 2,000 Lakes of Powell $175,000 - $220,000 2,200 Regency $170,000 - $230,000 2,450 Showcase Homes Signature $220,000 - $275,000 2,500 Hampsted $180,000 - $340,000 2,600 Classic $250,000 - $340,000 2,800 In addition, the Company offers a line of attached townhomes in the Maryland and Virginia markets. These homes are marketed primarily to first-time buyers and range from 1,600 to 2,300 square feet of living space. These homes utilize wood frame construction and feature aluminum exteriors with brick fronts. In Maryland, Virginia and Phoenix, the Company offers homes with up to 4,700 square feet of living space for base sales prices ranging up to $860,000. In each of the Company's lines of homes, certain options are available to the purchaser for an additional charge. Major options include fireplaces, additional bathrooms, and higher quality carpeting, cabinets and appliances. The options typically are more numerous and significant on the more expensive homes. In offering its various products, the Company attempts to maintain substantially the same ratio of revenue to costs and expenses for each of its product lines. LAND DEVELOPMENT ACTIVITIES The Company's land development activities and land holdings have increased significantly in the past few years, and are expected to continue to increase. The Company continues to purchase lots from outside developers under option contracts, when possible, to limit the Company's risk; however, the Company continues to evaluate all of its alternatives to satisfy its need for lots in the most cost effective manner. The Company develops its own lots when it can gain a competitive advantage by doing so or when shortages of qualified land developers make it impractical to purchase the required lots from outside sources. The Company seeks to limit its investment in undeveloped land and lots to the amount reasonably expected to be sold in the next three to five years. Although the Company purchases land and engages in land development activities primarily for the purpose of furthering its own homebuilding activities, in certain markets, the Company has developed land with the intention of selling a portion of the lots to outside homebuilders. To limit the risk involved in the development of raw land, the Company has primarily acquired land through the use of contingent purchase contracts. These contracts require the approval of the Company's land committee. These contracts condition the Company's obligation to purchase land upon the Company's review and approval of zoning, utilities, soil and subsurface conditions, environmental and wetland conditions, levels of taxation, traffic patterns, development costs, title matters and other property-related criteria. In addition, careful attention is paid to the quality of the public school system. Only after this thorough evaluation has been completed does the Company make a commitment to purchase undeveloped land. To further reduce its risk when evaluating the acquisition of raw land, the Company generally does not commence development and engineering plans or surveys until all necessary zoning approvals are obtained. The Company from time to time enters into joint ventures, generally with other homebuilders. At December 31, 1997, the Company had interests varying from 33% to 50% in each of 16 joint ventures and 11 limited 7 8 liability companies ("LLCs"). These joint ventures and LLCs develop land into lots and, generally, the Company receives its percentage interest in the form of a distribution of developed lots. The joint ventures and LLCs pay the managing partner or manager certain fees for accounting, administrative and construction supervision services performed by the managing partner or manager in addition to its percentage interest as a partner in the profits of the joint venture or LLC. The Company currently is responsible for the management of 6 of these 16 joint ventures and 6 of the 11 LLCs. These joint ventures and LLCs are equity financed, except where seller financing is available on attractive terms. During the development of lots and land, the Company is required by some municipalities and other governmental authorities to provide completion bonds for sewer, streets and other improvements. The Company generally provides letters of credit in lieu of these completion bonds. At December 31, 1997, $9.6 million of letters of credit were outstanding for these purposes, as well as $10.2 million of completion bonds. AVAILABLE LOTS AND LAND The Company seeks to balance the economic risk of owning lots and land with the necessity of having lots available for its homes. At December 31, 1997, the Company had in inventory 1,947 developed lots and 1,896 lots under development. The Company also owned raw land expected to be developed into approximately 1,644 lots. In addition, at December 31, 1997, the Company's interest in lots held by its joint ventures and LLCs consisted of 41 developed lots and 392 lots under development. The Company also owns interests in raw land held by its joint ventures and LLCs zoned for 915 lots. It is anticipated that some of the lots owned by the Company and the joint ventures and LLCs will be sold to others. At December 31, 1997, the Company had options and purchase contracts, which expire over the next 5 years, to acquire 3,008 developed lots and land to be developed into approximately 6,179 lots, for a total of 9,187 lots, with an aggregate current purchase price of approximately $166.4 million. Purchase of these properties is contingent upon satisfaction of certain requirements by the Company and the sellers, such as zoning approval. The majority of these lot purchase agreements provide for periodic escalation of the purchase price which, the Company believes, reflects the developers' carrying cost of the lots. The following table sets forth the Company's land position in lots (including the Company's interest in joint ventures) by region in which the Company operated at December 31, 1997:
OWNED LOTS ------------------------------------- Under To Be Lots under Region Developed Development Developed Option Total -------------------------------------------------------------------------------------------- Ohio and Indiana 1,096 743 1,881 6,767 10,487 Florida 461 136 286 1,278 2,161 Carolina 207 61 140 752 1,160 Washington, D.C. and Phoenix 224 1,348 252 390 2,214 -------------------------------------------------------------------------------------------- Total 1,988 2,288 2,559 9,187 16,022 ============================================================================================
FINANCIAL SERVICES Through its wholly-owned subsidiary, M/I Financial, the Company offers fixed and adjustable rate mortgage loans, primarily to buyers of the Company's homes. M/I Financial has branches in all of the Company's housing markets, with the exception of Virginia, Maryland and Arizona. Of the 2,917 Homes Delivered in 1997 in the markets in which M/I Financial operates, M/I Financial provided financing for 2,365 of these homes representing approximately $340.6 million of mortgage loans originated and sold. M/I Financial issues commitments to customers and closes both conventional and government-insured loans in its own name. However, in an effort to minimize the risk of financing activities, M/I Financial generally sells the loans it originates to the secondary market which provides the funding within 8 9 several days thereafter. The Company retains a small servicing portfolio which it currently sub-services with a financial institution. At December 31, 1997, the Company was committed to fund $85.4 million in mortgage loans to home buyers. Of this total, approximately $27.3 million were adjustable rate loans and $58.1 million were fixed rate loan commitments. The loans are granted at current market interest rates and the rate is guaranteed through the transfer of the title of the home to the buyer. The Company uses hedging methods to reduce its exposure to interest rate fluctuations between the commitment date of the loan and the time the home closes. One of the methods the Company uses to hedge the interest rate risk relative to unclosed loans is to purchase commitments from outside investors to acquire the loans at the interest rate at which the loan will be closed. The cost of these purchase commitments is recorded as an asset and is expensed as loans are closed under the related commitments. Any remaining unused balance is expensed when the commitment expires or earlier, if the Company determines that it will be unable to use the entire commitment prior to its expiration date. At December 31, 1997, the Company had approximately $33.3 million of commitments to deliver mortgage loans to outside investors. Another method utilized by the Company to hedge its interest rate risk is the use of forward sales of mortgage-backed securities whereby the Company agrees to sell and later repurchase similar but not identical mortgage-backed securities. Generally, the agreements are fixed-coupon agreements whereby the interest rate and maturity date of both transactions are approximately the same and are established to correspond with the closing of the fixed interest rate mortgage loan commitments of the Company. The difference between the two values of the mortgage-backed securities in the agreements at settlement provide a hedge on the interest rate risk exposure in the mortgage loan commitments and is included in the gain or loss on the sale of the loans to third party investors. At December 31, 1997, these agreements matured within 90 to 120 days. Securities under forward sales agreements averaged approximately $37.3 million during 1997 and the maximum amount outstanding at any month end during 1997 was $49.0 million, the balance at December 31, 1997. Hedging gains of $1.4 million were deferred at year end as the mortgage loans and commitment contracts qualified for hedge accounting. To reduce the credit risk associated with accounting losses, which would be recognized if the counterparties failed completely to perform as contracted, the Company limits the entities that management can enter into a commitment with to the primary dealers in the market. The risk of accounting loss is the difference between the market rate at the time a counterparty fails and the rate the Company committed to for the mortgage loans and any purchase commitments recorded with the counterparty. M/I Financial has been approved by the Department of Housing and Urban Development and the VA to originate loans insured by the FHA and the VA, respectively, and has been approved by the Federal Home Loan Mortgage Corporation ("FHLMC") and by the Federal National Mortgage Association ("FNMA") as a seller and servicer of mortgages sold to FHLMC and FNMA. In 1996, the Company entered into a joint venture to provide title insurance in the Indianapolis and Columbus markets. In 1997, a similar joint venture was formed in the Tampa and Orlando markets. The Company plans to expand its title-related services by entering the Cincinnati market in 1998. COMPETITION The homebuilding industry is highly competitive. The Company competes in each of its local market areas with numerous national, regional and local homebuilders, some of which have greater financial, marketing, land acquisition and sales resources than the Company. Builders of new homes compete not only for home buyers, but also for desirable properties, financing, raw materials and skilled subcontractors. The Company also competes with the resale market for existing homes which provides certain attractions for home buyers over building a new home. 9 10 REGULATION AND ENVIRONMENTAL MATTERS The homebuilding industry, including the Company, is subject to various local, state and federal (including FHA and VA) statutes, ordinances, rules and regulations concerning zoning, building, design, construction, sales and similar matters. Such regulation affects construction activities, including types of construction materials which may be used, certain aspects of building design, sales activities and other dealings with consumers. The Company also must obtain certain licenses, permits and approvals from various governmental authorities for its development activities. In many areas, the Company is subject to local regulations which impose restrictive zoning and density requirements in order to limit the number of houses within the boundaries of a particular locality. The Company seeks to reduce the risk from restrictive zoning and density requirements by the use of contingent land purchase contracts which require that the land to be purchased by the Company meet various requirements, including zoning. The Company may be subject to periodic delays or may be precluded entirely from developing projects due to building moratoriums, particularly in Florida. Generally, such moratoriums relate to insufficient water or sewage facilities or inadequate road capacity within specific market areas or subdivisions. Moratoriums experienced by the Company have not been of long duration and have not had a material effect on the Company's business. Each of the states in which the Company operates has adopted a wide variety of environmental protection laws. These laws generally regulate developments of substantial size and which are in or near certain specified geographic areas. Furthermore, these laws impose requirements for development approvals which are more stringent than those which land developers would have to meet outside of these geographic areas. Increasingly stringent requirements may be imposed on homebuilders and developers in the future which may have a significant impact on the Company and the industry. Although the Company cannot predict the effect of these requirements, such requirements could result in time-consuming and expensive compliance programs. In addition, the continued effectiveness of licenses or permits already granted or development approvals already obtained is dependent upon many factors, some of which are beyond the Company's control. EMPLOYEES At March 2, 1998, the Company employed 758 people (including part-time employees), of which 202 were employed in sales, 304 in construction and 252 in management, administrative and clerical positions. The Company considers its employee relations to be excellent. No employees are represented by a collective bargaining agreement. ITEM 2. PROPERTIES The Company leases all of its offices, including the corporate and division locations. The Company leases a portion of its office space from a limited liability company in which the Company has a minority equity interest. See Notes 2, 5 and 9 to the Consolidated Financial Statements. Due to the nature of the Company's business, a substantial amount of property is held as inventory in the ordinary course of business. See "Item 1. Business - Available Lots and Land." ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine litigation incidental to its business. Management does not believe that any of this litigation is material to the financial statements of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1997, no matters were submitted to a vote of security holders. 10 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information required by this item is incorporated herein by reference from the Company's Annual Report to Shareholders for the year ended December 31, 1997. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference from the Company's Annual Report to Shareholders for the year ended December 31, 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information required by this item is incorporated herein by reference from the Company's Annual Report to Shareholders for the year ended December 31, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference from the Company's Annual Report to Shareholders for the year ended December 31, 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants during each of the two years ended December 31, 1997 and 1996. 11 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the Company's definitive proxy statement relating to the 1998 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Company's definitive proxy statement relating to the 1998 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Company's definitive proxy statement relating to the 1998 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Company's definitive proxy statement relating to the 1998 Annual Meeting of Shareholders. 12 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The following financial statements of M/I Schottenstein Homes, Inc. and its subsidiaries have been incorporated herein by reference as set forth in Item 8 of Part II of this Annual Report on Form 10-K: Independent Auditors' Report Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. Page ---- Independent Auditors' Report on financial statement schedules...... 19 For the Years ended December 31, 1997, 1996 and 1995: Schedule II - Valuation and Qualifying Accounts ................ 19 All other schedules have been omitted because the required information is included in the financial statements or notes thereto, the amounts involved are not significant, or the required matter is not present. 3. Exhibits. The following exhibits required by Item 601 of Regulation S-K are filed as part of this report. For convenience of reference, the exhibits are listed according to the numbers appearing in the Exhibit Table to Item 601 of Regulation S-K. Exhibit Number Description - -------------- ----------- 3.1 Amended and Restated Articles of Incorporation of the Company, hereby incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 3.2 Regulations of the Company, hereby incorporated by reference to Exhibit 3(l) of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 3.3 Amendment to the Code of Regulations of the Company, hereby incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8, Commission File No. 33-76518. 4 Specimen of Stock Certificate, hereby incorporated by reference to Exhibit 4 of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 13 14 Exhibit Number Description - -------------- ----------- 10.1 Executive Deferred Compensation Plan, hereby incorporated by reference to Exhibit 10(e) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10.2 Amendments to the Predecessor's Executive Deferred Compensation Plan dated March 29, 1991 and June 24, 1992, hereby incorporated by reference to Exhibit 19(a) of the Predecessor's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. 10.3 The Predecessor's Amended and Restated 401(K) Profit Sharing Plan, consisting of a savings plan adoption agreement, savings plan and savings plan trust, hereby incorporated by reference to Exhibit 10(cc) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10.4 P.L. 1992 Limited Partnership Certificate and Agreement of Limited Partnership dated March 25, 1992, hereby incorporated by reference to Exhibit 10(vv) of the Predecessor's Registration Statement on Form S-4, Commission File No. 33-44914. 10.5 Cascades 1992 Limited Partnership Certificate and Agreement of Limited Partnership dated July 20, 1992, hereby incorporated by reference to Exhibit 10(cc) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.6 Second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as agent for the banks, dated December 30, 1996, hereby incorporated by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.7 Consent to the creation of wholly-owned subsidiaries of the Company and to the amendment of the note purchase agreement pursuant to, and first amendment to, second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as agent for the banks, dated March 14, 1997, hereby incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.8 Second Amendment to second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A. as agent for the banks, dated May 7, 1997, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. 14 15 Exhibit Number Description - -------------- ----------- 10.9 Third Amendment to second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; BankBoston, N.A.; The Fifth Third Bank of Columbus and Bank One, N.A. as agent for the banks, dated September 29, 1997, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.10 Consent to the creation of subsidiaries of M/I Schottenstein Homes, Inc. pursuant to, and Fourth Amendment to, second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; BankBoston, N.A.; The Fifth Third Bank of Columbus and Bank One, N.A. as agent for the banks, dated December 29, 1997. (Filed herewith.) 10.11 Promissory Note by and among the Company, M/I Financial Corp. and Bank One, Columbus, N.A., dated November 5, 1993, hereby incorporated by reference to Exhibit 19(d) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.12 Revolving Credit Agreement by and among the Company, M/I Financial Corp. and Bank One, Columbus, N.A. dated July 19, 1996, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.13 Revolving Credit Agreement by and among the Company, M/I Financial Corp. and Bank One, NA, dated July 18, 1997, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.14 First Amendment to revolving credit agreement by and among the Company, M/I Financial Corp. and Bank One, NA, dated December 8, 1997. (Filed herewith.) 10.15 1993 Stock Incentive Plan of the Company, hereby incorporated by reference to Exhibit 4.4 of the Company's Registration Statement on Form S-8, Commission File No. 33-76518. 10.16 Termination Agreement between the Company and parties to the Melvin and Irving Schottenstein Family Agreement, dated July 31, 1997, hereby incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.17 Executive Employment Agreement by and between the Company and Irving E. Schottenstein dated August 9, 1994, hereby incorporated by reference to Exhibit 10(c) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. 15 16 Exhibit Number Description - -------------- ----------- 10.18 Company's 1996 President and Chief Executive Officer Bonus Program, hereby incorporated by reference to Exhibit 10.45 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.19 Company's 1996 Corporate Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.46 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.20 Company's 1996 Senior Vice President and Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.47 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.21 Company's 1997 President and Senior Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.22 Company's 1997 Senior Vice President and Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.23 Investment Home Compensation Plan dated September 1, 1995, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. 10.24 Limited Liability Company Agreement of Northeast Office Venture, Limited Liability Company dated November 17, 1995, hereby incorporated by reference to Exhibit 10.51 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.25 Lease Agreement by and between the Company and Northeast Office Venture, Limited Liability Company dated November 17, 1995, hereby incorporated by reference to Exhibit 10.52 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.26 Credit Agreement between the Company and BankBoston, N.A., the other parties which may become lenders and BankBoston, N.A. as agent, dated August 29, 1997, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.27 Company's Director Deferred Compensation Plan, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 16 17 Exhibit Number Description - -------------- ----------- 10.28 Collateral Assignment Split-Dollar Agreement by and among the Company and Robert H. Schottenstein, and Janice K. Schottenstein, as Trustee of the Robert H. Schottenstein 1996 Insurance Trust, dated September 24, 1997. (Filed herewith.) 10.29 Collateral Assignment Split-Dollar Agreement by and among the Company and Steven Schottenstein, and Irving E. Schottenstein, as Trustee of the Steven Schottenstein 1994 Trust, dated September 24, 1997. (Filed herewith.) 10.30 Collateral Assignment Split-Dollar Agreement by and among the Company and Kerrii B. Anderson, and Douglas T. Anderson, as Trustee of the Kerrii B. Anderson 1997 Irrevocable Life Insurance Trust, dated September 24, 1997. (Filed herewith.) 13 Annual Report to Shareholders for the year ended December 31, 1997. (Filed herewith.) 21 Subsidiaries of Company. (Filed herewith.) 23 Consent of Deloitte & Touche LLP. (Filed herewith.) 24 Powers of Attorney. (Filed herewith.) 27 Financial Data Schedule - --------------- (b) Reports on Form 8-K ------------------- No reports on Form 8-K have been filed during the last quarter of the period covered by this report. (c) See Item 14(a)(3). (d) Financial Statement Schedule - See Item 14(a)(2). 17 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in Columbus, Ohio on this 26th day of March, 1998. M/I SCHOTTENSTEIN HOMES, INC. (Registrant) By: /s/ ROBERT H. SCHOTTENSTEIN ---------------------------- Robert H. Schottenstein President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 26th of March, 1998. NAME AND TITLE NAME AND TITLE -------------- -------------- IRVING E. SCHOTTENSTEIN* /s/ ROBERT H. SCHOTTENSTEIN - ------------------------ ---------------------------- Irving E. Schottenstein Robert H. Schottenstein Chairman of the Board and President and Director Chief Executive Officer (Principal Executive Officer) STEVEN SCHOTTENSTEIN* /s/ KERRII B. ANDERSON - --------------------- ----------------------- Steven Schottenstein Kerrii B. Anderson Senior Executive Vice President Senior Vice President, Chief Financial and Director Officer, Assistant Secretary and Director (Principal Financial and Accounting Officer) FRIEDRICH K. M. BOHM* JEFFREY H. MIRO* - ---------------------- ---------------- Friedrich K. M. Bohm Jeffrey H. Miro Director Director LEWIS R. SMOOT, SR.* NORMAN L. TRAEGER* - -------------------- ------------------ Lewis R. Smoot, Sr. Norman L. Traeger Director Director * The above-named Directors and Officers of the Registrant execute this report by Robert H. Schottenstein and Kerrii B. Anderson, their Attorneys-in-Fact, pursuant to powers of attorney executed by the above-named Directors and filed with the Securities and Exchange Commission as Exhibit 24 to the report. By: /s/ ROBERT H. SCHOTTENSTEIN ---------------------------- Robert H. Schottenstein, Attorney-in-Fact By: /s/ KERRII B. ANDERSON ----------------------- Kerrii B. Anderson, Attorney-in-Fact 18 19 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of M/I Schottenstein Homes, Inc. Columbus, Ohio We have audited the consolidated financial statements of M/I Schottenstein Homes, Inc. and its subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 27, 1998; such financial statements and reports are included in your 1997 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of M/I Schottenstein Homes, Inc. and its subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP - -------------------------- Deloitte & Touche LLP Columbus, Ohio February 27, 1998 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - -----------------------------------------------
Additions Balance at Charged to Balance at Beginning Costs and End of Description of Year Expenses Deductions Year - ----------- ------- -------- ---------- ---- Valuation allowance deducted from asset account - single-family lots, land and land development costs: Year ended December 31, 1997 $ 2,350,000 $ 4,135,000 $ 2,485,000 $4,000,000 =========== =========== =========== ========== Year ended December 31, 1996 $ 975,000 $ 1,375,000 $ 0 $ 2,350,000 =========== =========== =========== =========== Year ended December 31, 1995 $ 0 $ 975,000 $ 0 $ 975,000 =========== =========== =========== ===========
19 20
EXHIBIT INDEX Exhibit Number Description Page No. - -------------- ----------- -------- 3.1 Amended and Restated Articles of Incorporation of the Company, hereby incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 3.2 Regulations of the Company, hereby incorporated by reference to Exhibit 3(l) of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 3.3 Amendment to the Code of Regulations of the Company, hereby incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8, Commission File No. 33-76518. 4 Specimen of Stock Certificate, hereby incorporated by reference to Exhibit 4 of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 10.1 Executive Deferred Compensation Plan, hereby incorporated by reference to Exhibit 10(e) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10.2 Amendments to the Predecessor's Executive Deferred Compensation Plan dated March 29, 1991 and June 24, 1992, hereby incorporated by reference to Exhibit 19(a) of the Predecessor's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. 10.3 The Predecessor's Amended and Restated 401(K) Profit Sharing Plan, consisting of a savings plan adoption agreement, savings plan and savings plan trust, hereby incorporated by reference to Exhibit 10(cc) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10.4 P.L. 1992 Limited Partnership Certificate and Agreement of Limited Partnership dated March 25, 1992, hereby incorporated by reference to Exhibit 10(vv) of the Predecessor's Registration Statement on Form S-4, Commission File No. 33-44914. 10.5 Cascades 1992 Limited Partnership Certificate and Agreement of Limited Partnership dated July 20, 1992, hereby incorporated by reference to Exhibit 10(cc) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
20 21
Exhibit Number Description Page No. - -------------- ----------- -------- 10.6 Second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as agent for the banks, dated December 30, 1996, hereby incorporated by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.7 Consent to the creation of wholly-owned subsidiaries of the Company and to the amendment of the note purchase agreement pursuant to, and first amendment to, second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as agent for the banks, dated March 14, 1997, hereby incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.8 Second Amendment to second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A. as agent for the bank, dated May 7, 1997, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. 10.9 Third Amendment to second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; BankBoston, N.A.; The Fifth Third Bank of Columbus and Bank One, N.A. as agent for the banks, dated September 29, 1997, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.10 Consent to the creation of subsidiaries of M/I Schottenstein Homes, Inc. pursuant to, and Fourth Amendment to, second restated revolving credit loan and standby letter of credit agreement by and among the Company; Bank One, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; BankBoston, N.A.; The Fifth Third Bank of Columbus and Bank One, N.A. as agent for the banks, dated December 29, 1997. (Filed herewith.)
21 22
Exhibit Number Description Page No. - -------------- ----------- -------- 10.11 Promissory Note by and among the Company, M/I Financial Corp. and Bank One, Columbus, N.A., dated November 5, 1993, hereby incorporated by reference to Exhibit 19(d) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.12 Revolving Credit Agreement by and among the Company, M/I Financial Corp. and Bank One, Columbus, N.A. dated July 19, 1996, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.13 Revolving Credit Agreement by and among the Company, M/I Financial Corp. and Bank One, NA, dated July 18, 1997, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.14 First Amendment to revolving credit agreement by and among the Company, M/I Financial Corp. and Bank One, NA, dated December 8, 1997. (Filed herewith.) 10.15 1993 Stock Incentive Plan of the Company, hereby incorporated by reference to Exhibit 4.4 of the Company's Registration Statement on Form S-8, Commission File No. 33-76518. 10.16 Termination Agreement between the Company and parties to the Melvin and Irving Schottenstein Family Agreement, dated July 31, 1997, hereby incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.17 Executive Employment Agreement by and between the Company and Irving E. Schottenstein dated August 9, 1994, hereby incorporated by reference to Exhibit 10(c) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. 10.18 Company's 1996 President and Chief Executive Officer Bonus Program, hereby incorporated by reference to Exhibit 10.45 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.19 Company's 1996 Corporate Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.46 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
22 23
Exhibit Number Description Page No. - -------------- ----------- -------- 10.20 Company's 1996 Senior Vice President and Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.47 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.21 Company's 1997 President and Senior Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.22 Company's 1997 Senior Vice President and Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.23 Investment Home Compensation Plan dated September 1, 1995, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. 10.24 Limited Liability Company Agreement of Northeast Office Venture, Limited Liability Company dated November 17, 1995, hereby incorporated by reference to Exhibit 10.51 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.25 Lease Agreement by and between the Company and Northeast Office Venture, Limited Liability Company dated November 17, 1995, hereby incorporated by reference to Exhibit 10.52 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.26 Credit Agreement between the Company and BankBoston, N.A., the other parties which may become lenders and BankBoston, N.A. as agent, dated August 29, 1997, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.27 Company's Director Deferred Compensation Plan, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.28 Collateral Assignment Split-Dollar Agreement by and among the Company and Robert H. Schottenstein, and Janice K. Schottenstein, as Trustee of the Robert H. Schottenstein 1996 Insurance Trust, dated September 24, 1997. (Filed herewith.)
23 24
Exhibit Number Description Page No. - -------------- ----------- -------- 10.29 Collateral Assignment Split-Dollar Agreement by and among the Company and Steven Schottenstein, and Irving E. Schottenstein, as Trustee of the Steven Schottenstein 1994 Trust, dated September 24, 1997. (Filed herewith.) 10.30 Collateral Assignment Split-Dollar Agreement by and among the Company and Kerrii B. Anderson, and Douglas T. Anderson, as Trustee of the Kerrii B. Anderson 1997 Irrevocable Life Insurance Trust, dated September 24, 1997. (Filed herewith.) 13 Annual Report to Shareholders for the year ended December 31, 1997. (Filed herewith.) 21 Subsidiaries of Company. (Filed herewith.) 23 Consent of Deloitte & Touche LLP. (Filed herewith.) 24 Powers of Attorney. (Filed herewith.) 27 Financial Data Schedule
24 EX-10.10 2 EXHIBIT 10.10 1 Exhibit 10.10 CONSENT TO THE CREATION OF SUBSIDIARIES OF M/I SCHOTTENSTEIN HOMES, INC. PURSUANT TO, AND FOURTH AMENDMENT TO, SECOND RESTATED REVOLVING CREDIT LOAN AND STANDBY LETTER OF CREDIT AGREEMENT This Consent to the Creation of Subsidiaries of M/I Schottenstein Homes, Inc. Pursuant to, and Fourth Amendment to, Second Restated Revolving Credit Loan And Standby Letter Of Credit Agreement (this "Amendment") is made to be effective as of December 29, 1997, by and among M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation ("Borrower"), BANK ONE, NA, a national banking association, formerly known as Bank One, Columbus, N.A., a national banking association ("Bank One"), THE HUNTINGTON NATIONAL BANK, a national banking association ("HNB"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("First Chicago"), NATIONAL CITY BANK OF COLUMBUS, a national banking association ("NCB"), BANKBOSTON, N.A., a national banking association, formerly known as The First National Bank of Boston, a national banking association ("BOB"), THE FIFTH THIRD BANK OF COLUMBUS, an Ohio banking corporation ("Fifth Third") (Bank One, HNB, First Chicago, NCB, BOB and Fifth Third is each a "Bank" and, collectively, "Banks"), and BANK ONE, NA, a national banking association, formerly known as Bank One, Columbus, N.A., a national banking association, as agent for Banks ("Agent"). For valuable consideration, the receipt of which is hereby acknowledged, Borrower, Banks and Agent, each intending to be legally bound, hereby recite and agree as follows: BACKGROUND INFORMATION A. Borrower, Bank One, HNB, First Chicago, NCB, BOB, Fifth Third and Agent are parties to a certain Second Restated Revolving Credit Loan and Standby Letter of Credit Agreement effective as of December 30, 1996, as amended by the First Amendment thereto effective as of March 14, 1997, the Second Amendment thereto effective as of May 7, 1997 and the Third Amendment thereto effective as of September 29, 1997 (the "Credit Agreement"). B. Borrower wants to form new limited liability companies (the "LLCs") in connection with the development of a 522-acre tract of land located in Prince William County, Virginia, near Manassas, Virginia, which tract is referred to from time to time as "Bellwood" and is the subject of that certain letter agreement between Borrower and Banks dated October 2 15, 1997 and in connection with the development of a tract of land located in Maryland. C. Borrower, Banks and Agent want to amend the Credit Agreement by modifying the definition of "Subsidiary" to encompass the LLCs, as a result of which modification subsection 7.16 of the Credit Agreement will require the prior written consent of the Required Banks to the formation of the LLCs. D. Subject to the terms and conditions of this Amendment and of the Credit Agreement, the Banks want to consent to the formation of the LLCs. E. Borrower, Banks and Agent want to amend the Credit Agreement by providing for the LLCs and by modifying subsection 7.9, Limitation on Investments, paragraph (g), which limits the investments by M/I Financial Corp. in second mortgage loans for the purchase of residential real property. AGREEMENT 1. Subject to the terms and conditions of this Amendment and of the Credit Agreement, as amended hereby, Bank, Agent and Borrower each hereby (a) consents to, and waives any Default solely as a result of, the formation by Borrower of, as new Subsidiaries of Borrower, Lot 5 - 1997, L.L.C., a Virginia limited liability company, Bellwood L.L.C., a Virginia limited liability company, Manor Road - 1997, L.L.C., a Virginia limited liability company and Chevy Chase Villas, L.L.C., a Virginia limited liability company. 2. Subsection 1.1, Defined Terms of the Credit Agreement is hereby amended by deleting the definitions of each of "Construction Bonds," "Customer Deposits," "Eligible Developed Lots Sold," "Eligible Developed Lots Unsold," "Eligible Model Houses," "Guaranties" and "Subsidiary" in their entireties and replacing them, respectively, with the following: "Construction Bonds" shall mean bonds issued by surety bond companies for the benefit of, and as required by, municipalities or other political subdivisions to secure the performance by Borrower or any Subsidiary of its obligations relating to lot improvements and subdivision development and completion. "Customer Deposits" shall mean cash deposits made by customers of Borrower or any 2 3 Subsidiary in connection with the execution of purchase contracts, which deposits shall be shown as liabilities on Borrower's consolidated financial statements. "Eligible Developed Lots Sold" shall mean all Developed Lots which Borrower or any Subsidiary has recorded as sold in accordance with its usual accounting practices to any Person other than an Affiliate or Subsidiary of Borrower. The value of Eligible Developed Lots Sold shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Developed Lots Sold and permitted by subsection 7.1(d) hereof. "Eligible Developed Lots Unsold" shall mean all Developed Lots which Borrower or any Subsidiary has not recorded as sold in accordance with its usual accounting practices, or which Borrower or any Subsidiary has recorded as sold to an Affiliate or Subsidiary of Borrower. The value of Eligible Developed Lots Unsold shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Developed Lots Unsold and permitted by subsection 7.1(d) hereof. "Eligible Model Houses" shall mean (a) all completed detached or attached single family houses (including townhouse condominiums and condominiums) which are being used by Borrower or any Subsidiary as sales models, and the lots on which such houses are located and (b) detached or attached (including townhouse condominiums and condominiums) single family houses for which there has been a Start of Construction which upon completion will be used by Borrower or any Subsidiary as sales models, and the lots on which such houses are located. The value of Eligible Model Houses shall be calculated in accordance with GAAP 3 4 and shall include all associated costs required to be capitalized under GAAP except for the costs of any furnishings, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Model Houses and permitted by subsection 7.1(d) hereof; provided, however, that (a) the aggregate value of attached (including townhouse condominiums and condominiums) single family homes constituting Eligible Model Houses shall not exceed $3,000,000, and (b) the aggregate value of all Eligible Model Houses shall not exceed $30,000,000. "Guaranties" (individually, "Guaranty") shall mean the guaranties of the Indebtedness evidenced by this Agreement and by all documents contemplated by this Agreement, including without limitation the Notes, as this Agreement and such documents may be amended or restated from time to time, which guaranties are substantially in the form of Exhibit A attached to this Agreement, executed by each of Borrower's Subsidiaries (which are M/I Financial Corp., 601RS, Inc., M/I Homes, Inc., M/I Homes Construction, Inc., Bellwood L.L.C., Lot 5 - 1997, L.L.C., Manor Road - 1997, L.L.C. and Chevy Chase Villas, L.L.C.) in favor of the respective Banks and to which Agent shall also be a party, and any guaranties in favor of Agent and the respective Banks executed by (a) each other permitted Subsidiary, if any, of Borrower and/or (b) the M/I Ancillary Businesses that are wholly-owned by the Borrower or by any Subsidiary. "Subsidiary" shall mean as to any Person, a corporation, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, limited liability company or other entity are at the time owned, or the management of which is otherwise controlled, directly, or indirectly 4 5 through one or more intermediaries, or both, by such Person, and with respect to Borrower shall include all Subsidiaries of Subsidiaries of Borrower. 3. Subsection 1.1, Defined Terms, of the Credit Agreement is hereby further amended by adding the following definitions thereto: "Bellwood L.L.C." shall mean Bellwood L.L.C., a Virginia limited liability company and a Subsidiary of Borrower, which is owned 99% by Lot 5 - 1997, L.L.C. and 1% by KSI Services, Inc., a Virginia corporation. "Chevy Chase Villas, L.L.C." shall mean Chevy Chase Villas, L.L.C., a Virginia limited liability company and a Subsidiary of Borrower, which is owned 99% by Manor Road - 1997, L.L.C. and 1% by KSI Services, Inc., a Virginia corporation. "Lot 5 - 1997, L.L.C." shall mean Lot 5 - 1997, L.L.C., a Virginia limited liability company and a wholly-owned Subsidiary of Borrower. "Manor Road - 1997, L.L.C." shall mean Manor Road - 1997, L.L.C., a Virginia limited liability company and a wholly-owned Subsidiary of Borrower. 4. Subsection 7.1, Limitation on Indebtedness, of the Credit Agreement is hereby amended by deleting paragraph (i) in its entirety and replacing it with the following paragraph (i): (i) Indebtedness of any wholly-owned Subsidiary of Borrower, or Indebtedness of Bellwood L.L.C. or Chevy Chase Villas, L.L.C., with respect to loans from Borrower or from any other Subsidiaries of Borrower; provided that each such Subsidiary shall have delivered to each of the Banks, prior to the making of any such loans, its respective Guaranty conforming to the requirements of this Agreement; provided further that any such Indebtedness of Bellwood L.L.C. shall not in the aggregate exceed $3,500,000; and provided further that any such Indebtedness 5 6 of Lot 5- 1997, L.L.C. shall not in the aggregate exceed $25,000,000; and 5. Subsection 7.2, Limitation on Liens, of the Credit Agreement is hereby amended by deleting paragraph (g) in its entirety and replacing it with the following paragraph (g): (g) (i) deposits to secure the performance of: bids; trade contracts (other than for borrowed money or the purchase price of property or services); leases; statutory and other obligations required by law; surety, appeal and performance bonds (including Construction Bonds); and other obligations of a like nature incurred in the ordinary course of business; and (ii) Liens in favor of surety bond companies pursuant to indemnity agreements to secure the reimbursement obligations of Borrower or any Subsidiary on Construction Bonds, provided (A) the Liens securing Construction Bonds shall be limited to the assets of, as appropriate, Borrower or such Subsidiary at, and the rights of, as appropriate, Borrower or such Subsidiary arising out of, the projects that are the subject of the Construction Bonds, (B) the Liens shall not attach to any real estate, and (C) the aggregate amount of such Liens at any time shall not exceed the dollar amount of Construction Bonds then outstanding, and in any event shall not exceed the amount of reimbursement obligations on Construction Bonds permitted to Borrower pursuant to subsection 7.3(a) hereof; 6. Subsection 7.6, Limitation on Dividends, of the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following subsection 7.6: 7.6 Limitation on Dividends and Distributions. Make any distributions or declare any dividends (other than dividends payable solely in common stock of Borrower) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, retirement or other acquisition of any shares of any class of stock of Borrower, whether now or 6 7 hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Borrower or any of its Subsidiaries (each of the foregoing a "Stockholder Payment"), except (a) so long as no Default or Event of Default has occurred and is continuing or would result therefrom, Borrower and any of its Subsidiaries may make Stockholder Payments in a total amount that, when added to all other Stockholder Payments permitted by this Agreement, does not exceed the sum of (i) twenty-five percent (25%) of cumulative Consolidated Earnings (taking into account losses, if any) of Borrower subsequent to December 31, 1994 plus (ii) $5,000,000; and (b) any Subsidiary of Borrower may declare and pay dividends or make distributions, and such dividends or distributions shall not be considered Stockholder Payments. In determining compliance with the foregoing, Borrower shall be in compliance if, as of the last day of the calendar month immediately preceding the month in which any such Stockholder Payments are made, the cumulative Stockholder Payments previously made plus the Stockholder Payments made during the current month would not in the aggregate exceed the amount permitted by clause (a), above. 7. Subsection 7.7, Limitation on Certain Real Property Expenditures, of the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following subsection 7.7: 7.7 Limitation on Certain Real Property Expenditures. Purchase or acquire any Eligible Raw Land and Land Under Development by the expenditure of cash, the incurrence of Indebtedness, as a result of Investment in Joint Venture(s), or otherwise, if as a result of such purchase or acquisition the aggregate cost of all the foregoing then owned by Borrower and its Subsidiaries (including their pro rata share of any undeveloped land that constitutes part of an Investment in Joint Venture) shall exceed (a) as to undeveloped land only, $55,000,000; and (b) as to the sum of undeveloped land and land under 7 8 development, $100,000,000; provided further, that the aggregate cost of any individual tract of land acquired by Borrower or any of its Subsidiaries, or their pro rata share of any tract that constitutes part of an Investment in Joint Venture may not exceed $2,000,000 except for land holdings set forth on Exhibit G attached hereto and except for Bellwood (as hereinafter defined); and, provided further, that the aggregate cost (net of any cash received from the sale of land or lots) to Borrower and all of its Subsidiaries with respect to the purchase or acquisition and the development of the 522-acre tract of land located in Prince William County, Virginia near Manassas, Virginia, which tract is referred to from time to time, and herein, as "Bellwood," shall not at any time exceed $25,000,000. For purposes of this subsection 7.7, the cost of undeveloped land and land under development shall be determined in accordance with GAAP. Further, for purposes of this subsection 7.7, any tract of land shall cease to be classified as undeveloped land after (i) commencement of the development of such tract into residential lots in good faith and provided the development thereof is completed over a period of not more than one year, or (ii) such tract is the subject of a valid, noncontingent contract of sale with a person who is not an Affiliate or Subsidiary and who is satisfactory to the Required Banks in their sole discretion, provided the sale contemplated by such contract is to be completed not more than two years after the date of the contract. In the event the development of any tract is discontinued for a period of 60 days or longer or not completed within one year, such tract shall automatically be deemed to be undeveloped land. 8. Subsection 7.9, Limitation on Investments, of the Credit Agreement is hereby amended by deleting paragraphs (d) and (g) in their entireties and replacing them with the following paragraphs (d) and (g): (d) any investments in M/I Financial Corp., 601RS, Inc., M/I Homes, Inc., M/I 8 9 Homes Construction, Inc., Lot 5 - 1997, L.L.C., Bellwood L.L.C., Manor Road - 1997, L.L.C. or Chevy Chase Villas, L.L.C. or any other Subsidiary created with the consent of the Required Banks hereafter; provided that the aggregate cost (net of any repayments, distributions or dividends) of investments by Borrower and all of the Subsidiaries in Bellwood L.L.C. shall not at any time exceed $25,000,000; and provided further that the aggregate cost (net of any repayments, distributions or dividends) of investments by Borrower and all of the Subsidiaries in Lot 5 - 1997, L.L.C. shall not at any time exceed $25,000,000; (g) second mortgage loans made in the ordinary course of M/I Financial Corp.'s business to natural persons for the purchase of residential real property, provided that such second mortgage loans (i) shall be made only in connection with a specific financing program to natural persons who have a first mortgage loan from M/I Financial Corp. with respect to the same real property, and (ii) shall not in the aggregate exceed $4,000,000 at any one time outstanding; 9. The Credit Agreement is hereby amended by deleting the existing Exhibit G - Certain Land Holdings in its entirety and replacing it with, and fully incorporating by this reference therein, amended Exhibit G thereto, which amended Exhibit G is attached hereto. 10. In order to induce Banks and Agent to enter into this Amendment, Borrower hereby represents and warrants to each Bank and to Agent that on the date hereof: (a) it has the corporate power and authority to make, deliver and perform this Amendment and to borrow under the Credit Agreement as amended by this Amendment and has taken all corporate action necessary to be taken by it to authorize the borrowings on the terms and conditions of the Credit Agreement as amended by this Amendment and to authorize the execution, delivery and performance of the Credit Agreement as amended by this Amendment; 9 10 (b) each of the Subsidiaries (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the corporate power and authority to conduct the business in which it is currently engaged, (iii) is qualified as a foreign corporation under the laws of any jurisdiction where the failure to so qualify would have a material adverse effect on the business of Borrower and its Subsidiaries taken as a whole, and (iv) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith would not, in the aggregate, have a material adverse effect on the business, operations, property or financial or other condition of Borrower and its Subsidiaries taken as a whole and would not materially adversely affect the ability of Borrower to perform its obligations under this Agreement and the Notes. (c) the execution, delivery and performance of the Guaranty by each of Lot 5 - 1997, L.L.C., Bellwood L.L.C., Manor Road - 1997, L.L.C. and Chevy Chase Villas, L.L.C. will not violate any Requirement of Law or Contractual Obligation of such Subsidiary and do not and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any Requirement of Law or Contractual Obligation. (d) Schedule 3 attached hereto contains the name, principal place of business, all other places of business and percentage of ownership of all of the Subsidiaries of Borrower. 11. The Credit Agreement is hereby amended by deleting the existing Schedule 3 (Subsidiaries) thereto in its entirety and replacing it with, and fully incorporating by reference therein, amended Schedule 3 thereto, which amended Schedule 3 is attached hereto. 12. The Credit Agreement, including without limitation Borrower's representations, warranties and covenants, as amended by this Amendment, shall remain in full force and effect in 10 11 accordance with its terms as amended hereby, and upon the effective date of this Amendment, the terms "Agreement" and "this Agreement" shall mean the Credit Agreement as amended by this Amendment. 13. The obligations of Agent and Banks pursuant to this Amendment are subject to the satisfaction of the following conditions precedent prior to the effective date of this Amendment: (a) Guaranties. Each Bank shall have received from each of Lot 5 - 1997, L.L.C., Bellwood L.L.C., Manor Road - 1997, L.L.C. and Chevy Chase Villas, L.L.C. its respective Guaranty, to which Agent shall also be a party, conforming to the requirements of the Credit Agreement and delivered by a duly authorized officer of each of Lot 5 - 1997, L.L.C., Bellwood L.L.C., Manor Road - 1997, L.L.C. and Chevy Chase Villas, L.L.C. (b) Guarantor's Consent and Reaffirmation of Guaranties. Each Bank and Agent shall have received from each of M/I Financial Corp., 601RS, Inc., M/I Homes, Inc. and M/I Homes Construction, Inc. an executed copy of its respective Guarantor's Consent and Reaffirmation of Guaranties (in form and substance satisfactory to Agent). (c) Proceedings of Borrower. Each Bank and Agent shall have received a copy of the resolutions (in form and substance satisfactory to Agent) of the Executive Committee of the Board of Directors of Borrower authorizing the execution, delivery and performance of this Amendment, certified by the Secretary or the Assistant Secretary of Borrower as of the date hereof. Such certificate shall state that the resolutions set forth therein have not been amended, modified, revoked or rescinded as of the effective date of this Amendment. (d) Proceedings of Subsidiaries of Borrower. Each Bank and Agent shall have received a copy of the resolutions (in form and substance satisfactory to each Bank and Agent) of (i) M/I Schottenstein Homes, Inc., 11 12 as the sole shareholder of each of M/I Financial Corp., 601RS, Inc., M/I Homes, Inc. and M/I Homes Construction, Inc., and as the sole member of Lot 5 - 1997, L.L.C. and Manor Road - 1997, L.L.C.; (ii) Lot 5 - 1997, L.L.C. and KSI Services, Inc., as the sole members of Bellwood L.L.C.; and (iii) Manor Road - 1997, L.L.C. and KSI Services, Inc., as the sole members of Chevy Chase Villas, L.L.C., each resolution authorizing the execution, delivery and performance of (y) by Lot 5 - 1997, L.L.C., Bellwood L.L.C., Manor Road - 1997, L.L.C. and Chevy Chase Villas, L.L.C., the respective Guaranties of each, and (z) by M/I Financial Corp., 601RS, Inc., M/I Homes, Inc., and M/I Homes Construction, Inc., Guarantor's Consent and Reaffirmation of Guaranties, all certified by the Secretary or Assistant Secretary of each respective Subsidiary of Borrower as of the date hereof. Such certificate shall state that the resolutions set forth therein have not been amended, modified, revoked or rescinded as of the effective date of this Amendment. (e) Incumbency Certificates of Subsidiaries. Each Bank and Agent shall have received a certificate of the Manager, or other appropriate person, of each of Lot 5 - 1997, L.L.C., Bellwood L.L.C., Manor Road - 1997, L.L.C. and Chevy Chase Villas, L.L.C., dated the date hereof, as to the incumbency and signatures of the Manager, or other appropriate person(s), of each executing its respective Guaranty. (f) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing under the Credit Agreement as of the effective date of this Amendment. 14. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Amendment shall become effective upon receipt by Agent and each Bank of executed counterparts of this Amendment by each of Borrower, Agent and the Required Banks. 12 13 15. This Amendment shall be governed by, and construed in accordance with, the local laws of the State of Ohio. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 13 14 IN WITNESS WHEREOF, Borrower, Banks and Agent have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. M/I SCHOTTENSTEIN HOMES, INC. By /s/ ROBERT H. SCHOTTENSTEIN ----------------------------------------- Robert H. Schottenstein Title: President and Assistant Secretary BANK ONE, NA, as Agent and as a Bank By /s/ THOMAS D. IGOE ------------------------------------------ Thomas D. Igoe Title: Senior Vice President THE HUNTINGTON NATIONAL BANK By /s/ R.H. FRIEND ------------------------------------------ R.H. Friend Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By /s/ GREGORY A. GILBERT ------------------------------------------ Gregory A. Gilbert Title: Vice President NATIONAL CITY BANK OF COLUMBUS By /s/ RALPH A. KAPAROS ------------------------------------------ Ralph A. Kaparos Title: Senior Vice President 14 15 BANKBOSTON, N.A. By /s/ KEVIN C. HAKE ------------------------------------------ Kevin C. Hake Title: Director THE FIFTH THIRD BANK OF COLUMBUS By /s/ MARK E. RANSOM ------------------------------------------ Mark E. Ransom Title: Vice President 15 16 GUARANTOR'S CONSENT AND REAFFIRMATION OF GUARANTIES The undersigned Guarantor hereby (a) acknowledges that it has read the foregoing Consent to the Creation of Subsidiaries of M/I Schottenstein Homes, Inc. Pursuant to, and Fourth Amendment to, Second Restated Revolving Credit Loan and Standby Letter of Credit Agreement, effective as of September 29, 1997 (the "Fourth Amendment"), and (b) agrees that the undersigned Guarantor's Guaranty dated as of December 30, 1996 of the obligations of M/I Schottenstein Homes, Inc. pursuant to the Second Restated Revolving Credit Loan and Standby Letter of Credit Agreement, as amended by the First Amendment thereto effective as of March 14, 1997, the Second Amendment thereto effective as of May 7, 1997, the Third Amendment thereto effective as of September 29, 1997 and the Fourth Amendment, and all representations, warranties and covenants in such Guaranty, continue in full force and effect notwithstanding the Fourth Amendment. M/I FINANCIAL CORP. By: /s/ PAUL S. ROSEN ------------------------------------------ Paul. S. Rosen Title: President 16 17 GUARANTOR'S CONSENT AND REAFFIRMATION OF GUARANTIES Each of the undersigned Guarantors hereby (a) acknowledges that it has read the foregoing Consent to the Creation of Subsidiaries of M/I Schottenstein Homes, Inc. Pursuant to, and Fourth Amendment to, Second Restated Revolving Credit Loan and Standby Letter of Credit Agreement, effective as of September 29, 1997 (the "Fourth Amendment"), and (b) agrees that each of the undersigned Guarantor's Guaranties dated as of March 14, 1997 of the obligations of M/I Schottenstein Homes, Inc. pursuant to the Second Restated Revolving Credit Loan and Standby Letter of Credit Agreement, as amended by the First Amendment thereto effective as of March 14, 1997, the Second Amendment thereto effective as of May 7, 1997, the Third Amendment thereto effective as of September 29, 1997 and the Fourth Amendment, and all representations, warranties and covenants in each of such Guaranties, continue in full force and effect notwithstanding the Fourth Amendment. 601RS, INC. M/I HOMES, INC. M/I HOMES CONSTRUCTION, INC. By: /s/ ROBERT H. SCHOTTENSTEIN ------------------------------------------ Robert H. Schottenstein President and Assistant Secretary of 601RS, Inc.; Vice Chairman of M/I Homes, Inc.; and Vice Chairman of M/I Homes Construction, Inc. EX-10.14 3 EXHIBIT 10.14 1 EXHIBIT 10.14 FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT This First Amendment to Revolving Credit Agreement is made to be effective as of December 8, 1997 ("this Amendment"), by and among M/I FINANCIAL CORP., an Ohio corporation ("Financial"), M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation ("M/I Homes") (Financial and M/I Homes are hereinafter referred to collectively as the "Borrowers"), and BANK ONE, NA, a national banking association (the "Bank"). For valuable consideration, the receipt of which is hereby acknowledged, Borrowers and Banks, intending to be legally bound, hereby recite and agree as follows: RECITALS A. Borrowers and the Bank are parties to a Revolving Credit Agreement made to be effective as of July 18, 1997 (the "Credit Agreement"). B. Borrowers and Bank wish to amend the Credit Agreement by modifying the interest rate for Eurodollar Rate Loans as set forth in subsection 2.2, Note, and by modifying subsection 6.5, Limitation on Investments. AGREEMENT 1. Subsection 2.2, Note, of the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: 2.2 Note. The Loans made by the Bank pursuant hereto shall be evidenced by a promissory note of the Borrowers, substantially in the form of Exhibit A attached hereto and made a part hereof (the "Note"), payable to the order of the Bank and evidencing the obligation of the Borrowers to pay the aggregate unpaid principal amount of the Loans made by the Bank, with interest thereon at a rate per annum equal to (i) in the case of Prime Rate Loans, the Prime Rate in effect from time to time minus one-quarter of one percent (1/4%) and (ii) in the case of Eurodollar Rate Loans if permitted hereunder at such time, the Eurodollar Rate determined 2 for each such loan plus one and 60/100 percent (1.60%), subject with respect to each of the aforesaid interest rates to the default interest rate provisions of subsection 2.6(c) hereof. Interest shall be payable in arrears and shall be due on the last day of each month, beginning with August 31, 1997, and continuing on the last day of each month thereafter, and on the last day of the Commitment Period. If not sooner paid, the entire principal amount of the Loans outstanding and any remaining unpaid interest on the Loans shall be due and payable on the last day of the Commitment Period. The Bank is hereby authorized to record electronically or otherwise the date and amount of each Loan disbursement made by the Bank and the date and amount of each payment or prepayment of principal thereof, and any such recordation shall constitute conclusive evidence, absent manifest error, of the accuracy of the information so recorded; provided, however, the failure of the Bank to make any such recordation(s) shall not affect the obligation of Borrowers to repay outstanding principal, interest, or any other amount due hereunder or under the Note in accordance with the terms hereof and thereof. The Note shall (a) be dated as of the date hereof, (b) be stated to mature on the last day of the Commitment Period, and (c) bear interest from and including the date thereof on the unpaid principal amount thereof from time to time outstanding at a rate per annum equal to (i) in the case of Prime Rate Loans, the Prime Rate in effect from time to time minus one-quarter of one percent (1/4%) and (ii) in the case of Eurodollar Rate Loans, the Eurodollar Rate determined for each such loan plus one and 60/100 percent (1.60%) subject with respect to each of the aforesaid interest rates to the default interest rate provisions of subsection 2.6(c) hereof. 2. Subsection 6.5, Limitation on Investments, of the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: 6.5 Limitation on Investments. Make or commit to make any advance, loan, 2 3 extension of credit or capital contribution to, or purchase of, any stock, bonds, notes, debentures or other securities of, or make any other investment in, any Person (all such transactions being herein called "investments") except for (i) first mortgage loans made in the ordinary course of Financial's business to natural persons for the purchase of residential real property, (ii) second mortgage loans made in the ordinary course of Financial's business to natural persons for the purchase of residential real property, provided that such second mortgage loans (A) shall be made only in connection with a specific financing program to natural persons who have a first mortgage loan from Financial with respect to the same real property, and (B) shall not exceed $4,000,000 in aggregate at any one time outstanding, (iii) first mortgage loans made in the ordinary course of Financial's business to natural persons for the purpose of re-financing an existing first mortgage loan, provided that the amount of such re-financing mortgage loans shall not exceed $5,000,000 in aggregate at any one time outstanding, (iv) investments in Cash Equivalents, (v) investments in Fannie Mae stock to the extent required for Financial to sell mortgages to Fannie Mae, but the amount of such investments in Fannie Mae stock shall in no event exceed $100,000, (vi) investments in the ordinary course of Financial's business in standard instruments hedging against interest rate risk incurred in the origination and sale of mortgage loans, in each case matching a hedging instrument or instruments to specific mortgages or specific groups of mortgages, but in no event including investments in futures contracts, options contracts or other derivative investment vehicles acquired as independent investments, and (vii) loans and advances to M/I Homes. 3. Each of the Borrowers hereby represents and warrants to Bank that it has the corporate power and authority to make, deliver and perform this Amendment and to borrow under the Credit Agreement as amended by this Amendment and has taken all corporate action necessary to be taken by it to authorize the borrowings on the terms and conditions of the Credit Agreement as amended by this 3 4 Amendment and to authorize the execution, delivery and performance of the Credit Agreement as amended by this Amendment. 4. The Credit Agreement, including without limitation each Borrower's representations, warranties and covenants, as amended by this Amendment shall remain in full force and effect in accordance with its terms as amended hereby, and upon the effective date of this Amendment, the terms "Agreement" and "this Agreement" shall mean the Credit Agreement as amended by this Amendment. 5. The obligations of the Bank pursuant to this Amendment are subject to the satisfaction of the following conditions precedent prior to the effective date of this Amendment: (a) Corporate Proceedings of Borrowers. Bank shall have received a copy of the resolution (in form and substance satisfactory to Bank) of (i) the Board of Directors or the Executive Committee of the Board of Directors of M/I Homes and (ii) the Sole Shareholder of Financial, in each case authorizing the execution, delivery and performance of this Amendment certified by the Secretary or the Assistant Secretary of each Borrower as of the date hereof. Such certificate shall state that the resolution set forth therein has not been amended, modified, revoked or rescinded as of effective date of this Amendment. (b) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing under the Credit Agreement as of the effective date of this Amendment. 6. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Amendment shall become effective upon receipt by Bank of executed counterparts of this Amendment by each of the parties hereto. 7. This Amendment shall be governed by, and construed in accordance with, the local laws of the State of Ohio. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. 4 5 BANK ONE, NA M/I FINANCIAL CORP. By /s/ THOMAS D. IGOE By /s/ PAUL S. ROSEN ---------------------------- ------------------------------ Thomas D. Igoe Paul S. Rosen Title: Senior Vice President Title: President M/I SCHOTTENSTEIN HOMES, INC. By /s/ ROBERT H. SCHOTTENSTEIN ------------------------------ Robert H. Schottenstein Title: President and Assistant Secretary 5 6 CERTIFICATE I, Paul S. Coppel, do hereby certify that (i) I am the duly elected, qualified and acting Secretary of M/I Financial Corp. (the "Corporation"), (ii) the resolutions attached hereto and marked as Exhibit A were duly adopted by the Sole Shareholder of the Corporation in a written action executed by the President of the Sole Shareholder and dated December 8, 1997 in accordance with the Regulations of the Corporation and applicable law, and (iii) said resolutions are in full force and effect without amendment or modifications as of the date hereof. /s/ PAUL S. COPPEL ----------------------------------- Paul S. Coppel, Secretary M/I Financial Corp. Dated: December 8, 1997 EX-10.28 4 EXHIBIT 10.28 1 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT DATED: SEPTEMBER 24, 1997 2 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT
TABLE OF CONTENTS ----------------- Background Information..............................................................................- Page 1 - 1. Purchase of the Policy; Conformity to this Agreement............................................- Page 1 - 2. Ownership and Possession of the Policy..........................................................- Page 2 - 3. Payment of Premiums.............................................................................- Page 2 - 4. Employer's Interest.............................................................................- Page 2 - 5. Collateral Assignment of the Policy.............................................................- Page 2 - 6. Borrowing from the Policy.......................................................................- Page 3 - 7. Surrender or Cancellation of the Policy.........................................................- Page 3 - 8. Death of the Employee...........................................................................- Page 3 - 9. Termination of Agreement........................................................................- Page 4 - 10. Disposition of Policy Upon Termination of Agreement.............................................- Page 4 - 11. Prohibition Against Transfer of Interests.......................................................- Page 5 - 12. Amendment and Waiver............................................................................- Page 5 - 13. Successors and Assigns..........................................................................- Page 5 - 14. Notices.........................................................................................- Page 6 - 15. Survival........................................................................................- Page 6 - 16. No Guaranty of Employment.......................................................................- Page 6 - 17. Cooperation.....................................................................................- Page 6 - 18. No Strict Construction..........................................................................- Page 6 - 19. Severability....................................................................................- Page 6 - 20. Third Party Beneficiary.........................................................................- Page 6 - 21. Exoneration of Insurer..........................................................................- Page 6 - 22. ERISA Compliance................................................................................- Page 7 - 23. Governing Law...................................................................................- Page 7 - 24. Headings........................................................................................- Page 7 -
- i - 3 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT This Agreement is made and entered into as of the 24th day of September, 1997, by and among M/I Schottenstein Homes, Inc., an Ohio corporation (the "Employer"), Robert H. Schottenstein (the "Employee"), and Janice K. Schottenstein, as Trustee of the Robert H. Schottenstein 1996 Insurance Trust (the "Trustee"). BACKGROUND INFORMATION ---------------------- A. The Employee is a capable, efficient and valued employee of the Employer. B. The Employee wishes to provide life insurance protection for the benefit of his family -- under the policy of insurance which is described in Exhibit A hereto. Such life insurance policy, together with any replacement of it or modification to it, is referred to herein as the "Policy." The company which issues the Policy is referred to herein as the "Insurer." C. The Employer is willing, on the terms and conditions set forth in this Agreement, to pay a portion of the premiums due on the Policy. D. The Trustee shall be the owner of the Policy and, as such, shall possess all incidents of ownership in and to the Policy. The Employee shall have no incident of ownership in or to the Policy. E. The Employer wishes to have the Policy collaterally assigned by the Trustee in order to secure the payment of all amounts which will, in the future, be due and payable to the Employer under this Agreement. F. This Agreement is intended to be a "split-dollar" arrangement, as described in Revenue Ruling 64-328 (issued by the Internal Revenue Service). AGREEMENT --------- NOW, THEREFORE, in consideration of the mutual promises contained below, the parties agree to the foregoing and as follows: -Page 1- 4 1. PURCHASE OF THE POLICY; CONFORMITY TO THIS AGREEMENT. With the consent of the Employee, the Trustee has purchased, or has arranged to purchase, the Policy from the Insurer. The parties (i) have taken, or will take, all necessary action to cause the Insurer to issue the Policy and (ii) shall take any further action which may be necessary to cause the Policy to conform to the provisions of this Agreement. The parties agree that the Policy shall be subject to (i) the terms of this Agreement and (ii) any collateral assignment filed with the Insurer relating to the Policy. 2. OWNERSHIP AND POSSESSION OF THE POLICY. The Trustee (i) shall be the sole and absolute owner of the Policy and (ii) may, except as otherwise provided herein, exercise all ownership rights granted under the terms of the Policy. However, the Employer shall have possession of the Policy. 3. PAYMENT OF PREMIUMS. The following provisions shall govern the payment of premiums with respect to the Policy -- a. EMPLOYER PAYMENT OF PREMIUMS. On or before the due date of each Policy premium, or within any grace period, the Employer shall (i) pay the full amount of the premium to the Insurer and (ii) promptly furnish evidence to the Employee and the Trustee of its timely payment of such premium. b. TRUSTEE REIMBURSEMENT OF COMPUTED ECONOMIC BENEFIT. The Trustee shall promptly reimburse the Employer for a portion of each premium paid by the Employer. The amount of such reimbursement shall equal the economic benefit to the Trustee attributable to the life insurance protection, on the Employee's life, that is provided under this Agreement. The value of such economic benefit shall be calculated using the lesser of (i) the rates known as "P.S. 58" rates or (ii) the Insurer's published premium rates for an individual 1-year term life insurance policy available to all standard risks -- in either case, based on the Employee's age at the due date of the premium payment. c. WAIVER OF PREMIUM (OR POLICY COSTS) RIDER. At the Trustee's option (and if allowed by the Insurer), the Policy may provide for the waiver of premium (or waiver of specified policy costs) in the event of the Employee's disability. However, unless the Employer and the Trustee otherwise agree (in advance and in writing), the Trustee shall reimburse the Employer for any additional cost associated with such waiver. 4. EMPLOYER'S INTEREST. As used in this Agreement, (i) the "Employer's Gross Interest" in the Policy shall mean the aggregate amount of all premiums paid by the Employer with respect to the Policy minus the aggregate amount of all reimbursements of -Page 2- 5 such premium payments by the Trustee, and (ii) the "Employer's Net Interest" in the Policy shall mean shall mean the Employer's Gross Interest minus the outstanding balance (if any) of all Policy loans made to the Employer (including all accrued and unpaid interest thereon). 5. COLLATERAL ASSIGNMENT OF THE POLICY. To secure the Employer's Net Interest in the Policy, the Trustee hereby assigns the Policy to the Employer as collateral. This Agreement, and the collateral assignment effected hereby, specifically limits the rights of the Employer in the Policy to the recovery of the Employer's Gross Interest. This collateral assignment of the Policy to the Employer shall not be terminated, altered or amended by the Trustee without the express written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. The Insurer is authorized to accept this Agreement as the Trustee's collateral assignment of the Policy to the Employer. The Trustee and the Employee agree, upon reasonable request by the Employer, to execute all other documents that may be necessary or desirable to perfect this collateral assignment of the Policy. 6. BORROWING FROM THE POLICY. The Employer and the Trustee may borrow from the Policy (as provided therein), subject to the following limitations -- a. BORROWING BY THE EMPLOYER. The outstanding amount of any such borrowing by the Employer (including all accrued and unpaid interest thereon) shall not exceed the Employer's Gross Interest in the Policy. The Trustee shall execute and file any forms required by the Insurer to permit the Employer to borrow from the Policy in accordance with this provision. b. BORROWING BY THE TRUSTEE. The Trustee shall not borrow from the Policy without the prior written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. In addition, the outstanding amount of any such borrowing by the Trustee (including all accrued and unpaid interest thereon) shall not prevent the Employer from borrowing the maximum amount permitted pursuant to the preceding provision. 7. SURRENDER OR CANCELLATION OF THE POLICY. If the Policy is surrendered or canceled for any reason (other than the death of the Employee), any net proceeds resulting from such surrender or cancellation (after reduction by all applicable surrender or cancellation charges) shall be distributed as follows -- a. EMPLOYER'S INTEREST. The Employer shall have the unqualified right to receive a portion of such net proceeds equal to the Employer's Net Interest; provided, however, in no event shall the amount payable to the Employer exceed -Page 3- 6 the entire amount of such net proceeds. b. TRUSTEE'S INTEREST. The remaining net proceeds (if any) shall be paid to the Trustee. 8. DEATH OF THE EMPLOYEE. Upon the death of the Employee -- a. PROOF OF CLAIM. The Trustee and Employer shall promptly take all action (including, without limitation, the filing of an appropriate proof of claim) which may be necessary or desirable in order to obtain the net death benefit provided under the Policy. b. EMPLOYER'S INTEREST. The Employer shall have the unqualified right to receive a portion of such net death benefit equal to the Employer's Net Interest; provided, however, in no event shall the amount payable to the Employer exceed the entire amount of such net death benefit. c. TRUSTEE'S INTEREST. The balance (if any) of the net death benefit provided under the Policy shall be paid to the beneficiary or beneficiaries designated by the Trustee, in the manner and amounts provided in the beneficiary designation provision of the Policy. d. POLICY BENEFICIARY DESIGNATION. The Employer and the Trustee agree that the beneficiary designation provision of the Policy shall conform to the foregoing provisions of this Agreement. 9. TERMINATION OF AGREEMENT. This Agreement shall terminate under the following circumstances -- a. TERMINATION WITHOUT NOTICE. This Agreement shall terminate without notice upon the occurrence of any of the following events: O The total cessation of the business of the Employer; or O The bankruptcy, receivership or dissolution of the Employer; or O The written agreement of the Trustee and the Employer. b. OPTIONAL TERMINATION BY THE TRUSTEE. The Trustee may terminate this Agreement by giving at least ten (10) days written notice to the Employer; provided, however, such notice may not be given while the Employee is employed by the Employer. Such termination shall be effective as of the date specified in the -Page 4- 7 notice but not sooner than ten (10) days after such notice is received by the Employer. c. OPTIONAL TERMINATION BY THE EMPLOYER. In the event that the Employee's employment by the Employer is terminated for any reason other than retirement, death or permanent disability of the Employee, the Employer may terminate this Agreement by giving at least ten (10) days written notice to the Trustee. Such termination shall be effective as of the date specified in the notice but not sooner than ten (10) days after such notice is received by the Trustee. 10. DISPOSITION OF POLICY UPON TERMINATION OF AGREEMENT. Upon any termination of this Agreement -- a. TRUSTEE'S OPTION TO ACQUIRE SOLE OWNERSHIP. For sixty (60) days after such termination, the Trustee shall have the option of obtaining the release of the collateral assignment of the Policy to the Employer. To obtain such release, the Trustee shall pay to the Employer an amount equal to the Employer's Net Interest. Upon receipt of such amount, the Employer shall release the collateral assignment of the Policy by the execution and delivery of an appropriate instrument of release. The Trustee may borrow against the Policy to finance the payment of the Employer's Net Interest to the Employer, and the Employer shall consent to any such borrowing. b. TRANSFER OF POLICY TO THE EMPLOYER. If the Trustee fails to exercise such option within such sixty (60) day period, the Trustee shall, upon request by the Employer, promptly execute any documents which are necessary or desirable to transfer ownership of the Policy to the Employer. Thereafter, neither the Trustee nor its beneficiaries, successors or assigns shall have any further interest in or to the Policy (either under the terms thereof or under this Agreement). 11. PROHIBITION AGAINST TRANSFER OF INTERESTS. a. TRANSFERS BY THE TRUSTEE. Except as otherwise provided in this Agreement, the Trustee shall not sell, assign, transfer, borrow against, surrender or cancel the Policy (or any portion thereof or interest therein) without the express written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. b. TRANSFERS BY THE EMPLOYER. Except as otherwise provided in this Agreement, the Employer shall not sell, assign, transfer, or borrow against any portion of its interest in the Policy without the express written consent of the -Page 5- 8 Trustee, which consent may be withheld in the Trustee's sole and absolute discretion. 12. AMENDMENT AND WAIVER. This Agreement may not be amended except by a written instrument signed by the Employer and the Trustee, or their respective successors or assigns, and may not be terminated except as provided herein. The failure of any party to strictly enforce any provision of this Agreement shall not affect the right of such party to thereafter enforce the same, or any other, provision of this Agreement in accordance with its terms. 13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of (i) the Employer, its successors and assigns, (ii) the Employee, his heirs, successors and assigns, and (iii) the Trustee, its beneficiaries, successors and assigns. 14. NOTICES. Any notice, consent or demand required or permitted to be given under this Agreement shall be (i) in writing and (ii) signed by the party giving or making the same. If such notice, consent or demand is mailed to a party, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Employer. The date of such mailing shall be deemed the date of notice, consent or demand. 15. SURVIVAL. The rights and obligations of the parties shall survive the termination of this Agreement and the Employee's death to the extent that any performance is required. 16. NO GUARANTY OF EMPLOYMENT. The Employee shall have no guarantee or right to employment by reason of this Agreement. 17. COOPERATION. The parties agree to take such actions as are desirable to allow the rights and duties specified in this Agreement to be brought into effect. The parties each agree to execute and deliver all documents which may be desirable to bring into effect the intent of this Agreement or to carry out its provisions. 18. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. 19. SEVERABILITY. Whenever possible, each provision of the Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision shall be held to be prohibited by, or invalid under, applicable law, such provision -Page 6- 9 shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 20. THIRD PARTY BENEFICIARY. The Employee shall be considered a third party beneficiary of the rights granted to the Trustee under this Agreement and shall be entitled to enforce those rights directly against the Employer without joinder of the Trustee. 21. EXONERATION OF INSURER. The Insurer shall be fully discharged from its obligations under the Policy by payment of all Policy death benefits to the beneficiary or beneficiaries named in the Policy subject to the terms and conditions of the Policy. In no event shall the Insurer be considered a party to this Agreement or any amendment hereof. No provision of this Agreement, nor of any amendment hereof, shall in any way be construed as enlarging, changing, varying, or in any other way affecting the obligations of the Insurer as expressly provided in the Policy except insofar as the provisions hereof are made a part of the Policy by any collateral assignment filed with the Insurer in connection with this Agreement. 22. ERISA COMPLIANCE. The Employer is hereby designated as the named fiduciary under this Agreement. The named fiduciary shall have authority to control and manage the operation and administration of this Agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this Agreement. The Employer shall make all determinations concerning rights to benefits under this Agreement. Any decision by the Employer denying a claim for benefits under this Agreement shall be stated in writing and delivered or mailed to the claimant. Such decision shall set forth the specific reasons for the denial, written to the best of the Employer's ability in a manner that may be understood without legal or actuarial counsel. In addition, the Employer shall afford a reasonable opportunity to the claimant for a full and fair review of the decision denying such claim. 23. GOVERNING LAW. This Agreement, and the rights of the parties, shall be governed by, and construed in accordance with, the laws of Ohio. 24. HEADINGS. The headings in this Agreement are for convenience only and shall be ignored in the construction of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. -Page 7- 10 M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation By: ---------------------------------- ---------------------------------------- ROBERT H. SCHOTTENSTEIN (the "Employee") Its: ---------------------------------- ---------------------------------------- JANICE K. SCHOTTENSTEIN, as Trustee of the Robert H. Schottenstein 1996 Insurance Trust (the "Trustee") -Page 8- 11 EXHIBIT A --------- INSURER POLICY NO. ------- ---------- Robert H. Schottenstein SV50186001 -Page 9- EX-10.29 5 EXHIBIT 10.29 1 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT DATED: SEPTEMBER 24, 1997 2 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT
TABLE OF CONTENTS ----------------- Background Information..............................................................................- Page 1 - 1. Purchase of the Policy; Conformity to this Agreement............................................- Page 1 - 2. Ownership and Possession of the Policy..........................................................- Page 2 - 3. Payment of Premiums.............................................................................- Page 2 - 4. Employer's Interest.............................................................................- Page 2 - 5. Collateral Assignment of the Policy.............................................................- Page 2 - 6. Borrowing from the Policy.......................................................................- Page 3 - 7. Surrender or Cancellation of the Policy.........................................................- Page 3 - 8. Death of the Employee...........................................................................- Page 3 - 9. Termination of Agreement........................................................................- Page 4 - 10. Disposition of Policy Upon Termination of Agreement.............................................- Page 4 - 11. Prohibition Against Transfer of Interests.......................................................- Page 5 - 12. Amendment and Waiver............................................................................- Page 5 - 13. Successors and Assigns..........................................................................- Page 5 - 14. Notices.........................................................................................- Page 6 - 15. Survival........................................................................................- Page 6 - 16. No Guaranty of Employment.......................................................................- Page 6 - 17. Cooperation.....................................................................................- Page 6 - 18. No Strict Construction..........................................................................- Page 6 - 19. Severability....................................................................................- Page 6 - 20. Third Party Beneficiary.........................................................................- Page 6 - 21. Exoneration of Insurer..........................................................................- Page 6 - 22. ERISA Compliance................................................................................- Page 7 - 23. Governing Law...................................................................................- Page 7 - 24. Headings........................................................................................- Page 7 -
- i - 3 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT This Agreement is made and entered into as of the 24th day of September, 1997, by and among M/I Schottenstein Homes, Inc., an Ohio corporation (the "Employer"), Steven Schottenstein (the "Employee"), and Irving E. Schottenstein, as Trustee of the Steven Schottenstein 1994 Trust (the "Trustee"). BACKGROUND INFORMATION ---------------------- A. The Employee is a capable, efficient and valued employee of the Employer. B. The Employee wishes to provide life insurance protection for the benefit of his family -- under the policy of insurance which is described in Exhibit A hereto. Such life insurance policy, together with any replacement of it or modification to it, is referred to herein as the "Policy." The company which issues the Policy is referred to herein as the "Insurer." C. The Employer is willing, on the terms and conditions set forth in this Agreement, to pay a portion of the premiums due on the Policy. D. The Trustee shall be the owner of the Policy and, as such, shall possess all incidents of ownership in and to the Policy. The Employee shall have no incident of ownership in or to the Policy. E. The Employer wishes to have the Policy collaterally assigned by the Trustee in order to secure the payment of all amounts which will, in the future, be due and payable to the Employer under this Agreement. F. This Agreement is intended to be a "split-dollar" arrangement, as described in Revenue Ruling 64-328 (issued by the Internal Revenue Service). AGREEMENT --------- NOW, THEREFORE, in consideration of the mutual promises contained below, the parties agree to the foregoing and as follows: -Page 1- 4 1. PURCHASE OF THE POLICY; CONFORMITY TO THIS AGREEMENT. With the consent of the Employee, the Trustee has purchased, or has arranged to purchase, the Policy from the Insurer. The parties (i) have taken, or will take, all necessary action to cause the Insurer to issue the Policy and (ii) shall take any further action which may be necessary to cause the Policy to conform to the provisions of this Agreement. The parties agree that the Policy shall be subject to (i) the terms of this Agreement and (ii) any collateral assignment filed with the Insurer relating to the Policy. 2. OWNERSHIP AND POSSESSION OF THE POLICY. The Trustee (i) shall be the sole and absolute owner of the Policy and (ii) may, except as otherwise provided herein, exercise all ownership rights granted under the terms of the Policy. However, the Employer shall have possession of the Policy. 3. PAYMENT OF PREMIUMS. The following provisions shall govern the payment of premiums with respect to the Policy -- a. EMPLOYER PAYMENT OF PREMIUMS. On or before the due date of each Policy premium, or within any grace period, the Employer shall (i) pay the full amount of the premium to the Insurer and (ii) promptly furnish evidence to the Employee and the Trustee of its timely payment of such premium. b. TRUSTEE REIMBURSEMENT OF COMPUTED ECONOMIC BENEFIT. The Trustee shall promptly reimburse the Employer for a portion of each premium paid by the Employer. The amount of such reimbursement shall equal the economic benefit to the Trustee attributable to the life insurance protection, on the Employee's life, that is provided under this Agreement. The value of such economic benefit shall be calculated using the lesser of (i) the rates known as "P.S. 58" rates or (ii) the Insurer's published premium rates for an individual 1-year term life insurance policy available to all standard risks -- in either case, based on the Employee's age at the due date of the premium payment. c. WAIVER OF PREMIUM (OR POLICY COSTS) RIDER. At the Trustee's option (and if allowed by the Insurer), the Policy may provide for the waiver of premium (or waiver of specified policy costs) in the event of the Employee's disability. However, unless the Employer and the Trustee otherwise agree (in advance and in writing), the Trustee shall reimburse the Employer for any additional cost associated with such waiver. 4. EMPLOYER'S INTEREST. As used in this Agreement, (i) the "Employer's Gross Interest" in the Policy shall mean the aggregate amount of all premiums paid by the Employer with respect to the Policy minus the aggregate amount of all reimbursements of -Page 2- 5 such premium payments by the Trustee, and (ii) the "Employer's Net Interest" in the Policy shall mean shall mean the Employer's Gross Interest minus the outstanding balance (if any) of all Policy loans made to the Employer (including all accrued and unpaid interest thereon). 5. COLLATERAL ASSIGNMENT OF THE POLICY. To secure the Employer's Net Interest in the Policy, the Trustee hereby assigns the Policy to the Employer as collateral. This Agreement, and the collateral assignment effected hereby, specifically limits the rights of the Employer in the Policy to the recovery of the Employer's Gross Interest. This collateral assignment of the Policy to the Employer shall not be terminated, altered or amended by the Trustee without the express written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. The Insurer is authorized to accept this Agreement as the Trustee's collateral assignment of the Policy to the Employer. The Trustee and the Employee agree, upon reasonable request by the Employer, to execute all other documents that may be necessary or desirable to perfect this collateral assignment of the Policy. 6. BORROWING FROM THE POLICY. The Employer and the Trustee may borrow from the Policy (as provided therein), subject to the following limitations -- a. BORROWING BY THE EMPLOYER. The outstanding amount of any such borrowing by the Employer (including all accrued and unpaid interest thereon) shall not exceed the Employer's Gross Interest in the Policy. The Trustee shall execute and file any forms required by the Insurer to permit the Employer to borrow from the Policy in accordance with this provision. b. BORROWING BY THE TRUSTEE. The Trustee shall not borrow from the Policy without the prior written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. In addition, the outstanding amount of any such borrowing by the Trustee (including all accrued and unpaid interest thereon) shall not prevent the Employer from borrowing the maximum amount permitted pursuant to the preceding provision. 7. SURRENDER OR CANCELLATION OF THE POLICY. If the Policy is surrendered or canceled for any reason (other than the death of the Employee), any net proceeds resulting from such surrender or cancellation (after reduction by all applicable surrender or cancellation charges) shall be distributed as follows -- a. EMPLOYER'S INTEREST. The Employer shall have the unqualified right to receive a portion of such net proceeds equal to the Employer's Net Interest; provided, however, in no event shall the amount payable to the Employer exceed -Page 3- 6 the entire amount of such net proceeds. b. TRUSTEE'S INTEREST. The remaining net proceeds (if any) shall be paid to the Trustee. 8. DEATH OF THE EMPLOYEE. Upon the death of the Employee -- a. PROOF OF CLAIM. The Trustee and Employer shall promptly take all action (including, without limitation, the filing of an appropriate proof of claim) which may be necessary or desirable in order to obtain the net death benefit provided under the Policy. b. EMPLOYER'S INTEREST. The Employer shall have the unqualified right to receive a portion of such net death benefit equal to the Employer's Net Interest; provided, however, in no event shall the amount payable to the Employer exceed the entire amount of such net death benefit. c. TRUSTEE'S INTEREST. The balance (if any) of the net death benefit provided under the Policy shall be paid to the beneficiary or beneficiaries designated by the Trustee, in the manner and amounts provided in the beneficiary designation provision of the Policy. d. POLICY BENEFICIARY DESIGNATION. The Employer and the Trustee agree that the beneficiary designation provision of the Policy shall conform to the foregoing provisions of this Agreement. 9. TERMINATION OF AGREEMENT. This Agreement shall terminate under the following circumstances -- a. TERMINATION WITHOUT NOTICE. This Agreement shall terminate without notice upon the occurrence of any of the following events: O The total cessation of the business of the Employer; or O The bankruptcy, receivership or dissolution of the Employer; or O The written agreement of the Trustee and the Employer. b. OPTIONAL TERMINATION BY THE TRUSTEE. The Trustee may terminate this Agreement by giving at least ten (10) days written notice to the Employer; provided, however, such notice may not be given while the Employee is employed by the Employer. Such termination shall be effective as of the date specified in the -Page 4- 7 notice but not sooner than ten (10) days after such notice is received by the Employer. c. OPTIONAL TERMINATION BY THE EMPLOYER. In the event that the Employee's employment by the Employer is terminated for any reason other than retirement, death or permanent disability of the Employee, the Employer may terminate this Agreement by giving at least ten (10) days written notice to the Trustee. Such termination shall be effective as of the date specified in the notice but not sooner than ten (10) days after such notice is received by the Trustee. 10. DISPOSITION OF POLICY UPON TERMINATION OF AGREEMENT. Upon any termination of this Agreement -- a. TRUSTEE'S OPTION TO ACQUIRE SOLE OWNERSHIP. For sixty (60) days after such termination, the Trustee shall have the option of obtaining the release of the collateral assignment of the Policy to the Employer. To obtain such release, the Trustee shall pay to the Employer an amount equal to the Employer's Net Interest. Upon receipt of such amount, the Employer shall release the collateral assignment of the Policy by the execution and delivery of an appropriate instrument of release. The Trustee may borrow against the Policy to finance the payment of the Employer's Net Interest to the Employer, and the Employer shall consent to any such borrowing. b. TRANSFER OF POLICY TO THE EMPLOYER. If the Trustee fails to exercise such option within such sixty (60) day period, the Trustee shall, upon request by the Employer, promptly execute any documents which are necessary or desirable to transfer ownership of the Policy to the Employer. Thereafter, neither the Trustee nor its beneficiaries, successors or assigns shall have any further interest in or to the Policy (either under the terms thereof or under this Agreement). 11. PROHIBITION AGAINST TRANSFER OF INTERESTS. a. TRANSFERS BY THE TRUSTEE. Except as otherwise provided in this Agreement, the Trustee shall not sell, assign, transfer, borrow against, surrender or cancel the Policy (or any portion thereof or interest therein) without the express written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. b. TRANSFERS BY THE EMPLOYER. Except as otherwise provided in this Agreement, the Employer shall not sell, assign, transfer, or borrow against any portion of its interest in the Policy without the express written consent of the -Page 5- 8 Trustee, which consent may be withheld in the Trustee's sole and absolute discretion. 12. AMENDMENT AND WAIVER. This Agreement may not be amended except by a written instrument signed by the Employer and the Trustee, or their respective successors or assigns, and may not be terminated except as provided herein. The failure of any party to strictly enforce any provision of this Agreement shall not affect the right of such party to thereafter enforce the same, or any other, provision of this Agreement in accordance with its terms. 13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of (i) the Employer, its successors and assigns, (ii) the Employee, his heirs, successors and assigns, and (iii) the Trustee, its beneficiaries, successors and assigns. 14. NOTICES. Any notice, consent or demand required or permitted to be given under this Agreement shall be (i) in writing and (ii) signed by the party giving or making the same. If such notice, consent or demand is mailed to a party, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Employer. The date of such mailing shall be deemed the date of notice, consent or demand. 15. SURVIVAL. The rights and obligations of the parties shall survive the termination of this Agreement and the Employee's death to the extent that any performance is required. 16. NO GUARANTY OF EMPLOYMENT. The Employee shall have no guarantee or right to employment by reason of this Agreement. 17. COOPERATION. The parties agree to take such actions as are desirable to allow the rights and duties specified in this Agreement to be brought into effect. The parties each agree to execute and deliver all documents which may be desirable to bring into effect the intent of this Agreement or to carry out its provisions. 18. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. 19. SEVERABILITY. Whenever possible, each provision of the Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision shall be held to be prohibited by, or invalid under, applicable law, such provision -Page 6- 9 shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 20. THIRD PARTY BENEFICIARY. The Employee shall be considered a third party beneficiary of the rights granted to the Trustee under this Agreement and shall be entitled to enforce those rights directly against the Employer without joinder of the Trustee. 21. EXONERATION OF INSURER. The Insurer shall be fully discharged from its obligations under the Policy by payment of all Policy death benefits to the beneficiary or beneficiaries named in the Policy subject to the terms and conditions of the Policy. In no event shall the Insurer be considered a party to this Agreement or any amendment hereof. No provision of this Agreement, nor of any amendment hereof, shall in any way be construed as enlarging, changing, varying, or in any other way affecting the obligations of the Insurer as expressly provided in the Policy except insofar as the provisions hereof are made a part of the Policy by any collateral assignment filed with the Insurer in connection with this Agreement. 22. ERISA COMPLIANCE. The Employer is hereby designated as the named fiduciary under this Agreement. The named fiduciary shall have authority to control and manage the operation and administration of this Agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this Agreement. The Employer shall make all determinations concerning rights to benefits under this Agreement. Any decision by the Employer denying a claim for benefits under this Agreement shall be stated in writing and delivered or mailed to the claimant. Such decision shall set forth the specific reasons for the denial, written to the best of the Employer's ability in a manner that may be understood without legal or actuarial counsel. In addition, the Employer shall afford a reasonable opportunity to the claimant for a full and fair review of the decision denying such claim. 23. GOVERNING LAW. This Agreement, and the rights of the parties, shall be governed by, and construed in accordance with, the laws of Ohio. 24. HEADINGS. The headings in this Agreement are for convenience only and shall be ignored in the construction of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. -Page 7- 10 M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation By: ---------------------------------- ------------------------------------- STEVEN SCHOTTENSTEIN (the "Employee") Its: ---------------------------------- ------------------------------------- IRVING E. SCHOTTENSTEIN, as Trustee of the Steven Schottenstein 1994 Trust (the "Trustee") -Page 8- 11 EXHIBIT A --------- NAME POLICY NO. ---- ---------- Steven Schottenstein SV50186003 -Page 9- EX-10.30 6 EXHIBIT 10.30 1 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT DATED: SEPTEMBER 24, 1997 2 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT
TABLE OF CONTENTS ----------------- Background Information..............................................................................- Page 1 - 1. Purchase of the Policy; Conformity to this Agreement............................................- Page 1 - 2. Ownership and Possession of the Policy..........................................................- Page 2 - 3. Payment of Premiums.............................................................................- Page 2 - 4. Employer's Interest.............................................................................- Page 2 - 5. Collateral Assignment of the Policy.............................................................- Page 2 - 6. Borrowing from the Policy.......................................................................- Page 3 - 7. Surrender or Cancellation of the Policy.........................................................- Page 3 - 8. Death of the Employee...........................................................................- Page 3 - 9. Termination of Agreement........................................................................- Page 4 - 10. Disposition of Policy Upon Termination of Agreement.............................................- Page 4 - 11. Prohibition Against Transfer of Interests.......................................................- Page 5 - 12. Amendment and Waiver............................................................................- Page 5 - 13. Successors and Assigns..........................................................................- Page 5 - 14. Notices.........................................................................................- Page 6 - 15. Survival........................................................................................- Page 6 - 16. No Guaranty of Employment.......................................................................- Page 6 - 17. Cooperation.....................................................................................- Page 6 - 18. No Strict Construction..........................................................................- Page 6 - 19. Severability....................................................................................- Page 6 - 20. Third Party Beneficiary.........................................................................- Page 6 - 21. Exoneration of Insurer..........................................................................- Page 6 - 22. ERISA Compliance................................................................................- Page 7 - 23. Governing Law...................................................................................- Page 7 - 24. Headings........................................................................................- Page 7 -
- i - 3 COLLATERAL ASSIGNMENT SPLIT-DOLLAR AGREEMENT This Agreement is made and entered into as of the 24th day of September, 1997, by and among M/I Schottenstein Homes, Inc., an Ohio corporation (the "Employer"), Kerrii B. Anderson (the "Employee"), and Douglas T. Anderson, as Trustee of the Kerrii B. Anderson 1997 Irrevocable Life Insurance Trust (the "Trustee"). BACKGROUND INFORMATION ---------------------- A. The Employee is a capable, efficient and valued employee of the Employer. B. The Employee wishes to provide life insurance protection for the benefit of her family -- under the policy of insurance which is described in Exhibit A hereto. Such life insurance policy, together with any replacement of it or modification to it, is referred to herein as the "Policy." The company which issues the Policy is referred to herein as the "Insurer." C. The Employer is willing, on the terms and conditions set forth in this Agreement, to pay a portion of the premiums due on the Policy. D. The Trustee shall be the owner of the Policy and, as such, shall possess all incidents of ownership in and to the Policy. The Employee shall have no incident of ownership in or to the Policy. E. The Employer wishes to have the Policy collaterally assigned by the Trustee in order to secure the payment of all amounts which will, in the future, be due and payable to the Employer under this Agreement. F. This Agreement is intended to be a "split-dollar" arrangement, as described in Revenue Ruling 64-328 (issued by the Internal Revenue Service). AGREEMENT --------- NOW, THEREFORE, in consideration of the mutual promises contained below, the parties agree to the foregoing and as follows: -Page 1- 4 1. PURCHASE OF THE POLICY; CONFORMITY TO THIS AGREEMENT. With the consent of the Employee, the Trustee has purchased, or has arranged to purchase, the Policy from the Insurer. The parties (i) have taken, or will take, all necessary action to cause the Insurer to issue the Policy and (ii) shall take any further action which may be necessary to cause the Policy to conform to the provisions of this Agreement. The parties agree that the Policy shall be subject to (i) the terms of this Agreement and (ii) any collateral assignment filed with the Insurer relating to the Policy. 2. OWNERSHIP AND POSSESSION OF THE POLICY. The Trustee (i) shall be the sole and absolute owner of the Policy and (ii) may, except as otherwise provided herein, exercise all ownership rights granted under the terms of the Policy. However, the Employer shall have possession of the Policy. 3. PAYMENT OF PREMIUMS. The following provisions shall govern the payment of premiums with respect to the Policy -- a. EMPLOYER PAYMENT OF PREMIUMS. On or before the due date of each Policy premium, or within any grace period, the Employer shall (i) pay the full amount of the premium to the Insurer and (ii) promptly furnish evidence to the Employee and the Trustee of its timely payment of such premium. b. TRUSTEE REIMBURSEMENT OF COMPUTED ECONOMIC BENEFIT. The Trustee shall promptly reimburse the Employer for a portion of each premium paid by the Employer. The amount of such reimbursement shall equal the economic benefit to the Trustee attributable to the life insurance protection, on the Employee's life, that is provided under this Agreement. The value of such economic benefit shall be calculated using the lesser of (i) the rates known as "P.S. 58" rates or (ii) the Insurer's published premium rates for an individual 1-year term life insurance policy available to all standard risks -- in either case, based on the Employee's age at the due date of the premium payment. c. WAIVER OF PREMIUM (OR POLICY COSTS) RIDER. At the Trustee's option (and if allowed by the Insurer), the Policy may provide for the waiver of premium (or waiver of specified policy costs) in the event of the Employee's disability. However, unless the Employer and the Trustee otherwise agree (in advance and in writing), the Trustee shall reimburse the Employer for any additional cost associated with such waiver. 4. EMPLOYER'S INTEREST. As used in this Agreement, (i) the "Employer's Gross Interest" in the Policy shall mean the aggregate amount of all premiums paid by the Employer with respect to the Policy minus the aggregate amount of all reimbursements of -Page 2- 5 such premium payments by the Trustee, and (ii) the "Employer's Net Interest" in the Policy shall mean shall mean the Employer's Gross Interest minus the outstanding balance (if any) of all Policy loans made to the Employer (including all accrued and unpaid interest thereon). 5. COLLATERAL ASSIGNMENT OF THE POLICY. To secure the Employer's Net Interest in the Policy, the Trustee hereby assigns the Policy to the Employer as collateral. This Agreement, and the collateral assignment effected hereby, specifically limits the rights of the Employer in the Policy to the recovery of the Employer's Gross Interest. This collateral assignment of the Policy to the Employer shall not be terminated, altered or amended by the Trustee without the express written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. The Insurer is authorized to accept this Agreement as the Trustee's collateral assignment of the Policy to the Employer. The Trustee and the Employee agree, upon reasonable request by the Employer, to execute all other documents that may be necessary or desirable to perfect this collateral assignment of the Policy. 6. BORROWING FROM THE POLICY. The Employer and the Trustee may borrow from the Policy (as provided therein), subject to the following limitations -- a. BORROWING BY THE EMPLOYER. The outstanding amount of any such borrowing by the Employer (including all accrued and unpaid interest thereon) shall not exceed the Employer's Gross Interest in the Policy. The Trustee shall execute and file any forms required by the Insurer to permit the Employer to borrow from the Policy in accordance with this provision. b. BORROWING BY THE TRUSTEE. The Trustee shall not borrow from the Policy without the prior written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. In addition, the outstanding amount of any such borrowing by the Trustee (including all accrued and unpaid interest thereon) shall not prevent the Employer from borrowing the maximum amount permitted pursuant to the preceding provision. 7. SURRENDER OR CANCELLATION OF THE POLICY. If the Policy is surrendered or canceled for any reason (other than the death of the Employee), any net proceeds resulting from such surrender or cancellation (after reduction by all applicable surrender or cancellation charges) shall be distributed as follows -- a. EMPLOYER'S INTEREST. The Employer shall have the unqualified right to receive a portion of such net proceeds equal to the Employer's Net Interest; provided, however, in no event shall the amount payable to the Employer exceed -Page 3- 6 the entire amount of such net proceeds. b. TRUSTEE'S INTEREST. The remaining net proceeds (if any) shall be paid to the Trustee. 8. DEATH OF THE EMPLOYEE. Upon the death of the Employee -- a. PROOF OF CLAIM. The Trustee and Employer shall promptly take all action (including, without limitation, the filing of an appropriate proof of claim) which may be necessary or desirable in order to obtain the net death benefit provided under the Policy. b. EMPLOYER'S INTEREST. The Employer shall have the unqualified right to receive a portion of such net death benefit equal to the Employer's Net Interest; provided, however, in no event shall the amount payable to the Employer exceed the entire amount of such net death benefit. c. TRUSTEE'S INTEREST. The balance (if any) of the net death benefit provided under the Policy shall be paid to the beneficiary or beneficiaries designated by the Trustee, in the manner and amounts provided in the beneficiary designation provision of the Policy. d. POLICY BENEFICIARY DESIGNATION. The Employer and the Trustee agree that the beneficiary designation provision of the Policy shall conform to the foregoing provisions of this Agreement. 9. TERMINATION OF AGREEMENT. This Agreement shall terminate under the following circumstances -- a. TERMINATION WITHOUT NOTICE. This Agreement shall terminate without notice upon the occurrence of any of the following events: O The total cessation of the business of the Employer; or O The bankruptcy, receivership or dissolution of the Employer; or O The written agreement of the Trustee and the Employer. b. OPTIONAL TERMINATION BY THE TRUSTEE. The Trustee may terminate this Agreement by giving at least ten (10) days written notice to the Employer; provided, however, such notice may not be given while the Employee is employed by the Employer. Such termination shall be effective as of the date specified in the -Page 4- 7 notice but not sooner than ten (10) days after such notice is received by the Employer. c. OPTIONAL TERMINATION BY THE EMPLOYER. In the event that the Employee's employment by the Employer is terminated for any reason other than retirement, death or permanent disability of the Employee, the Employer may terminate this Agreement by giving at least ten (10) days written notice to the Trustee. Such termination shall be effective as of the date specified in the notice but not sooner than ten (10) days after such notice is received by the Trustee. 10. DISPOSITION OF POLICY UPON TERMINATION OF AGREEMENT. Upon any termination of this Agreement -- a. TRUSTEE'S OPTION TO ACQUIRE SOLE OWNERSHIP. For sixty (60) days after such termination, the Trustee shall have the option of obtaining the release of the collateral assignment of the Policy to the Employer. To obtain such release, the Trustee shall pay to the Employer an amount equal to the Employer's Net Interest. Upon receipt of such amount, the Employer shall release the collateral assignment of the Policy by the execution and delivery of an appropriate instrument of release. The Trustee may borrow against the Policy to finance the payment of the Employer's Net Interest to the Employer, and the Employer shall consent to any such borrowing. b. TRANSFER OF POLICY TO THE EMPLOYER. If the Trustee fails to exercise such option within such sixty (60) day period, the Trustee shall, upon request by the Employer, promptly execute any documents which are necessary or desirable to transfer ownership of the Policy to the Employer. Thereafter, neither the Trustee nor its beneficiaries, successors or assigns shall have any further interest in or to the Policy (either under the terms thereof or under this Agreement). 11. PROHIBITION AGAINST TRANSFER OF INTERESTS. a. TRANSFERS BY THE TRUSTEE. Except as otherwise provided in this Agreement, the Trustee shall not sell, assign, transfer, borrow against, surrender or cancel the Policy (or any portion thereof or interest therein) without the express written consent of the Employer, which consent may be withheld in the Employer's sole and absolute discretion. b. TRANSFERS BY THE EMPLOYER. Except as otherwise provided in this Agreement, the Employer shall not sell, assign, transfer, or borrow against any portion of its interest in the Policy without the express written consent of the -Page 5- 8 Trustee, which consent may be withheld in the Trustee's sole and absolute discretion. 12. AMENDMENT AND WAIVER. This Agreement may not be amended except by a written instrument signed by the Employer and the Trustee, or their respective successors or assigns, and may not be terminated except as provided herein. The failure of any party to strictly enforce any provision of this Agreement shall not affect the right of such party to thereafter enforce the same, or any other, provision of this Agreement in accordance with its terms. 13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of (i) the Employer, its successors and assigns, (ii) the Employee, her heirs, successors and assigns, and (iii) the Trustee, its beneficiaries, successors and assigns. 14. NOTICES. Any notice, consent or demand required or permitted to be given under this Agreement shall be (i) in writing and (ii) signed by the party giving or making the same. If such notice, consent or demand is mailed to a party, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Employer. The date of such mailing shall be deemed the date of notice, consent or demand. 15. SURVIVAL. The rights and obligations of the parties shall survive the termination of this Agreement and the Employee's death to the extent that any performance is required. 16. NO GUARANTY OF EMPLOYMENT. The Employee shall have no guarantee or right to employment by reason of this Agreement. 17. COOPERATION. The parties agree to take such actions as are desirable to allow the rights and duties specified in this Agreement to be brought into effect. The parties each agree to execute and deliver all documents which may be desirable to bring into effect the intent of this Agreement or to carry out its provisions. 18. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. 19. SEVERABILITY. Whenever possible, each provision of the Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision shall be held to be prohibited by, or invalid under, applicable law, such provision -Page 6- 9 shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 20. THIRD PARTY BENEFICIARY. The Employee shall be considered a third party beneficiary of the rights granted to the Trustee under this Agreement and shall be entitled to enforce those rights directly against the Employer without joinder of the Trustee. 21. EXONERATION OF INSURER. The Insurer shall be fully discharged from its obligations under the Policy by payment of all Policy death benefits to the beneficiary or beneficiaries named in the Policy subject to the terms and conditions of the Policy. In no event shall the Insurer be considered a party to this Agreement or any amendment hereof. No provision of this Agreement, nor of any amendment hereof, shall in any way be construed as enlarging, changing, varying, or in any other way affecting the obligations of the Insurer as expressly provided in the Policy except insofar as the provisions hereof are made a part of the Policy by any collateral assignment filed with the Insurer in connection with this Agreement. 22. ERISA COMPLIANCE. The Employer is hereby designated as the named fiduciary under this Agreement. The named fiduciary shall have authority to control and manage the operation and administration of this Agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this Agreement. The Employer shall make all determinations concerning rights to benefits under this Agreement. Any decision by the Employer denying a claim for benefits under this Agreement shall be stated in writing and delivered or mailed to the claimant. Such decision shall set forth the specific reasons for the denial, written to the best of the Employer's ability in a manner that may be understood without legal or actuarial counsel. In addition, the Employer shall afford a reasonable opportunity to the claimant for a full and fair review of the decision denying such claim. 23. GOVERNING LAW. This Agreement, and the rights of the parties, shall be governed by, and construed in accordance with, the laws of Ohio. 24. HEADINGS. The headings in this Agreement are for convenience only and shall be ignored in the construction of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. -Page 7- 10 M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation By: ---------------------------------- ------------------------------------- KERRII B. ANDERSON (the "Employee") Its: ---------------------------------- ------------------------------------- Douglas T. Anderson, as Trustee of the Kerrii B. Anderson 1997 Irrevocable Life Insurance Trust (the "Trustee") -Page 8- 11 EXHIBIT A --------- INSURER POLICY NO. ------- ---------- Kerrii B. Anderson 2-118-135V -Page 9- EX-13 7 EXHIBIT 13 1 FINANCIAL REVIEW
Selected Consolidated Financial Data 14 Segment Information 15 Management's Discussion & Analysis of Results of Operations and Financial Condition 16 Consolidated Statements of Income 24 Consolidated Balance Sheets 25 Consolidated Statements of Stockholders' Equity 26 Consolidated Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28 Independent Auditors' Report 34 Stock Market Prices and Dividends 35
13 2 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT SELECTED CONSOLIDATED FINANCIAL DATA M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- Income Statement: (Year Ended December 31) Revenue $614,004 $577,192 $527,822 $491,719 $446,060 Gross margin 119,341 109,103 95,861 88,165 80,535 Income before extraordinary loss (1) 17,437 14,110 9,876 11,613 11,198 Income per common share before extraordinary loss (1) 2.15 1.60 1.12 1.32 1.87 Dividends per common share (2) -- -- -- -- -- Balance Sheet: (December 31) Total assets 366,020 305,359 281,143 277,614 227,958 Notes and mortgage notes payable 113,950 100,345 102,549 112,765 77,892 Subordinated notes 50,000 25,000 24,513 24,513 24,513 Stockholders' equity 115,506 112,319 99,496 89,620 79,089 - --------------------------------------------------------------------------------------------------------------------
(1) Information for 1993 includes adjustments to reflect the taxation of the Company as a C corporation using a 40% combined tax rate for federal, state and local income taxes. Pro forma information is not provided for years after 1993 as the Company was taxed as a C corporation during those periods. The per share information is based upon a weighted average of 8,108,293 common shares for 1997, 8,800,000 common shares for 1996, 1995 and 1994 and 5,975,068 common shares for 1993. (2) No dividends were paid by the Company during any period prior to 1998 in which the stock was publicly held; however, distributions were made to S corporation stockholders during 1993 while the Company was privately held. In January 1994, the Company made distributions of $1,082,000 to the former S corporation stockholders related to the Company's earnings from January 1, 1993 to November 8, 1993 (the date the Company's status as an S corporation was terminated). SELECTED CONSOLIDATED QUARTERLY FINANCIAL AND OPERATING DATA
Three Months Ended - ----------------------------------------------------------------------------------------------------------- December 31, September 30, June 30, March 31, (Dollars in thousands, except per share amounts) 1997 1997 1997 1997 - ----------------------------------------------------------------------------------------------------------- New contracts, net 861 823 768 907 Homes delivered 991 828 776 557 Backlog 1,544 1,674 1,679 1,687 Total revenue $ 204,203 $ 157,958 $ 146,014 $ 105,829 Gross margin $ 38,251 $ 30,779 $ 28,555 $ 21,756 Income before income taxes $ 8,778 $ 7,729 $ 7,848 $ 5,067 Net income $ 5,142 $ 4,608 $ 4,635 $ 3,052 Net income per common share $ 0.68 $ 0.59 $ 0.56 $ 0.35 Weighted average common shares outstanding 7,597,561 7,834,252 8,300,000 8,716,667 - -----------------------------------------------------------------------------------------------------------
Three Months Ended - ----------------------------------------------------------------------------------------------------------- December 31, September 30, June 30, March 31, (Dollars in thousands, except per share amounts) 1996 1996 1996 1996 - ----------------------------------------------------------------------------------------------------------- New contracts, net 716 730 760 956 Homes delivered 1,017 887 795 547 Backlog 1,337 1,638 1,795 1,830 Total revenue $ 187,045 $ 156,932 $ 137,357 $ 95,858 Gross margin $ 34,127 $ 29,691 $ 26,382 $ 18,903 Income before income taxes and extraordinary loss $ 7,145 $ 6,936 $ 6,778 $ 2,218 Income before extraordinary loss $ 4,461 $ 4,390 $ 3,936 $ 1,323 Income per common share before extraordinary loss $ 0.50 $ 0.50 $ 0.45 $ 0.15 Weighted average common shares outstanding 8,800,000 8,800,000 8,800,000 8,800,000 - -----------------------------------------------------------------------------------------------------------
14 3 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT SEGMENT INFORMATION M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES The business segments of the Company are defined as home-building 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 financial services operations include the origination of mortgage loans, primarily for purchasers of the Company's homes, and title services. The loans and the majority of the servicing rights are sold to outside mortgage lenders. Intersegment revenue represents the elimination of revenue included in financial services revenue for fees paid by the home-building operations. Corporate expenses include salaries and other administrative expenses which are not identifiable with a specific segment. Interest expense excludes interest expense related to the financial services segment of $159,000, $321,000 and $431,000 for 1997, 1996 and 1995, respectively, which is included in the determination of financial services operating income. Corporate assets consist primarily of cash, deferred taxes and other assets not associated with a specific business segment.
Year Ended December 31, (Dollars in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Revenue: Homebuilding $ 606,195 $ 570,719 $ 522,453 Financial services 10,627 9,037 7,208 Intersegment (2,818) (2,564) (1,839) - ---------------------------------------------------------------------------------------------------- Total Revenue $ 614,004 $ 577,192 $ 527,822 ==================================================================================================== Operating Income: Homebuilding $ 50,052 $ 45,981 $ 39,039 Financial services 5,594 4,100 2,697 - ---------------------------------------------------------------------------------------------------- Total Operating Income 55,646 50,081 41,736 Corporate expenses (14,641) (14,222) (11,463) Interest expense (11,583) (12,782) (13,767) - ---------------------------------------------------------------------------------------------------- Income Before Income Taxes and Extraordinary Loss $ 29,422 $ 23,077 $ 16,506 ==================================================================================================== Identifiable Assets: Homebuilding $ 300,476 $ 257,130 $ 243,842 Financial services 44,223 35,350 23,533 Corporate 21,321 12,879 13,768 - ---------------------------------------------------------------------------------------------------- Total Identifiable Assets $ 366,020 $ 305,359 $ 281,143 ==================================================================================================== Capital Expenditures: Homebuilding $ 6,773 $ 474 $ 453 Financial services 180 38 19 Corporate 1,555 99 219 - ---------------------------------------------------------------------------------------------------- Total Capital Expenditures $ 8,508 $ 611 $ 691 ==================================================================================================== Depreciation and Amortization: Homebuilding $ 857 $ 778 $ 1,298 Financial services 117 153 159 Corporate 649 446 297 - ---------------------------------------------------------------------------------------------------- Total Depreciation and Amortization $ 1,623 $ 1,377 $ 1,754 ====================================================================================================
15 4 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS CONSOLIDATED YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 TOTAL REVENUE. Total revenue for 1997 of $614.0 million set a new record for the Company and represented an increase of $36.8 million over 1996. Housing revenue, land revenue and other revenue increased $17.2 million, $17.9 million and $1.7 million, respectively. The increase in housing revenue was attributable to a 6.1% increase in the average sales price of Homes Delivered, partially offset by a 2.9% decrease in the number of Homes Delivered. The increase in land revenue was primarily due to an increase in the number of lots sold to third parties in the Washington, D.C. market. The increase in other revenue is primarily attributable to financial services where the gains recognized from the sale of loans increased in the current year. INCOME BEFORE INCOME TAXES. Income before income taxes and extraordinary loss for 1997 increased 27.5% over 1996. This increase related to both housing and land, where income before income taxes and extraordinary loss increased from $19.0 to $23.8 million, and financial services, where income before income taxes increased from $4.1 to $5.6 million. The increase in housing was primarily due to the increase in the average sales price of Homes Delivered. The increase in land was primarily due to a significant increase in the number of lots sold to third parties at relatively high margins in the Washington, D.C. market. The increase in financial services was primarily due to the significant increase in income from the sale of servicing and marketing gains due to increased loan volume and the favorable interest rate environment during the last half of 1996 and throughout 1997. Income before income taxes also increased due to a decrease in interest expense from $13.1 million in 1996 to $11.7 million in 1997. These decreases were primarily attributable to a decrease in the weighted average interest rate and an increase in the net amount of interest capitalized. The weighted average interest rate decreased due to more favorable terms on the Company's line of credit facilities and the replacement of the 14% Subordinated Notes with new Subordinated Notes at a significantly lower rate. Capitalized interest increased due to a significant increase in the Company's land development activities. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 TOTAL REVENUE. Total revenue for 1996 of $577.2 million set a new record for the Company and represented an increase of $49.4 million over 1995. Increases in housing revenue of $55.2 million and other revenue of $1.4 million were partially offset by a $7.2 million decrease in land revenue. The increase in housing revenue was attributable to an increase in the number of Homes Delivered. The Company delivered 294 more homes in 1996 than in 1995. The increase in other revenue is primarily attributable to financial services, where both the number of loans originated and the gains recognized from the sale of loans increased in the current year. The decrease in land revenue was primarily due to a significant decrease in the number of lots sold to third parties in the Maryland division. INCOME BEFORE INCOME TAXES. Income before income taxes and extraordinary loss for 1996 increased 39.8% over 1995. This increase related to both housing, where income before income taxes and extraordinary loss increased from $13.8 to $19.0 million, and financial services, where income before income taxes increased from $2.7 to $4.1 million. The increase in housing was primarily due to the increase in the number of Homes Delivered along with improved margins. Housing margins increased 0.7% in 1996. The increase in financial services was primarily due to the significant increase in income from the sale of servicing and marketing gains due to increased loan volume and the favorable interest rate environment during the last half of 1995 and 1996 compared to the same periods of 1994 and 1995. SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS The Company has experienced, and expects to continue to experience, significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, Homes Delivered increase substantially in the third and fourth quarters. The Company believes that this seasonality reflects the tendency of home buyers to shop for a new home in the spring with the goal of closing in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions. The following tables reflect this cycle for the Company during the four quarters of 1997 and 1996:
Three Months Ended ---------------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, (Dollars in thousands) 1997 1997 1997 1997 - ---------------------------------------------------------------------------------------------- Total revenue $204,203 $157,958 $146,014 $105,829 Unit data: New contracts, net 861 823 768 907 Homes delivered 991 828 776 557 Backlog at end of period 1,544 1,674 1,679 1,687
Three Months Ended ---------------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, (Dollars in thousands) 1996 1996 1996 1996 - ---------------------------------------------------------------------------------------------- Total revenue $187,045 $156,932 $137,357 $95,858 Unit data: New contracts, net 716 730 760 956 Homes delivered 1,017 887 795 547 Backlog at end of period 1,337 1,638 1,795 1,830 - ----------------------------------------------------------------------------------------------
16 5 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Homebuilding Segment The following table sets forth certain information related to the Company's homebuilding segment:
Year Ended December 31, (Dollars in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------- Revenue: Housing sales $578,185 $560,980 $505,810 Lot and land sales 26,814 8,915 16,145 Other income 1,196 824 498 - ----------------------------------------------------------------------------------- Total revenue $606,195 $570,719 $522,453 - ----------------------------------------------------------------------------------- Revenue: Housing sales 95.4% 98.3% 96.8% Lot and land sales 4.4 1.6 3.1 Other income 0.2 0.1 0.1 - ----------------------------------------------------------------------------------- Total revenue 100.0 100.0 100.0 Land and housing costs 82.1 82.5 83.0 - ----------------------------------------------------------------------------------- Gross margin 17.9 17.5 17.0 General and administrative expenses 3.1 2.8 2.9 Selling expenses 6.6 6.6 6.6 - ----------------------------------------------------------------------------------- Operating income 8.2% 8.1% 7.5% - ----------------------------------------------------------------------------------- Midwest Region Unit data: New contracts, net 2,059 1,910 1,865 Homes delivered 1,910 1,939 1,696 Backlog at end of period 1,057 908 937 Average sales price of homes in Backlog $ 178 $ 174 $ 155 Aggregate sales value of homes in Backlog $188,000 $158,000 $145,000 Number of active subdivisions 75 80 80 - ----------------------------------------------------------------------------------- Florida Region Unit data: New contracts, net 700 663 619 Homes delivered 666 667 657 Backlog at end of period 255 221 225 Average sales price of homes in Backlog $ 188 $ 163 $ 182 Aggregate sales value of homes in Backlog $ 48,000 $ 36,000 $ 41,000 Number of active subdivisions 30 35 35 - ----------------------------------------------------------------------------------- North Carolina, Virginia and Maryland, and Arizona Region Unit data: New contracts, net 600 589 632 Homes delivered 576 640 599 Backlog at end of period 232 208 259 Average sales price of homes in Backlog $ 303 $ 246 $ 208 Aggregate sales value of homes in Backlog $ 70,000 $ 51,000 $ 54,000 Number of active subdivisions 35 35 35 - ----------------------------------------------------------------------------------- Total Unit data: New contracts, net 3,359 3,162 3,116 Homes delivered 3,152 3,246 2,952 Backlog at end of period 1,544 1,337 1,421 Average sales price of homes in Backlog $ 198 $ 183 $ 169 Aggregate sales value of homes in Backlog $306,000 $245,000 $240,000 Number of active subdivisions 140 150 150 - -----------------------------------------------------------------------------------
A home is included in "New Contracts" when the Company's standard sales contract, which requires a deposit and generally has no contingencies other than for buyer financing, is executed. In a limited number of markets, contracts are sometimes accepted contingent upon the sale of an existing home. "Homes Delivered" represents homes for which the closing of the sale has occurred and title has transferred to the buyer. Revenue and cost of revenue for a home sale are recognized at the time of closing. "Backlog" represents homes for which the Company's standard sales contract has been executed, but which are not included in Homes Delivered because closings for these homes have not yet occurred as of the end of the period specified. Most cancellations of contracts for homes in Backlog occur because customers cannot qualify for financing. These cancellations usually occur prior to the start of construction. Since the Company arranges financing with guaranteed rates for many of its customers, the incidence of cancellations after the start of construction is low. In 1997, the Company delivered 3,152 homes, including most of the homes under contract in Backlog at December 31, 1996. Of the 1,337 contracts in Backlog at December 31, 1996, 14.1% were cancelled. The cancellation percentages were 14.4% and 15.6% for homes in Backlog as of December 31, 1995 and December 31, 1994, respectively. Unsold speculative homes, which are in various stages of construction, totaled 158, 122 and 150 at December 31, 1997, 1996 and 1995, respectively. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 TOTAL REVENUE. Total revenue for the homebuilding segment for 1997 was $606.2 million, a 6.2% increase over 1996. This increase was attributable to a 3.1% increase in housing revenue and a 200.8% increase in land revenue. The increase in housing revenue was due to a 6.1% increase in the average sales price of Homes Delivered. Excluding the Phoenix division, which had no Homes Delivered in 1996, the average sales price of Homes Delivered in 1997 increased in nine of the Company's twelve divisions, led by the Columbus market where the Company is building in more upscale and certain niche subdivisions. This increase was partially offset by a 2.9% decrease in the number of Homes Delivered in 1997. The decrease in the number of Homes Delivered was primarily due to changes in lot availability in certain markets. The increase in land revenue from $8.9 million to $26.8 million was primarily attributable to the Washington, D.C. market. Both the Maryland and Virginia divisions had significant lot sales to third party homebuilders. It continues to be part of the Company's strategy to sell to third parties in these divisions. HOME SALES AND BACKLOG. The Company recorded a 6.2% increase in the number of New Contracts recorded in 1997 over the prior year. New Contracts recorded increased in all three of the 17 6 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION COMPANY'S REGIONS. The increase in the number of New Contracts was due mainly to the Horizon division, in which the number of New Contracts increased by 168 units. The Horizon division, which builds lower priced homes, continues to expand into desirable locations in the Columbus market. The number of New Contracts recorded in future periods will be dependent on numerous factors, including future economic conditions, timing of land development, consumer confidence and interest rates available to potential home buyers. At December 31, 1997, the total sales value of the Company's Backlog of 1,544 homes was approximately $306.0 million, representing a 24.9% increase in sales value and a 15.5% increase in units from the levels reported at December 31, 1996. The average sales price of homes in Backlog increased 8.2% from December 31, 1996 to December 31, 1997. This increase was due to sales price increases in the Columbus, Cincinnati, Orlando and Maryland markets where the Company is building in more upscale and certain niche subdivisions. The Chevy Chase subdivision in Maryland, where the Company started selling in May of 1997, has an average selling price of over $750,000. The increase in units at December 31, 1997 is a result of record high New Contracts recorded along with a decrease in deliveries in 1997. GROSS MARGIN. The overall gross margin for the homebuilding segment was 17.9% for 1997 and 17.5% for 1996. The gross margin from housing sales was 18.0% in 1997 compared to 17.9% recorded in 1996. The overall increase in gross margin was mainly due to lot and land sales, where margins increased from 15.7% to 22.9%. Both the Maryland and Virginia divisions had significant increases in the number of lots sold to third party homebuilders. It continues to be part of the Company's strategy to sell to third parties in these divisions. Management continues to focus on maintaining accurate, up-to-date costing information so that sales prices can be set to achieve the desired margins. The Company also focuses on acquiring or developing lots in premier locations to obtain higher margins. Gross margins were also higher due to the national accounts program which the Company continues to expand. Through this program, the Company has been able to lower costs on many of the components used in building its homes through volume discounts and other negotiated price reductions from its suppliers. The Company's ability to maintain these levels of margins is dependent on a number of factors, some of which are beyond the Company's control, including possible shortages of qualified subcontractors. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a percentage of total revenue increased from 2.8% for 1996 to 3.1% for 1997. This increase was primarily attributable to the increase in bonuses, rental expense and real estate tax expense. More bonuses were recorded in 1997 compared to 1996 due to the significant increase in net income. The increase in rent was primarily due to new office space in the Columbus market. Real estate taxes increased in the current year as the Company's investment in land development activities increased over prior year balances. Additionally, the Company incurred start-up expenses of approximately $900,000 in its newest market, Phoenix, Arizona. SELLING EXPENSES. Selling expenses increased from $37.9 million for 1996 to $40.1 million for 1997 and as a percentage of total revenue remained constant at 6.6% for 1997 and 1996. The increase in dollars was primarily due to increases in sales commissions for internal salespeople as a result of the increase in sales volume. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 TOTAL REVENUE. Total revenue for the homebuilding segment for 1996 was $570.7 million, a 9.2% increase over total revenue recorded for 1995. This increase was attributable to a 10.9% increase in housing revenue and was offset by a 44.8% decrease in land revenue. The increase in housing revenue was due to a 10.0% increase in the number of Homes Delivered. Homes Delivered in 1996 were higher in all of the Company's regions, led by the Midwest Region where the number of Homes Delivered increased 14.3%. The introduction of the Company's more affordable Horizon product line into several new markets during 1995 had a positive impact on the number of Homes Delivered in 1996. The increase in the number of Homes Delivered during 1996 compared to the prior year was primarily due to the higher number of homes in Backlog at December 31, 1995 compared to the preceding year end as well as more New Contracts recorded during the first half of 1996. This was partially due to an overall strong economy, low unemployment and relatively low interest rates. The decrease in land revenue was primarily attributable to the Maryland division. The Maryland division had significant lot sales to outside homebuilders from its Willows land development project in 1995 which did not occur in 1996 due to delays in development and increased competition. HOME SALES AND BACKLOG. The Company recorded a 1.5% increase in the number of New Contracts recorded in 1996 compared to the prior year. An increase in New Contracts recorded in both the Midwest and Florida Regions were offset by a decrease in the North Carolina/Virginia/Maryland Region. The Company believes the increase in the number of New Contracts is attributable to the more favorable interest rate environment as compared to 1995. The introduction of the Company's more affordable Horizon product line into several new markets during 1995 also had a positive impact on the number of New Contracts for 1996. At December 31, 1996, the total sales value of the Company's Backlog of 1,337 homes was approximately $245.0 million, representing a 2.1% increase over 1995. However, there was a 5.9% 18 7 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION decrease in the number of units from the levels reported at December 31, 1995. The average sales price of homes in Backlog increased 8.3% from December 31, 1995 to December 31, 1996. This increase was due to increases in the Columbus, Columbus Showcase and Charlotte divisions where the Company is building in more upscale and certain niche subdivisions. The decrease in units at December 31, 1996 is a result of record high deliveries and a decrease in New Contracts recorded in the second half of 1996. GROSS MARGIN. The overall gross margin for the homebuilding segment was 17.5% for 1996 and 17.0% for 1995. The gross margin from housing sales was 17.9% in 1996 as compared to 17.2% recorded in 1995. This increase was offset by a decrease in the gross margin from lot and land sales from 17.8% in 1995 and 15.7% in 1996. Housing gross margins increased in eight of the Company's twelve divisions. This was due to the increased emphasis placed on improving margins during 1995 and improved market conditions in 1996. Management focused on maintaining accurate, up-to-date costing information so that sales prices could be set to achieve the desired margins. The Company has also focused on acquiring or developing lots in premier locations so that it could obtain higher margins. Gross margins were also higher due to the national accounts program which the Company has expanded significantly in 1996. Through this program, the Company has been able to lower costs on many of the components used in building its homes through volume discounts and other negotiated price reductions from its suppliers. The decrease in the gross margin from lot and land sales was due to decreased lot sales in the Willows land development project in the Maryland division due to delays in development and increased competition. In 1995, lot sales in this project generated very high margins. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a percentage of total revenue decreased from 2.9% for 1995 to 2.8% for 1996. However, this decrease resulted primarily from an increase in total revenue. SELLING EXPENSES. Selling expenses increased from $34.3 million for 1995 to $37.8 million for 1996 and as a percentage of total revenue remained constant at 6.6% for 1996 and 1995. The increase was primarily due to increases in sales commissions to internal salespeople as a result of the increase in sales volume. FINANCIAL SERVICES SEGMENT The following table sets forth certain information related to the Company's financial services segment:
Year Ended December 31, (Dollars in thousands) 1997 1996 1995 - --------------------------------------------------------------------------- Number of loans originated 2,395 2,427 1,873 Revenue: Loan origination fees $ 3,212 $3,094 $2,258 Sale of servicing and marketing gains 4,522 3,550 3,047 Other 2,893 2,393 1,903 - --------------------------------------------------------------------------- Total Revenue 10,627 9,037 7,208 - --------------------------------------------------------------------------- General & administrative expenses 5,033 4,937 4,511 - --------------------------------------------------------------------------- Operating Income $ 5,594 $4,100 $2,697 - ---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 TOTAL REVENUE. Total revenue for the year ended December 31, 1997 was $10.6 million, a 17.6% increase over the $9.0 million recorded for 1996. Loan origination fees increased 3.8% from 1996 to 1997, even though the number of loans originated decreased 1.3%. The increase in loan origination fees was due primarily to a higher capture rate of the Company's higher end product lines and higher sales prices of Homes Delivered. At December 31, 1997, M/I Financial was operating in eight of the Company's eleven markets. Of these eight markets, 81% of the parent Company's Homes Delivered were financed through M/I Financial. Revenue from the sale of servicing and marketing gains increased 27.4% to $4.5 million in 1997. This increase was primarily due to favorable market conditions during the last part of 1996 and early part of 1997 which increased marketing gains on loans that closed during the first quarter of 1997. The Company uses hedging methods whereby the Company has the option, but is not required, to complete the hedging transaction. The Company also negotiated more favorable terms with investors which resulted in an increase in service release premiums. Revenue from other sources increased 20.9% from 1996 to 1997. The increase was primarily due to earnings from the Company's interest in a limited liability company that provides title services that began operations early in 1997. 19 8 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 1.9% to $5.0 million for the year ended December 31, 1997 compared to the $4.9 million recorded in 1996. This increase was primarily due to higher rental costs for the Company's corporate department and Columbus operations. The Company moved into new office space early in 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 TOTAL REVENUE. Total revenue for the year ended December 31, 1996 was $9.0 million, a 25.4% increase over total revenue recorded for 1995. Loan origination fees increased 37.0% from 1995 to 1996, primarily due to the 29.6% increase in the number of loans originated as well as an increase in the average loan amount. The increase in the number of loans originated during 1996 as compared to the preceding year was due to an increase in the number of Homes Delivered by the parent Company. In addition, two M/I Financial branch offices were opened during 1995 and a branch office was opened in the Raleigh market during 1996. At December 31, 1996, M/I Financial was operating in eight of the Company's ten markets. Of these eight markets, 77% of the parent Company's Homes Delivered were financed through M/I Financial. Revenue from sale of servicing and marketing gains increased 16.5% to $3.5 million in 1996. This increase was primarily due to the increase in the number of loans originated in 1996 as well as an increase in servicing fees due to more fixed rate mortgages originated during 1996 as compared to 1995. In 1995, the Company originated a higher percentage of adjustable rate mortgages as compared to 1996. The Company generally earns higher premiums on fixed rate mortgages as opposed to adjustable rate mortgages. The Company seeks to minimize the risks associated with a rising interest rate market by using hedging methods whereby the Company has the option, but is not required, to complete the hedging transaction. M/I Financial's revenue from sale of servicing and marketing gains was also positively influenced by a significant shift from adjustable rate loans to fixed rate loans, which offer greater income potential through larger servicing release premiums. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 9.4% to $4.9 million for the year ended December 31, 1996 as compared to the $4.5 million recorded in 1995. This increase was primarily due to the opening of two new branches in 1995 and one new branch in 1996 as well as the closing of the Maryland branch in 1996. Also, personnel costs increased due to the significant increase in loans originated. OTHER OPERATING RESULTS CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses for the year ended December 31, 1997 totaled $14.6 million, a 2.9% increase from the $14.2 million recorded for 1996. As a percentage of total revenue, general and administrative expenses decreased to 2.4% in 1997 from 2.5% in 1996. This decrease resulted from an increase in total revenue. Corporate general and administrative expenses for the year ended December 31, 1996 totaled $14.2 million, or 2.5% of total revenue, a 24.1% increase from the $11.5 million, or 2.2% of total revenue, recorded for 1995. This increase is primarily due to higher amounts recorded for bonuses and commissions in 1996. INTEREST EXPENSE. Corporate and homebuilding interest expense for the year ended December 31, 1997 totaled $11.6 million, a 9.4% decrease from the $12.8 million recorded for the preceding year. Interest expense was lower in the current year due to a decrease in the weighted average interest rate and an increase in the net amount of interest capitalized during 1997 as compared to 1996. This was partially offset by an increase in the average borrowings outstanding. The weighted average interest rate decreased due to the Company replacing its 14% Subordinated Notes with new Subordinated Notes at a significantly lower rate. In May of 1996, the Company switched its bank borrowings from prime to LIBOR plus a margin, which also reduced the interest rate. Capitalized interest increased due to a significant increase in the Company's land development activities in 1997. Corporate and homebuilding interest expense for the year ended December 31, 1996 totaled $12.8 million, a 7.1% decrease from the $13.8 million recorded for the preceding year. Interest expense was lower in 1996 due to decreases in the weighted average interest rate and the average borrowings outstanding as a result of more favorable terms on the Company's credit facilities. These decreases were partially offset by a decrease in the net amount of interest capitalized during 1996 as compared to 1995. INCOME TAXES. The effective tax rate for 1997 increased to 40.7% from 38.9% for 1996. In 1996, the Company made a significant charitable contribution of commercial land, owned since 1986, decreasing the effective rate. The effective tax rate for 1996 decreased to 38.9% from 40.2% for 1995, primarily as a result of a significant charitable contribution of commercial land. EXTRAORDINARY LOSS. In December 1996, the Company redeemed all of its outstanding 14% Subordinated Notes due December 2001 at a price of 106% of par. The principal amount redeemed was $24.5 million and the redemption resulted in an extraordinary loss of $1.3 million, net of income taxes of $0.8 million. 20 9 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES NOTES PAYABLE BANKS. The Company's financing needs depend upon its sales volume, asset turnover, land acquisition and inventory balances. The Company has incurred substantial indebtedness, and may incur substantial indebtedness in the future, to fund the growth of its homebuilding activities. The Company's principal source of funds for construction and development activities has been from internally generated cash, from bank borrowings, which are primarily unsecured, and from an additional $25 million in subordinated notes. On December 31, 1997, the Company had bank borrowings outstanding of $78.0 million under its Bank Credit Facility, which permits aggregate borrowings, other than for the issuance of letters of credit, not to exceed the lessor of: (i) $186.0 million and (ii) the Company's borrowing base, which is calculated based on specified percentages of certain types of assets held by the Company as of each month end, less the sum of (A) outstanding letters of credit issued for purposes other than to satisfy bonding requirements and (B) the aggregate amount of outstanding letters of credit, other than letters of credit issued for the purpose of satisfying bonding requirements, for joint ventures in which the Company is a partner and which are guaranteed by the Company. The Bank Credit Facility matures September 30, 2002, at which time the unpaid balance of the revolving credit loans outstanding will be due and payable. Under the terms of the Bank Credit Facility, the banks will determine annually whether or not to extend the maturity date of the commitments by one year. On September 29, 1997, the Company amended its Bank Credit Facility, which lowered the borrowing rate. Also, on December 29, 1997, the Company amended its Bank Credit Facility, increasing the limitation on investments. At December 31, 1997, borrowings under the Bank Credit Facility were at the prime rate or, at the Company's option, LIBOR plus a margin of between 1.60% and 2.35% based on the Company's ratio of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to consolidated interest incurred and were primarily unsecured. The Bank Credit Facility contains restrictive covenants which require the Company, among other things, to maintain minimum net worth and working capital amounts, to maintain a minimum ratio of EBITDA to consolidated interest incurred and to maintain certain other financial ratios. The Bank Credit Facility also places limitations on the amount of additional indebtedness that may be incurred by the Company, the acquisition of undeveloped land, dividends that may be paid and the aggregate cost of certain types of inventory the Company can hold at any one time. An additional $30.0 million was outstanding as of December 31, 1997 under the M/I Financial loan agreement, which permits borrowings of $30.0 million to finance mortgage loans initially funded by M/I Financial for customers of the Company and a limited amount for loans to others. The Company and M/I Financial are co-borrowers under the M/I Financial loan agreement. This agreement limits the borrowings to 95% of the aggregate face amount of certain qualified mortgages and contains restrictive covenants requiring M/I Financial to maintain minimum net worth and certain minimum financial ratios. On December 8, 1997 the Company and M/I Financial amended its bank loan agreement. The amended agreement lowered the rate to (a) the prime rate less 0.25%, (b) LIBOR plus 1.60% or (c) a combination of (a) and (b). The agreement terminates on June 25, 1998 at which time the unpaid balance is due. At December 31, 1997, the Company had the right to borrow up to $216.0 million under its credit facilities, including $30.0 million under the M/I Financial loan agreements. At December 31, 1997, the Company had $108.0 million of unused borrowing availability under its loan agreements. The Company also had approximately $28.2 million of completion bonds and letters of credit outstanding at December 31, 1997. SUBORDINATED NOTES. On August 29, 1997, the Company entered into a Credit Agreement (the "Subordinated Debt Facility") for $50.0 million of Senior Subordinated Notes. The proceeds were used to repay outstanding amounts under the Bank Credit Facility and the existing $25.0 million Subordinated Note due 2001. The new notes bear interest at a fixed rate of 9.51% and mature August 29, 2004. CASH. Net income from housing and lot and land sales is the Company's primary source of net cash provided by operating activities. Net cash provided by operating activities in the year ended December 31, 1997 was $3.4 million compared to $13.5 million for the prior year. The decrease in net cash provided by operating activities was primarily due to a large increase in inventories. This was partially offset by an increase in accounts payable. LAND AND LAND DEVELOPMENT. Over the past several years, the Company's land development activities and land holdings have increased significantly, and the Company expects that this trend will continue in the foreseeable future. Single-family lots, land and land development costs increased 17.7% from December 31, 1996 to December 31, 1997. These increases are primarily due to the shortage of qualified land developers in certain of the Company's markets as well as the competitive advantages that can be achieved by developing land internally rather than purchasing lots from developers or competing homebuilders. This is particularly true for the Company's Horizon product line, in which lots are generally not available from third party developers at economically feasible prices due to the price points the Company targets. The Company continues to purchase lots from outside developers under option contracts, when possible, to limit its risk; however, the Company will continue to evaluate all of its alternatives to satisfy the Company's demand for lots in the most cost effective manner. 21 10 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The $1.0 million increase in notes payable to banks - homebuilding operations, along with the $25.0 million increase in subordinated notes, from December 31, 1996 to December 31, 1997 reflects increased borrowings primarily attributable to the increase in houses under construction, along with an increase in single-family lots, land and land development costs. Houses under construction increased $11.2 million from December 31, 1996 to December 31, 1997 while single-family lots, land and land development costs increased $22.9 million. It is expected that borrowing needs will increase as the Company continues to increase its investment in land under development and developed lots. As of December 31, 1997, the Company had closed on four phases of a six-phase land purchase contract in the Maryland division. This contract was entered into in 1994 and required a greater investment than the Company normally commits. It has been the Company's policy to sell a portion of these lots to outside homebuilders. The company has an option to purchase each of the remaining two phases. At December 31, 1997, mortgage notes payable outstanding were $5,950,000 secured by lots and land with a recorded book value of $8,196,000. As its capital requirements increase, the Company may increase its borrowings under its bank line of credit. In addition, the Company continually explores and evaluates alternative sources from which to obtain additional capital. TREASURY STOCK. On March 17, 1997 and August 1, 1997, the Company purchased 500,000 and 702,439 shares, respectively, of the Company's common stock from the Melvin L. Schottenstein family interests and trusts at an average per share price of $11.85. These shares are held as treasury shares by the Company. YEAR 2000 COMPLIANCE. The Company is currently in the process of modifying or replacing certain management information systems to address issues regarding the year 2000. In accordance with current accounting guidance, modification costs for the year 2000 will be charged to expense as incurred while replacement costs will be capitalized and amortized over the asset's useful life. It is not presently believed that these changes will have an adverse impact on operations or that the expenditures related thereto will be material to the Company's financial position or results of operations in any given year. INTEREST RATES AND INFLATION The Company's business is significantly affected by general economic conditions of the United States and, particularly, by the impact of interest rates. Higher interest rates may decrease the potential market by making it more difficult for home buyers to qualify for mortgages or to obtain mortgages at interest rates acceptable to them. Increases in interest rates also would increase the Company's interest expense as the rate on the revolving loans is based upon floating rates of interest. The weighted average interest rate on the Company's outstanding debt was 8.5%, 9.5% and 10.1% for 1997, 1996 and 1995, respectively. In conjunction with its mortgage banking operations, the Company uses hedging methods to reduce its exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. (See Note 14 to the Consolidated Financial Statements.) In recent years, the Company generally has been able to raise prices by amounts at least equal to its cost increases and, accordingly, has not experienced any detrimental effect from inflation. Where the Company develops lots for its own use, inflation may increase the Company's profits because land costs are fixed well in advance of sales efforts. The Company is generally able to maintain costs with subcontractors from the date a home sales contract is accepted; however, in certain situations, unanticipated costs may occur between the time a sales contract is executed and the time a home is constructed, which results in lower gross profit margins. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company wishes to take advantage of the safe harbor provisions included in the Private Securities Litigation Reform Act of 1995. Accordingly, in addition to historical information, this Management's Discussion & Analysis of Results of Operations and Financial Condition contains certain forward-looking statements, including, but not limited to, statements regarding the Company's future financial performance and financial condition. These statements involve a number of risks and uncertainties. Any forward-looking statements made by the Company herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various factors including, but not limited to, those referred to below. GENERAL REAL ESTATE, ECONOMIC AND OTHER CONDITIONS. The homebuilding industry is significantly affected by changes in national and local economic and other conditions, including employment levels, changing demographic considerations, availability of financing, interest rates, consumer confidence and housing demand. In addition, homebuilders are subject to various risks, many of them outside the control of the homebuilder, including competitive overbuilding, availability and cost of building lots, availability of materials and labor, adverse weather conditions which can cause delays in construction schedules, cost overruns, changes in government regulations, and increases in real estate taxes and other local government fees. The Company cannot predict whether interest rates will be at levels attractive to prospective home buyers. If interest rates increase, and in particular mortgage interest rates, the Company's business could be adversely affected. 22 11 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION LAND DEVELOPMENT ACTIVITIES. The Company develops the lots for a majority of its subdivisions. Therefore, the medium- and long-term financial success of the Company will be dependent on the Company's ability to develop its subdivisions successfully. Acquiring land and committing the financial and managerial resources to develop a subdivision involves significant risks. Before a subdivision generates any revenue, material expenditures are required for items such as acquiring land and constructing subdivision infrastructure (such as roads and utilities). THE COMPANY'S MARKETS. The Company's operations are in the Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; Virginia and Maryland metropolitan areas, and Phoenix, Arizona. Adverse general economic conditions in these markets could have a material adverse impact on the operations of the Company. For the year ended December 31, 1997, approximately 40% of the Company's housing revenue and a significant portion of the Company's operating income were derived from operations in its Columbus, Ohio market. The Company's performance could be significantly affected by changes in this market. COMPETITION. The homebuilding industry is highly competitive. The Company competes in each of its local market areas with numerous national, regional and local homebuilders, some of which have greater financial, marketing, land acquisition, and sales resources than the Company. Builders of new homes compete not only for home buyers, but also for desirable properties, financing, raw materials and skilled subcontractors. The Company also competes with the resale market for existing homes which provides certain attractions for home buyers over building a new home. GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONSIDERATIONS. The homebuilding industry is subject to increasing local, state and Federal statutes, ordinances, rules and regulations concerning zoning, resource protection (preservation of woodlands and hillside areas), building design, and construction and similar matters, including local regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular location. Such regulation affects construction activities, including construction materials which must be used in certain aspects of building design, as well as sales activities and other dealings with home buyers. The Company must also obtain licenses, permits and approvals from various governmental agencies for its development activities, the granting of which are beyond the Company's control. Furthermore, increasingly stringent requirements may be imposed on homebuilders and developers in the future. Although the Company cannot predict the impact on the Company of compliance with any such requirements, such requirements could result in time consuming and expensive compliance programs. The Company is also subject to a variety of local, state and Federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws which apply to any given project vary greatly according to the project site and the present and former uses of the property. These environmental laws may result in delays, cause the Company to incur substantial compliance costs (including substantial expenditures for pollution and water quality control) and prohibit or severely restrict development in certain environmentally sensitive regions. Although there can be no assurance that it will be successful in all cases, the Company has a general practice of requiring an environmental audit and resolution of environmental issues prior to purchasing land in an effort to avoid major environmental issues in the Company's developments. In addition, the Company has been, and in the future may be, subject to periodic delays or may be precluded from developing certain projects due to building moratoriums. These moratoriums generally relate to insufficient water supplies or sewage facilities, delays in utility hook-ups or inadequate road capacity within the specific market area or subdivision. These moratoriums can occur prior to, or subsequent to, commencement of operations by the Company without notice to, or recourse by, the Company. RISK OF MATERIAL AND LABOR SHORTAGES. The Company is presently not experiencing any serious material or labor shortages. However, the residential construction industry in the past has, from time to time, experienced serious material and labor shortages in insulation, drywall, certain carpentry and framing work and cement, as well as fluctuating lumber prices and supplies. Delays in construction of homes due to these shortages could adversely affect the Company's business. SIGNIFICANT VOTING CONTROL BY PRINCIPAL SHAREHOLDERS. As of December 31, 1997, members of the Irving E. Schottenstein family owned approximately 36% of the outstanding Common Shares of the Company. In particular, Irving E. Schottenstein, in his own name and as trustee of trusts for his children, had the right to vote 2,761,800 Common Shares. Therefore, members of the Irving E. Schottenstein family have significant voting power with respect to the election of the Board of Directors of the Company and, in general, the determination of the outcome of various matters submitted to the shareholders of the Company for approval. DEPENDENCE ON KEY EXECUTIVES. The Company is managed by a relatively small number of executive officers. The loss of the services of one or more of these executive officers could have an adverse effect on the Company's business and operations. IMPACT OF NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments of an Enterprise and Related Information". SFAS 131 is required to be adopted for the Company's 1998 annual financial statements. The Company has not yet determined what, if any, impact the adoption of this standard will have on its financial statements. 23 12 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Year Ended December 31, (Dollars in thousands, except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Revenue $ 614,004 $ 577,192 $ 527,822 - ------------------------------------------------------------------------------------------------------------------ Costs and expenses: Land and housing 494,663 468,089 431,961 General and administrative 38,092 34,980 30,660 Selling 40,085 37,943 34,497 Interest 11,742 13,103 14,198 - ------------------------------------------------------------------------------------------------------------------ Total costs and expenses 584,582 554,115 511,316 - ------------------------------------------------------------------------------------------------------------------ Income before income taxes and extraordinary loss 29,422 23,077 16,506 - ------------------------------------------------------------------------------------------------------------------ Income taxes (credit): Current 14,172 11,049 8,399 Deferred (2,187) (2,082) (1,769) - ------------------------------------------------------------------------------------------------------------------ Total income taxes 11,985 8,967 6,630 - ------------------------------------------------------------------------------------------------------------------ Income before extraordinary loss 17,437 14,110 9,876 - ------------------------------------------------------------------------------------------------------------------ Extraordinary loss from extinguishment of debt, net of income taxes of $823 -- (1,287) -- - ------------------------------------------------------------------------------------------------------------------ Net income $ 17,437 $ 12,823 $ 9,876 - ------------------------------------------------------------------------------------------------------------------ Per share data - basic and dilutive: Income before extraordinary loss $ 2.15 $ 1.60 $ 1.12 Extraordinary loss -- (.14) -- - ------------------------------------------------------------------------------------------------------------------ Net income $ 2.15 $ 1.46 $ 1.12 - ------------------------------------------------------------------------------------------------------------------ Weighted average common shares outstanding 8,108,293 8,800,000 8,800,000 - ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 24 13 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT CONSOLIDATED BALANCE SHEETS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
December 31, (Dollars in thousands, except par values) 1997 1996 - ------------------------------------------------------------------------------------------------------ ASSETS Cash $ 10,836 $ 6,368 Cash held in escrow 2,537 393 Receivables 43,819 34,447 Inventories: Single-family lots, land and land development costs 151,905 129,025 Houses under construction 100,916 89,696 Model homes and furnishings - at cost (less accumulated depreciation: 1997 - $47; 1996 - $56) 17,788 19,482 Land purchase deposits 645 716 Office furnishings, transportation and construction equipment - at cost (less accumulated depreciation: 1997 - $4,328; 1996 - $6,668) 8,647 1,635 Investment in unconsolidated joint ventures, limited liability companies and limited partnerships 15,236 12,998 Other assets 13,691 10,599 - ------------------------------------------------------------------------------------------------------ TOTAL $ 366,020 $305,359 - ------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable banks - homebuilding operations $ 78,000 $ 77,000 Note payable bank - financial operations 30,000 23,300 Mortgage notes payable 5,950 45 Subordinated notes 50,000 25,000 Accounts payable 42,793 32,016 Accrued compensation 13,042 11,802 Income taxes payable 4,072 1,502 Accrued interest, warranty and other 19,103 15,304 Customer deposits 7,554 7,071 - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 250,514 193,040 - ------------------------------------------------------------------------------------------------------ Commitments and Contingencies - ------------------------------------------------------------------------------------------------------ Stockholders' equity: Preferred stock - $.01 par value; authorized - 2,000,000 shares; none outstanding -- -- Common stock - $.01 par value; authorized - 38,000,000 shares; issued - 8,800,000 shares 88 88 Additional paid-in capital 50,573 50,573 Retained earnings 79,095 61,658 Treasury stock - at cost - 1,202,439 shares are held in treasury at December 31, 1997 (14,250) -- - ------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 115,506 112,319 - ------------------------------------------------------------------------------------------------------ TOTAL $ 366,020 $305,359 - ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 25 14 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Common Stock ------------------------- Additional Shares Paid-in Retained Treasury (Dollars in thousands) Outstanding Amount Capital Earnings Stock - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 8,800,000 $88 $50,573 $38,959 -- Net income -- -- -- 9,876 -- - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 8,800,000 88 50,573 48,835 -- Net income -- -- -- 12,823 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 8,800,000 88 50,573 61,658 -- Net income -- -- -- 17,437 -- Purchase of treasury stock (1,202,439) -- -- -- ($14,250) - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 7,597,561 $88 $50,573 $79,095 ($14,250) - ----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 26 15 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Year Ended December 31, (Dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 17,437 $ 12,823 $ 9,876 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss from extinguishment of debt -- 2,110 -- Loss from property disposals 128 1,008 335 Depreciation and amortization 1,623 1,377 1,754 Deferred income tax credit (2,187) (2,082) (1,769) Decrease (increase) in cash held in escrow (2,144) 14 296 Increase in receivables (9,372) (10,835) (6,265) Decrease (increase) in inventories (19,670) (612) 5,775 Decrease (increase) in other assets (432) (1,589) 861 Increase (decrease) in accounts payable 10,777 2,797 (2,217) Increase (decrease) in income taxes payable 2,570 (1,269) 1,602 Increase in accrued liabilities 5,039 9,983 5,155 Equity in undistributed income of unconsolidated joint ventures and limited partnerships (376) (223) (132) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,393 13,502 15,271 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to model and office furnishings, transportation and construction equipment (8,508) (611) (691) Investment in unconsolidated joint ventures (15,701) (12,718) (10,423) Distributions from unconsolidated joint ventures and limited partnerships 1,145 871 1,477 - ------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (23,064) (12,458) (9,637) - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable banks: Proceeds from borrowings 293,135 422,551 396,793 Principal repayments (285,435) (424,451) (407,023) Mortgage notes payable: Proceeds from borrowings 5,950 -- -- Principal repayments (45) (463) (360) Subordinated notes: Proceeds from issuance 50,000 25,000 -- Principal repayments (25,000) (24,513) -- Debt issuance costs (699) (650) -- Redemption premium -- (1,478) -- Net increase (decrease) in customer deposits 483 1,599 (671) Payments to acquire treasury stock (14,250) -- -- - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used) in financing activities 24,139 (2,405) (11,261) - ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 4,468 (1,361) (5,627) Cash balance at beginning of year 6,368 7,729 13,356 - ------------------------------------------------------------------------------------------------------------------------- Cash balance at end of year $ 10,836 $ 6,368 $ 7,729 - ------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest - net of amount capitalized $ 11,143 $ 12,875 $ 14,007 Income taxes - net $ 11,602 $ 11,495 $ 6,797 NON-CASH TRANSACTIONS DURING THE YEAR: Land acquired with mortgage notes payable $ 5,950 $ 159 $ 374 Single-family lots distributed from unconsolidated joint ventures $ 12,694 $ 10,713 $ 5,628 - -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 27 16 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of M/I Schottenstein Homes, Inc. and its subsidiaries (the "Company"). All significant intercompany transactions have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is engaged primarily in the construction and sale of single-family residential property in Columbus and Cincinnati, Ohio; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; Indianapolis, Indiana; the Virginia and Maryland suburbs of Washington, D.C. and, beginning in 1997, Phoenix, Arizona. The Company designs, builds and sells single-family homes on finished lots, which it purchases ready for home construction or which it develops. The Company also purchases undeveloped land to develop finished lots for future construction of single-family homes and for sale to others. The Company also conducts mortgage banking activities through M/I Financial Corp. ("M/I Financial"), which originates mortgage loans primarily for purchasers of the Company's homes. The loans and the majority of the servicing rights are sold to outside mortgage lenders. CASH AND CASH HELD IN ESCROW. Cash and cash held in escrow were primarily held in one bank at December 31, 1997 and 1996. INVENTORIES. Inventories are recorded at cost which is not in excess of net realizable value. Houses under construction include lot costs, construction costs, capitalized interest and indirect costs. These costs, other than interest, are charged, under the specific identification method, to cost of sales as housing sales are closed. Previously capitalized interest is included in interest expense when the related housing sales are closed. Lot costs are transferred to houses under construction from land costs when house construction commences. Depreciation on model home furnishings is recorded using an accelerated method over the estimated useful lives of the assets. Land and land development costs are allocated to development phases based on relative estimated market values. Development costs, capitalized interest and real estate taxes incurred during land development are allocated to each residential lot in a development phase based on relative estimated market values. INTEREST. The Company capitalizes interest during development and construction. Capitalized interest is charged to interest expense as the related inventory is delivered. The summary of total interest for 1997, 1996 and 1995 is as follows:
(Dollars in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Interest capitalized, beginning of year $ 6,862 $ 7,560 $ 7,322 Interest incurred 12,500 12,405 14,436 Interest expensed (11,742) (13,103) (14,198) - ----------------------------------------------------------------------------------------------- Interest capitalized, end of year $ 7,620 $ 6,862 $ 7,560 - -----------------------------------------------------------------------------------------------
Revenue Recognition. Revenue and cost of revenue from the sale of real estate are recognized at the time title is transferred to the buyer and the buyer has met the minimum down payment requirement. Discounts and other sales incentives are included as a reduction of homebuilding revenue. The following summarizes both housing and lot and land sales and cost of sales included in revenue and cost of revenue:
(Dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Housing sales $578,185 $560,980 $505,810 Housing cost of sales 473,995 460,573 418,697 Lot and land sales 26,814 8,915 16,145 Lot and land cost of sales 20,668 7,515 13,264 - -------------------------------------------------------------------------------
M/I Financial recognizes revenue from application fees when received, while revenue from loan origination fees is recorded when each loan closes. M/I Financial sells its loans and the majority of its servicing rights to outside mortgage lenders. The revenue from these transactions is recorded when each loan is sold. M/I Financial uses various methods to hedge the interest rate risk related to the loans it has committed to make to home buyers (see Note 15). Gains or losses resulting from these hedging transactions are included in revenue when the gain or loss from the sale of the related loan is recorded. WARRANTY COST. The Company provides a two-year limited warranty on materials and workmanship and a twenty-year limited warranty against major structural defects. An estimated amount of warranty cost is recorded for each house at the time of sale. Warranty expense was $4,791,000, $5,492,000 and $4,475,000 for 1997, 1996 and 1995, respectively. DEPRECIATION. Depreciation of model and office furnishings, transportation and construction equipment is computed using both straight-line and accelerated methods based on the estimated useful lives of the assets. Depreciation expense was $1,368,000, $1,193,000 and $1,574,000 in 1997, 1996 and 1995, respectively. AMORTIZATION. The costs incurred in connection with the issuance of the new Subordinated Notes issued in 1997 (see Note 8) are being amortized over the terms of the related debt. Amortization of these costs is 28 17 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS included in interest expense. Unamortized debt issuance costs of $1,078,000 relating to the new Subordinated Notes, and $632,000 relating to the Subordinated Note issued in 1996, are included in other assets at December 31,1997 and 1996, respectively. ADVERTISING. The Company expenses advertising costs as incurred. The Company expensed $5,555,000, $4,765,000 and $4,963,000 in 1997, 1996 and 1995, respectively. PER SHARE DATA. Per share data is calculated based on the weighted average number of common shares outstanding during the year. Effective December 31, 1997, the Company presents earnings per share data for all periods presented in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 requires presentation of both basic and diluted earnings per share. However, the impact of dilutive securities (stock options) has no effect on the per share amounts disclosed. PROFIT SHARING. The Company has a trusteed deferred profit-sharing plan which covers substantially all Company employees and permits members to make contributions to the plan on a pre-tax salary reduction basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Company contributions to the plan are made at the discretion of the Board and totalled $950,000 in 1997, $825,000 in 1996 and $620,000 in 1995 (including payment of expenses incurred by the plan). IMPACT OF NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board issued SFAS 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS 131 is required to be adopted for the Company's 1998 annual financial statements. The Company has not yet determined what, if any, impact the adoption of this standard will have on its financial statements. 2. TRANSACTIONS WITH RELATED PARTIES Related parties are entities owned by, or partially owned by, certain stockholders of the Company or joint ventures, limited liability companies and limited partnerships (see Notes 4 and 5) in which investments by the Company are accounted for by the equity method. The Company purchased lots and undeveloped land from the joint ventures, limited liability companies and limited partnerships of approximately $1,300,000, $1,159,000 and $4,286,000 in 1997, 1996 and 1995, respectively. The Company received distributions of $12,694,000, $10,713,000 and $5,628,000 in developed lots at cost in 1997, 1996 and 1995, respectively. On March 17, 1997 and August 1, 1997, the Company purchased 500,000 and 702,439 shares, respectively, of the Company's common stock from the Melvin L. Schottenstein family interests and trusts at an average per share price of $11.85. These shares are held as treasury shares by the Company. In 1995, the Company became a 1/3 owner of a limited liability company from which the Company leases office space in Columbus, Ohio. The Company paid rent of $1,195,000 in 1997 to this limited liability company (See Note 9). In December, 1996, the Company formed a title agency with an unrelated party. The Company owns a 49.9% interest in the agency. The Company accounts for this investment under the equity method and the total investment at December 31, 1997 was approximately $5,000. Approximately $1,306,000 of title insurance premiums and closing fees were paid to the agency in 1997. 3. RECEIVABLES Receivables consist of the following:
(Dollars in thousands) 1997 1996 - --------------------------------------------------------------- Mortgage loans to be funded $42,868 $33,799 Accounts receivable 951 648 - --------------------------------------------------------------- Total receivables $43,819 $34,447 - ---------------------------------------------------------------
Mortgage loans to be funded relate to houses sold and closed prior to December 31 which were subsequently funded by unrelated lending institutions. 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES, LIMITED LIABILITY COMPANIES AND LIMITED PARTNERSHIPS--LAND RELATED At December 31, 1997, the Company had interests varying from 33% to 50% in each of 18 separate joint ventures (33% - 4 and 50% - 14), 3 formed in 1995 and 15 prior to 1995, and 11 separate limited liability companies (33% - 1, 40% - 1 and 50% - 9), 6 formed in 1997 and 5 formed in 1996 that engage in land development activities. These interests are recorded using the equity method of accounting. The Company receives its percentage interest of profits or its percentage interest of the lots developed in the form of a capital distribution. The Company received distributions of $12,694,000, $10,713,000 and $5,628,000 in developed lots at cost in 1997, 1996 and 1995, respectively, and purchased lots totalling $1,300,000, $1,159,000 and $1,333,000 in 1997, 1996 and 1995 from the joint ventures and limited liability companies. Summarized condensed combined financial information for the joint ventures and limited liability companies as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 is as follows: 29 18 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARIZED CONDENSED COMBINED BALANCE SHEETS - ------------------------------------------------------------------- December 31, (Dollars in thousands) 1997 1996 - ------------------------------------------------------------------- Assets: Single-family lots, land and land development costs $35,369 $28,378 Other assets 1,783 1,796 - ------------------------------------------------------------------- Total $37,152 $30,174 - ------------------------------------------------------------------- Liabilities: Debt $ 1,464 $ 1,081 Other liabilities 5,041 3,429 - ------------------------------------------------------------------- Total liabilities 6,505 4,510 Partners' equity: Company's equity 13,609 11,143 Other 17,038 14,521 - ------------------------------------------------------------------- Total Partners' equity 30,647 25,664 - ------------------------------------------------------------------- Total $37,152 $30,174 - -------------------------------------------------------------------
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------- Year Ended December 31, (Dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------- Revenue $ 1,159 $1,334 $2,335 Costs and expenses (1,250) 1,153 2,158 - ------------------------------------------------------------------- Income (loss) $ (91) $ 181 $ 177 - -------------------------------------------------------------------
Joint venture and limited liability company earnings include $94,000, $20,000 and $45,000 of intercompany profit not included in the Company's revenue for 1997, 1996 and 1995, respectively. In addition, included in the Company's investment in the joint ventures and limited liability companies at December 31, 1997 and 1996, is $350,000 and $349,000, respectively, of capitalized interest and other costs. Letters of credit totalling approximately $7,631,000 are outstanding at December 31, 1997 and serve as completion bonds for joint venture and limited liability company development work in progress. In 1992, the Company became a limited partner in two limited partnerships formed by affiliates to purchase and develop land and lots. In 1996, all outstanding advances and deposits were reimbursed to the Company. The Company purchased lots totalling $2,953,000 from the limited partnerships in 1995. No lots were purchased from the limited partnerships in 1996 and 1997. The Company's investment in the limited partnerships was $0 at December 31, 1997 and 1996. 5. INVESTMENT IN LIMITED PARTNERSHIPS - NON-LAND RELATED In 1995, the Company became a 1/3 owner of a limited liability company (the "LLC") (ownership interest of $1,169,000) formed to build, own and operate an office building in Columbus, Ohio. This interest is recorded using the equity method of accounting. Summarized condensed financial information for the LLC is as follows: Assets, Liabilities and Partners' Equity were $12,168,000, $8,460,000 and $3,708,000 for 1997 and $12,196,000, $8,833,000 and $3,363,000 for 1996. In addition, revenue and net loss for the year ended December 31, 1997 were $943,000 and ($123,000). 6. NOTES PAYABLE BANKS At December 31, 1997, the Company's homebuilding operations had revolving credit loans of $78,000,000 and letters of credit totalling $17,172,000 outstanding under a loan agreement with six banks. Borrowings under the loan agreement are at LIBOR plus a margin of between 1.60% and 2.35% and are primarily unsecured. This agreement provides for total borrowings not to exceed the lesser of $186,000,000 under the revolving credit agreement and $25,000,000, including $4,000,000 for joint ventures in which the Company is a partner, in the form of letters of credit; or the Company's borrowing base, which is calculated based on specified percentages of certain types of assets held by the Company as of each month end. The revolving credit facility and letter of credit commitment expires September 30, 2002, at which time the unpaid balance of the revolving credit loans outstanding is due and payable. Under the terms of the agreement, the banks shall make an annual determination as to whether or not to extend the maturity date of the commitment by one year. The Company is required to pay interest at LIBOR plus a margin and a commitment fee of 1/4 of 1% based upon the average daily unused portion of the note. The terms of the loan agreement contain restrictive covenants which require the Company, among other things, to maintain minimum net worth and working capital amounts and to maintain certain financial ratios. This agreement also places limitations on the amount of additional indebtedness that may be incurred by the Company, on the acquisition of undeveloped land, on dividends that may be paid and on the aggregate cost of certain types of inventory the Company can hold at any one time. At December 31, 1997, approximately $784,000 of retained earnings was available for cash dividends and repurchases of the Company's stock under the terms of the loan agreement. At December 31, 1997, $30,000,000 was outstanding under a revolving loan agreement with a bank ("M/I Financial loan agreement") pursuant to which the Company was permitted to borrow up to $30,000,000 to finance mortgage loans initially funded by M/I Financial for customers of the Company and a limited amount for loans to others. This agreement limits the borrowings to 95% of the aggregate face amount of the mortgages and contains restrictive covenants requiring M/I Financial to maintain minimum net worth and certain minimum financial ratios. Under the loan agreement, interest is calculated at (a) the prime rate less 0.25%, (b) LIBOR plus 1.60% or (c) a combination of (a) and (b). A commitment fee of 1/4 of 1% is payable quarterly based upon the average daily unused portion of the note. The agreement terminates on June 25, 1998 at which time the unpaid balance is due. At December 31, 1997, the Company's homebuilding operations had $108,000,000 of unused borrowing availability under its loan agreement. The weighted average interest rate of the Company's total bank borrowings was 8.0%, 8.4% and 9.2% at December 31,1997, 1996 and 1995, respectively. 30 19 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. MORTGAGE NOTES PAYABLE Mortgage notes payable of $5,950,000 and $45,000 at December 31, 1997 and 1996, respectively, represent mortgages collateralized by land and lots (book value of $8,196,000 and $115,000 at December 31, 1997 and 1996, respectively). The notes payable outstanding at December 31, 1997 bear interest at 8.5% and mature April 29, 1999. 8. SUBORDINATED NOTES In December 1991, the Company issued $20,000,000 principal amount of 14% Subordinated Notes and in April 1992, issued an additional $4,513,000. In December 1996, the Company redeemed all of these notes at a price of 106% of par. The redemption resulted in an extraordinary loss of $1,287,000, net of income taxes of $823,000. In December 1996, the Company issued $25,000,000 in the form of a Subordinated Note. The proceeds were used to redeem the 14% Subordinated Notes outstanding in the amount of $24,513,000. In August 1997, the Company entered into a Credit Agreement (the "Subordinated Debt Facility") for $50,000,000 of Senior Subordinated Notes. The proceeds were used to repay outstanding amounts under the Bank Credit Facility and the existing $25,000,000 Subordinated Note due 2001. The new notes bear interest at a fixed rate of 9.51% and mature August 29, 2004. 9. LEASE COMMITMENTS The Company leases various office facilities, automobiles, model furnishings, and model homes under operating leases with remaining terms of 1 to 19 years. At December 31, 1997, the future minimum rental commitments, totalling $29,261,000, under noncancelable operating leases with initial terms in excess of one year are as follows: 1998 - $4,670,000; 1999 - $2,380,000; 2000 - $1,523,000; 2001 - $1,332,000; 2002 - $1,361,000; and thereafter - $17,995,000. The Company's lease with a related party for approximately 27,000 square feet of office space expired August 31, 1996. The Company extended the lease on a month-to-month basis through February 1997. Rental expense was $57,000, $347,000 and $358,000 for 1997, 1996 and 1995, respectively. The Company entered into a 20 year lease for its new office building and moved into this new facility in December 1996. Rental expense was $1,250,000 for 1997. Included in the future minimum rental commitments above are rentals of $1,132,000 for 1998; $1,132,000 for 1999; $1,132,000 for 2000; $1,132,000 for 2001; $1,203,000 for 2002; and $17,968,000 for all periods thereafter. The Company's total rental expense was $6,515,000, $5,048,000 and $5,023,000 for 1997, 1996 and 1995, respectively. 10. PREFERRED STOCK The Articles of Incorporation authorize the issuance of 2,000,000 shares of preferred stock, par value $.01 per share. The Board of Directors of the Company is authorized, without further stockholder action, to divide any or all shares of the authorized preferred stock into series and to fix and determine the designations, preferences and relative, participating, optional or other special rights (excluding, under current Ohio law, voting rights) and qualifications, limitations or restrictions thereon, of any series so established, including dividend rights, liquidation preferences, redemption rights and conversion privileges. 11. SUBSEQUENT EVENT On February 9, 1998, the Board of Directors approved a $0.05 per share cash dividend for stockholders of record of its common stock on April 1, 1998, payable on April 22, 1998. The Company's loan agreement and Subordinated Note place limits on dividends (see Notes 6 and 8). 12. STOCK INCENTIVE PLAN In November 1993, the Company adopted the M/I Schottenstein Homes, Inc. 1993 Stock Incentive Plan. This plan includes stock option, restricted stock and stock appreciation programs, under which an aggregate of 425,000 shares of common stock have been reserved for issuance. No awards have been granted under the restricted stock and stock appreciation programs. Stock options are granted at the market price at the close of business on the date of grant. Options awarded vest 20% annually over five years and expire after ten years. The following summarizes the transactions under the stock option program:
Weighted Option Price Avg. Exercise Shares Per Share Price - -------------------------------------------------------------------- Options outstanding December 31, 1994 84,200 $16.125 $16.125 Granted 68,200 $6.75-$9.25 $6.823 Forfeited (18,000) $6.75-$16.125 $14.042 - -------------------------------------------------------------------- Options outstanding December 31, 1995 134,400 $6.75-$16.125 $11.684 Granted 60,700 $10.875 $10.875 Forfeited (1,250) $10.875-$16.125 $11.925 - --------------------------------------------------------------------- Options outstanding December 31, 1996 193,850 $6.75-$16.125 $11.429 Granted 28,600 $10.625 $10.625 Forfeited (1,250) $6.75-$16.125 $11.050 - --------------------------------------------------------------------- Options outstanding December 31, 1997 221,200 $6.75-$16.125 $11.327 - --------------------------------------------------------------------- Options exercisable at December 31, 1995 40,920 $6.75-$16.125 $13.208 December 31, 1996 79,590 $6.75-$16.125 $12.338 December 31, 1997 123,480 $6.75-$16.125 $11.977 - --------------------------------------------------------------------
31 20 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1997, options outstanding have a weighted average remaining contractual life of 7.5 years. In February 1998, the Company granted options for an additional 46,100 shares with the same terms as the previous awards, at a price of $22.75 which represents the market value at the date of grant. As required under SFAS 123, the fair value of each option grant was estimated on the date of grant. The Company used the Black-Scholes option-pricing model with the following assumptions used for grants in 1997: expected volatility of 37.24%; risk-free interest rate of 7.00%; and an expected life of 4 years, and for grants in 1996: expected volatility of 37.29%; risk-free interest rate of 8.50%; and an expected life of 4 years. Based on these calculations, the fair value of the stock options at the date of grant were immaterial to the Company's financial statements at December 31, 1997 and 1996. 13. INCOME TAXES The provision for income taxes consists of the following:
(Dollars in thousands) 1997 1996 1995 - -------------------------------------------------------------- Federal $ 8,927 $7,060 $5,312 State and local 3,058 1,907 1,318 - -------------------------------------------------------------- Total $11,985 $8,967 $6,630 - --------------------------------------------------------------
Reconciliations of the differences between income taxes computed at federal statutory tax rates and consolidated provision for income taxes are as follows:
(Dollars in thousands) 1997 1996 1995 - --------------------------------------------------------------- Federal taxes at statutory rate $10,298 $8,077 $5,777 Deduct federal tax effect of: Charitable contribution -- (414) -- State taxes - net of federal tax benefit 1,988 1,240 857 Other (301) 64 (4) - --------------------------------------------------------------- Total $11,985 $8,967 $6,630 - ---------------------------------------------------------------
The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows:
(Dollars in thousands) 1997 1996 - --------------------------------------------------------------- Assets: Warranty, insurance and other reserves $3,795 $3,589 Inventory writedowns 2,686 1,107 Inventories 706 706 State taxes 263 - Depreciation 136 147 Other 1,071 647 - --------------------------------------------------------------- Total deferred tax assets 8,657 6,196 - --------------------------------------------------------------- Liabilities: Prepaid expenses and deferred charges 1,341 1,030 State taxes -- 37 - --------------------------------------------------------------- Total deferred tax liabilities 1,341 1,067 - --------------------------------------------------------------- Net deferred tax asset $7,316 $5,129 - ---------------------------------------------------------------
14. FINANCIAL INSTRUMENTS M/I Financial offers fixed and adjustable rate mortgage loans, primarily to buyers of the Company's homes. At December 31, 1997, M/I Financial is committed to fund $85,400,000 in mortgage loans to home buyers. Of this total, approximately $27,328,000 are adjustable rate loans and $58,072,000 are fixed rate loan commitments. The loans are granted at current market interest rates and the rate is guaranteed through the transfer of the title of the home to the buyer (the "Closing"). M/I Financial uses hedging methods to reduce its exposure to interest rate fluctuations between the commitment date of the loan and the time the home closes. The method to be used is determined at the time of the loan commitment based on the market conditions and alternatives available. M/I Financial's policy requires that there be no interest rate risk on loans closed waiting to be sold. Also according to policy, the pipeline of committed loans is to be hedged at 70 to 95% of the committed balance, which is the balance of loans expected to be closed. One of the methods that M/I Financial uses to hedge the interest rate risk relative to unclosed loans is to purchase commitments from outside investors to acquire the loans at the interest rate at which the loan will be closed. The cost of these purchase commitments is recorded as an asset and is expensed as loans are closed under the related commitments. Any remaining unused balance is expensed when the commitment expires, or earlier if the Company determines that they will be unable to use the entire commitment prior to its expiration date. The Company expended $498,000, $1,345,000 and $898,000 in 1997, 1996 and 1995, respectively, related to purchase commitments from outside investors to acquire mortgage loans. Such costs are expensed as a component of cost of goods sold. At December 31, 1997, the Company had approximately $33,300,000 of commitments to deliver mortgage loans to outside investors. The Company also hedges its interest rate risk using optional and mandatory forward sales of mortgage-backed securities. In these agreements, the Company agrees to sell and later agrees to buy similar but not identical mortgage-backed securities. Generally, the agreements are fixed-coupon agreements whereby the interest rate and maturity date of both transactions are approximately the same and are established to correspond with the closing of the fixed interest rate mortgage loan commitments of the Company. The difference between the two values of the mortgage-backed securities in the agreements at settlement provide a hedge on the interest rate risk exposure in the mortgage loan commitments and is included in the gain or loss on the sale of the loans to third party investors. At December 31, 1997, these agreements matured within 90 to 120 days. Securities under forward sales agreements averaged approximately $37,300,000 during 1997 and the maximum amount outstanding at any month end during 1997 was $49,000,000. Hedging gains of $1,389,000 were deferred at year end as the mortgage loans and commitment contracts qualified for hedge accounting. 32 21 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS To reduce the credit risk associated with accounting losses, which would be recognized if counterparties failed completely to perform as contracted, the Company limits the entities that management can enter into a commitment with to the primary dealers in the market. The risk of accounting loss is the difference between the market rate at the time a counterparty fails and the rate the Company committed to for the mortgage loans and any purchase commitments recorded with the counterparty. The following table presents the carrying amounts and fair values of the Company's financial instruments and the fair value of the Company's unrecognized financial instruments at December 31, 1997 and 1996. SFAS 107, "Disclosures about Fair Value of Financial Instruments", defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
1997 1996 Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value - ---------------------------------------------------------------------------------- Assets: Cash, including cash in escrow $ 13,373 $ 13,373 $ 6,761 $ 6,761 Mortgage loans to be funded 42,868 43,705 33,799 33,922 Accounts receivable 951 951 648 648 Prepaid financing commitments 121 -- 267 -- Interest rate cap -- -- 73 73 Liabilities: Notes payable banks 108,000 108,000 100,300 100,300 Mortgage notes payable 5,950 5,950 45 45 Subordinated notes 50,000 50,000 25,000 25,000 Accounts payable 42,793 42,793 32,016 32,016 Other liabilities 43,771 43,771 35,679 35,679 Unrecognized Financial Instruments: Letters of credit -- 195 -- 127 Commitments to extend real estate loans -- 2,333 -- 1,345 Forward sale of mortgage-backed securities -- (490) -- 187
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at December 31, 1997 and 1996: CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND OTHER LIABILITIES. The carrying amounts of these items are a reasonable estimate of their fair value. MORTGAGE LOANS TO BE FUNDED. The estimated fair value of mortgage loans to be funded at December 31, 1997 and 1996 includes the estimated gains and servicing rights which will be realized when the loans are sold. The estimated fair value was determined based on market quotes at December 31, 1997 and 1996. PREPAID FINANCING COMMITMENTS. The estimated fair value was determined using fees currently charged for similar commitments and by estimating the prepaid financing commitments that will be utilized by the Company. NOTES PAYABLE BANKS. The interest rates currently available to the Company fluctuate with the LIBOR rate of the lending institutions and thus their carrying value is a reasonable estimate of fair value. MORTGAGE NOTES PAYABLE. The estimated fair value was determined by comparing the interest rates and terms of the note agreements to debt instruments with similar terms and remaining maturities. SUBORDINATED NOTES. The estimated fair value was determined based upon market quotes at December 31, 1997 and 1996. LETTERS OF CREDIT. Letters of credit and outstanding completion bonds of $28,184,000 and $21,501,000 represent potential commitments at December 31, 1997 and 1996. The letters of credit generally expire within one to two years. The estimated fair value of letters of credit was determined using fees currently charged for similar arrangements. INTEREST RATE CAP, COMMITMENTS TO EXTEND REAL ESTATE LOANS AND FORWARD SALE OF MORTGAGE-BACKED SECURITIES. The fair value of these financial instruments was determined based upon market quotes at December 31, 1997 and 1996. 15. COMMITMENTS AND CONTINGENCIES At December 31, 1997, the Company had sales agreements outstanding, some of which have open contingencies for approval of financing, to deliver 1,544 homes with an aggregate purchase price of approximately $306,077,000. At December 31, 1997, the Company had options and contingent purchase contracts to acquire land and developed lots with an aggregate purchase price of approximately $166,432,000. Purchase of the properties is contingent upon satisfaction of certain requirements by the Company and the sellers. At December 31, 1997, the Company had outstanding approximately $28,184,000 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. 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 financial statements of the Company. 16. BUSINESS SEGMENTS The business segment information for 1997, 1996 and 1995 included on page 15 of this annual report is an integral part of these financial statements. 33 22 [DELOITTE & TOUCHE LLP LOGO] INDEPENDENT AUDITORS' REPORT To the Stockholders and Directors of M/I Schottenstein Homes, Inc.: We have audited the accompanying consolidated balance sheets of M/I Schottenstein Homes, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of M/I Schottenstein Homes, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Columbus, Ohio February 27, 1998 34 23 1997 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's common stock is traded on the New York Stock Exchange under the symbol "MHO". As of March 2, 1998, there were approximately 227 record holders of the Company's common stock. At that time there were 8,804,600 shares issued and 7,602,161 shares outstanding. The table below presents the highest and lowest prices for the Company's common stock during each of the quarters presented:
- ------------------------------------------------ 1997 HIGH LOW - ------------------------------------------------ First quarter $11.75 $ 8.25 Second quarter $11.38 $10.13 Third quarter $15.50 $11.25 Fourth quarter $19.50 $13.00
- ------------------------------------------------ 1996 HIGH LOW - ------------------------------------------------ First quarter $11.75 $ 9.75 Second quarter $11.00 $ 9.13 Third quarter $ 9.38 $ 8.25 Fourth quarter $10.63 $ 8.38
The highest and lowest prices for the Company's common stock from January 1, 1998 through March 2, 1998 was $24.56 and $17.75. Historically, the Company has not paid any dividends. However, on February 9, 1998, the Board of Directors approved a $0.05 per share cash dividend payable to stockholders of record of its common stock on April 1, 1998, payable on April 22, 1998. The Company's loan agreement and Subordinated Note place limits on dividends (see Notes 6 and 8 to the consolidated financial statements). 35 24 - -------------------------------------- EXECUTIVE OFFICERS - -------------------------------------- IRVING E. SCHOTTENSTEIN Chief Executive Officer ROBERT H. SCHOTTENSTEIN President STEVEN SCHOTTENSTEIN Senior Executive Vice President KERRII B. ANDERSON Senior Vice President, Chief Financial Officer - -------------------------------------- OTHER KEY OFFICERS - -------------------------------------- PAUL S. COPPEL Senior Vice President, General Counsel and Secretary PHILLIP G. CREEK Senior Vice President, Treasurer GARY A. HAARER President, Arizona Region ROBERT C. MOESLE President, Washington, D.C. Region LLOYD T. SIMPSON President, Columbus Region - -------------------------------------- DIRECTORS - -------------------------------------- IRVING E. SCHOTTENSTEIN (1*, 2) Chairman of the Board and Chief Executive Officer KERRII B. ANDERSON Senior Vice President, Chief Financial Officer FRIEDRICH K.M. BOHM (2, 3*) Managing Partner and Chief Executive Officer, NBBJ JEFFREY H. MIRO (2, 3) Chairman, Miro, Weiner and Kramer ROBERT H. SCHOTTENSTEIN (1, 2) President STEVEN SCHOTTENSTEIN (1) Senior Executive Vice President LEWIS R. SMOOT, SR. (1, 2*, 3) President and Chief Executive Officer, The Smoot Corporation NORMAN L. TRAEGER (2, 3) President, The Discovery Group (1) Executive Committee (2) Compensation Committee (3) Audit Committee * Chairman - -------------------------------------- CORPORATE INFORMATION - -------------------------------------- CORPORATE HEADQUARTERS 3 Easton Oval Columbus, Ohio 43219 STOCK EXCHANGE LISTING New York Stock Exchange (MHO) TRANSFER AGENT AND REGISTRAR EquiServe P.O. Box 8040 Boston, Massachusetts 02266-8040 www.equiserve.com ANNUAL MEETING The Annual Meeting of Stockholders will be held at 9:00 A.M. on April 28, 1998, at the offices of the Company, 3 Easton Oval, Columbus, Ohio. FORM 10-K Stockholders may receive a copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K without charge by writing to: Investor Relations M/I Schottenstein Homes, Inc. 3 Easton Oval Suite 500 Columbus, OH 43219 www.mihomes.com 36 EX-21 8 EXHIBIT 21 1 Exhibit 21 SUBSIDIARIES OF THE COMPANY 1. M/I Financial Corp., an Ohio corporation. M/I Financial Corp. is wholly-owned by the Company. 2. M/I Homes, Inc., an Arizona corporation. M/I Homes, Inc. is wholly-owned by the Company. 3. M/I Homes Construction, Inc., an Arizona corporation. M/I Homes Construction, Inc. is wholly-owned by the Company. 4. 601RS, Inc., an Ohio corporation. 601RS is wholly-owned by the Company 5. Lot 5 - 1997, L.L.C., a Virginia limited liability corporation. Lot 5 is wholly-owned by the Company. 6. Bellwood, L.L.C., a Virginia limited liability corporation. 99% L.L.C. owned by Lot 5. 7. Manor Road - 1997, L.L.C., a Virginia limited liability corporation. Manor Road is wholly-owned by the Company. 8. Chevy Chase Villas, L.L.C., a Virginia limited liability corporation. 99% L.L.C. owned by Manor Road. EX-23 9 EXHIBIT 23 1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 1-12434 of M/I Schottenstein Homes, Inc. on Form S-8 of our report dated February 27, 1998, appearing in and incorporated by reference in this Annual Report on Form 10-K of M/I Schottenstein Homes, Inc. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP - -------------------------- Deloitte & Touche LLP Columbus, Ohio March 26, 1998 EX-24 10 EXHIBIT 24 1 POWER OF ATTORNEY I, Steven Schottenstein, am Senior Executive Vice President and a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ STEVEN SCHOTTENSTEIN ------------------------- Steven Schottenstein Senior Executive Vice President and Director 2 POWER OF ATTORNEY I, Lewis R. Smoot, Sr., a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ LEWIS R. SMOOT, SR. ----------------------- Lewis R. Smoot, Sr. Director 3 POWER OF ATTORNEY I, Irving E. Schottenstein, am Chief Executive Officer and a director of M/I Schottenstein Homes, Inc. (the "Company"), and I do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacities as principal executive officer and a director of the Company and to execute any and all instruments for me and in my name in the capacities indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacities indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ IRVING E. SCHOTTENSTEIN ---------------------------- Irving E. Schottenstein Chief Executive Officer (principal executive officer) Director 4 POWER OF ATTORNEY I, Friedrich K. Bohm, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ FRIEDRICH K. BOHM --------------------- Friedrich K. Bohm Director 5 POWER OF ATTORNEY I, Norman L. Traeger, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ NORMAN L. TRAEGER --------------------- Norman L. Traeger Director 6 POWER OF ATTORNEY I, Robert H. Schottenstein, am President and a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Kerrii B. Anderson my true and lawful attorney and agent, with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorney or agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorney and agent, or her substitute or substitutes, shall do or cause to be done by virtue hereof. /s/ ROBERT H. SCHOTTENSTEIN --------------------------- Robert H. Schottenstein President and Director 7 POWER OF ATTORNEY I, Kerrii B. Anderson, am Chief Financial Officer (principal financial and accounting officer) and a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein my true and lawful attorney and agent, with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as the principal financial and accounting officer of the Company and to execute any and all instruments for me and in my name in the capacities indicated above, which said attorney or agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacities indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorney and agent, or her substitute or substitutes, shall do or cause to be done by virtue hereof. /s/ KERRII B. ANDERSON ----------------------- Kerrii B. Anderson Chief Financial Officer (principal financial and accounting officer) Director 8 POWER OF ATTORNEY I, Jeffrey H. Miro, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ JEFFREY H. MIRO ------------------- Jeffrey H. Miro Director EX-27 11 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR THEN ENDED OF M/I SCHOTTENSTEIN HOMES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 13,373 0 43,819 0 271,254 328,446 12,975 4,328 366,020 86,564 5,950 0 0 88 115,418 366,020 604,999 614,004 494,663 494,663 0 0 11,742 29,422 11,985 17,437 0 0 0 17,437 2.15 2.15
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