-----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, JVJJO3l+tBen4Hg6aPyw65OnU4vm908SUFu7sWp4YPePdbc7BN1Y924iekXcNi2z ocmBn3NHS9MRI7m0qgiXpw== 0000950152-96-001280.txt : 19960401 0000950152-96-001280.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950152-96-001280 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-43188 FILM NUMBER: 96541889 BUSINESS ADDRESS: STREET 1: 41 S HIGH ST STE 2410 CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142215700 FORMER COMPANY: FORMER CONFORMED NAME: MI SCHOTTENSTEIN HOMES INC DATE OF NAME CHANGE: 19920703 10-K 1 M/I SCHOTTENSTEIN HOMES 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File No. 33-44914, 33-68564 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.) 41 S. High Street, Suite 2410 Columbus, Ohio 43215 ------------------------------------------------------------------ (Address of principal executive offices)(zip code) Registrant's telephone number, including area code: (614) 221-5700 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 8, 1996, the aggregate market value of voting common stock held by non-affiliates of the registrant (3,424,300 shares) was approximately $36,383,000. The number of shares of common stock of M/I Schottenstein Homes, Inc., outstanding on March 8, 1996 was 8,800,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of Annual Report to Shareholders for the year ended December 31, 1995 (Part I and II) Portions of the registrant's Definitive Proxy Statement for the 1996 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A not later than April 8, 1996 (Part III) 2 PART I ITEM 1. BUSINESS COMPANY M/I Schottenstein Homes, Inc. was reincorporated in Ohio in November 1993. Prior to that date, the Company was a Delaware corporation. As used in this report, the term "Company" refers to M/I Schottenstein Homes, Inc.; its subsidiary, M/I Financial Corp. ("M/I Financial") and its predecessors, unless the context indicates otherwise. The Company maintains its executive offices at 41 South High Street, Suite 2410, Columbus, Ohio 43215 and its telephone number is (614) 221-5700. During October 1986, the Company completed a public offering of its Common Stock and from October 1986 to June 1990, the Company was publicly held, with Irving E. Schottenstein, Melvin L. Schottenstein and their family trusts owning approximately 79.0% of the outstanding shares of Common Stock. In June 1990, the shareholders of the Company approved a merger agreement providing for the merger of the Company with M/I Homes Acquisition Corp., a corporation formed by Irving E. Schottenstein, Melvin L. Schottenstein and their family trusts as a vehicle for acquiring the Company's publicly held Common Stock (the "Going Private Transaction"). As a result, Irving E. Schottenstein, Melvin L. Schottenstein and their family trusts became the holders of 100% of the Common Stock. Effective January 1, 1991, the Company elected to be treated as an S Corporation under the Internal Revenue Code of 1986, as amended (the "Code") for federal income tax purposes and comparable state tax laws. As a result of the S Corporation election, the Company was no longer subject to federal and state income taxation and its shareholders were taxed on the Company's income directly. In November 1993, the Company completed a public offering of its Common Stock, selling 3.3 million shares at an initial public offering price of $14 per share. At that time, the remaining 62.5% of the Company's outstanding Common Stock was held by Irving E. Schottenstein, the Estate of Melvin L. Schottenstein and their family trusts, the former S Corporation shareholders. In conjunction with the public offering, the Company terminated its S Corporation status effective November 8, 1993. Accordingly, from that date forward, the Company's income has been fully subject to federal, state and local taxes. SEGMENT INFORMATION The Company operates in two business segments - home-building and financial services. The home-building operations include the development of land and the sale and construction of single-family attached and detached homes. The financial services operations involve the origination of mortgage loans primarily for purchasers of the Company's homes. The financial information relating to business segments for the three years ended December 31, 1995, appearing in exhibit 13 of this Annual Report on Form 10-K, is incorporated by reference. HOME-BUILDING M/I Schottenstein Homes, Inc. is one of the nation's leading home builders. The Company is engaged in the sale and construction of single family homes marketed and sold under the M/I Homes and Showcase Homes tradenames. In 1994, the latest year for which information is available, the Company was the twentieth largest U.S. home builder (based on total revenue) as ranked by Builder Magazine. During the year ended December 31, 1995, the Company delivered 2,952 homes with a total sales value of over $505 million. The Company commenced home-building operations in Columbus, Ohio in 1976 and expanded into and opened a home-building division in Tampa, Florida in 1981. In 1984 the Company further expanded in Florida by opening home-building divisions in Palm Beach County and Orlando. The Company opened home-building divisions in Charlotte and Raleigh, North Carolina in 1985 and 1986, respectively. The Company opened a home-building division in Nashville, Tennessee in 1987 and, due to the lack of perceived growth opportunities, withdrew 2 3 from this market in December 1989. In 1988, the Company established a separate home-building division for its Showcase product lines in Columbus, Ohio with the intent of building and marketing semi-custom, upscale homes to more affluent customers. It was also in 1988 that the Company expanded into and opened home-building divisions in Cincinnati, Ohio and Indianapolis, Indiana. In 1991, the Company opened a home-building division in Washington D.C., encompassing certain D.C. suburbs located in Virginia and Maryland. Due to the growth in the Washington, D.C. market, the Company split this market into separate Maryland and Virginia divisions in the first quarter of 1994. In May 1993, the Company introduced its Horizon line of homes in the Columbus market. This is the Company's lowest priced line of homes and is targeted primarily at first time home buyers. Due to the strong sales of this line since its introduction and the anticipated growth in this segment of the market, the Company established a separate division for the Horizon line in the Columbus market in 1994. The Company also introduced this line of entry-level homes in several of its other markets in 1994 and 1995. The Company is the leading home builder in its core Columbus market and the Company's Columbus divisions accounted for approximately 40% of the Company's housing revenue in 1995. Each home-building division is managed by a division manager who is familiar with the unique market characteristics of their particular division. As commonly occurs in the home-building industry, it has been the Company's experience that it incurs substantial losses in a new market for the first two years of operations. With respect to the Company's nine developing markets, these losses have already been absorbed in the Company's historical results of operations. In addition, the Company continues to explore opportunities for expanding into new markets either by starting a new division or through acquisition. The Company, on a regional basis, offers up to eight distinct lines of single family homes ranging in price from the low $80,000's to approximately $500,000, with an average sales price of homes in Backlog as of December 31, 1995 of $169,000. By offering a wide range of homes, the Company is able to attract first-time home buyers as well as move-up buyers, many of whom were previous M/I or Showcase homeowners. The Company seeks to distinguish itself from its competitors by offering homes that have a higher level of design and construction quality within a given price range. The Company also believes that it offers one of the highest levels of customer service in the industry. Based on the responses to our customer questionnaire, for the fifth year in a row, more than 95% of the Company's customers would recommend an M/I or Showcase home to a potential home buyer. The Company believes that each of its markets has unique characteristics and must therefore be locally managed with dedicated, on-site management personnel. Each home-building division is supervised by a division manager who reports to a regional manager. The Company encourages its regional and division managers to be entrepreneurial and has accordingly adopted an incentive compensation structure under which their aggregate compensation is largely determined on the basis of net income and customer satisfaction in their region or division. To enhance the selling process, the Company operates design centers in the Cincinnati and Columbus markets. The design centers are staffed with interior design specialists who assist Columbus and Cincinnati 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 companies sales consultants. FINANCIAL SERVICES The Company offers fixed and adjustable rate mortgage loans, primarily to buyers of the Company's homes through its wholly owned subsidiary M/I Financial. At December 31, 1995, the Company is committed to fund $55.0 million in mortgage loans to home buyers. Of this total, approximately $6.0 million are adjustable rate loans and $49.0 million 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"). 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. The method to be used is determined at the time of the loan commitment based on the market conditions and alternatives available. The Company's policy requires that there be no interest rate risk on loans closed waiting to be sold. Also according to the 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. 3 4 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 they will be unable to use the entire commitment prior to its expiration date. At December 31, 1995, the Company had approximately $36.0 million of commitments to deliver mortgage loans to outside investors. The Company hedges its interest rate risk using 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, 1995, these agreements matured within 90 to 120 days. Securities under forward sales agreements averaged approximately $12.5 million during 1995 and the maximum amounts outstanding at any month end during 1995 was $16.0 million, the balance at December 31, 1995. Hedging gains of $456,000 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 is currently in the process of opening an office in Raleigh at which time they will have branches in all of the Company's housing markets, with the exception of Virginia and Maryland. M/I Financial provided financing for 1,873 homes in 1995, representing approximately $233.3 million of mortgage loans originated. The majority of these loans were made to buyers of the Company's homes. 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 several days thereafter. The Company retains a small servicing portfolio which it currently sub-services with a financial institution. M/I Financial has been approved by the Department of Housing and Urban Development and the Veterans Administration 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. BUSINESS STRATEGY The Company's business strategy emphasizes the following key areas: (i) profitability with focus on margins as well as expenses; (ii) having and continuing to pursue premier locations while maintaining a conservative land acquisition policy; (iii) maintaining a leadership position in Columbus and pursing profitable growth strategies in other markets; (iv) superior customer service; (v) product breadth and innovative design; and (vi) employing an experienced and entrepreneurial management team. Growth and performance expectations are always subject to changes in interest rates, the home-building industry's competitive environment, job growth and consumer confidence. The Company adapts to these constant changes by focusing on the following strategies and philosophies that have been key to its success: (i) Profitability. The overriding business strategy of the company is to increase profitability and focus on margins in order to enhance shareholder value. At the same time, the Company remains committed to its core 4 5 business practice of building quality homes and providing superior customer service. Although, there are times when increasing profits may conflict with issues of quality and customer service, the Company believes that it has been particularly successful in striking the proper balance between these vital Company goals. In order to do this, the Company constantly explores new methods and procedures designed to improve operating efficiency without sacrificing quality. In the selling process, the marketing sales efforts of the Company promote credibility and quality rather than price cutting or so-called "give aways". In each home building division, significant attention is paid to improving subdivision absorption as well as revenue enhancement through premiums and price increases where warranted. Management believes the Company's long-standing and very conservative policy against "spec" houses allowed the Company to avoid the significant discounting which may accompany the sale of a "spec" house. The Company strives to be in locations where the Company is the primary builder or, if not, the Company seeks to build in communities with other builders who have similiar risk/return philosophies. The Company is constantly exploring ways in which to make money without selling additional homes. In support of this, the Company continues to promote value engineering of its product lines. The Company strives to grow M/I Financial in the majority of its markets. The Company is considering two strategies that may be implemented in 1996 to improve profitability. The first strategy is to reduce its tax and legal liabilities through restructuring. The second strategy is to participate in a joint venture to capture title insurance profits in certain of its markets. The implementation of these strategies in 1996 is dependent upon a number of factors such as possible regulatory approval, administrative costs of the implementation, and analysis of the level of increased revenue that will be realized by the Company. Therefore, this objective of improving profitability during 1996 is a forward-looking statement that is subject to change as the Company evaluates the effect of the above mentioned factors upon the two strategies. Finally, the Company will continue to pursue ways to reduce its overall cost of capital as well as maintain financial flexibility. (ii) Premier Locations and Conservative Land Acquisition Policy. The Company understands that the profitability of each of its home building divisions is largely dependent upon the quality of the division's subdivision locations. When the market is strong, the good locations truly excel and when the market weakens, the good locations are usually the last to be affected. The Company has always been effective at securing good locations and with the recent internal formation of the Land Committee, the Company believes it will become even more effective in identifying and acquiring premier locations. The Company's land development activities and land holdings have increased significantly in the past few years and the Company expects land holdings to remain at relatively high levels. However, the Company has always pursued and continues to pursue a land acquisition policy that it believes is more conservative than the policies of the other national home builders. The Company develops its own lots where it can gain a competitive advantage by doing so or where 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 four years. All land to be acquired by the Company must be zoned and serviceable by all necessary utilities prior to being purchased. From time to time, the Company develops land in joint ventures which, in most cases, are entirely equity financed. As of December 31, 1995, the Company had an inventory of 2,141 developed lots, 912 lots under development and 2,281 lots zoned for future development, including its share of lots owned by its joint ventures. The Company believes that this level of land inventory, in combination with 5,769 lots that the Company may acquire pursuant to outstanding option and purchase contracts, is sufficient to meet its anticipated building needs over the next three to four years. (iii) Maintaining Leading Position in the Columbus Market and Profitable Growth Strategies in Other Markets. The Company is the leading builder of single-family detached homes in the Columbus market. In fact, the Company has built and delivered the greatest number of single-family detached homes in the Columbus area during each of the last seven years. In 1995, the Company's market share in Columbus reached a record setting 25% of the total market and more than 27% of the "under $250,000" market. The Company seeks to maintain its leading position in this market by continuing to provide high quality homes and superior customer service. Its success in Columbus has enabled the Company to expand into new markets that offer significant growth opportunities. Between 1981 and 1993, the Company expanded into and currently operates home-building divisions in nine markets outside its original Columbus market. The Company believes there are significant opportunities to 5 6 improve profitability in these markets through expansion of the Company's product offerings, the acquisition of land in increasingly desirable locations and by constructing and selling homes with the same commitment to customer service that has accounted for the Company's success in its Columbus market. In addition, the Company continues to explore opportunities for expanding into new markets whether by starting a new division or through acquisition. In developing proper growth strategies and goals for its other markets, however, the Company understands that the unique characteristics of each market significantly impacts the long-term strategies which the Company elects to pursue. Regardless of the strategies employed, the Company will continue to focus on profitability rather than mere market share. (iv) Superior Customer Service. The Company is committed to providing its home buyers with a wide array of functional and innovative designs from which to choose, quality construction utilizing the best building materials and a home with lasting value at an affordable price. The overriding Company philosophy is to provide superior service to its customers. The Company has always recognized that the purchase of a home in most instances represents the single largest investment ever made by its customers. The Company understands the importance of a home purchase decision and is sensitive to the fact that many prospective buyers have little knowledge of home construction and are unsure about how to choose a home builder and a home. Because of this, virtually every phase of the Company's operations - from the beginning of the selling process through construction, closing and service after delivery - is designed to educate and inform the customer, to involve the customer in the home-building process and to make the home-building experience more understandable and pleasant. The Company's selling process focuses on the home's features, benefits, quality and design (as opposed to merely emphasizing price and square footage). The Company assists many of its customers with financing and conducts a pre-construction "builder/buyer" conference with each customer to review the house plans, introduce the customer to his or her construction supervisor and explain the construction process. The Company encourages its customers to visit their homesites during construction and provides free periodic inspections of its homes after delivery. The Company also offers attractive warranties, including a 20-year transferable major structural warranty. The Company prides itself on the extraordinary efforts which it undertakes on a daily basis to "put the customer first" and thereby provide the highest levels of customer service. As a result, based on the responses to our customer questionnaire, for the fifth year in a row, more than 95% of the Company's customers would recommend an M/I or Showcase home to a potential home buyer. (v) Product Breadth and Innovative Design. The Company offers a wide range of homes at price points that appeal to both first-time and move-up buyers, as well as empty nesters. The Company offers more than 200 different floor plans and elevations in its various product lines. In some instances, the Company permits customers, at an additional cost, to modify the design of their homes or add special features. Such modifications are greatly facilitated by the Company's use of computer-aided design technology. The Company believes that its homes generally offer a higher level of quality design and construction within a given price range. It devotes significant resources to the research, design and development of its homes in order to better meet the needs of the various housing markets in which the Company operates. (vi) Management. The Company places high value on and dedicates substantial resources to assembling the most competent management team at the corporate and regional levels and within each of its divisions. The Company's success as a national home builder is in large part due to the skill and experience of the Company's managers, each of whom possess intimate knowledge of the markets they manage. The Company encourages its managers to be entrepreneurial and to operate their regions and divisions as if they were their own and, accordingly, has adopted an incentive compensation structure under which aggregate compensation for regional and division managers is determined on the basis of financial performance and customer satisfaction in their region or division. SALES AND MARKETING The Company markets and sells its homes under the 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. Every sales consultant is trained and equipped to fully explain the features and benefits of the Company's homes, to determine 6 7 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 127 sales consultants and operates approximately 160 model homes across all of its divisions. The Company advertises in newspapers and in 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 also resulted in a strong referral base and a significant number of repeat buyers. 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 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 product. The Company has always followed a very conservative policy with respect to the number of spec homes that can be started. Management strictly controls the number of spec homes that can be built by requiring that the division manager obtain the Chief Executive Officer's approval prior to start. 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 one 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 less than 1.0% of total costs and expenses for each of the years ended December 31, 1995, 1994, and 1993. 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 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 200 different floor plans and elevations. These designs may differ significantly from market to market. For example, in Florida, where lifestyles tend to be more leisurely and outdoor oriented, home designs tend to be more open and airy, with palladian windows, arches, gothic columns and covered lanais. In the Midwest, home design is more traditional. The construction of each home is supervised by a construction supervisor employed by the Company who reports to a Company-employed production manager. Every customer is introduced to their construction supervisor prior to commencement of home construction at a pre-construction "builder/buyer" conference. In addition to introducing the customer to their construction supervisor, the purpose of the "builder/buyer" conference is to review with the customer the home plans and all relevant construction details and to explain the construction process and schedule to the customer. Every customer is given a hard hat at the "builder/buyer" conference as an open invitation to visit the site at any time during the course of construction. The Company wants the customer to become involved and 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 home-building experience. 7 8 All homes are constructed according to standardized designs and meet applicable Federal Housing Authority (the "FHA") and Veterans Administration (the "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 so as to allow for price protection for the Company's Backlog. The Company seeks to build in large volume with a view toward reducing 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. MARKETS The Company's operations are organized into geographic regions in order to maximize management and operating efficiencies. Each geographic region comprises one or more operating divisions for a particular major metropolitan area. The Company's present divisional operating structure is as follows:
Year Operations Region Division Commenced ------ -------- --------- Ohio..................... Columbus - Horizon 1994 Columbus - Hallmark/Heritage/Regency 1976 Columbus - Showcase 1988 Cincinnati 1988 Florida.................. Tampa 1981 Orlando 1984 Palm Beach County 1984 Carolina................. Charlotte 1985 Raleigh 1986 Indiana.................. Indianapolis 1988 Washington D. C.......... Virginia 1991 Maryland 1991
A regional manager is responsible for and oversees all activities within the divisions contained in their region and the division manager is responsible for and oversees the activities within their particular division. Each division manager has one or more sales managers and production managers reporting to them. The sales manager supervises the sales consultants and the production manager supervises the construction supervisors. The home-building industry is highly competitive. The Company competes in each of the geographic areas in which it operates with numerous other home builders, ranging from small local to larger regional and national builders and developers. The Company continually evaluates its markets, focusing on key data such as population trends, job formation, income levels, housing demand and supply and home-building competition. Ohio Region. The Columbus market is a steady market with a stable and diverse employment base. The Company is the leading home builder in its core Columbus market based upon home closings, having built and delivered more single-family detached homes in the Columbus area than any other home builder during each of the last seven years. The Company seeks to maintain its leading position in this market by expanding its product offerings and the locations where it builds homes, while continuing to provide the high quality homes and superior 8 9 customer service on which the Company's reputation has been built. The Company's success in Columbus has enabled the Company to expand into new markets which offer significant growth opportunities. The Cincinnati division was started in 1988. The Company believes Cincinnati's market is characterized by a stable economic environment and a diverse employment base. In 1994 and 1995, the Company introduced its more affordable Horizon product line in this market in order to compete more effectively for first time home buyers. Florida Region. The Company commenced operations in Tampa in 1981. The Tampa market continues to experience strong building permit activity after a decline that began in the late 1980s. This increase has been driven by increased jobs in the services, government and finance industries. The Company opened the Palm Beach Division in 1984 and recently introduced its Showcase product line in order to offer homes in more affluent areas of the County. With the introduction of the Showcase product line and new subdivisions opened in 1995, the Company believes it is well positioned in this market. The Orlando division opened in 1984. Orlando's economy is anchored by the service industry, representing approximately 33% of total employment. The Orlando market has traditionally experienced lower unemployment rates than both the state of Florida and the United States. Home builder competition remains strong and the Company competes heavily in the areas of price and location. In 1995, the Company introduced its upscale product line in this market in order to compete more effectively. Carolina Region. The Company entered Charlotte and Raleigh in 1985 and 1986, respectively. Charlotte continues to grow as a financial center, with Raleigh also attracting jobs as a leader in the research and development area. The Company believes that Charlotte and Raleigh both continue to attract well-educated, higher income level consumers. Indiana Region. The Company opened the Indianapolis division in 1988. The Indianapolis market is a growing market noted for an excellent transportation system and a relatively young population. In 1995, the Company introduced its Horizon product line in this market to offer more choices for first time home buyers. This division recorded a record number of New Contracts in 1995, primarily due to the strong performance of the Horizon product line. Washington, D.C. Region. The Washington, D.C. division was opened in late 1991. In 1994, operations were split into separate Maryland and Virginia divisions to more effectively manage this market. Current operations are primarily located in Fairfax, Prince William and Loudoun Counties in Virginia and Prince Georges, Montgomery and Anne Arundel Counties in Maryland. The Company has experienced tremendous success in its Willows subdivision near the Potomac River in Maryland. The Company will continue to focus on geographic, product and pricing niches. PRODUCT LINES The Company, on a regional basis, offers up to eight distinct product lines, ranging in price from the low $80,000's to approximately $500,000 and ranging in square footage from approximately 1,100 to 4,000 square feet. Essentially, the difference among each of these products lines are the floor plans, square footage and price and availability of specific features and options. There are more than 200 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 as well as move-up buyers. 9 10 The Company offers a selective number of its product lines in its divisions outside of Columbus. However, in the Columbus market, which is the Company's largest market, the Company offers all of its eight distinct product lines. The price range and average square footage for these product lines are shown below:
PRODUCT LINE PRICE RANGE SQUARE FOOTAGE -------------------- --------------------- -------------- Horizon $ 80,000 - $ 95,000 1,200 Heritage $ 85,000 - $110,000 1,400 Hallmark $110,000 - $145,000 2,000 Regency $145,000 - $185,000 2,450 Showcase Signature $165,000 - $185,000 2,500 Showcase Classic $180,000 - $210,000 2,600 Hampsted $190,000 - $310,000 2,600 Showcase Estates $210,000 and up 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 1,400 to 2,200 square feet of living space. These homes utilize wood frame construction and feature exteriors of aluminum with brick fronts. In all 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 the Company expects land holdings to remain at relatively high levels. However, the Company has always pursued and continues to pursue a land acquisition policy that it believes is more conservative than the policies of the other national home builders. The Company develops its own lots where it can gain a competitive advantage by doing so or where 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 four years. Although the Company purchases land and engages in land development activities primarily for the purpose of furthering its own home-building activities, in certain markets, the Company has developed land with the intention of selling a portion of the lots to outside home builders. To limit its risk in connection with such development, the Company has primarily acquired land through the use of contingent purchase contracts. All such contracts require the internal 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 in undertaking land development, the Company generally does not commence technical and engineering surveys or obtain subdivision and other required governmental permits and development approvals until all necessary zoning approvals are obtained. To diversify its investment in land, the Company occasionally enters into joint ventures, generally with other home builders. At December 31, 1995, the Company had interests varying from 33% to 50% in each of 18 joint ventures, three formed in 1995, three formed in 1994, four of which were formed in 1993, and eight formed prior to 1993. These joint ventures develop land into lots and, generally, the Company receives its percentage 10 11 interest in the joint venture in the form of a distribution of developed lots. These joint ventures pay to the managing joint venture partner certain fees for accounting, administrative and construction supervision services performed by the managing partner in addition to its percentage interest as a partner in the profits of the joint venture. The Company currently is responsible for the management of seven of these 18 joint ventures. In most instances, these joint ventures are entirely equity financed. In developing 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, 1995, $9.8 million of letters of credit were outstanding for these purposes, as well as $3.3 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, 1995, the Company had in inventory 2,137 developed lots and 649 lots under development. The Company also owned raw land expected to be developed into approximately 1,438 lots. In addition, at December 31, 1995, the Company's interest in lots held by its joint ventures consisted of 4 developed lots and 263 lots under development. The Company also owns interests in raw land held by its joint ventures zoned for 843 lots. It is anticipated that some of the lots owned by the Company and the joint ventures will be sold to others, including land held through its joint ventures. At December 31, 1995, the Company had options and purchase contracts, which expire over the next three years, to acquire approximately 5,769 lots, including developed lots and land to be developed into lots, with an aggregate current purchase price of approximately $145.8 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 at December 31, 1995:
OWNED LOTS ----------------------------------- Under To Be Lots to be Region Developed Development Developed Purchased Total ------------------------------------------------------------------------------------- Ohio and Indiana 933 585 1,428 2,812 5,758 Florida 929 - 258 831 2,018 Carolina 109 126 153 1,548 1,936 Washington, D.C. 170 201 442 578 1,391 ------------------------------------------------------------------------------------ Total 2,141 912 2,281 5,769 11,103 ====================================================================================
REGULATION AND ENVIRONMENTAL MATTERS The home-building 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, as well as 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 11 12 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 home builders 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 December 31, 1995 the Company employed 712 people (including part-time employees), of which were 196 employed in sales, 284 in construction and 232 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 currently leases a portion of its office space from M/I Office Development Company, an Ohio general partnership of which the Irving and Frankie Schottenstein Trust and the Melvin L. Schottenstein Marital Trust are partners. See "Item 13. Certain Relationships and Related Transactions." 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 condition or the results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1995, no matters were submitted to a vote of security holders. 12 13 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, 1995. 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, 1995. 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, 1995. 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, 1995. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants during the two fiscal years ended December 31, 1995. 13 14 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 1996 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 1996 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 1996 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 1996 Annual Meeting of Shareholders. 14 15 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 subsidiary 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, 1995 and 1994 Consolidated Statements of Income - Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows - Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. All 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. 15 16 Exhibit Number Description - -------------- ----------- 10.1 Indenture between M/I Schottenstein Homes, Inc., a Delaware corporation (the "Predecessor") and Ameritrust Company National Association, as Trustee, including form of Subordinated Notes due December 1, 2001, hereby incorporated by reference to Exhibit 4(b) of the Predecessor's Registration Statement on Form S-4, Commission File No. 33-44914. 10.2 Supplemental Indenture between the Predecessor and Ameritrust Company National Association, as Trustee, dated April 22, 1992, including form of Exchange Notes due December 1, 2001, hereby incorporated by reference to Exhibit 4(a) of the Predecessor's Registration Statement on Form S-4, Commission File No. 33-44914. 10.3 Supplemental Indenture between the Company and Society National Bank, successor by merger to Ameritrust Company National Association, as Trustee, dated November 8, 1993, hereby incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.4 Exchange Agent Agreement between the Predecessor and Ameritrust Company National Association dated February 12, 1992, hereby incorporated by reference to Exhibit 10(a) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10.5 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. 10.6 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. 10.7 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. 10.8 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. 10.9 Promissory Note issued by P.L. 1992 Limited Partnership to the Predecessor dated March 27, 1992, hereby incorporated by reference to Exhibit 10(ww) of the Predecessor's Registration Statement on Form S-4, Commission File No. 33-44914. 16 17 Exhibit Number Description - -------------- ----------- 10.10 Promissory Note issued by P.L. 1992 Limited Partnership to the Company dated December 30, 1994, hereby incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.11 Master Lease Agreement between the Predecessor and M/I Office Development Company dated August 7, 1992, hereby incorporated by reference to Exhibit 19(c) of the Predecessor's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. 10.12 First Amendment to Master Lease Agreement between the Predecessor and M/I Office Development Company dated September 9, 1992, hereby incorporated by reference to Exhibit 19(b) of the Predecessor's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992. 10.13 Second Amendment to Master Lease Agreement between the Predecessor and M/I Office Development Company dated October 30, 1992, hereby incorporated by reference to Exhibit 19(c) of the Predecessor's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992. 10.14 Third Amendment to Master Lease Agreement between the Predecessor and M/I Office Development Company dated March 4, 1996. (Filed herewith.) 10.15 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. 10.16 Promissory Note issued by Cascades 1992 Limited Partnership to the Predecessor dated October 16, 1992, hereby incorporated by reference to Exhibit 10(dd) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.17 Promissory Note issued by Cascades 1992 Limited Partnership to the Company dated December 30, 1994, hereby incorporated by reference to Exhibit 10.22 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.18 Promissory Note issued by Cascades 1992 Limited Partnership to the Company dated December 30, 1995. (Filed herewith.) 17 18 Exhibit Number Description - -------------- ----------- 10.19 Revolving Credit Loan, Seasonal Loan and Standby Letter of Credit Agreement by and among the Company, Bank One, Columbus, N.A.; The Huntington National Bank; NBD Bank, N.A.; National City Bank, Columbus and Bank One, Columbus, N.A., as agent for the banks, dated June 8, 1994, hereby incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. 10.20 Amendment No. 1 to Revolving Credit Loan, Seasonal Loan and Standby Letter of Credit Agreement by and among the Company; Bank One, Columbus, N.A.; The Huntington National Bank; NBD Bank, N.A.; National City Bank, Columbus and Bank One, Columbus, N.A., as agent for the banks, dated September 19, 1994, hereby incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. 10.21 Amendment No. 2 to Revolving Credit Loan, Seasonal Loan and Standby Letter of Credit Agreement by and among the Company; Bank One, Columbus, N.A.; The Huntington National Bank; NBD Bank, N.A.; National City Bank, Columbus and Bank One, Columbus, N.A., as agent for the banks, dated March 29, 1995, hereby incorporated by reference to Exhibit 10.46 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.22 Revolving credit loan, seasonal loan and standby letter of credit agreement by and among the Company, Bank One, Columbus, N.A.; The Huntington National Bank; NBD Bank; National City Bank, Columbus; The First National Bank of Boston and Bank One, Columbus, N.A., as agent for the banks, dated September 29, 1995, hereby incorporated by reference to Exhibit 10.1 of the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995. 10.23 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. 10.24 Revolving Credit Agreement by and among the Company; M/I Financial Corp. and Bank One, Columbus, N.A., dated August 10, 1994, hereby incorporated by reference to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. 10.25 Revolving Credit Agreement by and among the Company; M/I Financial Corp. and Bank One, Columbus, N.S. dated August 7, 1995, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. 18 19 Exhibit Number Description - -------------- ----------- 10.26 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. 10.27 Melvin and Irving Schottenstein Family Agreement by and among the Predecessor, the Company and its then shareholders of record dated October 7, 1993, hereby incorporated by reference to Exhibit 10(ww) of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 10.28 Company's 1994 President and Chief Executive Officer Bonus Program, hereby incorporated by reference to Exhibit 10.55 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.29 Company's 1994 Corporate Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.56 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.30 Company's Amended 1994 Corporate Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.60 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.31 Company's 1994 Senior Vice President and Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.57 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.32 Company's 1994 Senior Vice President and Treasurer Bonus Program, hereby incorporated by reference to Exhibit 10.58 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.33 Company's 1994 Senior Vice President/General Counsel Bonus Program, hereby incorporated by reference to Exhibit 19.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994. 10.34 Company's 1994 Senior Vice President/Regional Manager Bonus Program, hereby incorporated by reference to Exhibit 10.59 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.35 Company's 1994 Division Manager Bonus Program, hereby incorporated by reference to Exhibit 10.60 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 19 20 Exhibit Number Description - -------------- ----------- 10.36 Consulting and Separation Agreement between the Company and Eric J. Schottenstein, dated January 5, 1994, hereby incorporated by reference to Exhibit 10.61 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.37 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. 10.38 Company's 1995 President and Chief Executive Officer Bonus Program, hereby incorporated by reference to Exhibit 10.68 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.39 Company's 1995 Corporate Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 10.40 Company's 1995 Senior Vice President and Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 10.41 Company's 1995 Senior Vice President and General Counsel Bonus Program, hereby incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 10.42 Company's 1995 Senior Vice President and Treasurer Bonus Program, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 10.43 Company's 1995 Senior Vice President/Regional Manager Bonus Program, hereby incorporated by reference to Exhibit 10.69 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.44 Company's 1995 Division Manager Bonus Program, hereby incorporated by reference to Exhibit 10.70 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.45 Company's 1996 President and Chief Executive Officer Bonus Program. (Filed herewith.) 10.46 Company's 1996 Corporate Executive Vice President Bonus Program. (Filed herewith.) 20 21 Exhibit Number Description - -------------- ----------- 10.47 Company's 1996 Senior Vice President and Chief Financial Officer Bonus Program. (Filed herewith.) 10.48 Company's 1996 Senior vice President and General Counsel Bonus Program. (Filed herewith.) 10.49 Company's 1996 Senior Vice President and Treasurer Bonus Program. (Filed herewith.) 10.50 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. 10.51 Limited Liability Company Agreement of Northeast Office Venture, Limited Liability Company dated November 17, 1995. (Filed herewith.) 10.52 Lease Agreement by and between the Company and Northeast Office Venture, Limited Liability Company dated November 17, 1995. (Filed herewith.) 13 Annual Report to Shareholders for the year ended December 31, 1995. (Filed herewith.) 21 Subsidiaries of Company, hereby incorporated by reference to Exhibit 21 of the Company's Registration Statement of Form S-1, Commission File No. 33-68564. 23 Consent of Deloitte & Touche LLP. (Filed herewith.) 24 Powers of Attorney. (Filed herewith.) - --------------- (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) Not applicable. 21 22 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 29th day of March, 1996. M/I SCHOTTENSTEIN HOMES, INC. (Registrant) By: /s/ IRVING E. SCHOTTENSTEIN ------------------------------------- Irving E. Schottenstein Chief Executive Officer and President 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 29th of March, 1996.
NAME AND TITLE NAME AND TITLE -------------- -------------- /s/ IRVING E. SCHOTTENSTEIN /s/ KERRII B. ANDERSON - -------------------------------------------- --------------------------------------------- Irving E. Schottenstein Kerrii B. Anderson Chairman of the Board, President and Senior Vice President, Chief Financial Chief Executive Officer Officer and Assistant Secretary (Principal Executive Officer) (Principal Financial and Accounting Officer) FRIEDRICH K. M. BOHM* JOHN B. GERLACH* - -------------------------------------------- --------------------------------------------- Friedrich K. M. Bohm John B. Gerlach Director Director HOLLY S. KASTAN* ERIC J. SCHOTTENSTEIN* - -------------------------------------------- --------------------------------------------- Holly S. Kastan Eric J. Schottenstein Director Director LENORE G. SCHOTTENSTEIN* ROBERT H. SCHOTTENSTEIN* - -------------------------------------------- --------------------------------------------- Lenore G. Schottenstein Robert H. Schottenstein Director Director STEVEN SCHOTTENSTEIN* LEWIS R. SMOOT, SR.* - -------------------------------------------- --------------------------------------------- Steven Schottenstein Lewis R. Smoot, Sr. Director Director
* The above-named Directors of the Registrant execute this report by Irving E. 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/ IRVING E. SCHOTTENSTEIN ----------------------------------------- Irving E. Schottenstein, Attorney-in-Fact By: /s/ KERRII B. ANDERSON ----------------------------------------- Kerrii B. Anderson, Attorney-in-Fact 22 EX-10.14 2 EXHIBIT 10.14 1 Exhibit 10.14 LEASE AMENDMENT This Lease Amendment is entered into this 4th day of March, 1996, by and between M/I OFFICE DEVELOPMENT COMPANY, an Ohio general partnership ("Landlord"), and M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation ("Tenant"). W I T N E S S E T H: That, WHEREAS, Landlord and Tenant have entered into a certain Lease dated August 2, 1992 (the "Lease"), regarding the office building and land commonly known as 1855 East Dublin-Granville Road, Columbus, Ohio; and WHEREAS, Landlord and Tenant now desire to amend the Lease to provide termination rights as described below. NOW, THEREFORE, in consideration of the mutual convenants and promises herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to amend the terms of the Lease as follows: 1. Landlord and Tenant shall each have the right to terminate the Lease, provided such termination shall not become effective before September 30, 1996. The party exercising such right of termination shall exercise such right of termination, if at all, by delivering to the other party, at any time after September 1, 1996, not less than thirty (30) days prior written notice of its intent to terminate the Lease. 2. Except as herein amended and modified, all terms and conditions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment effective the date first set forth above. LANDLORD: M/I OFFICE DEVELOPMENT COMPANY, an Ohio general partnership BY: M L Schottenstein Marital Trust, ITS: general partner BY: /S/ Lenore Schottenstein ------------------------------- Lenore Schottenstein ITS: Trustee BY: /S/ Eric Schottenstein ------------------------------- Eric Schottenstein ITS: Trustee 2 Signatures of M.L. Schottenstein Marital Trust, continued BY: /S/ Holly S. Kastan ------------------------------- Holly S. Kastan ITS: Trustee BY: IRVING AND FRANKIE SCHOTTENSTEIN 1994 TRUST U/A, dated December 22, 1994, its general partner BY:/S/ Irving E. Schottenstein -------------------------------- Irving E. Schottenstein ITS: Trustee TENANT: M/I SCHOTTENSTEIN HOMES, INC. an Ohio corporation BY: /S/ ------------------------------- ITS: /S/ ------------------------------- EX-10.18 3 EXHIBIT 10.18 1 EXHIBIT 10.18 PROMISSORY NOTE Columbus, Ohio $440,339.01 December 30, 1995 For value received, the undersigned, jointly and severally, if more than one, promise to pay to the order of M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation, at 41 S. High Street, Suite 2410, Columbus, Ohio 43215, or at such other address as the holder hereof may, from time to time, designate in writing, the sum of Four Hundred Forty Thousand Three Hundred Thirty-Nine Dollars and 01/100 ($440,339.01) with interest thereon at the rate of the prime rate of interest as charged by The Huntington National Bank, Columbus, Ohio, to M/I Schottenstein Homes, Inc., plus one-half percent (1/2%) adjusted as such interest rate charged to M/I Schottenstein Homes, Inc. is adjusted. The principal sum and interest shall be due and payable to the holder hereof after payments in full to Dominion Bank, National Association, or its successor or assign for any amounts arising out of that certain Loan Agreement dated as of March 27, 1992 between P. L. 1992 Limited Partnership and said Dominion Bank, National Association. Payments thereto shall include any obligations relating to the Acquisition Loan, the Development Loan or the Letter of Credit Loan such that obligations to such entities shall have been paid in full, provided further that payment hereunder shall be made in full for principal and interest in advance of any distributions to the partners of the entity executing this Agreement. The full amount of the principal and interest shall be paid on or before December 31 , 1996. All or any part of the principal sum and accrued interest may be paid at any time without penalty. This Note is not secured by a mortgage on real estate. Upon default in payment after the same is due, this Note shall, at the option of the holder hereof, bear interest thereon at a rate of fifteen percent (15%) per annum and the entire principal hereof then remaining unpaid, together with all accrued interest, shall, at said holder's option, become immediately due and payable without any notice or demand. All persons now or hereafter liable for the payment of the principal or interest due on this Note, or any part hereof, do hereby expressly waive presentment for payment, notice of dishonor, protest and notice of protest, and agree that the time for payment or payments of any part of this Note may be extended without releasing or affecting their liability on this Note. This Note is executed in Columbus, Franklin County, Ohio. CASCADES 1992 LIMITED PARTNERSHIP BY: THE FABULOUS EIGHT, INC., AN OHIO CORPORATION, GENERAL PARTNER By: ----------------------------- Name: Robert H. Schottenstein Title: President EX-10.45 4 EXHIBIT 10.45 1 EXHIBIT 10.45 M/I SCHOTTENSTEIN HOMES, INC. PERFORMANCE BASED BONUS PROGRAM CHIEF EXECUTIVE OFFICER EFFECTIVE JANUARY 1, 1996 This Performance Based Bonus Plan is for the Chief Executive Officer of M/I Schottenstein Homes, Inc., and shall be administered by a subcommittee of the Compensation Committee (the "Subcommittee") comprised of all members of the Compensation Committee who are "Outside Directors", as defined in the Treasury Regulations promulgated under Section 162(m) of the Internal Revenue Code (the "Code"). The Subcommittee shall have the authority to prospectively change the targets of the Plan. The Chief Executive Officer of M/I Schottenstein Homes, Inc. is eligible to receive up to four times his 1993 base salary of $575,000 as per the following criteria: I. ACTUAL PRE-TAX NET INCOME: In the event the actual pre-tax net income (before charges for a bond redemption) of the Company is equal to $10,000,000, the Chief Executive Officer will receive a graduating cents per dollar amount based on the following schedule.
Million Increments greater Cents per Incremental than or equal to $10,000,000 Million awarded $10,000,000.00 - $10,999,999.99 $0.0450 Cents $11,000,000.00 - $11,999,999.99 $0.0550 Cents $12,000,000.00 - $12,999,999.99 $0.0650 Cents $13,000,000.00 - $13,999,999.99 $0.0750 Cents $14,000,000.00 - $14,999,999.99 $0.0850 Cents $15,000,000.00 - $15,999,999.99 $0.0600 Cents $16,000,000.00 - $16,999,999.99 $0.0700 Cents $17,000,000.00 - $17,999,999.99 $0.0800 Cents $18,000,000.00 - $18,999,999.99 $0.0500 Cents $19,000,000.00 - $19,999,999.99 $0.0600 Cents $20,000,000.00 - $20,999,999.99 $0.0200 Cents $21,000,000.00 - $21,999,999.99 $0.0225 Cents $22,000,000.00 - $22,999,999.99 $0.0250 Cents $23,000,000.00 - $23,999,999.99 $0.0275 Cents $24,000,000.00 - $24,999,999.99 $0.0325 Cents $25,000,000.00 - $25,999,999.99 $0.0350 Cents $26,000,000.00 - $26,999,999.99 $0.0375 Cents $27,000,000.00 - $27,999,999.99 $0.0400 Cents $28,000,000.00 - $28,999,999.99 $0.0425 Cents $29,000,000.00 - $29,999,999.99 $0.0450 Cents $30,000,000.00 - $30,999,999.99 $0.0475 Cents $31,000,000.00 - $31,999,999.99 $0.0500 Cents $32,000,000.00 + $0.0525 Cents
II. If the actual pre-tax net income of the Company is at least 50% of Budgeted Net Income and the Company achieves at least a 92% affirmative response to Question Number 16 on the Customer Questionnaire, the Chief Executive Officer will receive 17% of his December 31 base salary, increasing proportionally for each increase in customer affirmative responses over 92%, to a maximum of 25% of December 31 base salary at a 100% "yes" response level. The Budgeted Net Income shall mean the amount of the Budgeted Net Income as presented to the Board of Directors on or before the 90th day of each year. PAYMENT Upon the certification by the members of the CEO Compensation Subcommittee that the objectives and material terms of the plan have been met, payment will be rendered. ACKNOWLEDGED: __________________________________________ _______________ Name Date 1 EX-10.46 5 EXHIBIT 10.46 1 EXHIBIT 10.46 M/I SCHOTTENSTEIN HOMES, INC. PERFORMANCE-BASED BONUS PROGRAM EXECUTIVE VICE PRESIDENT EFFECTIVE JANUARY 1, 1996 BONUS CRITERIA: The Executive Vice President is eligible to receive up to three times his December 31 base salary as per the following criteria: 1. If the pre-tax income (before charges for a bond redemption) of the Company is at least $10,000,000 a graduating cents per dollar amount will be awarded as indicated on ATTACHMENT A. 2. If the actual pre-tax net income (before charges for a bond redemption) of the Company is at least 50% of Budgeted Net Income and the Corporation achieves at least a 92% affirmative response to Question Number 16 on the Customer Questionnaire, the Executive Vice President will receive 17% of his December 31 base salary, increasing proportionally for each increase in customer affirmative responses over 92%, to a maximum of 25% of December 31 base salary at a 100% "yes" response level. PAYMENT: The bonus is 50% payable at the end of January and 50% payable prior to March 15 of the following year the bonus is earned. The individual must be employed in this capacity with the Company on the date the bonuses are distributed to receive a bonus. However, in the event of a promotion or transfer, the bonus amount will be allocated to time employed in each position. No amounts are considered due or payable in the event the employment relationship with the Company is terminated. THE COMPANY RESERVES THE RIGHT TO REVISE THIS PROGRAM AS IT CONSIDERS NECESSARY. ACKNOWLEDGED: ______________________________________________ __________ NAME DATE 2 2 ATTACHMENT A - EXECUTIVE VICE PRESIDENT Actual Net Income Results Over $10,000,000
============================================================================================================================= Incremental Net Income 0.00% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% ============================================================================================================================= $10,000,000 $0.0100 $0.0200 $0.0215 $0.0230 $0.0245 $0.0260 $0.0275 $0.0290 $0.0305 - ----------------------------------------------------------------------------------------------------------------------------- $11,000,000 $0.0115 $0.0215 $0.0230 $0.0245 $0.0260 $0.0275 $0.0290 $0.0305 $0.0320 - ----------------------------------------------------------------------------------------------------------------------------- $12,000,000 $0.0130 $0.0230 $0.0245 $0.0260 $0.0275 $0.0290 $0.0305 $0.0320 $0.0335 - ----------------------------------------------------------------------------------------------------------------------------- $13,000,000 $0.0145 $0.0245 $0.0260 $0.0275 $0.0290 $0.0305 $0.0320 $0.0335 $0.0350 - ----------------------------------------------------------------------------------------------------------------------------- $14,000,000 $0.0160 $0.0260 $0.0275 $0.0290 $0.0305 $0.0320 $0.0335 $0.0350 $0.0365 - ----------------------------------------------------------------------------------------------------------------------------- $15,000,000 $0.0175 $0.0275 $0.0290 $0.0305 $0.0320 $0.0335 $0.0350 $0.0365 $0.0380 - ----------------------------------------------------------------------------------------------------------------------------- $16,000,000 $0.0190 $0.0290 $0.0305 $0.0320 $0.0335 $0.0350 $0.0365 $0.0380 $0.0395 - ----------------------------------------------------------------------------------------------------------------------------- $17,000,000 $0.0205 $0.0305 $0.0320 $0.0335 $0.0350 $0.0365 $0.0380 $0.0395 $0.0410 - ----------------------------------------------------------------------------------------------------------------------------- $18,000,000 $0.0405 $0.0490 $0.0505 $0.0520 $0.0535 $0.0550 $0.0565 $0.0580 $0.0595 - ----------------------------------------------------------------------------------------------------------------------------- $19,000,000 $0.0455 $0.0540 $0.0555 $0.0570 $0.0585 $0.0600 $0.0615 $0.0630 $0.0645 =============================================================================================================================
====================================================================================================== Incremental Net Income 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% ====================================================================================================== $10,000,000 $0.0320 $0.0335 $0.0350 $0.0365 $0.0380 $0.0395 $0.0410 - ------------------------------------------------------------------------------------------------------ $11,000,000 $0.0335 $0.0350 $0.0365 $0.0380 $0.0395 $0.0410 $0.0425 - ------------------------------------------------------------------------------------------------------ $12,000,000 $0.0350 $0.0365 $0.0380 $0.0395 $0.0410 $0.0425 $0.0440 - ------------------------------------------------------------------------------------------------------ $13,000,000 $0.0365 $0.0380 $0.0395 $0.0410 $0.0425 $0.0440 $0.0455 - ------------------------------------------------------------------------------------------------------ $14,000,000 $0.0380 $0.0395 $0.0410 $0.0425 $0.0440 $0.0455 $0.0470 - ------------------------------------------------------------------------------------------------------ $15,000,000 $0.0395 $0.0410 $0.0425 $0.0440 $0.0455 $0.0470 $0.0485 - ------------------------------------------------------------------------------------------------------ $16,000,000 $0.0410 $0.0425 $0.0440 $0.0455 $0.0470 $0.0485 $0.0500 - ------------------------------------------------------------------------------------------------------ $17,000,000 $0.0425 $0.0440 $0.0455 $0.0470 $0.0485 $0.0500 $0.0515 - ------------------------------------------------------------------------------------------------------ $18,000,000 $0.0610 $0.0625 $0.0640 $0.0655 $0.0670 $0.0685 $0.0700 - ------------------------------------------------------------------------------------------------------ $19,000,000 $0.0660 $0.0675 $0.0690 $0.0705 $0.0720 $0.0735 $0.0750 ======================================================================================================
3 EX-10.47 6 EXHIBIT 10.47 1 EXHIBIT 10.47 M/I SCHOTTENSTEIN HOMES, INC. PERFORMANCE BASED BONUS PROGRAM SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER EFFECTIVE JANUARY 1, 1996 The Senior Vice President and Chief Financial Officer is eligible to receive up to 125% of December 31 base salary as per the following criteria: ACTUAL PRE-TAX NET INCOME: Provided the actual pre-tax net income (before charges for a bond redemption) of the Corporation equals $10,000,000, the Senior Vice President and Chief Financial Officer will receive a designated percentage of December 31 base salary as indicated by the following schedule:
Actual Pre-tax December 31 Base Salary Income Results Percentage -------------- ---------- $10,000,000.00 - $12,999,999.99 30% $13,000,000.00 - $13,999,999.99 35% $14,000,000.00 - $14,999,999.99 40% $15,000,000.00 - $15,999,999.99 45% $16,000,000.00 - $16,999,999.99 55% $17,000,000.00 - $17,999,999.99 65% $18,000,000.00 - $18,999,999.99 75% $19,000,000.00 - $19,999,999.99 100% ------------------------------- $20,000,000.00 - $20,999,999.99 110% ------------------------------- ---- $21,000,000.00 - $21,999,999.99 115% ------------------------------- ---- $22,000,000.00 - $22,999,999.99 120% ------------------------------- ---- $23,000,000.00 + 125% ---------------- ----
PAYMENT Bonuses are 50% payable at the end of January and 50% payable by March 15 of the following year the bonus is earned. The individual must be employed in this capacity with the Company on the date bonuses are distributed to receive a bonus. However, in the event of a promotion or transfer, the bonus will be allocated to time employed with each position. No amounts are considered due or payable in the event the employment relationship with the Company is terminated. THE COMPANY RESERVES THE RIGHT TO REVISE THIS PROGRAM AS IT CONSIDERS NECESSARY. ACKNOWLEDGED: _______________________________________________________ ____________ Name Date 5 EX-10.48 7 EXHIBIT 10.48 1 EXHIBIT 10.48 M/I SCHOTTENSTEIN HOMES, INC. PERFORMANCE BASED BONUS PROGRAM SENIOR VICE PRESIDENT AND GENERAL COUNSEL EFFECTIVE JANUARY 1, 1996 The Senior Vice President and General Counsel is eligible to receive up to 115% of December 31 base salary as per the following criteria: ACTUAL PRE-TAX NET INCOME: Provided the actual pre-tax net income (before charges for a bond redemption) of the Corporation equals $10,000,000, the Senior Vice President and General Counsel will receive a designated percentage of December 31 base salary as indicated by the following schedule:
Actual Pre-tax December 31 Base Salary Income Results Percentage -------------- ---------- $10,000,000.00 - $12,999,999.99 20% $13,000,000.00 - $13,999,999.99 25% $14,000,000.00 - $14,999,999.99 30% $15,000,000.00 - $15,999,999.99 35% $16,000,000.00 - $16,999,999.99 40% $17,000,000.00 - $17,999,999.99 50% $18,000,000.00 - $18,999,999.99 55% $19,000,000.00 - $19,999,999.99 85% ------------------------------- $20,000,000.00 - $20,999,999.99 100% ------------------------------- ---- $21,000,000.00 - $21,999,999.99 105% ------------------------------- ---- $22,000,000.00 - $22,999,999.99 110% ------------------------------- ---- $23,000,000.00 + 115% ---------------- ----
PAYMENT Bonuses are 50% payable at the end of January and 50% payable by March 15 of the following year the bonus is earned. The individual must be employed in this capacity with the Company on the date bonuses are distributed to receive a bonus. However, in the event of a promotion or transfer, the bonus will be allocated to time employed with each position. No amounts are considered due or payable in the event the employment relationship with the Company is terminated. THE COMPANY RESERVES THE RIGHT TO REVISE THIS PROGRAM AS IT CONSIDERS NECESSARY. ACKNOWLEDGED: _______________________________________________________ ________________ Name Date 6 EX-10.49 8 EXHIBIT 10.49 1 EXHIBIT 10.49 M/I SCHOTTENSTEIN HOMES, INC. PERFORMANCE BASED BONUS PROGRAM SENIOR VICE PRESIDENT AND TREASURER EFFECTIVE JANUARY 1, 1996 The Senior Vice President and Treasurer is eligible to receive up to 115% of December 31 base salary as per the following criteria: ACTUAL PRE-TAX NET INCOME: Provided the actual pre-tax net income (before charges for a bond redemption) of the Corporation equals $10,000,000, the Senior Vice President and Treasurer will receive a designated percentage of December 31 base salary as indicated by the following schedule:
Actual Pre-tax December 31 Base Salary Income Results Percentage -------------- ---------- $10,000,000.00 - $12,999,999.99 20% $13,000,000.00 - $13,999,999.99 25% $14,000,000.00 - $14,999,999.99 30% $15,000,000.00 - $15,999,999.99 35% $16,000,000.00 - $16,999,999.99 40% $17,000,000.00 - $17,999,999.99 50% $18,000,000.00 - $18,999,999.99 55% $19,000,000.00 - $19,999,999.99 85% -------------------------------- $20,000,000.00 - $20,999,999.99 100% ------------------------------- ---- $21,000,000.00 - $21,999,999.99 105% ------------------------------- ---- $22,000,000.00 - $22,999,999.00 110% ------------------------------- ---- $23,000,000.00 + 115% ---------------- ----
PAYMENT Bonuses are 50% payable at the end of January and 50% payable by March 15 of the following year the bonus is earned. The individual must be employed in this capacity with the Company on the date bonuses are distributed to receive a bonus. However, in the event of a promotion or transfer, the bonus will be allocated to time employed with each position. No amounts are considered due or payable in the event the employment relationship with the Company is terminated. THE COMPANY RESERVES THE RIGHT TO REVISE THIS PROGRAM AS IT CONSIDERS NECESSARY. ACKNOWLEDGED: ____________________________________________________________ ____________ Name Date 7 EX-10.51 9 EXHIBIT 10.51 1 EXHIBIT 10.51 LIMITED LIABILITY COMPANY AGREEMENT OF NORTHEAST OFFICE VENTURE, LIMITED LIABILITY COMPANY A DELAWARE LIMITED LIABILITY COMPANY AMONG THE GEORGETOWN COMPANY, LIMITED OVAL OFFICE I, INC. AND M/I SCHOTTENSTEIN HOMES, INC. DATED, EXECUTED AND DELIVERED: ________ __, 1995 TO BE EFFECTIVE: SEPTEMBER 5, 1995 THE INTERESTS CREATED BY THIS AGREEMENT HAVE NOT BEEN AND WILL NOT BE REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR WITH THE SECURITIES AUTHORITIES OF ANY STATE UNDER ANY STATE SECURITIES LAWS. AS A CONSEQUENCE, THE INTERESTS MAY NOT BE SOLD, ASSIGNED, CONVEYED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED BY A HOLDER THEREOF EXCEPT: (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT REGISTERING THE INTERESTS UNDER THE SECURITIES ACT AND/OR UNDER APPLICABLE STATE SECURITIES LAWS, OR (2) PURSUANT TO AN OPINION OF COUNSEL WHICH HAS BEEN OBTAINED BY SUCH HOLDER AND WHICH IS SATISFACTORY TO THE MANAGER, OR PURSUANT TO SUCH OTHER EVIDENCE WHICH HAS BEEN OBTAINED BY THE HOLDER AND WHICH IS SATISFACTORY TO THE MANAGER, THAT SUCH REGISTRATION UNDER THE SECURITIES ACT AND/OR UNDER APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED FOR SUCH HOLDER TO LAWFULLY EFFECT SUCH SUBSEQUENT SALE, ASSIGNMENT, CONVEYANCE, PLEDGE, HYPOTHECATION OR OTHER TRANSFER. 10/16/95 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS 1.1 Definitions...............................................................................1 ARTICLE II FORMATION AND NAME; BUSINESS OFFICE; REGISTERED OFFICE AND REGISTERED AGENT; PURPOSE; PARTNERSHIP STATUS; POWERS; AND TERM 2.1 Formation and Name........................................................................10 2.2 Business Office...........................................................................11 2.3 Registered Office and Registered Agent....................................................11 2.4 Purpose...................................................................................11 2.5 Partnership Status........................................................................11 2.6 Powers....................................................................................11 2.7 Term......................................................................................12 ARTICLE III MEMBERS AND CAPITAL 3.1 Members...................................................................................12 3.2 No Priority Among Members.................................................................13 3.3 No Interest on Capital Contributions; No Withdrawal of Capital............................13 3.4 Capital Accounts..........................................................................13 3.5 No Requirement to Restore Deficit in Capital Account......................................13 3.6 Subsequent Contributions..................................................................13 3.7 Loans by Members..........................................................................17 3.8 Representations of Members................................................................17 ARTICLE IV ALLOCATIONS AND DISTRIBUTIONS 4.1 Allocation of Operating Profits and Operating Losses......................................18 4.2 Allocations of Profits and Losses from a Capital Transaction..............................18 4.3 Special Allocations and Other Provisions Relating to Allocations..........................18 4.4 Distributions of Net Cash Receipts........................................................23 4.5 Distributions of Proceeds From Capital Transactions When Company Not Liquidated...........24 4.6 Distributions of Liquidation Proceeds Upon Liquidation....................................24 4.7 Distributions in Kind on Liquidation......................................................25 4.8 Certain Provisions of the Act Superseded..................................................25
-i- 3 ARTICLE V POWER, AUTHORITY, RIGHTS, DUTIES AND OBLIGATIONS OF THE MANAGER 5.1 Management of Company.....................................................................26 5.2 Construction of the Improvements..........................................................26 5.3 The Lease.................................................................................28 5.4 Operating and Capital Improvement Budgets.................................................29 5.5 Construction Loan and Permanent Loan......................................................31 5.6 Specific Rights and Powers of Manager.....................................................32 5.7 Agreements; Laws and Permits..............................................................33 5.8 Approval of Members.......................................................................33 5.9 Compensation of the Manager...............................................................35 5.10 Other Activities of Members..............................................................35 5.11 Indemnification..........................................................................36 5.12 Tax Matters Member.......................................................................36 5.13 Property Management Agent................................................................36 5.14 Certain Provisions of the Act Superseded.................................................37 ARTICLE VI RIGHTS, DUTIES AND OBLIGATIONS OF MEMBERS 6.1 Rights of Members Other Than the Manager to Participate in the Management or Control of the Business...................................................................37 6.2 Limited Liability of Members..............................................................37 6.3 Meetings..................................................................................37 6.4 Consent of the Members....................................................................37 ARTICLE VII TRANSFERS OF INTERESTS OR RETIREMENT; FIRST OFFER PROVISIONS; PURCHASE RIGHTS UPON DEFAULT; CONTINUATION AFTER RETIREMENT OF MEMBERS 7.1 Limitations on Transfers and Retirement; Certain Permitted Transfers......................38 7.2 Right of First Offer......................................................................39 7.3 Purchase Rights Upon Default..............................................................43 7.4 Additional Restrictions on Assignments or Transfers.......................................44 7.5 Requirements for Substitution.............................................................45 7.6 Obligations and Rights of Transferees.....................................................45 7.7 Distributions and Allocations in Respect of Transferred Percentage Interests..............46 7.8 Continuation After Retirement of Member..................................................46 7.9 Restrictions Reasonable...................................................................46 7.10 Certain Provisions of the Act Superseded.................................................47
-ii- 4 ARTICLE VIII REMOVAL OF MANAGER; ADMISSION OF SUBSTITUTE MANAGER 8.1 Removal of Manager........................................................................47 8.2 Admission of Substitute Manager...........................................................47 8.3 Manager Upon Purchase of Certain Percentage Interests.....................................47 ARTICLE IX PROCEDURE ON DISSOLUTION 9.1 Liquidation...............................................................................48 9.2 Operations During Liquidation.............................................................48 9.3 Time for Liquidation......................................................................48 9.4 Manager Not Liable for Return of Capital Contributions....................................48 9.5 Termination...............................................................................48 ARTICLE X BOOKS AND RECORDS; BANK ACCOUNTS 10.1 Maintenance of Books and Accounting Method...............................................49 10.2 Fiscal Year..............................................................................49 10.3 Reports to the Members...................................................................49 10.4 Inspection by Members....................................................................50 10.5 Banking..................................................................................50 10.6 Tax Elections; Special Basis Adjustments.................................................50 10.7 Cost Segregation Analysis................................................................50 ARTICLE XI AMENDMENTS 11.1 Unanimous Consent of the Members.........................................................51 ARTICLE XII GENERAL PROVISIONS 12.1 No Third Party Beneficiaries.............................................................51 12.2 Non-Waiver...............................................................................51 12.3 Additional Documents and Instruments.....................................................51 12.4 Severability.............................................................................51 12.5 Notices and Consents.....................................................................52 12.6 Entire Agreement.........................................................................53 12.7 Provisions Binding.......................................................................53 12.8 Captions.................................................................................53 12.9 Definitions..............................................................................53 12.10 Counterparts............................................................................53
-iii- 5 12.11 Word Meanings...........................................................................53 12.12 Applicable Law..........................................................................54 12.13 Choice of Venue and Consent to Jurisdiction and Venue...................................54
SCHEDULE A--Members, Capital Contributions and Interests SCHEDULE B--Legal Description of the Land SCHEDULE C--Form of Certificate of Formation SCHEDULE D--Location of Certain Real Property in Proximity to the Land SCHEDULE E--Preliminary Budget -iv- 6 LIMITED LIABILITY COMPANY AGREEMENT OF NORTHEAST OFFICE VENTURE, LIMITED LIABILITY COMPANY THIS LIMITED LIABILITY COMPANY AGREEMENT OF NORTHEAST OFFICE VENTURE, LIMITED LIABILITY COMPANY (this "Agreement"), dated, executed and delivered as of the ___ day of ________, 1995, to be effective September 5, 1995, by and among The Georgetown Company, a New York general partnership ("Georgetown"), Limited Oval Office I, Inc., a Delaware corporation ("Limited"), and M/I Schottenstein Homes, Inc., an Ohio corporation ("M/I"). W I T N E S S E T H: WHEREAS, the Members desire to enter into this Agreement, to cause a certificate of formation to be filed with the Secretary of State of the State of Delaware to form a limited liability company under the laws of the State of Delaware and to reflect certain agreements among themselves; WHEREAS, this Agreement shall constitute the "limited liability company agreement" of the Company within the meaning of that term as used in the Act; NOW, THEREFORE, it is mutually agreed as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: ACCOUNTANTS means such firm of independent certified public accountants as may be unanimously selected from time to time by the Members. ACT means the Delaware Limited Liability Company Act, Delaware Code Title 6, Sections 18-101, et seq., as the same may be amended from time to time, or the corresponding provisions of any subsequent Delaware law governing limited liability companies. ADJUSTED CAPITAL ACCOUNT DEFICIT means the deficit balance, if any, in a Member's Capital Account at the time in question, after (i) reducing the amount of such deficit by the amount, if any, of such Member's deficit restoration obligation and by the amount, if any, that such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Allocation Regulations, and (ii) increasing the amount of such deficit by the amount, if any, of the items described in paragraphs (4), (5) and (6) of Section 1.704-1(b)(2)(ii)(d) of the Allocation Regulations. The determination of a Member's Adjusted Capital Account Deficit is -1- 7 made for purposes of Section 1.704-1(b)(2)(ii)(d) of the Allocation Regulations and shall be made consistently therewith. AFFILIATE, in reference to a Person, means (i) any other Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any other Person owning or controlling ten percent (10%) or more of the outstanding voting securities of such Person, (iii) any officer, director, member, manager or partner of such Person and (iv) if such Person is an officer, director, member, manager or partner of any Entity, any Entity for which such Person acts in any such capacity. AGREEMENT means this Limited Liability Company Agreement, as the same may be modified, amended, supplemented and/or restated from time to time in accordance with its terms and applicable law. ALLOCATION REGULATIONS means the Income Tax Regulations promulgated under Code Section 704(b) (regarding partners' distributive shares of partnership tax items), as currently in effect, and as modified and clarified by amendment, successor regulation, ruling, court decision or other Income Tax Regulation relating to partners' distributive shares. APPRAISED VALUE has the meaning specified in Section 7.3(b). BANKRUPTCY, in reference to a Member, means that event and date when: (i) such Member makes an assignment for the benefit of creditors; (ii) such Member files a voluntary petition in bankruptcy; (iii) such Member is adjudicated a bankrupt or insolvent; (iv) such Member files a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law, or regulation; (v) such Member files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any proceeding of the type referred to in clause (iv); (vi) such Member seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of such Member or of all or any substantial part of its property; (vii) ninety (90) days or more have elapsed after the commencement of any proceeding against such Member seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law, or regulation, if the proceeding has not been dismissed prior thereto; (viii) ninety (90) days or more have elapsed after the appointment without its consent or acquiescence of a trustee, receiver, or liquidator of such Member or of all or any substantial part of its property, if such appointment has not been vacated or stayed prior thereto; or (ix) ninety (90) days have elapsed after the expiration of any such stay, if such appointment has not been vacated. BASE AMOUNT has the meaning specified in Section 3.6(b)(iii). BUILDING means the building to be constructed by the Company on the Land as part of the Improvements and the Tenant Improvements, to be leased to M/I pursuant to the Lease, as more particularly provided in this Agreement, together with all alterations and additions thereto and all restorations and replacements thereof. -2- 8 CAPITAL ACCOUNT has the meaning specified in Section 3.4. CAPITAL CONTRIBUTION means the total amount of cash and/or property contributed or agreed to be contributed to the Company by each Member as shown in Schedule A which is attached hereto and made a part hereof, as such Schedule A may be modified, supplemented or amended from time to time in accordance with this Agreement and applicable law, exclusive of any interest paid with respect to deferred installments of such amounts, plus any other contributions to the capital of the Company made by a Member pursuant to the terms of this Agreement, in respect of the interest of such Member in the Company. Any reference in this Agreement to the Capital Contribution of a Member shall include a Capital Contribution previously made by any predecessor Member with respect to the Company interest owned by such Member. CAPITAL PROCEEDS means the proceeds received by the Company as the result of a Capital Transaction. CAPITAL TRANSACTION means any of the following events: (a) a refinancing or recasting of any Mortgage Loan or any secondary financing of the Property or any portion thereof; (b) a sale (other than sales of personal property being replaced with like property), lease (other than of space in the Property in the ordinary course of business), condemnation award or other disposition of all or part of the Property; (c) the receipt of insurance proceeds by the Company (other than proceeds of rental or business interruption insurance) as a result of the occurrence of a casualty; or (d) any other event of a capital nature resulting in the receipt by the Company of revenues other than in the ordinary course of business. CASH NEEDS has the meaning specified in Section 3.6. CASH NEEDS CONTRIBUTION has the meaning specified in Section 3.6(a). CASH NEEDS NOTICE has the meaning specified in Section 3.6(a). CERTIFICATE OF FORMATION means the Certificate of Formation of the Company filed with the Secretary of State of the State of Delaware on September 5, 1995 as required by Section 18-201 of the Act, in the form attached hereto as Schedule C and made a part hereof, as amended and/or restated from time to time in accordance with the terms of this Agreement and applicable law. CODE means the Internal Revenue Code of 1986, as amended, or the corresponding provisions of any subsequent federal income tax law. COMPANY means Northeast Office Venture, Limited Liability Company, a Delaware limited liability company. COMPANY MINIMUM GAIN means "partnership minimum gain" as set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Allocation Regulations. -3- 9 COMPLETION DATE means the date on which the Improvements shall have been substantially completed in accordance with the terms of the Lease. CONSTRUCTION LOAN means the construction loan that will provide the debt financing for the construction of the Improvements and the landscaping of the Property, referred to in Section 5.5. CONSTRUCTION MANAGER has the meaning specified in Section 5.2(d). CONTRIBUTION AGREEMENT means that certain Capital Contribution and Real Estate Purchase and Sale Agreement, dated as of even date herewith, among Limited, Georgetown and M/I pursuant to which Georgetown and M/I shall contribute cash and Limited shall contribute cash together with the Land and the Other Interests to the Company. CONTRIBUTING MEMBER has the meaning specified in Section 3.6(b). DEFAULT AMOUNT has the meaning specified in Section 3.6(b)(v). DEFAULT PURCHASE RIGHT has the meaning specified in Section 7.3(a). DESIGN ARCHITECT has the meaning specified in Section 5.2(b). DEVELOPMENT AGREEMENT means that certain Development Agreement, dated as of even date herewith, between MORSO Holding Co., a Delaware corporation, and the Company. DEVELOPMENT BUDGET has the meaning specified in Section 5.2(f). DEVELOPMENT EXPENSES means the following costs and expenses incurred by the Company and approved in advance by all of the Members in connection with the development, construction and completion of the Improvements and the landscaping of the Property: (i) costs and expenses incurred in connection with the acquisition of the Land and the Other Interests pursuant to the terms of the Contribution Agreement (including, without limitation, title insurance, survey fees, recording fees, closing fees and brokerage fees with non-affiliated brokers); (ii) costs and expenses incurred in connection with the obtaining of the Construction Loan and the Permanent Loan, including, without limitation, for each such loan, closing fees and other charges or expenses of the lender payable by the Company in respect of such loan, appraisal fees, deposits, recording taxes and charges, title insurance premiums, fees and disbursements of lenders' attorneys and similar expenses; -4- 10 (iii) architects', engineers', consultants', attorneys', accountants' and other experts' fees and disbursements incurred in connection with the formation of the Company, the obtaining of zoning, building code and other requisite variances, licenses, permits and approvals and the development, design, construction, mortgaging and leasing of the Improvements and the landscaping of the Property; (iv) all costs of labor (including, without limitation, salaries, fringe benefits and bonuses) and materials incurred in connection with the construction of the Improvements (including, without limitation, tenant improvement costs or allowances provided to tenants in connection with the construction and installation of tenant improvements) and the landscaping of the Property; (v) real estate taxes, insurance premiums and interest and other charges payable under the Construction Loan or the Permanent Loan; (vi) interest payable under loans (other than the Construction Loan and the Permanent Loan) prior to the commencement date under the Lease; and (vii) any other costs and expenses that are usually and customarily incurred in connection with the development, construction and leasing of office space in the Columbus, Ohio metropolitan area. DUE DATE has the meaning specified in Section 3.6(b). ELECTING MEMBER has the meaning specified in Section 7.2(a). ENTITY means any limited liability company, general partnership, limited partnership, corporation, joint venture, trust, real estate investment trust, business trust, estate or association. FIRST OFFER CLOSING has the meaning specified in Section 7.2(d). FIRST OFFER CLOSING DATE has the meaning specified in Section 7.2(d). FIRST OFFER INTEREST has the meaning specified in Section 7.2(a). FIRST OFFER PERIOD has the meaning specified in Section 7.2(a). FIRST OFFER PRICE has the meaning specified in Section 7.2(c). FIRST OFFER PROCEDURES has the meaning specified in Section 7.2(a). FPAA has the meaning specified in Section 5.12. -5- 11 GOVERNMENTAL AUTHORITIES shall mean all federal, state, county, municipal and local governments, and all departments, commissions, boards, bureaus, agencies and offices thereof, having or claiming jurisdiction over all or any portion of the Property. IMPROVEMENTS means all of the following now or hereafter erected in, on, over or under the Land: all buildings (including, without limitation, the Building), structures and improvements, together with all walkway and road improvements, parking areas and facilities, landscaping improvements of whatever nature, utility and sewerage lines and all apparatus, machinery, devices, fixtures, appurtenances and equipment for the proper operation and maintenance of the foregoing and all alterations and additions thereto and restorations and replacements thereof; provided, however, that the Improvements shall not include the Tenant Improvements. INCAPACITY means, with respect to any Member who is an individual, any adjudication by a court of competent jurisdiction of such Member's incompetence to manage his person or his estate. INCOME TAX REGULATIONS means those regulations promulgated under the Code. Whenever reference is made to any Income Tax Regulation, unless otherwise specified, such reference shall be deemed to include any amendments or successor regulations thereto. INITIATING NOTICE has the meaning specified in Section 7.2(a). LAND means that certain real property located in Franklin County, Ohio and more particularly described on Schedule B attached hereto and made a part hereof, and any and all other real property hereafter acquired by the Company. LAWS means all present and future laws, ordinances, statutes, administrative and judicial orders, rules, regulations and requirements of all Governmental Authorities that may be applicable to the Property or any portion thereof. LEASE means the lease, dated as of even date herewith, between the Company, as landlord, and M/I, as tenant, pursuant to which M/I will lease virtually all of the Property, as it may be amended from time to time. LOSSES means the net losses of the Company for federal income tax purposes (or as may be otherwise required to comply with the Allocation Regulations) as determined as of the close of the Company's fiscal year and, when the context requires, related items of deduction or loss, tax preference, credits and depreciation, provided that "Losses" shall include items described in Code Section 705(a)(2)(B) or required by the Income Tax Regulations to be treated as so described. MANAGER means Georgetown, so long as it is the Manager in accordance with this Agreement, and any Member admitted as a substitute Manager as provided herein. In the event there is at any time more than one Manager, unless the context otherwise requires, the term "Manager" shall refer to any one Manager and to all such Managers. -6- 12 MEMBER means each Person identified as a Member on Schedule A hereto, as such Schedule A may be modified, supplemented or amended from time to time in accordance with this Agreement and applicable law, and any Person who may be admitted as an additional or Substitute Member as provided herein. Unless the context otherwise requires, the term "Member" shall refer to any one Member and to all such Members. MEMBER LOAN shall mean a loan made by a Member to the Company in accordance with the provisions of this Agreement. MEMBER NONRECOURSE DEBT means "partner nonrecourse debt" as set forth in Section 1.704-2(b)(4) of the Allocation Regulations. MEMBER NONRECOURSE DEBT MINIMUM GAIN means "partner nonrecourse debt minimum gain" as set forth in Sections 1.704-2(i)(2) and (3) and 1.704-2(d) of the Allocation Regulations. MORTGAGE means any mortgage or deed of trust encumbering the Property or any portion thereof in accordance with the terms of this Agreement, as the same may be amended or modified. The term "Mortgage" also shall mean and include the note secured by such mortgage or deed of trust, any collateral security documents, including, without limitation, financing statements, security agreements and any assignments of leases and rents, executed in connection with such mortgage or deed of trust, and the loan agreement, if any, pursuant to which such documents were executed. MORTGAGE LOAN means any loan secured by a Mortgage. NET CASH RECEIPTS means the cash from all operations of the Company (but not including Capital Proceeds or Capital Contributions) after the payment of all expenses (including, without limitation, all administrative, asset management and management fees) and other disbursements (including, without limitation, capital investments in the Property and interest and principal payments on loans -- excluding Member Loans) except that (i) amounts expended or reserved for capital improvements, reasonable working capital needs, contingent or unforeseen liabilities, replacement of equipment, fixtures and personalty, amounts paid into replacement reserves, and sinking funds, all as determined by the Manager, shall be reserved and deducted; and (ii) expenses paid out of a reserve, to the extent previously deducted under clause (i), shall be added. NON-CONTRIBUTING MEMBER has the meaning specified in Section 3.6(b). NONRECOURSE DEDUCTIONS has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Allocation Regulations. The amount of Nonrecourse Deductions for a Company fiscal year equals the excess, if any, of the net increase, if any, in the amount of Company Minimum Gain during that fiscal year over the aggregate amount of any distributions during that fiscal year of proceeds of a -7- 13 Nonrecourse Liability that are allocable to an increase in Company Minimum Gain, determined according to the provisions of Sections 1.704-2(b)(1) and 1.704-2(c) of the Allocation Regulations. NONRECOURSE LIABILITY has the meaning set forth in Section 1.704-2(b)(3) of the Allocation Regulations and Section 1.752-1(a)(2) of the Income Tax Regulations. OPERATING LOSSES means Losses from Company operations and not from Capital Transactions. OPERATING PROFITS means Profits from Company operations and not from Capital Transactions. OPTION ELECTION NOTICE has the meaning specified in Section 7.2(b). OTHER INTERESTS means all of Limited's right, title and interest in and to all leases, contracts, agreements, permits, plans, specifications, drawings, studies, reports, assessments, security and other deposits and other tangible and intangible personal property pertaining to the Land. OTHER MEMBER has the meaning specified in Section 7.2(b). PERCENTAGE INTERESTS means the interests in the Company of the Members, representing the Capital Contributions and the percentage interests as set forth on Schedule A attached hereto, including such Members' respective shares of, and rights to receive distributions and allocations of, the business, property, assets, capital, profits and losses of the Company, subject to and as provided in this Agreement and the Act. The holder of a Percentage Interest shall have no right to participate in the management of the business and affairs of the Company under the terms of this Agreement unless such holder is also a Member. PERMANENT LOAN means the permanent Mortgage Loan that will refinance the Construction Loan, referred to in Section 5.5. PERMITS means all certificates of occupancy, licenses, authorizations, variances, permits and approvals required pursuant to all applicable Laws or otherwise necessary for the lawful construction, use, occupancy and operation of the Property. PERSON means any natural person or Entity. PERSONALTY means all apparatus, machinery, devices, utility facilities, fixtures, appurtenances, equipment, furniture, furnishings, appliances and other items of personal property used in connection with the operation, maintenance and occupancy of the Improvements, the Tenant Improvements and/or the Land now or hereafter owned or leased by the Company. -8- 14 PHASE I WORK means the work identified as "Infrastructure" in the Development Agreement. PLANS has the meaning specified in Section 5.2(e). PRELIMINARY BUDGET has the meaning specified in Section 5.2(a) and is attached hereto and made a part hereof as Schedule E. PRIME RATE means the prime commercial lending rate of interest announced from time to time by Bank One , Columbus, N.A. PROFITS means the net profits of the Company for federal income tax purposes (or as may otherwise be required to comply with the Allocation Regulations) as determined as of the close of the Company's fiscal year, and, when the context requires, related items of income or gain, provided that Profits shall include income exempt from tax. PROJECT ARCHITECT has the meaning specified in Section 5.2(c). PROPERTY means the Land, the Improvements, the Tenant Improvements and the Personalty. PURCHASE OPTION has the meaning specified in Section 7.2(b). PURCHASING MEMBER has the meaning specified in Section 7.2(d). REQUESTED CONTRIBUTION has the meaning specified in Section 3.6(a). REQUESTED FUNDS has the meaning specified in Section 3.6(a). RETIREMENT means, with respect to any Member: (i) the death, Incapacity, or Bankruptcy of such Member; (ii) the Member's retirement, resignation, expulsion or other withdrawal from the Company; (iii) the assignment by the Member of all of the Member's Percentage Interest in compliance with this Agreement (other than (A) an assignment merely of its right to receive distributions or (B) a pledge, hypothecation, or other collateral assignment of its rights before the time such pledge, hypothecation or other collateral assignment becomes absolute); (iv) if such Member is a trustee of a trust, the termination of the trust but not merely the substitution of a new trustee; (v) if such Member is a corporation, the filing of a certificate of dissolution, or its equivalent, for said corporation, or the revocation of its charter; (vi) if such Member is a separate limited liability company or partnership, the dissolution and termination of such separate limited liability company or partnership; or (vii) if such Member is an estate, the distribution by the fiduciary of the estate's entire interest in the Company. SECRETARY OF STATE means the Secretary of State of the State of Delaware. SECTION 7.3(A) NOTICE DATE has the meaning specified in Section 7.3(b). -9- 15 SELLING MEMBER has the meaning specified in Section 7.2(d). STATED VALUATION PRICE has the meaning specified in Section 7.2(a). SUBSTITUTE MEMBER means any Person who acquires a Percentage Interest from a Member and is admitted to the Company as a Member. TAX MATTERS MEMBER has the meaning specified in Section 5.12. TENANT DEFAULT PERIOD has the meaning specified in Section 6.4(b). TENANT IMPROVEMENTS has the meaning specified in the Lease. TOTAL BUDGETED DEVELOPMENT EXPENSES shall mean the aggregate amount of Development Expenses specified in the Development Budget including, without limitation, the amount allocated to "contingency." UNCONTROLLABLE EXPENSE has the meaning specified in Section 5.4(c). ARTICLE II FORMATION AND NAME; BUSINESS OFFICE; REGISTERED OFFICE AND REGISTERED AGENT; PURPOSE; PARTNERSHIP STATUS; POWERS; AND TERM 2.1 FORMATION AND NAME. The Company was formed upon the execution by the Manager and the filing of the original Certificate of Formation with the Secretary of State in accordance with the provisions of the Act, under the name of Northeast Office Venture, Limited Liability Company. The Members hereby approve the Certificate of Formation and ratify the execution, delivery and filing of the Certificate of Formation by the Manager. Promptly after the filing of the Certificate of Formation in the Office of the Secretary of State and the execution and delivery of this Agreement, the Manager shall duly complete and file with the Ohio Secretary of State an Application for Registration of Foreign Limited Liability Company (Form LFA) in respect of the Company. The Company shall not engage in, transact or do business in any jurisdiction other than the State of Ohio, without the consent of all of the Members. The Manager shall, from time to time, execute or cause to be executed all such additional applications, certificates, registrations, or other documents, and cause to be performed all such filing, recording, publishing, or other acts as may be necessary to comply with the requirements of law applicable to the formation and operation of the Company under the laws of the State of Delaware and the operation of the Company as a foreign limited liability company in the State of Ohio. -10- 16 2.2 BUSINESS OFFICE. The business office of the Company at which its books and records shall be kept shall be maintained at 667 Madison Avenue, 23rd Floor, New York, New York 10021, or at such other location as the Manager may from time to time determine. The Manager shall provide written notice to the Members of any change in the location of the business office of the Company. 2.3 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of the Company required by the Act to be maintained in the State of Delaware shall be the office of the registered agent named in the Certificate of Formation or such other office as the Manager may from time to time determine and designate in the manner required by law. The registered agent of the Company required by the Act shall be the registered agent named in the Certificate of Formation or such other registered agent as may from time to time be determined and designated by the Manager in the manner required by law. The Manager shall provide written notice to the Members of any change in such registered office or registered agent of the Company. 2.4 PURPOSE. The purposes of the Company are to acquire, invest in, develop, construct, rehabilitate, maintain, operate, lease, improve, repair, replace, hold, mortgage, encumber, own, sell, convert, exchange, manage, finance, refinance and otherwise deal with the Property. 2.5 PARTNERSHIP STATUS. It is intended that the Company be treated as a partnership for federal and state income tax purposes (but not for non-tax purposes). Accordingly, this Agreement shall be construed in a manner that ensures the Company's classification as a partnership for federal and state income tax purposes at all times, and any provision of this Agreement that would have the effect of preventing the Company from being classified as a partnership for federal and state income tax purposes shall be null and void. The Members shall take all actions, and execute, acknowledge and deliver all documents, which in the judgment of the Manager, or in the opinion of counsel satisfactory to the Manager, are necessary or desirable to obtain and/or maintain the Company's classification as a partnership for such purposes at all times. 2.6 POWERS. In furtherance of the Company's purposes, the Company shall have all powers of a limited liability company under the Act, including, without limitation, the powers: (a) to acquire, improve, develop, construct, rehabilitate, repair, replace, mortgage, hold, sell, own, lease, operate, maintain, convert, exchange, and otherwise deal with the Property and any other real and/or personal property now or hereafter acquired by the Company and in interests therein as may be necessary or desirable to carry out the development, construction, rehabilitation, operation, leasing and maintenance of any of the Property and/or the purposes of the Company; (b) to borrow money, including (but not limited to) loans from any Members or Affiliates of Members, to further the purposes of the Company; to issue evidences of indebtedness in respect thereof and to secure the same by deed of trust, mortgage or pledge or grant of lien on or other security interest in the Property or any other assets of the Company; -11- 17 (c) to refinance, prepay (in whole or in part), recast, modify, renew, extend and/or restructure any Mortgage Loan or any other indebtedness of the Company and to execute any documents in connection therewith; (d) to employ management agents, including Affiliates of any of the Members, to manage the Property, and to pay compensation for such services; (e) to operate, provide and manage such other businesses and services as the Manager determines to be necessary or desirable in connection with any of the Property or the purposes of the Company; and (f) to do all things, carry on any activities and enter into, perform, modify, supplement or terminate any contracts necessary, in connection with or incidental to the furtherance of the purposes of the Company, so long as such things, activities and contracts may be lawfully done, carried on or entered into by the Company under the laws of the State of Delaware and under the terms of this Agreement. 2.7 TERM. The term of the Company shall commence with the filing of the Certificate of Formation with the office of the Secretary of State. The Company shall continue until dissolved upon the occurrence of the earliest of: (a) December 31, 2046; (b) the passage of 90 days from the sale or other disposition of all or substantially all of the assets of the Company unless the Members elect to continue the Company for the sole purpose of collecting the proceeds of such sale or other disposition; (c) the Retirement of a Member unless the Company is continued as provided in Section 7.8; (d) the unanimous written agreement of all Members to dissolve the Company; (e) at any time when there are less than two (2) Members of the Company, unless the Company's business is continued pursuant to Section 7.8 and the sole remaining Member admits an additional or Substitute Member to the Company; or (f) the entry of a judicial decree of dissolution; and shall terminate as soon as the winding up of its affairs upon such dissolution has been completed. The provisions of this Section 2.7 are intended to and shall, to the fullest extent permitted by law, supersede the provisions of the Act regarding the dissolution of limited liability companies. ARTICLE III MEMBERS AND CAPITAL 3.1 MEMBERS. The Members have contributed to the capital of the Company the amount of cash and/or property set forth opposite their respective names in Schedule A in consideration for their respective interests in the Company as set forth in Schedule A and as described herein. The Members agree that the fair value of the portion of the Land and the Other Interests to be contributed by Limited to the Company pursuant to the Contribution Agreement is equal to the amount designated as such on Exhibit A. Subject to the provisions of Section 3.6, no further contribution of capital shall be required of any Member. To and until the Completion -12- 18 Date, the obligations of Limited under this Agreement shall be guaranteed by an Affiliate of Limited satisfactory to Georgetown and M/I. 3.2 NO PRIORITY AMONG MEMBERS. No Member shall have priority over any other Member either as to the return of its original Capital Contribution or as to distributions by the Company, except as specifically provided in this Agreement. 3.3 NO INTEREST ON CAPITAL CONTRIBUTIONS; NO WITHDRAWAL OF CAPITAL. No interest shall be paid by the Company to any Member with respect to any Capital Contribution. Except as otherwise specifically set forth in this Agreement, no Member shall have the right to (a) demand or receive property other than cash in return for its Capital Contribution or as distributions of income, (b) withdraw any part of its Capital Contribution (regardless of whether or not such Member has withdrawn from the Company), or (c) receive any funds or property of the Company. 3.4 CAPITAL ACCOUNTS. A single Capital Account shall be established, determined and maintained for each Member on the books and records of the Company in accordance with the provisions of the Allocation Regulations. The property of the Company shall be revalued on the books of the Company in any case in which such revaluation is required by the Allocation Regulations and may be revalued in any case where such revaluation is permitted by the Allocation Regulations and such revaluation is determined to be appropriate by all of the Members. In the event any Company property is revalued on the books of the Company in accordance with the Allocation Regulations, the Members' Capital Accounts shall be adjusted in accordance with the Allocation Regulations to reflect such revaluations and for allocations to them of Profits and Losses, and items thereof, as computed for book purposes, with respect to such property. In the event the property of the Company is revalued on the books of the Company, all Company property shall be valued for such purpose at its fair market value, as determined by all of the Members. 3.5 NO REQUIREMENT TO RESTORE DEFICIT IN CAPITAL ACCOUNT. Nothing contained in this Agreement shall be construed to require any Member to restore any deficit in its Capital Account. 3.6 SUBSEQUENT CONTRIBUTIONS. It is understood that the Company may from time to time require funds following the date of this Agreement to meet its Cash Needs for the ongoing operation, maintenance, development and improvement of the Property. As used herein, "Cash Needs" of the Company shall mean and include any cash needs or requirements of the Company subsequent to the date of this Agreement: (i) for which sufficient funds are not available to it from (a) gross revenues generated by the Company's operations, (b) Mortgage Loans and other loans made to the Company, (c) contributions made by the Members to the capital of the Company pursuant to Section 3.1 and (d) reserves set aside to meet such needs and (ii) which have been or are to be incurred by the Manager on behalf of the Company within the scope of its authority under this Agreement and are necessary to meet operating expenses, leasing expenses, construction costs and other capital expenses and other items which, in accordance with generally accepted accounting principles, are capitalized and not expensed, to repay the principal and interest on the Construction Loan, the Permanent Loan and other loans made to the Company in -13- 19 accordance with the provisions hereof and to pay any other expenses or obligations on behalf of the Company. In order to help ensure that the Company will have funds in amounts sufficient to meet its Cash Needs at all times from and after the date of this Agreement, the Members hereby agree as follows: (a) Determination of Cash Needs by Members and Notice to Members. If at any time the Members unanimously determine, in the exercise of reasonable business judgment and good faith, that funds are required to meet Cash Needs of the Company, the Manager shall, subject to the provisions of Section 5.8, use its best efforts to arrange for the Company to borrow from third parties all of the required funds, such borrowing preferably to be on a nonrecourse basis (and, if not, on a recourse basis) to the Members (and any Affiliates thereof) and otherwise on terms reasonably acceptable to all of the Members. If and to the extent that the Members unanimously determine in good faith that the required funds cannot be borrowed on such terms, the Manager shall, by notice (the "Cash Needs Notice") to the Members, specify the amount of what the Members unanimously believe to be the Cash Needs of the Company (the "Requested Funds") at such time for the period mentioned below and call upon each Member to advance to the Company its proportionate share, determined in proportion to each Member's respective Percentage Interests at the time the Cash Needs Notice is given, of the Requested Funds (each Member's "Requested Contribution"). The Cash Needs Notice given to the Members shall be accompanied by documentation reasonably confirming the actual or estimated amount of such Cash Needs of the Company (in the amount of the Requested Funds) for the period for which such demand is being made and itemizing how the Requested Funds will be applied. Within twenty (20) days after the date of the Cash Needs Notice, each Member shall advance as a capital contribution to the Company its Requested Contribution. Any funds advanced by any Member to the Company pursuant to this Section 3.6(a) and not refunded to such Member shall, subject to the provisions of Section 3.6(b) below, constitute contributions to the capital of the Company ("Cash Needs Contributions"). (b) Remedies for Failure to Advance Funds. If in any instance any Member (including any guarantor of such Member's obligations hereunder) shall fail to advance all or any part of its Requested Contribution by the twentieth (20th) day (the "Due Date" with respect to such Requested Contribution) after the date of the Cash Needs Notice that calls for such advance, then the Member that has failed to make such advance in full shall be deemed the "Non-Contributing Member". In such event, each of the other Members (the "Contributing Members") that have advanced at least the full amount of their respective Requested Contributions, shall have the following rights and remedies (which rights and remedies, except as otherwise provided herein, shall be the only rights and remedies available to the Contributing Members with respect to such failure by the Non-Contributing Member): (i) Election of Remedies. This Section 3.6(b) provides alternative courses of action by Contributing Members in the case of a failure by a Member to make an advance called for under a Cash Needs Notice. If there is more than one Non-Contributing Member, any Contributing Member need not elect the same alternative with respect to each -14- 20 Non-Contributing Member. If there is more than one Contributing Member electing an alternative with respect to a Non-Contributing Member, the Contributing Members making such election must each elect the same alternative with respect to the unpaid funds payable by such Non-Contributing Member without any obligation to elect such alternative with respect to any other Non-Contributing Member. If there is more than one Contributing Member that so elects, then each Contributing Member shall provide an equal amount of the funds to be loaned or contributed, as the case may be, pursuant to the provisions of this Section 3.6(b), unless such Contributing Members elect otherwise pursuant to a written agreement. (ii) Election of Total Refund in the Event of Total Failure to Advance. If the Non-Contributing Member shall have advanced none of its share of the Requested Funds on or before the Due Date, each Contributing Member shall be relieved of any obligation to advance any portion of its Requested Contribution and shall be entitled, if it so elects, to receive a refund from the Company of all amounts that it may theretofore have advanced to the Company pursuant to the Cash Needs Notice. (iii) Election of Partial Refund in the Event of Partial Failure to Advance. If the Non-Contributing Member shall have advanced part, but not all, of its Requested Contribution on or before the Due Date, each Contributing Member shall be relieved of any obligation to advance any portion of its share of the Requested Funds in excess of the amount calculated by multiplying its Percentage Interest by the Base Amount (as defined below) and shall be entitled, if it so elects, to receive a refund from the Company of all amounts that it may theretofore have advanced to the Company pursuant to the Cash Needs Notice in excess of the amount calculated by multiplying its Percentage Interest by the Base Amount. As used herein, the term "Base Amount" shall mean the amount of the Requested Funds actually contributed by the Non-Contributing Member on or before the Due Date, divided by the Percentage Interest of the Non-Contributing Member. (iv) Election of Right to Advance Funds as a Member Loan. Provided a Contributing Member has advanced an amount equal to its Requested Contribution, such Contributing Member shall be entitled, but shall not be obligated, within sixty (60) days after the date of the Cash Needs Notice, to advance to the Company (it being understood that any refund to which a Contributing Member is entitled pursuant to Section 3.6(b)(ii) or 3.6(b)(iii) above, as applicable, which such Contributing Member does not elect to receive shall constitute an advance to the Company for the purposes of this Section 3.6(b)(iv)) an amount equal to all or any part of the excess of (i) the Requested Funds over (ii) the Base Amount, if any, and such advance shall constitute a Member Loan to the Company, which Member Loan shall bear interest, compounded annually, at an annual rate equal to the Prime Rate plus 5% and shall be repayable in accordance with Sections 4.4, 4.5 and 4.6. At any time after a Member Loan has been made by such Contributing Member (whether or not such Contributing Member has given the thirty (30) day notice provided for in Section 3.6(b)(v) below, and if such notice has been given, prior to the expiration of the thirty (30) day period provided for in such Section 3.6(b)(v)), the Non-Contributing Member may make the curative payment to such Contributing Member -15- 21 provided for in the first sentence of Section 3.6(b)(v) below with the consequences set forth in such Section. (v) Conversion of Member Loan to Percentage Interests; Termination of Certain Rights. Subject to the last sentence of this Section 3.6(b)(v), if a Contributing Member has made a Member Loan by virtue of the provisions of Section 3.6(b)(iv), it may, at its option, exercisable by such Contributing Member's giving at least thirty (30) days' notice to the Non-Contributing Member at any time after the later to occur of the date on which such Contributing Member has so made a Member Loan and the Due Date, elect to convert the outstanding amount of such Member Loan (the "Default Amount") into a Cash Needs Contribution to the Company in the amount of the Default Amount and, if the Non-Contributing Member fails within such thirty (30) day period to pay to such Contributing Member an amount equal to the Default Amount, together with the accrued and unpaid interest thereon, then, effective as of the expiration of such thirty (30) day period: (A) the Default Amount shall be converted from a Member Loan into a Cash Needs Contribution; (B) the Percentage Interest of the Non-Contributing Member shall be decreased by the full and fractional number of percentage points equal to the quotient achieved when the Default Amount is divided by $12,500, and the Percentage Interest of the Contributing Member converting such Member Loan shall be increased by the same full and fractional number of percentage points; and (C) all rights of the Non-Contributing Member to consent to or approve of any action, except (I) to consent to the admission of Substitute Members pursuant to Section 7.5(b) and (II) to consent to the continuation of the Company's business and reformation of the Company following the Retirement of a Member pursuant to Section 7.8, shall be suspended. Any interest that has accrued on such Member Loan prior to its conversion to a Cash Needs Contribution shall be paid to the Contributing Member making such Member Loan in accordance with Sections 4.4, 4.5 and 4.6. If the Non-Contributing Member pays to such Contributing Member an amount equal to the Default Amount, together with the accrued and unpaid interest thereon, within or prior to the commencement of the thirty (30) day period provided for in this Section 3.6(b)(v), the Default Amount shall constitute a Cash Needs Contribution of the Non-Contributing Member. (vi) General Provisions. The provisions of this Section 3.6(b) shall be applicable each time that any Member shall fail to advance pursuant to Section 3.6(a) all or any portion of its Requested Contribution on or before the Due Date. (c) No Other Capital Contributions Required. Except as expressly provided in this Article III, no Member shall be required to make any Capital Contributions or loans to the -16- 22 Company. In no event shall any Member have any personal liability for the making of any Capital Contributions or loans pursuant to this Agreement, it being agreed that the sole remedies for a Member's failure to make any such Capital Contributions or loans shall be those provided for in this Article III. 3.7 LOANS BY MEMBERS. Any Member may, but is not obligated to, loan to the Company such sums as the Manager determines to be appropriate for the conduct of the Company's business, upon the written consent of all of the Members. Any such Member Loans shall be made on such terms and for such maturities as are consented to by all of the Members. 3.8 REPRESENTATIONS OF MEMBERS (a) Each Member represents and warrants to each other Member and the Company as follows: (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (ii) it has full power and authority to execute, deliver and perform its obligations under this Agreement; (iii) it has duly authorized, executed and delivered this Agreement and has duly authorized the performance of its obligations under this Agreement; and (iv) its authorization, execution, delivery and performance under this Agreement do not and will not conflict with any organizational document, agreement or law applicable to it or by which it is bound. (b) Each Member further represents and warrants to the Company that it is acquiring its Percentage Interest for its own account and not with a view toward the gifting, distribution or resale thereof, and each Member agrees that it will not sell or offer to sell all or any portion of its Percentage Interest, or negotiate in respect thereof with any person or persons whomsoever, so as thereby to bring the transaction in which it acquired its Percentage Interest or any other offering of interests in the Company within the provisions of Section 5 of the Securities Act of 1933, as amended, or the registration requirement of any other federal or state securities statute. (c) Each Member further represents and warrants to each other Member and the Company that (i) it has been given access to all information concerning the Company, the Land, the Other Interests and the terms and conditions of the Percentage Interest it is purchasing hereby; (ii) it and its separate counsel have had the opportunity to fully negotiate the terms and conditions of this Agreement; (iii) it understands and acknowledges that the Percentage Interest it is purchasing hereby are speculative securities and involve a high degree of risk and that no federal or state agency has made any finding or determination as to the fairness for public or private investment in, nor any recommendations or endorsement of, such Percentage Interest as an investment; (iv) it has such knowledge and experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in such Percentage Interest; and (v) its financial situation is such that it can afford the risks of an investment in such Percentage Interest. -17- 23 ARTICLE IV ALLOCATIONS AND DISTRIBUTIONS 4.1 ALLOCATION OF OPERATING PROFITS AND OPERATING LOSSES. Except as otherwise specifically provided herein to the contrary, Operating Profits and Operating Losses for any fiscal year shall be allocated to the Members in proportion to their respective Percentage Interests. 4.2 ALLOCATIONS OF PROFITS AND LOSSES FROM A CAPITAL TRANSACTION. (a) Allocation of Profits from a Capital Transaction. After giving effect to any special allocations pursuant to Section 4.3 and any allocations of Operating Profits and Operating Losses pursuant to Section 4.1, Profits from a Capital Transaction shall be allocated in the following order of priority: (i) First, to the Members with deficit Capital Account balances, if any, pro rata in accordance with such deficit balances, until all of such deficit balances are increased to zero; (ii) Thereafter, to the Members in proportion to their respective Percentage Interests. (b) Allocation of Losses from a Capital Transaction. After giving effect to any special allocations pursuant to Section 4.3, Losses from a Capital Transaction shall be allocated in the following order of priority: (i) First, to the Members with positive Capital Account balances, if any, pro rata in accordance with such balances, until all such positive balances are reduced to zero; and (ii) Thereafter, to the Members in proportion to their respective Percentage Interests. 4.3 SPECIAL ALLOCATIONS AND OTHER PROVISIONS RELATING TO ALLOCATIONS. In the event of any conflict between the general allocation provisions set forth in Sections 4.1 and 4.2 and the provisions of this Section 4.3, the provisions of this Section 4.3 shall be controlling. (a) Company Minimum Gain Chargeback. Notwithstanding any other provision of this Article IV, if there is a net decrease in Company Minimum Gain during any Company fiscal year, the minimum gain chargeback requirement of Section 1.704-2(f) of the Allocation Regulations shall apply and this Section 4.3(a) shall be interpreted consistently therewith. To the extent permitted by such Section of the Allocation Regulations and for purposes of this Section 4.3(a) only, each Member's Adjusted Capital Account Deficit shall be -18- 24 determined prior to any other allocations pursuant to this Article IV with respect to such fiscal year and without regard to any net decrease in Member Nonrecourse Debt Minimum Gain during such fiscal year. (b) Chargeback of Member Nonrecourse Debt Minimum Gain. Notwithstanding any other provision of this Article IV except Section 4.3(a), if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any fiscal year, the chargeback of "partner nonrecourse debt minimum gain" requirement of Section 1.704-2(i)(4) of the Allocation Regulations shall apply and this Section 4.3(b) shall be interpreted consistently therewith. This Section 4.3(b) is intended to comply with the "partner minimum gain chargeback requirement" in such Section of the Allocation Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 4.3(b), each Member's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to this Article IV with respect to such fiscal year, other than allocations pursuant to Section 4.3(a) hereof. (c) Qualified Income Offset. In the event any Member's unexpected receipt of any adjustments, allocations, or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of the Allocation Regulations causes such Member to have (or increases) an Adjusted Capital Account Deficit, items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Allocation Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 4.3(c) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article IV have been tentatively made as if this Section 4.3(c) were not in the Agreement. (d) Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Company fiscal year which is in excess of the sum of (i) such Member's deficit restoration obligation, if any, and (ii) the amount, if any, such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Allocation Regulations, each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 4.3(d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article IV have been made as if Section 4.3(c) hereof and this Section 4.3(d) were not in the Agreement. (e) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or other period shall be allocated (with the Members intending to satisfy the reasonable consistency requirement contained in the Allocation Regulations as a result of this allocation) to the Members in proportion to their respective Percentage Interests. -19- 25 (f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Allocation Regulations Section 1.704-2. (g) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Allocation Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Allocation Regulations. (h) Curative Allocations. (i) The "Regulatory Allocations" consist of the "Basic Regulatory Allocations," as defined in Section 4.3(h)(ii) hereof, the "Nonrecourse Regulatory Allocations," as defined in Section 4.3(h)(iii) hereof, and the "Member Nonrecourse Regulatory Allocations," as defined in Section 4.3(h)(iv) hereof. (ii) The "Basic Regulatory Allocations" consist of allocations pursuant to Sections 4.3(c), (d) and (g) hereof. Notwithstanding any other provision of this Agreement, other than the Regulatory Allocations, the Basic Regulatory Allocations shall be taken into account in allocating items of income, gain, loss and deduction among the Members so that, to the extent possible, the net amount of such allocations of other items and the Basic Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Basic Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence, allocations pursuant to this Section 4.3(h)(ii) shall only be made with respect to allocations pursuant to Section 4.3(g) hereof to the extent the Manager reasonably determines that such allocations will otherwise be inconsistent with the economic agreement among the parties to this Agreement. (iii) The "Nonrecourse Regulatory Allocations" consist of all allocations pursuant to Sections 4.3(a) and (e) hereof. Notwithstanding any other provision of this Agreement, other than the Regulatory Allocations, the Nonrecourse Regulatory Allocations shall be taken into account in allocating items of income, gain, loss, and deduction among the Members so that, to the extent possible, the net amount of such allocations of other items and the Nonrecourse Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Nonrecourse Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence (A) no allocations pursuant to this Section 4.3(h)(iii) shall be made prior to the calendar year during which there is a net decrease in -20- 26 Company Minimum Gain, and then only to the extent necessary to avoid any potential economic distortions caused by such net decrease in Company Minimum Gain, and (B) allocations pursuant to this Section 4.3(h)(iii) shall be deferred with respect to allocations pursuant to Section 4.3(e) hereof to the extent the Manager reasonably determines that such allocations are likely to be offset by subsequent allocations pursuant to Section 4.3(a) hereof. (iv) The "Member Nonrecourse Regulatory Allocations" consist of all allocations pursuant to Section 4.3(b) and (f) hereof. Notwithstanding any other provision of this Agreement, other than the Regulatory Allocations, the Member Nonrecourse Regulatory Allocations shall be taken into account in allocating items of income, gain, loss, and deduction among the Members so that, to the extent possible, the net amount of such allocations of other items and the Member Nonrecourse Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Member Nonrecourse Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence (A) no allocations pursuant to this Section 4.3(h)(iv) shall be made with respect to allocations pursuant to Section 4.3(f) relating to a particular Member Nonrecourse Debt prior to the calendar year during which there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, and then only to the extent necessary to avoid any potential economic distortions caused by such net decrease in Member Nonrecourse Debt Minimum Gain, and (B) allocations pursuant to this Section 4.3(h)(iv) shall be deferred with respect to allocations pursuant to Section 4.3(f) hereof relating to a particular Member Nonrecourse Debt to the extent the Manager reasonably determines that such allocations are likely to be offset by subsequent allocations pursuant to Section 4.3(b) hereof. (v) The Manager shall have reasonable discretion, with respect to each calendar year, to (A) apply the provisions of Section 4.3(h)(ii), (iii) and (iv) hereof in whatever order is likely to minimize the economic distortions that might otherwise result from the Regulatory Allocations, and (B) divide all allocations pursuant to Sections 4.3(h)(ii), (iii) and (iv) hereof among the Members in a manner that is likely to minimize such economic distortions. (i) Manager's Fees. If the deduction of all or any part of any fee paid by the Company to the Manager or its Affiliates is disallowed by recharacterizing such fee as a distribution to such Manager, the Manager shall be, to the extent permitted by the Code, allocated items of Company income and gain for the taxable year in which such disallowed deduction was claimed by the Company in the amount of such disallowed deduction. (j) Section 704(c) Override. (i) In accordance with Code Section 704(c) and the Income Tax Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its value at the time of contribution to the Company. -21- 27 (ii) In the event that the book value of any Company property is adjusted in accordance with the Allocation Regulations, subsequent allocations of income, gain, loss and deduction with respect to such property shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its book value in the same manner as under Section 704(c) of the Code and the Income Tax Regulations thereunder, to the extent required by the Allocation Regulations. (iii) Any elections or other decisions relating to such allocations shall be made by the Manager, based upon the advice of the Accountants, in a manner consistent with the Allocation Regulations and in a manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section and Code Section 704(c) are solely for tax purposes and shall not be taken into account for purposes of determining "Profits" or "Losses" or adjustments to Capital Accounts. (k) Special Allocation Relative to Interest. Subject to the other provisions of this Section 4.3, any Company deduction or basis increase arising from or in connection with any interest which is deemed to have been paid by the Company to a Member in connection with any funds contributed to the Company by such Member, whether as Member or in its separate capacity, shall be allocated to such Member for all tax, accounting and other purposes. (l) Tax Credits. The basis (or cost) of any Company Code Section 38 property shall be allocated among the Members in accordance with Section 1.46-3(f)(2)(i) of the Income Tax Regulations. All tax credits (other than the investment tax credit) shall be allocated among the Members in accordance with applicable law. (m) Tax Credit Recapture. In the event Company Code Section 38 property is disposed of during any taxable year, Profits for such taxable year (and, to the extent such Profits are insufficient, Profits for subsequent taxable years) in an amount equal to the excess, if any, of (i) the reduction in the adjusted tax basis (or cost) of such property pursuant to Code Section 50(c), over (ii) any increase in the adjusted tax basis of such property pursuant to Code Section 50(c) caused by the disposition of such property, shall be excluded from the Profits allocated pursuant to Sections 4.1(a) and 4.2(a) hereof and shall instead be allocated among the Members in proportion to their respective shares of such excess, determined pursuant to Sections 4.3(n) and 4.3(o) hereof. In the event more than one item of such property is disposed of by the Company, the foregoing sentence shall apply to such items in the order in which they are disposed of by the Company, so that Profits equal to the entire amount of such excess with respect to the first such property disposed of shall be allocated prior to any allocations with respect to the second such property disposed of, and so forth. (n) Basis Increases. In the event the adjusted tax basis of any Code Section 38 property that has been placed in service by the Company is increased pursuant to Code Section 50(c), such increase shall be specially allocated among the Members (as an item in the -22- 28 nature of income or gain) in the same proportions as the investment tax credit that is recaptured with respect to such property is shared among the Members. (o) Basis Reductions. Any reduction in the adjusted tax basis (or cost) of Company Code Section 38 property pursuant to Code Section 50(c) shall be specially allocated among the Members (as an item in the nature of expenses or losses) in the same proportions as the basis (or cost) of such property is allocated pursuant to Section 1.46-3(f)(2)(i) of the Income Tax Regulations. (p) Varying Interests, Tax Accounting Conventions. In the event Members are admitted to the Company on different dates during any fiscal year, the Profits, Losses or any other items allocated to the Members for each such fiscal year shall be determined on a daily, monthly or other basis, as determined by the Manager using any permissible method under Code Section 706 and the Income Tax Regulations thereunder. (q) Excess Nonrecourse Liabilities. Solely for purposes of determining a Member's proportionate share of the "excess nonrecourse liabilities" of the Company within the meaning of Section 1.752-3(a)(3) of the Income Tax Regulations, the Members' interests in Company profits shall be (with the Members intending to satisfy the reasonable consistency requirement contained in the Allocation Regulations) in proportion to their respective Percentage Interests. (r) Treatment of Certain Distributions. To the extent permitted by Sections 1.704-2(h) and 1.704-2(i)(6) of the Allocation Regulations, the Manager shall endeavor to treat distributions of Net Cash Receipts or Capital Proceeds as having been made from the proceeds of a Nonrecourse Liability or a Member Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Member. (s) Effect. The Members are aware of the consequences of the allocations made by this Article IV and hereby agree to be bound by the provisions of this Article IV in reporting their shares of Company income and loss for income tax purposes and otherwise. 4.4 DISTRIBUTIONS OF NET CASH RECEIPTS. Net Cash Receipts for each fiscal year (or fractional portion thereof), if any, shall be distributed among the Members within twenty (20) days after the close of each calendar quarter, or more frequently in the Manager's sole discretion, in the following order of priority: (a) First, as interest to Members having outstanding Member Loans, in proportion to the amount of interest owed to each Member, until the Members shall have received amounts equal to the total amounts of accrued and unpaid interest owed on such Member Loans; -23- 29 (b) Second, as principal to Members having outstanding Member Loans, in proportion to the amount of principal owed to each Member, until the Members shall have received amounts equal to the total principal balances owed on such Member Loans; and (c) Thereafter, the balance thereof to the Members in proportion to their respective Percentage Interests. 4.5 DISTRIBUTIONS OF PROCEEDS FROM CAPITAL TRANSACTIONS WHEN COMPANY NOT LIQUIDATED. If, as a result of a Capital Transaction that does not result in the liquidation of the Company, the Company obtains Capital Proceeds, such Capital Proceeds shall be distributed, after payment of such debts and liabilities of the Company (excluding Member Loans), as may be determined by the Manager, in the following order of priority: (a) First, as interest to Members having outstanding Member Loans, in proportion to the amount of interest owed to each Member, until the Members shall have received amounts equal to the total amounts of accrued and unpaid interest owed on such Member Loans; (b) Second, as principal to Members having outstanding Member Loans, in proportion to the amount of principal owed to each Member, until the Members shall have received amounts equal to the total principal balances owed on such Member Loans; and (c) Thereafter, to the Members in proportion to their respective Percentage Interests. 4.6 DISTRIBUTIONS OF LIQUIDATION PROCEEDS UPON LIQUIDATION. Upon the liquidation of the Company, the Manager shall attempt to liquidate the assets of the Company and the proceeds of such liquidation shall be applied and distributed in the following order of priority: (a) First, to the payment of the debts and liabilities of the Company (excluding Member Loans) and the expenses of liquidation; (b) Second, to the setting up of reserves that the Manager determines are reasonably necessary to pay all contingent, conditional or unmatured claims and obligations that are known to the Company and all claims and obligations that are known to the Company but with respect to which the claimant or obligee is unknown. Such reserves may be paid over by the Manager to any attorney at law or other party selected by the Manager, as escrow agent to be held for disbursement in payment of any of the aforementioned liabilities or obligations, or at the expiration of such period as shall be deemed advisable by the Manager, for distribution in accordance with clauses (c) through (e) of this Section 4.6; (c) Third, as interest to Members having outstanding Member Loans, in proportion to the amount of interest owed to each Member, until the Members shall have received amounts equal to the total amounts of accrued and unpaid interest owed on such Member Loans; -24- 30 (d) Fourth, as principal to Members having outstanding Member Loans, in proportion to the amount of principal owed to each Member, until the Members shall have received amounts equal to the total principal balances owed on such Member Loans; and (e) Thereafter, to the Members in accordance with their respective positive Capital Account balances, determined after all allocations pursuant to Sections 4.1 through 4.3 (including, without limitation, allocations to reflect the gain or loss recognized upon the sale of the Property) and all distributions pursuant to Sections 4.4 and 4.5 have been made, but before any distributions pursuant to this Section 4.6(e) are made. 4.7 DISTRIBUTIONS IN KIND ON LIQUIDATION. Upon the liquidation of the Company, to the extent the Company's assets are not sold or otherwise disposed of, such assets (if any) may, at the unanimous direction of the Members, be distributed in kind to the Members as follows: the value of such assets shall be appraised (by an appraiser selected by the Members) to determine the Profits and Losses that would have resulted if such assets had been sold; the Capital Account of each Member shall be debited or credited with such Member's respective share of the hypothetical gains or losses resulting from such assumed sales in the same manner as such Capital Account would have been debited or credited on the actual disposition of such assets; and such assets shall be distributed in accordance with the Members' Capital Account balances as thus adjusted, each Member taking an undivided interest in such assets subject to a pro rata share of the Company's liabilities. 4.8 CERTAIN PROVISIONS OF THE ACT SUPERSEDED. The provisions of this Agreement regarding allocations and distributions among the Members are intended to and should, to the fullest extent permitted by law, supersede the provisions of the Act regarding allocations and distributions. -25- 31 ARTICLE V POWER, AUTHORITY, RIGHTS, DUTIES AND OBLIGATIONS OF THE MANAGER 5.1 MANAGEMENT OF COMPANY. (a) Authority of M/I Under Lease. The Members acknowledge that M/I is the tenant under the Lease and that, pursuant to the provisions of the Lease, M/I shall have the authority and obligations with respect to the maintenance and operation of the Building and the other matters as set forth in the Lease. (b) Authority of Manager to Manage Company's Business. Except as otherwise specifically limited herein, the Manager shall have the exclusive right to manage the Company's business. Accordingly, except as otherwise specifically limited in this Agreement or under applicable law, the Manager shall: (i) manage the affairs and business of the Company; (ii) exercise the authority and powers granted to the Company; and (iii) otherwise act in all other matters on behalf of the Company. No contract, obligation or liability of any kind or type may be entered into on behalf of the Company by any Member other than the Manager. The Manager shall take all actions which shall be necessary or appropriate to accomplish the Company's purposes in accordance with the terms of this Agreement. The Manager is hereby designated and named a "manager" of the Company, within the meaning of Section 18-101(10) of the Act. 5.2 CONSTRUCTION OF THE IMPROVEMENTS. The Manager shall use its best efforts on behalf of the Company to cause the Improvements to be constructed and completed in accordance with the terms of the Lease. For the purposes of this Section 5.2, the use of the term "best efforts" by the Manager shall not require the Manager to advance any of its funds on behalf of the Company where it is not otherwise obligated to furnish such funds under the terms of this Agreement. Such duties of the Manager shall be performed in accordance with and shall include, but not be limited to, the following: (a) Preliminary Budget. Attached hereto as Schedule E is a preliminary budget (the "Preliminary Budget"), which has been approved by all of the Members as providing the preliminary understanding of the viability of the development of the Improvements. (b) Design Architect. The Manager shall retain, on behalf of the Company, the firm of Gensler and Associates (the "Design Architect") to be the design architect for the Improvements. The Design Architect shall be retained upon such terms and conditions and for such compensation as all of the Members shall have approved in advance. The Members shall use their best efforts and due diligence to cooperatively and collaboratively review, refine and ultimately approve in writing such terms, conditions and compensation. M/I agrees to retain, at the Company's cost as a Development Expense, the Design Architect to be the design architect for the Tenant Improvements. -26- 32 (c) Project Architect. The Manager shall retain, on behalf of the Company, the firm of NBBJ (the "Project Architect") to prepare the construction drawings for the Improvements. The Project Architect shall be retained upon such terms and conditions and for such compensation as all of the Members shall have approved in advance. The Members shall use their best efforts and due diligence to cooperatively and collaboratively review, refine and ultimately approve in writing such terms, conditions and compensation. M/I agrees to retain, at the Company's cost as a Development Expense, the Project Architect to prepare the construction drawings for the Tenant Improvements. (d) Construction Manager. The Manager shall retain, on behalf of the Company, the joint venture Gillbane and Smoot (the "Construction Manager"), to serve as the construction manager for the construction of the Improvements. The Construction Manager shall be retained upon such terms and conditions and for such compensation as all of the Members shall have approved in advance. The Members shall use their best efforts and due diligence to cooperatively and collaboratively review, refine and ultimately approve in writing such terms, conditions and compensation. M/I agrees to retain, at the Company's cost as a Development Expense, the Construction Manager to serve as the construction manager for the construction of the Tenant Improvements. (e) Plans. The Manager shall deliver or caused to be delivered to the Members proposed plans and specifications for the Improvements and for the Tenant Improvements. Such proposed plans and specifications shall (i) include, without limitation, the siting, schematic design and specifications for facade materials for the Building and the other Improvements and the Tenant Improvements, (ii) to the satisfaction of Limited, be complementary in siting, design and materials and consistent in quality and design to the building proposed to be built by Limited (or an affiliate of Limited) and intended to be located as shown on Schedule D attached hereto and made a part hereof and (iii) in all respects provide for the construction of a first class office building. The Members shall use their best efforts and due diligence to cooperatively and collaboratively review, refine and ultimately approve in writing such proposed plans and specifications. The proposed plans and specifications for the Improvements and the Tenant Improvements approved by all of the Members shall be referred to herein as the "Plans". (f) Development Budget; Right of Manager to Pay Development Expenses. Following the approval of the Plans by all of the Members, the Manager shall prepare and deliver to each of the Members a proposed development budget. Such proposed development budget shall be in substantially the same form as the Preliminary Budget and shall require the approval of each of the Members. The Members shall use their best efforts and due diligence to cooperatively and collaboratively review, refine and ultimately approve in writing such proposed development budget; provided, however, that such final approval shall not occur unless and until all of the Members have reviewed and approved final contracts for engineering services for the Improvements, final contracts for the services to be provided to the Company by the Design Architect, the Project Architect and the Construction Manager, and contracts with subcontractors accounting for not less than ninety percent (90%) of the labor and materials necessary -27- 33 to construct the Improvements. The proposed development budget approved by all of the Members shall be referred to herein as the "Development Budget". Upon such approval of the Development Budget by the Members, the Manager shall have the right, without further consent or approval by the Members, to incur or pay the expenses set forth in such approved Development Budget. After approval of the Development Budget by all of the Members, subject to the provisions of Section 5.2(g) below, the Manager may at any time reallocate a portion of any line-item therein to any other such line-item; provided, however, that, without the written consent of all of the Members, (i) no such reallocation may result in any increase in the Total Budgeted Development Expenses and (ii) no such reallocation may result in the amount set forth in any particular line item (including the "contingency") being increased or decreased by more than five percent (5%). (g) Changes to Plans. All proposed changes in or additions to the Plans shall be submitted by the Manager to the Members for their approval. No proposed changes to the Plans shall be adopted, accepted or implemented without the prior approval of all of the Members. The Members shall use their best efforts and due diligence to cooperatively and collaboratively review, refine and ultimately approve in writing such proposed changes to the Plans. (h) Retention of Agents. Upon obtaining prior approval of all of the Members, the Manager may retain, on behalf of the Company, such Persons as all of the Members shall deem advisable in connection with the construction of the Improvements and the landscaping of the Property, including, without limitation, attorneys, engineers and contractors, on such terms and for such compensation as all of the Members shall determine; provided, however, that the Manager shall not employ any affiliate of any Member except as described in Section 5.10. 5.3 THE LEASE. The Manager shall, on behalf of the Company, enter into the Lease of the Building with M/I. The Manager will not, without the prior consent of Limited: (i) modify, amend, renew or grant any consent or waiver under the Lease, (ii) grant rent concessions or discount rents (except as specifically provided for in the Lease), (iii) accept a surrender of the Lease, (iv) exercise any right or option granted to the landlord thereunder to cancel all or any part of the term of the Lease or fail to take any reasonable action that may terminate any option of the tenant thereunder to cancel the Lease or (v) approve any assignment of the Lease or any subletting of all or any portion of the premises demised under the Lease. The Manager shall: (a) on behalf of the Company, perform, observe and discharge the obligations of the landlord under the Lease and enforce or secure the performance, observance and discharge of the obligations of the tenant to be performed, observed or discharged under the Lease, (b) give prompt notice to Limited of each breach or alleged breach by the landlord or the tenant under the Lease, together with a true and complete copy of each notice of default or demand and each summons or other legal process and each pleading prepared by or on behalf of the landlord and each pleading received from the tenant with respect to any such breach and (c) on behalf of the Company, appear in and defend any action or proceeding arising out of or in connection with the Lease or the rents and other amounts payable thereunder. -28- 34 5.4 OPERATING AND CAPITAL IMPROVEMENT BUDGETS. (a) Preparation and Submission of Proposed Operating and Capital Budgets. Not later than sixty (60) days prior to the commencement of each fiscal year of the Company, commencing November 1, 1996, the Manager shall prepare or cause to be prepared and submit to the Members a proposed operating budget and a proposed capital improvement budget with respect to the Property for such fiscal year. The proposed operating budget shall set forth the projected income and receipts from the Property for such fiscal year and the operating expenses to be incurred during such year, such operating expenses to be set forth in reasonable detail with each category of expense listed on a separate line. The proposed capital improvement budget shall set forth in reasonable detail a description of all capital improvements, repairs, replacements and alterations (i.e., improvements, repairs, replacements or additions, the cost of which may not be deducted as an expense but must be capitalized and amortized over the life of such improvements, repairs, replacements or alterations, but not including therein any tenant improvement work) that the Manager proposes to make in and to the Property during such fiscal year and the estimated cost of each. (b) Approval of Operating Budgets by Members. Within twenty (20) days after such submission of the proposed operating budget to the Members, each Member shall send to the Manager a notice containing the approval of such proposed operating budget or the disapproval of such proposed operating budget and the specific detailed reasons for such disapproval. If within such twenty (20) day period a Member does not send to the Manager any such notice approving the proposed operating budget or disapproving the proposed operating budget and setting forth the specific detailed reasons for such disapproval, then such Member shall be deemed to have approved the proposed operating budget. If within such twenty (20) day period a Member sends the Manager a notice disapproving the proposed operating budget and setting forth the specific detailed reasons therefor, the Manager shall use its reasonable efforts to revise the proposed operating budget in order to address the reasons specified by such Member for its disapproval of the proposed operating budget and shall then submit the revised proposed operating budget to each Member for its approval. The Manager and the Members shall repeat the process described in this Section 5.4(b) until such proposed operating budget is approved or deemed approved by all of the Members. The Manager shall be deemed to have approved any proposed operating budget (or, as the case may be, any revised proposed operating budget) submitted to the Member pursuant to this Section 5.4(b). (c) Right of Manager to Pay Operating Expenses; Uncontrollable Expenses. Upon such approval of an operating budget by all of the Members, the Manager shall have the right, without further consent or approval by the Members, to incur and pay the operating expenses set forth in such approved budget, provided that in the case of any operating expense that is not an Uncontrollable Expense, the Manager shall not have the right to incur or pay the same if it exceeds by -29- 35 more than five percent (5%) the amount set forth on the appropriate line for the category of expense involved in the approved operating budget or if an expenditure will cause the aggregate amount of operating expenses that are not Uncontrollable Expenses to exceed by more than five percent (5%) the aggregate amount of such operating expenses provided for in the approved operating budget. As used in this Section 5.4, the term "Uncontrollable Expenses" shall mean an item of expense, the amount of which is not within the power of the Manager to control and shall include, by way of illustration and without limitation, real estate taxes, utility charges, and debt service under loans permitted hereunder or otherwise approved by all of the Members. If at any time the Manager desires to incur an operating expense that is not provided for in the approved operating budget, the Manager shall not incur such expense without the prior approval of all of the Members. If at any time it becomes evident to the Manager that the cost of any operating expense that is not an Uncontrollable Expense will exceed by more than five percent (5%) the amount set forth in respect thereof in the approved operating budget, or the amount of all such expenses will exceed by more than five percent (5%) the aggregate amount budgeted therefor in such operating budget, the Manager shall not incur the operating expense in question or, as applicable, any of such operating expenses without the approval of all of the Members. Notwithstanding the foregoing, however, if in the reasonable good-faith judgment of the Manager any operating expense not provided for in the approved operating budget, the cost of which in any single instance does not exceed $10,000, must at any time be undertaken immediately in order to protect the Property or any portion thereof or to avoid accident or injury to Persons or their property, the Manager shall be free to incur such operating expense without regard to the approved operating budget and without first securing the approval of the Members, but the Manager shall notify the Members promptly (and in no event later than one (1) full day after the Manager first becomes aware of the condition requiring the measures in question and of the need for such measures) of any condition requiring any of the aforesaid measures. (d) Approval of Capital Budgets by Members. Within twenty (20) days after such submission of the proposed capital improvement budget to each Member, each Member shall send to the Manager a notice containing the approval of such capital improvement budget or the disapproval of such proposed capital improvement budget and the specific detailed reasons for such disapproval. If, within such twenty (20) day period a Member does not send to the Manager a notice approving the proposed capital improvement budget or disapproving the proposed capital improvement budget and setting forth the specific detailed reasons for such disapproval, then such Member shall be deemed to have approved the proposed capital budget. If within such twenty (20) day period a Member sends the Manager a notice disapproving the proposed capital improvement budget and setting forth the specific detailed reasons therefor, the Manager shall use its reasonable efforts to revise the proposed capital improvement budget in order to address the reasons specified by such Member for its disapproval of the proposed capital improvement budget and shall then submit the revised proposed capital improvement budget to each Member for its approval. The Manager and the Members shall repeat the process described in this Section 5.4(d) until such proposed capital budget is approved or deemed approved by all of the Members. The Manager shall be deemed to have approved any proposed capital improvement budget (or, as the case may be, any revised proposed capital improvement budget) submitted to the Members pursuant to this Section 5.4(d). -30- 36 (e) Right of Manager to Pay Capital Expenses. Upon such approval of a capital improvement budget by all of the Members, the Manager shall have the right, without further consent or approval by the Members, to make the capital improvements, repairs, replacements and alterations set forth in such budget and to pay the cost thereof, and pay the capital improvement expenses set forth in such approved budget, provided that the cost of any such capital improvement, repair, replacement or alteration does not exceed by more than five percent (5%) the amount thereof set forth for such item in the approved capital improvement budget, and provided, further that the cost of all such capital improvements, repairs, replacements and alterations does not exceed by more than five percent (5%) the aggregate amount set forth in such capital improvement budget. If at any time the Manager desires to make a capital improvement, repair, replacement or alteration that is not provided for in the approved capital budget, the Manager shall not proceed with such improvement, repair, replacement or alteration without the prior approval of all of the Members. If at any time it becomes evident to the Manager that the cost of any capital improvement, repair, replacement or alteration provided for in the approved capital improvement budget will exceed by more than five percent (5%) the amount budgeted therefor in the approved capital improvement budget, or that the aggregate amount of the cost of all capital improvements, repairs, replacements and alterations provided for in such budget will exceed by more than five percent (5%) the aggregate amount budgeted therefor in the approved capital improvement budget, the Manager shall not proceed further with the making of such improvement, repair, replacement or alteration or, as applicable, with any of such capital improvements, repairs, replacements or alterations without the approval of all of the Members. Notwithstanding the foregoing, however, if in the reasonable good-faith judgment of the Manager any capital improvement, repair, replacement or alteration, the cost of which in any single instance does not exceed $10,000, must at any time be undertaken immediately in order to protect the Property or any portion thereof or to avoid accident or injury to Persons or their property, the Manager shall be free to make such capital improvement, repair, replacement or alteration without regard to the approved capital improvement budget and without first securing the approval of the Members, but the Manager shall notify each Member promptly (and in no event later than one (l) full day after the Manager first becomes aware of the condition requiring the measures in question and of the need for such measures) of any condition requiring any of the aforesaid measures. (f) Failure to Agree on Operating Budget. In the event that the Members are unable to agree on any operating budget for any fiscal year, or on any item therein, (i) any items in such operating budget which have been so approved shall become operative immediately and (ii) with respect to any other item of such operating budget, the Manager shall be entitled to expend in respect of such item, until such time as the dispute in question shall be otherwise resolved, an amount (on an annual basis) equal to the amount for the corresponding item in the operating budget for the then-current year. 5.5 CONSTRUCTION LOAN AND PERMANENT LOAN. Subject to the provisions of Section 5.8 hereof: -31- 37 (a) The Manager shall use its best efforts to obtain a commitment for and to close a Construction Loan. The Construction Loan shall be in such amount and on such other terms and conditions as shall be approved by all of the Members. The Members shall collaborate in good faith and in a timely manner to approve such amount, terms and conditions. (b) The Manager shall use its best efforts to obtain a commitment for and to close a Permanent Loan. The Permanent Loan shall be in such amount and on such other terms and conditions as shall be approved by all of the Members. The Members shall collaborate in good faith and in a timely manner to approve such amount, terms and conditions. (c) The Manager, on behalf of the Company, shall execute the Mortgages in respect of the Construction Loan and the Permanent Loan, when and as required by the commitments for same. With respect to each of the Construction Loan and the Permanent Loan and any other loan entered into by the Company in accordance with the provisions hereof, following the closing of each such loan, the Manager: (i) shall not, without the prior consent of all of the Members, modify or amend any provision of the Mortgage in respect of such loan, (ii) on behalf of the Company, shall perform, observe and discharge the obligations of the Company under the Mortgage in respect of such a loan, (iii) shall give to the Members prompt notice of each breach or alleged breach by the Company or the lender under the Mortgage in respect of such loan, together with a true and complete copy of each notice of default or demand and each summons or other legal process and each pleading prepared by or on behalf of the Company and each notice of default or demand and each summons or other legal process and each pleading received from such lender and (iv) on behalf of the Company, shall appear in and defend any action or proceeding arising out of or in connection with the Mortgage in respect of such loan. 5.6 SPECIFIC RIGHTS AND POWERS OF MANAGER. In addition to the rights and powers of the Manager provided for in Sections 5.1, 5.2, 5.3, 5.4 and 5.5, and subject to the limitations provided in such Sections, and the approval rights of the Members set forth in Section 5.8 hereof and except as otherwise specifically limited in this Agreement or under applicable law, the Manager shall have all specific rights and powers required for the management of the business of the Company including, without limitation, the right to do the following: (a) Operate, maintain, repair and improve the Property; (b) Incur all reasonable expenditures and pay all obligations of the Company; (c) Execute any and all documents or instruments of any kind which the Manager deems necessary or appropriate to achieve the purposes of the Company, including, without limitation, contracts, agreements, leases, subleases, easements, deeds, notes, Mortgages and other documents or instruments of any kind or character or amendments of any such documents or instruments; (d) Purchase or lease equipment for Company purposes; -32- 38 (e) Borrow money from individuals, banks and other lending institutions for any Company purpose, and mortgage or pledge all or any portion of the Property; to secure or provide for the repayment of such loans; obtain replacements of any Mortgage or Mortgages in whole or in part, refinance, recast, modify, extend or consolidate any Mortgage affecting all or any portion of Property; (f) Procure and maintain, at the expense of the Company and with responsible companies, such insurance as may be available in such amounts and covering such risks as are appropriate in the reasonable judgment of the Manager; (g) Employ and dismiss from employment any and all Company employees, agents, independent contractors, attorneys and accountants; and (h) Supervise the preparation and filing of all Company tax returns. 5.7 AGREEMENTS; LAWS AND PERMITS. Without limiting the provisions of Section 5.3 or Section 5.5 hereof and subject to the availability of required funds to the Company, the Manager shall cause the Company to comply with all agreements entered into by the Company or by which the Company is bound and all Laws and Permits applicable to the Company. 5.8 APPROVAL OF MEMBERS. Notwithstanding any contrary provision of this Article V, but subject to Section 6.4(b), the Manager shall not take any of the following actions without first obtaining the consent of all of the Members in accordance with the provisions of Section 6.4(a): (a) sell, exchange, transfer, convey, assign, lease or otherwise dispose of, or encumber the Property or any portion thereof (other than pursuant to the Lease entered into in compliance with the provisions hereof); (b) enter into any management, leasing or brokerage agreement for the Property or any portion thereof, modify, amend or revise in any material respect to extend, renew, cancel or terminate any such management, leasing or brokerage agreement or change or suffer or permit to be changed the agent under any such management, leasing or brokerage agreement; (c) acquire any real property other than the Property, including, without limitation, leases of real property, or any personal property other than the personal or other personal property necessary or desirable for the operation and maintenance of the Property; (d) agree to a settlement of any proceeding brought for the taking of all or any portion of the Property in condemnation or by eminent domain or to a sale of all or any portion of the Property in lieu of such taking in condemnation or by eminent domain; -33- 39 (e) borrow any money (including, without limitation, the Construction Loan and the Permanent Loan) (excluding any Member Loan made by virtue of the provisions of Section 3.6(b)(iv)); (f) place any Mortgage or deed of trust on the Property or any portion thereof, or prepay, extend, refinance, modify or amend any Mortgage covering the Property or any portion thereof; (g) demolish the whole or any part of any Improvement or Tenant Improvement; construct any addition to any Improvement or Tenant Improvement or any new Improvements or Tenant Improvements; undertake any repair, restoration, alteration, betterment, or rebuilding of any Improvement or Tenant Improvement (including, without limitation after any casualty) other than in accordance with Section 5.4 (regarding capital improvement budgets); reduce the amount of rentable area in the Property; reduce the parking area or the number of parking spaces or the landscaping on the Property; or alter the architectural appearance of any of the Improvements or the Tenant Improvements; (h) change the nature of the business of the Company or enter into any business other than or in addition to that contemplated by this Agreement; (i) take advantage on behalf of the Company of any federal or state bankruptcy or insolvency law or similar law for the relief of debtors; (j) make any loan from the Company to a Member or any Affiliate of a Member; (k) cause the formation of any corporation, partnership, limited liability company or other subsidiary entity owned or controlled by the Company; (l) make investments, other than the temporary investment of working capital as provided for in Section 10.5 in the ordinary course of business; (m) initiate in the name or on the account of the Company any lawsuit or other judicial proceeding other than in connection with proceedings concerning the Lease or the tenant thereunder; (n) establish any reserves from Net Cash Receipts or Capital Proceeds (it being understood that any reserve provided for in an approved budget shall be deemed for this purpose to have been approved by the Members); (o) commit or suffer any acts which would make it impossible to carry out the operation of the business of the Company, change or reorganize the Company into any other legal form or dissolve or voluntarily terminate the Company; -34- 40 (p) admit to the Company a new additional or Substitute Member except as otherwise specifically provided for in this Agreement; (q) amend this Agreement or the Certificate of Formation (except as provided in Section 11.1); or (r) engage, transact or do business in any jurisdiction other than the State of Ohio. 5.9 COMPENSATION OF THE MANAGER. The Manager shall not receive any compensation for its services as Manager hereunder. Notwithstanding the preceding sentence, however, the Company shall pay to the Manager, on an annual basis, the amount of out-of-pocket costs and expenses incurred in the performance of its duties hereunder, as set forth in the operating budgets in effect from time to time under Section 5.4. 5.10 OTHER ACTIVITIES OF MEMBERS. (a) The Manager shall devote to the Company such of its time and render such services as may be required for the efficient conduct of the business of the Company, to carry out the purpose of this Agreement, and to maintain the Property as a first-class office building and to attempt to maximize the profits resulting from the ownership thereof. (b) Any Member, any Affiliates and any officer, director, shareholder, member, manager, employee or agent of any Member or any Affiliates may lend money to and transact other business with the Company and may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, those competitive with the business of the Company. Neither the Company nor the other Members shall have any rights in and to such independent ventures or the income or profits derived therefrom nor shall any Member assert any claim with respect thereto on the opportunities therefrom. (c) The Members or their Affiliates may serve as asset manager and/or mortgage broker for the Company and/or as management agent of the Property. No compensation or fees shall be paid to the Members or their Affiliates except as described in this Agreement. The Members or their Affiliates may receive compensation for any goods or services rendered to the Company provided the amount of such compensation is not more than the amount the Company would be required to pay to unrelated Persons for comparable goods or services. Any payment to be made to a Member or one of its Affiliates for such goods or services shall be disclosed to the Members and approved by all of the Members in advance of the service being rendered or the goods being provided. Upon such disclosure and approval, no Member shall be entitled to any share of such payment, except to the extent made or received in violation of this Agreement. -35- 41 5.11 INDEMNIFICATION. The Company shall, to the fullest extent permitted under the Act and other applicable law, indemnify any Person who is a party, or is threatened to be made a party, to any threatened, pending or completed civil, criminal, administrative or investigative action, suit or proceeding because such Person is or was a Manager, Member, officer, employee or agent of the Company or is or was serving at the request of the Company as a member, manager, director, trustee, partner, officer, employee or agent of another limited liability company, corporation, partnership, joint venture, trust or other enterprise, against costs, claims, damages, losses, judgments, fines and expenses (including without limitation, reasonable attorneys' fees, filing fees, court reporters' fees and transcript costs) actually and reasonably incurred by such Person in connection with such action, suit or proceeding if such Person's act or omission giving rise to any claim for indemnification under this Section 5.11 was not occasioned by such Person's fraud, willful misconduct, gross negligence or intent to cause injury to the Company or by such Person's reckless disregard for the best interests of the Company, and in respect of any criminal action or proceeding, such Person had no reasonable basis to believe such Person's conduct was unlawful. Notwithstanding the foregoing, the Company shall not indemnify a Member in respect of a dispute among the Members, or any of them, arising out of this Agreement. 5.12 TAX MATTERS MEMBER. The "Tax Matters Member" (referred to as the "tax matters partner" in Section 6231(a)(7) of the Code), shall be designated in writing from time to time by the Manager and, initially, shall be Georgetown. The Tax Matters Member shall represent the Company and the Members, at Company expense, in any administrative or judicial proceeding with the Internal Revenue Service, at the direction of all of the Members. Any other Member may, at its own expense, participate in such proceeding to the extent permitted by the Code. If an administrative proceeding results in the issuance of a "final partnership administrative adjustment" ("FPAA"), as that term is used in Sections 6223 et seq. of the Code, the Tax Matters Member, at the direction of all of the Members, shall determine whether the Company shall seek judicial review of such FPAA. If the Tax Matters Member determines that the Company shall not seek judicial review, it shall promptly notify all the other Members of this determination and each Member shall be entitled, at its own expense, to pursue whatever rights it may have under the Code. Any amounts paid by the Tax Matters Member on behalf of the Company in connection with any administrative or judicial proceeding shall be considered a loan to the Company, and not a contribution to capital. The Tax Matters Member shall not be liable to the Company or the other Members for any action it takes or fails to take in connection with any such judicial or administrative proceeding, including, without limitation, the agreement to or failure to agree to a settlement or the extension of, or failure to extend the relevant statutes of limitations, unless such action or failure constitutes willful misconduct, fraud, gross negligence or breach of a fiduciary duty to the Company or any of the other Members. The Members shall use their best efforts and due diligence to cooperatively and collaboratively advise and direct the Tax Matters Member in the performance of its obligations under this Section 5.12. 5.13 PROPERTY MANAGEMENT AGENT. The Members, acting unanimously, shall have the right, from time to time, to select a property management agent to manage the Property. The terms of any property management agreement shall be determined by the unanimous consent of the Members. -36- 42 5.14 CERTAIN PROVISIONS OF THE ACT SUPERSEDED. The provisions of this Agreement regarding the management of the Company are intended to and shall, to the fullest extent permitted by law, supersede the provisions of the Act regarding the management of a limited liability company. ARTICLE VI RIGHTS, DUTIES AND OBLIGATIONS OF MEMBERS 6.1 RIGHTS OF MEMBERS OTHER THAN THE MANAGER TO PARTICIPATE IN THE MANAGEMENT OR CONTROL OF THE BUSINESS. Except as specifically set forth in this Agreement, the Members shall have the right and power to participate in the management and control of the Company, its business and its affairs. However, the Members other than the Manager shall have no right or power to control or supervise, and no duty or responsibility for, the filing of any tax return or the making of any tax payment for or on behalf of the Company or any of its officers or employees; and shall have no duty or obligation to be responsible for the execution of the Company's fiscal responsibilities. 6.2 LIMITED LIABILITY OF MEMBERS. Subject to the provisions of the Act, the liability of a Member for the debts and obligations of the Company shall be limited to the amount of its Capital Contribution, and no Member shall be obligated to contribute money to the Company or to otherwise answer for an obligation of the Company beyond its obligation to pay its Capital Contribution, except to the extent required by law. 6.3 MEETINGS. Members holding one third (1/3rd) or more of the Percentage Interests may by written notice to the Manager call a meeting of all the Members. Upon receipt of a written request for such a meeting, the Manager shall promptly, and in any event not later than five (5) days after receipt of such request, fix a place and time for such meeting, and shall notify each Member thereof in writing. Such notice shall state the purpose for which the meeting is to be held. Such meeting shall be held at a place convenient to the Members in Franklin County, Ohio. Such meeting shall be held not less than ten (10) nor more than twenty (20) days after receipt of a request for a meeting. 6.4 CONSENT OF THE MEMBERS. (a) General. Subject to Section 6.4(b), the unanimous written consent of the Members shall be required with respect to the matters referred to in Section 5.8. Such consent may be withheld by any Member, in its sole and absolute discretion, for any reason or for no reason at all. In the event that the Manager proposes to undertake on behalf of the Company any of such matters, the Manager shall give notice to the Members of such proposal, setting forth the material terms and conditions of such proposal and requesting a consent of each Member thereto. Within fifteen (15) days following receipt of such notice, each Member shall deliver a written response to the Manager either consenting to such proposal or refusing to consent to such proposal. A Member shall be deemed to have given its consent if (a) such consent is given in a vote (either in person or by proxy) at a meeting -37- 43 of the Members called and held in accordance with the provisions of Section 6.3, (b) such consent is delivered in writing to the Manager or (c) the Manager has not received written notice from such Member expressly withholding such consent within fifteen (15) days after a notice is sent to such Member seeking its consent. (b) Override During Tenant Default Period. Notwithstanding anything to the contrary set forth in this Agreement, during a Tenant Default Period, as defined below, all rights of M/I to consent to or approve of any action except those identified in the next sentence shall be suspended, and the provisions providing for such suspended consent or approval rights shall be deemed to apply only to the Members other than M/I or the successor to M/I's Percentage Interest. The following rights of M/I shall not be suspended during a Tenant Default Period: (i) the right to consent to the admission of Substitute Members pursuant to Section 7.5(b), (ii) the right to consent to the continuation of the Company's business and reformation of the Company following the Retirement of a Member pursuant to Section 7.8 and (iii) the right to receive notice of any action requiring the consent or approval of all Members hereunder. A "Tenant Default Period" shall mean any period or periods of time commencing upon the occurrence of a Lease Default, as defined in the following sentence, and ending upon the cure of such Lease Default. As used in the foregoing sentence only, a "Lease Default" shall mean either: (A) M/I's failure pursuant to the Lease to pay rent and/or real estate taxes and assessments on the Property as the same become due and payable (after the expiration of all notice and cure periods as provided in the Lease) (a "Monetary Default"); or (B) as to any default other than a Monetary Default (a "Nonmonetary Default"), agreement between the Company and M/I that a Nonmonetary Default has occurred or, absent such agreement, then a final, unappealable determination by a court of competent jurisdiction that a Nonmonetary Default has occurred; provided, however, that notwithstanding the foregoing provisions to the contrary, M/I shall have no right, from and after the occurrence of an alleged Nonmonetary Default, to consent or approve any action whereby the Company, in its reasonable discretion, expends funds or takes actions to preserve, repair or maintain the Company's assets or their value (including, without limitation, payments for taxes, assessments, insurance and utilities), to avoid the imposition of liens, to preserve tax abatement status for the Property, to comply with lender requirements, to comply with laws or to cure a default under the Lease by the Company. ARTICLE VII TRANSFERS OF INTERESTS OR RETIREMENT; FIRST OFFER PROVISIONS; PURCHASE RIGHTS UPON DEFAULT; CONTINUATION AFTER RETIREMENT OF MEMBERS 7.1 LIMITATIONS ON TRANSFERS AND RETIREMENT; CERTAIN PERMITTED TRANSFERS. (a) General Prohibition. Except as otherwise provided in this Section 7.1 or in Section 7.2, a Member may not sell, pledge, assign or otherwise transfer all or any portion of its Percentage Interest, without obtaining the unanimous written consent of the other Members, which consent may be withheld at their discretion for any reason or for no reason at all. Any -38- 44 attempt to do so in contravention of this Agreement shall be void. Other than in connection with a transfer or assignment and the admission of a Substitute Member in its place in accordance with this Article VII, a Member may not voluntarily Retire as a Member of the Company without the unanimous written consent of the other Members. Neither the death nor the dissolution of the Member, nor the commencement of proceedings for the Bankruptcy, insolvency or receivership of the Member, whether voluntary or involuntary, shall be deemed a "voluntary" Retirement by such Member for purposes of this Section 7.1(a), and the Company shall have no rights or claims for damages against such Member on account thereof. (b) Certain Permitted Transfers. (i) To Certain Commonly Controlled Persons. Each Member may assign or otherwise transfer all, but not less than all, of its Percentage Interest to a Person directly or indirectly controlling, controlled by or under common control with such Member without having to comply with Sections 7.1(a) or 7.2, provided that (A) the provisions of Section 7.4 are complied with in respect of such assignment or transfer, (B) the admission of a Substitute Member remains subject to the provisions of Section 7.5 and (C), in the case of assignments or transfers by Georgetown and its successors only, either or both of Marshall Rose or Edgar A. Lampert shall be a meaningful principal of or participant in the assignee or transferee. For purposes of this Section 7.1(b)(i) only, "control" of a Person by a Person shall mean the ownership by the controlling Person of at least fifty percent (50%) of the legal and beneficial interests of the Person controlled. The assigning or transferring Member shall provide the other Members with at least thirty (30) days written notice of any such proposed assignment or transfer. (ii) By Limited. On and after the Completion Date, Limited may assign or otherwise transfer all, but not less than all, of its Percentage Interest to a Person to whom Limited and/or its Affiliates are concurrently transferring all or substantially all of the property identified on Schedule D attached hereto, without having to comply with Sections 7.1(a) or 7.2, provided that (A) the provisions of Section 7.4 are complied with in respect of such assignment or transfer, (B) the admission of a Substitute Member remains subject to the provisions of Section 7.5, (C) the assignment or transfer is made for fair market value, and (D) M/I and Georgetown each are provided the opportunity to concurrently assign or transfer their respective Percentage Interests on the same terms and conditions to the assignee or transferee or, at the election of Limited, to Limited or its designee. (iii) Between the Members. On and after the Completion Date, each Member may assign or otherwise transfer all, but not less than all, of its Percentage Interest to any other Member without having to comply with Sections 7.1(a), 7.2 and 7.5, provided that the provisions of Section 7.4 are complied with in respect of such assignment or transfer. 7.2 RIGHT OF FIRST OFFER. -39- 45 (a) General. During the period of time commencing on the date which is the first day of the twenty-seventh month after the Completion Date, and ending upon the termination of the Company (the "First Offer Period"), each Member shall have the option to initiate the procedures provided for in this Section 7.2 (the "First Offer Procedures"). The First Offer Procedures shall be initiated upon the giving by a Member to all of the other Members of an Initiating Notice during the First Offer Period. As used in this Section 7.2, the term "Initiating Notice" shall mean a notice to the effect that the Member giving such notice (the "Electing Member" as to such notice) desires to initiate the First Offer Procedures and containing (i) a statement to the effect that the Electing Member offers to sell such Member's Percentage Interests and such Member's interest in any Member Loans made by such Member (such Member's "First Offer Interest"), (ii) a statement of the value (as determined by the Electing Member), in United States Dollars, of the assets of the Company upon which the Electing Member agrees to permit to be based the calculation of the purchase price of First Offer Interests to be purchased and sold in accordance with the First Offer Procedures (the "Stated Valuation Price"), and (iii) the additional terms of sale upon which the Electing Member offers to sell its First Offer Interest. (b) Options of Other Members. Upon the giving of an Initiating Notice, the Members to whom such Initiating Notice was given (the "Other Members") thereupon shall have an irrevocable option to purchase the interests offered to be sold in the corresponding Initiating Notice, each on the terms and subject to the conditions set forth in this Section 7.2 (the "Purchase Option"). Each Other Member may exercise the Purchase Option by giving to the Electing Member, within thirty (30) days of the giving by the Electing Member of the corresponding Initiating Notice, a notice to the effect that such Other Member desires to exercise the Purchase Option (an "Option Election Notice"). If more than one of the Other Members gives an Option Election Notice, then each such Other Member shall be deemed to have elected to purchase the portion of the First Offer Interest that bears the same proportion to the entire First Offer Interest as the Percentage Interest of such Offeree Member bears to the aggregate of the Percentage Interests of all the Offeree Members making such election. (c) Calculation of First Offer Price. The purchase price to be paid for a First Offer Interest (the "First Offer Price" in respect of such First Offer Interest) shall be calculated in accordance with this Section 7.2(c). The First Offer Price in respect of a Member's First Offer Interest shall be that amount which would be distributed to such Member pursuant to Section 4.6 assuming hypothetically that the assets of the Company were sold for the Stated Valuation Price and the proceeds of such sale were applied and distributed in accordance with said Section 4.6. Upon the giving of an Initiating Notice, the Manager promptly shall engage, on behalf of and at the expense of the Company, the Company's then-serving Accountants to determine the First Offer Price of the Electing Member's First Offer Interest in accordance with this Section 7.2, and to give notice of such determination to each Member. Such determination shall take into account any then-pending but uneffected conversions of Member Loans into Cash Needs Contributions, in accordance with the provisions of Sections 3.6(b)(v), as if such conversions had been effected. Such determination shall identify any Member Loan as to which no election to so convert such Member Loan to a Cash Needs Contribution has then been made, and shall assume that none of -40- 46 such Member Loans will be so converted. If for any reason notice of such determination is not given to the Members within twenty-one (21) days of the giving of the Initiating Notice, the Electing Member shall have the option to engage, on behalf of and at the expense of the Company, any nationally-recognized firm of independent public accountants for such purpose. If the Electing Member so engages a nationally-recognized firm of independent public accountants for such purpose, the Electing Member shall give to the other Members notice to that effect. At the corresponding First Offer Closing (as defined in Section 7.2(d)), the First Offer Price shall be adjusted to take into account any conversions of Member Loans to Cash Needs Contributions effected subsequent to, and not taken to account in, the determinations referred to in this Section 7.2(c). The failure of the First Offer Price to be so determined shall not affect the obligations of the Members set forth in this Section 7.2. (d) Closing of First Offer Purchase and Sale. The closing of the purchase and sale of a First Offer Interest upon the exercise of a Purchase Option (a "First Offer Closing") shall be consummated in accordance with the provisions of this Section 7.2(d). A First Offer Closing shall be consummated at the business office of the Company at 10:00 a.m., Columbus, Ohio local time, on the First Offer Closing Date. As used in this Agreement, the term "First Offer Closing Date" in reference to a First Offer Closing shall mean the date designated as such in a notice given by the Member (or jointly by the Members, if more than one) required to purchase a First Offer Interest at such First Offer Closing (each, a "Purchasing Member") to the Member required to sell the First Offer Interest at such First Offer Closing (the "Selling Member"); provided that such date shall be a date which is no sooner than thirty (30) days and no later than ninety (90) days after the date on which the corresponding Option Election Notice is given. In the event that no such notice is given, the First Offer Closing Date shall be the date which is the ninetieth (90th) day after the date on which the corresponding Option Election Notice is given. At the First Offer Closing, (i) each Purchasing Member shall pay to the Selling Member its share of the First Offer Price in respect of the First Offer Interest to be purchased and sold, calculated in accordance with Section 7.2(c) of this Agreement, in United States Dollars and in the form of a good bank-certified or cashier's check drawn on an institution reasonably satisfactory to the Selling Member or, at the direction of the Selling Member, by wire transfer to an account designated by the Selling Member, and (ii) the Selling Member shall effectively transfer to the order of each Purchasing Member its share of the Selling Member's First Offer Interest in accordance with the First Offer Procedures, free and clear of all liens or encumbrances of any kind. At, and subsequent to, the First Offer Closing, each Member and the Company shall execute, deliver and acknowledge any and all documents, agreements, and statements and certificates concerning factual matters, and shall take or refrain from taking actions, as shall be reasonable, necessary or appropriate in connection with the consummation of the First Offer Closing in accordance with the provisions of this Section 7.2. (e) Right to Transfer. In the event that the Electing Member does not receive within the time limits set forth in Section 7.2(b) above any Option Election Notice from any of the Other Members, then the Electing Member shall thereupon be free to sell and assign the First Offer Interest to any Person at a price not less than the First Offer Price and on terms not less -41- 47 favorable to the Electing Member than the terms described in the Option Election Notice for a period of one hundred eighty (180) days following the earlier of (i) the expiration of the thirty (30) day period during which the Other Members may deliver an Option Election Notice and (ii) the receipt by the Electing Member of any notice or notices from all of the Other Members rejecting such offer contained in the Initiating Notice, provided that (A) the provisions of Section 7.4 are complied with in respect of such assignment and (B) the admission of a Substitute Member remains subject to the provisions of Section 7.5. Each Member and the Company shall execute, deliver and acknowledge any and all documents, agreements, and statements and certificates concerning factual matters, and shall take or refrain from taking actions, as shall be commercially reasonable, necessary or appropriate in connection with the consummation of the sale or assignment by the Electing Member of the First Offer Interest in accordance with the provisions of this Section 7.2. If such sale and assignment is not consummated within such one hundred eighty (180) day period, the Electing Member shall not have the right to sell or assign the First Offer Interest without once again complying with the provisions of this Section 7.2. (f) Additional Provisions Governing First Offer Procedures. The provisions of this Section 7.2(f) shall govern the First Offer Procedures notwithstanding any contrary provision or effect of this Agreement. (i) Effect of Conflict With Loan Agreement. The Company shall provide to each Member a copy of each agreement entered into by the Company in accordance with the provisions of this Agreement providing for a loan to the Company by a lender other than a Member. If the implementation of the First Offer Procedures would conflict with or cause a default under any such agreement, a Member desiring to implement the First Offer Procedures shall have obtained the consent or waiver of the lender under each such agreement to the implementation of the First Offer Procedures prior to giving an Initiating Notice. (ii) Effect of Default by Lessee Under Lease. M/I shall not give an Initiating Notice during a Tenant Default Period, and any such notice given by M/I during a Tenant Default Period and purporting to be an Initiating Notice shall be void and of no effect whatsoever. (iii) Effect of Pending Cash Needs Contributions. The First Offer Procedures shall be subject to the provisions of Section 3.6(b)(v). Accordingly, in the event that the Selling Member has elected to convert a Member Loan to a Cash Needs Contribution in accordance with Section 3.6(b)(v) and such conversion remains uneffected during the period following the giving of an Initiating Notice, the implementation of the First Offer Procedures shall take into account the effect of Section 3.6(v)(5) as applied to such conversion. In the event that any such conversion remains uneffected at the time of a First Offer Closing scheduled in accordance with this Section 7.2, such First Offer Closing shall be deferred until the business day following the date on which such conversion has been effected. -42- 48 (iv) Effect of Pending Default Purchase Right. No Member shall give an Initiating Notice during any period in which Limited or Georgetown are entitled to exercise the Default Purchase Right pursuant to Section 7.3, any such notice given by a Member during such period and purporting to be an Initiating Notice shall be void and of no effect whatsoever, and the First Offer Procedures shall be suspended during such period. (v) Waiver, Modification and Amendment Permitted. Any of the provisions of this Section 7.2 may be waived, modified or amended by a written instrument executed by all of the Members. 7.3 PURCHASE RIGHTS UPON DEFAULT. (a) Purchase Rights Upon Event of Default Under Lease. Upon the occurrence of an Event of Default, as that term is defined in the Lease, which is undisputed between the tenant under the Lease and the Company or which has been determined to have occurred pursuant to a final, unappealable decision by a court of competent jurisdiction, each of Limited and Georgetown shall have the right (but not the obligation), at any time thereafter, to purchase and to receive an assignment of the entire Percentage Interest of M/I for an aggregate purchase price equal to the Appraised Value, as defined in Section 7.3(b), of the Company, multiplied by the Percentage Interest of M/I (a "Default Purchase Right"). If either Limited or Georgetown desires to elect to exercise its Default Purchase Right, such electing Member shall notify the other Member in writing of its decision, and such other Member shall within twenty (20) days thereafter notify the electing Member of its decision whether or not to exercise its Default Purchase Right. If both Limited and Georgetown elect to exercise their respective Default Purchase Rights, each of Limited and Georgetown shall be entitled to purchase the portion of the Percentage Interest of M/I that bears the same proportion to the entire Percentage Interest of M/I as the Percentage Interest of such Member bears to the aggregate of the Percentage Interests of Limited and Georgetown, for a purchase price equal to a proportionate amount of the Appraised Value of the Company, multiplied by the Percentage Interest of M/I. Each electing Member shall give to M/I a notice that such Member has elected to purchase the Percentage Interest of M/I. (b) Determination of Appraised Value. The "Appraised Value" of the Company shall be the value which M/I and the electing Member(s), collectively, shall assign to the Company. If the Members do not agree on such a value within twenty (20) days after the date of the giving of the notice (or the later of the notices, if more than one is given) referred to in the final sentence of Section 7.3(a) (the "Section 7.3(a) Notice Date"), the Appraised Value shall be the amount which would be distributed to all of the Members pursuant to Section 4.6 assuming hypothetically that the assets of the Company were sold for their fair market value, as determined by an appraiser mutually chosen by all of the Members. If the Members do not mutually agree on an appraiser within forty (40) days after the Section 7.3(a) Notice Date, the Appraised Value shall be the average of the two (2) closest amounts assigned as the Appraised Value by three (3) appraisers, one of whom is appointed by M/I, one of whom is appointed by the electing Member(s) and one of whom is chosen by the other two appraisers. If the appraisers chosen by -43- 49 M/I and the electing Member(s) do not mutually agree on the third appraiser within sixty (60) days after the Section 7.3(a) Notice Date, the Manager shall promptly thereafter, and in any event within eighty (80) days after the Section 7.3(a) Notice Date, formally request that the Administrative Law Judge of the Court of Common Pleas of Franklin County, Ohio select an appraiser for this purpose. The appraiser authorized under this Section 7.3(b) to assign a value to the Company shall have no more than forty-five (45) days from their final selection or appointment to prepare and deliver such appraisals to the Members. The costs of appraisal, if any, shall be borne fifty percent (50%) by M/I and fifty percent (50%) by the electing Member(s). (c) Closing of Purchase Option Under Section 7.3. The closing of a purchase of the Percentage Interest of M/I pursuant to this Section 7.3 shall be consummated at the business office of the Company at 10:00 a.m., Columbus, Ohio local time on the date agreed upon by the Members (or, in the absence of such agreement, the first business day which is at least twenty (20) days after the date the Appraised Value is determined). At the closing, each electing Member shall pay to M/I its share of (or, if applicable, the entire) purchase price determined under Sections 7.3(a) and (b), and M/I shall effectively transfer to the order of such electing Member(s) its Percentage Interest, free and clear of all liens or encumbrances of any kind. At, and subsequent to, closing, each Member and the Company shall execute, deliver and acknowledge any and all documents, agreements, and statements and certificates, and shall take or refrain from taking actions, as shall be commercially reasonable, necessary or appropriate in connection with the consummation of the transfer(s) contemplated by this Section 7.3. 7.4 ADDITIONAL RESTRICTIONS ON ASSIGNMENTS OR TRANSFERS. Notwithstanding anything in this Article VII to the contrary, the following additional restrictions apply to the Percentage Interests: (a) No Member shall make any assignment or transfer of any Percentage Interests if the assignment or transfer would, when considered with all other assignments and transfers during the same applicable twelve-month period, cause a termination of the Company for federal income tax purposes. (b) No Member shall make any assignment or transfer of any Percentage Interests to a minor or to an incompetent; except that an assignment or transfer may be made to a trustee, custodian or guardian for the benefit of a minor or an incompetent, if such assignment or transfer is effected in accordance with applicable law. No Member shall make an assignment to a tax-exempt entity under Section 168(h) of the Code. (c) No Member shall make any assignment or transfer of any Percentage Interests unless such Member gives a copy of this Agreement to the assignee or transferee before such assignment or transfer is effected. (d) The Manager may require, as a condition to the assignment or transfer of any Percentage Interests, that the assigning or transferring Member and/or the assignee or -44- 50 transferee (i) assume all costs incurred by the Company in connection therewith; and (ii) furnish reasonable assurances to the Manager, including the provision of any factual information and/or legal opinions satisfactory in all respects to the Manager, that such assignment or transfer complies in all respects with applicable federal and state securities laws. 7.5 REQUIREMENTS FOR SUBSTITUTION. Notwithstanding anything in this Article VII to the contrary, upon the assignment or other transfer of any Percentage Interests, no assignee shall have the right to become a Substitute Member in place of its assignor unless the conditions of Sections 7.1 and 7.4 have been satisfied and: (a) The assignor has evidenced in a written instrument of assignment its intention that the assignee be admitted as a Substitute Member pursuant to the provisions hereof; (b) The unanimous written consent of the Members has been obtained, which consent may be withheld by any Member, in its sole and absolute discretion, for any reason or for no reason at all; provided that the consent requirement of this Section 7.5(b) shall not apply to any assignee intending to become a Substitute Member in connection with a transfer or assignment by Limited or M/I described in Section 7.1(b)(i) or (ii) if Limited and M/I, in the aggregate, do not own eighty percent (80%) or more of all interests in the capital, income, gain, loss, deduction or credit of the Company; (c) The assignee has adopted and agreed in writing to be bound by all of the provisions hereof, as the same may have been amended; (d) The assignee shall have paid all reasonable legal fees and a reasonable handling fee to the Manager to cover administrative charges in connection with such assignment and substitution; and (e) All documents reasonably required by the Manager to effect the substitution of the assignee as a Member shall have been executed. When and if all of the provisions of this Section 7.5 have been complied with, the assignee shall thereupon become a Member of the Company. It is understood and agreed by and among the Members that an assignment or transfer between the Members pursuant to Section 7.1(b)(iii) need not comply with this Section 7.5. 7.6 OBLIGATIONS AND RIGHTS OF TRANSFEREES. Whether or not a Person who acquires an interest in the Company has accepted in writing the terms and provisions of this Agreement and assumed in writing the obligations hereunder of its predecessor in interest, such Person shall be deemed, by such acquisition of such interest, to have agreed to be subject to and bound by all the obligations of this Agreement with the same effect as any predecessor in interest of such Person. A Person acquiring an interest in the Company shall have only such rights and shall be subject to all the obligations as provided in this Agreement, and, without limiting the foregoing, such Person shall not -45- 51 have the right to have the value of its interest ascertained or receive the value of such interest or, in lieu thereof, profits attributable to any right in the Company, except as set forth in this Agreement. 7.7 DISTRIBUTIONS AND ALLOCATIONS IN RESPECT OF TRANSFERRED PERCENTAGE INTERESTS. If any Percentage Interest is sold, assigned or transferred during any accounting period in compliance with the provisions of this Article VII, Profits, Losses, each item thereof and all other items attributable to such Percentage Interest for such period shall be divided and allocated between the transferor and the transferee by taking into account their varying interests during the period in accordance with Code Section 706(d), using any conventions permitted by law and selected by the Manager. Unless otherwise determined by the Manager, all distributions made on or before the date thirty (30) days following the date on which the Company receives written notice of such transfer (accompanied by the transfer documents) shall be made to the transferor, and all distributions made thereafter shall be made to the transferee. Solely for purposes of making such allocations and distributions, the Company shall recognize such transfer not later than the end of the calendar month during which it is given notice of such transfer, provided that if the Company does not receive a notice stating the date such Percentage Interest or interest was transferred and such other information as the Manager may reasonably require within thirty (30) days after the end of the accounting period during which the transfer occurs, then, at the Manager's option, all of such items shall be allocated, and all distributions shall be made, to the Person who, according to the books and records of the Company, on the last day of the accounting period during which the transfer occurs, was the owner of the Percentage Interest or interest. Neither the Company nor the Manager shall incur any liability for making allocations and distributions in accordance with the provisions of this Section 7.7, whether or not the Manager or the Company has knowledge of any transfer of ownership of any Percentage Interest. 7.8 CONTINUATION AFTER RETIREMENT OF MEMBER. The Company shall be dissolved upon the Retirement of a Member; provided, however, that the Company and its business shall be continued (and the Company reformed) after such Retirement if the unanimous written consent of the remaining Members has been obtained, which consent may be withheld by any Member, in its sole and absolute discretion, for any reason or for no reason at all. In the event that the Company's business has been validly continued as provided in the preceding sentence, such business shall be continued in the form of a successor limited liability company, which shall be deemed constituted and continued on the terms and conditions set forth in this Agreement, except as may be modified by agreement of the Members; and the assets of the Company shall not be liquidated. The successor limited liability company shall be deemed to have acquired by contribution the assets of the Company and the interest of each Member in the Company, subject to the liabilities and obligations of the Company. Each Member hereby agrees to execute and deliver all documents necessary to effectuate the purposes of this Section. 7.9 RESTRICTIONS REASONABLE. Each Member acknowledges and agrees that the restrictions on the transfer of Percentage Interests imposed by this Agreement are imposed to accomplish legitimate purposes of the Company, and that such restrictions are not more restrictive than necessary to accomplish those purposes. -46- 52 7.10 CERTAIN PROVISIONS OF THE ACT SUPERSEDED. The provisions of this Agreement regarding the Retirement of a Member and the transfer of Percentage Interests are intended to and shall, to the fullest extent permitted by law, supersede the provisions of the Act regarding the withdrawal of a member, in respect of each Member. ARTICLE VIII REMOVAL OF MANAGER; ADMISSION OF SUBSTITUTE MANAGER 8.1 REMOVAL OF MANAGER. Subject to Section 8.3, the Manager may be removed as Manager upon the unanimous written direction of the Members other than the Manager, for any reason or no reason at all. 8.2 ADMISSION OF SUBSTITUTE MANAGER. Subject to Section 8.3: (a) a substitute Manager shall be chosen by the Members other than the removed Manager upon the removal or Retirement of the Manager, and shall succeed to all the rights, powers, authority, duties and obligations of such Manager as set forth in this Agreement immediately upon its admission as a Manager in the Company; (b) a Manager must also be a Member; and (c) a substitute Manager shall be admitted as Manager and as a Member on such terms and conditions as shall be determined with the unanimous written consent of the Members other than the removed Manager, which consent may be withheld by any of such Members, in its sole and absolute discretion, for any reason or for no reason at all. 8.3 MANAGER UPON PURCHASE OF CERTAIN PERCENTAGE INTERESTS. (a) Limited. In the event that Limited acquires the Percentage Interest of Georgetown or M/I pursuant to Section 7.1(b)(iii) or otherwise, the Members agree that Limited shall thereupon become the Manager without any further action and thereafter, notwithstanding Section 8.1, Limited may not be removed as Manager pursuant to Section 8.1. (b) M/I. In the event that M/I acquires the Percentage Interest of Georgetown or Limited pursuant to Section 7.1(b)(iii) or otherwise, the Members agree that M/I shall thereupon become the Manager without any further action and thereafter, notwithstanding Section 8.1, M/I may not be removed as Manager pursuant to Section 8.1. -47- 53 ARTICLE IX PROCEDURE ON DISSOLUTION 9.1 LIQUIDATION. Upon the dissolution of the Company, unless the Company is continued or reformed as provided in this Agreement, the Manager shall proceed to liquidate the Company and to apply and distribute the proceeds of liquidation as set forth in Sections 4.6 and 4.7. 9.2 OPERATIONS DURING LIQUIDATION. Upon the determination that the Company is to be dissolved and liquidated, the business of the Company during the period of liquidation shall be carried on by the Manager, or if there be no Manager, by a designee of the Members, who shall possess all the powers of the Manager to the extent necessary to wind up the business and affairs of the Company. 9.3 TIME FOR LIQUIDATION. In the event the Company is "liquidated" within the meaning of the Allocation Regulations, distributions shall be made pursuant to Section 4.6 in compliance with the timing requirements of the Allocation Regulations; provided, however, that if, in the opinion of counsel satisfactory to the Manager, failure to comply with the Allocation Regulations would not cause the allocations of Profits and Losses (or any item thereof) to the respective Members to lack substantial economic effect within the meaning of Section 704(b) of the Code, then distributions need not be made in compliance with the timing requirements of the Allocation Regulations. With the approval of the Manager, distributions pursuant to the preceding sentence may be distributed to a trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company in accordance with Section 4.6(b). The assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the trustee(s) thereof with the consent of the Manager in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement. The trustee(s) of such trust (and any successors) may be designated by the Manager. Subject to compliance with the foregoing, a reasonable amount of time shall be allowed for the orderly liquidation of the assets of the Company and the discharge of liabilities to creditors so as to enable the Manager to minimize the losses which might otherwise be attendant upon such liquidation. 9.4 MANAGER NOT LIABLE FOR RETURN OF CAPITAL CONTRIBUTIONS. The Manager shall not be personally liable for any distribution required pursuant to this Agreement unless such failure to distribute is caused by the gross negligence, fraud or willful misconduct of the Manager, and such distribution shall be made solely from available Company assets, if any. 9.5 TERMINATION. Upon compliance with the foregoing distribution plan (including payment over to an escrow agent or trustee, if deemed appropriate by the Manager and if there be sufficient funds therefor), the Company shall cease to be such, and the Manager shall execute, acknowledge and cause to be filed a certificate of cancellation of the Company with the Secretary of State, including the name of the Company and the effective date of its dissolution subject to and in accordance with applicable law. -48- 54 ARTICLE X BOOKS AND RECORDS; BANK ACCOUNTSACCOUNTS 10.1 MAINTENANCE OF BOOKS AND ACCOUNTING METHOD. The Manager shall keep or cause to be kept the following: (i) a current list of the full names, in alphabetical order, and last known business or residence addresses of all Members; (ii) a copy of the Certificate of Formation, including any amendments thereof and any written powers of attorney relating to the execution thereof; (iii) a copy of this Agreement, including any amendments thereof and any written powers of attorney relating to the execution thereof; (iv) copies of federal, state and local income tax returns and reports of the Company for the three most recent years; (v) copies of any financial statements of the Company for the three most recent years; and the other information required to be made available to the Members pursuant to the Act, including Section 18-305 thereof. Such books and records shall be maintained at the principal place of business of the Company and be available upon reasonable notice, at reasonable times, for inspection and examination by the Members or their duly authorized agents or representatives in accordance with and subject to the provisions of the Act. Such books and records shall be consistent with the rules set forth in Section 3.4 of this Agreement. The books and records of the Company shall be kept in accordance with generally accepted accounting principles and consistent with federal tax accounting principles prescribed in the Code. 10.2 FISCAL YEAR. The fiscal year of the Company shall be the calendar year. 10.3 REPORTS TO THE MEMBERS. (a) During the period commencing on the formation of the Company and terminating at the close of the Company's second fiscal year, not less often than quarterly, the Manager shall cause to be prepared (at the Company's expense) a statement of the financial affairs of the Company (including a balance sheet, income statement and cash flow statement) and shall submit copies of such statement to each Member. Thereafter, the Manager shall cause to be prepared (at the Company's expense) and submitted to the Members such statements on an annual basis; provided, however, that upon the reasonable request of a Member, the Manager shall cause to be prepared such statements on a more frequent basis. The annual financial statements shall be audited and certified by the Accountants. (b) The Manager shall cause to be prepared and distributed to each Member (at the Company's expense), on or before February 28 of each year, the Member's Schedule K-1 (Form 1065) and all other information reasonably necessary for the preparation of such Member's federal, state and local tax returns. No cause of action shall accrue to any Member under this Section 10.3 if the Manager shall have acted in good faith in attempting to meet its obligations under this Section yet failed to deliver the required statements, reports, returns or information within the specified period. -49- 55 (c) The Manager shall cause to be prepared and sent to each Member quarterly status reports concerning the operations of the Property. (d) The Accountants shall be selected from time to time upon the unanimous consent of the Members. 10.4 INSPECTION BY MEMBERS. Each Member and its representatives shall have the right, at the expense of the Member taking such action or on whose behalf such action is being taken, to inspect and examine all books, records, files and other documents of the Company at all reasonable times during normal business hours at the offices of the Company. Each Member and its representatives also shall have the right, in connection with an examination of the Company to interview the employees of the Manager or the Company in respect to Company activities, and to interview any other Person (including, without limitation, the Manager), and the employees thereof, which acts for or has custody or control of records or documents of the Company. In addition, the Members shall have the right to obtain from the Manager from time to time upon reasonable demand: (i) true and full information regarding the state of the business and financial condition of the Company and any other information regarding the affairs of the Company; (ii) the documents described in Section 10.1 hereof; and (iii) any other information regarding the affairs of the Company as is just and reasonable. 10.5 BANKING. All funds of the Company shall be deposited in such bank account or accounts as shall be established and designated by the Manager. Withdrawals from any such bank account shall be made upon such signature or signatures as the Manager may designate. All deposits and other funds not needed in the operation of the business of the Company and not distributed to the Members may be invested in deposits that are fully insured by the Federal Deposit Insurance Corporation or in money market funds rated in the highest rating category for such funds by a nationally-recognized rating service. 10.6 TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS. The Manager shall, at the direction of all of the Members, make all tax elections on behalf of the Company. In the event of a transfer of all or any part of the interest of any Member for an amount in excess of the adjusted basis for such interest for federal income tax purposes, the Manager may elect at the direction of all of the Members, pursuant to Section 754 of the Code (or corresponding provisions of succeeding law), to enable an adjustment to be made to the basis of the Property. Any costs incurred by the Company in connection with such Section 754 election shall be borne by the Member seeking a transfer of its interest. Any adjustments made pursuant to an election under Section 754 shall affect only the successor in interest to the transferring Member. Each Member will furnish the Company with all information necessary to give effect to such election. 10.7 COST SEGREGATION ANALYSIS. The Members hereby agree to cause the Company to engage the services of an appropriate professional firm to prepare a cost segregation analysis of the Improvements for the purpose of properly segregating, for income tax depreciation purposes, those -50- 56 assets which are subject to depreciation over a shorter period than that available for the Building, in order to maximize the income tax deductions available to the Company. ARTICLE XI AMENDMENTS 11.1 UNANIMOUS CONSENT OF THE MEMBERS. The provisions of this Agreement and the Certificate of Formation may be amended only upon the unanimous written consent of the Members. The consent of any Member to such amendment shall be deemed to have been given if (a) such consent is given in a vote (either in person or by proxy) at a duly called meeting of the Members, (b) such consent is delivered in writing to the Manager or (c) the Manager has not received a written notice from such Member expressly withholding such consent within fifteen (15) days after a notice is sent to such Member seeking its consent. ARTICLE XII GENERAL PROVISIONS 12.1 NO THIRD PARTY BENEFICIARIES. None of the provisions of this Agreement shall be construed as existing for the benefit of any creditor of the Company or as being enforceable by any party not a signatory hereto. There shall be no third party beneficiaries of this Agreement. 12.2 NON-WAIVER. No provision of this Agreement shall be deemed to have been waived unless such waiver is contained in a written notice given by the party granting such waiver to the party claiming such waiver and no such waiver shall be deemed to be a waiver of any other or further obligation or liability of the party or parties in whose favor the waiver was given or a waiver by any party not executing such waiver of any of its rights. 12.3 ADDITIONAL DOCUMENTS AND INSTRUMENTS. The parties shall execute and deliver to each other such other and further documents and instruments as may be necessary to carry out the purposes of this Agreement and which are required by the Manager, or any federal, state or local governmental agency having jurisdiction over the Property or the Company. 12.4 SEVERABILITY. If any provision or provisions of this Agreement (or any part thereof) or the application thereof to any particular facts or circumstances shall be illegal and unenforceable by reason of any statute or rule of law, or shall be deemed null and void pursuant to Section 2.5 of this Agreement, the remaining provisions (or parts thereof) of this Agreement or the application of the particular provision or provisions (or parts thereof) to other facts or circumstances shall not be affected thereby and shall remain in full force and effect. It is the intention of the provisions of this Section to -51- 57 make clear that the agreement of the parties to this Agreement is that this Agreement shall be enforced insofar as it may be enforced consistent with applicable statutes and rules of law. 12.5 NOTICES AND CONSENTS. Except as otherwise specifically set forth in this Agreement, all notices, demands, requests, consents or approvals given, required or permitted to be given hereunder, shall be contained in writing and shall be deemed sufficiently given if actually received or if hand delivered or sent by recognized overnight delivery service or by certified mail, postage prepaid and return receipt requested, addressed to the parties at the addresses set forth below: If to Georgetown: The Georgetown Company 667 Madison Avenue 23rd Floor New York, NY 10021 Attention: Controller If to Limited: Limited Oval Office I, Inc. Three Limited Parkway Columbus, Ohio 43230 Attention: Real Estate Legal Department with a copy to: John P. Wellner, Esq. Vorys, Sater, Seymour and Pease 52 East Gay Street P.O. Box 1008 Columbus, Ohio 43216-1008 If to M/I: M/I Schottenstein Homes, Inc. 41 South High Street Suite 2410 Columbus, Ohio 43215 Attention: General Counsel With a copy to: -52- 58 Daniel J. Kayne, Esq. Schottenstein, Zox & Dunn 41 South High Street Suite 2600 Columbus, Ohio 43215 or to such other address as the recipient shall have previously notified the sender of in writing, and shall be deemed received upon actual receipt (unless sent by certified mail, in which event such notice shall be deemed to have been received three (3) business days after the date of mailing). 12.6 ENTIRE AGREEMENT. This Agreement and each of the exhibits and/or schedules annexed hereto, each of which is made a part hereof by this reference, constitute the entire limited liability company agreement of the Company within the meaning of the Act and contain the entire understanding and agreement between the parties upon the subject matter of this Agreement and may only be amended or changed in a writing as provided in Article XI. Any prior understandings and agreements between the parties are merged herein, except only as herein otherwise expressly stated. 12.7 PROVISIONS BINDING. This Agreement shall inure to the benefit of and be binding upon the parties and their respective heirs, executors, administrators, successors and assigns and any additional or substitute Manager or Member (except as may otherwise be specifically provided herein). 12.8 CAPTIONS. The table of contents and captions set forth herein are for convenience and reference only and are not intended to modify, limit, describe or affect in any way the contents, scope or intent of this Agreement. 12.9 DEFINITIONS. All terms used herein which are defined in this Agreement shall have the meaning set forth in this Agreement, unless the context clearly indicates otherwise. 12.10 COUNTERPARTS. This Agreement may be executed in several counterparts and all so executed shall constitute one and the same agreement binding on all parties hereto, notwithstanding that all parties have not signed the same counterpart or that any such counterpart does not have attached copies of all exhibits and/or schedules hereto as then in effect and copies of all signature pages attached hereto that constitute part of this Agreement. The Manager shall maintain at the business office of the Company a counterpart of this Agreement as executed by all Members and to which shall be attached copies of all exhibits and/or schedules hereto as then in effect, and all signature pages, which counterpart shall be available for inspection by any Member. 12.11 WORD MEANINGS. The words such as "herein," "hereinafter," "hereof" and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural, and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. -53- 59 12.12 APPLICABLE LAW. This Agreement and the rights of the parties hereto shall be interpreted in accordance with the laws of the State of Delaware. 12.13 CHOICE OF VENUE AND CONSENT TO JURISDICTION AND VENUE. It is the intention of the parties that this Agreement shall be deemed to have been entered into in Franklin County, Ohio. EACH PARTY HEREBY: (I) CONSENTS TO THE SUBJECT MATTER AND PERSONAL JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO AND ANY OF THE COURTS OF FRANKLIN COUNTY, IN THE STATE OF OHIO IN ANY ACTION, SUIT OR PROCEEDING ARISING UNDER THIS AGREEMENT (INCLUDING, WITHOUT LIMITATION, ACTIONS, SUITS AND PROCEEDINGS IN CONNECTION WITH THE ENFORCEMENT OF ANY JUDGMENT), (II) AGREES THAT ANY SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT IN ANY OF SUCH COURTS, (III) WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO JURISDICTION OR VENUE OF ANY ACTION INSTITUTED IN SUCH COURTS HEREUNDER, AND (IV) AGREES THAT SERVICE OF PROCESS OR NOTICE IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE EFFECTIVE IF GIVEN IN ACCORDANCE WITH SECTION 12.5. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] -54- 60 IN WITNESS WHEREOF, the undersigned have duly executed this Limited Liability Company Agreement of Northeast Office Venture, Limited Liability Company. THE GEORGETOWN COMPANY By: ------------------------------------- Printed Name: Edgar A. Lampert Title: Authorized Representative LIMITED OVAL OFFICE I, INC. By: ------------------------------------ Printed Name: George R. Sappenfield Title: Vice President - Real Estate M/I SCHOTTENSTEIN HOMES, INC. By: ------------------------------------ Print Name: Irving E. Schottenstein Title: President -55- 61 SCHEDULE A MEMBERS, CAPITAL CONTRIBUTIONS AND PERCENTAGE INTERESTS
Member Percentage and Address Interests The Georgetown Company 33 1/3% 667 Madison Avenue 23rd Floor New York, NY 10021 Limited Oval Office I, Inc. 33 1/3% Three Limited Parkway Columbus, Ohio 43230 M/I Schottenstein Homes, Inc. 33 1/3% 41 South High Street Suite 2410 Columbus, Ohio 43215
-A-1- 62 SCHEDULE B LEGAL DESCRIPTION OF THE LAND -B-1- 63 SCHEDULE C CERTIFICATE OF FORMATION OF NORTHEAST OFFICE VENTURE, LIMITED LIABILITY COMPANY The undersigned, desiring to form a limited liability company under Chapter 6, Sections 18-101 et seq. of the Delaware Code, hereby certifies as follows: 1. The name of the limited liability company shall be Northeast Office Venture, Limited Liability Company. 2. The address of the limited liability company's registered office in the state of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle 19801. The name of its registered agent at such address is The Corporation Trust Company. 3. The undersigned is an authorized person for purposes of the execution and delivery of this Certificate of Formation. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Formation of Northeast Office Venture, Limited Liability Company this ____ day of ________, 1995. THE GEORGETOWN COMPANY, a New York general partnership By: ----------------------------- Print name: ----------------------- Title: ----------------------------- -C-1- 64 SCHEDULE D LOCATION OF CERTAIN REAL PROPERTY IN PROXIMITY TO THE LAND -D-1- 65 SCHEDULE ESCHEDULE E PRELIMINARY BUDGET -E-1- EX-10.52 10 EXHIBIT 10.52 1 Exhibit 10.52 THIS LEASE AGREEMENT (the "Lease Agreement") is made and entered into at Columbus, Ohio, to be effective as of ___________, 1995, by and between Northeast Office Venture, Limited Liability Company, a Delaware limited liability company ("Landlord"), and M/I Schottenstein Homes, Inc., an Ohio corporation ("Tenant"). RECITALS A. Landlord owns fee simple title to a certain tract of real property located in Columbus, Franklin County, Ohio, and Tenant desires to lease said real property from Landlord, together with an office building and related site improvements to be constructed thereon by Landlord. B. Landlord desires to construct an office building and related site improvements on said real property and to lease the same to Tenant. NOW, THEREFORE, for value received and in consideration of the terms, covenants and agreements herein contained, Landlord and Tenant hereby make the following agreement, intending to be legally bound hereby: ARTICLE 1 Definition of Certain Terms 1.01. The term "Additional Lease Term" shall have the meaning set forth in Section 3.03 of this Lease Agreement. 1.02. The term "Affiliate" means a Person who directly or indirectly controls, is controlled by, or is under common control with another Person. For purposes of this definition, a Person is deemed to control an entity of which he is a director, officer, member, or general partner, or in which he is the beneficial owner of 50% or more of its outstanding voting securities. 1.03. The term "Approved Plans and Specifications" shall have the meaning set forth in Section 4.01 of this Lease Agreement. 1.04. The term "Appurtenant Easements" shall have the meaning set forth in Section 2.02 of this Lease Agreement. 2 1.05. The term "Base Rent" means the base rent as defined in Section 7.01 of this Lease Agreement. 1.06. The term "Development Agreement" means that certain Development Agreement, of even date herewith, between Landlord and MORSO Holding Co. ("MORSO"), relating, among other things, to the construction of certain off-site improvements, a copy of which has been provided to Tenant. 1.07. The term "Easton Project" means the approximately 950-acre mixed use (i.e., office, retail, commercial, etc.) project being developed by MORSO and The Georgetown Company in the southwest quadrant of the intersection of Interstate Route 270 and Morse Road in Columbus, Franklin County, Ohio, of which the Premises are a part. 1.08. The term "Effective Date" means the date first set forth in this Lease Agreement. 1.09. The term "Election Notice" shall have the meaning set forth in Section 18.03 of this Lease Agreement. 1.10. The term "Fee Mortgage" shall have the meaning set forth in Section 17.02 of this Lease Agreement. 1.11. The term "Fee Mortgagee" shall have the meaning set forth in Section 17.02 of this Lease Agreement. 1.12. The term "Fixtures" means all furniture, fixtures, machinery, equipment, works of art and trade fixtures which Tenant may purchase (conditionally or otherwise) or lease and hereafter cause to be installed, maintained or kept in or otherwise at the Premises for any purpose whatsoever. 1.13. The term "Initial Lease Term" shall have the meaning set forth in Section 3.01 of this Lease Agreement. 1.14. The term "Lease Term" means the Initial Lease Term specified in Section 3.01 of this Lease Agreement, plus the Additional Lease Term, if any, plus any period during which Tenant may be a tenant-at-sufferance under Section 3.03 of this Lease Agreement, or the shorter period expiring upon the date of earlier termination of this Lease Agreement by Landlord or by Tenant, as provided elsewhere in this Lease Agreement. 1.15. The term "Lease Year" means the periods determined as follows: (a) the first Lease Year shall commence on the Rent Commencement Date and shall end on the last day of the twelfth (12th) full calendar month next following the Rent -2- 3 Commencement Date, and (b) each Lease Year thereafter shall run from the day after the date of termination of the preceding Lease Year and shall terminate on the anniversary date of the termination of the prior Lease Year, except that the last Lease Year shall end on the date this Lease Agreement shall expire or otherwise terminate. 1.16. The term "Land" means that certain tract of real property containing 5.823 acres and which is more particularly described in the legal description set forth in Annex 1, attached to this Lease Agreement. 1.17. The term "Landlord" means Northeast Office Venture, Limited Liability Company, and its successors and assigns. 1.18. The term "Landlord Improvements" means the five-story, first class office building containing approximately 86,000 square feet of floor space, which Landlord shall cause to be constructed on the Land as provided in this Lease Agreement, together with all other site improvements which Landlord shall cause to be placed upon the Land, including, but not limited to, paved surface parking areas, the underground parking and storage areas, driveways, vehicular and pedestrian circulation areas, and landscaping. The Landlord Improvements include all the items described in the Plans and Specifications, but do not include any of the Tenant Improvements or Fixtures. 1.19. The term "Non-Leased Parking Garage Area" means that portion of the Parking Garage located on the Land which is not included in the Premises and which is comprised of the parking spaces designated or described as the "Non-Leased Parking Spaces," together with that portion of the "Access Lane" which is adjacent to said spaces, all of which are delineated and designated on the drawing entitled "M/I Homes Office Building Partial Basement Plan," prepared by NBBJ, a copy of which is attached to this Lease Agreement as Annex 2 (the "Basement Floor Plan"). 1.20. The term "Oval District" means the approximately 73.9 acre development being developed and constructed by MORSO and The Georgetown Company, situated in the Easton Project and in which the Land is situated. 1.21. The term "Parking Agreement" means that certain Parking Facility Operation and Maintenance Agreement, of even date herewith, among Landlord, Tenant and Limited Oval Office II, Inc. ("LOO II"), relating to the operation of the Parking Garage. -3- 4 1.22. The term "Parking Garage" means the integrated, below-grade parking garage, presently designed to have 79 parking spaces, a portion of which is included in the Landlord Improvements and the balance of which forms a part of the office building being constructed by LOO II on the real property adjoining the Land, including the entry ramp thereto. 1.23. The term "Permitted Encumbrances" shall have the meaning set forth in Section 20.02 of this Lease Agreement. 1.24. The term "Person" means any individual, partnership, corporation, firm, joint venture, or other entity, or any combination thereof. 1.25. The term "Plans and Specifications" means all of the preliminary and final plans, drawings and specifications for the construction of the Landlord Improvements prepared or to be prepared by Gensler & Associates and NBBJ. 1.26. The term "Premises" means the Land, together with: (a) all of the above-grade Landlord Improvements; (b) that portion of the Parking Garage which forms a part of the Landlord Improvements and which consists of the parking spaces designated or described as the "Leased Parking Spaces" on the Basement Floor Plan; (c) all of the other areas contained in the below-grade Landlord Improvements which are not included in the "Non-Leased Parking Garage Area"; and (d) all of the Tenant Improvements. 1.27. The term "REA" means that certain Reciprocal Easement Agreement, of even date herewith, between Landlord and LOO II, which creates certain reciprocal easements and other rights and obligations relating to the Premises and that certain 7.983 acre parcel of land located immediately west of the Premises, a copy of which has been provided to Tenant. 1.28. The term "Rent Commencement Date" means sixty (60) calendar days following the Substantial Completion Date. 1.29. The term "Reserved Easements" shall have the meaning set forth in Section 2.03 of this Lease Agreement. 1.30. The term "Scheduled Commencement Date" shall have the meaning set forth in Section 4.03 of this Lease Agreement. -4- 5 1.31. The term "Substantial Completion Date" shall have the meaning set forth in Section 4.04 of this Lease Agreement. 1.32. The term "Tenant" means M/I Schottenstein Homes, Inc. and its successors and assigns. 1.33. The term "Tenant Improvements" means all of the items and work described or to be described in the Tenant Plans. 1.34. The term "Tenant Plans" shall have the meaning set forth in Section 4.05 of this Lease Agreement. ARTICLE 2 Creation of Leasehold 2.01. Demise. Upon the terms and conditions set forth in this Lease Agreement, Landlord does hereby demise and let unto Tenant, and Tenant does hereby lease and hire from Landlord, the Premises, together with the Appurtenant Easements, but subject to the Reserved Easements and Permitted Encumbrances. 2.02. Appurtenant Easements. Landlord does hereby assign, grant and convey to Tenant, as easements appurtenant to the Premises, for and during the Lease Term (a) all of the easements and rights created in favor of the Premises pursuant to the Development Agreement and REA, and (b) a non-exclusive easement over that portion of the "Access Lane" contained within the Non-Leased Parking Garage Area, for the purpose of providing a means of ingress to and egress from the parking spaces in the Parking Garage which are included in the Premises. 2.03. Reserved Easements. Landlord does hereby retain and reserve unto itself, and Tenant does hereby grant and convey to Landlord non-exclusive perpetual easements under, across and through the Premises for the purposes of constructing, installing, reconstructing, repairing, replacing, maintaining and using underground laterals and lines to be connected to those public utilities and appurtenant works, and connections which now or in the future may exist in the public thoroughfares or other portions of the Easton Project abutting the Premises, (herein collectively called the "Reserved Easements"); provided, however, that (i) such easements shall be used in such a manner as will not result in interference with the use and enjoyment of the Premises by Tenant for the purposes contemplated by this Lease Agreement, and (ii) if, as a result of Landlord's use of said easements for said purposes, Landlord shall damage the Premises, -5- 6 then Landlord shall promptly repair the damage and restore the Premises to its pre-existing condition. 2.04. Certain Additional Rights. Landlord hereby assigns to Tenant the right, during the term of this Lease and concurrent with and not in derogation of Landlord's right, to enforce the provisions of the REA and Development Agreement against Limited Oval Office II, Inc. and MORSO Holding Co., respctively. In addition, pursuant to Section 3.2 of the Declaration (as hereinafter defined), Landlord hereby assigns to Tenant the Landlord's right, during the term of this Lease, to vote on all matters as to which a Member (as defined in the Declaration) is entitled to vote pursuant to the terms and provisions of the Declaration. ARTICLE 3 Lease Term 3.01. Initial Lease Term. The initial term of this Lease (the "Initial Lease Term") shall commence on the Rent Commencement Date and shall be for a period of twenty (20) Lease Years, unless sooner terminated, as provided elsewhere in this Lease Agreement. Landlord and Tenant agree to execute a writing establishing the commencement and termination dates of the Initial Lease Term as soon as said dates have been determined. 3.02. Additional Lease Term (A) Renewal Options. Landlord does hereby grant to Tenant the right and option to extend the Initial Lease Term for six (6) additional periods of five (5) years each (with each such five-year period being herein called a "Renewal Term," and with all of such Renewal Terms being sometimes herein collectively called the "Additional Lease Term"), beginning on the day immediately following the expiration of the Initial Lease Term or the then current Renewal Term, as appropriate, upon the same terms, conditions, covenants and provisions as are provided in this Lease Agreement, except that the annual Base Rent payable during the Additional Term shall be determined in accordance with the provisions of Section 3.02(B) of this Lease Agreement. If Tenant intends to exercise a renewal option, then Tenant shall give to Landlord written notice of such intention not less than fifteen (15) months prior to the expiration of the Initial Lease Term or the then current Renewal Term, as appropriate. If an Event of Default has occurred under this Lease Agreement at the time Tenant gives notice of its intention -6- 7 to exercise a renewal option, or at the time the Renewal Term is otherwise scheduled to commence, and if Tenant does not cure such Event of Default in accordance with the provisions of Section 18.01, then the renewal option shall be invalid, and Tenant shall not be permitted to exercise it. If Landlord and Tenant dispute whether an Event of Default has occurred, the then current term hereof shall be automatically extended until a determination is made by a court of competent jurisdiction, or if the parties so elect, by arbitration in accordance with the procedures set forth in Article 25 hereof. The Base Rent to be paid during any such automatic extension shall be the Base Rent determined in accordance with Section 3.02(B). Tenant shall have a period of thirty (30) calendar days following the determination of the Base Rent, as provided in Section 3.02(B), within which to affirm or disaffirm its exercise of such renewal option. If Tenant disaffirms its exercise of such renewal option, the term of this Lease Agreement shall expire in accordance with the terms hereof. If Tenant fails to affirm or disaffirm its exercise of such renewal option within said 30-day period, Tenant shall be conclusively deemed to have disaffirmed such exercise. (B) Base Rent During Renewal Terms. The Base Rent payable during each Renewal Term shall be such amount of money as may be agreed upon between the parties, as being equal to 90% of the "fair market rental" rate for buildings of comparable size, quality and location, and tenants of comparable size and credit in central Ohio, prevailing at the time Tenant gives notice of its election to exercise the renewal option, or as otherwise being acceptable to both parties. In the absence of any such agreement, the Base Rent shall be determined as follows: the parties shall first attempt to agree upon the appointment of one real estate professional who, if so selected by the parties, shall, within 30 days after his appointment, establish the Base Rent for the Renewal Term by first determining the fair market rental rate for the Premises, and then taking 90% of that amount, which shall be the new Base Rent for the Renewal Term; provided, however, that the Base Rent for the first Renewal Term shall not be less than the Base Rent in effect for the last Lease Year of the Initial Lease Term, and the Base Rent for each succeeding Renewal Term shall not be less than the Base Rent in effect for the last Lease Year of the preceding Renewal Term. If the parties are unable to agree upon the appointment of one real estate professional within fifteen (15) days after Tenant gives notice of its election to exercise the renewal option, as contemplated by the preceding paragraph, then, not later than ten (10) days following the expiration of said 15-day -7- 8 period, each party shall designate, in a writing delivered to the other, a real estate professional to act on its behalf. The real estate professionals so chosen shall meet within ten (10) days after the last is so selected and shall, within ten (10) days thereafter, select a third real estate professional. All three such real estate professionals shall independently determine the Base Rent for the Renewal Term. The fair market rental rate for the Premises shall be equal to the average of the two (2) closest amounts as determined by such real estate professionals. Based on such fair market rental rate, the Base Rent for the Renewal Term shall be determined in the same manner as is set forth in the first paragraph of this Section 3.02(B). The fees of all of the real estate professionals chosen under this Section 3.02(B) shall be shared equally by the parties. For purposes of this Section 3.02(B), a "real estate professional" is defined as either (i) a real estate appraiser who shall have been active over the five (5) year period ending on the date of such appointment in the appraisal of office and commercial properties in the Columbus, Ohio, metropolitan area, or (ii) a real estate broker who shall have been active over the five (5) year period ending on the date of such appointment in the leasing of office and commercial properties in the Columbus, Ohio, metropolitan area. 3.03. Lease Hold-Over Provisions. If Tenant remains in possession of the Premises after the expiration of the Lease Term, Tenant shall be deemed to be a tenant-at-sufferance. 3.04. Failure to Give Notice of Election. In the event Tenant fails to deliver timely notice of an exercise of its option to renew for any Renewal Term, then such right of renewal shall not terminate unless and until Landlord delivers to Tenant written notice of such failure and Tenant fails, within thirty (30) days of the receipt of such notice, to deliver to Landlord written notice of its election to exercise its renewal option. ARTICLE 4 Design and Construction of Landlord Improvements and Tenant Improvements 4.01. Plans and Specifications. The parties acknowledge that Tenant is a "member" in Landlord, and that, pursuant to the provisions of Landlord's "Limited Liability Company Agreement" of even date herewith (herein called the "Operating Agreement"), Tenant, in its capacity as such member, has the right to review and approve all of the Plans and Specifications. Following approval of the Plans and -8- 9 Specifications by all of the members in Landlord (such plans, as so approved, being herein called the "Approved Plans and Specifications), any changes thereto must likewise be approved by Tenant pursuant to the Operating Agreement. Accordingly, Tenant's rights to review and approve the Plans and Specifications shall be governed by the provisions of the Operating Agreement, and Tenant shall have no additional rights to review and approve the Plans and Specifications under this Lease Agreement. 4.02. Development of the Landlord Improvements. Landlord shall proceed, with due diligence and in a continual manner, to cause the Landlord Improvements to be developed and constructed in a good and workmanlike manner and in substantial accordance with the Approved Plans and Specifications. 4.03. Commencement of Construction of the Landlord Improvements. (A) Landlord shall cause construction of the Landlord Improvements to commence not later than thirty (30) calendar days following the Effective Date hereof (the "Scheduled Commencement Date"). (B) In the event that Landlord shall have failed to commence construction of the Landlord Improvements on or before the Scheduled Commencement Date, then Tenant shall have the right and option, exercisable by written notice to Landlord prior to the date actual construction commences, but not later than thirty (30) calendar days following the Scheduled Commencement Date, to terminate this Lease Agreement and the Lease Term, whereupon both parties shall be released from all further obligations and liability hereunder, without prejudice to any rights or remedies either may have against the other for damages caused by such failure. On the date that construction of the Landlord Improvements actually shall be commenced, Landlord and Tenant shall enter into a writing to be signed by both Landlord and Tenant and to be in form and substance satisfactory to both Landlord and Tenant, wherein the actual date of such commencement of construction shall be set forth. 4.04. Completion of Construction of the Landlord Improvements and Certain Off-Site Improvements. Except as extended by reason of operation of Article 24 hereof, Landlord shall cause the Landlord Improvements, and those off-site improvements defined and described in Section 1.01 of the Development Agreement as the "Infrastructure" (herein called the -9- 10 "Infrastructure"), to be substantially completed not later than four hundred eighty (480) days following the Scheduled Commencement Date. The Landlord Improvements shall be deemed to be substantially completed only after the work called for in the Plans and Specifications has been completed (with the exception of punchlist and punchlist-type items) in accordance with such Plans and Specifications; and NBBJ has issued a "Certificate of Substantial Completion" therefor. The Infrastructure shall be deemed to be substantially completed only after Evans, Mechwart, Hambleton & Tilton, Inc. ("EMH&T") has certified such substantial completion to both Landlord and Tenant. The date the last of such certificates are issued shall be the "Substantial Completion Date" for all purposes hereunder, and Landlord and Tenant shall enter into a writing to be signed by both Landlord and Tenant and to be in form and substance satisfactory to both Landlord and Tenant, wherein the Substantial Completion Date shall be set forth and identified as such. Landlord shall, in connection with the construction of the Landlord Improvements, comply with, and Landlord shall cause, in connection with the construction of the Parking Garage and Infrastructure, the compliance with all applicable laws, ordinances, rules and regulations, and shall obtain all permits and approvals required or necessary thereunder, in order for Landlord to perform its work hereunder. Anything contained in this Lease Agreement to the contrary notwithstanding, no delay of any kind or character in the completion of construction of the Landlord Improvements shall give rise to any right in Tenant to terminate this Lease Agreement. 4.05. Plans and Specifications for Tenant Improvements. In coordination with Landlord's preparation of the Plans and Specifications, Tenant, at Landlord's sole cost and expense, shall prepare all necessary plans and specifications for the design and construction of the Tenant Improvements (herein called the "Tenant Plans"). Tenant shall cause its design professionals to consult with Landlord's design professionals so that the Tenant Improvements will create a level of finish and an ambiance equal to or better than that of the Landlord Improvements. The Tenant Plans shall be subject to review and approval by Landlord, which approval Landlord shall not unreasonably delay or refuse to give. Any changes to the Tenant Plans, once approved by Landlord, shall likewise be subject to review and approval by Landlord, which approval Landlord shall not unreasonably delay or refuse to give. Tenant shall cause the construction and installation of the Tenant Improvements to be in compliance with such approved Tenant Plans. -10- 11 4.06. Notice of Substantial Completion of the Landlord Improvements and Infrastructure; Entry by Tenant. Landlord shall notify Tenant, in writing, when construction of the Landlord Improvements and Infrastructure has been substantially completed. Upon receipt of such notice, Landlord shall permit Tenant reasonable access to the Premises for the construction and installation of the Tenant Improvements. Notwithstanding the foregoing, if Tenant uses the same contractor to construct the Tenant Improvements as Landlord uses to construct the Landlord Improvements, then Landlord shall permit Tenant reasonable access to the Premises at the earliest possible time (whether or not construction of the Landlord Improvements is substantially completed) to commence construction and installation of the Tenant Improvements. In either case (i.e., whether or not construction of the Landlord Improvements has been substantially completed when Tenant is granted access), such access shall be at Tenant's own risk, shall not interfere with or delay completion of the Landlord Improvements by Landlord, and shall be only after Tenant has obtained the insurance required under this Lease Agreement. Tenant shall, in connection with the construction and installation of the Tenant Improvements, comply with all applicable laws, ordinances, rules and regulations and shall obtain all permits and approvals required or necessary thereunder in order for Tenant to perform its work hereunder. 4.07. Rights During Construction. (a) Tenant's Rights. At all times prior to the Substantial Completion Date, Tenant, at its option, but only during normal business hours, shall have the right, but not the obligation, to enter upon the Premises to inspect the Premises and the Landlord Improvements, for the purpose of determining that the construction of the Landlord Improvements is proceeding in substantial accordance with the Approved Plans and Specifications and the terms of this Lease Agreement; provided that any such inspections shall not unreasonably interfere with the activities of Landlord or its agents or contractors in or on the Premises, nor cause or result in any damage to the Premises or the Landlord Improvements. (b) Landlord's Rights. At all times prior to the completion of construction and installation of the Tenant Improvements, Landlord, at its option, but only during normal business hours, shall have the right, but not the obligation, to enter upon the Premises to inspect the Premises and the Tenant Improvements, for the purpose of determining that the construction of the Tenant Improvements is proceeding in substantial accordance with the Tenant Plans and the terms of -11- 12 this Lease Agreement; provided that any such inspections shall not unreasonably interfere with the activities of Tenant or its agents or contractors in or on the Premises, nor cause or result in any damage to the Premises or the Tenant Improvements. 4.08. Landlord's Contribution to Construction of Tenant Improvements. Of the costs incurred by Tenant to construct the Tenant Improvements (the "Work Costs"), Landlord agrees to pay to Tenant the sum of Two Million One Hundred Fifty Thousand Dollars ($2,150,000.00) (the "Allowance"). Any Work Costs in excess of the Allowance shall be paid by Tenant. If the Allowance exceeds the Work Costs, such excess shall nevertheless be paid to Tenant at such time as the Tenant Improvements are complete. The Allowance shall be paid by Landlord toward the first invoices received for the construction of the Tenant Improvements, and shall be paid in accordance with the following procedures: (a) Tenant shall provide Landlord, not more often than once per calendar month, with an invoice (on a form reasonably acceptable to Landlord) prepared and certified by Tenant's chief financial officer, setting forth the Work Costs payable since the last such invoice, and certifying that all disbursements theretofore made under this Section 4.08 have been applied toward payment of the Work Costs covered by and described in the previous invoices. (b) Landlord shall pay to Tenant, within five (5) business days of receipt of the documentation described in Section 4.08(a), the Work Costs set forth on the invoice. Upon exhaustion of the Allowance, it shall become Tenant's responsibility to pay the Work Costs, and Tenant shall provide Landlord with evidence of such payment. The foregoing payment procedures are subject to the review and approval of Landlord's construction lender, and if such lender imposes additional disbursement requirements, such additional requirements shall be followed. 4.09. Additional Construction Provisions. In addition to the other provisions set forth in this Article 4, Landlord and Tenant agree that: -12- 13 (A) Each shall require all contractors retained by it to take any and all safety measures reasonably required to protect Landlord and Tenant and their respective agents, contractors and employees from injury or damage caused by or resulting from the performance of the construction of the Landlord and Tenant Improvements; (B) All construction contracts, in connection with the Landlord and Tenant Improvements, shall contain provisions that obligate the contractors to (i) carry public liability and property damage insurance, with the limitations set forth in Section 12.03 of this Lease Agreement, naming Landlord and Tenant as additional insureds; (ii) indemnify, defend and hold harmless Landlord and Tenant from and against any claims, cost, loss, expense (including attorneys' fees), liabilities and damages any of them may suffer on account of the negligence of the contractor; and (iii) carry workers' compensation insurance; (C) The review and approval by Landlord of the Tenant Plans for the Tenant Improvements, pursuant to this Article 4, is solely for the benefit of Landlord, and, in reviewing and approving the same, Landlord assumes no liability for the design of the Tenant Improvements or the adequacy thereof, nor shall such review or approval by Landlord release Tenant from any obligation or liability in respect thereof; (D) The review and approval by Tenant of the Plans and Specifications for the Landlord Improvements, pursuant to the Operating Agreement, is solely for the benefit of Tenant, and, in reviewing and approving the same, Tenant assumes no liability for the design of the Landlord Improvements or the adequacy thereof, nor shall such review or approval by Tenant release Landlord from any obligation or liability in respect thereof; (E) Upon Landlord's request, from time to time and in any event upon final completion of the Tenant Improvements, Tenant shall promptly submit to Landlord then-current copies of any and all plans, specifications and/or working drawings relative to the Tenant Improvements which have not been previously submitted to Landlord pursuant to other provisions of this Lease Agreement; and (F) All items of Tenant Improvements, whether or not the cost thereof is covered by the Allowance, shall become the property of Landlord upon expiration or earlier termination of -13- 14 this Lease Agreement, and shall remain on the Premises at all times during the term hereof. ARTICLE 5 Ownership of Fixtures All of the Fixtures (as distinguished from the Tenant Improvements) shall remain the property of Tenant and shall be removable at any time, including upon the expiration of the Lease Term; provided that Tenant shall repair any damage to the Premises caused by the removal of the Fixtures. ARTICLE 6 Liens 6.01. Indemnity; Removal of Liens. At all times during the Lease Term, Tenant agrees to and shall indemnify, defend, save and hold harmless Landlord from and against any and all loss, damage, liability, expense or claim whatsoever (including reasonable fees of attorneys, paralegals, experts, court reporters and others), arising by reason of any claim or lien, including, without limitation, any judgment lien, tax lien or vendor's lien, or any mechanic's lien, laborer's lien, materialmen's lien, or other similar lien or claim based upon or arising out of the furnishing of materials, fuel, machinery, supplies or labor to or in respect of the Tenant Improvements or the Premises, and not expressly contracted for in writing by Landlord. In the event any such lien is filed, Tenant shall cause any such lien to be discharged, at its sole cost and expense, within sixty (60) days after Tenant shall have notice of the existence of any suit, action, or other proceeding to foreclose the lien or to seek execution in respect thereof, unless such lien and the claim occasioning it both are contested or litigated in good faith by Tenant, at its sole cost and expense, and Tenant shall have posted, at its sole cost and expense, a bond (with surety) or other security satisfactory to Landlord, sufficient to insure that upon final determination of the validity of the lien or claim, any final judgment rendered against Tenant or Landlord, together with all related costs and charges, will be fully paid. At all times during the Lease Term, Landlord agrees to and shall indemnify, defend, save and hold harmless Tenant from and against any and all loss, damage, liability, expense or claim whatsoever (including reasonable fees of attorneys, paralegals, -14- 15 experts, court reporters and others), affecting Tenant's leasehold interest in the Premises and arising by reason of any claim or lien, including, without limitation, any judgment lien, tax lien or vendor's lien, or any mechanic's lien, laborer's lien, materialmen's lien, or other similar lien or claim based upon or arising out of the furnishing of materials, fuel, machinery, suppliers or labor to or in respect of the Landlord Improvements, and not expressly contracted for in writing by Tenant. In the event any such lien is filed, Landlord shall cause such lien to be discharged, at its sole cost and expense, within sixty (60) days after Landlord shall have notice of the existence of any suit, action or other proceeding to foreclose the lien or to seek execution in respect thereof, unless such lien and the claim occasioning it both are contested or litigated in good faith by Landlord, at its sole cost and expense, and Landlord shall have posted, at its sole cost and expense, a bond (with surety) or other security satisfactory to Tenant, sufficient to ensure that upon final determination of the validity of the lien or claim, any final judgment rendered against Landlord or Tenant, together with all related costs and charges, will be fully paid. 6.02. Liens Prohibited. Nothing in this Lease Agreement shall be construed as constituting the express or implied consent or request of Landlord to any contractor, subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials, fuel, machinery or supplies, or any specific improvements, alteration of or repair to the Premises, or any improvement thereto, nor as giving Tenant any right, power or authority to act as agent of Landlord or to contract for, or to permit the performance or furnishing of, any labor, material, fuel, machinery or supplies on any basis, which would entitle any person to assert and/or perfect a mechanic's lien or other claim encumbering the Premises and/or the interests of Landlord in the Premises. Landlord may (but shall not be required to) post and maintain at the Premises any notices which Landlord may deem appropriate for the protection of the Premises, from efforts by others to perfect or assert mechanics' liens or other claims in respect of the Premises. Nothing in this Lease Agreement shall be construed as constituting the express or implied consent or request of Tenant to any contractor, subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials, fuel, machinery or supplies, or any specific improvements, alteration of or repair to the Premises, or any improvement thereto, nor as giving Landlord any right, power or authority to act as agent of Tenant or to contract for, or to permit the performance or furnishing of, any labor, material, fuel, -15- 16 machinery or supplies on any basis, which would entitle any person to assert and/or perfect a mechanic's lien or other claim encumbering Tenant's leasehold estate in the Premises. Tenant may (but shall not be required to) post and maintain at the Premises any notices which Tenant may deem appropriate for the protection of Tenant's leasehold estate in the Premises, from efforts by others to perfect or assert mechanics' liens or other claims in respect of Tenant's leasehold estate in the Premises. ARTICLE 7 Rent and Other Payments 7.01. Base Rent. Tenant shall pay to Landlord, as base rent ("Base Rent") for the Premises during the Initial Lease Term, an annual sum as set forth on the Base Rent Schedule attached hereto as Annex 3. Base Rent shall be payable in equal consecutive monthly installments equal to one-twelfth (1/12th) of the annual Base Rent, in advance, on or before the first day of each and every calendar month during the Initial Lease Term, commencing on the Rent Commencement Date; provided, however, that if the Rent Commencement Date shall be a day other than the first day of a calendar month, the Base Rent installment for such first fractional month shall be prorated on the basis of the number of days during such month this Lease Agreement was in effect in relation to the total number of days in such month. 7.02. Rent to Be Net to Lessor. Except as otherwise specifically provided herein, it is the intention of the parties that all amounts of rent (by any name and in any form) payable hereunder shall be net to Landlord so that this Lease Agreement shall yield to Landlord the net rent specified herein during the Lease Term, and so that all costs, expenses and obligations of every kind and nature whatsoever relating to the Premises shall be paid by Tenant. ARTICLE 8 Taxes, Assessments, Service Charges and Other Payments 8.01. Taxes and Assessments. (A) Subject to the provisions of Section 8.02, commencing on the Rent Commencement Date and continuing at all times thereafter during the Lease Term, Tenant shall be responsible for and shall pay, when due, all intangible, personal, sales, personal property and real estate taxes and -16- 17 assessments, both general and special, and all other charges of any kind levied, assessed, charged, taxed or imposed by any governmental authority upon or in respect of the Premises, the Fixtures, and/or any other property, fixtures or improvements now or hereafter situated upon the Land, including any tax or excise on rents levied or assessed by the State of Ohio or any political subdivision thereof against Landlord in respect of the Base Rent or any other rent payable hereunder in any form, as a substitution in whole or in part for taxes assessed or imposed by said state or any political subdivision thereof on land and buildings or on land or buildings; provided, however, the foregoing obligations shall not include or require Tenant to pay any form of income tax imposed on Landlord. (B) On the Rent Commencement Date, (i) Landlord shall pay or shall have paid to the taxing authorities all then delinquent or due and payable real estate taxes in respect of the Premises, and all installments of assessments which are then due and payable, and (ii) Landlord shall pay to Tenant, or credit against the Base Rent payment next payable, a portion of the real estate taxes which then constitute a lien, but which are not yet due and payable in respect of the Premises, prorated through the Rent Commencement Date. (C) Upon expiration or termination of this Lease Agreement, real estate taxes and assessments due or payable, or which are or become a lien upon or in respect of the Premises and/or any other property, fixtures or improvements situated upon the Land, shall be prorated to the date of expiration or termination of this Lease Agreement. (D) The parties recognize that the Premises are part of a larger tax parcel (herein called the "Existing Tax Parcel") and that real estate taxes are therefore assessed on the Existing Tax Parcel and are not separately apportioned to the Premises and the remaining portions of the Existing Tax Parcel. Accordingly, until such time as the Franklin County Auditor separately assesses the Premises for real estate tax purposes, Tenant shall only be obligated to pay a pro rata portion of the real estate taxes and assessments levied on the Existing Tax Parcel. Such pro rata portion shall be equal to (a) 100% of the taxes attributable to the value of the Improvements, plus (b) a portion of the taxes attributable to the value of the land contained in the Existing Tax Parcel, equal to the product of (i) said taxes, and (ii) a fraction, the numerator of which is the number of acres contained in the Premises and the denominator of which is the number of acres in the Existing Tax Parcel. Landlord shall cause the real estate taxes and assessments on the balance of the Existing Tax Parcel to be paid by the owner thereof, and will -17- 18 indemnify and hold Tenant harmless from and against any claims or damages suffered by Tenant as a result of such owner's failure to pay such taxes and assessments. (E) The proration(s) of said real estate taxes, as provided for in Sections 8.01(B)(ii) and (C) above, shall be based upon a 365-day year and the most recently-available tax rates and valuations; provided that, at such time as final tax rates and valuations are determined by the taxing authorities for the period(s) of time in question, real estate taxes shall be reprorated based upon said final tax rates and valuations, and adjustment amounts, if any, shall be paid promptly to the entitled party. 8.02. Tax Abatement. Tenant acknowledges that it has received and reviewed copies of Columbus City Council Resolution No. 62X-87 and Columbus City Council Resolution No. 172X-92 which relate to the Amended Stelzer/Stygler Road Community Reinvestment Area (the "CRA"), and that Tenant has made its own independent determination that the Premises is situated in the CRA. Landlord agrees to file an application for, and use commercially reasonable efforts to obtain, an exemption from real property taxation for the Landlord Improvements and Tenant Improvements, pursuant to Section 3735.67 of the Ohio Revised Code. Landlord shall be the party primarily responsible for the filing of the application for tax exemption, and Landlord shall pay all of the costs and expenses associated therewith. Tenant agrees to cooperate with Landlord in pursuing such filing. If for any reason such exemption is not granted, the increased tax burden occasioned thereby shall be borne 100% by Landlord. 8.03. Right to Contest Taxes or Other Charges. Tenant may (but shall not be required to) contest, in its or in the name of Landlord, the amount or validity of any taxes, assessments or other charges which Tenant is required to pay as provided in this Article 8, or to apply for the reduction thereof. Landlord shall notify (or shall, in good faith, use all reasonable efforts to make all necessary arrangements to have the appropriate governmental authorities notify) Tenant of any new or increased taxes, assessments, or other charges which Tenant is obligated to pay under this Article 8, in sufficient time to permit Tenant to contest or appeal the same or to seek reassessment in respect thereof. Landlord shall, upon request by Tenant, execute or join in executing all such documents as are necessary or desirable in connection with any such contest or appeal, and Landlord shall, upon request by Tenant and at Tenant's sole cost and expense, join and actively participate in prosecuting any such proceeding. -18- 19 8.04. Tax and Other Statements. Landlord and Tenant shall, in good faith, exercise all reasonable efforts to make all necessary arrangements to have the appropriate governmental authorities send directly to Tenant all pertinent statements and bills in respect of taxes, assessments, and other charges to be paid by Tenant as provided in this Article 8, and Tenant shall, not later than the date such payments are due, furnish to Landlord written evidence of the payment by Tenant of any and all such statements and bills. If tax bills are received by Landlord, Landlord shall promptly forward the bills to Tenant. 8.05. Owners' Association Assessments. Subject to the cap set forth below, commencing on the date the Additional Infrastructure (as such term is defined in Section 1.02 of the Development Agreement) is substantially completed (the "Infrastructure Completion Date"), and continuing at all time thereafter during the Lease Term, Tenant shall be responsible for, and shall pay when due, all installments of owners' association assessments ("Assessments") imposed by the owners' association created by the Declaration (as defined in Section 20.02 hereof), upon or in respect of the Premises. The amount of Assessments for which Tenant shall be responsible in any Lease Year shall not (subject to adjustment as hereinafter set forth) exceed $.25 per square foot of gross floor area contained in the Landlord Improvements, and any excess shall be paid by Landlord. Said $.25 per square foot Assessment cap shall be adjusted annually at the end of each Lease Year following the Infrastructure Completion Date (to be effective during the ensuing Lease Year) by multiplying said Assessment cap by a fraction, the denominator of which shall be the index level of the Consumer Price Index for All Urban Consumers (CPI-U), all items index (Base 1982-84 = 100), for the North Central Region (Size Class A), as published by the Bureau of Labor Statistics of the United States Department of Labor ("CPI"), applicable on the Infrastructure Completion Date, and the numerator of which shall be the most recent CPI level available on the first day of the Lease Year for which the adjustment is being made. For purposes of this Section 8.05, construction of the Additional Infrastructure shall be deemed substantially complete when the work called for in the plans and specifications therefor has been completed (with the exception of punchlist and punchlist-type items) in accordance with such plans and specifications (excluding any seasonal plantings that may be included in the landscaping component of the Additional Infrastructure) and EMH&T has certified such substantial completion to both Landlord and Tenant. -19- 20 ARTICLE 9 Utilities Service and Charges 9.01. Water, Sewer, Gas, Electric and Telephone Service. Landlord shall cause facilities providing water service, storm sewer service, sanitary sewer service, gas service, electric service and telephone service, in capacities sufficient to service the Premises, to be connected to the Premises in the manner and to the extent provided in the Approved Plans and Specifications. Thereafter, Tenant, at its sole cost and expense, shall be responsible for maintaining all such facilities. Landlord shall pay all fees and charges normally charged by the utility service providers to tap into and otherwise access such utility services, with such fees and charges being included in the Development Costs. 9.02. Utility Charges. On and after the Substantial Completion Date and thereafter throughout the Lease Term, Tenant shall contract, in its own name, and pay for all charges for gas, water, electricity, sewer, and other utility services furnished to the Premises or to Tenant. ARTICLE 10 Project Charges Landlord shall pay, when due, all inspection fees, permit fees, and other fees charged by the City of Columbus or others in connection with the construction of the Landlord Improvements. Tenant shall pay, when due, all inspection fees, permit fees, and other fees charged by the City of Columbus or others in connection with the construction of the Tenant Improvements. ARTICLE 11 Indemnification 11.01. Indemnification. From and after the Substantial Completion Date (and except for injuries, deaths, losses, damages, or other matters resulting from the acts or omissions of Landlord or of the agents or employees thereof), Tenant shall indemnify Landlord and save it harmless from and against all loss, liability, damage, actions, causes of action or claims for injury, death, loss or damage of whatever nature to any Person, property or business interest caused by or resulting -20- 21 from any event or occurrence in, on or about the Premises, or resulting from the occupancy or use of the Premises and/or the Appurtenant Easements by Tenant or agents, employees, customers, servants, licensees, tenants, subtenants, guests or invitees of Tenant, or from the use by Tenant of the property of other Persons pursuant to rights granted to Tenant by or in connection with this Lease Agreement or other agreements, and from and against any and all costs, expenses or liabilities (including reasonable fees of attorneys, paralegals, experts, court reporters and others) incurred by Landlord in connection with any claim, action or proceeding in respect of any such loss, liability, damage or claim. Prior to the Substantial Completion Date (and except for injuries, deaths, losses, damages, or other matters resulting from the acts or omissions of Tenant or of the agents or employees thereof), Landlord shall indemnify Tenant and save it harmless from and against all loss, liability, damage, actions, causes of action or claims for injury, death, loss or damage of whatever nature to any Person, property or business interest caused by or resulting from any event or occurrence in, on or about the Premises, or resulting from the construction of the Landlord Improvements by Landlord or the contractors of Landlord, and from and against any and all costs, expenses or liabilities (including reasonable fees of attorneys, paralegals, experts, court reporters and others) incurred by Tenant in connection with any claim, action or proceeding in respect of any such loss, liability, damage or claim. 11.02. Procedures. In the event that any claim is asserted, or any action or proceeding is instituted, against a party (the "indemnified party") by reason of any event or occurrence in respect of which the other party (the "indemnifying party") is to provide indemnity as provided in Section 11.01 of this Lease Agreement: (A) The indemnifying party shall, if requested in writing by the indemnified party, cause such claim, action or proceeding to be resisted, defended and resolved, at the indemnifying party's sole cost and expense, and, by legal counsel, to be approved by the indemnified party, which approval shall not be unreasonably withheld or delayed; or (B) In the event that the indemnifying party shall fail to engage legal counsel within thirty (30) days after the written request contemplated by clause (A) above, the indemnified party may cause such claim, action or proceeding to be resisted and defended by legal counsel designated by the indemnified party, in which event the indemnifying party shall reimburse the -21- 22 indemnified party, upon demand made from time to time, for the costs thereby incurred by the indemnified party (including the reasonable fees of attorneys, paralegals, experts, court reporters and others) and reasonable amounts paid to resolve any such claim, action or proceeding. ARTICLE 12 Insurance 12.01. Public Liability Insurance. At all times on and after the Substantial Completion Date and during the Lease Term, Tenant shall carry and maintain Broad Form Comprehensive or Commercial General liability insurance, written on an occurrence basis, against claims for personal injury or death or property damage occurring on or about the Premises and Non-Leased Parking Garage Area, with financially responsible insurers acceptable to Landlord and authorized to transact insurance business in the State of Ohio, with a combined single limit of not less than Five Million Dollars ($5,000,000.00) per occurrence, which insurance shall contain a contractual liability endorsement covering the matters set forth in Section 11.01 of this Lease Agreement. Such insurance policy shall name Landlord as an additional insured. Notwithstanding anything contained in this Section 12.01 to the contrary, and in recognition of the length of the Lease Term, Landlord shall have the right, from time to time, but not more often than once in any five (5) year period, based upon community custom and a standard of reasonableness, to re-establish, by written notice to Tenant, minimum insurance amounts in excess of those set forth above in this Section 12.01. 12.02. Casualty Insurance. At all times on and after the Substantial Completion Date and during the Lease Term, Tenant shall keep the Landlord Improvements, the Tenant Improvements and the Fixtures insured, with financially responsible insurers acceptable to Landlord and authorized to transact insurance business in the State of Ohio, against all loss or damage by fire, vandalism, malicious mischief, and all other hazards, risks and perils (except for earthquakes and floods) in respect of which extended coverage and "all risk" insurance is available, in an amount equal to 100% of the replacement cost of the Landlord Improvements, the Tenant Improvements, and the Fixtures. If such insurance coverage has a deductible clause, the deductible amount (on a per occurrence basis) shall be mutually agreed upon by Landlord and Tenant, and Tenant shall be responsible for such deductible amount in the event of an insured loss. Such replacement cost shall be determined from time to time, but not more frequently than once in any 36 consecutive calendar months, -22- 23 at the request of Landlord, by the insurer or, at the option of Landlord, by an appraiser or architect who shall be mutually and reasonably acceptable to Landlord and Tenant. No omission on the part of Landlord to request any such determination shall relieve Tenant of its obligations under this Section 12.02. 12.03. Insurance During Construction. During the construction of the Landlord Improvements and up to the Substantial Completion Date, Landlord shall obtain, at its sole expense, carry and maintain, or cause to be carried and maintained, with financially responsible insurers authorized to transact insurance business in the State of Ohio, Builder's Risk Insurance in the full amount of the replacement cost of the work being performed, and comprehensive general public liability insurance against claims for personal injury or death or property damage occurring on or about the Premises and the Non-Leased Parking Garage Area, with a combined single limit of not less than Five Million Dollars ($5,000,000.00) per occurrence. During the construction of the Tenant Improvements and up to the completion thereof, Tenant shall obtain, at its sole expense, carry and maintain, or cause to be carried and maintained, with financially responsible insurers licensed to transact insurance business in the State of Ohio, Builder's Risk Insurance in the full amount of the replacement cost of the work being performed, and comprehensive general public liability insurance against claims for personal injury or death or property damage occurring on or about the Premises and the Non-Leased Parking Garage Area, with a combined single limit of not less than Five Million Dollars ($5,000,000.00) per occurrence. 12.04. Rental Value Insurance. On and after the Rent Commencement Date and at all times during the Lease Term, Tenant shall keep and maintain, in the name of Landlord, with loss payable to Landlord and any Fee Mortgagee, as their interests may appear, rental value insurance covering risk of loss due to the occurrence of any of the hazards described in Section 12.02, in an amount not less than the annual Base Rent, plus the estimated annual taxes and assessments described in Section 8.01 hereof and the annual premiums for the insurance described in this Article 12 (other than the builder's risk insurance described in Section 12.03). 12.05. Other Insurance Tenant shall keep and maintain such other insurance on the Landlord and Tenant Improvements, and in such amounts as may from time to time be agreed upon by Landlord and Tenant against other insurable hazards which, at the time, are commonly insured against in the case of properties similarly situated, due regard being given to the type of the -23- 24 Landlord and Tenant Improvements, their construction, location, use and occupancy. 12.06. Named Insureds; Settlement of Claims. Any policies of insurance of the character described in Sections 12.02, 12.03 and 12.05 shall expressly provide that any losses thereunder shall be adjusted with and approved by Landlord, Tenant, and any Fee Mortgagee, as their interests may appear. All such insurance shall be carried in the name of Landlord, Tenant, and all Fee Mortgagees, as their interests may appear. Subject to the rights of all Fee Mortgagees, any loss thereunder shall be paid to Landlord, for application by Landlord to restoration and repair of the Landlord and Tenant Improvements. 12.07. Notice of Cancellation or Surrender. Each policy of insurance required to be carried and maintained by Tenant or its contractors under this Article 12 shall provide that it cannot be cancelled or surrendered unless Landlord and each Fee Mortgagee have been given actual notice of such proposed cancellation or surrender at least thirty (30) days prior to such cancellation or surrender. 12.08. Evidence of Insurance. Originals, duplicate originals, or certificates of each policy of insurance required to be carried and maintained by Tenant or its contractors under this Article 12, and renewal or other policies, as the case may be, or certificates thereof, shall be delivered by Tenant to Landlord and each Fee Mortgagee promptly upon request. 12.09. Waiver of Subrogation. Landlord and Tenant hereby release each other and each other's employees, agents, customers and invitees from any and all liability for any loss, damage or injury to property occurring in, on or about or to the Premises, by reason of fire or other casualty which could be insured against under a standard fire and extended coverage insurance policy, regardless of cause, including the negligence of Landlord or Tenant and their employees, agents, customers and invitees; provided, however, this mutual release shall not apply to the willful misconduct of a party or anyone for whom such party is legally responsible. Because the provisions of this Section 12.09 preclude the assignment of any claim mentioned herein, by way of subrogation or otherwise, to an insurance company or any other person, each party to this Lease shall give to each insurance company which has issued to it one or more policies of fire and extended coverage insurance notice of the terms of the mutual releases contained in this Section 12.09, and have such insurance policies properly endorsed, if necessary, to -24- 25 prevent the invalidation of insurance coverages by reason of these mutual releases. 12.10. Reimbursement of Additional Premiums. Landlord shall reimburse Tenant for any additional premiums paid by Tenant for liability insurance coverage in respect of the Non-Leased Parking Garage Area, as required by Sections 12.01 and 12.03 of this Lease Agreement. Such reimbursement shall be made within thirty (30) calendar days following receipt by Landlord of an invoice therefor from Tenant, showing the additional premiums charged for such coverage. ARTICLE 13 Use; Maintenance, Operation and Repair; Surrender 13.01. Use of Premises. Tenant shall use the Premises only as a first-class office building, and for no other purpose; provided, however, that retail uses consistent with institutional quality, first-class office buildings situated in predominantly office settings will also be permitted with Landlord's consent, which consent will not be unreasonably withheld or delayed. Landlord hereby indicates its consent, in advance, to Tenant's use of a portion of the Premises as a "Design and Sales Center" for Tenant's home construction business. 13.02. Maintenance and Operation. (A) Tenant shall, at its sole cost and expense, cause the Premises and the Non-Leased Parking Garage Area to be operated, maintained and repaired in a first class manner and condition, in compliance with all present and future laws, codes, rules, orders, ordinances, regulations, statutes and requirements of any federal, state, county, or other governmental entity having jurisdiction. Tenant shall not use, or permit or suffer the use of, the Premises, or any part thereof, for any unlawful purpose or for any dangerous or noxious trade or business, or in violation of any occupancy permit issued in respect thereof. Tenant shall not commit, suffer or permit waste in or to the Premises or Non-Leased Parking Garage Area. If Tenant elects to employ a property manager to operate and maintain the Premises and Non-Leased Parking Garage Area, such manager must first be approved by Landlord, which approval will not be unreasonably withheld or delayed. (B) The REA obligates the owner of the Land to reimburse the Contracting Agent (as such term is defined in the REA) for one-half of all costs incurred for the repair and maintenance of the Common Accessway and Portico (as such terms -25- 26 are defined in the REA). During the term of this Lease, Tenant shall assume and be responsible for such reimbursement obligations. (C) Section 3.3 of the Parking Agreement provides that certain categories of maintenance of the Parking Garage will be performed by the Operator (as such term is defined in the Parking Agreement), and the performance of such maintenance by the Operator, in accordance with the provisions of the Parking Agreement, shall satisfy Tenant's maintenance obligations in respect of the Non-Leased Parking Garage Area and the portion of the Parking Garage included in the Premises. If other maintenance or repair work of the nature contemplated by Section 3.4 of the Parking Agreement (i.e., work not required to be performed by the Operator under the Parking Agreement) is necessary in respect of the Non-Leased Parking Garage Area, such work shall be performed by Tenant as is provided in Section 13.02(A), but Landlord shall reimburse Tenant for the costs of any such work. Such reimbursement shall be made within thirty (30) calendar days following receipt by Landlord of an invoice therefor from Tenant, showing, in reasonable detail, the charges incurred for such work. 13.03. Casualty Repairs. (A) In the event the Landlord or Tenant Improvements are damaged or destroyed, then so long as the full cost of repairing such damage or destruction is covered by insurance policies carried by Tenant (except for deductible amounts, which shall, in all cases, be paid by Tenant), Landlord shall repair and restore the Landlord and Tenant Improvements (but not any of Tenant's Fixtures, furnishings or equipment, for which Tenant may submit a separate claim to the insurer) to their condition existing prior to said damage or destruction, and this Lease Agreement shall continue in full force and effect. Any damage or destruction of the type described above is referred to herein as an "Insured Loss." The proceeds of insurance shall be delivered to Landlord and shall be used to pay the cost and expense of repairing and rebuilding the Landlord and Tenant Improvements. If the cost of repairing any damage or destruction to the Landlord and Tenant Improvements is not covered by insurance due solely to Tenant's failure to obtain and maintain in effect the policies of insurance which Tenant is required to maintain pursuant to Section 12.02 of this Lease Agreement, then such damage and destruction shall be treated in the same manner as an Insured Loss pursuant to this Section 13.03(A), but Tenant shall be required to pay to Landlord the full amount of any costs of repairing such damage or destruction which would have been covered by insurance had Tenant maintained the required -26- 27 insurance, and Tenant shall be required to pay to Landlord the full amount of any deductible amounts which Tenant would have been required to pay pursuant to the terms of this Lease Agreement had Tenant maintained the required insurance. (B) In the event the Landlord Improvements or Tenant Improvements are damaged or destroyed, and, for reasons other than Tenant's failure to maintain in effect the insurance which Tenant is required to maintain pursuant to Section 12.02 of this Lease Agreement, the cost of repairing such damage or destruction is not covered by insurance policies carried by Tenant (an "Uninsured Loss"), then so long as the cost of repairing such damage or destruction does not exceed the "Cap Amount" (as defined below), Landlord shall repair and restore the Landlord and Tenant Improvements (but not any of Tenant's Fixtures, furnishings or equipment) to its condition existing prior to said damage or destruction, and this Lease Agreement shall continue in full force and effect. As used herein, the term "Cap Amount" shall mean the amount of Fifty Thousand Dollars ($50,000.00). In the event of an Uninsured Loss having a repair cost which is equal to or less than the Cap Amount, Landlord and Tenant shall each contribute one-half of the repair cost of such Uninsured Loss (up to a maximum contribution amount of Twenty-Five Thousand Dollars ($25,000.00) each for Landlord and Tenant). If the repair cost of such Uninsured Loss exceeds the Cap Amount, Landlord and Tenant shall each have the right to terminate this Lease Agreement upon thirty (30) days' written notice to the other. However, if a party has elected to terminate this Lease Agreement pursuant to this Section 13.03(B), the other party may prevent termination of this Lease Agreement, pursuant to this Section 13.03(B), by paying (in addition to any other amounts to be paid by such party pursuant to this Section 13.03(B)) the amount by which the cost of repairing such Uninsured Loss exceeds the Cap Amount. (C) Upon the occurrence of any damage or destruction to the Landlord or Tenant Improvements, Landlord shall, within thirty (30) days following the date Landlord receives notice from Tenant of the occurrence of such damage or destruction, provide to Tenant a written notice of Landlord's reasonable and good faith estimate of the time required to complete the repair and restoration of the Landlord and/or Tenant Improvements ("Landlord's Time Estimate"). Landlord's Time Estimate shall be supported by a certification letter addressed to both Landlord and Tenant, from a properly licensed and qualified general contractor selected by Landlord and approved by Tenant, such approval not to be unreasonably withheld or delayed, stating the opinion of such contractor as to the number of days following the issuance of the necessary building permits necessary to complete -27- 28 the repair and restoration of the Landlord and/or Tenant Improvements. If Landlord reasonably estimates that such repair and restoration will take more than two hundred ten (210) days to complete (measured from the date of issuance of necessary building permits for the repair and restoration work), Tenant may elect to terminate this Lease Agreement upon written notice to Landlord, which notice shall be given, if at all, within twenty (20) days following Tenant's receipt of Landlord's Time Estimate. Once such notice has been delivered, the twenty- (20-) day response period has expired, and the repair and restoration work has commenced, Tenant shall not have the right to terminate this Lease Agreement as a result of the occurrence of such damage or destruction, regardless of the actual time necessary to complete such repair and restoration work, but Landlord agrees that it shall use diligent efforts to complete the restoration work in a timely manner. If this Lease Agreement is terminated by Tenant pursuant to this Section 13.03(C), Tenant shall pay to Landlord one (but not more than one) of the following amounts: (a) the deductible amount payable by Tenant in the event of an Insured Loss, if the damage and destruction results from an Insured Loss; or (b) Tenant's portion of the Cap Amount, if the damage and destruction results from an Uninsured Loss. If the reconstruction of the Landlord and/or Tenant Improvements is delayed beyond the date established for completion of repair and restoration work, as provided in the general contract between Landlord and the general contractor selected by Landlord to perform such repair and restoration work (the "General Contractor"), and if Tenant actually suffers damages as a result of such delay, then so long as Landlord continues to receive the proceeds of rent abatement insurance during the period of such delay, Landlord shall assign to Tenant (to the extent of any damages actually suffered by Tenant as a result of such delay) any liquidated damages or other damages payable by the general contractor pursuant to the terms of its general contract, as a result of such delay. To the extent Landlord does not receive sufficient rent abatement insurance proceeds to fully compensate Landlord for any abatement of rent under this Lease Agreement, Landlord shall have a first priority claim to any such liquidated damages or other damages payable by the General Contractor. (D) The Base Rent, taxes and assessments, insurance premiums, and other charges payable by Tenant hereunder shall abate, in the proportion that the part of the Premises rendered unusable to Tenant bears to the whole thereof, from the date of the damage or destruction through the time required by Landlord to repair and rebuild the Landlord and/or Tenant Improvements, but only to the extent to which Landlord receives, or is ultimately entitled to receive, reimbursement for such abatement pursuant to the rental value insurance maintained under -28- 29 Section 12.04 of this Lease Agreement, it being the intention of the parties that Landlord shall always receive the Base Rent and Tenant shall always pay the taxes and assessments, insurance premiums, and other charges payable under this Lease Agreement, either directly or through an insurance carrier. (E) If the Landlord or Tenant Improvements are damaged or destroyed, either partially or totally, during the last year of the Lease Term, Landlord or Tenant may, at such party's option, cancel and terminate this Lease Agreement as of the date of occurrence of such damage, by giving written notice to the other party of the electing party's election to do so within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Tenant has, at the time of the occurrence of such damage or destruction, already exercised an option to extend the Lease Term (but the Renewal Term has not yet commenced), then if Tenant reaffirms its exercise of such option within twenty (20) days after the occurrence of such damage or destruction, Landlord shall not have the right to terminate this Lease Agreement pursuant to this Section 13.03(E), and the other applicable provisions of this Article 13 shall govern the repair and restoration of the Landlord and Tenant Improvements or the termination of this Lease Agreement (as the case may be). 13.04. Surrender. Subject to the provisions of Article 15 of this Lease Agreement, upon the exercise by Landlord of its right to obtain possession of the Premises upon the occurrence of an Event of Default hereunder, or upon the expiration or sooner termination of this Lease Agreement, Tenant will surrender the Premises to Landlord, with all improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Tenant performing all of its obligations under this Lease Agreement. In connection with such surrender, Tenant shall execute and deliver to Landlord such deeds, bills of sale, assignments and/or other instruments of conveyance and/or transfer as Landlord may reasonably request to evidence, confirm and effect the surrender to Landlord of the Premises. 13.05. Determination of First Class. The determination of "first class," wherever required by this Lease Agreement, shall take into consideration the age of the Landlord and Tenant Improvements. -29- 30 ARTICLE 14 Alterations and Improvements; Signage 14.01. Alterations, Improvements. Following the completion of the Tenant Improvements, Tenant shall not be entitled to make any alterations, improvements or additions to the Premises, unless and until it has received Landlord's approval thereof, which approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Tenant shall be entitled to make alterations, improvements or additions to the interior of the Premises without the necessity of obtaining Landlord's prior approval, so long as such improvements, alterations or additions (a) do not affect the structural integrity of the Premises; (b) do not in any way diminish the value of the Premises; or (c) are not visible from the exterior of the Premises. All such alterations, improvements or additions (whether interior or otherwise) shall be accomplished (i) at Tenant's sole cost and expense, and (ii) in compliance with the provisions of Article 4 of this Lease Agreement, pertaining to the construction of the Tenant Improvements, as though the making of such alterations, improvements and additions were the construction of the Tenant Improvements; provided that Landlord shall have no obligation to fund any such alterations, improvements or additions. All such alterations, improvements and additions shall (automatically and without further act by any party) become a part of the Premises. 14.02. Signage. Tenant may, at its own risk and expense, erect and maintain signage on the Premises; provided that (a) the location of any exterior signs must be agreed upon by both Landlord and Tenant; (b) the kind, size, amount and content of any such exterior signs shall have first been approved by Landlord, which approval Landlord shall not unreasonably delay or refuse to give, but in which approval process it shall be deemed reasonable for Landlord to give due consideration to the signage criteria and objectives established by Limrea Properties Limited Partnership for the Oval Office Park; and (c) any such signs shall be in compliance with local, state and federal laws, ordinances and regulations. ARTICLE 15 Condemnation 15.01. Total Condemnation. If all of the Premises are taken by any condemning authority under the power of eminent domain or otherwise, or by any purchase or other acquisition in -30- 31 lieu of eminent domain or otherwise (a "Total Take"), this Lease Agreement and the Lease Term shall terminate as of the date when possession of the Premises is required by the condemning authority, and all Base Rent and other sums required to be paid by Tenant hereunder shall be apportioned and paid to the date of such taking. 15.02. Partial Condemnation. (A) In the event a "substantial portion of the Premises" [as defined in Section 15.02 (D) below] is taken or condemned by any condemning authority, Landlord shall immediately send written notice thereof to Tenant and Tenant shall have the right: (i) to terminate this Lease Agreement as of the date of the taking of possession by the condemning authority, in which event the Base Rent and all other charges shall be apportioned and paid to the date of the taking, or (ii) to continue this Lease Agreement in full force and effect, with a reduced Base Rent commensurate with the reduced area and/or reduced utility of the Premises, in lieu of the amount of Base Rent hereinbefore provided, which reduced Base Rent will become effective upon the date of such taking. Tenant shall elect between these rights and give notice to Landlord of its election within thirty (30) days after receipt from Landlord of (a) the aforesaid notice, and (b) plans setting forth the details of Landlord's proposed restoration of the Premises. (B) If Tenant does not elect to terminate this Lease Agreement as set forth in Section 15.02 (A), then the award or payment for the taking shall be paid to and used by Landlord to restore, with reasonable dispatch, the portion of the Premises remaining, after the taking, to substantially the same condition and tenantability as existed immediately preceding the taking. (C) If Landlord does not commence, within sixty (60) days after receipt of the award, and with reasonable dispatch continue, to restore the portion of the Premises as provided in Section 15.02 (B) (subject to the provisions of Article 24 hereof), Tenant shall have the right, upon giving notice to Landlord, in addition to other rights provided herein, to (i) restore the Premises, at Landlord's sole cost and expense, or (ii) terminate this Lease Agreement, on written notice to Landlord, and all Base Rent and all other charges shall be apportioned and paid to the date of such notice. If Tenant elects to restore, Landlord shall promptly pay to Tenant any award or payment made as to the taking of the Premises. (D) A "substantial portion of the Premises" shall be deemed to have been condemned if such condemnation results in any -31- 32 of the following: (i) any reduction in Tenant's "minimum parking requirement," and Landlord shall not promptly add additional parking (by the addition of immediately contiguous land, or otherwise in a manner reasonably acceptable to Tenant) to meet Tenant's "minimum parking requirement"; (ii) loss of direct access from the Premises to any adjacent public street or highway (and a substitute means of access reasonably satisfactory to Tenant is not immediately provided); or (iii) loss of a portion of the Landlord or Tenant Improvements, the absence of which would have a substantial, adverse impact on Tenant's business conducted on or from the Premises. As used herein, Tenant's "minimum parking requirement" shall mean the minimum number of surface parking spaces that will satisfy all applicable legal requirements, and 20 parking spaces in the Parking Garage. (E) Termination of this Lease Agreement because of condemnation shall be without prejudice to the rights of either Landlord or Tenant to recover from the condemning authority compensation and damages for the injury and loss sustained by them as a result of the taking. Landlord shall have the right to recover from the condemning authority compensation and damages for the injury and loss sustained by Landlord as a result of the taking of the Premises, including the Land, the Landlord Improvements, and the Tenant Improvements that were paid for with funds provided by Landlord pursuant to Section 4.08 hereof. Tenant shall have the right to make an independent claim against the condemning authority for the unamortized value of the Tenant Improvements funded by Tenant, in excess of the funds provided by Landlord pursuant to Section 4.08 hereof, and the value of Tenant's trade fixtures, furniture and personal property, interruption or dislocation of business in the Premises, loss of good will, and for moving and remodeling expenses. ARTICLE 16 Assignment and Subletting 16.01. Assignment. Tenant acknowledges that Landlord's ability to finance the construction of the Landlord and Tenant Improvements is in large part dependent upon this Lease Agreement and the financial strength of Tenant. Accordingly, Tenant shall not assign this Lease Agreement or its rights in or to the Premises, or permit the assumption of all or any part of the obligations of Tenant under this Lease Agreement, without the prior written consent of Landlord, which consent Landlord shall not unreasonably withhold or delay. Notwithstanding any such consent, Tenant will remain jointly and severally liable (along with the approved assignee), and Landlord shall be permitted to -32- 33 enforce the provisions of this Lease directly against Tenant and/or any assignee without being required to proceed in any way against the other. For purposes of this Section 16.01, an assignment shall mean the sale, conveyance, transfer or assignment of this Lease Agreement by Tenant, or the assumption of Tenant's obligations hereunder, to or by any Persons. 16.02. Subletting. (A) Tenant may sublease all or any part of the Premises to Affiliates of Tenant, without the necessity of obtaining Landlord's consent thereto (with any such sublease being herein called an "Affiliate Sublease"); provided that (i) no such subletting shall release or relieve Tenant from any of its obligations under this Lease Agreement; (ii) all Affiliate Subleases of all or any part of the Premises shall be and be deemed, at all times, to be subject and subordinate to the terms and conditions of this Lease Agreement; and (iii) Tenant shall have furnished to Landlord a copy of the Affiliate Sublease. (B) Except for Affiliate Subleases, Tenant shall not sublease all or any part of the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. For purposes of this Lease Agreement, a "sublease" shall include subleases, licenses, concessions, and all other possessory arrangements entered into by Tenant in respect of the Premises. (C) If Landlord consents to a sublease (herein called an "Approved Sublease"), the following provisions shall apply: (i) the Approved Sublease must contain the following provision: "Tenant understands that the landlord herein is the lessee under an underlying lease of the land and building of which the premises form a part and that this lease is subject and subordinate to such underlying lease and any extensions or modifications thereof. Tenant covenants and agrees that if, by reason of any default upon the part of the landlord herein as lessee under such underlying lease, the underlying lease is terminated by summary proceedings, voluntary agreement or as otherwise permitted or required by law, the tenant herein will attorn to and recognize the lessor under such underlying lease as tenant's landlord under -33- 34 this lease. Tenant further agrees to execute and deliver at any time upon request of the lessor under the underlying lease or of any person, firm, or corporation which shall succeed to the interest of such lessor an instrument to evidence such attornment. Tenant waives the provisions of any law now or hereafter in effect or any other provision of this lease which may give tenant any right of election to terminate this lease or to surrender possession of the premises." (ii) no such subletting shall release or relieve Tenant from any of its obligations under this Lease Agreement; and (iii) if the space included within the Approved Sublease, when added to the space included within all other existing Approved Subleases, exceeds 20,000 square feet, then, as to any sublet space that exceeds the aggregate threshhold of 20,000 square feet, Tenant shall pay to Landlord a sum equal to seventy-five percent (75%) of (a) any rent or other consideration paid to Tenant by the subtenant which (after deducting the costs of Tenant, if any, in effecting the subletting, including reasonable alteration costs, commissions and legal fees, and an amount up to the aggregate of two months' fixed rent payable under the sublease, provided the sublease shall contain a specific statement that such sum is given as free rent in lieu of Tenant's obligation to perform alterations or other work preparatory to such subtenant's occupancy of the subleased premises, with the amount of such deductions being amortized over the term of the Approved Sublease) is in excess of the Base Rent and other charges allocable to the subleased space which is then being paid by Tenant to Landlord pursuant to the terms hereof; and (b) any other profit or gain (after deducting any necessary expenses incurred, again with such deduction being amortized over the term of the Approved Sublease) realized by Tenant from any such subletting, including an amount of free rent in lieu of construction, to the extent specified in clause (a) above. All sums payable hereunder by Tenant shall be payable to Landlord as additional rent, upon receipt thereof by Tenant. ARTICLE 17 Conveyance or Encumbrancing by Landlord 17.01. Conveyances. Landlord shall have the unrestricted right to sell, assign, convey or transfer to any Persons all or any part of its right, title or interest in or to the Premises; subject, however, to this Lease Agreement. In the -34- 35 event of a sale or transfer of the Premises, the "landlord" named herein, or, in the case of a subsequent transfer, the transferor, shall, after the date of such transfer, be automatically released from all further liability for the performance or observance of any term, condition, covenant or obligation required to be performed or observed by Landlord hereunder; and the transferee shall be deemed to have assumed all of such terms, conditions, covenants and obligations, it being intended hereby that such terms, conditions, covenants and obligations shall be binding upon Landlord, its successors and assigns, only during and in respect of their successive periods of ownership during the Lease Term. 17.02. Encumbrancing. Landlord shall have the unrestricted right to mortgage to any Persons all or any part of its right, title or interest in or to the Premises (with any such mortgage being herein called a "Fee Mortgage"), provided that, at Landlord's option, either: (i) so long as Tenant shall perform its obligations hereunder, this Lease Agreement, and any and all rights of Tenant hereunder, shall be deemed prior to any such Fee Mortgage, without regard to the respective dates of execution, delivery and recordation thereof, and without the necessity of any further instrument or act on the part of Landlord or Tenant, with the holder of any such Fee Mortgage (herein called a "Fee Mortgagee") to have those rights which would have accrued to it if this Lease Agreement had been executed, delivered and recorded prior to the execution, delivery and recordation of such Fee Mortgage, or (ii) Landlord and any such Fee Mortgagee shall execute an instrument (in a form recordable under the laws of the State of Ohio) to confirm that if, by disposition, foreclosure, or otherwise, such Fee Mortgagee or any successor thereto, or any purchaser at a foreclosure or similar sale, shall come into possession of or become the owner of the Premises, such person will not disturb the possession, use or enjoyment of the Premises by Tenant, or disaffirm this Lease Agreement, so long as Tenant shall perform its obligations under this Lease Agreement. 17.03. Attornment. Subject to the provisions of Section 17.02(ii), Tenant shall, at the request of any Fee Mortgagee upon acquisition of title to the Premises, attorn to any such Fee Mortgagee as the Landlord under the terms and conditions of this Lease Agreement. 17.04. Notice and Cure Rights. If Tenant shall serve Landlord with any notice claiming a default or breach of this Lease Agreement by Landlord, Tenant shall serve a duplicate of said notice upon each Fee Mortgagee, provided that Tenant has received the name and address of such Fee Mortgagees. The Fee Mortgagees shall be permitted to correct or remedy the breach or -35- 36 default complained of, within a reasonable time after the expiration of Landlord's time to do so and with the same effect as if Landlord itself had done so. Landlord shall endeavor to have included within each Fee Mortgage a provision which (i) shall require the Fee Mortgagee to deliver to Tenant a duplicate copy of any notice of default which such Fee Mortgagee delivers to Landlord under the Fee Mortgage, and (ii) will afford Tenant the right to cure such default, on the part of Landlord, within a reasonable time after the expiration of Landlord's time to do so and with the same affect as if Landlord itself had done so. ARTICLE 18 Default; Termination 18.01. Default by Tenant. Tenant shall create, and there shall exist, an event of default (herein called an "Event of Default") under this Lease Agreement if: (A) Tenant shall fail to pay any installment of Base Rent or other amounts required to be paid or expended by it under the provisions of this Lease Agreement, including, but not limited to, taxes, insurance premiums and/or costs of indemnity required to be paid by Tenant, when the same shall become due for payment and if such default shall remain uncured for more than ten (10) consecutive business days after notice of such default shall have been given to Tenant by Landlord; or (B) Tenant shall fail to perform or comply with any non-monetary obligation of Tenant under this Lease Agreement, and if Tenant shall not commence the correction of such default within thirty (30) days after notice of such default from Landlord and shall not proceed with due diligence to complete such correction within a reasonable time; or (C) Tenant shall make a general assignment for the benefit of creditors, or if Tenant's interest in the Premises is sold upon execution or other legal process; or (D) Tenant shall suffer a receiver to be appointed in any action or proceeding by or against Tenant, and such appointment is not stayed or discharged within sixty (60) days after the commencement thereof, or if Tenant is a debtor in any insolvency proceeding conducted pursuant to the laws of any state or of a political subdivision of any state and such proceeding is not stayed or discharged within sixty (60) days after the -36- 37 commencement thereof, or if Tenant shall be or become, either voluntarily or involuntarily, a debtor in any case commenced under the provisions of the U.S. Bankruptcy Code, as amended, and such case is not stayed or discharged within sixty (60) days after the commencement thereof. 18.02. Rights of Landlord upon Tenant's Default. In the event that Tenant shall create or suffer an Event of Default under this Lease Agreement, in addition to the other rights and remedies available to Landlord hereunder, in equity or at law, Landlord shall have the right, by giving an Election Notice as prescribed in Section 18.03 hereof, to elect: (A) Without cancelling or terminating this Lease Agreement or the Lease Term, to repossess the Premises, and to possess the Premises and the Fixtures and each and every part thereof and to expel Tenant therefrom. Neither such termination of the right of Tenant to occupy the Premises, nor such repossession and possession by Landlord, shall relieve Tenant from its obligations to pay Base Rent and all other amounts payable by Tenant under the terms of this Lease Agreement, and/or to perform and observe all of the obligations of Tenant under this Lease Agreement; and/or (B) To cancel and terminate this Lease Agreement and the Lease Term at any time (including any time after Landlord has terminated the right of Tenant to possession only of the Premises and of the Fixtures, as provided in subsection 18.02(A) of this Lease Agreement), and to collect from Tenant, without demand therefor, any and all amounts of Base Rent and all other amounts payable by Tenant under the terms of this Lease Agreement and accruing through the date of such termination. 18.03. Election Notice. Landlord may elect to exercise the rights afforded to it under Section 18.02 of this Lease Agreement only by giving written notice of such election (each an "Election Notice"), in addition to any notice provided for under Section 18.01 of this Lease Agreement, to Tenant. ARTICLE 19 Plenary Right To Cure Certain Defaults 19.01. Default By Tenant Under This Lease Agreement. If Tenant shall create or suffer an Event of Default under this Lease Agreement, Landlord may (but shall not be required to) cure such default on behalf of Tenant (without thereby waiving any of the rights otherwise afforded to Landlord under Article 18 of -37- 38 this Lease Agreement by reason of such default), and the amount of the reasonable cost to Landlord of curing any such default shall be paid by Tenant to Landlord on demand, together with interest thereon at a per annum rate equal to the "prime rate" of Bank One, Columbus, NA (as such rate is announced or disclosed from time to time), plus one (1) percentage point (the "Default Rate"), or at the maximum rate of interest permitted by law if less than the Default Rate, from the date or dates of payment thereof by Landlord. 19.02. Default By Tenant Under Subleases. Tenant shall include, in each Affiliate Sublease and Approved Sublease of all or any portion of the Premises, a provision which states that if Tenant shall default in its obligations as lessor under the sublease, the subtenant shall notify Landlord of such default at the same time it notifies Tenant, and shall permit Landlord to correct or remedy the default within a reasonable time after the expiration of Tenant's time to do so and with the same effect as if Tenant itself had done so; provided, however, that the existence of such provision shall in no way obligate Landlord to correct or remedy such default. 19.03. Default by Subtenant Under Sublease. Tenant shall include, in each Affiliate Sublease and Approved Sublease of all or any portion of the Premises, a provision which states that if the subtenant shall default in its obligations under the sublease, Tenant shall notify Landlord of such default at the same time it notifies the subtenant, and shall permit Landlord to correct or remedy the default within a reasonable time after the expiration of the subtenant's time to do so and with the same effect as if the subtenant itself had done so; provided, however, that the existence of such provision shall in no way obligate Landlord to correct or remedy such default. ARTICLE 20 Quiet Enjoyment; Title Matters 20.01. Quiet Enjoyment. Landlord covenants with and warrants and represents to Tenant that, so long as Tenant is not in default hereunder, Tenant shall, at all times during the Lease Term, peaceably and quietly have, hold, occupy and enjoy the Premises, without hindrance or molestation by Landlord or by any person claiming rights through Landlord in respect of the Premises, other than rights created by Tenant. 20.02. Warranties of Title. Landlord covenants with and warrants and represents to Tenant that Landlord now owns good -38- 39 and merchantable fee simple title to the Premises, free and clear from all defects, liens, encumbrances and easements, except for the matters which are set forth on Annex 4, attached hereto (the "Permitted Encumbrances"). The Permitted Encumbrances include (or may include) a Declaration of Protective Covenants (the "Declaration") which, among other things, establishes a comprehensive set of development, construction and use restrictions and create an owner's association which will maintain the common areas of the real estate subject to the Declaration, and, in order to pay for the same, will charge assessments to the members of the owner's association, including Landlord and Tenant as owners of the fee simple and leasehold estates in the Land. If the Declaration has not been filed of record on the Effective Date hereof, Tenant agrees to subordinate its leasehold estate in the Premises to the Declaration, in a document recordable under the laws of the State of Ohio; provided, however, that any such subordination documentation shall specifically provide that so long as Tenant has complied with the provisions of Article 4 of this Lease Agreement, the development and construction of the Tenant Improvements, and the use of the Premises as a first-class office building shall be deemed not to have violated any of the requirements established by the Declaration. ARTICLE 21 Inspection Landlord and its duly authorized representatives may enter the Premises at all reasonable times, upon at least twenty-four (24) hours' prior written notice to Tenant, to view and inspect the Premises and to inspect all repairs, additions and alterations or to perform any work which may be necessary by reason of Tenant's default under the terms of this Lease Agreement; provided that any such inspections shall not unreasonably interfere with the activities of Tenant or its agents or contractors in or on the Premises, nor cause or result in any damage to the Premises. ARTICLE 22 Notices and Payments 22.01. Notices. Any notice or other communication required or permitted to be given to a party under this Lease Agreement shall be in writing and shall be given by one of the following methods to such party, at the address set forth at the -39- 40 end of this Section 22.01: (i) it may be sent by registered or certified United States (U.S.) mail, return receipt requested and postage prepaid, or (ii) it may be sent by ordinary U.S. mail or delivered in person or by courier, telecopier, telex, telegram, interconnected computers, or any other means for transmitting a written communication. Any such notice shall be deemed to have been given as follows: (i) when sent by registered or certified U.S. mail, as of the second business day after it was mailed, and (ii) when sent or delivered by any other means, upon receipt, with written confirmation thereof. Either party may change its address for notice by giving written notice thereof to the other party. The address of each party for notice initially is as follows: Landlord Tenant Northeast Office Until the Rent Venture, Limited Commencement Date: Liability Company c/o The Georgetown Company M/I Schottenstein 667 Madison Avenue Homes, Inc. 23rd Floor 41 South High Street New York, New York 10021 Columbus, Ohio 43215 Attn: Edgar A. Lampert, Esq. Attn: President With a duplicate copy similarly addressed and directed to the attention of: General Counsel. After the Rent Commencement Date, Notices shall be sent to Tenant at the Premises address, Attn: President, with a duplicate copy directed to the attention of: General Counsel. 22.02. Place of Payment; No Setoff. All rent and other payments required to be made by Tenant to Landlord shall be delivered or mailed to Landlord at the address specified in Section 22.01 hereof, or any other address Landlord may specify from time to time by written notice given to Tenant, without notice or demand and without abatement, deduction or setoff of any amount whatsoever. -40- 41 ARTICLE 23 Compliance with Laws 23.01. General Compliance. At all times during the Lease Term, Tenant shall, in respect of this Lease Agreement and its use and occupancy of the Premises, comply with all applicable federal, state and local laws, codes, ordinances, rules and regulations, and any other applicable requirements. 23.02. Incorporation of Provisions of Law. Each and every provision required by applicable federal, state or local laws, codes, ordinances, rules and regulations to be included in this Lease Agreement shall be deemed to be incorporated herein by reference and included in this Lease Agreement, and this Lease Agreement shall be read, construed and enforced as though each such provision were set forth herein and if, through mistake, inadvertence or otherwise, any such provision or clause is not included herein or is incorrectly set forth herein, this Lease Agreement shall nevertheless be read, construed and enforced as though such provision were correctly set forth herein. ARTICLE 24 Force Majeure The time periods by which the Landlord and/or Tenant are required to perform their obligations under this Lease Agreement shall be extended by the period of any delays arising by reason of excused causes. Excused causes include, without limiting the generality of the foregoing, war, nuclear disaster, insurrection, strikes or other labor disputes, unavailability of materials, riot, rationing, civil disobedience, fire, flood, hurricane, earthquake, any act of God and acts, actions, failures to act, and proceedings or regulations of any governmental authority (whether legislative, executive, administrative or judicial). Excused causes shall not include (i) causes which result from a substantial fault or negligence of a party, or (ii) the lack of sufficient funds. ARTICLE 25 Arbitration Whenever in this Lease Agreement it is provided that a dispute shall be determined by arbitration, the arbitration shall be conducted as provided in this Article 25. The party desiring -41- 42 such arbitration shall give written notice to that effect to the other, specifying the dispute to be arbitrated and the name and address of the person designated to act as the arbitrator on its behalf. Within ten days after said notice is given, the other party shall give written notice to the first party, specifying the name and address of the person designated to act as arbitrator on its behalf. If the second party fails to notify the first party of the appointment of its arbitrator, as aforesaid, by the time above specified, then the appointment of the second arbitrator shall be made in the same manner as hereinafter provided for the appointment of a third arbitrator. The arbitrators so chosen shall meet within ten days after the second arbitrator is appointed and within 20 days thereafter shall decide the dispute. If within said period they cannot agree upon their decision, they shall appoint a third arbitrator, and if they cannot agree upon said appointment, the third arbitrator shall be appointed upon their application or upon the application of either party by the Administrative Judge of the Franklin County, Ohio Common Pleas Court. The three arbitrators shall meet and decide the dispute. A decision in which two of the three arbitrators concur shall be binding and conclusive upon the parties. In designating arbitrators and in deciding the dispute, the arbitrators shall act in accordance with the Commercial Arbitration Rules then in force of the American Arbitration Association; subject, however, to such limitations as may be placed upon them by the provisions of this Lease Agreement. The obligation of Landlord and Tenant to submit a dispute to arbitration is limited to disputes arising under those Articles or Sections of this Lease Agreement which specifically provide for arbitration. ARTICLE 26 Miscellaneous Provisions 26.01. Brokers, Finders and Others. Landlord and Tenant each warrant and represent to the other that it has had no compensable dealings, negotiations, agreements, consultations or other transactions with any broker, finder, or other intermediary in respect of the Premises or this Lease Agreement, and that no person is entitled to any brokerage fee, commission, or other payment in respect of this Lease Agreement, the transactions contemplated thereby and/or the Premises, arising from agreements, arrangements or undertakings made or effected by it with any third Persons. 26.02. Memorandum of Lease. Landlord and Tenant shall, upon request by the other, execute and deliver a -42- 43 memorandum of lease or similar instrument reflecting such of the terms of this Lease Agreement as may be acceptable to the parties, which instrument shall be in a form recordable under the laws, regulations and customs of the State of Ohio and its political subdivisions, and which instrument shall be recorded in appropriate public offices. 26.03. Estoppel Certificates. Each party shall, within ten (10) days after written request from the other party, from time to time and at any time, complete, execute, acknowledge and deliver to the requesting party a written instrument, in a form prepared and presented by the requesting party and acceptable to the other party, certifying that this Lease Agreement is unmodified and in full force and effect (or if there have been modifications, that it is in full force and effect as modified and stating the modifications), and the dates to which Base Rent and other charges have been paid in advance, if any, and stating whether or not, to the knowledge of such party, the requesting party is in default in the performance of any obligation of such requesting party under this Lease Agreement, and, if so, specifying each such default of which such party has knowledge and certifying any other fact reasonably requested to be certified by the requesting party, it being intended that any such instrument may be delivered to and relied upon by any prospective purchaser of Landlord's interest in the Premises and any prospective assignee of Tenant's leasehold estate in the Premises, or any mortgagee or prospective mortgagee in respect thereof or any part thereof. 26.04. Successors and Assigns. Except as otherwise specifically provided herein, this Lease Agreement shall inure to the benefit of and be binding upon the respective successors and assigns (including successive, as well as immediate, successors and assigns) of Landlord and of Tenant. 26.05. Governing Law. This Lease Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. 26.06. Remedies Cumulative. All rights and remedies of Landlord and of Tenant enumerated in this Lease Agreement shall be cumulative and, except as specifically contemplated otherwise by this Lease Agreement, none shall exclude any other right or remedy allowed at law or in equity, and said rights or remedies may be exercised and enforced concurrently. No waiver by Landlord or by Tenant of any covenant or condition of this Lease Agreement, to be kept or performed by any other party, shall constitute a waiver by the waiving party of any subsequent breach of such covenant or condition, or authorize the breach or -43- 44 nonobservance on any other occasion of the same or any other covenant or condition of this Lease Agreement. 26.07. Duplicate Originals. This Lease Agreement may be executed in one or more counterparts, each of which shall be deemed to be a duplicate original, but all of which, taken together, shall constitute a single instrument. 26.08. Article and Section Captions. The Article and Section captions contained in this Lease Agreement are included only for convenience of reference and do not define, limit, explain or modify this Lease Agreement or its interpretation, construction or meaning, and are in no way to be construed as a part of this Lease Agreement. 26.09. Severability. If any provision of this Lease Agreement or the application of any provision to any Person or any circumstance shall be determined to be invalid or unenforceable, then such determination shall not affect any other provision of this Lease Agreement or the application of said provision to any other Person or circumstance, all of which other provisions shall remain in full force and effect, and it is the intention of Landlord and of Tenant that if any provision of this Lease Agreement is susceptible of two or more constructions, one of which would render the provision valid and the other or others of which would render the provision invalid, then such provision shall have a meaning which renders it valid. 26.10. Amendments in Writing; Annexes. No officer, employee, or other servant or agent of Landlord or of Tenant is authorized to make any representation, warranty, or other promise not contained in this Lease Agreement in respect of the subject matter hereof. No amendment, change, termination or attempted waiver of any of the provisions of this Lease Agreement shall be binding upon Landlord or Tenant, unless in writing and signed by the party affected. Each of the annexes, exhibits or instruments attached hereto are hereby expressly incorporated herein by this reference. 26.11. No Third Party Beneficiaries. Except as otherwise expressly provided herein: (a) the provisions of this Lease Agreement are for the exclusive benefit of the parties hereto and are not for the benefit of any other Person, and (b) this Lease Agreement shall not be deemed to have conferred any rights, express or implied, upon any third Person. 26.12. Hazardous Substances. Neither party shall cause or permit any Hazardous Substance (as hereinafter defined) to be used, stored, generated or disposed of on or in the -44- 45 Premises, in violation of any applicable laws, without first obtaining the other party's written consent. If Hazardous Substances are used, stored, generated or disposed of on or in the Premises, or if the Premises become contaminated in any manner for which a party is legally liable, such party (the "indemnitor") shall indemnify and hold harmless the other party (the "indemnitee") from any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including, without limitation, a decrease in value of the Premises, damages caused by loss or restriction of rentable or usable space, or any damages caused by adverse impact on marketing of the space, and any and all sums paid for settlement of claims, attorneys' fees, consultant and expert fees) arising during or after the Lease Term, and arising as a result of that contamination by the indemnitor. This indemnification includes, without limitation, any and all costs incurred because of any investigation of the site or any cleanup, removal or restoration mandated by a federal, state or local agency or political subdivision. Without limitation of the foregoing, if a party causes or permits the presence of any Hazardous Substance on or in the Premises and that results in contamination, such party shall promptly, at its sole expense, take any and all necessary actions to return the Premises to the condition existing prior to the presence of any such Hazardous Substance on or in the Premises. Such party shall first obtain the other party's approval for any such remedial action. As used herein, "Hazardous Substance" means any substance that is toxic, ignitable, reactive or corrosive and that is regulated by any local government, the State of Ohio, or the United States Government. "Hazardous Substance" includes any and all materials or substances that are defined as "hazardous waste," "extremely hazardous waste," or a "hazardous substance" pursuant to state, federal or local governmental law. "Hazardous Substance" includes, but is not restricted to, asbestos, polychlorinated byphenyls, petroleum, petroleum products, and petroleum wastes. ARTICLE 27 Exculpation If Landlord shall fail to perform any covenant, term or condition of this Lease Agreement, upon Landlord's part to be performed, and if, as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Premises and out of rents or other income from the Premises receivable by Landlord, or out -45- 46 of the consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title and interest in the Premises, subject, nevertheless, to the rights of any Fee Mortgagee, and neither Landlord nor any member in Landlord, nor any of the shareholders, directors or officers of any corporate member in Landlord, shall be liable for any deficiency. [The remainder of this page 46 has intentionally been left blank. The signatures appear on the following page 47.] -46- 47 IN WITNESS WHEREOF, this Lease Agreement was executed on behalf of Landlord and Tenant by the duly authorized officials or officers thereof, to be effective as of the date first above written. Signed and acknowledged LANDLORD: in the presence of: Northeast Office Venture, As to Landlord: Limited Liability Company By: The Georgetown Company, Member and Manager ______________________________ By:__________________________ (witness signature) Edgar A. Lampert Authorized Representative ______________________________ (printed name) and ______________________________ (witness signature) ______________________________ (printed name) As to Tenant: TENANT: M/I Schottenstein Homes, Inc. ______________________________ By:___________________________ (witness signature) Irving E. Schottenstein President ______________________________ (printed name) and ______________________________ (witness signature) ______________________________ (printed name) -47- 48 STATE OF OHIO COUNTY OF FRANKLIN, SS: The foregoing instrument was acknowledged before me this _____ day of September, 1995, by Edgar A. Lampert, an Authorized Representative of The Georgetown Company, a New York general partnership and a member in Northeast Office Venture, Limited Liability Company, a Delaware limited liability company, on behalf of the partnership and limited liability company. ------------------------------ Notary Public STATE OF OHIO COUNTY OF FRANKLIN, SS: The foregoing instrument was acknowledged before me this _____ day of September, 1995, by Irving E. Schottenstein, President of M/I Schottenstein Homes, Inc., an Ohio corporation, on behalf of the corporation. ------------------------------ Notary Public -48- 49 ANNEX 1 Preliminary Estimate of Development Costs [to be supplied by parties] 50 ANNEX 2 Legal Description of the Land [to be supplied by EMH&T] 51 ANNEX 3 Sub-Grade Garage Floor Plan [to be provided] 52 ANNEX 3 Schedule of Base Rent
Monthly Installments Lease Years Annual Base Rent of Base Rent - ----------- ---------------- ------------ 1-5 $1,131,576.00 $ 94,298.00 6-10 $1,217,693.00 $101,474.42 11-15 $1,275,104.00 $106,258.67 16-20 $1,303,810.00 $108,650.83
Note The above Schedule of Base Rent was calculated by multiplying the "agreed development costs" for the Premises (i.e., $11,482,255) by the decimal equivalent of the sum of (i) the "debt constant" on Landlord's permanent mortgage loan for the Premises (i.e., .09355), plus (ii) the additional interest factor set forth in the following table:
Lease Years Additional Interest Factor ----------- -------------------------- 1-5 .5% (50 basis pts.) 6-10 1.25% (125 basis pts.) 11-15 1.75% (175 basis pts.) 16-20 2.00% (200 basis pts.)
If Landlord either (i) closes its permanent mortgage loan on different terms than presently contemplated, or (ii) refinances its permanent mortgage loan at any time, or from time to time, in the future, and, as a result thereof, the debt constant on the permanent mortgage loan is less than .09355, the Base Rent shall be adjusted using the new debt constant in the foregoing formula. 53 ANNEX 4 Permitted Title Encumbrances The following are the Permitted Encumbrances on title to the Premises being leased pursuant to the foregoing Lease Agreement (with all recording information being references to instruments recorded in the Recorder's Office, Franklin County, Ohio): 1(a). Real estate taxes and assessments which are a lien on the Premises, but which are not, on the date of this Lease Agreement, due and payable. 1(b). Zoning and building laws, ordinances and regulations, including building setback lines. 2. The matters set forth in the Declaration of Covenants, Conditions and Restrictions for Easton recorded at Official Records Vol. _____, page _____. 3. The matters set forth in the Development Agreement recorded at Official Records Vol. _____, page _____. 4. The matters set forth in the Reciprocal Easement Agreement recorded at Official Records Vol. _____, page _____. 5. The matters set forth in the Easement recorded at Miscellaneous Records Vol. 5, page 469. 6. The matters set forth in the Easement recorded at Miscellaneous Records Vol. 2, page 545. 7. The matters set forth in the Easement recorded at Miscellaneous Records Vol. 5, page 442. 8. The matters set forth in the Easement recorded at Official Records Vol. 330, page E-09. 9. The matters set forth in the Easement recorded at Official Records Vol. 29304, page I-13. EX-13 11 EXHIBIT 13 1 EXHIBIT 13 SELECTED CONSOLIDATED FINANCIAL DATA M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Years Ended December 31, (Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------------- Revenue $ 527,822 $ 491,719 $ 446,060 $ 372,026 $ 269,409 Costs and expenses 511,316 472,526 427,512 359,854 261,528 Income before income taxes 16,506 19,193 18,548 12,172 7,881 Net income (1) 9,876 11,613 11,198 7,304 4,743 Net income per common share (1) 1.12 1.32 1.87 1.33 0.86 Dividends per common share (2) - - - - - Total assets 281,143 277,614 227,958 172,176 148,497 Notes and mortgage notes payable 102,549 112,765 77,892 61,742 46,970 13 1/4% Senior Subordinated Notes due October 1, 1996, net of discount - - - 16,664 24,870 14% Subordinated Notes due December 1, 2001 24,513 24,513 24,513 24,513 20,000 Stockholders' equity 99,496 89,620 79,089 36,830 31,801 Stockholders' equity per common share (3) 11.31 10.18 8.99 6.70 5.78 - --------------------------------------------------------------------------------------------------------------------------------
(1) Information for 1993, 1992 and 1991 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 1995 and 1994 as the Company was taxed as a C corporation during those periods. The per share information is based upon a weighted average of 8,800,000 common shares for 1995 and 1994, 5,975,068 common shares for 1993 and on a total of 5,500,000 outstanding shares of common stock for 1992 and 1991. (2) No dividends were paid by the Company during any period in which the stock was publicly held; however, distributions were made to S corporation stockholders during 1993, 1992 and 1991 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). (3) The per share information is based on the total shares outstanding at the end of each period (8,800,000 outstanding for 1995, 1994 and 1993 and 5,500,000 outstanding for 1992 and 1991.) 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) 1995 1995 1995 1995 New Contracts 795 811 767 743 Homes Delivered 941 765 697 549 Backlog 1,421 1,567 1,521 1,451 Total revenue $ 169,849 $ 137,092 $ 125,305 $ 95,576 Gross margin $ 31,343 $ 24,823 $ 22,806 $ 16,889 Income before income taxes $ 6,800 $ 4,294 $ 4,002 $ 1,410 Net income $ 4,042 $ 2,575 $ 2,417 $ 842 Net income per common share $ 0.46 $ 0.29 $ 0.27 $ 0.10 Weighted average common shares outstanding 8,800,000 8,800,000 8,800,000 8,800,000
Three months ended December 31, September 30, June 30, March 31, (Dollars in thousands, except per share amounts) 1994 1994 1994 1994 New Contracts 677 576 622 932 Homes Delivered 857 778 813 542 Backlog 1,257 1,437 1,639 1,830 Total revenue $ 145,612 $ 131,819 $ 130,367 $ 83,921 Gross margin $ 25,135 $ 23,806 $ 23,904 $ 15,320 Income before income taxes $ 5,458 $ 5,571 $ 6,077 $ 2,087 Net income $ 3,408 $ 3,411 $ 3,572 $ 1,222 Net income per common share $ 0.39 $ 0.39 $ 0.41 $ 0.14 Weighted average common shares outstanding 8,800,000 8,800,000 8,800,000 8,800,000
20 2 SEGMENT INFORMATION M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY The business segments of the Company are defined as home-building and financial services. The home-building operations include the development of land and the sale and construction 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. 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 $431,000, $323,000 and $229,000 for 1995, 1994 and 1993, 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.
(Dollars in thousands) 1995 1994 1993 Revenue: Home-Building $ 522,453,000 $ 487,786,000 $ 442,547,000 Financial Services 7,208,000 5,250,000 4,608,000 Intersegment (1,839,000) (1,317,000) (1,095,000) Total Revenue $ 527,822,000 $ 491,719,000 $ 446,060,000 Operating Income: Home-Building $ 39,039,000 $ 37,712,000 $ 36,180,000 Financial Services 2,697,000 1,524,000 1,373,000 Total 41,736,000 39,236,000 37,553,000 Corporate Expenses (11,463,000) (10,401,000) (9,269,000) Interest Expenses (13,767,000) (9,642,000) (9,736,000) INCOME BEFORE INCOME TAXES $ 16,506,000 $ 19,193,000 $ 18,548,000 Identifiable Assets: Home-Building $ 243,117,000 $ 244,429,000 $ 196,372,000 Financial Services 23,694,000 16,430,000 19,573,000 Corporate 14,332,000 16,755,000 12,013,000 Total $ 281,143,000 $ 277,614,000 $ 227,958,000 Capital Expenditures: Home-Building $ 363,000 $ 1,029,000 $ 618,000 Financial Services 19,000 437,000 42,000 Corporate 309,000 683,000 695,000 Total $ 691,000 $ 2,149,000 $ 1,355,000 Depreciation and Amortization: Home-Building $ 916,000 $ 893,000 $ 983,000 Financial Services 159,000 124,000 87,000 Corporate 679,000 630,000 516,000 Total $ 1,754,000 $ 1,647,000 $ 1,586,000
21 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY RESULTS OF OPERATIONS CONSOLIDATED YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 TOTAL REVENUE. Total revenue for 1995 of $527.8 million set a new record for the Company and represented a 7.3% increase over the $491.7 million reported for 1994. This increase was primarily attributable to higher housing revenue, which increased 5.7% to $505.8 million for 1995. This increase was due to a 7.0% increase in the average selling price of Homes Delivered partially offset by a 1.3% decline in the number of Homes Delivered. Land revenue also increased significantly as the number of lots developed for sale to third parties significantly increased during 1995. INCOME BEFORE INCOME TAXES. Income before income taxes decreased to $16.5 million for 1995 from $19.2 million for the preceding year. This decline was due to the increase in interest expense, which increased from $10.0 million in 1994 to $14.2 million in 1995. This increase was primarily attributable to an increase in the weighted average interest rate, due to the increases in the prime rate of interest in late 1994 and early 1995, as well as an increase in the average borrowings outstanding. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 TOTAL REVENUE. Total revenue in 1994 was 10.2% greater than total revenue recorded in 1993, primarily due to the 9.5% increase in housing revenue. This increase was caused by a 7.1% increase in the average sales price of Homes Delivered and a 2.2% increase in the number of Homes Delivered. INCOME BEFORE INCOME TAXES. Income before income taxes increased to $19.2 million for 1994 from $18.5 million for 1993. This increase was primarily due to the increase in housing revenues which was partially offset by lower gross margins and higher selling expenses. SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS The Company has experienced, and expects to continue to experience, significant seasonality and quarter-to-quarter variability in home-building 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 1995 and 1994:
Three Months Ended ----------------------------------------- Dec. 31, Sept. 30, June 30, March 31, (Dollars in thousands) 1995 1995 1995 1995 - ------------------------------------------------------------------ Total revenue $169,849 $137,092 $125,305 $95,576 In units: New Contracts, net of cancellations 795 811 767 743 Homes Delivered 941 765 697 549 Backlog at end of period 1,421 1,567 1,521 1,451
Three Months Ended ----------------------------------------- Dec. 31, Sept. 30, June 30, March 31, (Dollars in thousands) 1994 1994 1994 1994 Total revenue $145,612 $131,819 $130,367 $83,921 In units: New Contracts, net of cancellations 677 576 622 932 Homes Delivered 857 778 813 542 Backlog at end of period 1,257 1,437 1,639 1,830
HOME-BUILDING SEGMENT The following table sets forth certain information related to the Company's home-building segment:
Years Ended December 31, (Dollars in thousands) 1995 1994 1993 Revenue: Housing Sales $505,810 $478,657$ 437,283 Lot and Land Sales 16,145 8,528 4,824 Other Income 498 601 440 Total Revenue $522,453 $487,786 $442,547 Revenue: Housing Sales 96.8% 98.1% 98.8% Lot and Land Sales 3.1 1.8 1.1 Other Income 0.1 0.1 0.1 Total Revenue 100.0 100.0 100.0 Land and Housing Costs 83.0 83.0 82.9 Gross Margin 17.0 17.0 17.1 General and Administrative Expenses 2.9 2.8 3.0 Selling Expenses 6.6 6.5 5.9 Operating Income 7.5% 7.7% 8.2% Average sales price of Homes Delivered $ 171.3 $ 160.1 $ 149.4 Unit data: New Contracts 3,116 2,807 3,222 Homes Delivered 2,952 2,990 2,926 Backlog at end of period 1,421 1,257 1,440 Average sales price of homes in Backlog $ 169.0 $ 176.4 $ 158.1 Aggregate sales value of homes in Backlog $240,095 $221,683 $227,638
22 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 the Midwest Region, contracts are sometimes accepted contingent upon the sale of an existing home. "Homes Delivered" represents units for which the closing of the sale has occurred and title has transferred to the buyer. Revenue and cost of revenue for a home sale are recognized at the time of such 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 the sale of such homes have not yet occurred as of the end of the periods specified. Most cancellations of contracts for homes in Backlog occur because customers cannot qualify for financing. These cancellations usually occur prior to the start of construction. Since the Company arranges financing with guaranteed rates for many of its customers, the incidence of cancellations after the start of construction is low. In 1995, the Company delivered 2,952 homes, including most of the homes under contract in Backlog at December 31, 1994. Of the 1,257 contracts in Backlog at December 31, 1994, 16% were cancelled. The cancellation percentages were 14% and 13% for homes in Backlog as of December 31, 1993 and December 31, 1992, respectively. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 TOTAL REVENUE. Total revenue for the home-building segment for 1995 was $522.5 million, a 7.1% increase over total revenue recorded for 1994. This increase was primarily attributable to the 5.7% increase in housing revenue as well as a significant increase in land revenue. The increase in housing revenue was due to a 7.0% increase in the average sales price of Homes Delivered, partially offset by a 1.3% decrease in the number of Homes Delivered. The increase in the average sales price of Homes Delivered was primarily due to the increase in the number of Homes Delivered in the Columbus Showcase and Maryland divisions where the average sales prices are significantly higher than the Company's average due to the types of product offered. In addition, the Maryland and Palm Beach County divisions experienced significant increases in the average sales price of Homes Delivered. In Maryland, the increase was primarily due to the opening of a new subdivision where the average sales price is significantly higher than the division's average and where sales were particularly strong in 1995. In Palm Beach County, the Company expanded the product lines offered to include higher priced homes, allowing the division to build in more upscale areas of the market. The decrease in the number of Homes Delivered during 1995 as compared to the prior year was primarily due to the lower number of homes in backlog at December 31, 1994 as compared to the preceding year end as well as lower New Contracts recorded during the first quarter of 1995. The Company believes New Contracts recorded during the first quarter of 1995 were adversely affected by consumer uncertainty regarding the overall strength of the economy and how it might affect their future. The Company also recorded a significant increase in revenue from lot and land sales, which increased to $16.1 million for 1995 from $8.5 million for the preceding year. This increase was primarily attributable to the Washington, D.C. market. Late in 1994, the Company completed development of the first phase of a six phase land development project. Development is currently in progress on the second phase of this project. The Company has entered into contracts to sell a portion of the lots developed in both of these phases to outside home builders. The Company believes that lot and land revenue will remain at relatively high levels for the next few years in comparison to historical amounts as the Company continues to develop this and other projects where a portion of the lots will be sold to outside home builders. HOME SALES AND BACKLOG. The Company recorded an 11.0% increase in the number of New Contracts recorded in 1995 as compared to the prior year. This increase was primarily attributable to the Columbus Horizon, Indianapolis, Cincinnati and Raleigh divisions. The Company's lower priced Horizon line of homes was first introduced in Columbus in May 1993 and sales have continued to increase as new locations have been opened. Late in 1994, the Company introduced its Horizon line of homes in both Indianapolis and Cincinnati where it has found strong acceptance among first-time home buyers. The Raleigh division was able to increase the number of New Contracts recorded in 1995 primarily due to the opening of new subdivisions in more desirable locations. The number of New Contracts recorded in future periods will be dependent on future economic conditions, consumer confidence and interest rates available to potential home buyers. At December 31, 1995, the total sales value of the Company's Backlog of 1,421 homes was approximately $240.1 million, representing an 8.3% increase in sales value and a 13.0% increase in units from the levels reported at December 31, 1994. The average sales price of homes in backlog decreased 4.2% from December 31, 1994 to December 31, 1995. This decline was primarily due to the introduction of the Company's lower priced Horizon line into several other markets in 1995 as well as a significant increase in the Backlog for the Columbus Horizon division whose average sales price is significantly below the Company's average. GROSS MARGIN. The overall gross margin for the housing segment was 17.0% for both 1995 and 1994. A slight increase in housing gross margins was partially offset by a decrease in gross margins from lot and land sales. The increase in housing gross margins was primarily due to the Columbus Horizon, Columbus Showcase and Maryland divisions where the Company began closing homes in subdivisions which are in more desirable locations. The decrease in gross margins from lot and land sales was primarily due to the sale of a tract of commercial real estate in 1994 which produced a gross margin significantly higher than normal lot sales. The Company recorded an after-tax gain of approximately $425,000 from this sale. Excluding the effects of 23 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION this sale, the gross margin from land sales was actually higher in the current year as the Company has begun to develop lots in certain areas specifically for sale to third parties where gross margins would be expected to be higher than on other lot sales where the Company will sometimes accept lower gross margins in order to reduce inventory levels. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a percentage of total revenue increased from 2.8% for 1994 to 2.9% for 1995. This increase was primarily due to two factors. Bonus expense for regional and division managers increased approximately $1.1 million from 1994 to 1995. These bonuses are based on customer satisfaction ratings, net income and increases in net income over prior year amounts for the individual's division or region. While net income for the Company as a whole actually decreased from 1994 to 1995, the net income of certain individual divisions and regions increased significantly in the current year earning these managers higher bonuses in the current year. In addition, real estate tax expense and homeowners association dues increased approximately $890,000 in 1995 as the Company's investment in developed lots and raw land awaiting development increased over amounts held during 1994. SELLING EXPENSES. Selling expenses increased from $31.6 million for 1994 to $34.3 million for 1995 and as a percentage of total revenue increased from 6.5% for 1994 to 6.6% for 1995. In terms of actual dollars spent, a portion of the increase was due to the 5.7% increase in housing revenue which caused a corresponding increase in variable selling expenses. In addition, bonus expense recorded for 1995 for both sales managers and individual salespersons was higher due to the increase in the number of New Contracts recorded in the current year as well as new bonus plans for individual salespersons which were adopted in several of our divisions in 1995. Additional expenses were also incurred in 1995 related to the opening of model homes in new subdivisions. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 TOTAL REVENUE. Total revenue for the home-building segment for 1994 was $487.8 million, a 10.2% increase over the $442.5 million reported for 1993. This increase was primarily due to a 9.5% increase in housing revenues. This increase was caused by a 7.1% increase in the average sales price of Homes Delivered and a 2.2% increase in the number of Homes Delivered. The largest increase in the average sales price of Homes Delivered occurred in the Tampa, Cincinnati, Charlotte and Raleigh divisions. These divisions have expanded the products offered to include higher priced homes and have also been required to increase sale prices due to rising land costs and increases in fees. The increase in the number of Homes Delivered related primarily to the Columbus market where the Company introduced its Horizon product line in May 1993. The Company delivered its first Horizon homes in September 1993 and since that time, this product line has enjoyed strong acceptance among first-time home buyers. HOME SALES AND BACKLOG. The Company recorded a 12.9% decrease in the number of New Contracts entered into in 1994 compared to 1993. The number of New Contracts recorded in 1994 was lower in all markets except Palm Beach County which experienced a 4.0% increase. The Company believes that these decreases resulted from the increase in interest rates available to home buyers, the uncertainty surrounding future interest rates and reduced buyer enthusiasm from people who have refinanced their homes at interest rates significantly below the rates currently available. The total sales value of the Company's Backlog of 1,257 homes at December 31, 1994 was approximately $221.7 million representing a 2.6% decrease in sales value and a 12.7% decrease in units from levels reported at December 31, 1993. GROSS MARGIN. The overall gross margin for the housing segment was 17.0% in 1994 compared to 17.1% in 1993. Housing margins decreased from 17.2% for 1993 to 16.7% for 1994 while gross margins from lot and land sales increased from 1.9% to 23.9%. The decrease in housing gross margins was primarily attributable to the Columbus market where shortages of qualified subcontractors in certain areas of the construction trades resulted in construction delays. Higher costs were also incurred in 1994 from the unusually severe winter weather experienced in many of our markets. The significant increase in gross margins from lot and land sales was due to the sale of a tract of commercial real estate which produced a gross margin significantly higher than normal lot sales. The Company recorded an after-tax gain of approximately $425,000 from this sale. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a percentage of total revenue decreased from 3.0% in 1993 to 2.8% in 1994. This decrease was brought about by the 10.2% increase in total revenue and management's efforts to control increases in general and administrative expenses. SELLING EXPENSES. Selling expenses as a percentage of total revenue increased from 5.9% for 1993 to 6.5% for 1994. A portion of this increase was due to higher outside realtor commissions as a result of more buyers using outside Realtors as well as higher commission rates being paid. In addition, with the softening demand for new homes, the Company increased advertising and promotional expenditures in an effort to stimulate sales. 24 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL SERVICES SEGMENT The following table sets forth certain information related to the Company's financial services segment:
Years Ended December 31, (Dollars in thousands) 1995 1994 1993 Number of Loans Originated 1,873 1,455 1,234 Revenue: Loan Origination Fees $2,258 $1,688 $1,327 Sale of Servicing and Marketing Gains 3,047 2,207 2,060 Other 1,903 1,355 1,221 Total Revenue 7,208 5,250 4,608 General & Administrative Expenses 4,511 3,726 3,236 Operating Income $2,697 $1,524 $1,373
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 TOTAL REVENUE. Total revenue for the year ended December 31, 1995 was $7.2 million, a 37.3% increase over total revenue recorded for 1994. Loan origination fees increased 33.8% from 1995 to 1994, primarily due to the 28.7% 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 1995 as compared to the preceding year was due to an increase in the percentage of the parent company's home sales which were financed through M/I Financial. In addition, M/I Financial branch offices were opened in the Tampa and Maryland markets during 1995. Revenue from sale of servicing and marketing gains increased 38.1% to $3.0 million in 1995. This increase was primarily due to the increase in the number of loans originated in the current year as well as a falling interest rate environment which increased marketing gains during the current year. While M/I Financial's revenue increased due to the falling interest rates in the current year, 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 21.1% to $4.5 million for the year ended December 31, 1995 as compared to the $3.7 million recorded in 1994. This increase was primarily due to the opening of the two new branches in 1995 as well as increases in personnel costs related to the significant increase in loans originated. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 TOTAL REVENUE. Total revenue for the year ended December 31, 1994 was $5.3 million, a 13.9% increase over total revenue recorded for 1993. Loan origination fees increased 27.2% from 1993 to 1994, primarily due to the 17.9% 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 1994 as compared to the preceding year was due to an increase in the percentage of the parent company's home sales which were financed through M/I Financial. Revenue from sale of servicing and marketing gains increased 7.1% from 1993 to 1994. This increase was due to the increase in the number of loans originated, partially offset by a shift in the types of loans originated from predominately fixed rate loans to more variable rate loans which decreases the profit potential. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 15.1% to $3.7 million for the year ended December 31, 1994 compared to the $3.2 million recorded in 1993. This increase was primarily due to increased personnel costs. In mid 1993, several changes were made in the management of M/I Financial in an effort to strengthen the management team and refocus the business to better serve its customers as well as increase profitability. OTHER OPERATING RESULTS CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses for the year ended December 31, 1995 totaled $11.5 million, or 2.2% of total revenue, a 10.2% increase from the $10.4 million or 2.1% of total revenue, recorded for 1994. This increase was primarily due to expenses incurred in conjunction with the Company's new office building which is currently under construction (See Note 10 to the Consolidated Financial Statements). Corporate general and administrative expenses for the year ended December 31, 1994 totaled $10.4 million or 2.1% of total revenue, a 12.2% increase from the $9.3 million or 2.1% of total revenue recorded for 1993. This increase in general and administrative expenses primarily related to expenses incurred in conjunction with the conversion of the Companies accounting and costing systems to a new computer system. These costs included consulting fees, additional personnel costs for system support as well as additional depreciation expense related to the new hardware and software purchased in the current year. This conversion was undertaken to increase operating efficiencies and provide management with better information in a more timely manner. INTEREST EXPENSE. Corporate and home-building interest for the year ended December 31, 1995 totaled $13.8 million, a 42.8% increase over the $9.6 million recorded for the preceding year. This increase was due to increases in the weighted aver- 25 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION age interest rate and the average borrowings outstanding as well as a decrease in the net amount of interest capitalized during 1995 as compared to 1994. The interest rate on the bank borrowings is based on the prime rate of interest and increased five times during late 1994 and once more in early 1995 as the prime rate of interest increased. The increase in the average borrowings outstanding was primarily used to fund the increase in inventories of both houses under construction as well as land and lot inventories. Corporate and home-building interest for the year ended December 31, 1994 totaled $9.6 million, relatively unchanged from the $9.7 million recorded for the year ended December 31, 1993. Interest expense for 1993 included $616,000 of redemption premium and write-off of unamortized debt issuance costs and original issue discount related to the Senior Subordinated Notes which were redeemed in December 1993. The expected decrease in interest expense was offset by an increase in average borrowings during 1994 and a decreased portion of interest costs being capitalized. The weighted average interest rate remained constant from 1993 to 1994. The increase in interest rates on the Company's bank borrowings due to increases in the prime rate of interest was offset by the effect of paying off the 13 1/4% Senior Subordinated Notes in December 1993. LIQUIDITY AND CAPITAL RESOURCES The Company's financing needs depend upon its sales volume, asset turnover, land acquisition and inventory balances. The Company has incurred substantial indebtedness, and expects to incur indebtedness in the future, to fund the growth of its home-building activities. Historically, the Company's principal sources of funds for construction and development activities has been from internally generated cash and from bank borrowings which are primarily unsecured. At December 31, 1995, the Company had bank borrowings outstanding of $87.0 million under its loan agreement which permits aggregate borrowings not to exceed the lesser of: $136.0 million in revolving credit loans and $25.0 million, including $4.0 million 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 loan agreement matures September 30, 2000, at which time the unpaid balance of the revolving credit loans outstanding shall be due and payable. Under the terms of the loan agreement, the banks make an annual determination as to whether or not to extend the maturity date of the commitments by one year. Borrowings under this agreement are at the bank's prime rate and are primarily unsecured. The loan agreement also provides for seasonal loans of up to $30.0 million which are available from March 1st through December 31st during each year of the agreement. The loan agreement contains restrictive covenants which require the Company, among other things, to maintain minimum net worth and working capital amounts and to maintain certain financial ratios. The loan agreement also places limitations on the amount of additional indebtedness that may be incurred by the Company, 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. An additional $15.2 million was outstanding as of December 31, 1995 under the M/I Financial loan agreement, which permitted borrowings of $25.0 million to finance mortgage loans initially funded by M/I Financial for customers of the Company and a limited amount for loans to others. 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. Borrowings under this agreement are at the bank's prime rate and are unsecured. The M/I Financial Loan Agreement terminates on July 19, 1996 and the unpaid balance of such loans are payable on this date. In addition, there were outstanding Subordinated Notes in the principal amount of $24.5 million at December 31, 1995 and approximately $19.5 million of completion bonds and letters of credit at December 31, 1995. At December 31, 1995, the Company had $55.5 million of unused borrowing availability under its loan agreements. At December 31, 1995, the Company had the right to borrow up to $157.7 million under its credit facilities, including $21.7 million under the M/I Financial Credit Agreement (95% of the aggregate face amount of eligible mortgage loans.) The Company also has a seasonal loan of up to $30.0 million available from March 1st through December 31st during each year of the loan agreement. During the fourth quarter of 1993, the Company sold 3.3 million shares of common stock in its initial public offering. Of the net proceeds of approximately $42.2 million, approximately $32.2 million was used to reduce debt, including the redemption of the outstanding Senior Subordinated Notes. The remaining $10.0 million of the net proceeds was used to make a distribution to the former S Corporation stockholders of previously taxed S Corporation earnings. Net income from housing and lot and land sales are the Company's primary sources of net cash provided by operating activities. Net cash provided by operating activities in 1995 was $14.6 million. Net cash used by operating activities was $19.8 million in 1994 and $10.4 million in 1993. The change from net cash used by operating activities in 1994 to net cash provided by operating activities in 1995 was primarily due to the change in cash used/provided by changes in working capital components, primarily inventories, which provided $5.8 million of cash in 1995 while using $38.8 million in the preceding year. The Company has reached agreement with certain unrelated parties for the development and occupancy of an approximately 85,000 square foot building. The four current office locations in Columbus, Ohio will be consolidated into one building in an effort to improve operating efficiencies. The building will be built, owned and operated, by a limited liability company in which the Company has a 1/3 interest (the "LLC"). The building will primarily be financed through borrowings of the LLC. The LLC has obtained financing for the construction of the building and also has obtained commitments for the permanent financing. The Company has entered into a long-term operating lease for the premises with the LLC. Construction of the build- 26 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ing has commenced and is expected to be completed by the third quarter of 1996. The Company believes that any commitments arising from this transaction would not significantly affect its liquidity or capital resources. Over the past several years, the Company's land development activities and land holdings have increased significantly and the Company expects this trend to continue into the foreseeable future. These increases are primarily due to the shortage of qualified land developers in certain of our markets as well as the competitive advantages that can be achieved by developing land internally rather than purchasing lots from developers or other competing home builders. This is particularly true for our Horizon product line where, due to the price points we are targeting, lots are generally not available from third party developers at economically feasible prices. The Company continues to purchase lots from outside developers under option contracts, when possible, to limit our risk; however, we will continue to evaluate all of our alternatives to satisfy our demand for lots in the most cost effective manner. In 1994, the Company entered into two land purchase contracts which require a greater investment than the Company normally commits and could significantly impact the Company's liquidity. On January 31, 1994, the Company closed on the first phase of a six phase land purchase contract in the Washington, D.C. market. This first phase was purchased for $6.6 million and was developed into 106 single-family and townhouse lots. Based on the demand for lots in this area and the strong sales in the first phase of this development, the Company purchased the second phase of this development through a series of three closings in May, June and July of 1995 and expects to purchase the third phase in the third quarter of 1996. The total purchase price for the second phase was approximately $6.4 million and this section will be developed into 122 single-family and townhouse lots. The Company sold a portion of the developed lots from the first phase to outside home builders and has entered into similar contracts to sell a portion of the lots in the second phase to outside home builders. The Company has an option to purchase each of the remaining phases. If the Company purchases all six phases, the total purchase price will be approximately $38.9 million and the land will be developed into approximately 710 lots. In August 1994, the Company completed the purchase of a parcel of land in the Columbus market for $7.5 million which will be developed into approximately 375 lots. The Company has completed development of several phases of this project into a total of 168 lots. Model homes were opened in this development in April 1995 and sales have remained strong. 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. The Company believes that it's currently available financial resources are sufficient to meet it's current and near-term capital requirements; however, the extent of the Company's ability to invest in additional land and land development activities in the long-term will be dependent on its ability to obtain additional capital. At December 31, 1995 mortgage notes payable outstanding were $349,000 secured by lots and land with a recorded book value of $1.2 million. The Company does not currently have any arrangements for additional capital nor is there any assurance that it will be able to obtain additional capital. 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 rates on the Company's outstanding debt were 10.1% for 1995 and 9.0% for 1994 and 1993. 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 16 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 Except for the historical information contained herein, the matters discussed in this annual report are forward-looking statements which involve risks and uncertainties, including but not limited to economic, competitive and governmental factors affecting the Company's markets, prices and other facets of its operations. 27 9 CONSOLIDATED STATEMENTS OF INCOME M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Years Ended December 31, (Dollars in thousands, except per share amounts) 1995 1994 1993 Revenue (Notes 1 and 4) $ 527,822 $ 491,719 $ 446,060 Costs and expenses: Land and housing (Notes 1, 2 and 4) 431,961 403,554 365,525 General and administrative (Notes 1 and 2) 30,660 27,208 25,687 Selling (Notes 1 and 2) 34,497 31,799 26,335 Interest (Notes 1, 4, 6, 7, 8 and 9) 14,198 9,965 9,965 Total costs and expenses 511,316 472,526 427,512 Income before income taxes 16,506 19,193 18,548 Income taxes (credit) (Notes 1 and 14): Current 8,399 8,101 3,204 Deferred (1,769) (521) (751) Total income taxes 6,630 7,580 2,453 Net income $ 9,876 $ 11,613 $ 16,095 Pro forma net income (Note 17) (Unaudited) - - $ 11,198 Net income per common share (Note 1) $ 1.12 $ 1.32 - Pro forma net income per common share (Note 17) (Unaudited) - - $ 1.87 Weighted average common shares outstanding 8,800,000 8,800,000 5,975,068
See Notes to Consolidated Financial Statements. 28 10 CONSOLIDATED BALANCE SHEETS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
December 31, (Dollars in thousands, except par values) 1995 1994 ASSETS Cash, including cash in escrow (Note 1) $ 8,136 $ 14,059 Receivables (Note 3) 23,612 17,347 Inventories (Notes 1, 2, 4, 5, and 7): Single-family lots, land and land development costs 120,806 122,532 Houses under construction 86,110 85,410 Model homes and furnishings (less accumulated depreciation: 1995 - $823; 1994 - $1,654) 20,971 19,830 Land purchase deposits 381 542 Office furnishings, transportation and construction equipment - at cost (less accumulated depreciation: 1995 - $6,106; 1994 - $5,705) (Note 1) 2,392 3,337 Investment in unconsolidated joint ventures and limited partnerships (Notes 2, 4, and 5) 11,641 8,191 Other assets (Notes 1 and 14) 7,094 6,366 TOTAL $ 281,143 $ 277,614 LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable banks - home-building operations (Note 6) $ 87,000 $ 97,800 Note payable bank - financial operations (Note 6) 15,200 14,630 Mortgage notes payable (Note 7) 349 335 Subordinated notes (Note 9) 24,513 24,513 Accounts payable 29,219 31,436 Accrued compensation 7,336 5,542 Income taxes payable (Notes 1 and 14) 2,771 1,169 Accrued interest, warranty and other (Note 1) 9,787 6,426 Customer deposits 5,472 6,143 TOTAL LIABILITIES $181,647 $187,994 Commitments and Contingencies (Notes 4, 6, 10, 13, 15 and 16) Stockholders' equity (Notes 1, 2, 6, 9, 11, 12 and 13): Preferred stock - $.01 par value; authorized 2,000,000 shares; none outstanding - - Common stock - $.01 par value; authorized - 38,000,000 shares; issued and outstanding - 8,800,000 shares 88 88 Additional paid-in capital 50,573 50,573 Retained earnings 48,835 38,959 TOTAL STOCKHOLDERS' EQUITY 99,496 89,620 TOTAL $ 281,143 $ 277,614
See Notes to Consolidated Financial Statements. 29 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Common Stock Additional Stockholders' Shares Paid-in Retained Notes (Dollars in thousands) Outstanding Amount Capital Earnings Receivable Balance at December 31, 1992 5,400 - $ 3,323 $ 33,699 $ (192) Net income - - - 16,095 - Distributions to stockholders (Note 1) - - - (6,339) - Principal repayments (Note 2) - - - - 192 Redemption of Delaware corporation shares (Note 12) (2,700) - - (10,000) - Reincorporation in State of Ohio (Note 12) 5,497,300 $55 (55) - - Issuance of common stock, net of costs of $3,994 (Note 12) 3,300,000 33 42,173 - - Transfer S corporation retained earnings to additional paid-in capital (Note 1) - - 5,027 (5,027) - Gain on repurchase of M/I Financial minority interest (Note 2) - - 105 - - Balance at December 31, 1993 8,800,000 88 50,573 28,428 - Net Income - - - 11,613 - Distributions to stockholders (Note 1) - - - (1,082) - 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 -
See Notes to Consolidated Financial Statements. 30 12 CONSOLIDATED STATEMENTS OF CASH FLOWS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Years Ended December 31, (Dollars in thousands) 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,876 $ 11,613 $ 16,095 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,754 1,647 1,586 Deferred income tax credit (1,769) (521) (751) Decrease (increase) in receivables (6,265) 3,865 (11,513) Decrease (increase) in inventories 5,775 (38,807) (28,444) Decrease (increase) in other assets 861 (845) (784) Increase (decrease) in accounts payable (2,217) 6,652 7,659 Increase (decrease) in income taxes payable 1,602 (1,453) 2,485 Increase (decrease) in accrued liabilities 5,155 (1,694) 3,392 Equity in undistributed income of unconsolidated joint ventures and limited partnerships (132) (242) (110) Net cash provided (used) by operating activities 14,640 (19,785) (10,385) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to model and office furnishings, transportation and construction equipment (691) (2,149) (1,355) Proceeds from property disposals 335 254 1,042 Investment in unconsolidated joint ventures (10,423) (9,752) (10,515) Distributions from unconsolidated joint ventures and limited partnerships 1,477 823 303 Net cash used in investing activities (9,302) (10,824) (10,525) CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable banks: Cash proceeds from borrowings 396,793 438,816 350,612 Principal repayments (407,023) (403,891) (332,687) Principal repayments of mortgage notes payable (360) (571) (2,081) Principal repayments of senior subordinated notes - - (16,737) Net increase (decrease)in customer deposits (671) 747 887 Proceeds from the sale of stock, net of costs of $3,994 - - 42,206 Repurchase of M/I Financial minority interest - - (281) Principal repayments of stockholders' notes receivable - - 192 Distributions paid to former S corporation stockholders (1,082) (16,339) Net cash provided (used) by financing activities (11,261) 34,019 25,772 Net increase (decrease) in cash (5,923) 3,410 4,862 Cash balance at beginning of year 14,059 10,649 5,787 Cash balance at end of year $ 8,136 $ 14,059 $ 10,649 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest - net of amount capitalized $ 14,007 $ 10,634 $ 8,734 Income taxes - net $ 6,797 $ 9,554 $ 719 NON-CASH TRANSACTIONS DURING THE YEAR: Land acquired with mortgage notes payable $ 374 $ 519 $ 306 Single-family lots distributed from unconsolidated joint ventures $ 5,628 $ 11,588 $ 6,663
See Notes to Consolidated Financial Statements. 31 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY 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 wholly owned subsidiary, M/I Financial Corp. ("M/I Financial") (see Note 2). 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; and the Virginia and Maryland suburbs of Washington, D.C. The Company designs, builds and sells single-family houses 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 houses and for sale to others. The Company also conducts mortgage banking activities through 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 IN ESCROW. Cash includes cash held in escrow of $407,000 and $703,000 at December 31, 1995 and 1994, respectively, pending completion of construction. Cash was primarily held in one bank at December 31, 1995 and three banks at December 31, 1994. 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 1995, 1994 and 1993 is as follows:
(Dollars in thousands) 1995 1994 1993 Interest capitalized, beginning of year $ 7,322 $ 6,139 $ 4,649 Interest incurred 14,436 11,148 11,455 Interest expensed (14,198) (9,965) (9,965) Interest capitalized, end of year $ 7,560 $ 7,322 $ 6,139
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. Included in revenue are homebuilding sales of $505,810,000, $478,657,000 and $437,283,000 for 1995, 1994 and 1993 and revenue from lot and land sales of $16,145,000, $8,528,000 and $4,824,000 for 1995, 1994 and 1993. Land and housing costs related to homebuilding sales were $418,697,000, $397,063,000 and $360,791,000 for 1995, 1994 and 1993 and costs relating to lot and land sales were $13,264,000, $6,491,000 and $4,734,000 for 1995, 1994 and 1993. No indirect expenses are allocated to land cost of sales. M/I Financial recognizes revenue from application fees when received while revenue from loan origination fees are recorded when the 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 the 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 16). 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 provided for each house at the time of sale. Warranty expense was $4,475,000, $4,256,000 and $3,886,000 for 1995, 1994 and 1993. DEPRECIATION. Depreciation of 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 $1,574,000, $1,466,000 and $1,199,000 in 1995, 1994 and 1993. AMORTIZATION. The costs incurred in connection with the issuance of the Subordinated Notes and Exchange Subordinated Notes (see Note 9) are being amortized over the terms of the related debt using the effective yield method. Unamortized debt issuance costs of $798,000 and $978,000 are included in other 32 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS assets at December 31, 1995 and 1994. ADVERTISING. The Company expenses advertising costs as incurred. The Company expensed $4,963,000, $4,831,000 and $3,267,000 in 1995, 1994 and 1993, respectively. INCOME TAXES. Effective November 8, 1993, in conjunction with the initial public offering (see Note 12), the Company terminated its S corporation status and, accordingly, is fully subject to federal, state and local taxes from that date forward. Upon termination of the Company's S corporation status, the remaining S corporation retained earnings were transferred to additional paid-in capital. The Company's subsidiary, M/I Financial, has been taxed as a C corporation under the Internal Revenue Code of 1986, as amended (the "Code") during all periods presented. NET INCOME PER COMMON SHARE. Net income per common share is calculated based on the weighted average shares outstanding during the period. 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 Code. Company contributions to the plan are made at the discretion of the Board and totalled $620,000 in 1995, $715,000 in 1994 and $700,000 in 1993 (including payment of expenses incurred by the plan). DISTRIBUTIONS TO STOCKHOLDERS. Distributions to stockholders represent payments by the Company to its stockholders while it was an S corporation. 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). IMPACT OF ACCOUNTING STANDARDS. In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 121 amends the impairment provisions of the existing accounting literature which required the Company's home-building inventories to be carried at the lower of cost or net realizable value. Under the new provisions, if the Company's home-building inventories are determined to be impaired, the impairment loss is measured based upon the difference between the fair value of the asset and its carrying amount. SFAS 121 is required to be adopted no later than the first quarter of 1996. The Company has not completed its analysis of the impact of this new pronouncement; however, based on preliminary estimates, the Company believes that implementation of the provisions of this statement will not have a material impact on the financial condition or results of operations of the Company. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires adoption no later than fiscal years beginning after December 15, 1995. Under SFAS 123, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the financial statements pro forma net income and earnings per share, as if the Company had applied the new method of accounting. The Company has determined that it will not adopt the expense recognition provisions of this standard; therefore, the new standard will have no effect on the Company's financial condition or results of operations. 2. TRANSACTIONS WITH RELATED PARTIES Related parties are entities owned by, or partially owned by, certain stockholders of the Company or joint ventures 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 or limited partnerships of approximately $4,286,000, $3,608,000 and $3,507,000 for 1995, 1994 and 1993. The Company received distributions of $5,628,000, $11,588,000 and $6,663,000 in developed lots at joint venture cost in 1995, 1994 and 1993, respectively. The Company also had notes receivable from limited partnerships (see Note 3). Until September 1993, an officer of the Company was associated with a law firm that provided legal services for the Company. The Company paid the firm approximately $779,000 (of which $39,000 was paid by joint ventures and limited partnerships) in 1993. Additionally, approximately $1,436,000 of title insurance premiums and closing fees were paid to wholly owned subsidiaries of the firm in 1993. Immediately prior to the consummation of the initial public offering (see Note 12), the Company repurchased the 20.1% share of the common stock of M/I Financial previously owned by the former controlling officers/stockholders of the Company. These shares were repurchased for the same price at which they were originally sold to them, resulting in a gain of $105,000 which was credited to additional paid-in capital. The remaining balance of the related notes receivable owed to the Company was also repaid at that time. Eric J. Schottenstein, formerly Senior Vice President/Regional Manager - Carolina Region, resigned his position with the Company in December 1993. Mr. Schottenstein has agreed to serve as a consultant to the Company for a period of three years, for which he was paid $207,000 in 1995 and $215,000 in 1994 and will be paid approximately $200,000 in 1996. 33 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. RECEIVABLES Receivables consist of the following:
(Dollars in thousands) 1995 1994 Mortgage loans to be funded $22,797 $15,418 Notes receivable from limited partnerships 440 1,219 Accounts receivable 356 265 Accounts receivable from limited partnerships 19 445 Total receivables $23,612 $17,347
Mortgage loans to be funded relate to houses sold and closed prior to December 31 and which were subsequently funded by unrelated lending institutions. Notes receivable from limited partnerships represent advances from the Company which bear interest at the prime rate plus 1/2%, total of 9.00% at December 31, 1995 and 1994. One of the notes was paid off in 1995 and the maturity date of the remaining note was extended to December 31, 1996 (see Note 5). 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES At December 31, 1995, the Company had interests varying from 33% to 50% in each of 18 separate joint ventures (33%-4 and 50%-14), three formed in 1995, three formed in 1994, four formed in 1993 and eight formed prior to 1993 that engage in land development activities. These interests are recorded using the equity method of accounting. The Company receives its percentage interest share of joint venture profits or, in the majority of the joint ventures, its percentage interest share of the lots developed in the form of a capital distribution. The Company received distributions of $5,628,000, $11,588,000 and $6,663,000 in developed lots at joint venture cost in 1995, 1994 and 1993, respectively, and purchased lots totalling $1,333,000, $1,105,000 and $589,000 in 1995, 1994 and 1993 from the joint ventures. Summarized condensed combined financial information for the joint ventures as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 is as follows: SUMMARIZED CONDENSED COMBINED BALANCE SHEETS
December 31 (Dollars in thousands) 1995 1994 Assets: Single family lots, land and land development costs $ 25,173 $18,152 Other assets 1,284 1,188 Total $ 26,457 $19,340 Liabilities: Debt $ 2,544 $ 2,510 Other liabilities 2,132 1,748 Total liabilities 4,676 4,258 Partners' equity: Company's equity 9,890 7,043 Other 11,891 8,039 Total Partners' equity 21,781 15,082 Total $ 26,457 $19,340
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS
Years Ended December 31 (Dollars in thousands) 1995 1994 1993 Revenue $ 2,335 $ 1,706 $ 1,233 Costs and expenses 2,158 1,809 1,519 Income (loss) $ 177 $ (103) $ (286)
Joint venture earnings include $45,000 and $44,000 of intercompany profit not included in the Company's earnings for 1995 and 1994. In addition, included in the Company's investment in the joint ventures at December 31, 1995 and 1994, is $413,000 and $376,000 of capitalized interest and other costs relating to the joint ventures. Letters of credit totalling approximately $3,794,000 are outstanding at December 31, 1995, which serve as completion bonds for joint venture development work in progress. 5. INVESTMENT IN LIMITED PARTNERSHIPS In 1992, the Company became a limited partner in two limited partnerships formed by affiliates to purchase and develop land and lots. The operations of the limited partnerships have primarily been funded through advances from the Company. The advances outstanding as of December 31, 1995 and 1994 totaled $465,000 and $1,712,000, respectively, including $440,000 and $1,219,000 of notes receivable which bear interest at prime plus 1/2%. Also included in these advances are $6,000 and $48,000 of deposits for lots the Company has an option to purchase from the limited partnerships at fair market value. The Company purchased lots totalling $2,953,000, $2,503,000 and $2,918,000 from the limited partnerships in 1995, 1994 and 1993, respectively. For both limited partnerships, the land and related debt are recorded on the limited partnerships' books and the Company is not contingently liable for any of the limited partnerships' debt; therefore, the only amounts related to the limited partnerships that are recorded on the Company's books are the advances noted above, and the Company's investment in the limited partnerships of $262,000 and $772,000 respectively at December 31, 1995 and 1994. The Company recorded income from the limited partnerships of $85,000, $322,000 and $294,000 respectively for 1995, 1994 and 1993. 6. NOTES PAYABLE BANKS At December 31, 1995, the Company had revolving credit loans of $87,000,000 and letters of credit totalling $14,748,000 outstanding under a loan agreement with five banks. Borrowings under the loan agreement are at the banks' prime rates and are primarily unsecured. This agreement provides for total borrowings not to exceed the lesser of $136,000,000 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. This revolving credit facility and letter of credit commitment 34 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS will be in effect until September 30, 2000, at which time the unpaid balance of the revolving credit loans outstanding shall be 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 the prime rate of the banks and a commitment fee of 1/4 of 1% based upon the average daily unused portion of the note. The loan agreement also provides for seasonal loans of up to $30,000,000 which are available from March 1st through December 31st during each year of the agreement 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, 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, 1995, approximately $7,500,000 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, 1995, $15,200,000 was outstanding under a revolving loan agreement with a bank ("M/I Financial Loan Agreement") pursuant to which the Company and M/I Financial were permitted to borrow up to $25,000,000 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. Borrowings under this agreement are at the bank's prime rate and are unsecured. A commitment fee of 1/4 of 1% is payable quarterly based upon the average daily unused portion of the note. The M/I Financial Loan Agreement terminates on July 19, 1996 and the unpaid balance of such loans are payable on this date. At December 31, 1995, the Company had $49,000,000 of unused borrowing availability under its loan agreement, as well as $6,500,000 under the M/I Financial Loan Agreement. The interest rate of the Company's bank borrowings was 8.5% at December 31, 1995 and 1994 and 6.0% at December 31, 1993. 7. MORTGAGE NOTES PAYABLE Mortgage notes payable of $349,000 and $335,000 at December 31, 1995 and 1994, represent mortgages collateralized by land and lots (book value of $1,162,000 and $1,184,000 at December 31, 1995 and 1994, respectively). The notes payable outstanding at December 31, 1995 are noninterest bearing; however, the seller of the land securing the notes will share in the profits the Company recognizes from developing this land. 8. SENIOR SUBORDINATED NOTES In December 1993, the Company redeemed the remaining $12,987,000 of its 13 1/4% senior subordinated notes issued in 1986 at 103% of their principal amount, plus accrued interest. Included in interest expense in 1993 is $616,000 that represents the write-off of unamortized issuance costs and original issue discount and redemption premium resulting from the redemption of the Senior Subordinated Notes. 9. 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. The Subordinated Notes provide for semi-annual interest payments and are subordinated to all senior indebtedness as defined in the related indenture. Annual sinking fund payments of 15% of the aggregate amount of the Subordinated Notes commence December 1, 1997, and a final payment of 40% of the total amount of such notes is due at maturity on December 1, 2001. The notes are redeemable in whole or in part at the option of the Company on or after December 1, 1996, at 106% of the principal amount until December 1, 1997 and declining 1 1/2% annually through 2000. The indenture related to the Subordinated Notes restricts certain payments by the Company, including payments for cash dividends and repurchase of the Company's stock. The indenture also provides for mandatory redemption of 15% of the total principal amount of the Subordinated Notes at par plus accrued interest if the Company's consolidated net worth, as defined, is less than $3,500,000 for two consecutive quarters. In the event of a Change of Control (as defined in the related indenture), holders of $20,000,000 of Subordinated Notes will be entitled to require redemption of its Subordinated Notes for the full principal amount (plus accrued interest), but holders of the remaining Notes will not have a similar right. 10. LEASE COMMITMENTS The Company leases various office facilities, automobiles, model furnishings, and model homes under operating leases with remaining terms of one to twenty years. At December 31, 1995, the future minimum rental commitments, totalling $29,889,000 under noncancelable operating leases with initial terms in excess of one year are as follows: 1996 - $3,710,000; 1997 - $2,219,000; 1998 - $1,642,000; 1999 - $1,439,000; 2000 - $1,142,000 and thereafter - $19,737,000. Included in the amount for 1996 is $153,000 related to a lease with a related party for approximately 27,000 square feet of office space. This lease expires August 31, 1996 at which time the Company has the right to extend the lease on a month-to-month basis at the current rental rate. Rental expense was $358,000 for 1995, $367,000 for 1994 and for a lesser amount of space was $262,000 for 1993 (which included operating expense increases). In 1995, the Company became a 1/3 owner of a limited liability company (the "LLC") formed to build, own and operate an approximately 85,000 square foot office building in Columbus, Ohio. The Company plans to consolidate its four Columbus locations into this building and has entered into a 20 year lease 35 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the premises with the LLC. This building is currently under construction and the Company anticipates moving into this new facility in September 1996. Included in the amounts above are rentals of $337,000 for 1996; $1,132,000 for 1997; $1,132,000 for 1998; $1,132,000 for 1999; $1,132,000 for 2000; and $19,737,000 for all periods thereafter. The Company's total rental expense was $5,023,000, $3,699,000 and $3,174,000 for 1995, 1994 and 1993, respectively. 11. 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, and qualifications, limitations or restrictions thereon, of any series so established, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. The Board of Directors has not authorized any series of preferred stock and there are no plans, agreements or understandings for the authorization or issuance of any shares of preferred stock. 12. COMMON STOCK In November 1993, the Company was reincorporated in Ohio and the 2,700 remaining outstanding shares of the Delaware corporation were exchanged for 5,500,000 shares of the new Ohio corporation. In November 1993, the Company sold 3,300,000 shares of common stock at $14.00 per share in its initial public offering. The net proceeds from the sale were approximately $42,206,000. 13. 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 granted in 1995 were awarded 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:
Option Price Shares Per Share Options outstanding January 1, 1994 - - Granted 94,200 $16.125 Forfeited (10,000) $16.125 Options outstanding December 31, 1994 84,200 $16.125 Granted 68,200 $6.75-$9.25 Forfeited (18,000) $6.75-$16.125 Options outstanding December 31, 1995 134,400 $6.75-$16.125 Options exercisable at December 31, 1995 40,920 $6.75-$16.125
In February 1996, the Company granted options for an additional 60,700 shares with the same terms as the previous awards, at a price of $10.875 which represents the market value at the date of grant. 14. INCOME TAXES Effective January 1, 1991, the Company elected to be taxed as an S corporation under the Code. Effective November 8, 1993, the Company terminated its S corporation status. From that date forward, the Company's income was fully subject to federal, state and local taxes. In connection with the Company's S corporation termination, deferred income tax benefits of $475,000 were recognized in the fourth quarter of 1993. The provisions for income taxes consist of the following:
(Dollars in thousands) 1995 1994 1993 Federal $5,312 $6,216 $1,847 State and local 1,318 1,364 606 Total $6,630 $7,580 $2,453
Reconciliations of the differences between income taxes computed at federal statutory tax rates and consolidated provisions for income taxes are as follows:
(Dollars in thousands) 1995 1994 1993 Federal taxes at statutory rate $5,777 $6,718 $6,306 Deduct federal tax effect of S corporation status - - (3,823) State taxes - net of federal tax benefit 857 887 400 Realization of deferred tax benefit as a result of change from S corporation status - - (475) Other (4) (25) 45 Total $6,630 $7,580 $2,453
36 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities at December 31, 1995 and 1994 follows:
(Dollars in thousands) 1995 1994 Assets: Warranty, insurance and other reserves $1,855$ 846 Inventory writedowns 749 436 Inventories 584 360 State taxes 226 236 Depreciation 67 - Other 420 306 Total deferred tax assets 3,901 2,184 Liabilities: Prepaid expenses and deferred charges 854 854 Depreciation - 52 Total deferred tax liabilities 854 906 Net deferred tax asset $ 3,047 $1,278
15. COMMITMENTS AND CONTINGENCIES At December 31, 1995, the Company had sales agreements outstanding, some of which have open contingencies for approval of financing, to deliver 1,421 homes with an aggregate purchase price of approximately $240,095,000. At December 31, 1995, the Company had options and contingent purchase contracts to acquire land and developed lots with an aggregate purchase price of approximately $145,781,000. Purchase of the properties is contingent upon satisfaction of certain requirements by the Company and the sellers. At December 31, 1995, the Company had outstanding approximately $19,525,000 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 condition or results of operations of the Company. 16. FINANCIAL INSTRUMENTS M/I Financial offers fixed and adjustable rate mortgage loans, primarily to buyers of the Company's homes. At December 31, 1995, M/I Financial is committed to fund $55.0 million in mortgage loans to home buyers. Of this total, approximately $6.0 million are adjustable rate loans and $49.0 million 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. At December 31, 1995, the Company had approximately $36.0 million of commitments to deliver mortgage loans to outside investors. The Company also hedges its interest rate risk using 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, 1995, these agreements matured within 90 to 120 days. Securities under forward sales agreements averaged approximately $12.5 million during 1995 and the maximum amounts outstanding at any month end during 1995 was $16.0 million. Hedging gains of $456,000 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 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 notional amount and fair value of the Company's unrecognized financial instruments at December 31, 1995 and 1994. SFAS No. 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. 37 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995 1994 Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value Assets Cash, including cash in escrow $ 8,136 $ 8,136 $ 14,059 $ 14,059 Receivables: Mortgage loans to be funded 22,797 23,029 15,418 15,556 Notes receivable 440 440 1,219 1,219 Accounts receivable 375 375 710 710 Prepaid financing commitments 213 -- 518 268 Liabilities Notes payable banks 102,200 102,200 112,430 112,430 Mortgage notes payable 349 349 335 335 Subordinated notes 24,513 23,346 24,513 23,346 Accounts payable 29,219 29,219 31,436 31,436 Other liabilities 25,366 25,366 19,280 19,280 Unrecognized Financial Instruments: Letters of credit -- 84 -- 90 Commitments to extend real estate loans -- 687 -- 605 Forward sale of mortgage-backed securities -- (163) -- 20
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at December 31, 1995 and 1994: CASH, ACCOUNTS RECEIVABLE, ACCRUED LIABILITIES AND ACCOUNTS PAYABLE. 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, 1995 and 1994 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, 1995 and 1994. NOTES RECEIVABLES. The carrying value of notes receivable from limited partnerships, which bear interest at the prime rate plus 1/2%, approximates their fair value at December 31, 1995 and 1994. 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 prime 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 using the bid price for the debt instruments at December 31, 1995 and 1994. LETTERS OF CREDIT. Letters of credit and outstanding completion bonds of $19,525,000 and $19,020,000 represent potential commitments at December 31, 1995 and 1994. 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. 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, 1995 and 1994. 17. PRO FORMA INFORMATION (UNAUDITED) The pro forma financial information for the year ended December 31, 1993 presents the pro forma effects on the historical financial information as if the Company had always been taxed as a C corporation, using an effective 40% tax rate for federal, state and local income taxes. Pro forma net income per common share includes the shares which would have been outstanding if the reincorporation in the state of Ohio had occurred on January 1, 1993 and also reflects the increase in average common shares outstanding from the 3,300,000 shares sold in the public offering. 18. BUSINESS SEGMENTS The business segment information for 1995, 1994 and 1993 included on page 21 of this annual report is an integral part of these financial statements. 38 20 INDEPENDENT AUDITORS' REPORT [D & T Letterhead] 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 subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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 subsidiary at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Columbus, Ohio February 29, 1996 39 21 STOCK MARKET PRICES AND DIVIDENDS The Company's common stock is traded on the New York Stock Exchange under the symbol "MHO". As of March 15, 1996, there were approximately ____ record holders of the Company's common stock. At that time there were 8,800,000 shares issued and outstanding. The table below presents the highest and lowest prices for the Company's common stock during each of the quarters presented:
1995 HIGH LOW First Quarter $ 7.63 $ 6.50 Second Quarter $ 9.50 $ 6.50 Third Quarter $10.38 $ 8.75 Fourth Quarter $12.50 $ 9.38 1994 HIGH LOW First Quarter $18.25 $14.75 Second Quarter $15.25 $10.88 Third Quarter $13.25 $10.00 Fourth Quarter $10.25 $ 6.75
No dividends have been paid in the period following the completion of the public offering and the Company does not anticipate paying cash dividends on its common stock in the near future. The Company's loan agreement and Subordinated Note Indenture place limits on the amount of dividends the Company can pay (see Footnotes 6 and 9 to the consolidated financial statements). EX-23 12 EXHIBIT 23 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-76518 of M/I Schottenstein Homes, Inc. on Form S-8 of our report dated February 29, 1996, incorporated by reference in this Annual Report on Form 10-K of M/I Schottenstein Homes, Inc. for the year ended December 31, 1995. Deloitte & Touche LLP Columbus, Ohio March 28, 1996 EX-24 13 EXHIBIT 24 1 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitutes and appoints Irving E. Schottenstein and Kerrii B. Anderson, and each of them, as his true and lawful attorney-in-fact and agent for him and in his name, place and stead, in any and all capacities, to sign the 1995 Annual Report on Form 10-K for M/I Schottenstein Homes, Inc., and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the foregoing, as he might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Date: March 29, 1996 /s/ Eric J. Schottenstein ----------------------------- Eric J. Schottenstein 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitutes and appoints Irving E. Schottenstein and Kerrii B. Anderson, and each of them, as his true and lawful attorney-in-fact and agent for him and in his name, place and stead, in any and all capacities, to sign the 1995 Annual Report on Form 10-K for M/I Schottenstein Homes, Inc., and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the foregoing, as he might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Date: March 29, 1996 /s/ Friedrich K.M. Bohm ----------------------------- Friedrich K.M. Bohm 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitutes and appoints Irving E. Schottenstein and Kerrii B. Anderson, and each of them, as her true and lawful attorney-in-fact and agent for her and in her name, place and stead, in any and all capacities, to sign the 1995 Annual Report on Form 10-K for M/I Schottenstein Homes, Inc., and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the foregoing, as she might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Date: March 29, 1996 /s/ Holly S. Kastan ----------------------------- Holly S. Kastan 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitutes and appoints Irving E. Schottenstein and Kerrii B. Anderson, and each of them, as his true and lawful attorney-in-fact and agent for him and in his name, place and stead, in any and all capacities, to sign the 1995 Annual Report on Form 10-K for M/I Schottenstein Homes, Inc., and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the foregoing, as he might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Date: March 29, 1996 /s/ John B. Gerlach ----------------------------- John B. Gerlach 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitutes and appoints Irving E. Schottenstein and Kerrii B. Anderson, and each of them, as her true and lawful attorney-in-fact and agent for her and in her name, place and stead, in any and all capacities, to sign the 1995 Annual Report on Form 10-K for M/I Schottenstein Homes, Inc., and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the foregoing, as she might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Date: March 29, 1996 /s/ Lenore G. Schottenstein ----------------------------- Lenore G. Schottenstein 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitutes and appoints Irving E. Schottenstein and Kerrii B. Anderson, and each of them, as his true and lawful attorney-in-fact and agent for him and in his name, place and stead, in any and all capacities, to sign the 1995 Annual Report on Form 10-K for M/I Schottenstein Homes, Inc., and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the foregoing, as he might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Date: March 29, 1996 /s/ Lewis R. Smoot, Sr. ----------------------------- Lewis R. Smoot, Sr. 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitutes and appoints Irving E. Schottenstein and Kerrii B. Anderson, and each of them, as his true and lawful attorney-in-fact and agent for him and in his name, place and stead, in any and all capacities, to sign the 1995 Annual Report on Form 10-K for M/I Schottenstein Homes, Inc., and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the foregoing, as he might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Date: March 29, 1996 /s/ Robert H. Schottenstein ----------------------------- Robert H. Schottenstein 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitutes and appoints Irving E. Schottenstein and Kerrii B. Anderson, and each of them, as his true and lawful attorney-in-fact and agent for him and in his name, place and stead, in any and all capacities, to sign the 1995 Annual Report on Form 10-K for M/I Schottenstein Homes, Inc., and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the foregoing, as he might or could do in person, and hereby ratifies and confirms all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Date: March 29, 1996 /s/ Steven Schottenstein ----------------------------- Steven Schottenstein EX-27 14 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR THEN ENDED OF M/I SCHOTTENSTEIN HOMES, INC. 1000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 8,136 0 23,612 0 228,268 260,016 8,498 6,106 281,143 54,585 24,862 0 0 88 99,408 281,143 521,955 527,822 431,961 431,961 0 0 14,198 16,506 6,630 9,876 0 0 0 9,876 1.12 1.12
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