-----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, F/sMHgXjCYDDiHe1vQMpKPmVq1Q1t7jQyzmyhEAsqrj7w1vDDYFH9tJU+aGKCFnC t6ChI2b+/o/WWctczQp/og== 0000950152-97-002544.txt : 19970401 0000950152-97-002544.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950152-97-002544 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 001-12434 FILM NUMBER: 97570874 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 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 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.) 3 Easton Oval, Suite 500 Columbus, Ohio 43219 -------------------- (Address of principal executive offices)(zip code) Registrant's telephone number, including area code: (614) 418-8000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange on Title of Each Class Which Registered ------------------- ----------------------- Common Stock, par value $.01 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None -------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 14, 1997, the aggregate market value of voting common stock held by non-affiliates of the registrant (3,548,617 shares) was approximately $37,260,000. The number of shares of common stock of M/I Schottenstein Homes, Inc., outstanding on March 14, 1997 was 8,800,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1996 (Part I, II and IV) Portions of the registrant's Definitive Proxy Statement for the 1997 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A not later than April 1, 1997 (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 3 Easton Oval, Suite 500, Columbus, Ohio 43219 and its telephone number is (614) 418-8000. 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, 1996, 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 1995, the latest year for which information is available, the Company was the 19th largest U.S. home builder (based on total revenue) as ranked by Builder Magazine. During the year ended December 31, 1996, the Company delivered 3,246 homes with a total sales value of over $560 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. 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. In 1988, the Company also expanded into and opened home-building 2 3 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. In the fourth quarter of 1996, the Company opened a home-building division in Phoenix, Arizona. In addition, the Company continues to explore opportunities for expanding into new and existing markets either by starting a new division or through acquisition. The Company, on a regional basis, offers up to seven distinct lines of single-family homes ranging in price from the low $80,000's to approximately $600,000, with an average sales price of homes in Backlog as of December 31, 1996 of $183,000. 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 the Company's customer questionnaire, for the sixth 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 president who reports to a region president. The Company encourages its region and division presidents to be entrepreneurial and has accordingly adopted an incentive compensation structure under which their aggregate compensation is largely determined on the basis of operating income and customer satisfaction in their region or division. To enhance the selling process, the Company operates design centers in the Columbus and Cincinnati 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 company's sales consultants. BUSINESS STRATEGY The Company's business strategy emphasizes the following key areas: (i) maintaining 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) providing superior customer service; (v) providing 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 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 which limits the number of "spec" houses has allowed the Company to avoid the significant discounting which may accompany the sale of a "spec" house. The 3 4 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 similar 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 also strives to grow M/I Financial in the majority of its markets. In addition, in 1996, the Company formed a title insurance agency joint venture to capture title insurance profits in certain of its markets. Finally, the Company continues 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, good locations truly excel and when the market weakens, good locations are usually the last to be affected. The Company has always been effective at securing good locations and with the formation of the Land Committee in early 1996, which is comprised of the CEO and other Senior Officers of the Company, 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, 1996, the Company had an inventory of 2,009 developed lots, 1,400 lots under development and 2,296 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 7,951 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 eight years. In 1996, the Company's market share in Columbus reached a record tying 24% of the total 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 1996, the Company expanded into and currently operates home-building divisions in 10 markets outside its original Columbus market. The Company believes there are significant opportunities to 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 or existing markets whether by starting a new division, as evidenced by the expansion into Phoenix, Arizona late in 1996, 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 4 5 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 level of customer service. As a result, based on the responses to the Company's customer questionnaire, for the sixth year in a row, more than 95% of the Company's customers would recommend one of the Company's homes 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 possesses 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 presidents 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 sales personnel. Every sales consultant is trained and equipped to fully explain the features and benefits of the Company's homes, to determine which home best suits each customer's needs, to explain the construction process and to assist the customer in choosing the best financing. Significant attention is paid to the training and re-training of all sales personnel to assure the highest levels of professionalism and product knowledge. The Company currently employs 105 sales consultants and operates approximately 150 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 5 6 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 and limits the number of spec homes. 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 has been approximately 1.0% of total costs and expenses for each of the years ended December 31, 1996, 1995, and 1994. 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 the 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 customers 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. All homes are constructed according to standardized designs and meet applicable Federal Housing Authority ("FHA") and Veterans Administration ("VA") requirements. To allow maximum design flexibility, the Company limits the use of pre-assembled building components and pre-fabricated structural assemblies. The efficiency of the building process is enhanced by the Company's use of standardized materials available from a variety of sources. The Company has, from time to time, experienced construction delays due to shortages of materials or subcontractors. Such construction delays may, in turn, delay the delivery of homes, thereby extending the period of time between the signing of a purchase contract with respect to a home and the receipt of revenue by the Company; however, the Company cannot predict the extent to which shortages of necessary materials or labor may occur in the future. The Company employs independent subcontractors for the installation of site improvements and the construction of its homes. Subcontractors are supervised by the Company's on-site construction supervisors. All subcontractor work is performed pursuant to written agreements with the Company. Such agreements are generally short-term, with terms from six to twelve months, provide for a fixed price for labor and materials and are structured 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. 6 7 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 ------ -------- --------- Midwest: Ohio...................... Columbus - Hallmark/Heritage/Regency 1976 Columbus - Showcase 1988 Columbus - Horizon 1994 Cincinnati 1988 Indiana................... Indianapolis 1988 Florida: Florida................... Tampa 1981 Orlando 1984 Palm Beach County 1984 Carolina/Washington, D.C.: Carolina.................. Charlotte 1985 Raleigh 1986 Washington D. C........... Virginia 1991 Maryland 1991 Arizona: Arizona................... Phoenix 1996
Midwest Region. The Company began its operations in the Columbus, Ohio market in 1976 and expanded into both Cincinnati, Ohio and Indianapolis, Indiana in 1988. These markets accounted for approximately 60% of the Company's deliveries in 1996. The Company believes that Columbus is a steady market with a stable and diverse employment base. The Company is the leading home builder in Columbus, having built and delivered more single-family detached homes in this market than any other home builder during each of the last eight years. In 1996, the Company had a 24% market share in the Columbus market. The Company believes that the Cincinnati market, similar to Columbus, is characterized by a stable economic environment and a diverse employment base. In 1994, the Company introduced its more affordable Horizon product line in this market in order to compete more effectively for first-time home buyers. This division recorded a record number of New Contracts and Homes Delivered in 1996, primarily due to the strong performance of the Horizon product line. 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 Homes Delivered in 1996, primarily due to the strong performance of the Horizon product line. 7 8 Florida Region. The Company entered the Florida market in 1981, when it opened its Tampa division. In 1984, the Company opened additional divisions in Palm Beach County and Orlando. In 1996, deliveries from this region represented approximately 20% of the Company's total deliveries. Tampa's economy is one of the fastest growing economies in the United States. Growth in this market is supported by business relocations and expansions, attracted by the metropolitan area's low costs and an ample labor supply. Due to the increased number of jobs in the services, government and finance industries, the Tampa market continues to present significant opportunities for the Company. Palm Beach County is one of the more affluent markets in the United States. The tourist industry is the largest employer and is one of the key drivers for the metropolitan area's growth. The Company introduced its highest priced product line in order to cater to the more affluent residents in this market. 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 in this area. In 1995, the Company introduced a more upscale product line in order to compete more effectively in this market. The Carolina/Washington, D.C. Region. In 1985, the Company entered Charlotte and a year later opened in Raleigh-Durham. In 1991, the Company expanded into both Virginia and Maryland. In 1996, these markets represented approximately 20% of the Company's total deliveries. Charlotte, which is home to two of the fastest growing firms in the banking industry, continues to grow as a financial center. The Company expects this market to continue to gain administrative and back-office jobs as these firms pursue growth outside the region. In addition, Charlotte is establishing itself as a transportation hub with its manufacturing base. Given this strong industry presence, Charlotte is ranked above average for long-term employment growth. Raleigh is well situated to take advantage of the explosive growth in high-tech firms with a well-educated workforce. The Company expects the housing market in this area to continue to exhibit strong growth. This division recorded a record number of Homes Delivered in 1996. The Company believes that the Washington, D.C. market will remain very competitive. The Washington, D.C. region historically has been dominated by federal government employment. However, there has been an increasing trend toward private sector jobs, especially in the high-technology area. The Company's current operations in the Washington, D.C. region are located primarily in Fairfax, Prince William and Loudoun counties in Virginia and Prince Georges, Montgomery and Anne Arundel counties in Maryland. The Company 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 in the Washington, D.C. market. The Arizona Region. The Company entered the Phoenix market late in 1996. 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 10 of the Company's 11 developing markets, these losses have already been absorbed in the Company's historical results of operations. The Company expects to incur losses in its Phoenix division as a result of its conservative expense policy relating to start-ups. PRODUCT LINES The Company, on a regional basis, offers up to seven distinct product lines, ranging in price from the low $80,000's to approximately $600,000 and ranging in square footage from approximately 1,100 to 4,000 square feet. 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, move-up buyers and "empty-nesters". 8 9 In the Columbus market, which is the Company's largest market, the Company offers all of its seven distinct product lines. In addition, the Company offers a select number of its product lines in its divisions outside of Columbus. The price range, excluding optional add-ons, and average square footage for these product lines in Columbus are shown below:
AVERAGE PRODUCT LINE PRICE RANGE SQUARE FOOTAGE ------------------------ ------------------------- -------------- Horizon $80,000 - $140,000 1,400 Heritage $115,000 - $165,000 1,500 Hallmark $140,000 - $205,000 2,000 Regency $165,000 - $230,000 2,450 Showcase Signature $190,000 - $230,000 2,500 Hampsted $180,000 - $300,000 2,600 Showcase Classic $205,000 - $310,000 2,800
In addition, the Company offers a line of attached townhomes in the Maryland and Virginia markets. These homes are marketed primarily to first-time buyers and range from 1,400 to 2,300 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 pursues a land acquisition policy that it believes is more conservative than other national home builders. The Company continues to purchase lots from outside developers under option contracts, when possible, to limit the Company's risk; however, the Company continues to evaluate all of its alternatives to satisfy its need for lots in the most cost effective manner. The Company develops its own lots 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 raw land 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 when evaluating the acquisition of raw land, the Company generally does not commence engineering until all necessary land use and zoning approvals are obtained. To diversify its investment in land, the Company from time to time enters into joint ventures and limited liability corporations (LLC's), generally with other homebuilders. At December 31, 1996, the Company had interests varying from 33% to 50% in each of 18 joint ventures and 5 LLC's. These joint ventures and LLC's develop land into lots and, generally, the Company receives its percentage interest in the joint venture and LLC in the form of a distribution of developed lots. These joint ventures and LLC's pay to the managing partner certain fees for accounting, 9 10 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 and LLC. The Company currently is responsible for the management of 7 of the 18 joint ventures and 3 of the 5 LLC's. These joint ventures and LLC's are equity financed, except where seller financing is available on attractive terms. 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, 1996, $9.5 million of letters of credit were outstanding for these purposes, as well as $3.8 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, 1996, the Company had in inventory 2,003 developed lots and 979 lots under development. The Company also owned raw land expected to be developed into approximately 1,269 lots. In addition, at December 31, 1996, the Company's interest in lots held by its joint ventures and LLC's consisted of 6 developed lots and 421 lots under development. The Company also owns interests in raw land held by its joint ventures and LLC's zoned for 1,027 lots. It is anticipated that some of the lots owned by the Company and the joint ventures and LLC's will be sold to others, including land held through its joint ventures and LLC's. At December 31, 1996, the Company had options and purchase contracts, which expire over the next three years, to acquire 3,184 developed lots, and land which will be developed into approximately 4,767 lots, for a total of 7,951 lots, with an aggregate current purchase price of approximately $167.0 million. Purchase of the land which will be developed is contingent upon satisfaction of certain requirements by the Company and the sellers, such as zoning approval. The majority of purchase agreements for developed lots 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 and LLC's) by region at December 31, 1996:
OWNED LOTS ----------------------------------- Under To Be Lots to be Region Developed Development Developed Purchased Total ---------------------------------------------------------------------------------- Midwest 857 992 1,575 5,195 8,619 Florida 717 123 106 1,432 2,378 Carolina 195 129 152 779 1,255 Washington, D.C. 240 156 463 545 1,404 --------------------------------------------------------------------------------- Total 2,009 1,400 2,296 7,951 13,656 =================================================================================
FINANCIAL SERVICES Through its wholly-owned subsidiary M/I Financial, the Company offers fixed and adjustable rate mortgage loans, primarily to buyers of the Company's homes. M/I Financial has branches in all of the Company's housing markets, with the exception of Virginia, Maryland and Phoenix. Of the 2,985 Homes Delivered in 1996, in the markets in which M/I Financial operates, M/I Financial provided financing for 2,309 of these homes, representing approximately $304.7 million of mortgage loans originated and sold. M/I Financial issues commitments to customers and closes both conventional and government-insured loans in its own name. However, in an effort to minimize the risk of financing activities, M/I Financial generally sells the loans it originates to the secondary market which provides the funding shortly thereafter. The Company retains a small servicing portfolio which it currently sub-services with a financial institution. 10 11 At December 31, 1996, the Company was committed to fund $79.8 million in mortgage loans to home buyers. Of this total, approximately $11.0 million were adjustable rate loans and $68.8 million were fixed rate loan commitments. The loans are granted at current market interest rates and the rate is guaranteed through the transfer of the title of the home to the buyer. The Company uses hedging methods to reduce its exposure to interest rate fluctuations between the commitment date of the loan and the time the home closes. 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 represents the percentage of loans expected to be closed. One of the methods the Company uses to hedge the interest rate risk relative to unclosed loans is to purchase commitments from outside investors to acquire the loans at the interest rate at which the loan will be closed. The cost of these purchase commitments is recorded as an asset and is expensed as loans are closed under the related commitments. Any remaining unused balance is expensed when the commitment expires, or earlier if the Company determines that it will be unable to use the entire commitment prior to its expiration date. At December 31, 1996, the Company had approximately $50.7 million of commitments to deliver mortgage loans to outside investors. Another method utilized by the Company to hedge its interest rate risk is the use of forward sales of mortgage-backed securities whereby the Company agrees to sell and later repurchase similar but not identical mortgage-backed securities. Generally, the agreements are fixed-coupon agreements whereby the interest rate and maturity date of both transactions are approximately the same and are established to correspond with the closing of the fixed interest rate mortgage loan commitments of the Company. The difference between the two values of the mortgage-backed securities in the agreements at settlement provide a hedge on the interest rate risk exposure in the mortgage loan commitments and is included in the gain or loss on the sale of the loans to third party investors. At December 31, 1996, these agreements matured within 90 to 120 days. Securities under forward sales agreements averaged approximately $15.3 million during 1996 and the maximum amounts outstanding at any month end during 1996 was $27.0 million, the balance at December 31, 1996. Hedging gains of $868,000 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 has been approved by the Department of Housing and Urban Development and the VA to originate loans insured by the FHA and the VA, respectively, and has been approved by the Federal Home Loan Mortgage Corporation ("FHLMC") and by the Federal National Mortgage Association ("FNMA") as a seller and servicer of mortgages sold to the FHLMC and FNMA. 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 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 11 12 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 March 14, 1997, the Company employed 732 people (including part-time employees), of which 179 were employed in sales; 303 in construction; and 250 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 leased 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." The Company currently leases a portion of its office space from a limited liability company, in which the Company has a minority equity interest. See Note 8 to the Consolidated Financial Statements. Due to the nature of the Company's business, a substantial amount of property is held as inventory in the ordinary course of business. See "Item 1. Business - Available Lots and Land." ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine litigation incidental to its business. Management does not believe that any of this litigation is material to the financial 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 1996, 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, 1996. 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, 1996. 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, 1996. 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, 1996. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants during each of the two years ended December 31, 1996 and 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 1997 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 1997 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 1997 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 1997 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, 1996 and 1995 Consolidated Statements of Income - Year Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity - Year Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Year Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedules.
Page ---- Independent Auditors' Report on financial statement schedules...................... 21 For the Year ended December 31, 1996, 1995 and 1994: Schedule II - Valuation and Qualifying Accounts ................................ 21
All other schedules have been omitted because the required information is included in the financial statements or notes thereto, the amounts involved are not significant, or the required matter is not present. 3. Exhibits. The following exhibits required by Item 601 of Regulation S-K are filed as part of this report. For convenience of reference, the exhibits are listed according to the numbers appearing in the Exhibit Table to Item 601 of Regulation S-K. Exhibit Number Description - -------------- ----------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of the Company, hereby incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 3.2 Regulations of the Company, hereby incorporated by reference to Exhibit 3(l) of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 3.3 Amendment to the Code of Regulations of the Company, hereby incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8, Commission File No. 33-76518. 4 Specimen of Stock Certificate, hereby incorporated by reference to Exhibit 4 of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 15 16 Exhibit Number Description - -------------- ----------------------------------------------------- 10.1 Executive Deferred Compensation Plan, hereby incorporated by reference to Exhibit 10(e) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10.2 Amendments to the Predecessor's Executive Deferred Compensation Plan dated March 29, 1991 and June 24, 1992, hereby incorporated by reference to Exhibit 19(a) of the Predecessor's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. 10.3 The Predecessor's Amended and Restated 401(K) Profit Sharing Plan, consisting of a savings plan adoption agreement, savings plan and savings plan trust, hereby incorporated by reference to Exhibit 10(cc) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10.4 P.L. 1992 Limited Partnership Certificate and Agreement of Limited Partnership dated March 25, 1992, hereby incorporated by reference to Exhibit 10(vv) of the Predecessor's Registration Statement on Form S-4, Commission File No. 33-44914. 10.5 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. 10.6 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. 10.7 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. 10.8 Third Amendment to Master Lease Agreement between the Predecessor and M/I Office Development Company dated March 4, 1996, hereby incorporated by reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.9 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. 16 17 Exhibit Number Description - -------------- ----------------------------------------------------- 10.10 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. 10.11 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; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston and Bank One, Columbus, N.A., as agent for the banks, dated May 7, 1996, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. 10.12 Second restated revolving credit loan and standby letter of credit agreement by and among the Company, Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as agent for the banks, dated December 30, 1996. (Filed herewith.) 10.13 Amendment No. 1 to second restated revolving credit loan and standby letter of credit agreement by and among the Company, Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as agent for the banks, dated March 14, 1997. (Filed herewith.) 10.14 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. 10.15 Revolving Credit Agreement by and among the Company; M/I Financial Corp. and Bank One, Columbus, N.A., 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. 10.16 First Amendment to revolving credit agreement by and among the Company, M/I Financial Corp. and Bank One, Columbus, N.A., dated May 7, 1996, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. 10.17 Revolving Credit Agreement by and among the Company; M/I Financial Corp. and Bank One, Columbus, N.A. dated July 19, 1996, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 17 18 Exhibit Number Description - -------------- ----------------------------------------------------- 10.18 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. 10.19 Melvin and Irving Schottenstein Family Agreement by and among 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. 10.20 First Amendment to Melvin and Irving Schottenstein Family Agreement by and among the Company dated March 17, 1997. (Filed herewith.) 10.21 Consulting and Separation Agreement between the Company and Eric J. Schottenstein, dated January 5, 1994, hereby incorporated by reference to Exhibit 10.27 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.22 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. 10.23 Company's 1995 President and Chief Executive Officer Bonus Program, hereby incorporated by reference to Exhibit 10.29 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.24 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. 10.25 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. 10.26 Company's 1996 President and Chief Executive Officer Bonus Program, hereby incorporated by reference to Exhibit 10.45 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.27 Company's 1996 Corporate Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.46 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.28 Company's 1996 Senior Vice President and Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.47 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 18 19 Exhibit Number Description - -------------- ----------------------------------------------------- 10.29 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. 10.30 Limited Liability Company Agreement of Northeast Office Venture, Limited Liability Company dated November 17, 1995, hereby incorporated by reference to Exhibit 10.51 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.31 Lease Agreement by and between the Company and Northeast Office Venture, Limited Liability Company dated November 17, 1995, hereby incorporated by reference to Exhibit 10.52 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.32 Note Purchase Agreement between the Company and The First National Bank of Boston, dated September 30, 1996, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 13 Annual Report to Shareholders for the year ended December 31, 1996. (Filed herewith.) 21 Subsidiaries of Company. (Filed herewith.) 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) Financial Statement Schedule - See Item 14(a)(2). 19 20 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 28th day of March, 1997. M/I SCHOTTENSTEIN HOMES, INC. (Registrant) By: /S/ ROBERT H. SCHOTTENSTEIN --------------------------------- Robert H. Schottenstein 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 28th of March, 1997.
NAME AND TITLE NAME AND TITLE -------------- -------------- IRVING E. SCHOTTENSTEIN* /S/ KERRII B. ANDERSON - ------------------------------- ------------------------------------------- Irving E. Schottenstein Kerrii B. Anderson Chairman of the Board 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* NORMAN L. TRAEGER* - ------------------------------- ------------------------------------------- Friedrich K. M. Bohm Norman L. Traeger Director Director HOLLY S. KASTAN* ERIC J. SCHOTTENSTEIN* - ------------------------------- ------------------------------------------- Holly S. Kastan Eric J. Schottenstein Director Director AMY D. SCHOTTENSTEIN* /S/ ROBERT H. SCHOTTENSTEIN - ------------------------------- ------------------------------------------- Amy D. Schottenstein Robert H. Schottenstein Director President STEVEN SCHOTTENSTEIN* LEWIS R. SMOOT, SR.* - ------------------------------- ------------------------------------------- Steven Schottenstein Lewis R. Smoot, Sr. Director Director * The above-named Directors and Officers of the Registrant execute this report by Robert H. Schottenstein and Kerrii B. Anderson, their Attorneys-in-Fact, pursuant to powers of attorney executed by the above-named Directors and filed with the Securities and Exchange Commission as Exhibit 24 to the report.
By: /S/ ROBERT H. SCHOTTENSTEIN -------------------------------------------- Robert H. Schottenstein, Attorney-in-Fact By: /S/ KERRII B. ANDERSON -------------------------------------------- Kerrii B. Anderson, Attorney-in-Fact 20 21 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of M/I Schottenstein Homes, Inc. Columbus, Ohio We have audited the consolidated financial statements of M/I Schottenstein Homes, Inc. and its subsidiary as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 27, 1997, except with respect to the last paragraph of Note 2, for which the date is March 15, 1997; such financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of M/I Schottenstein Homes, Inc. and its subsidiary, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP - ----------------------------------- Deloite & Touche LLP Columbus, Ohio February 27, 1997 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - -----------------------------------------------
Additions Balance at Charged to Balance at Beginning Costs and End of Description of Year Expenses Deductions Year - ----------- ------- -------- ---------- ---- Valuation allowance deducted from asset account - single-family lots, land and land development costs: Year ended December 31, 1996 $975,000 $ 1,375,000 $ 0 $ 2,350,000 ========== =========== =========== =========== Year ended December 31, 1995 $ 0 $ 975,000 $ 0 $ 975,000 ========== =========== =========== =========== Year ended December 31, 1994 $ 0 $ 0 $ 0 $ 0 ========== =========== =========== ===========
21 22 EXHIBIT INDEX
Exhibit Number Description Page No. - -------------- ------------------------------------------------------- -------- 3.1 Amended and Restated Articles of Incorporation of the Company, hereby incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 3.2 Regulations of the Company, hereby incorporated by reference to Exhibit 3(l) of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 3.3 Amendment to the Code of Regulations of the Company, hereby incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8, Commission File No. 33-76518. 4 Specimen of Stock Certificate, hereby incorporated by reference to Exhibit 4 of the Company's Registration Statement on Form S-1, Commission File No. 33-68564. 10.1 Executive Deferred Compensation Plan, hereby incorporated by reference to Exhibit 10(e) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10.2 Amendments to the Predecessor's Executive Deferred Compensation Plan dated March 29, 1991 and June 24, 1992, hereby incorporated by reference to Exhibit 19(a) of the Predecessor's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. 10.3 The Predecessor's Amended and Restated 401(K) Profit Sharing Plan, consisting of a savings plan adoption agreement, savings plan and savings plan trust, hereby incorporated by reference to Exhibit 10(cc) of the Predecessor's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10.4 P.L. 1992 Limited Partnership Certificate and Agreement of Limited Partnership dated March 25, 1992, hereby incorporated by reference to Exhibit 10(vv) of the Predecessor's Registration Statement on Form S-4, Commission File No. 33-44914. 10.5 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.
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Exhibit Number Description Page No. - -------------- ------------------------------------------------------- -------- 10.6 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. 10.7 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. 10.8 Third Amendment to Master Lease Agreement between the Predecessor and M/I Office Development Company dated March 4, 1996, hereby incorporated by reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.9 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. 10.10 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. 10.11 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; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston and Bank One, Columbus, N.A., as agent for the banks, dated May 7, 1996, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
23 24
Exhibit Number Description Page No. - -------------- ------------------------------------------------------- -------- 10.12 Second restated revolving credit loan and standby letter of credit agreement by and among the Company, Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as agent for the banks, dated December 30, 1996. (Filed herewith.) 10.13 Amendment No. 1 to second restated revolving credit loan and standby letter of credit agreement by and among the Company, Bank One, Columbus, N.A.; The Huntington National Bank; The First National Bank of Chicago; National City Bank of Columbus; The First National Bank of Boston; The Fifth Third Bank of Columbus and Bank One, Columbus, N.A., as agent for the banks, dated March 14, 1997. (Filed herewith.) 10.14 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. 10.15 Revolving Credit Agreement by and among the Company; M/I Financial Corp. and Bank One, Columbus, N.A., 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. 10.16 First Amendment to revolving credit agreement by and among the Company, M/I Financial Corp. and Bank One, Columbus, N.A., dated May 7, 1996, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. 10.17 Revolving Credit Agreement by and among the Company; M/I Financial Corp. and Bank One, Columbus, N.A. dated July 19, 1996, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.18 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.
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Exhibit Number Description Page No. - -------------- ------------------------------------------------------- -------- 10.19 Melvin and Irving Schottenstein Family Agreement by and among 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. 10.20 First Amendment to Melvin and Irving Schottenstein Family Agreement by and among the Company dated March 17, 1997. (Filed herewith.) 10.21 Consulting and Separation Agreement between the Company and Eric J. Schottenstein, dated January 5, 1994, hereby incorporated by reference to Exhibit 10.27 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.22 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. 10.23 Company's 1995 President and Chief Executive Officer Bonus Program, hereby incorporated by reference to Exhibit 10.29 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.24 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. 10.25 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. 10.26 Company's 1996 President and Chief Executive Officer Bonus Program, hereby incorporated by reference to Exhibit 10.45 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.27 Company's 1996 Corporate Executive Vice President Bonus Program, hereby incorporated by reference to Exhibit 10.46 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
25 26
Exhibit Number Description Page No. - -------------- ------------------------------------------------------- -------- 10.28 Company's 1996 Senior Vice President and Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.47 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.29 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. 10.30 Limited Liability Company Agreement of Northeast Office Venture, Limited Liability Company dated November 17, 1995, hereby incorporated by reference to Exhibit 10.40 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.31 Lease Agreement by and between the Company and Northeast Office Venture, Limited Liability Company dated November 17, 1995, hereby incorporated by reference to Exhibit 10.52 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 10.32 Note Purchase Agreement between the Company and The First National Bank of Boston, dated September 30, 1996, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 13 Annual Report to Shareholders for the year ended December 31, 1996. (Filed herewith.) 21 Subsidiaries of Company. (Filed herewith.) 23 Consent of Deloitte & Touche LLP. (Filed herewith.) 24 Powers of Attorney. (Filed herewith.)
26 EX-10.12 2 EXHIBIT 10.12 1 Exhibit 10.12 SECOND RESTATED REVOLVING CREDIT LOAN AND ----------------------------------------- STANDBY LETTER OF CREDIT AGREEMENT ---------------------------------- THIS AGREEMENT is made to be effective as of December 30, 1996, by and among M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation ("BORROWER"), BANK ONE, COLUMBUS, N.A., a national banking association ("BANK One"), THE HUNTINGTON NATIONAL BANK, a national banking association ("HNB"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("FIRST CHICAGO"), NATIONAL CITY BANK OF COLUMBUS, a national banking association ("NCB"), THE FIRST NATIONAL BANK OF BOSTON, a national banking association ("BOB"), THE FIFTH THIRD BANK OF COLUMBUS, an Ohio banking corporation ("FIFTH THIRD") (Bank One, HNB, First Chicago, NCB, BOB and Fifth Third is each a "BANK" and, collectively, "BANKS"), and BANK ONE, COLUMBUS, N.A., as agent for Banks ("AGENT"). For valuable consideration, the receipt of which is hereby acknowledged, Borrower, Banks and Agent, each intending to be legally bound, hereby recite and agree as follows: BACKGROUND INFORMATION ---------------------- A. Borrower, Bank One, HNB, First Chicago, NCB, BOB and Agent are parties to a certain Restated Revolving Credit Loan, Seasonal Loan and Standby Letter of Credit Agreement effective as of September 29, 1995, as amended by Amendment No. 1 thereto effective as of May 7, 1996 (collectively, the "EXISTING CREDIT AGREEMENT"). B. Borrower, Banks and Agent want to modify the Existing Credit Agreement by, among other things, adding Fifth Third as a Bank, eliminating the Seasonal Loans (as defined in the Existing Credit Agreement) and increasing the amount of credit available to Borrower as Revolving Credit Loans. 2 AGREEMENT SECTION 1. DEFINITIONS ----------- 1.1 DEFINED TERMS. As used in this Agreement, the following terms have the following respective meanings: "ADJUSTMENT DATE" shall mean each date that is two Business Days after February 15, May 15, August 15 and November 15 of each year of the Commitment, subject to the provisions in the definition of "Applicable Eurodollar Margin" for a later adjustment in certain circumstances. "AFFILIATE" shall mean (a) any Person (other than a Subsidiary of Borrower) which, directly or indirectly, controls, is controlled by or is under common control with Borrower or (b) any Person who is a director, officer or key employee of Borrower, any Subsidiary of Borrower or any Person described in clause (a) of this definition. For purposes of this definition, "control" of a Person means the power, direct or indirect, to vote twenty percent (20%) or more of the securities having voting power for the election of directors of such Person or otherwise to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "AGREEMENT" shall mean this Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "APPLICABLE EURODOLLAR MARGIN" shall mean, during the period from the date hereof until the first Adjustment Date, [2.00]% per annum. Thereafter, subject to the other terms and conditions of this Agreement (including the limitations on the availability of Eurodollar Rate Loans and including the termination of the Commitment as set forth in Section 9 hereof), the "Applicable Eurodollar Margin" will be adjusted on each Adjustment Date to the applicable rate per annum that corresponds to the ratio of EBITDA to Consolidated Interest Incurred, determined from the financial statements and compliance certificate that relate to the last month of the fiscal quarter immediately preceding such Adjustment Date, as set forth below: If the ratio of EBITDA Applicable Eurodollar to Consolidated Margin for Eurodollar Interest INCURRED Rate Loans is: is: ------------------------ --------------------- -2- 3 If the ratio of EBITDA Applicable Eurodollar to Consolidated Margin for Eurodollar Interest INCURRED Rate Loans is: is: ------------------------ --------------------- less than 1.75 to 1.0 Eurodollar Rate Loans are not available equal to or greater than 1.75 to 1.0 but less than 2.0 to 1.0 2.50% per annum equal to or greater than 2.0 to 1.0 but less than 2.50 to 1.0 2.25% per annum equal to or greater than 2.50 to 1.0 but less than 3.0 to 1.0 2.00% per annum equal to or greater than 3.0 to 1.0 1.75% per annum If, however, the financial statements required to be delivered pursuant to subsection 6.1(b) and the related compliance certificate required to be delivered pursuant to subsection 6.2(a) are not delivered when due, then: (a) if such financial statements and compliance certificate are delivered after the date such financial statements and compliance certificate were required to be delivered but before the expiration of any applicable cure period and the Applicable Eurodollar Margin increases from that previously in effect as a result of a change in the ratio of EBITDA to Consolidated Interest Incurred as determined from such financial statements and compliance certificate, then the Applicable Eurodollar Margin during the period from the date upon which such financial statements were required to be delivered but before the expiration of any applicable cure period until the date upon which they actually are delivered shall be the Applicable Eurodollar Margin as so increased; (b) if such financial statements and compliance certificate are delivered after the date such financial statements and compliance certificate were required to be delivered but before the expiration of any applicable cure period and the Applicable Eurodollar Margin decreases from that previously in effect as a result of a change in the ratio of EBITDA to Consolidated Interest Incurred as determined from such -3- 4 financial statements and compliance certificate, then such decrease in the Applicable Eurodollar Margin shall not become applicable until the date upon which the financial statements and compliance certificates are actually delivered; and (c) if such financial statements and certificate are not delivered prior to the expiration of the applicable cure period, the Applicable Eurodollar Margin for the period beginning as of the date upon which such financial statements and compliance certificate were required to be delivered without regard to any applicable cure period until two Business Days following the date upon which they actually are delivered shall be, per annum, one percent (1.0%) plus the Applicable Eurodollar Margin that was in effect at the time of such expiration (it being understood that the foregoing shall not limit the rights of the Agent and the Banks set forth in Section 9). "BANKS" shall mean Bank One, HNB, First Chicago, NCB, BOB and Fifth Third. "BORROWING BASE" shall mean, as of any date of determination, an amount equal to the sum of: (a) the amount calculated by multiplying .90 by the value of Eligible Production Inventory; plus (b) the amount calculated by multiplying .85 by the aggregate value of Eligible Model Houses which are not over two (2) years old (as measured from the date of the completion of construction); plus (c) the amount calculated by multiplying .75 by the aggregate value of Eligible Model Houses which are over two (2) years old (as measured from the date of the completion of construction); plus (d) the amount calculated by multiplying .80 by the value of Eligible Developed Lots Sold; plus (e) the amount calculated by multiplying .50 by the value of Eligible Developed Lots Unsold; plus (f) the amount calculated by multiplying .25 by the value of Eligible Raw Land and Land Under Development; plus (g) the amount calculated by multiplying .25 by the value of Investments in Joint Ventures; -4- 5 less the sum of (i) the aggregate amount of Customer Deposits then held by Borrower and (ii) the aggregate outstanding amount of Liens incurred by Borrower and permitted by subsection 7.2(i) hereof. "BORROWING BASE CERTIFICATE" shall have the meaning set forth in subsection 5.1(c) hereof. "BORROWING DATE" shall mean any Business Day specified pursuant to (a) subsection 2.3 hereof as a date on which Banks make, at Borrower's request, a disbursement of the Revolving Credit Loans hereunder, or (b) subsection 2.13 hereof as a date on which Agent issues, at Borrower's request, a Standby L/C hereunder. "BUSINESS DAY" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in Columbus, Ohio are authorized or required by law to close, except that when used in connection with Eurodollar Rate Loans, "Business Day" shall mean any Business Day on which dealings in Dollars between banks may be carried on in London, England and Columbus, Ohio. "CASH EQUIVALENTS" shall mean (a) securities with maturities of 180 days or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and bankers' acceptances, each issued by Bank One, HNB, NBD, NCB, BOB or Fifth Third and each with a maturity of 180 days or less from the date of acquisition, and (c) commercial paper of a domestic issuer rated at least A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc. with a maturity of not more than 180 days. "CODE" shall mean the Internal Revenue Code of 1986, as amended or superseded from time to time. Any reference to a specific provision of the Code shall be construed to include any comparable provision of the Code as hereafter amended or superseded. "COMMITMENT" shall mean the aggregate of (a) the Revolving Credit Loan Commitments and (b) the L/C Commitments as set forth on Schedule 1 hereto. "COMMITMENT PERIOD" shall mean the period from and including the date hereof to September 30, 2001, or such earlier or later date as the Commitment shall terminate as provided herein. -5- 6 "COMMONLY CONTROLLED ENTITY" shall mean an entity, whether or not incorporated, which is under common control with Borrower within the meaning of Section 414(b) or (c) of the Code. "CONSOLIDATED EARNINGS" at any date shall mean the amount which would be set forth opposite the caption "net income" (or any like caption) in a consolidated statement of income or operations of Borrower and its Subsidiaries at such date prepared in accordance with GAAP. -6- 7 "CONSOLIDATED INTEREST EXPENSE" shall mean, for any period, interest expense on Indebtedness of the Borrower and its Subsidiaries for such period, in each case determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED INTEREST INCURRED" shall mean, for any rolling 12 month period, all interest incurred during such period on outstanding Indebtedness of Borrower and its Subsidiaries irrespective of whether such interest is expensed or capitalized by Borrower or its Subsidiaries, in each case determined on a consolidated basis. "CONSOLIDATED LIABILITIES" at any date shall mean the total of all amounts which would be properly classified as liabilities in a consolidated balance sheet of Borrower and its Subsidiaries at such date prepared in accordance with GAAP, including without limitation deferred income taxes and capital lease obligations, if any. "CONSOLIDATED TANGIBLE NET WORTH" at any date shall be the excess, if any, of the total amount of assets over the total amount of liabilities, deferred credits and minority interests, as the same would appear in a consolidated balance sheet of Borrower and its Subsidiaries at such date prepared in accordance with GAAP, less the book value of all intangible assets, determined in accordance with GAAP. "CONSOLIDATED UNSUBORDINATED LIABILITIES" at any date shall mean Consolidated Liabilities less Subordinated Indebtedness. "CONSTRUCTION BONDS" shall mean bonds issued by surety bond companies for the benefit of, and as required by, municipalities or other political subdivisions to secure Borrower's performance of its obligations relating to lot improvements and subdivision development and completion. "CONTINGENT OBLIGATION" shall mean as to any Person, any reimbursement obligations (including Reimbursement Obligations) of such Person in respect of drafts that may be drawn under letters of credit, any reimbursement obligations of such Person in respect of surety bonds (including reimbursement obligations in respect of Construction Bonds), and any obligation of such Person guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations primarily to pay money ("PRIMARY OBLIGATIONS") of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including without limitation any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect -7- 8 security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the obligee under any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the obligee under such primary obligation against loss in respect thereof; provided, however, that the term "Contingent Obligation" shall not include (A) endorsements of instruments for deposit or collection in the ordinary course of business, (B) Mortgage Loan Repurchase Obligations, or (C) obligations under lot purchase contracts entered into in the ordinary course of business. "CONTRACTUAL OBLIGATION" shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "CUSTOMER DEPOSITS" shall mean cash deposits made by customers of Borrower in connection with the execution of purchase contracts, which deposits shall be shown as liabilities on Borrower's financial statements. "DEFAULT" shall mean any of the events specified in Section 9 hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "DEVELOPED LOTS" shall mean (a) all residential lots with respect to which (i) development has been completed to such an extent that permits that allow use and construction, including building, sanitary sewer and water, could be obtained for a detached or attached single family house (including a townhouse condominium building or condominium building) on each such lot, and (ii) Start of Construction has not occurred; and (b) all lots zoned for commercial use that have sewer and water available for use at such lots. The value of Developed Lots shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP; provided, however, that the total value (calculated in accordance with GAAP) of commercial lots constituting Developed Lots shall not exceed $1,000,000 at any one time. "DOLLARS" and "$" shall mean dollars in lawful currency of the United States of America. -8- 9 "EBITDA" shall mean, for any rolling 12 month period, on a consolidated basis for the Borrower and its Subsidiaries, the sum of the amounts for such period of (a) Consolidated Earnings, PLUS (b) charges against income for federal, state and local income taxes, PLUS (c) Consolidated Interest Expense, PLUS (d) depreciation and amortization expense, PLUS (e) extraordinary losses EXCLUSIVE of any such losses that are attributable to the write-down or other downward revaluation of assets (including the establishment of reserves), MINUS (x) interest income, MINUS (y) all extraordinary gains. "ELIGIBLE DEVELOPED LOTS SOLD" shall mean all Developed Lots which Borrower has recorded as sold in accordance with its usual accounting practices to any Person other than an Affiliate or Subsidiary of Borrower. The value of Eligible Developed Lots Sold shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Developed Lots Sold and permitted by subsection 7.1(d) hereof. "ELIGIBLE DEVELOPED LOTS UNSOLD" shall mean all Developed Lots which Borrower has not recorded as sold in accordance with its usual accounting practices, or which Borrower has recorded as sold to an Affiliate or Subsidiary of Borrower. The value of Eligible Developed Lots Unsold shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Developed Lots Unsold and permitted by subsection 7.1(d) hereof. "ELIGIBLE MODEL HOUSES" shall mean (a) all completed detached or attached single family houses (including townhouse condominiums and condominiums) which are being used by Borrower as sales models, and the lots on which such houses are located and (b) detached or attached (including townhouse condominiums and condominiums) single family houses for which there has been a Start of Construction which upon completion will be used by Borrower as sales models, and the lots on which such houses are located. The value of Eligible Model Houses shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP except for the costs of any furnishings, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Model Houses and permitted by subsection 7.1(d) hereof; provided, however, that (a) the aggregate value of attached (including townhouse condominiums and condominiums) single family homes constituting -9- 10 Eligible Model Houses shall not exceed $3,000,000, and (b) the aggregate value of all Eligible Model Houses shall not exceed $30,000,000. "ELIGIBLE MORTGAGE LOAN" shall mean at any date an original (not a rewritten or renewed) loan evidenced by a note and secured by a first mortgage on residential real property which (a) M/I Financial Corp. has made to enable a natural person or persons to purchase a home from Borrower or another Person that is substantially completed, (b) is not more than 60 days old as determined by the date of the note which evidences such loan, and (c) is subject, or M/I Financial Corp. reasonably believes is subject, to a Purchase Commitment; provided, however, that the amount of Eligible Mortgage Loans consisting of loans made by M/I Financial Corp. for the purchase of homes from any Person other than Borrower shall not, in the aggregate at any one time outstanding, exceed the amount of $5,000,000. "ELIGIBLE PRODUCTION INVENTORY" shall mean all detached or attached (including townhouse condominiums and condominiums) single family houses which are completed (including Speculative Houses but excluding Eligible Model Houses and Rental Houses, if any) or for which there has been a Start of Construction (including Speculative Houses but excluding Eligible Model Houses and Rental Houses, if any), and the lots on which such houses are located. The value of Eligible Production Inventory shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Production Inventory and permitted by subsection 7.1(d) hereof; provided that the cost of obtaining commitments for financing terms to be provided to the buyers of Eligible Production Inventory shall be excluded. "ELIGIBLE RAW LAND AND LAND UNDER DEVELOPMENT" shall mean all land other than land included in the definition of Eligible Model Houses, Rental Houses (if any), Eligible Production Inventory, Eligible Developed Lots Sold, or Eligible Developed Lots Unsold. The value of Eligible Raw Land and Land Under Development shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized in accordance with GAAP, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Raw Land and Land Under Development and permitted by subsection 7.1(d) hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. -10- 11 "EUROCURRENCY RESERVE REQUIREMENTS" shall mean, for any day as applied to a Eurodollar Rate Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System. "EURODOLLAR BASE RATE" shall mean, with respect to each day during each Interest Period, the rate per annum equal to the rate at which Agent is offered Dollar deposits at or about 10:00 A.M., Columbus, Ohio time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Rate Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Rate Loan to be outstanding during such Interest Period. "EURODOLLAR RATE LOANS" shall mean Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "EURODOLLAR RATE" shall mean with respect to each day during each Interest Period pertaining to a Eurodollar Rate Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): EURODOLLAR BASE RATE ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "EVENT OF DEFAULT" shall mean any of the events specified in Section 9 hereof, provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "FANNIE MAE" shall mean the Federal National Mortgage Association, or any successor thereto. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect at the time any determination is made or financial statement is required hereunder as promulgated by the American Institute of Certified Public Accountants, the Accounting Principles Board, the Financial Accounting Standards Board or any other body existing from time to -11- 12 time which is authorized to establish or interpret such principles, applied on a consistent basis throughout any applicable period, subject to any change required by a change in GAAP; provided, however, that if any change in generally accepted accounting principles from those applied in preparing the financial statements referred to in subsection 4.1 hereof affects the calculation of any financial covenant contained herein, Borrower, Banks and Agent hereby agree to amend the Agreement to the effect that each such financial covenant is not more or less restrictive than such covenant as in effect on the date hereof using generally accepted accounting principles consistent with those reflected in such financial statements. "GOVERNMENTAL AUTHORITY" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GUARANTEED HNB JOINT VENTURES LETTERS OF CREDIT" shall mean that portion of the standby letters of credit (including joint venture letters of credit issued by HNB prior to the date of this Agreement that will remain in place after the effective date of this Agreement) issued by HNB for the account of joint ventures of which Borrower is a partner pursuant to the HNB Joint Ventures Letter of Credit Agreement that Borrower has guaranteed in accordance with the terms of the HNB Joint Ventures Letter of Credit Agreement, provided that the portion of such letters of credit that has been guaranteed by Borrower shall not exceed in the aggregate $4,000,000 at any one time outstanding. "GUARANTIES" (individually, "GUARANTY") shall mean the guaranties of the Indebtedness evidenced by this Agreement and by all documents contemplated by this Agreement, including without limitation the Notes, as this Agreement and such documents may be amended or restated from time to time, which guaranties are substantially in the form of Exhibit A attached to this Agreement, executed by M/I Financial Corp. (which as of the date hereof is Borrower's only Subsidiary) in favor of the respective Banks and to which Agent shall also be a party, and any guaranties in favor of Agent and the respective Banks executed by (a) each other permitted Subsidiary, if any, of Borrower and/or (b) the M/I Ancillary Businesses that are wholly-owned by the Borrower or by any Subsidiary. "HNB JOINT VENTURES LETTER OF CREDIT AGREEMENT" shall mean the Agreement to Issue Letters of Credit dated as of June 8, 1994, as amended by the First Amendment to Agreement to Issue Letters of Credit dated as of September 29, 1995, with respect to standby letters of credit issued or to be issued by HNB -12- 13 for the account of certain joint ventures of which Borrower is a partner. "INDEBTEDNESS" shall mean as to any Person, at a particular time, (a) indebtedness for borrowed money or for the deferred purchase price of property or services (including without limitation any such indebtedness which is non-recourse to the credit of such Person but is secured by assets of such Person) other than current (due and payable within 12 months or less), unsecured obligations for operating expense items incurred in the ordinary course of business, (b) any other indebtedness evidenced by promissory notes or other debt instruments, (c) obligations under material leases which shall have been or should be, in accordance with GAAP, recorded as capitalized leases, (d) indebtedness arising under acceptance facilities, (e) indebtedness arising under unpaid reimbursement obligations (including Reimbursement Obligations) in respect of all drafts actually drawn under letters or credit (including Standby L/Cs) issued for the account of such Person, (f) indebtedness arising under unpaid reimbursement obligations in respect of all payments actually made under surety bonds (including payments actually made under Construction Bonds), and (g) the incurrence of withdrawal liability under Title IV of ERISA by such Person or a Commonly Controlled Entity to a Multiemployer Plan. "INTEREST PAYMENT DATE" shall mean, (a) with respect to any Prime Rate Loan, the last day of each March, June, September and December, commencing on the first of such days to occur after the first Borrowing Date, (b) with respect to any Eurodollar Rate Loan having an Interest Period of three months or less, the last day of such Interest Period, and (c) with respect to any Eurodollar Rate Loan having an Interest Period longer than three months, (x) each day which is three months, or a whole multiple thereof, after the first day of such Interest Period, and (y) the last day of such Interest Period. "INTEREST PERIOD" shall mean with respect to any Eurodollar Rate Loan: (i) initially, the period commencing on the Borrowing Date or conversion date, as the case may be, with respect to such Eurodollar Rate Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Rate Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to -13- 14 the Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that all of the foregoing provisions relating to Interest Periods are subject to the following: (1) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (2) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (3) no Interest Period shall be for less than one month, and the Borrower shall not select an Interest Period for a Eurodollar Rate Loan as a Revolving Credit Loan if the last day of such Interest Period would be after the last day of the Commitment Period. "INTEREST RATE CONTRACT" shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate insurance arrangement, or any other agreement or arrangement designed to provide protection against fluctuation in interest rates. "INVESTMENTS IN JOINT VENTURES" shall mean investments (as defined in subsection 7.9 hereof) in joint ventures that are general partnerships, limited partnerships, limited liability companies, corporations or any other business association formed for the purpose of acquiring land, the majority of which land is zoned residential and is to be developed into residential lots for attached or detached single family housing (including a townhouse condominium building or condominium building), and/or performing such development. The value of Investments in Joint Ventures shall be calculated in accordance with GAAP. "L/C COMMITMENT" shall mean, as to any L/C Participant, the percentage (the "L/C COMMITMENT PERCENTAGE") and amount set forth opposite its name on Schedule 1 hereto under the headings "L/C Commitment Percentage" and "L/C Commitment"; and collectively, as to all L/C Participants, the "L/C COMMITMENTS". -14- 15 "L/C PARTICIPANT(S)" shall mean any one or more of the Banks. -15- 16 "LIEN" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, charge, encumbrance, lien (statutory or other), preference, priority or other security agreement or similar preferential arrangement of any kind or nature whatsoever (including without limitation any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the authorized filing by or against a Person of any financing statement as debtor under the Uniform Commercial Code or comparable law of any jurisdiction). A restriction, covenant, easement, right of way, or similar encumbrance affecting any interest in real property owned by Borrower and which does not secure an obligation to pay money is not a Lien. "LIQUIDITY RATIO" at any date shall mean the ratio, determined on an unconsolidated basis of Borrower only, of (a) the sum of Borrower's (i) cash, (ii) trade receivables (exclusive of any receivables due from Affiliates or Subsidiaries), (iii) Eligible Production Inventory, (iv) the aggregate cost of Developed Lots, and (v) the aggregate costs of all Eligible Model Houses that are not more than two years old as measured from the date of completion of construction thereof, to (b) the sum of all of Borrower's (i) accounts payable, (ii) accruals, (iii) Customer Deposits, and (iv) Indebtedness permitted pursuant to subsection 7.1(a) hereof. The amount of each asset included in (a) above shall be the book value of such asset (net of any applicable reserves) determined in accordance with GAAP and the value of each liability included in (b) above shall be determined in accordance with GAAP. "LOANS" shall mean the Revolving Credit Loans. "M/I ANCILLARY BUSINESSES" shall mean businesses that are corporations, limited partnerships, limited liability partnerships or limited liability companies which are engaged solely in activities reasonably related to the sale of single family housing and in which the Borrower or any Subsidiary has an investment or other interest, provided that such investment or other interest shall be as (a) a shareholder if the business is a corporation, (b) a limited partner if the business is a limited partnership, (c) a limited liability partner if the business is a limited liability partnership, or (d) a limited liability member if the business is a limited liability company. "M/I FINANCIAL CORP." shall mean M/I Financial Corp., an Ohio corporation, and, as of the date of this Agreement, the only Subsidiary of Borrower. -16- 17 "M/I FINANCIAL CORP. LOAN AGREEMENT" shall mean the Revolving Credit Agreement by and among M/I Financial Corp., Borrower and Bank One, effective as of July 19, 1996, as the same may be, in Bank One's sole discretion, amended, extended, renewed or replaced from time to time. "MORTGAGE LOAN REPURCHASE OBLIGATIONS" shall mean those obligations (as more particularly described in this definition) of M/I Financial Corp. under a Purchase Commitment to repurchase (a) Eligible Mortgage Loans, (b) first mortgage loans that are not Eligible Mortgage Loans solely because either (i) the mortgagor did not purchase from Borrower the home subject to such mortgage loan, or (ii) such mortgage loan is more than 60 days old as determined by the date of the note which evidences such loan, (c) those second mortgage loans permitted by subsection 7.9(g) hereof, and (d) those first mortgage refinancing loans permitted by subsection 7.9(h) hereof; provided, the obligations to repurchase the mortgage loans described in clauses (a) through (d) of this definition shall exist only if (A) such mortgage loans do not meet for any reason the investor guidelines regarding loan origination, loan processing or loan closing and regarding underwriting criteria for such Purchase Commitment or defects are noted in origination, processing or closing of Mortgage Loans by investor, (B) M/I Financial Corp. or its employees engage in any fraudulent conduct or misrepresentation, (C) the mortgagor fails to make timely payment of any of the first, second, third or fourth installments due under such mortgage loan, and such delinquency remains uncured for a period of more than 30 days or results in a foreclosure action, (D) the mortgagor fails to make timely payment of two or more monthly installments within six months from the date such mortgage loan is purchased by such secondary market lender, (E) the mortgagor engages in fraudulent conduct or misrepresentation or (F) with respect to mortgage loans issued pursuant to the North Carolina Housing Finance Authority bond programs, the mortgagor fails to make timely payment of the first installment due under such mortgage loans. "NOTE PURCHASE AGREEMENT" shall mean the note purchase agreement dated September 30, 1996 between Borrower and The First National Bank of Boston, in its capacity as note purchaser, and any subsequent purchasers or assignees, which note purchase agreement governs the issuance by Borrower of subordinated indebtedness in the principal amount of $25,000,000.00. "NOTES" shall mean the Revolving Credit Notes. "OFFICE BUILDING" shall mean the office building constructed by the Office Building Limited Liability Company at 3 Easton Oval, Columbus, Ohio 43219 in which Borrower is a tenant. -17- 18 "OFFICE BUILDING LIMITED LIABILITY COMPANY" shall mean Northeast Office Venture, Limited Liability Company, formed under Delaware law, the ownership interest of which is 33-1/3% in Borrower, 33-1/3% in Limited Oval Office I, Inc., a Delaware corporation, and 33-1/3% in The Georgetown Company, a New York general partnership, the purpose of which limited liability company is for the construction and operation of the Office Building. "OFFICE BUILDING LOAN OBLIGATIONS" shall mean the joint and several obligations of Borrower, as a guarantor or as a direct borrower or direct co-borrower, on the construction loan from Bank One, Columbus, N.A. for the construction of the Office Building, provided that the principal amount of such loan and Borrower's obligations thereunder shall not at any time exceed $8,500,000, and further provided that the maturity date of such loan shall not be later than June 30, 1997. "OPERATING LEASE" at any date shall mean any lease other than a lease which is required to be capitalized in accordance with GAAP, provided such lease has, as of the date of determination, a remaining term of 12 months or more, or may at the option of the lessor or lessee be extended for a term of 12 months or more. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "PERSON" shall mean an individual, a partnership (including without limitation a joint venture), a limited liability company (including without limitation a joint venture), a corporation (including without limitation a joint venture), a business trust, a joint stock company, a trust, an unincorporated association, a Governmental Authority or any other entity of whatever nature (including without limitation a joint venture). "PLAN" shall mean any pension plan which is covered by Title IV of ERISA and in respect of which Borrower or a Commonly Controlled Entity is an "employer" as defined in Section 3(5) of ERISA. "PRIME RATE" shall mean the rate of interest per annum announced by Agent from time to time as its prime rate, with any change thereto effective as of the opening of business on the day of the change; which Prime Rate is not necessarily the best interest rate offered by Agent. -18- 19 "PRIME RATE LOANS" shall mean Loans the rate of interest applicable to which is based on the Prime Rate. "PURCHASE COMMITMENT" shall mean a commitment from a secondary market lender, pursuant to an agreement with M/I Financial Corp., either with respect to a particular mortgage loan or with respect to mortgage loans meeting specified criteria, to purchase such mortgage loan or loans without recourse (except for Mortgage Loan Repurchase Obligations) for an amount not less than the difference of (a) the face amount of the note evidencing such mortgage loan(s), minus (b) the sum of (i) the points agreed upon between M/I Financial Corp. and such secondary market lender, and (ii) the amount of funds (for example, without limitation, escrow funds and origination fees), other than points, received by M/I Financial Corp. at the loan closing from the mortgagor. "REIMBURSEMENT OBLIGATIONS" shall mean Borrower's obligations to reimburse (a) Agent or, (b) in the case of Standby L/Cs previously issued which will remain in place after the execution of this Agreement, Bank One or HNB, as appropriate, as a result of draws on one or more Standby L/Cs. "RENTAL HOUSES" shall mean (a) all completed detached or attached (including townhouse condominiums and condominiums) single family houses which are rented to third parties or held for rental by Borrower or which were previously so held and are currently held for sale and (b) detached or attached (including townhouse condominiums and condominiums) single family houses for which there has been a Start of Construction which upon completion will be rented to third parties or will be held for rental by Borrower. The value of Rental Houses shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP. "REPORTABLE EVENT" shall mean any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder. "REQUIRED BANKS" shall mean, at any particular time, Banks having at least 55% of the aggregate amount of the Commitment, whether or not Borrower has drawn all or any portion of the Commitment; provided that for purposes of consent to waiver or amendment of the covenants contained in subsection 6.14 hereof, Required Banks shall mean, at any particular time, Banks having at least 67% of the aggregate amount of the Commitment, whether or not Borrower has drawn all or any portion of the Commitment. "REQUIREMENT OF LAW" shall mean as to any Person, the Certificate (or Articles) of Incorporation, By-Laws (or Code of Regulations), Close Corporation Agreement (where applicable) or -19- 20 other organizational or governing documents of such Person, and any law, treaty, rule or regulation, or determination, including without limitation all environmental laws, rules, regulations and determinations, of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESPONSIBLE OFFICER" shall mean as to Borrower or any of its Subsidiaries, the Chairman, President, an Executive Vice President or a Senior Vice President of such Person and, with respect to financial matters, the chief financial officer, treasurer or controller of such Person, in each case acting in his or her capacity as such. "REVOLVING CREDIT LOAN COMMITMENT" shall mean, as to any Bank that has committed to make Revolving Credit Loans hereunder, the percentage (the "REVOLVING CREDIT LOAN COMMITMENT PERCENTAGE") and amount set forth opposite its name on Schedule 1 hereto under the headings "Revolving Credit Loan Commitment Percentage" and "Revolving Credit Loan Commitment" as such amount may be reduced from time to time in accordance with the provisions of subsection 2.6 hereof; and collectively, as to all Banks that have committed to make Revolving Credit Loans hereunder, the "REVOLVING CREDIT LOAN COMMITMENTS". "REVOLVING CREDIT LOANS" shall mean the revolving credit loans made pursuant to this Agreement that are more particularly described in subsection 2.1 hereof. "REVOLVING CREDIT NOTES" shall have the meaning set forth in subsection 2.2 hereof. "S CORPORATION" shall have the meaning set forth in Section 1361(a)(1) of the Code. "SHAREHOLDERS EQUITY" at any date shall mean the amount which would be set forth opposite the caption "Shareholders Equity" or "Stockholders Equity" (or any like caption) in a consolidated balance sheet of Borrower and its Subsidiaries at any such date prepared in accordance with GAAP. "SINGLE EMPLOYER PLAN" shall mean any Plan which is not a Multiemployer Plan (as defined in ERISA). "SPECULATIVE HOUSES" shall mean the aggregate value (which value shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Speculative Houses and permitted by subsection 7.1(d) hereof) as determined in accordance with GAAP of: (a) all uncompleted houses for which -20- 21 there has been a Start of Construction except (1) Eligible Model Houses, (2) Rental Houses, if any, and (3) those which are less than nine months old as measured from the date on which construction was begun and are subject to valid noncontingent, except for financing, contracts of sale (A) to Persons who are not Affiliates or Subsidiaries, and (B) that provide for closing within 30 days after completion; and (b) all completed houses except (1) Eligible Model Houses, (2) Rental Houses, if any, and (3) those subject to valid noncontingent, except for financing, contracts of sale (A) to Persons who are not Affiliates or Subsidiaries, and (B) that provide for closing on or before the later of 60 days after the date of the contract or 30 days after completion of construction. "STANDBY L/C" shall mean an irrevocable letter of credit, including any extensions or renewals, (a) issued by Agent or (b) previously issued by Bank One pursuant to the Existing Credit Agreement, or by Bank One or HNB pursuant to any predecessor to the Existing Credit Agreement, and which will remain in place as of the first Borrowing Date, in which each L/C Participant agrees to purchase a participation equal to its L/C Commitment Percentage and the issuing bank agrees to make payments in Dollars for the account of Borrower, on behalf of Borrower or any Subsidiary thereof in respect of obligations of Borrower or such Subsidiary incurred pursuant to contracts made or performances undertaken or to be undertaken or like matters relating to contracts to which Borrower or such Subsidiary is or proposes to become a party in the ordinary course of Borrower's or such Subsidiary's business. The term "Standby L/C" shall not include any letters of credit issued pursuant to the HNB Joint Ventures Letter of Credit Agreement. "STANDBY L/C APPLICATION" shall have the meaning set forth in subsection 2.13 hereof. "START OF CONSTRUCTION" shall mean the commencement of the digging of the foundation or footer for a detached or attached single family house (including a townhouse condominium building or condominium building). "STOCKHOLDER PAYMENT" shall have the meaning set forth in subsection 7.6 hereof. "SUBORDINATED INDEBTEDNESS" at any date shall mean (i) the unsecured Indebtedness of Borrower created as a result of the Note Purchase Agreement, and (ii) all other future unsecured subordinated Indebtedness of Borrower, the terms and manner (including without limitation the terms and manner with respect to subordination) of which are satisfactory to Required Banks in their sole discretion and approved in writing by Required Banks and which is subordinate to (a) Borrower's obligations to Banks -21- 22 and Agent under this Agreement and the Notes and (b) Borrower's obligations, if any, as a guarantor or otherwise of the obligations of M/I Financial Corp. (including without limitation the obligations with respect to the M/I Financial Corp. Loan Agreement). "SUBSIDIARY" shall mean as to any Person, a corporation of which shares of stock having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation are at the time owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person, and with respect to Borrower shall include all Subsidiaries of Subsidiaries of Borrower. "TRANCHE" shall mean the collective reference to those Eurodollar Rate Loans, the then current Interest Periods with respect to all of which begin on the same date and end on the same date (whether or not such Loans shall originally have been made on the same day). "UNCOMMITTED LAND" shall mean the aggregate value as determined in accordance with GAAP of: (a) Eligible Raw Land and Land Under Development, (b) Eligible Developed Lots Unsold, (c) Borrower's pro rata share of land that constitutes part of Investments in Joint Ventures which is not subject to an agreement for sale, and (d) deposits for land purchases and purchase options. "UNIFORM CUSTOMS" shall mean the Uniform Customs and Practice for Documentary Credits, 1993 revision, ICC Publication No. 500, or amendment thereof or successor thereto referenced in Agent's issued letters of credit; provided, however, as to any letter of credit issued prior to January 1, 1994, "Uniform Customs" shall mean the Uniform Customs and Practice for Documentary Credits, 1983 revision, ICC Publication No. 400. "WASHINGTON, D.C. MARKET" shall mean the geographic area consisting of Washington, D.C., Virginia and Maryland. 1.2 Other Definitional Provisions. ----------------------------- (a) All terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto or thereto unless otherwise defined therein. -22- 23 (b) As used herein, in the Notes or in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to Borrower and its Subsidiaries not defined in subsection 1.1 hereof, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) Any reference to "value" of property shall mean the lower of cost or market value of such property, determined in accordance with GAAP. (d) The definition of any document or instrument includes all schedules, attachments and exhibits thereto and all renewals, extensions, supplements and amendments thereof; terms otherwise defined herein have the same meanings throughout this Agreement. (e) "Hereunder," "herein," "hereto," "this Agreement" and words of similar import refer to this entire document; "including" is used by way of illustration and not by way of limitation, unless the context clearly indicates the contrary; and the singular includes the plural and conversely. SECTION 2. AMOUNT AND TERMS OF COMMITMENT, REVOLVING ----------------------------------------- CREDIT LOANS AND STANDBY LETTERS OF CREDIT ------------------------------------------ 2.1 REVOLVING CREDIT LOAN COMMITMENTS. Subject to the terms and conditions of this Agreement, each Bank severally agrees to make revolving credit loans ("REVOLVING CREDIT LOANS") to Borrower from time to time during the Commitment Period in an aggregate principal amount at any one time outstanding not to exceed that Bank's Revolving Credit Loan Commitment Percentage of the lesser of (a) the Borrowing Base (determined as of the most recent month end or, if Borrower elects to provide an interim Borrowing Base Certificate pursuant to subsection 6.4 hereof, as of the date stated in such Borrowing Base Certificate) minus the sum of the (i) aggregate principal amount of undrawn and drawn Standby L/Cs, exclusive of the amount of Standby L/Cs issued for the purpose of satisfying bonding requirements, then outstanding, and (ii) the aggregate principal amount of undrawn and drawn Guaranteed HNB Joint Ventures Letters of Credit, exclusive of the amount of Guaranteed HNB Joint Ventures Letters of Credit issued for the purpose of satisfying bonding requirements, then outstanding, or (b) One Hundred Eighty-Six Million and 00/100 Dollars ($186,000,000.00). During the Commitment Period and as long as no Event of Default exists, Borrower may use the Revolving Credit Loan Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. -23- 24 Subject to the terms and conditions of this Agreement (including the limitations on the availability of Eurodollar Rate Loans and including the termination of the Commitment as set forth in Section 9 hereof), the Revolving Credit Loans may from time to time be (i) Eurodollar Rate Loans, (ii) Prime Rate Loans, or (iii) a combination thereof, as determined by Borrower and notified to Agent in accordance with subsection 2.3 hereof, provided (a) that no Revolving Credit Loan shall be made as a Eurodollar Rate Loan if the ratio of EBITDA to Consolidated Interest Incurred as of the most recent Adjustment Date, determined from the financial statements and compliance certificate that relate to the last month of the fiscal quarter immediately preceding such Adjustment Date, is less than 1.75 to 1.0, (b) that no Revolving Credit Loan shall be made as a Eurodollar Rate Loan after the day that is one month prior to the last day of the Commitment Period, and (c) that the maximum number of Tranches that may be outstanding at any one time as Revolving Credit Loans may not exceed five in the aggregate. 2.2 REVOLVING CREDIT NOTES. The Revolving Credit Loans made by Banks pursuant hereto shall be evidenced by promissory notes of Borrower, substantially in the form of Exhibit B attached hereto (each a "REVOLVING CREDIT NOTE" and collectively the "REVOLVING CREDIT NOTES"), payable to the order of the respective Bank and evidencing the obligation of Borrower to pay the aggregate unpaid principal amount of the Revolving Credit Loans made by such Bank, with interest thereon as prescribed in subsection 2.5 hereof. Each Bank is hereby authorized to record electronically or otherwise the date and amount of each Revolving Credit Loan disbursement made by such Bank, and the date and amount of each payment or prepayment of principal thereof, and any such recordation shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded; provided, however, the failure of such Bank to make any such recordation(s) shall not affect the obligation of Borrower to repay outstanding principal, interest, or any other amount due hereunder or under the Revolving Credit Notes in accordance with the terms hereof and thereof. Each Revolving Credit Note shall (a) be dated as of the date hereof, (b) be stated to mature on September 30, 2001, which maturity date may be extended as provided in subsection 2.7 hereof, and (c) bear interest for the period from and including the date thereof on the unpaid principal amount thereof from time to time outstanding at the applicable interest rate per annum determined as provided in subsection 2.5 hereof. Interest on each Revolving Credit Note shall be payable as specified in subsection 2.5 hereof. 2.3 PROCEDURE FOR BORROWING. Borrower may borrow under the Revolving Credit Loan Commitments (subject to the limitations on the availability of Eurodollar Rate Loans), during -24- 25 the Commitment Period, provided Borrower shall give Agent telephonic or written notice (the "NOTICE OF BORROWING"), which Notice of Borrowing must be received (a) prior to 12:00 Noon, Columbus, Ohio time, at least three Business Days prior to the requested Borrowing Date for that part of the requested borrowing that is to be Eurodollar Rate Loans, or (b) prior to 11:00 a.m., Columbus, Ohio time on or before the requested Borrowing Date for that part of the requested borrowing that is to be Prime Rate Loans which Notice of Borrowing, in the case of Prime Rate Loan(s), shall be irrevocable. Each Notice of Borrowing shall specify (i) the Borrowing Date (which shall be a Business Day), (ii) the amount of the requested borrowing, (iii) whether the borrowing is to be of Eurodollar Rate Loans, Prime Rate Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Rate Loans, the amount of each Prime Rate Loan, if any, and the respective amounts of each such Eurodollar Rate Loan and the respective lengths of the initial Interest Periods therefor. Each borrowing pursuant to the Revolving Credit Loan Commitments shall be in the principal amount (a) in the case of Prime Rate Loans, of the lesser of (i) $1,000,000 or any larger amount which is an even multiple of $100,000, and (ii) the then undrawn Revolving Credit Loan Commitments, and (b) in the case of Eurodollar Rate Loans, of $10,000,000 or any larger amount which is an even multiple of $1,000,000 so long as the principal amount of the requested borrowing is less than the then undrawn Revolving Credit Loan Commitments. After the Borrower gives a Notice of Borrowing with respect to Eurodollar Rate Loans, Agent, by 10:00 a.m., Columbus, Ohio time, two Business Days prior to the requested Borrowing Date, shall advise the Borrower of the applicable interest rate(s) (which is the sum of the applicable Eurodollar Rate(s) and the Applicable Eurodollar Margin) for the Eurodollar Rate Loan(s) and Interest Period(s) requested in the Notice of Borrowing. Not more than two hours thereafter, the Borrower shall give Agent written irrevocable confirmation of whether or not the Borrower wants Eurodollar Rate Loan(s) on such Borrowing Date and, if so, the amount(s) and Interest Period(s) of such Eurodollar Rate Loan(s). If the Borrower's written confirmation is timely made, the Borrower shall be deemed to be requesting borrowing(s) of Eurodollar Rate Loan(s) in the amount(s) and for the Interest Period(s) stated in the confirmation. If the Borrower's confirmation is not timely made, the Borrower shall be deemed to have requested a borrowing entirely as a Prime Rate Loan in the aggregate amount and on the Borrowing Date specified in the Notice of Borrowing. -25- 26 By 2:00 p.m., Columbus, Ohio time, two Business Days prior to the requested Borrowing Date, Agent shall give telephonic or written notice to each Bank of such request, specifying (i) the Borrowing Date (which shall be a Business Day), (ii) the amount of the requested borrowing, (iii) whether the borrowing is to be of Eurodollar Rate Loans, Prime Rate Loans or a combination thereof, and (iv) if the borrowing is to be entirely or partly of Eurodollar Rate Loans, the amount of each Prime Rate Loan, if any, and the respective amounts of each such Eurodollar Rate Loan, the applicable Eurodollar Rate for each such Eurodollar Rate Loan and the respective lengths of the initial Interest Periods therefor. Subject to satisfaction of the terms and conditions of this Agreement, each Bank shall deposit funds with Agent for the account of Borrower by 2:00 p.m. on the Borrowing Date by wire transfer or other immediately available funds equal to its Revolving Credit Loan Commitment Percentage of the Revolving Credit Loans to be made on the Borrowing Date. The Loan(s) will then be made available to Borrower by Agent crediting the account of Borrower on the books of Agent with the aggregate amounts made available to Agent by Banks, and in like funds as received by Agent. The provisions for conversion and continuation of the Loans are set forth in subsection 3.1. 2.4 REVOLVING CREDIT LOAN COMMITMENT FEE. Borrower agrees to pay to Agent for the pro rata benefit of Banks a commitment fee for the Commitment Period, computed at the rate of 1/4 of 1 percent (1/4%) per annum on the average daily unused amount of the aggregate Revolving Credit Loan Commitments during the Commitment Period, payable quarterly in arrears and due on the last day of each March, June, September and December and on the last day of the Commitment Period, commencing on the first of such dates to occur after the date hereof. 2.5 Interest; Default Interest. -------------------------- (a) Except as provided in subsection 2.5(b) hereof, the Revolving Credit Loans shall bear interest on the unpaid principal amount thereof at a rate per annum equal to (i) in the case of Prime Rate Loans, the Prime Rate in effect from time to time and (ii) in the case of Eurodollar Rate Loans, if permitted hereunder at such time, the Eurodollar Rate determined for such day plus the Applicable Eurodollar Margin in effect for such day. (b) If all or a portion of the principal amount of any of the Revolving Credit Loans made hereunder (whether as Prime Rate Loans or Eurodollar Rate Loans or a combination thereof) shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), any such overdue -26- 27 principal amount and, to the extent permitted by applicable law, any overdue installment of interest on any Revolving Credit Loan shall, without limiting any other rights of Banks, bear interest at a rate per annum which is the sum of one percent (1.0%) plus the Prime Rate in effect from time to time from the date of such non-payment until paid in full (before, as well as after, judgment); provided, however, if all or any portion of any principal on any Revolving Credit Loan made as a Eurodollar Rate Loan hereunder shall not be paid when due and the then current Interest Period for such Eurodollar Rate Loan has not yet expired, the entire principal amount of such Eurodollar Rate Loan and, to the extent permitted by applicable law, any overdue installment of interest on such Eurodollar Rate Loan shall, without limiting any other rights of Banks, bear interest at a rate per annum which is the sum of one percent (1.0%) plus the applicable non-default interest rate (which is the sum of the applicable Eurodollar Rate and the Applicable Eurodollar Margin) on such Eurodollar Rate Loan then in effect from the date of such non-payment until the expiration of the then current Interest Period with respect to such Eurodollar Rate Loan (before, as well as after, judgment); thereafter, the entire principal amount of such Eurodollar Rate Loan and, to the extent permitted by applicable law, any overdue installment of interest on such Eurodollar Rate Loan shall, without limiting any other rights of Banks, bear interest at a rate per annum which is the sum of one percent (1.0%) plus the Prime Rate in effect from time to time until paid in full (before, as well as after, judgment). (c) Interest shall be payable in arrears and shall be due on each Interest Payment Date. 2.6 Termination Or Reduction Of Commitment. -------------------------------------- (a) Provided that each Bank consents in writing, Borrower shall have the right to terminate the Commitment or, from time to time (and so long as no Default or Event of Default exists), reduce the amount of the Commitment, upon not less than five Business Days' written notice to each Bank specifying (i) either a reduction or termination and (ii) in the case of a reduction, whether any prepayment, if required by this Agreement, shall be of Prime Rate Loans, Eurodollar Rate Loans or a combination thereof, and, in each case if a combination thereof, the principal allocable to each. (b) Any reduction of the Commitment shall be in the amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof and shall reduce permanently the amount of the Commitment then in effect. Any such reduction shall be accompanied by prepayment of the Revolving Credit Loans made hereunder to the extent, if any, that the amount of such -27- 28 Revolving Credit Loans then outstanding exceeds the amount of the Revolving Credit Loan Commitments, as then reduced, together with accrued interest on the amount so prepaid to the date of such prepayment, and (ii) if a Revolving Credit Loan is a Eurodollar Rate Loan that is prepaid other than at the end of the Interest Period applicable thereto, by any amounts payable pursuant to subsection 3.5, Indemnity. Any such reduction of the L/C Commitment, if the L/C Commitment is being reduced, shall be accompanied by either (A) return to Agent of the outstanding Standby L/Cs or (B) payment by Borrower to Agent of cash to fully -28- 29 collateralize outstanding Standby L/Cs, to the extent, if any, that the amount of such Standby L/Cs then outstanding exceeds the L/C Commitment portion of the Commitment as then reduced. (c) Any such termination of the Commitment shall be accompanied (i) by prepayment in full of the Revolving Credit Loans then outstanding hereunder, together with accrued interest thereon to the date of such prepayment, and the payment of any unpaid commitment fee then accrued hereunder; (ii) with respect to Standby L/Cs, by Borrower's compliance with the terms of subsection 2.13(b) hereof; and (iii) if a Revolving Credit Loan is a Eurodollar Rate Loan that is prepaid other than at the end of the Interest Period applicable thereto, by any amounts payable pursuant to subsection 3.5, Indemnity. (d) Any such reduction or termination of the Revolving Credit Loan Commitments and/or L/C Commitments portion(s) of the Commitment shall be allocated to each Bank ratably in proportion to that Bank's Revolving Credit Loan Commitment Percentage and/or L/C Commitment Percentage, as appropriate. 2.7 MATURITY DATE OF COMMITMENT; EXTENSION. Unless earlier terminated pursuant to the terms of this Agreement, the Commitment shall terminate on September 30, 2001, and the unpaid balance of the Revolving Credit Loans outstanding shall be paid on said date; provided, however, that once each year during each and every year of the Commitment Period (without regard to whether or not all Banks elected to extend the Commitment Period in any preceding year during the Commitment Period) all Banks shall make an election whether or not, in all Banks' sole discretion, to extend the maturity date of the Commitment by one year. If all Banks elect to extend the maturity date of the Commitment by one year, such election shall be made on or before September 30 of each year (or the first Business Day after September 30 if September 30 is not a Business Day) by written notice from Agent to Borrower. Each notice granting an extension shall be attached to each of the Notes and shall constitute an amendment extending the maturity date of each Note by one year. If all Banks do not unanimously elect to extend the maturity date of the Commitment by one year, Agent shall not be required to give notice to Borrower of such election not to extend. If Borrower has not received notice from Agent as stated herein that all Banks have elected to extend the maturity date of the Commitment by one year, the maturity date of the Commitment shall be deemed not to have been extended. -29- 30 2.8 COMPUTATION OF INTEREST AND FEES. Commitment fees on the Commitment and interest in respect of the Revolving Credit Loans shall be calculated on the basis of a 360 day year for the actual days elapsed. Any change in the interest rate on the Loans and the Notes resulting from a change in the Prime Rate or the Eurocurrency Reserve Requirements shall become effective as of the opening of business of the day on which such change in the Prime Rate or the Eurocurrency Reserve Requirements shall become effective, without notice to Banks or Borrower. However, Agent shall give Borrower and Banks prompt notice of all changes in the Prime Rate or the Eurocurrency Reserve Requirements. Each determination of an interest rate by Agent pursuant to any provision of this Agreement shall be conclusive and binding on Banks and Borrower in the absence of manifest error. 2.9 INCREASED COSTS. In the event that at any time after the date of this Agreement any law, rule or regulation regarding capital adequacy, or any change therein or in the interpretation or application thereof or compliance by any Bank (including Agent) with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or other Governmental Authority, agency or instrumentality, does or shall have, in the opinion of such Bank, the effect of reducing the rate of return on the capital of such Bank or any corporation controlling such Bank as a consequence of such Bank's obligations hereunder to a level below that which such Bank or any corporation controlling such Bank could have achieved but for its adoption, change or compliance (taking into account such Bank's or such corporation's policies, as the case may be, with respect to capital adequacy) by an amount deemed by such Bank to be material, then, from time to time, after submission by such Bank to Borrower of a written request therefor, Borrower shall pay to such Bank additional amount or amounts as will compensate such Bank or such corporation, as the case may be, for such reduction. Such Bank's written request to Borrower for compensation shall set forth in reasonable detail the computation of any additional amounts payable to such Bank by Borrower, and such request and computation shall be conclusive in the absence of manifest error. This provision shall remain in full force and effect, with respect to the Revolving Credit Loans until the later of (a) the termination of this Agreement or (b) the payment in full of all Notes (provided that before accepting final payment on the Notes, Bank shall calculate any amounts due in accordance with this subsection 2.9 and give notice to Borrower of such amounts as stated herein, and Borrower shall include such amounts in its final payment). This provision shall survive the termination of all Standby L/Cs and, with respect to Standby L/Cs, shall remain in full force and effect until there is no existing or future obligation of Agent or any -30- 31 L/C Participant under any Standby L/C. The provisions of this subsection 2.9 shall be supplemented by the provisions of Section 3 hereof. 2.10 USE OF PROCEEDS. The proceeds of the initial Revolving Credit Loans made hereunder shall be used by Borrower to pay in full the obligations outstanding on the Revolving Credit Loans and Seasonal Loans, if any (as each term is defined in the Existing Credit Agreement), under the Existing Credit Agreement. Upon Borrower's irrevocable payment in full of the obligations outstanding under the Existing Credit Agreement (other than Standby L/Cs that remain in existence), Bank One, HNB, First Chicago, NCB and BOB shall cancel the Existing Credit Agreement (except for Standby L/Cs that remain in existence and all reimbursement agreements related to such Standby L/Cs) and all promissory notes and guaranties executed pursuant to the Existing Credit Agreement. Thereafter, the proceeds of the Revolving Credit Loans made hereunder shall be used by Borrower for lawful purposes in its business. 2.11 PRO RATA TREATMENT AND PAYMENTS. (a) Each borrowing by Borrower from Banks hereunder, each ayment (including each prepayment) by Borrower on account of principal of and interest on the Loans, each payment by Borrower on account of any commitment fee hereunder and any reduction of the Revolving Credit Loan Commitments and/or the L/C Commitments shall be made pro rata according to the respective Revolving Credit Loan Commitment Percentage and/or L/C Commitment Percentage, as appropriate, then held by Banks. All payments (including prepayments) to be made by Borrower hereunder and under the Notes, whether on account of principal, interest, fees or otherwise, shall be made without set-off or counterclaim and shall be made prior to 12:00 Noon, Columbus, Ohio time, on the due date thereof to Agent, for the account of Banks, at Agent's 100 East Broad Street office in Columbus, Ohio, in Dollars and in immediately available funds. Agent shall distribute such payments to Banks promptly upon receipt in like funds as received. If any payment hereunder on a Prime Rate Loan becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment hereunder on a Eurodollar Rate Loan becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day (and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension) unless the result of such extension would be to extend -31- 32 such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. 2.12 THE STANDBY L/CS. So long as no Default or Event of Default exists, Agent agrees to issue Standby L/Cs, pursuant to the terms and conditions hereof, provided that the aggregate of the undrawn and drawn amounts of the Standby L/Cs at any one time outstanding, including the amount of Standby L/Cs issued for the purpose of satisfying bonding requirements, shall not exceed Twenty-One Million and 00/100 Dollars ($21,000,000), of which the amount of Standby L/Cs issued for purposes other than satisfying bonding requirements shall not exceed the lesser of (x) (i) the Borrowing Base (determined as of the most recent month end or, if Borrower elects to provide an interim Borrowing Base Certificate pursuant to subsection 6.4 hereof, as of the date stated in such Borrowing Base Certificate) minus (ii) the sum of (A) the principal amount of Revolving Credit Loans hereunder then outstanding and (B) the aggregate principal amount of undrawn and drawn Guaranteed HNB Joint Ventures Letters of Credit, exclusive of the amount of Guaranteed HNB Joint Ventures Letters of Credit issued for the purpose of satisfying bonding requirements, then outstanding, or (y) Twelve Million and 00/100 Dollars ($12,000,000). 2.13 ISSUANCE OF STANDBY L/CS. (a) Borrower may request Agent to issue a Standby L/C by delivering to Agent, no later than 11:00 a.m. two Business Days prior to the date on which issuance of the Standby L/C is requested by Borrower, a standby letter of credit application and reimbursement agreement in Agent's then customary form (the "STANDBY L/C APPLICATION") completed to the satisfaction of Agent, together with the proposed form of such letter of credit (which shall comply with the applicable requirements of subsection 2.13 (b) below) and such other certificates, documents and other papers and information as Agent may reasonably request. (b) Each Standby L/C issued hereunder shall, among other things, (i) be in such form requested by Borrower as shall be acceptable to Agent in its sole discretion, and (ii) have an expiry date occurring not later than three years after such Standby L/C's date of issuance. If the Commitment is terminated (whether by acceleration, demand, or otherwise), then, not later than simultaneously with such termination, all outstanding Standby L/Cs shall be returned to Agent or Borrower shall provide cash to Agent to fully collateralize all outstanding Standby L/Cs. Each Standby L/C Application and each Standby L/C shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of Ohio. -32- 33 2.14 PROCEDURE FOR OPENING STANDBY L/CS. Upon receipt of any Standby L/C Application from Borrower, Agent will process such Standby L/C Application, and the other certificates, documents and other papers delivered to Agent in connection therewith, in accordance with its customary procedures and send a copy thereof to each L/C Participant, and, upon satisfaction of all conditions contained in this Agreement, shall promptly open such Standby L/C by issuing the original of such Standby L/C to the beneficiary thereof and by furnishing a copy thereof to Borrower. 2.15 STANDBY L/C PARTICIPATIONS. (a) Agent irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce such Agent to issue Standby L/Cs hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from Agent, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk, an undivided interest equal to such L/C Participant's L/C Commitment Percentage in Agent's obligations and rights under each Standby L/C and the amount of each draft paid by Agent. Each L/C Participant's obligations as set forth in the immediately preceding sentence shall be limited to the term of this Agreement, subject to the condition that each L/C Participant unconditionally and irrevocably agrees with Agent that, if a draft is paid at any time (whether during or after the term of this Agreement) under any Standby L/C issued prior to the end of the term of this Agreement for which Agent is not reimbursed in full by Borrower (including failure by Borrower to provide cash collateral as provided in subsection 2.13(b) hereof) at any time in accordance with the terms of this Agreement or for which Agent is required at any time to return any portion of such reimbursement (whether because of Borrower's bankruptcy or otherwise), such L/C Participant shall pay to Agent upon demand at Agent's address for notices specified herein an amount equal to such L/C Participant's L/C Commitment Percentage of the amount of such draft, or any part thereof, which is not so reimbursed or which Agent is required to return. (b) If any amount required to be paid by any L/C Participant to Agent in respect of any unreimbursed portion of any payment made by Agent under any Standby L/C is not paid to Agent on the date such payment is due but is paid within three Business Days after such payment is due, such L/C Participant shall pay to Agent on demand an amount equal to the product of (i) such amount, multiplied by (ii) the daily average Federal funds rate, as quoted by Agent, during the period from and including the date such payment is required to the date on which such payment is immediately available to Agent, multiplied by (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount -33- 34 required to be paid by any L/C Participant pursuant to this subsection 2.15 is not paid to Agent by such L/C Participant within three Business Days after the date such payment is due, Agent shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from the fourth Business Day after such due date until paid at the rate per annum applicable to Revolving Credit Loans made as Prime Rate Loans hereunder. A certificate of Agent submitted to any L/C Participant with respect to any amounts owing under this subsection 2.15 shall be conclusive in the absence of manifest error. (c) Whenever, at any time after Agent has made payment under any Standby L/C and has received from any L/C Participant its pro rata share of such payment, Agent receives any payment related to such Standby L/C (whether directly from Borrower or otherwise, including proceeds of collateral applied thereto by Agent), or any payment of interest on account thereof, Agent will distribute to such L/C Participant its pro rata share thereof; provided, however, that in the event that any such payment received by Agent shall be required to be returned by Agent, such L/C Participant shall return to Agent the portion thereof previously distributed by Agent to it. 2.16 PAYMENTS. Borrower agrees (a) to reimburse Agent, for the pro rata benefit of the L/C Participants in accordance with each L/C Participant's respective L/C Commitment Percentage, forthwith upon its demand and otherwise in accordance with the terms of the Standby L/C Application relating thereto, for any expenditure or payment made by Agent or L/C Participants under any Standby L/C, and (b) to pay interest on any unreimbursed portion of any such payments from the date of such payment until reimbursement in full thereof at a rate per annum equal to (i) prior to the date which is (A) one Business Day after the day on which Agent demands reimbursement from Borrower for such payment if such demand is made prior to 11:00 a.m., Columbus, Ohio time or (B) two Business Days after the day on which Agent demands reimbursement if such demand is made at or after 11:00 a.m. Columbus, Ohio time, the rate which would then be payable on any outstanding Revolving Credit Loan made as a Prime Rate Loan which is not in default, and (ii) thereafter, the rate which would then be payable on any outstanding Revolving Credit Loan made as a Prime Rate Loan which is in default. 2.17 STANDBY L/C FEES. In lieu of any letter of credit commissions and fees provided for in any Standby L/C Application (other than standard issuance, amendment and negotiation fees), Borrower agrees to pay Agent, for the pro rata benefit of the L/C Participants according to each L/C Participant's respective L/C Commitment Percentage, with respect to each Standby L/C, a Standby -34- 35 L/C fee (which shall be refundable on a pro rata basis to the extent (i) such Standby L/C is cancelled prior to its expiry date or (ii) the face amount of such Standby L/C is reduced from time to time) equal to and payable in accordance with one of the following options selected by Borrower with respect to each Standby L/C: (a) one percent (1%) per annum on the face amount of each Standby L/C, payable in advance not later than the date of issuance thereof; or (b) one and one-quarter percent (1 1/4%) per annum on the face amount of the Standby L/C, payable in advance on the first day of each January, April, July and October, beginning on the first of such dates to occur after the date of issuance of the Standby L/C, occurring prior to the expiry date of the Standby L/C. In addition, Agent shall charge and retain for its own account, and Borrower agrees to pay, Agent's usual and customary charges with respect to the issuance and administration of the Standby L/C. 2.18 LETTER OF CREDIT RESERVES. If any change in any law or regulation or in the interpretation or application thereof by any court or other governmental authority charged with the administration thereof shall either (a) impose, modify, deem or make applicable any reserve, special deposit, assessment or similar requirement against letters of credit issued by Agent, or (b) impose on Agent or any L/C Participant any other condition regarding this Agreement or any Standby L/C, and the result of any event referred to in clause (a) or (b) above shall be to increase the cost to Agent or any L/C Participant of issuing or maintaining any Standby L/C (which increase in cost shall be the result of Agent's or any L/C Participant's reasonable allocation of the aggregate of such cost increases resulting from such events), then, upon demand by Agent or any L/C Participant, Borrower shall immediately pay to Agent, for the pro rata benefit of such L/C Participant(s), from time to time as specified by Agent or such L/C Participant(s), additional amounts which shall be sufficient to compensate Agent or such L/C Participant(s) for such increased cost, together with interest on each such amount from the date demanded until payment in full thereof at a rate per annum equal to the then applicable interest rate on the Revolving Credit Loans made as Prime Rate Loans. A certificate as to such increased cost incurred by Agent or such L/C Participant(s), submitted by Agent or such L/C Participant(s) to Borrower, shall be conclusive, absent manifest error, as to the amount thereof. This provision shall survive the termination of this Agreement and shall remain in full force and effect until there is no existing or future obligation of Agent or any L/C Participant under any Standby L/C. 2.19 FURTHER ASSURANCES. Borrower hereby agrees to do and perform any and all acts and to execute any and all further instruments reasonably requested by Agent more fully to effect the purposes of this Agreement and the issuance of Standby L/Cs -35- 36 hereunder, and further agrees to execute any and all instruments reasonably requested by Agent in connection with the obtaining and/or maintaining of any insurance coverage applicable to any Standby L/C. 2.20 OBLIGATIONS ABSOLUTE. The contingent reimbursement obligations and the Reimbursement Obligations of Borrower with respect to Standby L/Cs under this Agreement shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including without limitation the following: (a) the existence of any claim, set-off, defense or other right which Borrower may have at any time against any beneficiary, or any transferee, of any Standby L/C (or any Persons for whom any such beneficiary or any such transferee may be acting), Agent, or any other Person, whether in connection with this Agreement, the transaction contemplated herein, or any unrelated transaction; (b) any statement or any other document presented under any Standby L/C proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (c) payment by Agent under any Standby L/C against presentation of a draft or certificate which does not comply with the terms of such Standby L/C provided that Agent has made such payment to the beneficiary set forth on the face of such Standby L/C; or (d) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing. 2.21 EXISTING STANDBY L/CS; L/C PARTICIPATIONS. Attached hereto as Schedule 2 is a list of all Standby L/Cs previously issued by Bank One or HNB for the account of Borrower that are outstanding and will remain in place as of the first Borrowing Date ("Existing Standby L/Cs"). The amount of the Existing Standby L/Cs shall be deemed to be included in the aggregate amount of Standby L/Cs outstanding as of the first Borrowing Date for purposes of subsection 2.12 hereof. Where appropriate, in any provision in subsections 2.15 through 2.20 hereof that provides for Borrower to make payment to Agent or that grants other rights to Agent with respect to Standby L/Cs, or that provides for the purchase by L/C Participants of an interest in Standby L/Cs, the words "Bank One or HNB, as appropriate" shall be substituted for "Agent" with respect to Existing Standby L/Cs. Not later than the first Borrowing Date, each L/C Participant shall enter into a letter agreement in substantially the form of -36- 37 Exhibit H attached hereto whereby (a) each L/C Participant shall purchase or sell, as appropriate, participations in each Existing Standby L/C in such amounts to make each L/C Participant's respective percentage interest in each Existing Standby L/C equal to such L/C Participant's L/C Commitment Percentage and (b) each L/C Participant shall share in the fees paid and earned beginning as of the first Borrowing Date (including that portion of fees paid prior to the first Borrowing Date that have not been earned as of the first Borrowing Date), and shall pay to Bank One or HNB, as appropriate, for the account of Borrower such L/C Participant's respective L/C Commitment Percentage of the refund (as provided in subsection 2.17 hereof) of any fees for any Existing Standby L/C that is terminated early or reduced in amount and for which a fee has been allocated in accordance with the such letter agreement. SECTION 3. GENERAL PROVISIONS APPLICABLE TO LOANS 3.1 CONVERSION AND CONTINUATION OPTIONS. (a) The Borrower may elect from time to time to convert outstanding Revolving CreditLoans from Eurodollar Rate Loans to Prime Rate Loans by giving the Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of Eurodollar Rate Loans may only be made on the last day of an Interest Period with respect thereto. Subject to the limitations on the availability of Eurodollar Rate Loans, the Borrower may elect from time to time to convert outstanding Revolving Credit Loans from Prime Rate Loans to Eurodollar Rate Loans by giving the Agent telephonic or written notice (the "NOTICE OF CONVERSION"), which Notice of Conversion must be received prior to 12:00 Noon, Columbus, Ohio time, at least three Business Days prior to the requested date for the conversion, which Notice of Conversion shall specify (i) the date for the conversion; (ii) the aggregate amount of Prime Rate Loans to be converted; and (iii) and for each such Prime Rate Loan to be converted to a Eurodollar Rate Loan, the respective amount and the respective length of the initial Interest Period. Each conversion from Prime Rate Loans to Eurodollar Rate Loans shall be in the principal amount of $10,000,000 or any larger amount which is an even multiple of $1,000,000. After the Borrower gives a Notice of Conversion from Prime Rate Loans to Eurodollar Rate Loans, Agent, by 10:00 a.m., Columbus, Ohio time, two Business Days prior to the requested date for the conversion, shall advise the Borrower of the applicable interest rate(s) (which is the sum of the applicable Eurodollar Rate(s) and the Applicable Eurodollar Margin) for the Eurodollar Rate Loan(s) and Interest Period(s) requested in the Notice of Conversion. Not more than two hours thereafter, the Borrower shall give Agent written irrevocable confirmation of whether or not the Borrower wants to convert the Prime Rate Loans -37- 38 to Eurodollar Rate Loan(s) on such requested date and, if so, the amount and the Interest Period for each such Eurodollar Rate Loan. If the Borrower's confirmation is not timely made, the Borrower shall be deemed to have withdrawn Borrower's Notice of Conversion and the Prime Rate Loans that were the subject of such Notice of Conversion shall continue as Prime Rate Loans. If the Borrower's written confirmation is timely made, the Borrower shall be deemed to be requesting a conversion from Prime Rate Loans to Eurodollar Rate Loan(s) in the amount(s) and for the Interest Period(s) stated in the confirmation. By 2:00 p.m., Columbus, Ohio time, two Business Days prior to the requested Borrowing Date, Agent shall give telephonic or written notice to each Bank of Borrower's request for conversion, specifying (i) the date for the conversion; (ii) the aggregate amount of Prime Rate Loans to be converted; and (iii) and, for each such Prime Rate Loan to be converted to a Eurodollar Rate Loan, the respective amount, the respective Eurodollar Rate, and the respective length of the initial Interest Period applicable thereto. All or any part of outstanding Eurodollar Rate Loans and Prime Rate Loans may be converted as provided herein, provided that (i) (unless the Required Banks otherwise consent) no Prime Rate Loan may be converted into a Eurodollar Rate Loan when any Default or Event of Default has occurred and is continuing and (ii) no Prime Rate Loan may be converted into a Eurodollar Rate Loan after the date that is one month prior to the last day of the Commitment Period. (b) Subject to the limitations on the availability of Eurodollar Rate Loans, any Eurodollar Rate Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving Agent telephonic or written notice, which notice must be received prior to 12:00 Noon, Columbus, Ohio time, at least three Business Days prior to such last day of the then current Interest Period, and which notice shall specify the amount of the Eurodollar Rate Loans to be continued as such and the respective amount and the respective length of the Interest Period for each Eurodollar Rate Loan. After the Borrower gives such notice, Agent, by 10:00 a.m. two Business Days prior to the end of the Interest Period, shall advise the Borrower of the applicable interest rate(s) (which is the sum of the applicable Eurodollar Rate(s) and the Applicable Eurodollar Margin) for the Eurodollar Rate Loan(s) and Interest Period(s) requested in such notice. Not more than two hours thereafter, the Borrower shall give Agent written irrevocable confirmation of whether or not the Borrower wants to continue the Eurodollar Rate Loan(s) as such and, if so, the amount and the Interest Period for each such Eurodollar Rate Loan. If the Borrower's confirmation is not timely made, the Borrower shall be deemed to have withdrawn Borrower's notice for a continuation and the Eurodollar Rate Loans that were the subject of such request -38- 39 shall convert automatically to a Prime Rate Loan upon the expiration of the then current Interest Period. If the Borrower's written confirmation is timely made, the Borrower shall be deemed to be requesting a continuation of the Eurodollar Rate Loan(s) in the amount(s) and for the Interest Period(s) stated in such notice. Agent shall give prompt telephonic or written notice to each Bank of such request for continuation, specifying the aggregate amount of the Eurodollar Rate Loans to be continued as such and, for each such Eurodollar Rate Loan to be continued, the respective amount, the respective Eurodollar Rate, and the respective length of the Interest Period applicable thereto. All or any part of outstanding Eurodollar Rate Loans may be continued as provided herein, provided that (i) (unless the Required Banks otherwise consent) no Eurodollar Rate Loan may be continued when any Default or Event of Default has occurred and is continuing and (ii) no Eurodollar Rate Loan may be continued as a Eurodollar Rate Loan after the date that is one month prior to the last day of the Commitment Period. 3.2 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day of any Interest Period, the Agent or the Required Banks shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, the Agent shall give telecopy, telephonic or written notice thereof to the Borrower and the Banks as soon as practicable thereafter. If such notice is given (x) any Eurodollar Rate Loans requested to be made on the first day of such Interest Period shall be made as Prime Rate Loans and (y) any Loans that were to have been converted on the first day of such Interest Period to or continued as Eurodollar Rate Loans shall be converted to or continued as Prime Rate Loans. Until such notice has been withdrawn by the Agent, no further Eurodollar Rate Loans shall be made or continued as such, nor shall the Borrower have the right to convert Prime Rate Loans to Eurodollar Rate Loans. 3.3 ILLEGALITY; IMPRACTICABILITY. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful, or if compliance by any Bank or its applicable lending office, branch or any affiliate thereof with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority occurring after the date hereof (or, if later, the date on which such Bank becomes a Bank pursuant to any permitted assignment) shall make it impracticable, for any Bank, or its applicable lending office, branch or any affiliate thereof, to make or maintain Eurodollar Rate Loans as contemplated by this Agreement, -39- 40 (a) such Bank shall promptly give written notice of such circumstances to the Borrower and the Agent (which notice shall be withdrawn whenever such circumstances no longer exist), (b) the commitment of such Bank hereunder to make Eurodollar Rate Loans, continue Eurodollar Rate Loans as such and convert Prime Rate Loans to Eurodollar Rate Loans shall forthwith be canceled and, until such time as it shall no longer be unlawful for such Bank to make or maintain Eurodollar Rate Loans, such Bank shall then have a commitment only to make a Prime Rate Loan when a Eurodollar Rate Loan is requested and (c) such Bank's Loans then outstanding as Eurodollar Rate Loans, if any, shall be converted automatically to Prime Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Rate Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Bank such amounts, if any, as may be required pursuant to subsection 3.5, Indemnity. 3.4 REQUIREMENTS OF LAW. If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof applicable to any Bank, or its applicable lending office, branch or any affiliate thereof, or compliance by any Bank, or its applicable lending office, branch or any affiliate thereof, with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority, in each case made subsequent to the date hereof (or, if later, the date on which such Bank becomes a Bank pursuant to any permitted assignment): (a) shall subject such Bank, or its applicable lending office, branch or any affiliate thereof, to any tax of any kind whatsoever with respect to any Eurodollar Rate Loans made by it or its obligation to make Eurodollar Rate Loans, or change the basis of taxation of payments to such Bank in respect thereof and changes in taxes measured by or imposed upon the overall net income, or franchise taxes, or taxes measured by or imposed upon overall capital or net worth, or branch taxes (in the case of such capital, net worth or branch taxes, imposed in lieu of such net income tax), of such Bank or its applicable lending office, branch, or any affiliate thereof; (b) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Bank which is not otherwise included in the determination of the Eurodollar Rate hereunder; or -40- 41 (c) shall impose on such Bank, or its applicable lending office, branch or any affiliate thereof, any other condition; and the result of any of the foregoing is to increase the cost to such Bank, by an amount which such Bank, or its applicable lending office, branch or any affiliate thereof, deems to be material, of making, converting into, continuing or maintaining Eurodollar Rate Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, upon notice to the Borrower from such Bank, through the Agent, in accordance herewith, the Borrower shall promptly pay such Bank, upon its demand, any additional amounts necessary to compensate such Bank for such increased cost or reduced amount receivable; in addition, in any such case, the Borrower may elect to convert the Eurodollar Rate Loans made by such Bank hereunder to Prime Rate Loans by giving the Agent at least one Business Day's notice of such election, in which case the Borrower shall promptly pay to such Bank, upon demand, without duplication, such amounts, if any, as may be required pursuant to subsection 3.5. If any Bank becomes entitled to claim any additional amounts pursuant to this subsection, it shall provide prompt notice thereof to the Borrower, through the Agent, certifying (x) that one of the events described in this paragraph (a) has occurred and describing in reasonable detail the nature of such event, (y) as to the increased cost or reduced amount receivable hereunder resulting from such event and (z) as to the additional amount demanded by such Bank and a reasonably detailed explanation of the calculation thereof. Such a certificate as to any additional amounts payable pursuant to this subsection submitted by such Bank, through the Agent, to the Borrower shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 3.5 INDEMNITY. The Borrower agrees to indemnify each Bank and to hold each Bank harmless from any loss or expense which such Bank may sustain or incur (other than through such Bank's gross negligence or willful misconduct) as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Rate Loans after the Borrower has given Agent written irrevocable confirmation that Borrower wants such Eurodollar Rate Loans in accordance with subsection 2.3 or subsection 3.1, as appropriate, of this Agreement, (b) default by the Borrower in making any prepayment or conversion of a Eurodollar Rate Loan after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Rate Loans on a day which is not the last day of an Interest Period with respect thereto (whether by acceleration, demand or -41- 42 otherwise). Such indemnification may include, without limitation, an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or converted, or not so borrowed, converted or continued, for the period from the date of such prepayment or conversion or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Eurodollar Rate Loans provided for herein over (ii) the amount of interest (as reasonably determined by such Bank) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce Banks and Agent to enter into this Agreement and to make the Revolving Credit Loans and to issue the Standby L/Cs herein provided for, Borrower hereby covenants, represents and warrants to each Bank and to Agent that on the date hereof: 4.1 FINANCIAL STATEMENTS. Borrower has heretofore furnished to each Bank (a) the consolidated balance sheet of Borrower and its Subsidiary as of December 31, 1995, and the related consolidated statements of income, of stockholders' equity and of cash flows for the fiscal year of Borrower then ended, certified by Deloitte & Touche, independent public accountants and (b) the consolidated unaudited balance sheet and income statement of Borrower and its Subsidiary as of October 31, 1996. Each of the foregoing financial statements fairly presents the financial condition of Borrower and its Subsidiary as of the date thereof and the results of the operations of Borrower and its Subsidiary for the period then ended (subject, in the case of the October 31, 1996 financial statements, to year-end audit adjustments) and, from the respective dates of the foregoing financial statements to the date hereof, there has been no material adverse change in such condition. 4.2 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of Borrower and its Subsidiary (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has the corporate power and authority to conduct the business in which it is currently engaged, (c) is qualified as a foreign corporation under the laws of any -42- 43 jurisdiction where the failure to so qualify would have a material adverse effect on the business of Borrower and its Subsidiary taken as a whole, and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith would not, in the aggregate, have a material adverse effect on the business, operations, property or financial or other condition of Borrower and its Subsidiary taken as a whole and would not materially adversely affect the ability of Borrower to perform its obligations under this Agreement and the Notes. 4.3 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Borrower has the corporate power and authority to make, deliver and perform this Agreement and the Notes and to borrow hereunder, and has taken all corporate action necessary to be taken by it to authorize (a) the borrowings on the terms and conditions of this Agreement and the Notes, and (b) the execution, delivery and performance of this Agreement and the Notes. No consent, waiver or authorization of, or filing with any Person (including without limitation any Governmental Authority) is required to be made or obtained by Borrower in connection with the borrowings hereunder or the execution, delivery, performance, validity or enforceability of this Agreement and the Notes. This Agreement has been, and each Note will be, duly executed and delivered on behalf of Borrower and this Agreement constitutes, and each Note when executed and delivered hereunder will constitute, a legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms, subject to the effect, if any, of bankruptcy, insolvency, reorganization, arrangement or other similar laws relating to or affecting the rights of creditors generally and the limitations, if any, imposed by the general principles of equity and public policy. 4.4 NO LEGAL BAR. The execution, delivery and performance of this Agreement and the Notes, the borrowings hereunder and the use of the proceeds thereof do not and will not violate any Requirement of Law or Contractual Obligation (including without limitation the Indenture) of Borrower or its Subsidiary and do not and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any Requirement of Law or Contractual Obligation. 4.5 NO MATERIAL LITIGATION. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the best knowledge of Borrower, threatened by or against Borrower or its Subsidiary or against any of their respective properties or revenues (a) with respect to this Agreement or the Notes or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to -43- 44 have a material adverse effect on the business, operations, property or financial or other condition of Borrower and its Subsidiary taken as a whole. 4.6 REGULATION U. Neither Borrower nor its Subsidiary is engaged, nor will either of them engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any loans hereunder will be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of such Board of Governors. If requested by Agent, Borrower and its Subsidiary will furnish to Agent a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation U to the foregoing effect. 4.7 INVESTMENT COMPANY ACT. Neither Borrower nor its Subsidiary is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 4.8 ERISA. Borrower and its Subsidiary are in compliance in all material respects with ERISA. There has been no Reportable Event with respect to any Plan. There has been no institution of proceedings or any other action by PBGC or Borrower or any Commonly Controlled Entity to terminate or withdraw or partially withdraw from any Plan under any circumstances which could lead to material liabilities to PBGC or, with respect to a Multiemployer Plan, the Reorganization or Insolvency (as each such term is defined in ERISA) of the Plan. 4.9 DISCLOSURE. No representations or warranties made by Borrower in this Agreement or in any other document furnished from time to time in connection herewith (as such other documents may be supplemented from time to time) contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements herein or therein not misleading. 4.10 SUBSIDIARY INFORMATION. Schedule 3 attached hereto contains the name, principal place of business, all other places of business and percentage of ownership of the only Subsidiary of Borrower. -44- 45 4.11 SCHEDULES. Each of the Schedules to this Agreement contains true, complete and correct information in all material respects. SECTION 5. CONDITIONS PRECEDENT 5.1 CONDITIONS TO INITIAL LOAN(S). The obligation of the Banks to make the initial Loan(s) and of Agent to issue any Standby L/C hereunder on the first Borrowing Date is subject to the satisfaction of the following conditions precedent on or prior to such date: (a) NOTES. Each Bank shall have received its respective Revolving Credit Note, conforming to the requirements hereof and duly executed and delivered by a duly authorized officer of Borrower. (b) GUARANTIES. Each Bank shall have received its respective Guaranty to which Agent shall also be a party, conforming to the requirements hereof and duly executed and delivered by a duly authorized officer of Borrower's Subsidiary. (c) BORROWING BASE COMPLIANCE. Borrower shall have delivered to each Bank and Agent a Borrowing Base Certificate in the form of Exhibit C attached hereto ("BORROWING BASE CERTIFICATE"), certified by Borrower's chief financial officer, which shows that the Borrowing Base as of October 31, 1996 is at least equal to the Loans (including any Standby L/Cs either (i) issued hereunder or (ii) issued under the Existing Credit Agreement and that remain in place) requested hereunder. (d) LEGAL OPINIONS OF COUNSEL TO BORROWER. Each Bank and Agent shall have received an executed legal opinion of Schottenstein, Zox & Dunn, counsel to Borrower and its Subsidiary, dated as of the date hereof and addressed to each Bank and Agent, substantially in the form of Exhibit D attached hereto, and otherwise in form and substance satisfactory to each Bank and Agent and covering such other matters incident to the transactions contemplated hereby as each Bank and Agent or their respective counsel may reasonably require. (e) CORPORATE PROCEEDINGS OF BORROWER. Each Bank and Agent shall have received a copy of the resolutions (in form and substance satisfactory to each Bank and Agent) of the Board of Directors of Borrower authorizing (i) the execution, delivery and performance of this Agreement, (ii) the consummation of the transactions contemplated hereby, (iii) the borrowings herein provided for, and (iv) the execution, delivery and performance of the Notes and the other documents provided for in this Agreement, -45- 46 all certified by the Secretary or the Assistant Secretary of Borrower as of the date hereof. Such certificate shall state that the resolutions set forth therein have not been amended, modified, revoked or rescinded as of the date hereof. (f) CORPORATE PROCEEDINGS OF SUBSIDIARY OF BORROWER. Each Bank and Agent shall have received a copy of the resolutions (in form and substance satisfactory to each Bank and Agent) of the Sole Shareholder of the Subsidiary of Borrower authorizing the execution, delivery and performance of each Guaranty, all certified by the Secretary or Assistant Secretary of the Subsidiary of Borrower as of the date hereof. Such certificate shall state that the resolutions set forth therein have not been amended, modified, revoked or rescinded as of the date hereof. (g) INCUMBENCY CERTIFICATE OF BORROWER. Each Bank and Agent shall have received a certificate of the Secretary or an Assistant Secretary of Borrower, dated the date hereof, as to the incumbency and signature of the officer(s) of Borrower executing this Agreement, the Notes and any certificate or other documents to be delivered pursuant hereto or thereto. (h) INCUMBENCY CERTIFICATE OF SUBSIDIARY. Each Bank and Agent shall have received a certificate of the Secretary or Assistant Secretary of the Subsidiary of Borrower, dated the date hereof, as to the incumbency and signatures of the officer(s) of the Subsidiary of Borrower executing each Guaranty. (i) NO PROCEEDING OR LITIGATION; NO INJUNCTIVE RELIEF. No action, suit or proceeding before any arbitrator or any Governmental Authority shall have been commenced, no investigation by any Governmental Authority shall have been commenced and no action, suit, proceeding or investigation by any Governmental Authority shall have been threatened, against Borrower or the Subsidiary of Borrower or any of the officers or directors of Borrower or the Subsidiary of Borrower, seeking to restrain, prevent or change the transactions contemplated by this Agreement in whole or in part or questioning the validity or legality of the transactions contemplated by this Agreement or seeking damages in connection with such transactions. (j) CONSENTS, LICENSES, APPROVALS, ETC. Each Bank and Agent shall have received true copies (certified to be such by Borrower or other appropriate party) of all consents, licenses and approvals required in accordance with applicable law in connection with the execution, delivery, performance, validity and enforceability of this Agreement, the Notes and the Guaranties, if the failure to obtain such consents, licenses or approvals, individually or in the aggregate, would have a material -46- 47 adverse effect on Borrower and its Subsidiary taken as a whole, or would adversely affect the validity or enforceability of any of the foregoing documents, and approvals obtained shall be in full force and effect and be satisfactory in form and substance to each Bank and Agent. (k) COMPLIANCE WITH LAW. Neither Borrower nor its Subsidiary shall be in violation in any material respect of any applicable statute, regulation or ordinance, including without limitation statutes, regulations or ordinances relating to environmental matters, of any governmental entity, or any agency thereof, in any respect materially and adversely affecting the business, property, assets, operations or condition, financial or otherwise, of Borrower and its Subsidiary taken as a whole. (l) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default shall have occurred and be continuing hereunder prior to or after giving effect to the making of the initial loans (including the issuance of Standby L/Cs) on the first Borrowing Date hereunder. (m) NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the consolidated financial condition or business or operations of Borrower or its Subsidiary from the date of Borrower's December 31, 1995, audited financial statements to the first Borrowing Date. (n) ADDITIONAL MATTERS. All corporate and other proceedings and all other documents and legal matters in connection with the transactions contemplated by this Agreement, the Notes and the Guaranties shall be satisfactory in form and substance to each Bank and Agent and their respective counsel. (o) STANDBY L/C APPLICATION. If the issuance of any Standby L/C is part of the initial loan(s), Borrower shall have delivered to Agent a Standby L/C Application in accordance with subsection 2.13 hereof for each Standby L/C that Borrower has requested Agent to issue on the first Borrowing Date. 5.2 CONDITIONS TO ALL LOANS. In addition to the other terms and conditions of this Agreement with respect to the making of Loans and the issuance of Standby L/Cs, the obligation of each Bank to make any Loan and of Agent to issue of any Standby L/C hereunder on any date (including without limitation the first Borrowing Date) is subject to the satisfaction of the following conditions precedent as of such date: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Borrower in this Agreement and any representations and warranties made by Borrower or any -47- 48 Subsidiary of Borrower which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall be true and correct in all material respects on and as of the date of such Loan as if made on and as of such date unless stated to relate to a specific earlier date. (b) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loan to be made or Standby L/C to be issued on such date. (c) STANDBY L/C APPLICATION. If the issuance of any Standby L/C is part of any borrowing, Borrower shall have delivered to Agent a Standby L/C Application in accordance with subsection 2.13 hereof for each Standby L/C that Borrower has requested Agent to issue as part of such borrowing. Each borrowing by Borrower (including the submission of a Standby L/C Application) under this Agreement shall constitute a representation and warranty by Borrower as of the date of such borrowing that the conditions contained in the foregoing paragraphs (a), (b) and (c) of this subsection 5.2 have been satisfied. SECTION 6. AFFIRMATIVE COVENANTS Borrower hereby agrees that, from the date hereof and so long as the Commitment remains in effect, any portion of any Note or Reimbursement Obligation remains outstanding and unpaid, any Standby L/C remains outstanding that is not fully collateralized with cash in a manner satisfactory to Agent, or any other amount is owing to Agent or any Bank hereunder, Borrower shall, and in the case of subsections 6.6, 6.7, 6.8 and 6.9 hereof, shall cause each of its Subsidiaries to: 6.1 FINANCIAL STATEMENTS. Furnish to each Bank and Agent: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of Borrower, a copy of the audited consolidated balance sheet of Borrower and its consolidated Subsidiaries as of the end of such year and the related audited consolidated statements of income, of stockholders' equity and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, together with the opinion of independent certified public accountants of nationally recognized standing, which opinion shall not contain a "going concern" or like qualification or exception, or qualification arising out of the scope of the -48- 49 audit or qualification which would affect the computation of financial -49- 50 covenants contained herein other than a qualification for consistency due to a change in the application of GAAP with which Borrower's independent certified public accountants concur; and (b) as soon as available, but in any event not later than 45 days after the end of each monthly accounting period (including the monthly accounting period for the last month of each fiscal year of the Commitment Period), the unaudited consolidated balance sheet of Borrower and its consolidated Subsidiaries as of the end of each such month and the related unaudited consolidated statements of income and of stockholders' equity of Borrower and its consolidated Subsidiaries for such month and the portion of the fiscal year through such date setting forth in each case in comparative form the figures for the previous year, and including in each case: (i) the relevant figures broken down with respect to each division of Borrower and its Subsidiaries, (ii) a listing of all residential and commercial lots, land under development and unsold lots, and (iii) a statement of the calculation of Borrower's ratio of Consolidated Unsubordinated Liabilities to the sum of Consolidated Tangible Net Worth and Subordinated Indebtedness as of the end of such month, all of the foregoing certified by a Responsible Officer as being fairly stated in all material respects, subject to year-end audit adjustments; all such financial statements to be complete and correct in all material respects and prepared in reasonable detail and in accordance with GAAP (except, in the case of the financial statements referred to in subparagraph (b) of this subsection 6.1, that such financial statements need not contain footnotes and may be subject to year-end audit adjustments). 6.2 CERTIFICATES; OTHER INFORMATION. Furnish to each Bank and Agent: (a) concurrently with the delivery of each financial statement referred to in subsection 6.1(a) above and each financial statement referred to in subsection 6.1(b) above, a summary in form and substance satisfactory to the Required Banks of the status of the hedging investments described in subsection 7.9(j) hereof, and a certificate of a Responsible Officer of Borrower (in the form of Exhibit E attached hereto or such other form as shall be reasonably acceptable to each Bank and Agent) stated to have been made after due examination by such Responsible Officer (i) stating that, to the best of such officer's knowledge, Borrower and each of its Subsidiaries during such period has observed or performed in all material respects all of its covenants and other agreements, and satisfied every condition contained in this Agreement and the Notes to be observed, performed or satisfied by it, and that such officer has -50- 51 obtained no knowledge of any Default or Event of Default except as specified in such certificate, and (ii) showing in detail the calculations supporting such statement in respect of subsections 6.11, 6.12, 6.13, 6.14, 6.15, 7.1(d), 7.3, 7.6, 7.7, 7.8, 7.9(e), 7.9(k), 7.9(l), 7.20 and 7.22 hereof; (b) not later than March 31 of each year, comprehensive projections for that year, setting forth projected income and cash flow for each quarter of that year, and the projected balance sheet as of the end of each quarter of that year, together with a summary of the assumptions upon which such projections are based and a certificate in the form of Exhibit F hereto of the chief financial officer or the controller of Borrower with respect to such projections; (c) promptly after the same are sent, copies of all financial statements, reports and notices which Borrower or any of its Subsidiaries sends to its stockholders as stockholders and, so long as Borrower is a reporting company under the Securities Exchange Act of 1934, promptly after the same are filed, copies of all financial statements which Borrower may make to, or file with, and copies of all material notices Borrower receives from, the Securities and Exchange Commission or any public body succeeding to any or all of the functions of the Securities and Exchange Commission; (d) promptly upon receipt thereof, copies of all final reports submitted to Borrower by independent certified public accountants in connection with each annual, interim or special audit of the books of Borrower or any of its Subsidiaries made by such accountants, including without limitation any final comment letter submitted by such accountants to management in connection with their annual audit; and (e) promptly, on reasonable notice to Borrower, such additional financial and other information as any Bank may from time to time reasonably request. 6.3 BORROWING BASE CERTIFICATE. Furnish to each Bank and Agent as soon as available, but in any event within twenty-five (25) days after the end of each month, a Borrowing Base Certificate in substantially the form of Exhibit C, certified by the chief financial officer or the controller of Borrower, showing the calculation of the Borrowing Base for such month. 6.4 COMPLIANCE WITH BORROWING BASE REQUIREMENTS. At any time any Borrowing Base Certificate required to be furnished to each Bank and Agent in accordance with subsection 6.3 hereof indicates that the aggregate principal amount of the Loans and undrawn and drawn Standby L/Cs then outstanding exceeds the amount -51- 52 of Loans and Standby L/Cs then permitted hereunder, within five calendar days after the delivery of such Borrowing Base Certificate to each Bank and Agent, (a) reduce the principal amount of the Loans and undrawn and drawn Standby L/Cs then outstanding by an amount sufficient to make the Loans and undrawn and drawn Standby L/Cs then outstanding not more than the Loans and Standby L/Cs then permitted hereunder, or (b) deliver to each Bank and Agent a more current Borrowing Base Certificate that demonstrates that the aggregate principal amount of the Loans and undrawn and drawn Standby L/Cs outstanding as of the date of such Borrowing Base Certificate is not in excess of the Loans and Standby L/Cs permitted hereunder at such time. 6.5 INTEREST RATE PROTECTION. At any time the Prime Rate shall equal or exceed eight percent (8%) per annum and Borrower shall not have an Interest Rate Contract in effect pursuant to this subsection 6.5, the Required Banks, by written notice from Agent to Borrower, may require Borrower to enter into an Interest Rate Contract or series of Interest Rate Contracts providing to Borrower an effective specified rate of interest on fifty percent (50%) of the maximum amount of Revolving Credit Loans available hereunder of not more than two percentage points higher than the Prime Rate per annum in effect at the time of Agent's notice to Borrower. In such event, Borrower, within 30 days of receipt of such notice from Agent, shall enter into an Interest Rate Contract or series of Interest Rate Contracts, and provide a copy or copies thereof to each Bank and Agent, which Interest Rate Contract or series of Interest Rate Contracts shall (i) provide interest rate protection to Borrower on fifty percent (50%) of the maximum Revolving Credit Loans available hereunder by providing to Borrower an effective specified rate of interest on fifty percent (50%) of the maximum amount of Revolving Credit Loans available hereunder of not more than two percentage points higher than the Prime Rate per annum in effect at the time of Agent's notice to Borrower, (ii) be in effect for a period of at least three years from the later of (A) the date of acquisition of such Interest Rate Contract or series of Interest Rate Contracts or (B) the date of Agent's notice to Borrower hereunder (provided that if such period exceeds the maturity date of the Commitment, including any permitted extensions of the maturity date, the Interest Rate Contract(s) need only be in effect until such maturity date), and (iii) be entered into with (A) any Bank, or (B) a bank or other financial institution that has unsecured, uninsured and unguaranteed long-term debt which is rated at least A-3 by Moody's Investor Service, Inc. or at least A- by Standard & Poor's Corporation. 6.6 PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its Indebtedness and other -52- 53 material obligations of whatever nature, except, (a) without prejudice to the effectiveness of paragraph (5) of Section 9 hereof, for any Indebtedness or other obligations (including any obligations for taxes), when the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of Borrower or its Subsidiaries, as the case may be, and (b) for any Indebtedness secured by a mortgage on real estate if such Indebtedness is, by its terms, exculpatory (I.E., non-recourse to Borrower and its Subsidiaries). 6.7 MAINTENANCE OF EXISTENCE. Except as may be permitted under subsection 7.4 hereof, preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges, contracts, copyrights, patents, trademarks, trade names and franchises necessary or desirable in the normal conduct of its business, and comply with all Contractual Obligations and Requirements of Law except to the extent that the failure to take such actions or comply with such Contractual Obligations and Requirements of Law would not, in the aggregate, have a material adverse effect on the business, operations, property or financial or other condition of Borrower or of Borrower and its Subsidiaries, taken as a whole. Borrower and its Subsidiaries have no duty to renew or extend contracts which expire by their terms. 6.8 MAINTENANCE OF PROPERTY, INSURANCE. Keep all property useful in and necessary to its business in good working order and condition; maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, general liability and business interruption insurance) as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to each Bank and Agent, upon written request, full information as to the insurance carried. 6.9 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities, subject in the case of interim statements to year-end audit adjustments; and permit representatives of each Bank and Agent to visit and inspect any of its properties, and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be requested, and to discuss the business, operations, properties and financial and other condition of Borrower and its Subsidiaries with officers and employees of Borrower and its -53- 54 Subsidiaries and, if notice thereof is given to Borrower prior to the date of such discussions, with its independent certified public accountants. 6.10 NOTICES. Promptly give notice to each Bank and Agent: (a) of the occurrence of any Default or Event of Default; (b) of any (i) default or event of default under any loan or letter of credit agreement binding upon Borrower or any of its Subsidiaries, (ii) default under any other Contractual Obligation that would enable the obligee of the Contractual Obligations to compel Borrower or any of its Subsidiaries to immediately pay all amounts owing thereunder or otherwise accelerate payments thereunder and would have a material adverse effect on Borrower and its Subsidiaries taken as a whole, or (iii) litigation, investigation or proceeding which may exist at any time between Borrower and its Subsidiaries and any Governmental Authority, which, if adversely determined, would have a material adverse effect on the business, operations, property or financial or other condition of Borrower and its Subsidiaries taken as a whole; (c) of any litigation or proceeding affecting Borrower or any of its Subsidiaries (i) (A) in which the amount involved is $500,000.00 or more and not covered by insurance, or (B) which, in the reasonable opinion of a Responsible Officer of Borrower, would, if adversely determined, have a material adverse effect on Borrower and its Subsidiaries taken as a whole, or (ii) in which injunctive or similar relief is sought and which, in the reasonable opinion of a Responsible Officer of Borrower, would, if adversely determined, have a material adverse effect on Borrower and its Subsidiaries taken as a whole; (d) of the following events, as soon as possible and in any event within 30 days after Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan with respect to which the PBGC has not waived the 30 day reporting requirement, or (ii) the institution of proceedings or the taking or expected taking of any other action by PBGC or Borrower or any Commonly Controlled Entity to terminate or withdraw or partially withdraw from any Plan under circumstances which could lead to material liability to the PBGC or, with respect to a Multiemployer Plan, the Reorganization or Insolvency (as each such term is defined in ERISA) of the Plan and in addition to such notice, deliver to each Bank and Agent whichever of the following may be applicable: (A) a certificate of a Responsible Officer of Borrower setting forth details as to -54- 55 such Reportable Event and the action that Borrower or Commonly Controlled Entity proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed with PBGC, or (B) any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated, as the case may be; and (e) of a material adverse change in the business, operations, property or financial or other condition of Borrower and its Subsidiaries taken as a whole. Each notice pursuant to this subsection 6.10 shall be accompanied by a statement of the chief executive officer or chief financial officer or other Responsible Officer of Borrower setting forth details of the occurrence referred to therein and stating what action Borrower proposes to take with respect thereto. For all purposes of clause (d) of this subsection 6.10, Borrower shall be deemed to have all knowledge or knowledge of all facts attributable to the administrator of such Plan if such Plan is a Single Employer Plan. 6.11 MAINTENANCE OF CONSOLIDATED TANGIBLE NET WORTH. Maintain its Consolidated Tangible Net Worth in amounts at all times equal to at least the following amounts during the following periods: PERIOD AMOUNT ------ ------ Date hereof to and including $ 89,000,000 12/31/96 1/1/97 to and including $89,000,000 plus 50% of audited 12/31/97 Consolidated Earnings for fiscal year 1996 1/1/98 to and including Consolidated Tangible Net 12/31/98 Worth required for 1997 plus 50% of audited Consolidated Earnings for fiscal year 1997 1/1/99 to and including Consolidated Tangible Net Worth 12/31/99 required for 1998 plus 50% of audited Consolidated Earnings for fiscal year 1998 -55- 56 PERIOD AMOUNT ------ ------ 1/1/00 to and including Consolidated Tangible Net 12/31/00 Worth required for 1999 plus 50% of audited Consolidated Earnings for fiscal year 1999 1/1/01 and thereafter Consolidated Tangible Net Worth required for 2000 plus 50% of audited Consolidated Earnings for fiscal year 2000 provided, however, that the Consolidated Tangible Net Worth requirements shall not be reduced if Consolidated Earnings is zero or negative for any applicable fiscal year or any applicable interim period; and further provided, however, that each of the foregoing Consolidated Tangible Net Worth amounts shall be increased by 90% of the aggregate increase in Borrower's Consolidated Tangible Net Worth as a result of the issuance of additional stock of Borrower after the date hereof. 6.12 MAINTENANCE OF DEBT TO WORTH. Maintain at all times (a) during the period from March 1 through November 30 of each year during the Commitment Period a ratio of Consolidated Unsubordinated Liabilities to the sum of Consolidated Tangible Net Worth and Subordinated Indebtedness not in excess of 2.25 to 1.0, and (b) during the period from December 1 through February 28 or 29, as appropriate, of each year during the Commitment Period a ratio of Consolidated Unsubordinated Liabilities to the sum of Consolidated Tangible Net Worth and Subordinated Indebtedness not in excess of 2.1 to 1.0. 6.13 MAINTENANCE OF LIQUIDITY RATIO. Maintain at all times during the Commitment Period a Liquidity Ratio of not less than 1.10 to 1.0. 6.14 MAINTENANCE OF OVERALL LEVERAGE RATIO. Maintain at all times during the Commitment Period (a) a ratio of Consolidated Tangible Net Worth to Subordinated Indebtedness of not less than 3.0 to 1.0, and (b) a ratio of Consolidated Liabilities to Consolidated Tangible Net Worth not in excess of 3.0 to 1.0. 6.15 MAINTENANCE OF EBITDA TO CONSOLIDATED INTEREST INCURRED RATIO. Maintain at all times during the Commitment Period a ratio of EBITDA to Consolidated Interest Incurred of not less than 1.65 to 1.0. -56- 57 6.16 GUARANTIES OF WHOLLY-OWNED M/I ANCILLARY BUSINESSES. Upon the request of the Agent on behalf of the Required Banks, cause each of the M/I Ancillary Businesses that is wholly-owned by the Borrower or by any Subsidiary and which is not precluded by law from executing a Guaranty to execute a Guaranty in favor of the Banks and the Agent with respect to the Indebtedness of the Borrower hereunder. SECTION 7. NEGATIVE COVENANTS Borrower hereby agrees that, from the date hereof and so long as the Commitment remains in effect, any portion of any Note or Reimbursement Obligation remains outstanding and unpaid, any Standby L/C remains outstanding that is not fully collateralized with cash in a manner satisfactory to Agent, or any other amount is owing to Agent or any Bank hereunder, Borrower shall not, nor shall it permit any of its Subsidiaries or, in the case of subsections 7.1, 7.2, 7.3 and 7.21, permit any M/I Ancillary Business that is wholly-owned by the Borrower or by any Subsidiary to, directly or indirectly: 7.1 LIMITATION ON INDEBTEDNESS. Create, incur, assume or suffer to exist any Indebtedness except: (a) Indebtedness in respect of the Notes; (b) Indebtedness of Borrower and M/I Financial Corp. under the M/I Financial Corp. Loan Agreement, which shall not exceed the aggregate principal amount of $25,000,000 at any time; (c) Subordinated Indebtedness of Borrower, subject to the limitations of subsection 6.14 hereof; (d) Secured Indebtedness in respect of capitalized lease obligations and purchase money obligations within the limitations set forth in subsection 7.2(c) hereof; provided, however, that the aggregate amount of any such secured Indebtedness at any one time outstanding shall not exceed $10,000,000 on a consolidated basis; (e) Indebtedness of Borrower and its Subsidiaries arising out of or under unpaid reimbursement and guaranty obligations in respect of payments actually made by (i) issuers or otherwise on all drafts or borrowings under standby letters of credit and (ii) bonding companies on Construction Bonds, as each is permitted by subsection 7.3(a) hereof, provided payment of said Indebtedness is not yet due, and further provided that the -57- 58 aggregate amount of said Indebtedness does not exceed $2,000,000 at any one time outstanding; (f) Indebtedness of Borrower in respect of Standby L/Cs, provided payment of said Indebtedness is not yet due; and -58- 59 (g) Indebtedness for Office Building Loan Obligations, provided that the sum of the amount of such Indebtedness and the amount of Borrower's Contingent Obligations for Office Building Loan Obligations as permitted by subsection 7.3(d) hereof shall at no time exceed the principal amount of $8,500,000 in the aggregate. (h) Indebtedness of Borrower with respect to loans from M/I Financial Corp.; provided that the amount of such loans from M/I Financial Corp. shall not exceed $5,000,000 at any time that the aggregate principal amount of the Loans outstanding is less than the aggregate principal amount of the Loans available pursuant to subsection 2.1 hereof. 7.2 LIMITATION ON LIENS. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether owned or hereafter acquired, except: (a) Liens in favor of Agent, for the ratable benefit of Banks, including without limitation Liens in favor of Agent on Borrower's real property inventory situated in the State of Indiana to secure the Indebtedness to Banks; (b) Liens granted by M/I Financial Corp. on mortgage notes receivable, which Liens secure Indebtedness permitted under subsection 7.1(b) hereof not in excess of $25,000,000; (c) Liens securing Indebtedness permitted under subsection 7.1(d) hereof; provided, however, that (i) such Liens do not at any time encumber any property other than the property financed by such secured Indebtedness, and (ii) the Indebtedness secured thereby shall not exceed the cost or fair market value, whichever is lower, of the property being acquired on the date of acquisition; (d) Liens for taxes and special assessments not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of Borrower and its Subsidiaries in accordance with GAAP; -59- 60 (e) carriers', warehousemen's, mechanics', materialmen's, repairmen's, or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of Borrower and its Subsidiaries in accordance with GAAP; (f) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (g) (i) deposits to secure the performance of: bids; trade contracts (other than for borrowed money or the purchase price of property or services); leases; statutory and other obligations required by law; surety, appeal and performance bonds (including Construction Bonds); and other obligations of a like nature incurred in the ordinary course of business; and (ii) Liens in favor of surety bond companies pursuant to indemnity agreements to secure Borrower's reimbursement obligations on Construction Bonds, provided (A) the Liens securing Construction Bonds shall be limited to the Borrower's assets at, and Borrower's rights arising out of, the projects that are the subject of the Construction Bonds, (B) the Liens shall not attach to any real estate, and (C) the aggregate amount of such Liens at any time shall not exceed the dollar amount of Construction Bonds then outstanding, and in any event shall not exceed the amount of reimbursement obligations on Construction Bonds permitted to Borrower pursuant to subsection 7.3 (a) hereof; (h) Liens of landlords, arising solely by operation of law, on fixtures and moveable property located on premises leased in the ordinary course of business; provided, however, that the rental payments secured thereby are not yet due; and (i) Liens arising as a result of a judgment or judgments against Borrower or any of its Subsidiaries which do not in the aggregate exceed $500,000 at any one time outstanding, which are being diligently contested in good faith, which are not the subject of any attachment, levy or enforcement proceeding, and as to which appropriate reserves have been established in accordance with GAAP. 7.3 LIMITATION ON CONTINGENT OBLIGATIONS. Agree to or assume, guarantee, indorse or otherwise in any way be or become responsible or liable for, directly or indirectly, any Contingent Obligation, including but not limited to Contingent Obligations incurred as a general partner in any limited partnership or general partnership, except: -60- 61 (a)(i) reimbursement and other obligations under standby letters of credit (including letters of credit issued for the purpose of satisfying bonding requirements) issued by Persons other than Banks; (ii) Contingent Obligations of Borrower as the guarantor of letters of credit issued for the account of joint ventures in which Borrower is a partner (including Guaranteed HNB Joint Ventures Letters of Credit), provided that Borrower's Contingent Obligation on any such guaranty shall be limited to a percentage of the amount of that joint venture's letters of credit equal to Borrower's pro rata equitable ownership interest in such joint venture, provided further that the sum of the obligations permitted by clauses (a)(i) and (a)(ii) shall not exceed the aggregate amount of $7,000,000 at any one time outstanding on a consolidated basis, which $7,000,000 limitation shall not include any obligations in connection with Standby L/Cs; and (iii) reimbursement obligations not in excess of $10,000,000 at any one time outstanding on a consolidated basis under Construction Bonds; (b) Contingent Obligations consisting of (i) guaranties by Borrower of M/I Financial Corp.'s lease obligations in an amount not to exceed $1,000,000 in any period of 12 consecutive months, (ii) Borrower's obligations under the M/I Financial Corp. Loan Agreement in a principal amount not to exceed $25,000,000, and (iii) guaranties by any Subsidiary of the obligations of Borrower (including without limitation any guaranty by M/I Financial Corp. of any obligation of Borrower to Banks); (c) Contingent Obligations related to Indebtedness of joint ventures in which Borrower has made Investments in Joint Ventures as permitted by subsection 7.9(e) hereof and in which Borrower is a partner, member or shareholder; provided, however, that the aggregate amount of such Contingent Obligations at any one time outstanding pursuant to this subsection 7.3(c) shall not exceed (i) $10,000,000 less (ii) the aggregate amount of secured and unsecured Indebtedness then outstanding pursuant to subsection 7.1(d) hereof; (d) Contingent Obligations for Office Building Loan Obligations, provided that the sum of the amount of such Contingent Obligations and the amount of Borrower's Indebtedness for Office Building Loan Obligations as permitted by subsection 7.1(g) hereof shall at no time exceed the principal amount of $8,500,000 in the aggregate; and (e) other Contingent Obligations of Borrower which do not in the aggregate at any one time outstanding exceed $2,000,000, subject to the limitations of subsection 7.9(l) hereof. -61- 62 7.4 LIMITATION ON FUNDAMENTAL CHANGES. Enter into any transaction of merger, consolidation, amalgamation or reorganization (including without limitation any election to be taxed as an S Corporation), or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or, except for the sale of land, lots and houses from inventory in the ordinary course of business, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business or assets, whether now owned or hereafter acquired, or make any material change in the method by which it conducts business, except any Subsidiary of Borrower may be (i) merged, amalgamated or consolidated with or into Borrower or any wholly-owned Subsidiary of Borrower, or (ii) liquidated, wound up or dissolved into, or all or substantially all of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Borrower or any wholly-owned Subsidiary of Borrower; provided, however, that, in the case of such a merger, liquidation or consolidation, Borrower or such wholly-owned Subsidiary, as the case may be, shall be the continuing or surviving corporation. 7.5 LIMITATION ON ACQUISITIONS. Except for the acquisition of land, lots and houses in the ordinary course of business to the extent not otherwise prohibited hereunder, acquire all or any material part of the business or assets of, any Person without the prior written consent of the Required Banks. 7.6 LIMITATION ON DIVIDENDS. Declare any dividends (other than dividends payable solely in common stock of Borrower) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, retirement or other acquisition of any shares of any class of stock of Borrower, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Borrower (any of the foregoing a "STOCKHOLDER PAYMENT"), except so long as no Default or Event of Default has occurred and is continuing or would result therefrom, Borrower may make Stockholder Payments in an amount that, when added to all other Stockholder Payments permitted by this Agreement, does not exceed the sum of (i) twenty-five percent (25%) of cumulative Consolidated Earnings (taking into account losses, if any) of Borrower subsequent to December 31, 1994 plus (ii) $5,000,000. In determining compliance with the foregoing, Borrower shall be in compliance if, as of the last day of the calendar month immediately preceding the month in which such payment is made, the cumulative payments previously made plus the payments made during the current month would not in the aggregate exceed the amount permitted by the foregoing. -62- 63 7.7 LIMITATION ON CERTAIN REAL PROPERTY EXPENDITURES. Purchase or acquire any Eligible Raw Land and Land Under Development by the expenditure of cash, the incurrence of Indebtedness, as a result of Investment in Joint Venture(s), or otherwise, if as a result of such purchase or acquisition the aggregate cost of all the foregoing then owned by Borrower and its Subsidiaries (including their pro rata share of any undeveloped land that constitutes part of an Investment in Joint Venture) shall exceed (a) as to undeveloped land only, $50,000,000; and (b) as to the sum of undeveloped land and land under development, $95,000,000; and, provided further, that the aggregate cost of any individual tract of land acquired by Borrower or any of its Subsidiaries, or their pro rata share of any tract that constitutes part of an Investment in Joint Venture may not exceed $2,000,000 except for land holdings set forth on Exhibit G attached hereto. For purposes of this subsection 7.7, the cost of undeveloped land and land under development shall be determined in accordance with GAAP. Further, for purposes of this subsection 7.7, any tract of land shall cease to be classified as undeveloped land after (i) commencement of the development of such tract into residential lots in good faith and provided the development thereof is completed over a period of not more than one year, or (ii) such tract is the subject of a valid, noncontingent contract of sale with a person who is not an Affiliate or Subsidiary and who is satisfactory to the Required Banks in their sole discretion, provided the sale contemplated by such contract is to be completed not more than two years after the date of the contract. In the event the development of any tract is discontinued for a period of 60 days or longer or not completed within one year, such tract shall automatically be deemed to be undeveloped land. 7.8 LIMITATION ON SPECULATIVE HOUSES AND ELIGIBLE MODEL HOUSES. Permit the aggregate cost, as determined in accordance with GAAP on a consolidated basis, of (a) Speculative Houses owned by Borrower and its Subsidiaries to exceed $20,000,000 at any one time outstanding, of which not more than $4,000,000 may consist of attached (including townhouse condominiums and condominiums) single family homes, or (b) Eligible Model Houses owned by Borrower and its Subsidiaries to exceed $30,000,000 at any one time outstanding, of which not more than $3,000,000 may consist of attached (including townhouse condominiums and condominiums) single family homes. 7.9 LIMITATION ON INVESTMENTS. Make or commit to make any advance, loan, extension of credit or capital contribution to, or purchase of any stock, bonds, note, debenture or other security of, or make any other investment in, any Person (all such transactions being herein called "investments"), except: -63- 64 (a) investments in Cash Equivalents; (b) extensions of credit in connection with the sale of land, secured by land sold, which do not exceed in the aggregate $1,000,000 at any one time outstanding and which have a maximum maturity of five years; (c) loans and advances to officers and employees of Borrower or its Subsidiaries, to other Persons in the ordinary course of business or as permitted by the Code of Regulations of Borrower, which do not exceed in the aggregate $500,000 at any one time outstanding; (d) any investments in M/I Financial Corp. or any other Subsidiary created with the consent of the Required Banks hereafter; (e) any Investments in Joint Ventures, the aggregate cost of which, as determined in accordance with GAAP (excluding, however, Borrower's or its Subsidiaries' equity in the undistributed earnings or losses in each such joint venture, whether such joint venture is a general or limited partnership, a limited liability company, a corporation or any other form of business association), does not at any one time outstanding exceed $17,500,000; provided, however, that with respect to each such joint venture, whether such joint venture is a general partnership, a limited partnership, a limited liability company, a corporation or any other form of business association, Borrower shall have at least a 33 1/3% ownership interest in such joint venture and all decisions with respect to the management and control of each such joint venture's business (other than decisions with respect to development of undeveloped land owned by such joint venture) shall require the consent and approval of Borrower; and provided further, however, that no such investment may be made if it causes or results (singly or with other actions or events) in (i) any violation of subsection 7.3 hereof or any other covenant or condition hereof, or (ii) any other Default or Event of Default; (f) first mortgage loans made in the ordinary course of M/I Financial Corp.'s business to natural persons for the purchase of residential real property; (g) second mortgage loans made in the ordinary course of M/I Financial Corp.'s business to natural persons for the purchase of residential real property, provided that such second mortgage loans (i) shall be made only in connection with a specific financing program to natural persons who have a first mortgage loan from M/I Financial Corp. with respect to the same -64- 65 real property, and (ii) shall not in the aggregate exceed $500,000 at any one time outstanding; (h) first mortgage loans made in the ordinary course of M/I Financial Corp.'s business to natural persons for the purpose of refinancing an existing first mortgage loan, provided that the amount of such refinancing mortgage loans shall not exceed $5,000,000 in the aggregate at any one time outstanding; (i) investments by M/I Financial Corp. in the stock of Fannie Mae to the extent required for M/I Financial Corp. to sell mortgages to Fannie Mae, but the amount of such investments in Fannie Mae stock shall in no event exceed $100,000; (j) investments by M/I Financial Corp. in the ordinary course of its business in standard instruments hedging against interest rate risk incurred in the origination and sale of mortgage loans, in each case matching a hedging instrument or instruments to specific mortgages or specific groups of mortgages, but in no event including investments in futures contracts, options contracts or other derivative investment vehicles acquired as independent investments; (k) investments in the Office Building Limited Liability Company specifically for the purpose of constructing, owning and operating the Office Building in an amount not to exceed $1,200,000 in the aggregate; (l) investments in, advances to, and Contingent Obligations related to the obligations of, the M/I Ancillary Businesses in an amount not to exceed $100,000 in the aggregate; and (m) other investments or advances directly related to the Borrower's business, provided that the aggregate amount of such investments and advances shall not at any time exceed $2,000,000.00 in the aggregate. 7.10 LIMITATION ON OPERATING LEASES. Enter into or renew any Operating Lease if as a result thereof: (a) the aggregate rentals payable by Borrower and all of its Subsidiaries under all Operating Leases, except for any Operating Lease with respect to the Office Building, would exceed in any period of 12 consecutive months the aggregate amount of $4,200,000; or (b) the term of (i) any Operating Lease with respect to Eligible Model Houses and furnishings for Eligible Model Houses would exceed three years, and (ii) any other Operating Lease, except for any Operating Lease with respect to the Office Building, would exceed five years, provided that so long as the initial term or -65- 66 any renewal of an Operating Lease included within this clause (b) does not exceed five years or three years, as appropriate, the aggregate of the initial term and all renewals of such Operating Lease may exceed five years or three years, as appropriate, if any right of renewal is solely at the option of the Borrower or its Subsidiaries; or (c) the aggregate rentals payable by Borrower and all of its Subsidiaries under all Operating Leases with respect to the Office Building would exceed, for the periods set forth below, the amounts that correspond to such periods, as set forth below:
Aggregate Rentals Year of the Operating Lease Per Lease Year --------------------------- ----------------- Beginning with Lease Year 1 $1,131,576.00 Through and including Lease Year 5 Beginning with Lease Year 6 $1,217,693.00 Through and including Lease Year 10 Beginning with Lease Year 11 $1,275,104.00 Through and including Lease Year 15 Beginning with Lease Year 16 $1,303,810.00 Through and including Lease Year 20
7.11 TRANSACTIONS WITH AFFILIATES AND OFFICERS. (a) Except for (i) any consulting agreements or employment agreements to which Borrower is a party and which were in effect as of March 1, 1994, (ii) any agreements entered into in connection with the construction of the Office Building by the Office Building Limited Liability Company and/or with Borrower's leasehold improvements to, the Office Building, and (iii) compensation arrangements in the ordinary course of business with the officers, directors, and employees of Borrower and its Subsidiaries, enter into any transaction, including without limitation the purchase, sale or exchange of property or the rendering of any services, with any Affiliate or any officer or director thereof, or enter into, assume or suffer to exist any employment or consulting contract with any Affiliate or an officer or director thereof, except any transaction or contract which is in the ordinary course of Borrower's or any of its Subsidiaries' business and which is upon fair and reasonable terms no less favorable to Borrower or its Subsidiaries than it would obtain in -66- 67 a comparable arm's length transaction with a Person not an Affiliate; -67- 68 (b) make any advance or loan to any Affiliate or any director or officer thereof or of Borrower or to any trust of which any of the foregoing is a beneficiary, or to any Person on the guarantee of any of the foregoing, except as expressly permitted by subsection 7.9(c) hereof; or (c) pay any fees or expenses to, or reimburse or assume any obligation for the reimbursement of any expenses incurred by, any Affiliate or any officer or director thereof, except as may be permitted in accordance with clauses (a) and (b) of this subsection 7.11, and except as may be required pursuant to the Melvin and Irving Schottenstein Family Agreement dated October 11, 1993, in connection with certain registration rights of certain shareholders. 7.12 SALE AND LEASEBACK. Enter into any arrangement with any Person providing for the leasing by Borrower or any of its Subsidiaries of real or personal property which has been or is to be sold or transferred by Borrower or any of its Subsidiaries to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of Borrower or any of its Subsidiaries; provided, however, that such arrangements shall be permitted with respect to Eligible Model Houses, so long as any such arrangement with respect to Eligible Model Houses does not result in: (a) the creation of a lease which is required to be capitalized in accordance with GAAP; (b) the initial term of such arrangement plus any options or renewals exercisable by lessor or lessee exceeding three years; or (c) the violation of any term, condition or covenant hereof, including without limitation subsection 7.10 hereof. 7.13 LIMITATION ON PAYMENTS OF SUBORDINATED INDEBTEDNESS AND MODIFICATION OF SUBORDINATION AGREEMENTS. Without the prior written consent of the Required Banks, (a) repay, prepay, purchase, redeem, or otherwise acquire any of its Subordinated Indebtedness; or (b) make any other payments, including without limitation payment of interest, on any Subordinated Indebtedness if an Event of Default exists or if such payment would cause an Event of Default to occur; or (c) permit the modification, waiver or amendment of any of the terms of any Subordinated Indebtedness; or -68- 69 (d) permit (whether or not within the control of Borrower or any of its Subsidiaries) the modification, waiver, or amendment of, or release of any parties to, any subordination agreement with respect to any Subordinated Indebtedness; provided, however, nothing contained in this subsection 7.13 shall prevent Borrower from making regularly scheduled payments (including sinking fund payments) on any Subordinated Indebtedness if no Event of Default exists and the payment would not cause an Event of Default to occur. With respect to the Subordinated Indebtedness pursuant to the Note Purchase Agreement, dated as of September 30, 1996 (the "Bank of Boston Subordinated Indebtedness"), between the Borrower and The First National Bank of Boston, in its capacity as note purchaser, and any subsequent purchasers or assignees (the "Note Purchaser"), "regularly scheduled payments" shall mean only (i) the $500,000.00 commitment fee, (ii) quarterly interest payments, (iii) the $250,000.00 extension fee if the Borrower exercises its option to extend the maturity date of the Note Purchase Agreement which is December 15, 2001 (iv) the three mandatory prepayments of $2,500,000.00 each if the Borrower elects to extend the maturity date from December 15, 2001 to December 15, 2003 pursuant to Section 3.2 of the Note Purchase Agreement and (v) the payment of principal at the maturity date which is December 15, 2001 or, if extended pursuant to Section 3.2 of the Note Purchase Agreement, December 15, 2003. The parties hereby agree that the addition of the definition of "regularly scheduled payments" set forth herein is intended to clarify what payments of Subordinated Indebtedness pursuant to the Bank of Boston Subordinated Indebtedness constitute "regularly scheduled payments" and that none of the amendments to this subsection 7.13 are intended to modify the rights and obligations of the Note Purchaser and the Borrower, or the rights of the Banks and the Agent, pursuant to or arising out of the Bank of Boston Subordinated Indebtedness; provided that nothing herein shall be construed to be a consent by the Banks (in their capacity as Banks under this Agreement) and the Agent to any payment of any Subordinated Indebtedness that is prohibited by this Agreement. 7.14 SALE OF SUBSIDIARY SECURITIES. Sell any security, debt or equity of any Subsidiary, or permit any Subsidiary to sell or issue any security, debt or equity to any Person other than Borrower or any Bank; provided, however, Borrower may sell through M/I Financial Corp. mortgage loans on a non-recourse basis, subject to Mortgage Loan Repurchase Obligations; provided further, however, that this subsection 7.14 shall not prohibit Indebtedness of any Subsidiary permitted under subsection 7.1 hereof. -69- 70 7.15 CONSTRUCTION ON REAL PROPERTY NOT OWNED. Make investments in construction on real property that is not then owned by Borrower; provided, however, that Borrower may make investments in construction on such real property if the contract price for the land plus the cost of investment in construction with respect to all such real property does not in the aggregate exceed $500,000 at any one time outstanding. 7.16 LIMITATION ON SUBSIDIARIES. Create any Subsidiaries, other than the Office Building Limited Liability Company (to the extent, if any, that the Office Building Limited Liability Company is considered a Subsidiary), without the prior written consent of the Required Banks. 7.17 LIMITATION ON LOCATION OF ATTACHED HOUSES. Construct or make investments in construction of any attached (including townhouse condominiums and condominiums) single family houses in any area outside of the Washington, D.C. Market. 7.18 LIMITATION ON RENTAL HOUSES. Permit investments in Rental Houses, determined in accordance with GAAP, to exceed $500,000 in aggregate at any time. 7.19 LIMITATION ON INVESTMENTS IN COMMERCIAL REAL ESTATE. Permit investments (including investments attributed to Borrower's pro rata share of land owned by partnerships in which Borrower is a general or limited partner or by limited liability companies of which Borrower is a member) in commercial real estate (including raw land, land under development and commercial Developed Lots), determined in accordance with GAAP, to exceed $1,500,000 in the aggregate at any one time outstanding; provided, however, that any investments permitted by subsection 7.9(k) hereof shall not be included in the $1,500,000 investment limitation of this subsection 7.19. 7.20 LIMITATION ON UNCOMMITTED LAND. Permit the ratio of (a) Uncommitted Land to (b) the sum of Borrower's (i) Shareholders Equity, and (ii) Subordinated Indebtedness to exceed at any one time: (A) from the date hereof through and including December 31, 1997, 1.30 to 1.0; and (B) from January 1, 1998 and thereafter, 1.25 to 1.0. 7.21 LIMITATION ON NEGATIVE PLEDGES. Enter into any agreement other than this Agreement which prohibits or limits the ability of Borrower, any of its Subsidiaries or any of the M/I Ancillary Businesses that are wholly-owned by the Borrower or by any Subsidiary to create, incur, assume or suffer to exist any Lien upon any of its assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether now owned or hereafter acquired. -70- 71 7.22 LIMITATION ON STANDBY L/CS. Have drawn and undrawn Standby L/Cs outstanding at any time in an amount in excess of the amounts permitted at such time by subsection 2.12 hereof for (a) Standby L/Cs, including those issued for the purpose of satisfying bonding requirements, and (b) Standby L/Cs, exclusive of those issued for the purpose of satisfying bonding requirements, respectively. 7.23 HNB JOINT VENTURES LETTER OF CREDIT AGREEMENT. Modify or amend the HNB Joint Ventures Letter of Credit Agreement in any way without the written consent of the Required Banks. SECTION 8. OPTIONAL SECURITY Notwithstanding any other provision of this Agreement, from time to time if Agent requests and Borrower consents, Borrower may grant to Agent, for the pro rata benefit of Banks, mortgages on specific parcels of real property owned by Borrower in the State of Indiana, each securing Borrower's Indebtedness to Banks hereunder. Unless an Event of Default has occurred and is continuing, each such mortgage shall be released by Agent upon Borrower's sale of the subject real property, without the requirement of any payment to Agent (other than reimbursement of costs incurred) or the consent of any Banks. If an Event of Default that has not been waived by all Banks has occurred and is continuing, Agent shall release any such mortgage(s) only upon (a) payment to Agent for the pro rata benefit of Banks (in accordance with the pro rata distribution as described in Section 9 hereof with respect to distribution of Proceeds after Default) of the amount secured by such mortgage(s) and (b) the consent of all Banks. SECTION 9. DEFAULTS, EVENTS OF DEFAULT; DISTRIBUTION OF PROCEEDS AFTER EVENT OF DEFAULT Upon the occurrence of any of the following events: (1) Borrower shall fail to pay any principal of any Note or make any reimbursement (including payment of Reimbursement Obligations) in connection with any Standby L/C when due in accordance with the terms thereof; or (2) Borrower shall fail to pay (a) any interest on any Note or in connection with any Standby L/C, or (b) any fee, charge or other amount payable hereunder, within three days after Agent or any Bank notifies Borrower that such interest, fee or amount has become due in accordance with the terms thereof or -71- 72 hereof and has not been paid; or Borrower shall fail to comply with the provisions of any one or more of subsections 6.4, 6.5, 7.4, 7.5, 7.10, 7.12, 7.13, 7.14, 7.16, 7.17, 7.21, 7.22 or the limitations set forth in 7.9(j) hereof; or (3) any representation or warranty made or deemed made by Borrower herein or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (4) Borrower shall default in the observance or performance of any covenant or agreement contained in (a) subsection 6.3 hereof and such default remains uncured for five days (notice to Borrower from Agent or any Bank of such default is not required), (b) subsections 6.2(c), 6.2(d), 6.6, 6.10, 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 7.1, 7.2, 7.3, 7.6, 7.7, 7.8, 7.9 (other than failure to comply with the limitations of 7.9(j)), 7.11, 7.15, 7.18, 7.19 or 7.20 hereof and such default remains uncured ten days after Agent or any Bank notifies Borrower that such default has occurred, (c) subsection 6.9 hereof and such default remains uncured for ten days after Agent or any Bank notifies Borrower that such default has occurred, provided, that for any default under subsection 6.9 for which cure cannot reasonably be accomplished within ten days, if cure is commenced within such ten-day period, Borrower may have an additional period of up to 30 days after notice to cure such default before it is an Event of Default, (d) any one or more of subsections 6.1(b), 6.2(a) or 6.2(b) hereof and such default remains uncured 15 days after Agent or any Bank notifies Borrower that such default has occurred, or (e) any other provision of this Agreement (including without limitation subsections 6.1(a), 6.2(e), 6.7 and 6.8 hereof) which default shall remain uncured 30 days after Agent or any Bank notifies Borrower that such a default has occurred, which notice shall specify the nature of the default; or (5) (a) Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (i) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or Borrower or any of its Subsidiaries shall make a general assignment for the benefit of -72- 73 its creditors; or (b) there shall be commenced against Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (a) above which (i) results in the entry of an order for relief or any such adjudication or appointment, and (ii) remains undismissed, undischarged or unbonded for a period of 60 days; or (c) there shall be commenced against Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (d) Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (a), (b) or (c) above; or (e) Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (6) Borrower shall (a) default in any payment of principal of or interest on any Indebtedness (other than the Notes and Reimbursement Obligations) or in the payment of any Contingent Obligation, the aggregate principal amount then outstanding of which exceeds $500,000.00, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Contingent Obligation was created, or (b) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Contingent Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Contingent Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Contingent Obligation to become payable; provided, however, that it shall not constitute a Default or Event of Default if (x) Borrower defaults on Indebtedness secured by a mortgage on real estate if such Indebtedness is by its terms exculpatory, i.e., non-recourse to Borrower and its Subsidiaries, or (y) a draw is made on a standby letter of credit or payment is made on a performance bond, so long as any reimbursement obligation of Borrower with respect to such letter of credit or performance bond is made within the time required by the document creating the reimbursement obligation; or (7) (a) any party in interest (as defined in Section 3(14) of ERISA) affiliated with Borrower or any of its -73- 74 Subsidiaries shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (b) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (c) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or institution of proceedings is, in the opinion of the Required Banks, likely to result in the termination of such Plan for purposes of Title IV of ERISA, and, in the case of a Reportable Event, the continuance of such Reportable Event unremedied for 30 days after notice of such Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or, in the case of institution of proceedings, the continuance of such proceedings for 30 days after commencement thereof, (d) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, or (e) any other event or condition shall occur or exist with respect to a Single Employer Plan and in each case in clauses (a) through (e) above, such event or condition, together with all other such events or conditions, if any, could subject Borrower or any of its Subsidiaries to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of Borrower or of Borrower and its Subsidiaries taken as a whole; or (8) one or more judgments or decrees shall be entered against Borrower or any of its Subsidiaries involving in the aggregate a liability (not covered by insurance) of $500,000.00 or more and all such judgments or decrees in excess of $500,000.00 shall not have been vacated, satisfied, discharged, or stayed or bonded pending appeal within 30 days from the entry thereof; or (9) any Person or group of related Persons (other than Irving E. Schottenstein and the estate of Melvin L. Schottenstein and the immediate families of Irving E. Schottenstein and Melvin L. Schottenstein or trusts for the benefit of their respective children and grandchildren) owns or controls more than twenty-five percent (25%) of the outstanding voting capital stock of Borrower; or (10) any subordination agreement that evidences any Subordinated Indebtedness (i) ceases to be the legal, valid and binding agreement of any Person party thereto, enforceable against such Person in accordance with its terms or a payment is made by Borrower in violation of any provision thereof, or (ii) shall be terminated, invalidated or set aside, or be declared ineffective or inoperative or in any way ceases to fully subordinate all of Borrower's indebtedness and other liabilities -74- 75 to Banks and Agent under this Agreement and the Notes and to Borrower's obligations, if any, as a guarantor or otherwise of the indebtedness and other liabilities of M/I Financial Corp. (including without limitation the obligations with respect to the M/I Financial Corp. Loan Agreement); then, and in any such event, (a) if such event is an Event of Default specified in paragraph (5) above, the Commitment, if still outstanding, shall automatically and immediately terminate and the full amount of all outstanding Revolving Credit Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and/or the Notes shall immediately become due and payable, (b) if such event is any other Event of Default and is continuing, either or both of the following actions may be taken: (i) with the consent of the Required Banks Agent may, or upon the request of the Required Banks Agent shall, by notice to Borrower, declare the Commitment to be terminated forthwith, whereupon the Commitment shall immediately terminate and Agent shall have the rights set forth in subsection 2.13(b) hereof with respect to the Standby L/Cs upon the termination of the Commitment; and (ii) with the consent of the Required Banks Agent may, or upon the request of the Required Banks Agent shall, by notice of default to Borrower, declare the full amount of all outstanding Revolving Credit Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable, and (c) if such event is any payment Event of Default, then, in addition to the rights given to Agent in clause (b), each Bank may, by notice of default to Borrower and each other Bank, declare the full amount of all of the obligations owing by Borrower to such Bank pursuant to the Revolving Credit Loans (with accrued interest thereon) and all other amounts owing to such Bank under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Section 9, presentment, demand, protest and all other notices of any kind are hereby expressly waived. Additionally, Agent and each Bank may exercise any and all other rights and remedies available to Agent and each Bank at law or in equity to the extent not inconsistent with the rights specifically granted to Agent and each Bank hereunder. Notwithstanding any provisions concerning distribution of payments to the contrary in this Agreement, so long as any Event of Default exists that has not been waived by all Banks, each Bank shall share in any payments or proceeds, including proceeds of any collateral, received by Agent or any Bank (including without limitation proceeds received by HNB with respect to Guaranteed HNB Joint Ventures Letters of Credit) made or received at any time from and after any Event of Default -75- 76 ("PROCEEDS AFTER DEFAULT") in an amount equal to the Proceeds after Default multiplied by such Bank's Total Commitment Percentage as set forth on Schedule 1 hereto as such Schedule may be amended from time to time; provided, however, if any one or more of the Bank(s) has not made any funding when required hereunder, the distribution of Proceeds after Default shall be adjusted so that each Bank shall receive Proceeds after Default in an amount equal to (a) the Proceeds after Default multiplied by (b) the percentage (rounded to five decimal places) of the total amount outstanding funded by all Banks that such Bank has actually funded (including the amount of such Bank's participation in outstanding Standby L/Cs). If necessary, Agent and each Bank shall use the adjustments procedure set forth in subsection 11.8(a) hereof to make the appropriate distributions to Banks as set forth in this paragraph of this Section 9. SECTION 10. THE AGENT 10.1 APPOINTMENT. Each Bank hereby irrevocably designates and appoints Bank One, Columbus, N.A. as Agent of such Bank under this Agreement and each of the Notes and the Guaranties, and each Bank hereby irrevocably authorizes Bank One, Columbus, N.A., as Agent for such Bank, to take such action on its behalf under the provisions of this Agreement, the Notes and the Guaranties and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement, the Notes and the Guaranties, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or any Note or Guaranty, Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any Note or Guaranty or otherwise exist against Agent. 10.2 DELEGATION OF DUTIES. Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 10.3 EXCULPATORY PROVISIONS. Neither Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any Note or Guaranty (except for its or such Person's own gross negligence or willful misconduct) or (ii) -76- 77 responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by Borrower or any of Borrower's Subsidiaries or any officer thereof contained in this Agreement or any Note or Guaranty or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any Note or Guaranty or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the Notes or the Guaranties, or for any failure of Borrower or any of Borrower's Subsidiaries to perform its obligations hereunder or thereunder. Agent shall be under no obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, the Notes, or the Guaranties, or to inspect the properties, books or records of Borrower or any of Borrower's Subsidiaries. 10.4 RELIANCE BY AGENT. Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, Guaranty, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to Borrower or any of Borrower's Subsidiaries), independent accountants and other experts selected by Agent. Agent may deem and treat the payee of any Note as the owner thereof for all purposes. Agent shall be fully justified in failing or refusing to take any action under this Agreement, the Notes or the Guaranties unless it shall first receive such advice or concurrence of the Required Banks or, in the case of items set forth in subsection 11.1 hereof that require written consent of all Banks, all Banks as it deems appropriate or it shall first be indemnified to its satisfaction by all Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement, the Notes and the Guaranties in accordance with a request of the Required Banks or, in the case of items set forth in subsection 11.1 hereof that require written consent of all Banks, all Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon all Banks and all future holders of the Notes. 10.5 NOTICE OF DEFAULT. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless Agent has received notice from any Bank or Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a -77- 78 "notice of default". If Agent receives such a notice, Agent shall give notice thereof to Banks. Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks or, in the case of items set forth in subsection 11.1 hereof that require written consent of all Banks, all Banks; provided that, unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall reasonably deem advisable in the best interests of Banks. 10.6 NON-RELIANCE ON AGENT AND OTHER BANKS. Each Bank expressly acknowledges that neither Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and Borrower's Subsidiaries shall be deemed to constitute any representation or warranty by Agent to any Bank. Each Bank represents to Agent that it has, independently and without reliance upon Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of Borrower and Borrower's Subsidiaries and made its own decision to make its extensions of credit hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, the Notes and the Guaranties, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of Borrower and Borrower's Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Banks by Agent hereunder, Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of Borrower or any of Borrower's Subsidiaries which may come into the possession of Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 10.7 INDEMNIFICATION. Each Bank agrees to indemnify Agent in its capacity as such (to the extent not reimbursed by Borrower and any of Borrower's Subsidiaries and without limiting the obligation of Borrower and Borrower's Subsidiaries to do so), ratably according to the respective amounts of its original (a) Revolving Credit Loan Commitment Percentage, in the -78- 79 case of Revolving Credit Loans, and (b) L/C Commitment Percentage, in the case of Standby L/Cs, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against Agent in any way relating to or arising out of this Agreement, the Notes, the Guaranties or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted by Agent under or in connection with any of the foregoing; provided that no Bank shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Notes and all other amounts payable hereunder. 10.8 BANK ONE IN ITS INDIVIDUAL CAPACITY. Bank One and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with Borrower or any of Borrower's Subsidiaries as though Bank One were not the Agent hereunder. With respect to its loans made or renewed by it and any Note issued to it and with respect to any Standby L/C issued by it either as Bank One or Agent, Bank One shall have the same rights and powers under this Agreement as any Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" shall include Bank One in its individual capacity. 10.9 SUCCESSOR AGENT. Agent may resign as agent upon 30 days' notice to the Banks. If Agent shall resign as agent under this Agreement, then the Required Banks shall appoint from among the Banks a successor agent for the Banks, whereupon such successor agent shall succeed to the rights, powers and duties of Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Agent's resignation hereunder as agent, the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 11. MISCELLANEOUS 11.1 AMENDMENTS AND WAIVERS. Agent and Borrower may, from time to time, with the written consent of the Required Banks, enter into written amendments, supplements or modifications for -79- 80 the purpose of adding any provisions to this Agreement or the Notes or changing in any manner the rights of Banks or Borrower hereunder or thereunder, and with the consent of the Required Banks, Agent on behalf of Banks may execute and deliver to Borrower a written instrument waiving, on such terms and conditions as Agent may specify in such instrument, any of the requirements of this Agreement, the Notes or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall extend the final maturity of any Note, or reduce the rate or extend the time of payment of interest or fees thereon or reduce the principal amount thereof, or change the amount or terms of any Bank's Revolving Credit Loan or L/C Commitment Percentage, or change the Borrowing Base, or amend, modify, change any provision of the Guaranties, or release any Guaranties, or amend, modify or change any provision of this subsection, or reduce the percentage specified in the definition of Required Banks, or consent to the assignment or transfer by Borrower of any of its rights and obligations under this Agreement, or consent to the modification or termination of any subordination agreement or provisions that evidence Subordinated Indebtedness, or consent to the release of any collateral (except as provided in Section 8 hereof with respect to collateral that is the subject of a mortgage in the State of Indiana), or amend, modify or change any other provision of this Agreement that requires the consent of all Banks, in each case without the written consent of all Banks. Any such waiver and any such amendment, supplement or modification shall be binding upon Borrower, Agent and each Bank, and all future holders of the Notes. In the case of any waiver, Borrower, Agent and each Bank shall be restored to their former position and rights hereunder and under the outstanding Notes, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 11.2 NOTICES. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing or by telecopy or other electronic facsimile and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the United States mail, Registered or Certified, Return Receipt Requested, postage prepaid, or, in the case of telecopy or other electronic facsimile notice, when receipt confirmed by sender's electronic facsimile machine, addressed as follows in the case of Borrower, Agent and each Bank, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of any Note: Borrower: M/I Schottenstein Homes, Inc. -80- 81 3 Easton Oval Columbus, Ohio 43219 Attention: Irving E. Schottenstein With a copy to: Phillip G. Creek Facsimile: (614) 418-8080 -81- 82 With a copy to: Paul S. Coppel, Esq. M/I Schottenstein Homes, Inc. 3 Easton Oval Columbus, Ohio 43219 Facsimile: (614) 418-8030 Agent and/or Bank One: Bank One, Columbus, N.A. 100 East Broad Street 7th Floor Columbus, Ohio 43271 Attention: Thomas D. Igoe Facsimile: (614) 248-5518 HNB: The Huntington National Bank 41 South High Street 8th Floor Columbus, Ohio 43287 Attention: James R. Willet Facsimile: (614) 480-3066 First Chicago: The First National Bank of Chicago One First National Plaza Mail Suite 0315 Chicago, Illinois 60670 Attention: Gregory A. Gilbert Facsimile: (312) 732-1117 NCB: National City Bank of Columbus 155 East Broad Street 3rd Floor Columbus, Ohio 43251 Attention: Ralph A. Kaparos Facsimile: (614) 463-6770 BOB: The First National Bank of Boston 115 Perimeter Center Place Suite 500 Atlanta, Georgia 30346 Attention: Kevin C. Hake Facsimile: (770) 390-8434 -82- 83 Fifth Third: The Fifth Third Bank of Columbus 21 East State Street Columbus, Ohio 43215 Attention: Mark E. Ransom Facsimile: (614) 341-2606 11.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of Agent or any Bank, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and, except for rights the exercise of which require consent of the Required Banks or all Banks, as appropriate, under this Agreement, not exclusive of any rights, remedies, powers and privileges provided by law. 11.4 PARTICIPANTS. (a) Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other financial institutions ("PARTICIPANTS") participating interests in any Revolving Credit Loan owing to such Bank, any Note held by such Bank, any interest (including any Reimbursement Obligation) in any Standby L/C with respect to such Bank, any Revolving Credit Loan Commitment of such Bank, or any other interest of such Bank hereunder; provided, however, that upon the sale of any participating interest the selling Bank shall provide promptly to Borrower and Agent notice of such sale; and provided further, however, that no Participant's consent shall be required to approve any amendments, waivers or other modifications of this Agreement or of any document contemplated by this Agreement, and no participation agreement shall provide any Participant with such rights. In the event of any such sale by a Bank of participating interests to a Participant, such Bank's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Bank shall remain solely responsible for the performance thereof, and such Bank shall remain the holder of any such Note for all purposes under this Agreement, and, except as provided in the immediately following sentence, Borrower, the other Banks, and Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. However, any Participant that is an affiliate of any Bank shall have the right to deal directly with any other Bank and Borrower with respect to any matter that is the subject of this Agreement, and Banks and Borrower agree to deal directly with such affiliate Participant(s); provided, -83- 84 however, that each Bank needs to deal only with other Banks (and not such other Banks' affiliate Participant(s)), in those matters in which the consent of any one or more Banks is required. The rights set forth in the immediately preceding sentence shall apply only to Participants that are affiliates of any Bank, and such rights do not apply to any Participants that are not affiliates of any Bank. Borrower agrees that if amounts outstanding under this Agreement or the Notes are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of a Default or an Event of Default, each Participant shall be deemed to have the right of set-off provided to Banks in this Agreement in respect of its participating interest in amounts owing under this Agreement or any Note or Reimbursement Obligation to the same extent as if the amount of its participating interests were owing directly to it as a Bank under this Agreement, any Note or any Standby L/C or participation in any Standby L/C. (b) Borrower authorizes each Bank and Agent to disclose to any Participant and any prospective Participant any and all financial information in such Bank's or Agent's possession concerning Borrower and any of Borrower's Subsidiaries which has been delivered to such Bank or Agent by Borrower or Borrower's Subsidiaries pursuant to this Agreement or which has been delivered to such Bank or Agent by Borrower or Borrower's Subsidiaries in connection with such Bank's or Agent's credit evaluation of Borrower and Borrower's Subsidiaries prior to entering into this Agreement. Any Participant or prospective Participant shall be subject to the confidentiality provisions of this Agreement. (c) Other than the sale of participating interests as described in this subsection 11.4, no Bank may sell or assign its rights and interests under this Agreement without the written consent of each Bank and Borrower, provided that after the occurrence of a Default or an Event of Default that has not been waived by all Banks, Borrower's consent to such sale or assignment shall not be required. 11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes and shall remain in full force and effect until this Agreement is terminated, all Standby L/Cs are cancelled or are fully collateralized with cash in a manner satisfactory to Agent and all indebtedness (including Reimbursement Obligations with respect to Standby L/Cs that are not fully collateralized with cash) created or evidenced by this Agreement and/or each Note is paid in full. -84- 85 11.6 PAYMENT OF EXPENSES AND TAXES. Borrower agrees: (a) to pay or reimburse Agent and each Bank for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement, the Notes, the Guaranties, the Standby L/Cs and any other documents prepared in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including without limitation the reasonable fees and disbursements of counsel to Agent and each Bank; and (b) to pay or reimburse Agent and each Bank for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the Notes, the Guaranties, the Standby L/Cs and any such other documents, including without limitation the reasonable fees and disbursements of counsel to Agent and each Bank. 11.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Borrower, Agent and each Bank, all future holders of the Notes and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of all Banks, which consent may be withheld by any Bank in its sole discretion. 11.8 ADJUSTMENTS; SET-OFF. (a) If any Bank (a "BENEFITTED BANK") shall at any time receive any payment of all or part of its Loans or Reimbursement Obligations owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in paragraph (5) of Section 9 hereof, or otherwise) in a greater proportion than any such payment to any other Bank in respect of such other Bank's Loans or Reimbursement Obligations owing to it, or interest thereon, such benefitted Bank shall purchase for cash from the other Banks such portion of each such other Bank's Loans or Reimbursement Obligations owing to it, as shall be necessary to cause such benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the Banks; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Borrower agrees that each Bank so purchasing a portion of another Bank's Loans or Reimbursement Obligations owing to it may exercise all rights of payment -85- 86 (including, without limitation, rights of set-off) with respect to such portion as fully as if such Bank were the direct holder of such portion. (b) In addition to those rights and remedies of each Bank provided by law, subject to the terms and conditions of this Agreement, upon the occurrence of an Event of Default and acceleration of the obligations owing in connection with this Agreement, each Bank shall have the right, without prior notice to Borrower or its Subsidiaries, any such notice being expressly waived by Borrower and its Subsidiaries to the extent permitted by applicable law, to set-off and apply against any indebtedness, whether matured or unmatured, of Borrower to such Bank, any amount held by or owing from such Bank to or for the credit or the account of Borrower or its Subsidiaries at, or at any time after, the happening of any of the above-mentioned events, and the aforesaid right of set-off may be exercised by each Bank against Borrower and its Subsidiaries or against any trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, receiver, custodian or execution, judgment or attachment creditor of Borrower and its Subsidiaries, or against anyone else claiming through or against Borrower and its Subsidiaries or such trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, receiver, custodian or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Bank prior to the making, filing or issuance of, or service upon such Bank of, or of notice of, any such petition; assignment for the benefit of creditors; appointment or application for the appointment of a receiver; or issuance of execution, subpoena, order or warrant. Each Bank agrees promptly to notify Borrower and, if set-off is made against Borrower's Subsidiaries, its Subsidiaries after any such set-off and application made by such Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. 11.9 WAIVER OF JURY TRIAL. AGENT, EACH BANK AND BORROWER, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THE AGREEMENT OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY OF THEM. NONE OF AGENT, ANY BANK OR BORROWER SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY ANY OF -86- 87 AGENT, ANY BANK OR BORROWER EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY ALL OF THEM. 11.10 CONFIDENTIALITY. Agent and each Bank shall hold all confidential information obtained pursuant to the requirements of the Agreement which has been identified as such by Borrower in accordance with its customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure to its examiners, affiliates, outside auditors, counsel and other professional advisors in connection with the Agreement or as reasonably required by any bona fide Participant or prospective Participant in connection with any contemplated participation therein or as required or requested by any governmental agency or representative thereof or pursuant to legal process. Without limiting the foregoing, it is expressly understood that such confidential information which, at the time of disclosure is in the public domain or which, after disclosure, other than disclosure by Agent or any Bank, becomes part of the public domain or information which is obtained by Agent or any Bank prior to the time of disclosure and identification by Borrower under this subsection, or information received by Agent or any Bank from a third party shall not be subject to the confidentiality requirements of this subsection 11.10. Nothing in this subsection or otherwise shall prohibit Agent or any Bank from disclosing any confidential information to any other Bank in connection with the Loans contemplated by this Agreement or render it liable in connection with any such disclosure. 11.11 COUNTERPARTS; EFFECTIVE DATE. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Agreement shall become effective upon the receipt by Agent and each Bank of executed counterparts of this Agreement by each of the parties hereto. 11.12 GOVERNING LAW. This Agreement, the Notes and the rights and obligations of the parties under this Agreement and the Notes shall be governed by, and construed and interpreted in accordance with, the local laws of the State of Ohio. 11.13 HEADINGS. The headings of the Sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part hereof. -87- 88 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. M/I SCHOTTENSTEIN HOMES, INC. By_________________________________ Irving E. Schottenstein Title: Chairman and Chief Executive Officer BANK ONE, COLUMBUS, N.A., as Agent and as a Bank By_________________________________ Thomas D. Igoe Title: Senior Vice President THE HUNTINGTON NATIONAL BANK By_________________________________ James R. Willet Title: Assistant Vice President THE FIRST NATIONAL BANK OF CHICAGO By_________________________________ _________________________________ Title: __________________________ NATIONAL CITY BANK OF COLUMBUS By_________________________________ Ralph A. Kaparos Title: Senior Vice President -88- 89 THE FIRST NATIONAL BANK OF BOSTON By_________________________________ Kevin C. Hake Title: Director THE FIFTH THIRD BANK OF COLUMBUS By__________________________________ Print:____________________________ Title:____________________________ -89- EX-10.13 3 EXHIBIT 10.13 1 Exhibit 10.13 CONSENT TO THE CREATION OF WHOLLY-OWNED SUBSIDIARIES OF M/I ----------------------------------------------------------- SCHOTTENSTEIN HOMES, INC. AND TO THE AMENDMENT OF THE NOTE ---------------------------------------------------------- PURCHASE AGREEMENT PURSUANT TO, AND FIRST AMENDMENT TO, SECOND -------------------------------------------------------------- RESTATED REVOLVING CREDIT LOAN AND STANDBY LETTER OF CREDIT AGREEMENT --------------------------------------------------------------------- This Consent to the Creation of Wholly-Owned Subsidiaries of M/I Schottenstein Homes, Inc. and to the Amendment of the Note Purchase Agreement Pursuant to, and First Amendment to, the Second Restated Revolving Credit Loan And Standby Letter Of Credit Agreement (this "Amendment") is made to be effective as of March 14, 1997, by and among M/I SCHOTTENSTEIN HOMES, INC., an Ohio corporation ("BORROWER"), BANK ONE, COLUMBUS, N.A., a national banking association ("BANK ONE"), THE HUNTINGTON NATIONAL BANK, a national banking association ("HNB"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking association ("FIRST CHICAGO"), NATIONAL CITY BANK OF COLUMBUS, a national banking association ("NCB"), THE FIRST NATIONAL BANK OF BOSTON, a national banking association ("BOB"), THE FIFTH THIRD BANK OF COLUMBUS, an Ohio banking corporation ("FIFTH THIRD") (Bank One, HNB, First Chicago, NCB, BOB and Fifth Third is each a "BANK" and, collectively, "BANKS"), and BANK ONE, COLUMBUS, N.A., as agent for Banks ("AGENT"). For valuable consideration, the receipt of which is hereby acknowledged, Borrower, Banks and Agent, each intending to be legally bound, hereby recite and agree as follows: BACKGROUND INFORMATION ---------------------- A. Borrower, Bank One, HNB, First Chicago, NCB, BOB, Fifth Third and Agent are parties to a certain Second Restated Revolving Credit Loan and Standby Letter of Credit Agreement effective as of December 30, 1996 (the "CREDIT AGREEMENT"). B. Borrower wants to create new wholly-owned subsidiaries of Borrower in accordance with the Credit Agreement, which requires in subsection 7.16 the prior written consent of the Required Banks, and to amend the Note Purchase Agreement (as defined in the Credit Agreement) to modify the definition of "Change of Control," which requires in subsection 7.13(c) the prior written consent of the Required Banks. 2 C. Subject to the terms and conditions of this Amendment and of the Credit Agreement, the Banks want to consent to the creation of the new wholly-owned subsidiaries of Borrower and to the amendment of the Note Purchase Agreement to modify the definition of "Change of Control." D. Borrower, Banks and Agent want to amend the Credit Agreement to provide for the newly created wholly-owned subsidiaries of Borrower and for the amendment of the Note Purchase Agreement. AGREEMENT --------- 1. Subject to the terms and conditions of this Amendment and of the Credit Agreement, as amended hereby, each Bank, Agent and Borrower each hereby (a) consents to, and waives any Default solely as a result of, the creation by Borrower of, as new wholly-owned subsidiaries of Borrower, 601RS, Inc., an Ohio corporation, M/I Homes, Inc., an Arizona corporation, and M/I Homes Construction, Inc., an Arizona corporation, and (b) consents to the First Amendment to Note Purchase Agreement in the form attached hereto as Exhibit A to modify the definition of "Change of Control." 2. Subsection 1.1 (Defined Terms) of the Credit Agreement is hereby amended by deleting the definitions of each of "Construction Bonds," "Customer Deposits," "Eligible Developed Lots Sold," "Eligible Developed Lots Unsold," "Eligible Model Houses," "Eligible Mortgage Loan," "Guaranties" and "Note Purchase Agreement" in their entireties and replacing them, respectively, with the following: "CONSTRUCTION BONDS" shall mean bonds issued by surety bond companies for the benefit of, and as required by, municipalities or other political subdivisions to secure the performance by Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. of its obligations relating to lot improvements and subdivision development and completion. "CUSTOMER DEPOSITS" shall mean cash deposits made by customers of Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. in connection with the execution of purchase contracts, which deposits shall be shown as liabilities on Borrower's consolidated financial statements. 2 3 "ELIGIBLE DEVELOPED LOTS SOLD" shall mean all Developed Lots which Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. has recorded as sold in accordance with its usual accounting practices to any Person other than an Affiliate or Subsidiary of Borrower. The value of Eligible Developed Lots Sold shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Developed Lots Sold and permitted by subsection 7.1(d) hereof. "ELIGIBLE DEVELOPED LOTS UNSOLD" shall mean all Developed Lots which Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. has not recorded as sold in accordance with its usual accounting practices, or which Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. has recorded as sold to an Affiliate or Subsidiary of Borrower. The value of Eligible Developed Lots Unsold shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Developed Lots Unsold and permitted by subsection 7.1(d) hereof. "ELIGIBLE MODEL HOUSES" shall mean (a) all completed detached or attached single family houses (including townhouse condominiums and condominiums) which are being used by Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. as sales models, and the lots on which such houses are located and (b) detached or attached (including townhouse condominiums and condominiums) single family houses for which there has been a Start of Construction which upon completion will be used by Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. as sales models, and the lots on which such houses are located. The value of Eligible Model Houses shall be calculated in accordance with GAAP and shall include all associated costs required to be capitalized under GAAP except for the costs 3 4 of any furnishings, but shall be reduced by the then outstanding aggregate amount of Indebtedness secured by any Eligible Model Houses and permitted by subsection 7.1(d) hereof; provided, however, that (a) the aggregate value of attached (including townhouse condominiums and condominiums) single family homes constituting Eligible Model Houses shall not exceed $3,000,000, and (b) the aggregate value of all Eligible Model Houses shall not exceed $30,000,000. "ELIGIBLE MORTGAGE LOAN" shall mean at any date an original (not a rewritten or renewed) loan evidenced by a note and secured by a first mortgage on residential real property which (a) M/I Financial Corp. has made to enable a natural person or persons to purchase a home from Borrower, any Subsidiary of Borrower or another Person that is substantially completed, (b) is not more than 60 days old as determined by the date of the note which evidences such loan, and (c) is subject, or M/I Financial Corp. reasonably believes is subject, to a Purchase Commitment; provided, however, that the amount of Eligible Mortgage Loans consisting of loans made by M/I Financial Corp. for the purchase of homes from any Person other than Borrower or any Subsidiary of Borrower shall not, in the aggregate at any one time outstanding, exceed the amount of $5,000,000. "GUARANTIES" (individually, "GUARANTY") shall mean the guaranties of the Indebtedness evidenced by this Agreement and by all documents contemplated by this Agreement, including without limitation the Notes, as this Agreement and such documents may be amended or restated from time to time, which guaranties are substantially in the form of Exhibit A attached to this Agreement, executed by each of Borrower's Subsidiaries (which are M/I Financial Corp., 601RS, Inc., M/I Homes, Inc. and M/I Homes Construction, Inc.) in favor of the respective Banks and to which Agent shall also be a party, and any guaranties in favor of Agent and the respective Banks executed by (a) each other permitted Subsidiary, if any, of Borrower 4 5 and/or (b) the M/I Ancillary Businesses that are wholly-owned by the Borrower or by any Subsidiary. "NOTE PURCHASE AGREEMENT" shall mean the note purchase agreement dated September 30, 1996 and amended as of February __, 1997 between Borrower and The First National Bank of Boston, in its capacity as note purchaser, and any subsequent purchasers or assignees, which note purchase agreement governs the issuance by Borrower of subordinated indebtedness in the principal amount of $25,000,000.00. 3. Subsection 1.1 (Defined Terms) of the Credit Agreement is hereby further amended by adding the following definitions thereto: "601RS, Inc." shall mean 601RS, Inc., an Ohio corporation, and a wholly-owned Subsidiary of Borrower. "M/I Homes, Inc." shall mean M/I Homes, Inc., an Arizona corporation, and a wholly-owned Subsidiary of Borrower. "M/I Homes Construction, Inc." shall mean M/I Homes Construction, Inc., an Arizona corporation, and a wholly-owned Subsidiary of Borrower. 4. Subsection 7.1 (Limitation on Indebtedness) of the Credit Agreement is hereby amended by deleting subsection (h) in its entirety and replacing it with the following subsection (h) and by adding the following subsections (i) and (j): (h) Indebtedness of Borrower with respect to loans from any of the Subsidiaries of Borrower; provided that the amount of such loans from M/I Financial Corp. shall not exceed $5,000,000 at any time that the aggregate principal amount of the Loans outstanding is less than the aggregate principal amount of the Loans available pursuant to subsection 2.1 hereof; (i) Indebtedness of any wholly-owned Subsidiary of Borrower with respect to loans from Borrower or from any other Subsidiaries 5 6 of Borrower; provided that each such Subsidiary shall have delivered to each of the Banks, prior to the making of any such loans, its respective Guaranty conforming to the requirements of this Agreement; and (j) Indebtedness of Borrower and/or 601RS, Inc. not in excess of $5,000,000 secured by a Lien permitted by subsection 7.2(j) hereof. 5. Subsection 7.2 (Limitation on Liens) of the Credit Agreement is hereby amended by deleting subsection (g) in its entirety and replacing it with the following subsection (g) and by adding the following subsection (j): (g) (i) deposits to secure the performance of: bids; trade contracts (other than for borrowed money or the purchase price of property or services); leases; statutory and other obligations required by law; surety, appeal and performance bonds (including Construction Bonds); and other obligations of a like nature incurred in the ordinary course of business; and (ii) Liens in favor of surety bond companies pursuant to indemnity agreements to secure the reimbursement obligations of Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. on Construction Bonds, provided (A) the Liens securing Construction Bonds shall be limited to the assets of, as appropriate, Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. at, and the rights of, as appropriate, Borrower, M/I Homes, Inc. or M/I Homes Construction, Inc. arising out of, the projects that are the subject of the Construction Bonds, (B) the Liens shall not attach to any real estate, and (C) the aggregate amount of such Liens at any time shall not exceed the dollar amount of Construction Bonds then outstanding, and in any event shall not exceed the amount of reimbursement obligations on Construction Bonds permitted to Borrower pursuant to subsection 7.3(a) hereof; (j) a first priority Lien on an aircraft owned by 601RS, Inc. from time to time to secure the Indebtedness of 601RS, Inc. and/or Borrower not in excess of $5,000,000. 6 7 6. Subsection 7.3(b) is hereby amended by deleting it in its entirety and replacing it with the following: (b) Contingent Obligations consisting of (i) guaranties by Borrower of M/I Financial Corp.'s lease obligations in an amount not to exceed $1,000,000 in any period of 12 consecutive months, (ii) Borrower's obligations under the M/I Financial Corp. Loan Agreement in a principal amount not to exceed $25,000,000, (iii) guaranties by any Subsidiary of the obligations of Borrower permitted under this Agreement (including without limitation any guaranty by any Subsidiary of Borrower of any obligation of Borrower to Banks) and (iv) guaranties by Borrower of the obligations permitted under this Agreement of any permitted wholly-owned Subsidiary of Borrower. 7. Subsection 7.6 (Limitation on Dividends) of the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: 7.6 LIMITATION ON DIVIDENDS. Declare any dividends (other than dividends payable solely in common stock of Borrower) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, retirement or other acquisition of any shares of any class of stock of Borrower, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Borrower or any of its Subsidiaries (any of the foregoing a "STOCKHOLDER PAYMENT"), except (a) so long as no Default or Event of Default has occurred and is continuing or would result therefrom, Borrower and any of its Subsidiaries may make Stockholder Payments in a total amount that, when added to all other Stockholder Payments permitted by this Agreement, does not exceed the sum of (i) twenty-five percent (25%) of cumulative Consolidated Earnings (taking into account losses, if any) of Borrower subsequent to December 31, 1994 plus (ii) $5,000,000, and (b) any wholly-owned 7 8 Subsidiary of Borrower may declare and pay dividends to Borrower and such dividends shall not be considered Stockholder Payments. In determining compliance with the foregoing, Borrower shall be in compliance if, as of the last day of the calendar month immediately preceding the month in which any such Stockholder Payments are made, the cumulative Stockholder Payments previously made plus the Stockholder Payments made during the current month would not in the aggregate exceed the amount permitted by clause (a), above. 8. Subsection 7.9(d) is hereby amended by deleting it in its entirety and replacing it with the following: (d) any investments in M/I Financial Corp., 601RS, Inc., M/I Homes, Inc. or M/I Homes Construction, Inc., or any other Subsidiary created with the consent of the Required Banks hereafter; 9. Subsection 7.10 (Limitation on Operating Leases) of the Credit Agreement is hereby amended by deleting it in its entirety and replacing it with the following: 7.10 LIMITATION ON OPERATING LEASES. Enter into or renew any Operating Lease if as a result thereof: (a) the aggregate rentals payable by Borrower and all of its Subsidiaries under all Operating Leases on a consolidated basis, except for any Operating Lease with respect to the Office Building, would exceed in any period of 12 consecutive months the aggregate amount of $4,200,000; or (b) the term of (i) any Operating Lease with respect to Eligible Model Houses and furnishings for Eligible Model Houses would exceed three years, and (ii) any other Operating Lease, except for any Operating Lease with respect to the Office Building, would exceed five years, provided that so long as the initial term or any renewal of an Operating Lease included within this clause (b) does not exceed five years or three years, as appropriate, the aggregate of the initial term and all renewals of such Operating Lease may exceed five years or three years, as appropriate, if any right of renewal is solely at the option of the 8 9 Borrower and all of its Subsidiaries under all Operating Leases with respect to the Office Building would exceed, for the periods set forth below, the amounts that correspond to such periods, as set forth below:
Aggregate Rentals Per Year of the Operating Lease Lease Year --------------------------- ---------------------- Beginning with Lease Year 1 $1,131,576.00 Through and including Lease Year 5 Beginning with Lease Year 6 $1,217,693.00 Through and including Lease Year 10 Beginning with Lease Year 11 $1,275,104.00 Through and including Lease Year 15 Beginning with Lease Year 16 $1,303,810.00 Through and including Lease Year 20
10. Paragraphs 6, 9 and 10 of Section 9 (Defaults, Events of Default; Distribution of Proceeds After Event of Default) of the Credit Agreement are hereby amended by deleting them in their entireties and replacing them with the following: (6) Borrower or any Subsidiary of Borrower shall (a) default in any payment of principal of or interest on any Indebtedness (other than the Notes and Reimbursement Obligations) or in the payment of any Contingent Obligation beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Contingent Obligation was created, and the aggregate principal amount then outstanding of all such Indebtedness and Contingent Obligations of Borrower and all Subsidiaries exceeds $500,000.00, or (b) default in the observance or performance of any other agreement or 9 10 condition relating to any such Indebtedness or Contingent Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Contingent Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Contingent Obligation to become payable; provided, however, that it shall not constitute a Default or Event of Default if (x) Borrower or any Subsidiary of Borrower defaults on Indebtedness secured by a mortgage on real estate if such Indebtedness is by its terms exculpatory, i.e., non-recourse to Borrower and its Subsidiaries, or (y) a draw is made on a standby letter of credit or payment is made on a performance bond, so long as any reimbursement obligation of Borrower with respect to such letter of credit or performance bond is made within the time required by the document creating the reimbursement obligation; or (9) any Person or group of related Persons (other than Irving E. Schottenstein, the Marital Trusts of Melvin L. Schottenstein, and the immediate families of Irving E. Schottenstein and Melvin L. Schottenstein or trusts for the benefit of their respective children and grandchildren) owns or controls more than twenty-five percent (25%) of the outstanding voting capital stock of Borrower; or (10) any subordination agreement that evidences any Subordinated Indebtedness (i) ceases to be the legal, valid and binding agreement of any Person party thereto, enforceable against such Person in accordance with its terms or a payment is made by Borrower in violation of any provision thereof, or (ii) shall be terminated, 10 11 invalidated or set aside, or be declared ineffective or inoperative or the Indebtedness related thereto is in any way not fully subordinate to all of Borrower's Indebtedness and other liabilities to Banks and Agent under this Agreement and the Notes and to Borrower's obligations, if any, as a guarantor or otherwise of the Indebtedness and other liabilities of M/I Financial Corp. (including without limitation the obligations with respect to the M/I Financial Corp. Loan Agreement); 11. The Credit Agreement is hereby amended by deleting the existing Schedule 3 (Subsidiaries) thereto in its entirety and replacing it with, and fully incorporating by reference therein, amended Schedule 3 thereto, which amended Schedule 3 is attached hereto. 12. The Borrower hereby represents and warrants to each Bank and to Agent that it has the corporate power and authority to make, deliver and perform this Amendment and to borrow under the Credit Agreement as amended by this Amendment and has taken all corporate action necessary to be taken by it to authorize the borrowings on the terms and conditions of the Credit Agreement as amended by this Amendment and to authorize the execution, delivery and performance of the Credit Agreement as amended by this Amendment. 13. The Credit Agreement, including without limitation the Borrower's representations, warranties and covenants, as amended by this Amendment shall remain in full force and effect in accordance with its terms as amended hereby, and upon the effective date of this Amendment, the terms "AGREEMENT" and "THIS AGREEMENT" shall mean the Credit Agreement as amended by this Amendment. 14. The obligations of the Agent and the Banks pursuant to this Amendment are subject to the satisfaction of the following conditions precedent prior to the effective date of this Amendment: (a) GUARANTIES. Each Bank shall have received from each of 601RS, Inc., M/I Homes, Inc. and M/I Homes Construction, Inc. its respective Guaranty, to which Agent shall also be a party, conforming to the requirements of the Credit Agreement and delivered by a duly authorized officer of each of 601RS, Inc., M/I Homes, Inc. and M/I Homes Construction, Inc. 11 12 (b) GUARANTOR'S CONSENT AND REAFFIRMATION OF GUARANTIES. Each Bank and Agent shall have received from M/I Financial Corp. a copy of Guarantor's Consent and Reaffirmation of Guaranties (in form and substance satisfactory to each Bank and Agent). (c) CORPORATE PROCEEDINGS OF BORROWER. Each Bank and Agent shall have received a copy of the resolution (in form and substance satisfactory to each Bank and Agent) of the Executive Committee of the Board of Directors of Borrower authorizing the execution, delivery and performance of this Amendment, certified by the Secretary or the Assistant Secretary of Borrower as of the date hereof. Such certificate shall state that the resolution set forth therein has not been amended, modified, revoked or rescinded as of the effective date of this Amendment. (d) CORPORATE PROCEEDINGS OF SUBSIDIARIES OF BORROWER. Each Bank and Agent shall have received a copy of the resolution (in form and substance satisfactory to each Bank and Agent) of the Sole Shareholder of each of the Subsidiaries of Borrower authorizing the execution, delivery and performance of (i) by 601RS, Inc., M/I Homes, Inc. and M/I Homes Construction, Inc. the respective Guaranties of each, and (ii) by M/I Financial Corp., Guarantor's Consent and Reaffirmation of Guaranties, all certified by the Secretary or Assistant Secretary of each respective Subsidiary of Borrower as of the date hereof. Such certificate shall state that the resolution set forth therein has not been amended, modified, revoked or rescinded as of the effective date of this Amendment. (e) INCUMBENCY CERTIFICATES OF SUBSIDIARIES. Each Bank and Agent shall have received a certificate of the Secretary or Assistant Secretary of each of the Subsidiaries of Borrower, dated the date hereof, as to the incumbency and signatures of the respective officer(s) of each of the Subsidiaries of Borrower executing (i) with respect to 601RS, Inc., M/I Homes, Inc. and M/I Homes Construction, Inc. each Guaranty, and (ii) with respect to M/I Financial Corp., Guarantor's Consent and Reaffirmation of Guaranties. (f) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default shall have occurred and be continuing under the Credit Agreement as of the effective date of this Amendment. 12 13 15. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This Amendment shall become effective upon receipt by Agent and each Bank of executed counterparts of this Amendment by each of Borrower, Agent and the Required Banks. 16. This Amendment shall be governed by, and construed in accordance with, the local laws of the State of Ohio. IN WITNESS WHEREOF, the Borrower, Banks and Agent have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. M/I SCHOTTENSTEIN HOMES, INC. By_________________________________ Irving E. Schottenstein Title: Chairman and Chief Executive Officer BANK ONE, COLUMBUS, N.A., as Agent and as a Bank By_________________________________ Thomas D. Igoe Title: Senior Vice President THE HUNTINGTON NATIONAL BANK By_________________________________ James R. Willet Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By_________________________________ Gregory A. Gilbert Title: Vice President 13 14 NATIONAL CITY BANK OF COLUMBUS By_________________________________ Ralph A. Kaparos Title: Senior Vice President THE FIRST NATIONAL BANK OF BOSTON By_________________________________ Kevin C. Hake Title: Director THE FIFTH THIRD BANK OF COLUMBUS By Print: Mark E. Ransom Title: Vice President 14 15 GUARANTOR'S CONSENT AND REAFFIRMATION OF GUARANTIES --------------------------------------------------- The undersigned Guarantor hereby (a) acknowledges that it has read the foregoing Consent to the Creation of Wholly-Owned Subsidiaries of M/I Schottenstein Homes, Inc. and to the Amendment of the Note Purchase Agreement Pursuant to, and First Amendment to, Second Restated Revolving Credit Loan and Standby Letter of Credit Agreement, effective as of March 14, 1997 (the "Amendment"), and (b) agrees that each of the undersigned Guarantor's Guaranties dated as of December 30, 1996 of the obligations of M/I Schottenstein Homes, Inc. pursuant to the Second Restated Revolving Credit Loan and Standby Letter of Credit Agreement, as amended by the Amendment, and all representations, warranties and covenants in each of such Guaranties, continue in full force and effect notwithstanding the Amendment. M/I FINANCIAL CORP. By:________________________________ Print Name:_____________________ Title:__________________________ 15 EX-10.20 4 EXHIBIT 10.20 1 SCHEDULE 10.20 FIRST AMENDMENT TO MELVIN AND IRVING SCHOTTENSTEIN FAMILY AGREEMENT THIS FIRST AMENDMENT TO THE MELVIN AND IRVING SCHOTTENSTEIN FAMILY AGREEMENT (the "First Amendment") is made and entered into as of the 17th day of March, 1997, among the parties to the Melvin and Irving Schottenstein Family Agreement dated as of October 11, 1993 (the "Family Agreement"), including, for the limited purposes set forth therein, M/I Schottenstein Homes, Inc., an Ohio corporation (the "M/I Ohio"). Capitalized terms used in this First Amendment shall have the meanings assigned thereto in the Family Agreement. RECITAL WHEREAS, in order to fully accommodate, and in connection with, M/I Ohio's repurchase of 500,000 COMMON SHARES from certain of MEL'S FAMILY SHAREHOLDERS and LENORE'S resignation from the Board of Directors of M/I Ohio, the parties hereto desire to amend the Family Agreement; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: Section 1. AMENDMENT OF SECTION 3.3.4 OF THE FAMILY AGREEMENT. Section 3.3.4 of the Family Agreement is hereby amended to delete the text of subsection (a) therein and to replace such text with the words: "[INTENTIONALLY OMITTED]." Notwithstanding the foregoing, the parties hereto acknowledge and agree that the provisions of subsections (b), (c), (d) and (e) of Section 3.3.4 shall remain in full force and effect and shall continue to be binding upon the parties to the Family Agreement. Section 2. AMENDMENT OF THE FAMILY AGREEMENT TO DELETE SECTION 3.5. The Family Agreement is hereby amended to delete Section 3.5 therein in its entirety. The parties hereto acknowledge and agree that LENORE'S seat on the Executive Committee of the Board of Directors of the Company shall be filled by the Board of Directors without regard to the Family Agreement. The parties hereto further acknowledge and agree that the Board of Directors may (i) constitute any committee of the Board of Directors, (ii) reconstitute any committee of the Board of Directors, (iii) appoint the directors of the various committees and/or (iv) remove one or more directors from a committee of the Board of Directors, in each case, as the Board of Directors may determine in its sole discretion without regard to the Family Agreement and subject only to the provisions of M/I Ohio's Amended and Restated Articles of Incorporation and Regulations and to applicable law. 2 Section 3. FACILITATION OF COMMON SHARE REPURCHASE. Each of the parties hereto agree that, notwithstanding anything in the Family Agreement to the contrary, M/I Ohio may repurchase from MEL'S FAMILY SHAREHOLDERS, and MEL'S FAMILY SHAREHOLDERS may sell to M/I Ohio, up to 500,000 COMMON SHARES on the date hereof at a repurchase price of $10.50 per COMMON SHARE. Section 4. WAIVER OF RIGHTS OF FIRST AND SECOND REFUSAL. Each of the parties hereto waives any and all rights of first and second refusal, and notice thereof, pursuant to Section 6 of the Family Agreement on a one time basis, solely in connection with the repurchase by M/I Ohio of COMMON SHARES from one or more of MEL'S FAMILY SHAREHOLDERS as contemplated by Section 3 of this First Amendment. The parties hereto acknowledge and agree that, except as set forth in the immediately preceding sentence, nothing herein shall constitute, or shall be deemed to constitute, a waiver by any party to the Family Agreement of its rights of first and second refusal pursuant to Section 6 of the Family Agreement. Section 5. SECURITIES LAWS COMPLIANCE. It is the intention of the parties hereto that the repurchase of COMMON SHARES from one or more of MEL'S FAMILY SHAREHOLDERS contemplated by Section 3 of this First Amendment comply with all applicable federal and state securities laws, and each of the parties hereto, including for such purpose M/I Ohio, agrees to take all actions reasonably necessary and to cooperate in good faith to ensure such compliance to make any all filings required under all applicable federal and state securities laws. Section 6. FURTHER ASSURANCES. Each of the parties hereto agrees, at any time and from time to time, upon the reasonable request of any other party hereto, to do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, documents and instruments as may be required to effect any of the transactions contemplated by this First Amendment. Section 7. BINDING EFFECT. This First Amendment shall be binding upon and inure to the benefit of the PARTIES and their respective heirs, executors and permitted assigns. Section 8. JOINT PREPARATION. This First Amendment shall be deemed to have been prepared jointly by the parties hereto, and any uncertainty or ambiguity existing herein shall not be interpreted against any PARTY, but shall be interpreted according to the rules for the interpretation of arm's length agreements. Section 9. GOVERNING LAW; VENUE. This First Amendment shall be construed in accordance with Ohio law. The parties hereto agree that any action concerning, relating to, or involving this First Amendment must be venued in Franklin County, Ohio, and the parties hereto irrevocably consent to the jurisdiction of the courts in Franklin County, Ohio. Section 10. COUNTERPARTS. This First Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 2 3 IN WITNESS WHEREOF, the FAMILY REPRESENTATIVES, on behalf of the PARTIES, have entered into this First Amendment pursuant to Section 10.2.1 of the Family Agreement as of the date and year first above written. /s/ IRVING E. SCHOTTENSTEIN /s/ Lenore S. Sagner - -------------------------------- ----------------------------- Irving E. Schottenstein Lenore S. Sagner Family Representative Family Representative Acknowledged and agreed: M/I SCHOTTENSTEIN HOMES, INC. By: /s/ IRVING E. SCHOTTENSTEIN ---------------------------- Irving E. Schottenstein Chief Executive Officer 3 EX-13 5 EXHIBIT 13 1 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Selected Consolidated Financial Data - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
(Dollars in thousands, except per share amounts) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT: (Year Ended December 31) Revenue $577,192 $527,822 $491,719 $446,060 $372,026 Costs and expenses 554,115 511,316 472,526 427,512 359,854 Net income before extraordinary loss (1) 14,110 9,876 11,613 11,198 7,304 Net income per common share before extraordinary loss (1) 1.60 1.12 1.32 1.87 1.33 Dividends per common share (2) - - - - - BALANCE SHEET: (December 31) Total assets 305,359 281,143 277,614 227,958 172,176 Notes and mortgage notes payable 100,345 102,549 112,765 77,892 61,742 Subordinated Notes 25,000 24,513 24,513 24,513 41,177 Stockholders' equity 112,319 99,496 89,620 79,089 36,830 - --------------------------------------------------------------------------------------------------------------------------------- (1) Information for 1993 and 1992 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 1996, 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 1996, 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. (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 and 1992 while the Company was privately held. In January 1994, the Company made distributions of $1,082,000 to the former S corporation stockholders related to the Company's earnings from January 1, 1993 to November 8, 1993 (the date the Company's status as an S corporation was terminated).
SELECTED CONSOLIDATED QUARTERLY FINANCIAL AND OPERATING DATA
Three months ended - --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (Dollars in thousands, except per share amounts) 1996 1996 1996 1996 - --------------------------------------------------------------------------------------------------------------------------------- New contracts 716 730 760 956 Homes delivered 1,017 887 795 547 Backlog 1,337 1,638 1,795 1,830 Total revenue $187,045 $156,932 $137,357 $ 95,858 Gross margin $ 34,127 $ 29,691 $ 26,382 $ 18,903 Income before income taxes and extraordinary loss $ 7,145 $ 6,936 $ 6,778 $ 2,218 Net income before extraordinary loss $ 4,461 $ 4,390 $ 3,936 $ 1,323 Net income per common share before extraordinary loss $ 0.50 $ 0.50 $ 0.45 $ 0.15 Weighted average common shares outstanding 8,800,000 8,800,000 8,800,000 8,800,000 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
14 2 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT 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 construction and sale of single-family attached and detached homes. The financial services operations include the origination of mortgage loans, primarily for purchasers of the Company's homes. 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 $321,000, $431,000 and $323,000 for 1996, 1995 and 1994, respectively, which is included in the determination of financial services operating income. Corporate assets consist primarily of cash, deferred taxes and other assets not associated with a specific business segment.
Year Ended December 31, (Dollars in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Revenue: Home-building $ 570,719 $ 522,453 $ 487,786 Financial services 9,037 7,208 5,250 Intersegment (2,564) (1,839) (1,317) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUE $ 577,192 $ 527,822 $ 491,719 ================================================================================================================================== Operating Income: Home-building $ 45,981 $ 39,039 $ 37,712 Financial services 4,100 2,697 1,524 - ---------------------------------------------------------------------------------------------------------------------------------- Total 50,081 41,736 39,236 Corporate expenses (14,222) (11,463) (10,401) Interest expense (12,782) (13,767) (9,642) - ---------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS $ 23,077 $ 16,506 $ 19,193 ================================================================================================================================== Identifiable Assets: Home-building $ 253,912 $243,117 $ 244,429 Financial services 35,650 23,694 16,430 Corporate 15,797 14,332 16,755 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 305,359 $281,143 $ 277,614 ================================================================================================================================== Capital Expenditures: Home-building $ 317 $ 363 $ 1,029 Financial services 38 19 437 Corporate 256 309 683 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 611 $ 691 $ 2,149 ================================================================================================================================== Depreciation and Amortization: Home-building $ 494 $ 916 $ 893 Financial services 153 159 124 Corporate 730 679 630 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 1,377 $ 1,754 $ 1,647 ==================================================================================================================================
15 3 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY RESULTS OF OPERATIONS CONSOLIDATED YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 TOTAL REVENUE. Total revenue for 1996 of $577.2 million set a new record for the Company and represented an increase of $49.4 million over 1995. Increases in housing revenue of $55.2 million and other revenue of $1.4 million were partially offset by a $7.2 million decrease in land revenue. The increase in housing revenue was attributable to an increase in the number of Homes Delivered. The Company delivered 294 more homes in 1996 than in 1995. The increase in other revenue is primarily attributable to M/I Financial, where both the number of loans originated and the gains recognized from the sale of loans increased in the current year. The decrease in land revenue was primarily due to a significant decrease in the number of lots sold to third parties in the Maryland division. INCOME BEFORE INCOME TAXES. Income before income taxes and extraordinary loss for 1996 increased 39.8% over 1995. This increase related to both housing, where income before income taxes and extraordinary loss increased from $13.8 to $19.0 million, and M/I Financial, where income before income taxes increased from $2.7 to $4.1 million. The increase in housing was primarily due to the increase in the number of Homes Delivered along with improved margins. Housing margins increased 0.7% in 1996. The increase in M/I Financial was primarily due to the significant increase in income from the sale of servicing and marketing gains due to increased loan volume and the favorable interest rate environment during the last half of 1995 and 1996 as compared to the same periods of 1994 and 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 TOTAL REVENUE. Total revenue for 1995 of $527.8 million 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 in the Maryland division 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. 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 1996 and 1995:
Three Months Ended - ---------------------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, (Dollars in thousands) 1996 1996 1996 1996 - ---------------------------------------------------------------------- Total revenue $187,045 $156,932 $137,357 $95,858 Unit Data: New contracts 716 730 760 956 Homes delivered 1,017 887 795 547 Backlog at end of period 1,337 1,638 1,795 1,830 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 Unit Data: New contracts 795 811 767 743 Homes delivered 941 765 697 549 Backlog at end of period 1,421 1,567 1,521 1,451 - ----------------------------------------------------------------------
16 4 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- HOME-BUILDING SEGMENT The following table sets forth certain information related to the Company's home-building segment:
YEAR ENDED DECEMBER 31, (Dollars in thousands) 1996 1995 1994 - -------------------------------------------------------------- Revenue: Housing sales $560,980 $505,810 $478,657 Lot and land sales 8,915 16,145 8,528 Other income 824 498 601 - -------------------------------------------------------------- Total Revenue $570,719 $522,453 $487,786 - -------------------------------------------------------------- Revenue: Housing sales 98.3% 96.8% 98.1% Lot and land sales 1.6 3.1 1.8 Other income 0.1 0.1 0.1 - -------------------------------------------------------------- Total Revenue 100.0 100.0 100.0 Land and housing costs 82.5 83.0 83.0 - -------------------------------------------------------------- Gross Margin 17.5 17.0 17.0 General and administrative expenses 2.8 2.9 2.8 Selling expenses 6.6 6.6 6.5 - -------------------------------------------------------------- Operating Income 8.1% 7.5% 7.7% - -------------------------------------------------------------- MIDWEST REGION Unit Data: New contracts 1,910 1,865 1,530 Homes delivered 1,939 1,696 1,640 Backlog at end of period 908 937 768 Average sales price of homes in backlog $ 174 $ 155 $ 168 Aggregate sales value of homes in backlog $158,000 $145,000 $129,000 Number of active subdivisions 80 80 75 - -------------------------------------------------------------- FLORIDA REGION Unit Data: New contracts 663 619 653 Homes delivered 667 657 671 Backlog at end of period 221 225 263 Average sales price of homes in backlog $ 163 $ 182 $ 163 Aggregate sales value of homes in backlog $ 36,000 $ 41,000 $ 43,000 Number of active subdivisions 35 35 35 - -------------------------------------------------------------- NORTH CAROLINA, VIRGINIA AND MARYLAND REGION Unit Data: New contracts 589 632 624 Homes delivered 640 599 679 Backlog at end of period 208 259 226 Average sales price of homes in backlog $ 246 $ 208 $ 213 Aggregate sales value of homes in backlog $ 51,000 $ 54,000 $ 48,000 Number of active subdivisions 35 35 30 - -------------------------------------------------------------- TOTAL Unit Data: New contracts 3,162 3,116 2,807 Homes delivered 3,246 2,952 2,990 Backlog at end of period 1,337 1,421 1,257 Average sales price of homes in backlog $ 183 $ 169 $ 176 Aggregate sales value of homes in backlog $245,000 $240,000 $220,000 Number of active subdivisions 150 150 140 - --------------------------------------------------------------
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 period specified. Most cancellations of contracts for homes in Backlog occur because customers cannot qualify for financing. These cancellations usually occur prior to the start of construction. Since the Company arranges financing with guaranteed rates for many of its customers, the incidence of cancellations after the start of construction is low. In 1996, the Company delivered 3,246 homes, including most of the homes under contract in Backlog at December 31, 1995. Of the 1,421 contracts in Backlog at December 31, 1995, 14% were cancelled. The cancellation percentages were 16% and 14% for homes in Backlog as of December 31, 1994 and December 31, 1993, respectively. Unsold speculative homes, which are in various stages of construction, totaled 122, 150 and 143 at December 31, 1996, 1995 and 1994, respectively. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 TOTAL REVENUE. Total revenue for the home-building segment for 1996 was $570.7 million, a 9.2% increase over total revenue recorded for 1995. This increase was attributable to a 10.9% increase in housing revenue and was offset by a 44.8% decrease in land revenue. The increase in housing revenue was due to a 10.0% increase in the number of Homes Delivered. Homes Delivered in 1996 were higher in all of the Company's regions, led by the Midwest Region where the number of Homes Delivered increased 14.3%. The introduction of the Company's more affordable Horizon product line into several new markets during 1995 had a positive impact on the number of Homes Delivered in 1996. The increase in the number of Homes Delivered during 1996 as compared to the prior year was primarily due to the higher number of homes in backlog at December 31, 1995 as compared to the preceding year end as well as more New Contracts recorded during the first half of 1996. This was partially due to an overall strong economy, low unemployment and relatively low interest rates. The decrease in land revenue was primarily attributable to the Maryland division. The Maryland division had significant lot sales to outside homebuilders from its Willows land development project in 1995 which did not occur in 1996 due to delays in development and increased competition. 17 5 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- HOME SALES AND BACKLOG. The Company recorded a 1.5% increase in the number of New Contracts recorded in 1996 as compared to the prior year. An increase in New Contracts recorded in both the Midwest and Florida Regions were offset by a decrease in the North Carolina/Virginia/Maryland Region. The Company believes the increase in the number of New Contracts is attributable to the more favorable interest rate environment in the current year as compared to 1995. The introduction of the Company's more affordable Horizon product line into several new markets during 1995 also had a positive impact on the number of New Contracts for the current year. The number of New Contracts in future periods will be dependent on numerous factors, including future economic conditions, timing of land development, consumer confidence and interest rates available to potential home buyers. At December 31, 1996, the total sales value of the Company's Backlog of 1,337 homes was approximately $245.2 million, representing a 2.1% increase over 1995. However, there was a 5.9% decrease in the number of units from the levels reported at December 31, 1995. The average sales price of homes in Backlog increased 8.3% from December 31, 1995 to December 31, 1996. This increase was due to increases in the Columbus, Columbus Showcase and Charlotte divisions where the Company is building in more upscale and certain niche subdivisions. The decrease in units at December 31, 1996 is a result of record high deliveries and a decrease in New Contracts recorded in the second half of 1996. GROSS MARGIN. The overall gross margin for the home-building segment was 17.5% for 1996 and 17.0% for 1995. The gross margin from housing sales was 17.9% in 1996 as compared to 17.2% recorded in 1995. This increase was offset by a decrease in the gross margin from lot and land sales from 17.8% in 1995 to 15.7% in 1996. Housing gross margins increased in 8 of the Company's 12 divisions. This was due to the increased emphasis placed on improving margins during 1995 and improved market conditions in 1996. Management continues to focus on maintaining accurate, up-to-date costing information so that sales prices can be set to achieve the desired margins. The Company has also focused on acquiring or developing lots in premier locations so that it can obtain higher margins. Gross margins were also higher due to the national accounts program which the Company has expanded significantly in the current year. Through this program, the Company has been able to lower costs on many of the components used in building its homes through volume discounts and other negotiated price reductions from its suppliers. The Company's ability to maintain these levels of margins is dependent on a number of factors, some of which are beyond the Company's control. Due to the increased level of sales during the first half of 1996, some of the Company's divisions are beginning to experience shortages of qualified subcontractors in certain construction trades. This could negatively impact gross margins by requiring the Company to pay premiums to expedite construction work or delaying construction, thus delaying revenue recognition and increasing carrying costs. In addition, due to the competitive sales environment, the Company is offering promotions in selected cities which could adversely impact gross margins in the first half of 1997. The decrease in the gross margin from lot and land sales was due to decreased lot sales in the Willows land development project in the Maryland division due to delays in development and increased competition. In 1995, lot sales in this project generated very high margins. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a percentage of total revenue decreased from 2.9% for 1995 to 2.8% for 1996. However, this decrease resulted primarily from an increase in total revenue. SELLING EXPENSES. Selling expenses increased from $34.3 million for 1995 to $37.8 million for 1996 and as a percentage of total revenue remained constant at 6.6% for 1996 and 1995. The increase was primarily due to increases in sales commissions to internal salespeople as a result of the increase in sales volume. 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 18 6 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- 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 Maryland division. Late in 1994, the Company completed development of the first phase of a six-phase land development project. Development was in progress on the second phase of this project during 1995. The Company sold 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. 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 December31,1994 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 this sale, the gross margin from land sales was actually higher in 1995 as the Company began 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 Presidents 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 individuals higher bonuses in 1995. 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 divisions in 1995. Additional expenses were also incurred in 1995 related to the opening of model homes in new subdivisions. 19 7 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & 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:
Year Ended December 31, (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------ Number of loans originated 2,427 1,873 1,455 Revenue: Loan origination fees $3,094 $2,258 $1,688 Sale of servicing and marketing gains 3,550 3,047 2,207 Other 2,393 1,903 1,355 - ------------------------------------------------------------------ Total Revenue 9,037 7,208 5,250 - ------------------------------------------------------------------ General & administrative expenses 4,937 4,511 3,726 - ------------------------------------------------------------------ Operating Income $4,100 $2,697 $1,524 - ------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 TOTAL REVENUE. Total revenue for the year ended December31, 1996 was $9.0 million, a 25.4% increase over total revenue recorded for 1995. Loan origination fees increased 37.0% from 1996 to 1995, primarily due to the 29.6% increase in the number of loans originated as well as an increase in the average loan amount. The increase in the number of loans originated during 1996 as compared to the preceding year was due to an increase in the number of Homes Delivered by the parent company. In addition, two M/I Financial branch offices were opened during 1995 and a branch office was opened in the Raleigh market during 1996. At December 31, 1996, M/IFinancial was operating in eight of the Company's eleven markets. Of these eight markets, 77% of the parent Company's Homes Delivered were financed through M/I Financial. Revenue from sale of servicing and marketing gains increased 16.5% to $3.5 million in 1996. This increase was primarily due to the increase in the number of loans originated in the current year as well as an increase in servicing fees due to more fixed rate mortgages originated during 1996 as compared to 1995. In 1995, the Company originated a higher percentage of adjustable rate mortgages as compared to 1996. The Company generally earns higher premiums on fixed rate mortgages as opposed to adjustable rate mortgages. The Company seeks to minimize the risks associated with a rising interest rate market by using hedging methods whereby the Company has the option, but is not required, to complete the hedging transaction. M/I Financial's revenue from sale of servicing and marketing gains was also positively influenced by a significant shift from adjustable rate loans to fixed rate loans, which offer greater income potential through larger servicing release premiums. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 9.4% to $4.9 million for the year ended December 31, 1996 as compared to the $4.5 million recorded in 1995. This increase was primarily due to the opening of two new branches in 1995 and one new branch in 1996 as well as the closing of the Maryland branch in 1996. Also, personnel costs increased due to the significant increase in loans originated. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 TOTAL REVENUE. Total revenue for the year ended December31, 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 1995 as well as a falling interest rate environment which increased marketing gains. 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. OTHER OPERATING RESULTS CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses for the year ended December31, 1996 totaled $14.2 million, or 2.5% of total revenue, a 24.1% increase from the $11.5 million, or 2.2% of total revenue, recorded for 1995. This increase is primarily due to higher amounts recorded for bonuses and commissions in the current year. 20 8 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- 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 was under construction during 1995 (See Note 8 to the Consolidated Financial Statements). INTEREST EXPENSE. Corporate and home-building interest expense for the year ended December 31, 1996 totaled $12.8 million, a 7.1% decrease from the $13.8 million recorded for the preceding year. Interest expense was lower in the current year due to decreases in the weighted average interest rate and the average borrowings outstanding as a result of more favorable terms on the Company's credit facilities. These decreases were partially offset by a decrease in the net amount of interest capitalized during 1996 as compared to 1995. 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 average 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. INCOME TAXES. The effective tax rate for 1996 decreased to 38.9% from 40.2% for 1995, primarily as a result of a significant charitable contribution of commercial land. The effective tax rate increased from 39.5% to 40.2% from 1994 to 1995. EXTRAORDINARY LOSS. In December 1996, the Company redeemed all of its outstanding 14% Subordinated Notes due December 2001 at a price of 106% of par. The principal amount redeemed was $24.5 million and the redemption resulted in an extraordinary loss of $1.3 million, net of income taxes of $0.8 million. LIQUIDITY AND CAPITAL RESOURCES NOTES PAYABLE BANKS. The Company's financing needs depend upon its sales volume, asset turnover, land acquisition and inventory balances. The Company continues to incur substantial indebtedness, and expects to incur indebtedness in the future, to fund the growth of its home-building activities. Historically, the Company's principal source of funds for construction and development activities has been from internally generated cash and from bank borrowings, which are primarily unsecured. On December 30, 1996, the Company amended its bank loan agreement. The limit on aggregate borrowings was increased from $166.0 million to $186.0 million, eliminating the seasonality of borrowings available. The maturity date of the loan was extended from September 30, 2000 to September 30, 2001. Limits on certain restrictive covenants were also increased under the amended agreement. At December 31, 1996, the Company had bank borrowings outstanding of $77.0 million under its loan agreement relating to its home-building operations, which permits aggregate borrowings not to exceed the lesser of: $186.0 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, 2001, 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. At December 31, 1996, borrowings under the loan agreement were at LIBOR plus a margin of between 1.75% and 2.5% based on the Company's ratio of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to consolidated interest incurred and were primarily unsecured. The loan agreement contains restrictive covenants which require the Company, among other things, to maintain minimum net worth and working capital amounts, to maintain a minimum ratio of EBITDA to consolidated interest incurred and to maintain certain other financial ratios. The 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 $23.3 million was outstanding as of December 31, 1996 under the M/I Financial loan agreement, which permits 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. At December 31, 1996, borrowings under this agreement were at the bank's prime rate less 0.25% and were unsecured. The agreement terminates on June 20, 1997, and the unpaid balance of such borrowings are payable on this date. At December 31, 1996, the Company had the right to borrow up to $211.0 million under its credit facilities, including $25.0 million under the M/I Financial loan agreement. At December 31, 21 9 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- 1996, the Company had $110.7 million of unused borrowing availability under its loan agreements. The Company also had approximately $21.5 million of completion bonds and letters of credit outstanding at December 31, 1996. On March 15, 1997, the Board of Directors of the Company authorized the repurchase of 500,000 shares of the Company's common stock at $10.50 per share, which represents the closing price of the Company's common stock on March 14, 1997, from the Melvin L. Schottenstein family interests. These shares will be held as treasury shares by the Company. The total purchase price will be $5,250,000 and will be paid from proceeds of the Company's revolving line of credit. In conjunction with this stock transaction, Lenore S. Sagner has resigned from the Board of Directors. Amy D. Schottenstein has been elected to fill this vacancy. SUBORDINATED NOTES. On December 3, 1996, the Company issued $25.0 million in the form of a Subordinated Note with The First National Bank of Boston. The proceeds were used to redeem the Company's 14% Subordinated Notes, in the amount of $24.5 million, previously outstanding. The maturity date of the $25.0 million Subordinated Note is December 15, 2001 and can be extended two additional years at the Company's option. The Subordinated Note is redeemable, in whole or in part, after one year without penalty or premium. Interest on the Subordinated Note can adjust every three months and is based on LIBOR plus 3.5%. Upon the redemption of the 14% Subordinated Notes, the Company incurred a $1.3 million extraordinary loss, net of tax. In compliance with the terms of the new Subordinated Note, the Company purchased a three-year, 9% interest rate cap agreement, effective December 2, 1996 through December 2, 1999. The agreement provides that if the interest rate in effect for each three month period is greater than the cap rate, the bank will pay to the Company the excess interest computed. CASH. Net income from housing and lot and land sales is the Company's primary source of net cash provided by operating activities. Net cash provided by operating activities in the year ended December 31, 1996 was $13.5 million compared to $15.0 million for the prior year. The decrease in net cash provided by operating activities was primarily due to large increases in accounts receivable and inventories partially offset by increases in accounts payable and accrued liabilities. LAND AND LAND DEVELOPMENT. Over the past several years, the Company's land development activities and land holdings have increased significantly, and the Company expects that this trend will continue to increase in the foreseeable future. Lots, land and land development costs increased 9.4% in the 4th quarter of 1996 and 6.8% over December 31, 1995. The Company anticipates that its land holdings in the Columbus market will increase 50% in 1997. These increases are primarily due to the shortage of qualified land developers in certain of the Company's markets as well as the competitive advantages that can be achieved by developing land internally rather than purchasing lots from developers or other competing homebuilders. This is particularly true for the Company's Horizon product line where, due to the price points the Company targets, 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 its risk; however, the Company will continue to evaluate all of its alternatives to satisfy the Company's demand for lots in the most cost effective manner. The $1.9 million decrease in notes payable to banks from December 31, 1995 to December 31, 1996 reflects decreased borrowings primarily attributable to the increase in the number of Homes Delivered in 1996 offset by an increase in single family lots, land and land development costs. Single-family lots, land and land development costs increased $11.1 million in the fourth quarter, and it is expected that borrowing needs will increase as the Company continues to increase its investment in land under development and developed lots and as its investment in houses under construction increases. In 1994, the Company entered into a land purchase contract which required a greater investment than the Company normally commits. On January 31, 1994, the Company closed on the first phase of a six-phase land purchase contract in the Maryland division. 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. The total purchase price for the second phase was approximately $6.4 million and this section was developed into 122 single family and townhouse lots. On July 1, 1996, the Company purchased the third phase for $5.6 million which will provide an additional 95 single-family and townhouse lots. The Company sold a portion of the developed lots from the first and second phases to outside homebuilders and has entered into similar contracts to sell a portion of the lots in the third phase to outside homebuilders. The Company has an option to purchase each of the remaining three 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. 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. In December 1996, the Company eliminated the seasonal aspect of the loan agreement and increased the amount of the lines of credit by $20.0 million. The Company executed an agreement with certain unrelated 22 10 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- parties for the development and occupancy of an approximately 85,000 square foot building to be used as the Company's headquarters. The five office locations in Columbus, Ohio were consolidated into one building in an effort to improve operating efficiencies. The building was built, and is owned and operated by, a limited liability company in which the Company has invested $1.1 million and holds a 1/3 interest (the LLC). The building will be financed primarily through borrowings of the LLC. The construction financing was jointly and severally guaranteed by the members of the LLC. The Company has entered into a long-term operating lease for the premises with the LLC. Construction of the building was substantially completed late in the fourth quarter of 1996. The Company believes that any commitments arising from this transaction will not significantly affect its liquidity or capital resources. INTEREST RATES AND INFLATION The Company's business is significantly affected by general economic conditions of the United States and, particularly, by the impact of interest rates. Higher interest rates may decrease the potential market by making it more difficult for home buyers to qualify for mortgages or to obtain mortgages at interest rates acceptable to them. Increases in interest rates also would increase the Company's interest expense as the rate on the revolving loans is based upon floating rates of interest. The weighted average interest rate on the Company's outstanding debt was 9.5%, 10.1% and 9.0% for 1996, 1995 and 1994, respectively. In conjunction with its mortgage banking operations, the Company uses hedging methods to reduce its exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. (See Note 13 to the Consolidated Financial Statements.) In recent years, the Company generally has been able to raise prices by amounts at least equal to its cost increases and, accordingly, has not experienced any detrimental effect from inflation. Where the Company develops lots for its own use, inflation may increase the Company's profits because land costs are fixed well in advance of sales efforts. The Company is generally able to maintain costs with subcontractors from the date a home sales contract is accepted; however, in certain situations, unanticipated costs may occur between the time a sales contract is executed and the time a home is constructed, which results in lower gross profit margins. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company wishes to take advantage of the safe harbor provisions included in the Private Securities Litigation Reform Act of 1995. Accordingly, in addition to historical information, this Management's Discussion and Analysis of Results of Operations and Financial Condition contains certain forward-looking statements, including, but not limited to, statements regarding the Company's future financial performance and financial condition. These statements involve a number of risks and uncertainties. Any forward-looking statements made by the Company herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various factors including, but not limited to, those referred to below. GENERAL REAL ESTATE, ECONOMIC AND OTHER CONDITIONS. The home-building industry is significantly affected by changes in national and local economic and other conditions, including employment levels, changing demographic considerations, availability of financing, interest rates, consumer confidence and housing demand. In addition, homebuilders are subject to various risks, many of them outside the control of the homebuilder, including competitive overbuilding, availability and cost of building lots, availability of materials and labor, adverse weather conditions which can cause delays in construction schedules, cost overruns, changes in government regulations, and increases in real estate taxes and other local government fees. The Company has benefited during the current fiscal year from a relatively strong national economy and strong local economies in its markets. The Company has benefited as well from steadily low interest rates. If such trends do not continue, the Company's business will be adversely affected. PRESENT AND FUTURE SUBDIVISIONS. The Company intends for its subdivisions to be built out over time. Therefore, the medium- and long-term financial success of the Company will be dependent on the Company's ability to develop and market its subdivisions successfully. Acquiring land and committing the financial and managerial resources to develop a subdivision involves significant risks. Before a subdivision generates any revenue, material expenditures are required for items such as acquiring land; obtaining development approvals; and constructing project infrastructure (such as roads and utilities), model homes and sales facilities. It generally takes several years for subdivisions to achieve cumulative positive cash flow. LONG-TERM NATURE OF PROJECTS; PERIOD-TO-PERIOD FLUCTUATIONS. The majority of the Company's subdivisions are long-term projects. Sales activity at the Company's subdivisions varies from period to period, and the ultimate success of any subdivision cannot necessarily be judged by results in any particular period or periods. A subdivision may generate significantly higher sales levels at inception (whether because of local pent-up demand in the area or other reasons) than it does during later periods over the life of the subdivision. Revenues and earnings of the Company will also be affected by period-to-period fluctuations in the mix of product and home closings among the Company's subdivisions. 23 11 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion & Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- THE COMPANY'S MARKETS. The Company's operations are concentrated in the Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; and Virginia and Maryland metropolitan areas. Although these are stable, established markets in which the Company has operated successfully, there can be no assurance that the stability of these markets or the Company's favorable results there will continue. Adverse general economic conditions in these markets could have a material adverse impact on the operations of the Company. For the year ended December 31, 1996, approximately 38% of the Company's housing revenue and a significant portion of the Company's operating income was derived from operations in its Columbus, Ohio market. The Company's performance could be significantly affected by changes in this market. The Company has also expanded into a new geographic market, Phoenix, Arizona, which could reduce the Company's dependence upon its existing markets. The Company currently has three employees in Phoenix and is actively pursuing land positions in the Phoenix market. A significant amount of selling and general and administrative expenses are incurred when opening a new division, and, as a result, such expenses will increase in 1997. However, any new markets may prove to be less stable and may involve delays, problems and expenses not typically found by the Company in the existing markets with which it is familiar. Such delays, problems, and expenses would be likely to occur in any new market and may include, without limitation, the development of relationships with local contractors and suppliers, land acquisition and development, construction of new model homes, acquiring local office facilities and hiring additional personnel. COMPETITION. The home-building industry is highly competitive. The Company competes in each of its local market areas with numerous national, regional and local homebuilders, some of which have greater financial, marketing, land acquisition, and sales resources than the Company. Builders of new homes compete not only for home buyers, but also for desirable properties, financing, raw materials and skilled subcontractors. The Company also competes with the resale market for existing homes which provides certain attraction for home buyers over building a new home. The Company attempts to meet this competition from the home resale market by offering benefits which the resale market for existing homes cannot provide: new home warranties and the flexibility to select precise location, style and elevation, and interior and exterior finishes. GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONSIDERATIONS. The home-building industry is subject to increasing local, state and Federal statutes, ordinances, rules and regulations concerning zoning, resource protection (preservation of woodlands and hillside areas), building design, and construction and similar matters, including local regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular location. Such regulation affects construction activities, including construction materials which must be used in certain aspects of building design, as well as sales activities and other dealings with homebuyers. The Company must also obtain licenses, permits and approvals from various governmental agencies for its development activities, the granting of which are beyond the Company's control. Furthermore, increasingly stringent requirements may be imposed on homebuilders and developers in the future. Although the Company cannot predict the impact on the Company of compliance with any such requirements, such requirements could result in time consuming and expensive compliance programs. The Company is also subject to a variety of local, state and Federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws which apply to any given project vary greatly according to the project site and the present and former uses of the property. These environmental laws may result in delays, cause the Company to incur substantial compliance costs (including substantial expenditures for pollution and water quality control) and prohibit or severely restrict development in certain environmentally sensitive regions. Although there can be no assurance that it will be successful in all cases, the Company has a general practice of requiring an environmental audit and resolution of environmental issues prior to purchasing land in an effort to avoid major environmental issues in the Company's developments. In addition, the Company has been, and in the future may be, subject to periodic delays or may be precluded from developing certain projects due to building moratoriums. These moratoriums generally relate to insufficient water supplies, sewage facilities, delays in utility hook-ups, or inadequate road capacity within the specific market area or subdivision. These moratoriums can occur prior to, or subsequent to, commencement of operations by the Company without notice to, or recourse by, the Company. Although the Company's practice of resolving such issues before committing to purchase property tends to reduce the Company's exposure to financial risk as a result of such moratoriums, the Company must utilize its resources in dealing with them. CONSTRUCTION. The Company has from time to time experienced shortages of materials or qualified subcontractors and volatile increases in the cost of certain materials (particularly increases in the price of lumber and framing, which are significant components of home construction costs), resulting in longer than normal construction periods and increased costs not reflected in the prices of homes. Generally, the Company's home sales contract does not contain provisions for price increases if the Company's costs of construction increase. 24 12 [DELOITTE & TOUCHE LLP LOGO] INDEPENDENT AUDITORS' REPORT To the Stockholders and Directors of M/I Schottenstein Homes, Inc.: We have audited the accompanying consolidated balance sheets of M/I Schottenstein Homes, Inc. and its subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Columbus, Ohio February 27, 1997, except with respect to the last paragraph of Note 2, for which the date is March 15, 1997 25 13 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Consolidated Statements of Income - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
YEAR ENDED DECEMBER 31, (Dollars in thousands, except per share amounts) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Revenue (Notes 1, 4 and 5) $ 577,192 $527,822 $491,719 - --------------------------------------------------------------------------------------------------------------------------- Costs and expenses: Land and housing (Notes 1, 2 and 4) 468,089 431,961 403,554 General and administrative (Notes 1 and 2) 34,980 30,660 27,208 Selling (Notes 1 and 2) 37,943 34,497 31,799 Interest (Notes 1, 4, 6 and 7) 13,103 14,198 9,965 - --------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 554,115 511,316 472,526 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary loss 23,077 16,506 19,193 - --------------------------------------------------------------------------------------------------------------------------- Income taxes (credit) (Note 11): Current 11,049 8,399 8,101 Deferred (2,082) (1,769) (521) - --------------------------------------------------------------------------------------------------------------------------- Total income taxes 8,967 6,630 7,580 - --------------------------------------------------------------------------------------------------------------------------- Income before extraordinary loss 14,110 9,876 11,613 - --------------------------------------------------------------------------------------------------------------------------- Extraordinary loss from extinguishment of debt, net of income taxes of $823 (Note 7) (1,287) - - - --------------------------------------------------------------------------------------------------------------------------- Net income $ 12,823 $ 9,876 $ 11,613 - --------------------------------------------------------------------------------------------------------------------------- Net income before extraordinary loss per common share (Note 1) $ 1.60 $ 1.12 $ 1.32 - --------------------------------------------------------------------------------------------------------------------------- Extraordinary loss per common share (Note 7) $ (.14) - - - --------------------------------------------------------------------------------------------------------------------------- Net income per common share (Note 1) $ 1.46 $ 1.12 $ 1.32 - --------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 8,800,000 8,800,000 8,800,000 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 26 14 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Consolidated Balance Sheets - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
DECEMBER 31, (Dollars in thousands, except par values) 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash, including cash in escrow (Note 1) $ 6,761 $ 8,136 Receivables (Note 3) 34,447 23,612 Inventories (Notes 1, 2, 4 and 5): Single-family lots, land and land development costs 129,025 120,806 Houses under construction 89,696 86,110 Model homes and furnishings (less accumulated depreciation: 1996 - $56; 1995 - $823) 19,482 20,971 Land purchase deposits 716 381 Office furnishings, transportation and construction equipment - at cost (less accumulated depreciation: 1996 - $6,668; 1995 - $6,106) (Note 1) 1,635 2,392 Investment in unconsolidated joint ventures and limited partnerships (Notes 2, 4, 5 and 8) 12,998 11,641 Other assets (Notes 1 and 11) 10,599 7,094 - --------------------------------------------------------------------------------------------------------------------------- TOTAL $ 305,359 $281,143 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable banks - home-building operations (Note 6) $ 77,000 $ 87,000 Note payable bank - financial operations (Note 6) 23,300 15,200 Subordinated notes (Note 7) 25,000 24,513 Accounts payable 32,016 29,219 Accrued compensation 11,802 7,336 Income taxes payable (Note 11) 1,502 2,771 Accrued interest, warranty and other (Note 1) 15,349 10,136 Customer deposits 7,071 5,472 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 193,040 181,647 - --------------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes 4, 6, 7, 8, 10, 12 and 13) - --------------------------------------------------------------------------------------------------------------------------- Stockholders' equity (Notes 1, 2, 6, 9 and 10): 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 61,658 48,835 - --------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 112,319 99,496 - --------------------------------------------------------------------------------------------------------------------------- TOTAL $ 305,359 $281,143 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 27 15 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Consolidated Statements of Stockholders' Equity - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
Common Stock ---------------------------- Additional Shares Paid-in Retained (Dollars in thousands) Outstanding Amount Capital Earnings - ------------------------------------------------------------------------------------------------------------------------------- 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 Net income - - - 12,823 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 8,800,000 $88 $50,573 $61,658 - -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 28 16 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARY
YEAR ENDED DECEMBER 31, (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,823 $ 9,876 $ 11,613 Adjustments to reconcile net income to net cash provided (used) by operating activities: Extraordinary loss from extinguishment of debt 2,110 - - Loss from property disposals 1,008 335 254 Depreciation and amortization 1,377 1,754 1,647 Deferred income tax credit (2,082) (1,769) (521) Decrease (increase) in receivables (10,835) (6,265) 3,865 Decrease (increase) in inventories (612) 5,775 (38,807) Decrease (increase) in other assets (1,589) 861 (845) Increase (decrease) in accounts payable 2,797 (2,217) 6,652 Increase (decrease) in income taxes payable (1,269) 1,602 (1,453) Increase (decrease) in accrued liabilities 9,983 5,155 (1,694) Equity in undistributed income of unconsolidated joint ventures and limited partnerships (223) (132) (242) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 13,488 14,975 (19,531) - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to model and office furnishings, transportation and construction equipment (611) (691) (2,149) Investment in unconsolidated joint ventures (12,718) (10,423) (9,752) Distributions from unconsolidated joint ventures and limited partnerships 871 1,477 823 - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (12,458) (9,637) (11,078) - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable banks: Cash proceeds from borrowings 422,551 396,793 438,816 Principal repayments (424,451) (407,023) (403,891) Principal repayments of mortgage notes payable (463) (360) (571) Proceeds from the issuance of subordinated notes 25,000 - - Principal repayments of subordinated notes (24,513) - - Debt issuance costs (650) - - Subordinated notes redemption premium (1,478) - - Net increase (decrease) in customer deposits 1,599 (671) 747 Distributions paid to former S corporation stockholders - - (1,082) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (2,405) (11,261) 34,019 - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (1,375) (5,923) 3,410 Cash balance at beginning of year 8,136 14,059 10,649 - ------------------------------------------------------------------------------------------------------------------------------- Cash balance at end of year $ 6,761 $ 8,136 $ 14,059 - ------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest - net of amount capitalized $ 12,875 $ 14,007 $ 10,634 Income taxes - net $ 11,495 $ 6,797 $ 9,554 NON-CASH TRANSACTIONS DURING THE YEAR: Land acquired with mortgage notes payable $ 159 $ 374 $ 519 Single-family lots distributed from unconsolidated joint ventures $ 10,713 $ 5,628 $ 11,588 - -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 29 17 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT 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 subsidiaries. All significant intercompany transactions have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is engaged primarily in the construction and sale of single-family residential property in Columbus and Cincinnati, Ohio; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; Indianapolis, Indiana; the Virginia and Maryland suburbs of Washington, D.C. and, beginning in 1997, Phoenix, Arizona. The Company designs, builds and sells single-family homes on finished lots, which it purchases ready for home construction or which it develops. The Company also purchases undeveloped land to develop finished lots for future construction of single-family homes and for sale to others. The Company also conducts mortgage banking activities through M/I Financial, 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 $393,000 and $407,000 at December 31, 1996 and 1995, respectively, pending completion of construction. Cash was primarily held in one bank at December 31, 1996 and 1995. 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 1996, 1995 and 1994 is as follows:
(Dollars in thousands) 1996 1995 1994 - -------------------------------------------------------------------------- Interest capitalized, beginning of year $ 7,560 $ 7,322 $ 6,139 Interest incurred 12,405 14,436 11,148 Interest expensed (13,103) (14,198) (9,965) - -------------------------------------------------------------------------- Interest capitalized, end of year $ 6,862 $ 7,560 $ 7,322 - --------------------------------------------------------------------------
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 home-building revenue. The following table summaries both home-building and lot and land sales and cost of sales included in revenue and cost of revenue:
(Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------ Home-building sales $560,980 $505,810 $478,657 Lot and land sales 8,915 16,145 8,528 Home-building cost of sales 460,573 418,697 397,063 Lot and land cost of sales 7,515 13,264 6,491 - ------------------------------------------------------------
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 13). 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 $5,492,000, $4,475,000 and $4,256,000 for 1996, 1995 and 1994, respectively. 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 $1,193,000, $1,574,000 and $1,466,000 in 1996, 1995 and 1994, respectively. AMORTIZATION. The costs incurred in connection with the issuance of the new Subordinated Note, issued in 1996, (see Note7) are being amortized over the terms of the related debt and are included in interest expense. Unamortized debt issuance costs of $632,000 relating to the new Subordinated Note, and $798,000 relating to the 14% Subordinated Notes, are included in other assets at December 31, 1996 and 1995, respectively. ADVERTISING. The Company expenses advertising costs as incurred. The Company expensed $4,765,000, $4,963,000 and 30 18 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- $4,831,000 in 1996, 1995 and 1994, respectively. NET INCOME PER COMMON SHARE. Net income per common share is calculated based on the weighted average shares outstanding during the period. The Company has no common stock equivalents other than outstanding options, which have no significant effect on the calculation. PROFIT SHARING. The Company has a trusteed deferred profit-sharing plan which covers substantially all Company employees and permits members to make contributions to the plan on a pre-tax salary reduction basis in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Company contributions to the plan are made at the discretion of the Board and totalled $825,000 in 1996, $620,000 in 1995 and $715,000 in 1994 (including payment of expenses incurred by the plan). DISTRIBUTIONS TO STOCKHOLDERS. Distributions to stockholders represent payments by the Company to its stockholders for income earned 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. The Company adopted SFAS 121 during the first quarter of 1996. Based on the Company's analysis of its home-building inventories, nothing of significance was found to be impaired and therefore the implementation of this statement had no 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". 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 are 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. See Note 10 for the required disclosure under SFAS 123. 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 and limited liability companies or limited partnerships of approximately $1,159,000, $4,286,000 and $3,608,000 in 1996, 1995 and 1994, respectively. The Company received distributions of $10,713,000, $5,628,000 and $11,588,000 in developed lots at cost in 1996, 1995 and 1994, respectively. The Company also had notes receivable from limited partnerships in 1995 (see Note 3). Eric J. Schottenstein, formerly Senior Vice President/Regional Manager - Carolina Region, resigned his position with the Company in December 1993. Mr. Schottenstein agreed to serve as a consultant to the Company for a period of three years, for which he was paid $192,000 in 1996, $207,000 in 1995 and $215,000 in 1994. This contract was paid in full in 1996. On March 15, 1997, the Board of Directors of the Company authorized the repurchase of 500,000 shares of the Company's common stock at $10.50 per share, which represents the closing price of the Company's common stock on March 14, 1997, from the Melvin L. Schottenstein family interests. These shares will be held as treasury shares by the Company. The total purchase price will be $5,250,000 and will be paid from proceeds of the Company's revolving line of credit. In conjunction with this stock transaction, Lenore S. Sagner has resigned from the Board of Directors. Amy D. Schottenstein has been elected to fill this vacancy. 3. RECEIVABLES Receivables consist of the following:
(Dollars in thousands) 1996 1995 - ----------------------------------------------------------------- Mortgage loans to be funded $34,121 $22,797 Notes receivable from limited partnerships - 440 Accounts receivable 326 356 Accounts receivable from limited partnerships - 19 - ----------------------------------------------------------------- Total receivables $34,447 $23,612 - -----------------------------------------------------------------
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 an advance from the Company which bore interest at the prime rate plus 1/2% for a total of 9.00% at December 31, 1995. The note was collected in full in 1996 (see Note 5). 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND LIMITED LIABILITY CORPORATIONS At December 31, 1996, 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 in 1994, and twelve prior to 1994, and five separate limited liability corporations formed in 1996 (33% - 1 and 50% - 4) that engage in land development activi- 31 19 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- ties. These interests are recorded using the equity method of accounting. The Company receives its percentage interest of profits or its percentage interest of the lots developed in the form of a capital distribution. The Company received distributions of $10,713,000, $5,628,000 and $11,588,000 in developed lots at cost in 1996, 1995 and 1994, respectively, and purchased lots totalling $1,159,000, $1,333,000 and $1,105,000 in 1996, 1995 and 1994 from the joint ventures and limited liability corporations. Summarized condensed combined financial information for the joint ventures and limited liability corporations as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 is as follows:
SUMMARIZED CONDENSED COMBINED BALANCE SHEETS - ------------------------------------------------------------------- December 31, (Dollars in thousands) 1996 1995 - ------------------------------------------------------------------- Assets: Single-family lots, Land and land development costs $28,378 $25,173 Other assets 1,796 1,284 - ------------------------------------------------------------------- Total $30,174 $26,457 - ------------------------------------------------------------------- Liabilities: Debt $ 1,081 $ 2,544 Other liabilities 3,429 2,132 - ------------------------------------------------------------------- Total liabilities 4,510 4,676 Partners' equity: Company's equity 11,143 9,890 Other 14,521 11,891 - ------------------------------------------------------------------- Total Partners' equity 25,664 21,781 - ------------------------------------------------------------------- Total $30,174 $26,457 - -------------------------------------------------------------------
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------- Year Ended December 31, (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------- Revenue $1,334 $2,335 $1,706 Costs and expenses 1,153 2,158 1,809 - ------------------------------------------------------------------- Income (loss) $ 181 $ 177 $ (103) - -------------------------------------------------------------------
Joint venture earnings include $20,000, $45,000 and $44,000 of intercompany profit not included in the Company's earnings for 1996, 1995 and 1994, respectively. In addition, included in the Company's investment in the joint ventures at December 31, 1996 and 1995, is $349,000 and $413,000 of capitalized interest and other costs relating to the joint ventures. Letters of credit totalling approximately $3,297,000 are outstanding at December 31, 1996, 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 has primarily been funded through advances from the Company. In 1996, all outstanding advances and deposits were reimbursed to the Company. The advances outstanding as of December 31, 1995 totaled $465,000, which included $440,000 of notes receivable, which bore interest at prime plus 1/2%, and included $6,000 of deposits for lots the Company had an option to purchase from the limited partnerships at fair market value. The Company purchased lots totalling $2,953,000 and $2,503,000 from the limited partnerships in 1995 and 1994, respectively. No lots were purchased from the limited partnerships in 1996. For both limited partnerships, the land and related debt were recorded on the limited partnerships' books and the Company was not contingently liable for any of the limited partnerships' debt; therefore, the only amounts related to the limited partnerships that were recorded on the Company's books were the advances noted above, and the Company's investment in the limited partnerships of $0 and $262,000 at December 31, 1996 and 1995, respectively. The Company recorded income using the equity method of accounting from the limited partnerships of $65,000, $85,000 and $322,000 respectively for 1996, 1995 and 1994. 6. NOTES PAYABLE BANKS At December 31, 1996, the Company had revolving credit loans of $77,000,000 and letters of credit totalling $17,048,000 outstanding under a loan agreement with five banks. Borrowings under the loan agreement are at LIBOR plus a margin of between 1.75% and 2.50% and are primarily unsecured. This agreement provides for total borrowings not to exceed the lesser of $186,000,000 under the revolving credit agreement and $25,000,000, including $4,000,000 for joint ventures in which the Company is a partner, in the form of letters of credit; or the Company's borrowing base, which is calculated based on specified percentages of certain types of assets held by the Company as of each month end. This revolving credit facility and letter of credit commitment expires September 30, 2001, 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 LIBOR plus a margin and a commitment fee of 1/4 of 1% based upon the average daily unused portion of the note. The terms of the loan agreement contain restrictive covenants which require the Company, among other things, to maintain minimum net worth and working capital amounts and to maintain certain financial ratios. This agreement also places limitations on the amount of additional indebtedness that may be incurred by the Company, 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, 1996, $23,300,000 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 32 20 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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 less 0.25% 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 June 20, 1997 and the unpaid balance of such loans are payable on this date. At December 31, 1996, the Company had $109,000,000 of unused borrowing availability under its loan agreement, as well as $1,700,000 under the M/I Financial Loan Agreement. The weighted average interest rate of the Company's bank borrowings was 7.6% at December31,1996 and 8.5% at December 31, 1995 and 1994. 7. SUBORDINATED NOTES In December 1991, the Company issued $20,000,000 principal amount of 14% Subordinated Notes and in April 1992, issued an additional $4,513,000. In December 1996, the Company redeemed all of these notes at a price of 106% of par. The redemption resulted in an extraordinary loss of $1,287,000, net of income taxes of $823,000. In December 1996, the Company executed a $25,000,000 Subordinated Note Purchase Agreement with The First National Bank of Boston. The proceeds were used to redeem the 14% Subordinated Notes outstanding in the amount of $24,513,000. The maturity date of the new Subordinated Note is December 15, 2001 and can be extended two additional years at the Company's option. The new Subordinated Note is redeemable, in whole or in part, after one year without penalty or premium. Each partial payment must be equal to or in excess of $5,000,000. Interest on the new Subordinated Note is at LIBOR plus 3.50% and adjusts quarterly. The new Subordinated Note limits payments for cash dividends to $2,000,000 plus a percentage of revenues. In compliance with the terms of the new Subordinated Note, the Company purchased a three-year, 9% interest rate cap agreement, effective December 2, 1996 through December 2, 1999. The agreement provides that if the interest rate in effect for each three month period is greater than the cap rate, the bank will pay to the Company the excess interest computed. 8. 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, 1996, the future minimum rental commitments, totalling $29,062,000, under noncancelable operating leases with initial terms in excess of one year are as follows: 1997 - $3,363,000; 1998 - $2,290,000; 1999 - $1,745,000; 2000 - $1,335,000; 2001 - $1,205,000; and thereafter - $19,124,000. The Company's lease with a related party for approximately 27,000 square feet of office space expired August 31, 1996. At this time the Company extended the lease on a month-to-month basis at the current rental rate through February 1997. Rental expense was $347,000, $358,000 and $367,000 for 1996, 1995 and 1994, respectively. 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 consolidated its five Columbus locations into this building and entered into a 20 year lease for the premises with the LLC. The Company moved into this new facility in December 1996. Included in the future minimum rental commitments above are rentals of $990,000 for 1997; $1,132,000 for 1998; $1,132,000 for 1999; $1,132,000 for 2000; $1,132,000 for 2001; and $19,124,000 for all periods thereafter. The Company's total rental expense was $5,048,000, $5,023,000 and $3,699,000 for 1996, 1995 and 1994, respectively. 9. PREFERRED STOCK The Articles of Incorporation authorize the issuance of 2,000,000 shares of preferred stock, par value $.01 per share. The Board of Directors of the Company is authorized, without further stockholder action, to divide any or all shares of the authorized preferred stock into series and to fix and determine the designations, preferences and relative, participating, optional or other special rights (excluding, under current Ohio law, voting rights) and qualifications, limitations or restrictions thereon, of any series so established, including dividend rights, liquidation preferences, redemption rights and conversion privileges. 10. STOCK INCENTIVE PLAN In November 1993, the Company adopted the M/I Schottenstein Homes, Inc. 1993 Stock Incentive Plan. This plan includes stock option, restricted stock and stock appreciation programs, under which an aggregate of 425,000 shares of common stock have been reserved for issuance. No awards have been granted under the restricted stock and stock appreciation programs. Stock options are granted at the market price at the close of business on the date of grant. Options awarded vest 20% annually over five years and expire after ten years. The following summarizes the transactions under the stock option program:
Weighted Option Price Avg. Exercise Shares Per Share Price - --------------------------------------------------------------------- Options outstanding December 31, 1993 - - - Granted 94,200 $16.125 $16.125 Forfeited (10,000) $16.125 $16.125 - --------------------------------------------------------------------- Options outstanding December 31, 1994 84,200 $16.125 $16.125 Granted 68,200 $6.75-$9.25 $6.823 Forfeited (18,000) $6.75-$16.125 $14.042 - --------------------------------------------------------------------- Options outstanding December 31, 1995 134,400 $6.75-$16.125 $11.684 Granted 60,700 $10.875 $10.875 Forfeited (1,250) $10.875-$16.125 $11.925 - --------------------------------------------------------------------- Options outstanding December 31, 1996 193,850 $6.75-$16.125 $11.429 - --------------------------------------------------------------------- Options exercisable at December 31, 1994 16,840 $16.125 $16.125 December 31, 1995 40,920 $6.75-$16.125 $13.208 December 31, 1996 79,590 $6.75-$16.125 $12.338 - ---------------------------------------------------------------------
33 21 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- At December 31, 1996, options outstanding have a weighted average remaining contractual life of 8.9 years. In February 1997, the Company granted options for an additional 28,600 shares with the same terms as the previous awards, at a price of $10.625 which represents the market value at the date of grant. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996: expected volatility of 37.29%; risk-free interest rate of 8.50%; and expected lives of 4 years, and for grants in 1995: expected volatility of 50.84%; risk-free interest rate of 8.88%; and expected lives of 4 years. Based on these calculations, the fair value of the stock options at the date of grant were immaterial to the Company's financial statements at December 31, 1996 and 1995. 11. INCOME TAXES The provision for income taxes consists of the following:
(Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------ Federal $7,060 $5,312 $6,216 State and local 1,907 1,318 1,364 - ------------------------------------------------------------------ Total $8,967 $6,630 $7,580 ==================================================================
Reconciliations of the differences between income taxes computed at federal statutory tax rates and consolidated provision for income taxes are as follows:
(Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------ Federal taxes at statutory rate $8,077 $5,777 $6,718 Deduct federal tax effect of: Charitable contribution (414) - - State taxes - net of federal tax benefit 1,240 857 887 Other 64 (4) (25) - ------------------------------------------------------------------ Total $8,967 $6,630 $7,580 ==================================================================
The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities at December 31,1996 and 1995 are as follows:
- ------------------------------------------------------------------- (Dollars in thousands) 1996 1995 - ------------------------------------------------------------------- Assets: Warranty, insurance and other reserves $3,589 $1,855 Inventory writedowns 1,107 749 Inventories 706 584 State taxes -- 226 Depreciation 147 67 Other 647 420 - ------------------------------------------------------------------- Total deferred tax assets 6,196 3,901 - ------------------------------------------------------------------- Liabilities: Prepaid expenses and deferred charges 1,030 854 State taxes 37 -- - ------------------------------------------------------------------- Total deferred tax liabilities 1,067 854 - ------------------------------------------------------------------- Net deferred tax asset $5,129 $3,047 ===================================================================
12. COMMITMENTS AND CONTINGENCIES At December 31, 1996, the Company had sales agreements outstanding, some of which have open contingencies for approval of financing, to deliver 1,337 homes with an aggregate purchase price of approximately $245,236,000. At December 31, 1996, the Company had options and contingent purchase contracts to acquire land and developed lots with an aggregate purchase price of approximately $167,010,000. Purchase of the properties is contingent upon satisfaction of certain requirements by the Company and the sellers. At December 31, 1996, the Company had outstanding approximately $21,501,000 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 such litigation will be material to the financial statements of the Company. 13. FINANCIAL INSTRUMENTS M/I Financial offers fixed and adjustable rate mortgage loans, primarily to buyers of the Company's homes. At December 31, 1996, M/I Financial is committed to fund $79,800,000 in mortgage loans to home buyers. Of this total, approximately $11,000,000 are adjustable rate loans and $68,800,000 are fixed rate loan commitments. The loans are granted at current market interest rates and the rate is guaranteed through the transfer of the title of the home to the buyer (the "Closing"). M/I Financial uses hedging methods to reduce its exposure to interest rate fluctuations between the commitment date of the loan and the time the home closes. The method to be used is determined at the time of the loan commitment based on the market conditions and alternatives available. M/I Financial's policy requires that there be no interest rate risk on loans closed waiting to be sold. Also according to policy, the pipeline of committed loans is to be hedged at 70 to 95% of the committed balance, which is the balance of loans expected to be closed. One of the methods that M/I Financial uses to hedge the interest rate risk relative to unclosed loans is to purchase commitments from outside investors to acquire the loans at the interest rate at which the loan will be closed. The cost of these purchase commitments is recorded as an asset and is expensed as loans are closed under the related commitments. Any remaining unused balance is expensed when the commitment expires, or earlier if the Company determines that they will be unable to use the entire commitment prior to its expiration date. The Company expended $1,345,000, $898,000 and $1,406,000 in 1996, 1995 and 1994, respectively, related to purchase commitments from outside investors to acquire mortgage loans. Such costs are expensed as a component of cost of goods sold. At December 31, 1996, the Company had approximately $50,700,000 of commitments to deliver mortgage loans to outside investors. The Company also hedges its interest rate risk using optional and mandatory forward sales of mortgage-backed securities. In these agreements, the Company agrees to sell and later agrees to buy similar but not identical mortgage-backed securities. Generally, the agreements are fixed-coupon agreements whereby 34 22 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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, 1996, these agreements matured within 90 to 120 days. Securities under forward sales agreements averaged approximately $15,300,000 during 1996 and the maximum amount outstanding at any month end during 1996 was $27,000,000. Hedging gains of $868,000 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 fair value of the Company's unrecognized financial instruments at December 31, 1996 and 1995. 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.
1996 1995 ------------------- --------------------- Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value - --------------------------------------------------------------------------- Assets: Cash, including cash in escrow $ 6,761 $ 6,761 $ 8,136 $ 8,136 Mortgage loans to be funded 34,121 34,244 22,797 23,029 Notes receivable -- -- 440 440 Accounts receivable 326 326 375 375 Prepaid financing commitments 183 -- 213 -- Interest rate cap 73 73 -- -- Liabilities: Notes payable banks 100,300 100,300 102,200 102,200 Subordinated notes 25,000 25,000 24,513 23,346 Accounts payable 32,016 32,016 29,219 29,219 Other liabilities 35,724 35,724 25,715 25,715 Unrecognized Financial Instruments: Letters of credit -- 127 -- 84 Commitments to extend real estate loans -- 1,345 -- 687 Forward sale of mortgage-backed securities -- 187 -- (163)
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at December 31, 1996 and 1995: CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND OTHER LIABILITIES. The carrying amounts of these items are a reasonable estimate of their fair value. MORTGAGE LOANS TO BE FUNDED. The estimated fair value of mortgage loans to be funded at December 31, 1996 and 1995 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, 1996 and 1995. NOTES RECEIVABLE. The carrying value of notes receivable from limited partnerships, which bore interest at the prime rate plus 1/2%, approximates their fair value at December 31, 1995. PREPAID FINANCING COMMITMENTS. The estimated fair value was determined using fees currently charged for similar commitments and by estimating the prepaid financing commitments that will be utilized by the Company. NOTES PAYABLE BANKS. The interest rates currently available to the Company fluctuate with the LIBOR rate of the lending institutions and thus their carrying value is a reasonable estimate of fair value. SUBORDINATED NOTES. The estimated fair value was determined using the bid price for the debt instruments at December 31, 1995. LETTERS OF CREDIT. Letters of credit and outstanding completion bonds of $21,501,000 and $19,525,000 represent potential commitments at December 31, 1996 and 1995. The letters of credit generally expire within one to two years. The estimated fair value of letters of credit was determined using fees currently charged for similar arrangements. INTEREST RATE CAP, COMMITMENTS TO EXTEND REAL ESTATE LOANS AND FORWARD SALE OF MORTGAGE-BACKED SECURITIES. The fair value of these financial instruments was determined based upon market quotes at December 31, 1996 and 1995. 14. BUSINESS SEGMENTS The business segment information for 1996, 1995 and 1994 included on page 15 of this annual report is an integral part of these financial statements. 35 23 1996 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT 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 14, 1997, there were approximately 298 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:
- -------------------------------------------------- 1996 HIGH LOW - -------------------------------------------------- First quarter $11.75 $9.75 Second quarter $11.00 $9.13 Third quarter $ 9.38 $8.25 Fourth quarter $10.63 $8.38 - -------------------------------------------------- 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
The highest and lowest prices for the Company's common stock from January 1, 1997 through March 14, 1997 was $11.13 and $10.00. No dividends have been paid 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 place limits on the amount of dividends the Company can pay (see Footnotes 6 and 7 to the consolidated financial statements). 36 24 - ------------------------------------------ EXECUTIVE OFFICERS - ------------------------------------------ IRVING E. SCHOTTENSTEIN Chief Executive Officer ROBERT H. SCHOTTENSTEIN President STEVEN SCHOTTENSTEIN Senior Executive Vice President KERRII B. ANDERSON Senior Vice President, Chief Financial Officer - ------------------------------------------ OTHER KEY OFFICERS - ------------------------------------------ PAUL S. COPPEL Senior Vice President, General Counsel PHILLIP G. CREEK Senior Vice President, Treasurer ROBERT C. MOESLE Senior Vice President, Regional President LLOYD T. SIMPSON Senior Vice President, Regional President RONALD G. SMITH Senior Vice President, Regional President - ------------------------------------------ DIRECTORS - ------------------------------------------ IRVING E. SCHOTTENSTEIN (1*, 2) Chairman of the Board and Chief Executive Officer FRIEDRICH K.M. BOHM (2,3*) Managing Partner and Chief Executive Officer, NBBJ HOLLY S. KASTAN Private Investor AMY D. SCHOTTENSTEIN Private Investor ERIC J. SCHOTTENSTEIN President, The Joshua Company ROBERT H. SCHOTTENSTEIN President STEVEN SCHOTTENSTEIN Senior Executive Vice President LEWIS R. SMOOT, SR. (1, 2*, 3) President and Chief Executive Officer, The Smoot Corporation NORMAN L. TRAEGER (2, 3) President, The Discovery Group (1) Executive Committee (2) Compensation Committee (3) Audit Committee * Chairman - ------------------------------------------------------------------------------- CORPORATE INFORMATION - ------------------------------------------------------------------------------- CORPORATE HEADQUARTERS 3 Easton Oval Columbus, Ohio 43219 STOCK EXCHANGE LISTING New York Stock Exchange (MHO) TRANSFER AGENT AND REGISTRAR Boston EquiServe 150 Royall Street Canton, Massachusetts 02021 ANNUAL MEETING The Annual Meeting of Stockholders will be held at 9:00 A.M. on May 7, 1997, at the offices of the Company, 3 Easton Oval, Columbus, Ohio. FORM 10-K Stockholders may receive a copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K without charge by writing to: Investor Relations M/I Schottenstein Homes, Inc. 3 Easton Oval Suite 500 Columbus, OH 43219 EX-21 6 EXHIBIT 21 1 SUBSIDIARIES OF THE COMPANY 1. M/I Financial Corp., an Ohio corporation. M/I Financial Corp. is wholly-owned by the Company. 2. M/I Homes, Inc., an Arizona corporation. M/I Homes, Inc. is wholly-owned by the Company. 3. M/I Homes Construction, Inc., an Arizona corporation. M/I Homes Construction, Inc. is wholly-owned by the Company. 4. 601RS, Inc., an Ohio corporation. 601RS is wholly-owned by the Company EX-23 7 EXHIBIT 23 1 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 27, 1997, except with respect to the last paragraph of Note 2, for which the date is March 15, 1997, incorporated by reference in this Annual Report on Form 10-K of M/I Schottenstein Homes, Inc. for the year ended December 31, 1996. /s/ Deloitte & Touche LLP - -------------------------- Deloitte & Touche LLP Columbus, Ohio March 28, 1997 EX-24 8 EXHIBIT 24 1 POWER OF ATTORNEY I, Steven Schottenstein, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Steven Schottenstein ------------------------- Steven Schottenstein Director 2 POWER OF ATTORNEY I, Lewis R. Smoot, Sr., a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Lewis R. Smoot, Sr. ------------------------ Lewis R. Smoot, Sr. Director 3 POWER OF ATTORNEY I, Holly S. Kastan, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Holly S. Kastan ---------------------- Holly S. Kastan Director 4 POWER OF ATTORNEY I, Irving E. Schottenstein, am Chief Executive Officer and a director of M/I Schottenstein Homes, Inc. (the "Company"), and I do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacities as principal executive officer and a director of the Company and to execute any and all instruments for me and in my name in the capacities indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacities indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Irving E. Schottenstein -------------------------------------------- Irving E. Schottenstein Chief Executive Officer (principal executive officer) Director 5 POWER OF ATTORNEY I, Friedrich K. Bohm, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Friedrich K. Bohm ----------------------- Friedrich K. Bohm Director 6 POWER OF ATTORNEY I, Norman L. Traeger, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Norman L. Traeger ------------------------ Norman L. Traeger Director 7 POWER OF ATTORNEY I, Amy D. Schottenstein, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Amy D. Schottenstein ------------------------------- Amy D. Schottenstein Director 8 POWER OF ATTORNEY I, Eric J. Schottenstein, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Kerrii B. Anderson, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Eric J. Schottenstein -------------------------------- Eric J. Schottenstein Director 9 POWER OF ATTORNEY I, Robert H. Schottenstein, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Kerrii B. Anderson my true and lawful attorney and agent, with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorney or agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorney and agent, or her substitute or substitutes, shall do or cause to be done by virtue hereof. /s/ Robert H. Schottenstein ------------------------------- Robert H. Schottenstein Director 10 POWER OF ATTORNEY I, Kerrii B. Anderson, Chief Financial Officer (principal financial and accounting officer) of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein my true and lawful attorney and agent, with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as the principal financial and accounting officer of the Company and to execute any and all instruments for me and in my name in the capacities indicated above, which said attorney or agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacities indicated above, the 1996 Form 10-K and any and all amendments to such 1996 Form 10-K; and I do hereby ratify and confirm all that the said attorney and agent, or her substitute or substitutes, shall do or cause to be done by virtue hereof. /s/ Kerrii B. Anderson ----------------------------------------------- Kerrii B. Anderson Chief Financial Officer (principal financial and accounting officer) EX-27 9 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR THEN ENDED OF M/I SCHOTTENSTEIN HOMES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 6,761 0 34,447 0 238,919 280,127 8,303 6,668 305,359 67,695 45 88 0 0 112,231 305,359 569,895 577,192 468,089 468,089 0 0 13,103 23,077 8,967 14,110 0 (1,287) 0 12,823 1.46 1.46
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