-----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, VmFG6hw6c0Wrz7+g0JZtESjHveHQHqwO/Hp3VglOBnzn+uWDwXv1AJQET6sNYWat d9/6hwY2B7IN3ho5lhHU1w== 0000950152-03-003721.txt : 20030331 0000950152-03-003721.hdr.sgml : 20030331 20030331112327 ACCESSION NUMBER: 0000950152-03-003721 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: M I SCHOTTENSTEIN HOMES INC CENTRAL INDEX KEY: 0000799292 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 311210837 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12434 FILM NUMBER: 03627955 BUSINESS ADDRESS: STREET 1: 3 EASTON OVAL STE 500 CITY: COLUMBUS STATE: OH ZIP: 43219 BUSINESS PHONE: 6144188000 10-K 1 l99426ae10vk.txt M/I SCHOTTENSTEIN HOMES, INC. 12-31-2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File No. 1-12434 M/I SCHOTTENSTEIN HOMES, INC. ----------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1210837 -------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 Easton Oval, Suite 500 Columbus, Ohio 43219 --------------------- (Address of principal executive offices)(zip code) Registrant's telephone number, including area code: (614) 418-8000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange on Title of Each Class Which Registered ---------------------------- ------------------------ Common Stock, par value $.01 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No . --- --- As of June 28, 2002, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of voting common stock held by non-affiliates of the registrant (11,216,596 shares) was approximately $422,640,000. The number of shares of common stock of M/I Schottenstein Homes, Inc. outstanding on February 26, 2003 was 14,497,371. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 2002 (Part I, II and IV) Portions of the registrant's Definitive Proxy Statement for the 2003 Annual Meeting of Shareholders filed pursuant to Regulation 14A (Part III) PART I ITEM 1. BUSINESS COMPANY M/I Schottenstein Homes, Inc. and subsidiaries ("the Company") is one of the nation's leading homebuilders. In 2001, the latest year for which information is available, we were the 18th largest U.S. single-family homebuilder (based on homes delivered) as ranked by Builder Magazine. The Company was incorporated, through predecessor entities, in 1973 and commenced homebuilding activities in 1976. We sell and construct single-family homes to the first-time, move-up, empty-nester, and luxury buyer under the M/I Homes and Showcase Homes trade names. In 2002, our average sales price was $238,000. During the year ended December 31, 2002, we delivered 4,140 homes and had revenues of $1.0 billion and net income of $66.6 million, the highest in our history. Our homes are sold in ten geographic markets including Columbus and Cincinnati, Ohio; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; Indianapolis, Indiana; and the Virginia and Maryland suburbs of Washington, D.C. We are the leading homebuilder in the Columbus, Ohio market, based on revenue, and have been the number one builder of single-family detached homes in this market for each of the last fourteen years. In addition, we are currently one of the top ten homebuilders in several of our other markets and believe we are well positioned to further penetrate these markets. Our growth strategy primarily targets increasing our market position in the selected markets in which we currently operate. With respect to geographical diversification, we have expanded into new markets by opening new divisions rather than through acquisitions. We believe that we distinguish ourselves from competitors by offering homes in select areas with a high level of design and construction quality within a given price range, and by providing superior customer service. Offering homes at a variety of price points allows us to attract a wide range of buyers, including many existing M/I homeowners. We support our homebuilding operations by providing mortgage financing services through M/I Financial and title-related services through affiliated entities. Our financial reporting segments consist of homebuilding and financial services. Our homebuilding operations comprise the most substantial part of our business, with more than 98% of consolidated revenues in fiscal 2000, 2001 and 2002. The homebuilding operations segment generates the majority of its revenues from the sale of completed homes with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance and closing services. Financial information, including revenue, pre-tax income and identifiable assets for each of our reporting segments is included in the consolidated financial statements. Our business strategy emphasizes the following key objectives: Focus on profitability. We focus on improving profitability while maintaining the high quality of our homes and customer service. We focus on gross margins by stressing the features, benefits, quality and design of our homes during the sale process and by minimizing speculative building. We also value-engineer our homes by working with our subcontractors and suppliers to provide attractive features while minimizing raw material and construction costs. Superior locations. Our success is largely dependent on the quality of our subdivision locations; therefore, we focus on locating and controlling land in the most desirable areas of our markets. We are conservative in our land acquisition policy by limiting acquisitions to land that is already zoned and serviceable by utilities. We seek to control a three- to four-year supply of land. We believe our expertise in developing land gives us a competitive advantage in controlling attractive locations at competitive costs, and, as a result, we have developed 72% of our communities as of December 31, 2002. At December 31, 2002, we owned 8,593 lots and controlled an additional 9,171 lots pursuant to contracts. Maintain or increase market position in select markets. As the leading builder of single-family, detached homes in the Columbus market, we seek to maintain our leading position by continuing to provide high-quality homes and superior customer service. We also believe there are significant opportunities to profitably expand in certain of our existing markets, namely Columbus, Indianapolis, Tampa, Orlando and Charlotte. While our primary growth strategy will focus on increasing our market position in these five markets, we may, on an opportunistic basis, explore expansion into new markets through organic growth or acquisition. 2 Provide superior customer service. Our overriding philosophy is to provide superior customer service to our homeowners. We involve the homeowner in virtually every phase of the building process from sale through construction, financing and closing, and service after delivery. Our selling process focuses on the homes' features, benefits, quality and design as opposed to merely price and square footage. In certain markets, we utilize design centers to allow buyers to visualize options and get assistance with choices. This enhances the selling process and increases the sale of optional features that typically carry higher margins. As a result, based on the responses to our customer questionnaire, for the twelfth year in a row, more than 95% of our customers would recommend us to a potential buyer. Offer product breadth and innovative design. We devote significant resources to the research and design of our homes to better meet the needs of our customers. We offer a number of distinct product lines and more than 400 different floor plans and elevations. In addition to providing customers with a wide variety of choices, we believe we offer a high level of design and construction quality within each of our price ranges. Maintain decentralized operations with experienced management. Each of our markets has unique characteristics and, therefore, is managed locally by dedicated, on-site personnel. Our managers possess intimate knowledge of their particular market and are encouraged to be entrepreneurial to best meet the needs of that market. Our incentive compensation structure supports our overall Company goals by rewarding each manager based on financial performance, income growth and customer satisfaction. SALES AND MARKETING We market and sell our homes exclusively under the M/I Homes trade name in all markets except Columbus where a limited number of our homes are also marketed under the Showcase Homes trade name. Company-employed sales personnel conduct home sales from on-site sales offices within our furnished model homes. Each sales consultant is trained and prepared to fully explain the features and benefits of our 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 given to the ongoing training of all sales personnel to assure the highest level of professionalism and product knowledge. We currently employ 160 sales consultants and operate approximately 180 model homes. We advertise using newspapers, magazines, direct mail, billboards, radio and television. The particular marketing mediums used differ from division to division based upon marketing demographics and other competitive factors. We have also significantly increased advertising on the worldwide web through expansion of our website at www.mihomes.com and through homebuilder.com. In addition, we encourage independent broker participation and, from time to time, utilize various promotions and sales incentives to attract interest from these brokers. Our commitment to quality design and construction along with our reputation for superior customer service has resulted in a strong referral base and numerous repeat buyers. One way that we enhance the selling process is by operating design centers in the Cincinnati, Columbus, Tampa and Indianapolis markets. We will also be opening a design center in our Orlando market in 2003 and we are considering opening additional design centers in certain other markets. These design centers are staffed with interior design specialists who assist customers in selecting interior and exterior colors, standard options and upgrades. In our other markets, this selection process is handled directly by our sales consultants. We also add to the selling process by offering financing to our customers through our wholly owned subsidiary, M/I Financial, which has branches in all of our markets except Virginia and Maryland. M/I Financial originates loans for purchasers of our homes. The loans are then sold, along with the servicing rights, to outside mortgage lenders. Title-related services are provided to purchasers of our homes in the majority of our markets through affiliated entities. We generally do not commence construction of a home until we obtain a sales contract and preliminary oral advice from the customer's lender that financing should be approved. However, in certain markets, contracts may be accepted contingent upon the sale of an existing home and construction may be authorized through a certain stage prior to satisfaction of that contingency. In addition, a limited, strictly-controlled number of speculative, or "spec", homes (i.e., homes started in the absence of an executed contract) may be built to facilitate delivery of homes on an immediate-need basis and to provide presentation of new products. Spec homes are released for start only after approval is given by the respective region president and corporate management. 3 Our inspection and warranty programs further enhance our sales and marketing efforts. Immediately prior to closing and again three months after a home is delivered, we inspect each home with the customer. We may also provide a 1-year drywall inspection. We offer a 2-year limited warranty on materials and workmanship and a 30-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. We also pass along to our customers all warranties provided by the manufacturers or suppliers of components installed in each home. Our warranty expense was approximately 1.0% of total costs and expenses for each of the years ended December 31, 2002, 2001 and 2000. DESIGN AND CONSTRUCTION We devote significant resources to the research, design and development of our homes in order to fulfill the needs of homebuyers in all of our markets. Experienced and qualified in-house professionals use modern computer-aided technology to design virtually all of our floor plans and elevations. We offer more than 400 different floor plans and elevations that are tailored to meet the requirements of each of our markets. The construction of each home is supervised by a construction supervisor who reports to a production manager, both of whom are employees of M/I Homes. Customers are introduced to their construction supervisor prior to commencement of home construction at a pre-construction "buyer/builder conference." The purpose of this conference is to review the home plans and all relevant construction details with the customer and to explain the construction process and schedule. Every customer is given a hard hat at the conference as an open invitation to visit the site of his or her home at any time during the course of construction. We want customers to be involved in order to understand the construction of their home and see the quality being built into their home. All of this is part of our exclusive "confidence builder program" which, consistent with our business philosophy, is designed to "put the customer first" and enhance the total homebuying experience. Homes generally are constructed according to standardized designs and meet applicable Federal Housing Authority ("FHA") and Veterans Administration ("VA") requirements. To allow maximum design flexibility, we limit the use of pre-assembled building components. The efficiency of the building process is enhanced through the use of standardized materials available from a variety of sources. We utilize independent subcontractors for the installation of site improvements and the construction of our homes. These subcontractors are supervised by our on-site construction supervisors. All subcontractor work is performed pursuant to written agreements. These agreements are generally short-term, with terms from six to twelve months, and include or specify a fixed price for labor and materials. The agreements are structured to provide price protection for a majority of the higher-cost phases of construction for homes in our Backlog. We seek to build in large volume to reduce the per unit cost of each home due to advantages achieved by lower unit prices paid to subcontractors for labor and materials. 4 MARKETS Our operations are organized into separate homebuilding divisions to maximize operating efficiencies and use of local management. Our present divisional operating structure is as follows:
Year Operations State Division Commenced ----- -------- --------- Ohio........................... Columbus - M/I 1976 Columbus - Showcase 1988 Columbus - Horizon 1994 Cincinnati 1988 Indiana........................ Indianapolis 1988 Florida........................ Tampa 1981 Orlando 1984 Palm Beach County 1984 North Carolina................. Charlotte 1985 Raleigh 1986 Washington, D. C. ............. Virginia and Maryland 1991
Columbus is the capital of Ohio, with federal, state and local governments providing significant and stable employment. Columbus is also the home of The Ohio State University, one of the largest universities in the world. Columbus continues to be a stable market with diverse economic and employment bases and strong permit activity in 2002. Since 1994, we have had three separate operating divisions in Columbus. We have been the dominant builder in Columbus for fourteen years, based on revenues, and our market share has exceeded 20% during each of the last eight years. Cincinnati is characterized by a stable economic environment and a diverse employment base. Employers include Proctor & Gamble, Kroger, the University of Cincinnati and General Electric. In addition, Cincinnati has a vibrant financial services industry. We continue to expand our Horizon product line in this market and focus on more affordable communities. Indianapolis is a growth market noted for its diverse industrial structure and relatively young population. Significant industries include health and pharmaceutical, distribution and services. Single-family housing permits reached nearly 13,500 in 2002. Tampa's housing market is strong, buoyed by financial and other back-office operations, tourism and conventions. In-migration remains steady as a result of on-going business expansions and relocations. Single-family housing permits reached nearly 17,000 in 2002. Orlando's economy continues to be stable and offer significant growth potential. Predominant industries include tourism, high-tech and manufacturing. Single-family permits reached nearly 17,000 in 2002. Palm Beach County is one of the more affluent markets in the United States. Job gains in 2002 were led by the construction, retail, tourism and service sectors. Housing activity continued to be stable in 2002 with over 8,000 single-family permits. 5 Charlotte is home to firms in the banking industry, as well as a growing presence of corporate headquarters and high-tech companies. The demographics continue to support long-term growth with strong in-migration and an educated workforce. In 2002, construction activity continued to be steady with over 17,000 single-family permits. The Raleigh market continues to be strong with state government, the Research Triangle Park and three major universities contributing to its significant and stable employment base. Job growth continued in 2002 and single-family permits exceeded 13,500. The Washington, D.C. metro economy continues to be favorable with major contributions from the construction, technology and government sectors. Housing activity continues to be robust, with over 27,000 single-family permits issued in 2002. Our operations are located primarily in Fairfax, Prince William and Loudoun counties in Virginia and Frederick and Montgomery counties in Maryland. PRODUCT LINES On a regional basis, we offer homes ranging in base sales price from approximately $90,000 to $880,000 and ranging in square footage from approximately 1,100 to 4,200 square feet. There are more than 400 different floor plans and elevations across all product lines. In addition, we offer a line of attached townhomes exclusively in the Maryland and Virginia markets that with approximately 2,000 square feet of living space. By offering a wide range of homes, we are able to attract first-time, move-up, empty-nester and luxury homebuyers. It is our goal to sell more than one home to our customers and we have been very successful in this area. In each of our home lines, certain options are available to the purchaser for an additional charge. Major options include fireplaces, additional bathrooms and higher quality flooring, cabinets and appliances. The options are typically more numerous and significant on more expensive homes. LAND DEVELOPMENT ACTIVITIES Our land development activities and land holdings have increased in the past few years. We continue to purchase lots from outside developers under option contracts, when possible, to limit our risk; however, we constantly evaluate other alternatives to satisfy the need for lots in the most cost effective manner. We develop ground internally when we can gain a competitive advantage by doing so or when shortages of qualified land developers make it impractical to purchase required lots from outside sources. At the present time, approximately 85% of our lots are internally developed. We seek to limit our investment in undeveloped land and lots to the amount reasonably expected to be sold in the next three to four years. Although we purchase land and engage in land development activities primarily for the purpose of furthering our homebuilding activities, we have, on a very select basis, developed land with the intention of selling a portion of the lots to outside homebuilders in certain markets. To limit the risk involved in the development of raw land, we acquire land primarily through the use of contingent purchase contracts. These contracts require the approval of our land committee and condition our obligation to purchase land upon approval of zoning, utilities, soil and subsurface conditions, environmental and wetland conditions, traffic patterns, market analysis, 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 do we make a commitment to purchase undeveloped land. To further reduce the risk involved in acquiring raw land, we generally do not commence engineering or development until zoning approvals are secured. From time to time we enter into land joint ventures. At December 31, 2002, we had interests varying from 33% to 50% in each of 25 joint ventures (all located in Columbus, Ohio) and limited liability companies ("LLCs"). These joint ventures and LLCs develop raw ground into lots and, typically, we receive our percentage interest in the form of a distribution of developed lots. These joint ventures and LLCs are equity financed except where seller financing is available on attractive terms. 6 During the development of lots, we are required by some municipalities and other governmental authorities to provide completion bonds or letters of credit for sewer, streets and other improvements. At December 31, 2002, $34.6 million of completion bonds were outstanding for these purposes, as well as $6.2 million of letters of credit. AVAILABLE LOTS AND LAND We seek to balance the economic risk of owning lots and land with the necessity of having lots available for our homes. At December 31, 2002, we had 3,129 developed lots and 924 lots under development in inventory. We also owned raw land expected to be developed into approximately 3,229 lots. In addition, at December 31, 2002, our interest in lots held by joint ventures and LLCs consisted of 92 lots under development, and raw land zoned for 1,219 lots. It is anticipated that some of the lots owned will be sold to others. At December 31, 2002, we had purchase contracts to acquire 2,223 developed lots and land to be developed into approximately 6,948 lots, for a total of 9,171 lots, with an aggregate current purchase price of approximately $193 million. Purchase of these properties is contingent upon satisfaction of certain requirements by us and the sellers, such as zoning approval, completion of development and availability of building permits. The following table sets forth our land position in lots (including our interest in joint ventures and LLCs) at December 31, 2002:
Owned Lots ------------------------------------------------ Under To Be Total Lots under State Developed Development Developed Owned Contract Total ------------------------------------------------------------------------------------------------------ Ohio and Indiana 2,207 631 3,625 6,463 5,430 11,893 Florida 416 119 510 1,045 2,807 3,852 North Carolina, Virginia, Maryland and Phoenix 506 266 313 1,085 934 2,019 ----------------------------------------------------------------------------------------------------- Total 3,129 1,016 4,448 8,593 9,171 17,764 =====================================================================================================
FINANCIAL SERVICES Through our wholly-owned subsidiary, M/I Financial, we offer fixed and adjustable rate mortgage loans to buyers of our homes. M/I Financial has branches in all of our housing markets, with the exception of Virginia and Maryland. Of the 3,898 Homes Delivered in 2002 in the markets in which M/I Financial operates, M/I Financial provided financing for 3,388 of these homes representing approximately $632.6 million of mortgage loans originated. M/I Financial issues commitments to customers and closes both conventional and government-insured loans in its own name. Loan commitments that relate to the origination of mortgage loans that will be held for resale are considered derivative instruments. To minimize the risk of financing activities, M/I Financial sells the loans it originates to the secondary market which provides the funding within several days. We retain a small servicing portfolio which is currently sub-serviced by a financial institution. M/I Financial hedges its interest rate risk using optional and mandatory forward sales of mortgage-backed securities whereby we agree to sell and later repurchase similar but not identical mortgage-backed securities. These agreements are considered derivative instruments. 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. 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. 7 Additionally, we hedge the interest rate risk relative to unclosed loans by purchasing commitments from outside investors to acquire the loans at the interest rate at which the loan will be closed. The cost, if any, 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 we determine that we will be unable to use the entire commitment prior to its expiration date. At December 31, 2002, we had approximately $36.6 million of commitments to deliver mortgage loans to outside investors. Under SFAS No. 133, derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The fair values of the loan commitments and forward sale agreements of mortgage-backed securities are recorded as derivative assets or derivative liabilities on the Company's balance sheet and any changes in the value of these derivative instruments are recognized in current earnings. To reduce the credit risk associated with accounting losses, which would be recognized if the counterparties failed to completely perform as contracted, we limit the entities with which management can enter into a commitment 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 to which we committed for the mortgage loans and any purchase commitments recorded with the counterparty. M/I Financial has been approved by the Department of Housing and Urban Development and the VA to originate loans insured by the FHA and the VA, respectively, and has been approved by the Federal Home Loan Mortgage Corporation ("FHLMC") and by the Federal National Mortgage Association ("FNMA") as a seller and servicer of mortgages sold to FHLMC and FNMA. We provide title services to purchasers of our homes through affiliated entities in the Columbus, Indianapolis, Tampa, Orlando, Cincinnati, Virginia and Maryland markets. COMPETITION The homebuilding industry is highly competitive. In each of our markets, we compete with numerous national, regional and local homebuilders, some of which have greater financial, marketing, land acquisition and sales resources. Builders of new homes compete not only for homebuyers, but also for desirable properties, financing, raw materials and skilled subcontractors. In addition, there is competition with the resale market for existing homes. REGULATION AND ENVIRONMENTAL MATTERS The homebuilding industry, including M/I Homes, 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. These regulations affect construction activities, including types of construction materials which may be used, certain aspects of building design, sales activities and dealings with consumers. We are required to obtain licenses, permits and approvals from various governmental authorities for development activities. In many areas, we are subject to local regulations which impose restrictive zoning and density requirements in order to limit the number of homes within the boundaries of a particular locality. We strive to reduce the risks of restrictive zoning and density requirements by using contingent land purchase contracts which state that land must meet various requirements, including zoning, prior to our purchase. Development may be subject to periodic delays or precluded entirely due to building moratoriums. Generally, these moratoriums relate to insufficient water or sewage facilities or inadequate road capacity within specific market areas or subdivisions. The moratoriums we have experienced have not been of long duration and have not had a material effect on our business. Each of the states in which we operate has a wide variety of environmental protection laws. These laws generally regulate developments which are 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. 8 Additional requirements may be imposed on homebuilders and developers in the future which could have a significant impact on us and the industry. Although we cannot predict the effect, such requirements could result in time-consuming and expensive compliance programs. In addition, the continued effectiveness of current licenses, permits or development approvals is dependent upon many factors, some of which may be beyond our control. EMPLOYEES At March 25, 2003, we employed 946 people (including part-time employees), of which 276 were employed in sales, 422 in construction and 248 in management, administrative and clerical positions. We consider our employee relations to be very good. No employees are represented by a collective bargaining agreement. ACCESS TO SEC FILINGS THROUGH M/I SCHOTTENSTEIN HOMES, INC. WEBSITE We maintain a corporate website at www.mihomes.com. We make available free of charge on or through the website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such material with or to the Securities and Exchange Commission. The contents of our website are not part of this report. ITEM 2. PROPERTIES We own and operate an approximately 85,000 square foot office building used for our home office and lease all of our other offices. Due to the nature of our 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 We are involved in routine litigation incidental to our business. Management does not believe that any of this litigation is material to our consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 2002, no matters were submitted to a vote of security holders. 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 our Annual Report to Shareholders for the year ended December 31, 2002. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference from our Annual Report to Shareholders for the year ended December 31, 2002. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference from our Annual Report to Shareholders for the year ended December 31, 2002. ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference from our Annual Report to Shareholders for the year ended December 31, 2002. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference from our Annual Report to Shareholders for the year ended December 31, 2002. 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, 2002 and 2001. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to our definitive Proxy Statement relating to the 2003 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to our definitive Proxy Statement relating to the 2003 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 our definitive Proxy Statement relating to the 2003 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to our definitive Proxy Statement relating to the 2003 Annual Meeting of Shareholders. 10 ITEM 14. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon this evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Therefore, we do not expect our disclosure controls to prevent all error and all fraud. Since the date of our evaluation to the filing date of this Annual Report on Form 10-K, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The following financial statements of M/I Schottenstein Homes, Inc. and its subsidiaries have been incorporated herein by reference as set forth in Item 8 of Part II of this Annual Report on Form 10-K: Independent Auditors' Report Consolidated Balance Sheets - December 31, 2002 and 2001 Consolidated Statements of Income - Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows - Years Ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements
2. Financial Statement Schedules. Page ---- Independent Auditors' Report on Financial Statement Schedules................................... 20 For the Years ended December 31, 2002, 2001 and 2000: Schedule II - Valuation and Qualifying Accounts ............................................. 21
All other schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto, the amounts involved are not significant or the required matter is not present. 3. Exhibits. 11 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 Amended and Restated Regulations of the Company, hereby incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 3.3 Amendment of Article I(f) of the Company's Amended and Restated Code of Regulations to permit shareholders to appoint proxies in any manner permitted by Ohio law, hereby incorporated by reference to Exhibit 3.1(b) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 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 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. 10.2 Amendment Number 1 to the M/I Schottenstein Homes, Inc. 401(k) Profit Sharing Plan for the Economic Growth and Tax Relief Reconciliation Act of 2001 dated November 12, 2002, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. 10.3 Credit Agreement by and among M/I Schottenstein Homes, Inc., as borrower; Bank One, NA, as agent for the banks; The Huntington National Bank, as documentation agent; U.S. Bank, N.A., National City Bank, AMSouth Bank, and Suntrust Bank, as co-agents; Bank One NA, The Huntington National Bank, U.S. Bank, N.A., National City Bank, AMSouth Bank, Suntrust Bank, Comerica Bank, Fifth Third Bank, Central Ohio, PNC Bank, National Association, Washington Mutual Bank, FA, Fleet National Bank and Guaranty Bank, as banks; and Banc One Capital Markets, Inc., as lead arranger and sole book runner dated March 6, 2002, hereby incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 10.4 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.
12
Exhibit Number Description - -------------- ------------------------------------------------------ 10.5 Revolving Credit Agreement by and among M/I Financial Corp., the Company and Guaranty Bank dated May 3, 2001, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.6 First Amendment to Revolving Credit Agreement by and among M/I Financial Corp., the Company and Guaranty Bank dated May 2, 2002, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.7 M/I Schottenstein Homes, Inc. 1993 Stock Incentive Plan As Amended, dated April 22, 1999, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 10.8 First Amendment to M/I Schottenstein Homes, Inc. 1993 Stock Incentive Plan As Amended, dated August 11, 1999, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 10.9 Second Amendment to the Company's 1993 Stock Incentive Plan as Amended dated February 13, 2001, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. 10.10 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. 10.11 Amendment to Executive Employment Agreement by and between the Company and Irving E. Schottenstein dated November 14, 2001, hereby incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 10.12 Company's 2001 Chief Executive 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, 2001. 10.13 Company's 2001 President Bonus Program, hereby incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.14 Company's 2001 Chief Operating Officer Bonus Program, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
13
Exhibit Number Description - -------------- ------------------------------------------------------ 10.15 Company's 2001 Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.16 Company's 2002 Chief Executive 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, 2002. 10.17 Company's 2002 President Bonus Program, hereby incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.18 Company's 2002 Chief Operating Officer Bonus Program, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.19 Company's 2002 Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.20 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. 10.21 Credit Agreement between the Company and BankBoston, N.A., the other parties which may become lenders and BankBoston, N.A., as agent, dated August 29, 1997, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.22 First Amendment to Credit Agreement by and among M/I Schottenstein Homes, Inc., Fleet National Bank (formerly known as BankBoston, N.A.), Highland Legacy Limited and Fleet National Bank, as agent, dated September 15, 2000, hereby incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 10.23 Second Amendment to Credit Agreement by and among M/I Schottenstein Homes, Inc., Fleet National Bank (formerly known as BankBoston, N.A.), Bankers Trust Company and Fleet National Bank, as agent, dated March 6, 2002, hereby incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
14
Exhibit Number Description - -------------- ------------------------------------------------------ 10.24 Credit Agreement between M/I Schottenstein Homes, Inc. and Fleet National Bank, Bankers Trust Company, and other parties which may become lenders and Fleet National Bank, as agent and Fleet Securities, Inc. dated September 28, 2001, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.25 Company's Director Deferred Compensation Plan, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.26 First Amendment to M/I Schottenstein Homes, Inc. Director Deferred Compensation Plan, dated February 16, 1999, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 10.27 Second Amendment to M/I Schottenstein Homes, Inc. Director Deferred Compensation Plan, dated July 1, 2001. (Filed herewith). 10.28 Amended and Restated M/I Schottenstein Homes, Inc. Executives' Deferred Compensation Plan, dated April 18, 2001, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.29 First Amendment to M/I Schottenstein Homes, Inc. Executives' Deferred Compensation Plan, dated July 1, 2001. (Filed herewith). 10.30 Second Amendment to M/I Schottenstein Homes, Inc. Executives' Deferred Compensation Plan dated June 19, 2002, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. 10.31 Collateral Assignment Split-Dollar Agreement by and among the Company and Robert H. Schottenstein, and Janice K. Schottenstein, as Trustee of the Robert H. Schottenstein 1996 Insurance Trust, dated September 24, 1997, hereby incorporated by reference to Exhibit 10.28 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.32 Collateral Assignment Split-Dollar Agreement by and among the Company and Steven Schottenstein, and Irving E. Schottenstein, as Trustee of the Steven Schottenstein 1994 Trust, dated September 24, 1997, hereby incorporated by reference to Exhibit 10.29 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.33 M/I Schottenstein Homes, Inc. Executive Officer Compensation Plan, hereby incorporated by reference to the Company's definitive Proxy Statement relating to the 1999 Annual Meeting of Shareholders.
15
Exhibit Number Description - -------------- ------------------------------------------------------ 11 Earnings Per Share Calculations. (Filed herewith.) 13 Annual Report to Shareholders for the year ended December 31, 2002. (Filed herewith.) 21 Subsidiaries of Company. (Filed herewith.) 23 Consent of Deloitte & Touche LLP. (Filed herewith.) 24 Powers of Attorney. (Filed herewith.) 99.1 Certification by Irving E. Schottenstein, Chief Executive Officer, pursuant to 10 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to M/I Schottenstein Homes, Inc. and will be retained by M/I Schottenstein Homes, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 99.2 Certification by Phillip G. Creek, Chief Financial Officer, pursuant to 10 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to M/I Schottenstein Homes, Inc. and will be retained by M/I Schottenstein Homes, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. (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 15(a)(3). (d) Financial Statement Schedule - See Item 15(a)(2).
16 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 31st day of March 2003. M/I SCHOTTENSTEIN HOMES, INC. (Registrant) By: /s/ ROBERT H. SCHOTTENSTEIN ------------------------------ Robert H. Schottenstein President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 31st day of March 2003.
NAME AND TITLE NAME AND TITLE -------------- -------------- IRVING E. SCHOTTENSTEIN* /s/ ROBERT H. SCHOTTENSTEIN - ----------------------------------------- -------------------------------------------- Irving E. Schottenstein Robert H. Schottenstein Chairman of the Board and President and Director Chief Executive Officer (Principal Executive Officer) STEVEN SCHOTTENSTEIN* /s/ PHILLIP G. CREEK - ----------------------------------------- -------------------------------------------- Steven Schottenstein Phillip G. Creek Chief Operating Officer and Director Senior Vice President, Treasurer, Chief Financial Officer, Director and (Principal Financial and Accounting Officer) FRIEDRICH K.M. BOHM* JEFFREY H. MIRO* - ----------------------------------------- -------------------------------------------- Friedrich K. M. Bohm Jeffrey H. Miro Director Director LEWIS R. SMOOT, SR.* NORMAN L. TRAEGER* - ----------------------------------------- -------------------------------------------- Lewis R. Smoot, Sr. Norman L. Traeger Director Director THOMAS D. IGOE * - ----------------------------------------- Thomas D. Igoe Director
* The above-named Directors and Officers of the Registrant execute this report by Robert H. Schottenstein and Phillip G. Creek, 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/ PHILLIP G. CREEK ------------------------------------------- Phillip G. Creek, Attorney-in-Fact 17 CERTIFICATIONS I, Irving E. Schottenstein certify that: 1. I have reviewed this annual report on Form 10-K of M/I Schottenstein Homes, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Irving E. Schottenstein -------------------------------------- Irving E. Schottenstein Chairman and Chief Executive Officer 18 CERTIFICATIONS I, Phillip G. Creek certify that: 1. I have reviewed this annual report on Form 10-K of M/I Schottenstein Homes, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Phillip G. Creek ---------------------------------------- Phillip G. Creek Senior Vice President, Chief Financial Officer and Treasurer 19 INDEPENDENT AUDITORS' REPORT To the Shareholders and Directors of M/I Schottenstein Homes, Inc. Columbus, Ohio We have audited the consolidated financial statements of M/I Schottenstein Homes, Inc. and its subsidiaries as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, and have issued our report thereon dated February 14, 2003; such consolidated financial statements and report are included in your 2002 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of M/I Schottenstein Homes, Inc. and its subsidiaries, listed in Item 15. These consolidated financial statement schedules are 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 schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP - ----------------------------- Deloitte & Touche LLP Columbus, Ohio February 14, 2003 20 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at Charged to Balance at Beginning Costs and End of Description of Year Expenses Deductions (1) Year - ----------- ------- -------- ---------- ---- Valuation allowance deducted from asset account - single-family lots, land and land development costs: Year ended December 31, 2002 $ 9,750,000 $ 2,010,000 $ 2,760,000 $ 9,000,000 =========== =========== =========== =========== Year ended December 31, 2001 $ 7,500,000 $ 3,432,000 $ 1,182,000 $ 9,750,000 =========== =========== =========== =========== Year ended December 31, 2000 $ 6,967,000 $ 1,322,000 $ 789,000 $ 7,500,000 =========== =========== =========== ===========
(1) Represents write-downs of investment in single-family lots, land and land development costs. 21 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 Amended and Restated Regulations of the Company, hereby incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 3.3 Amendment of Article I(f) of the Company's Amended and Restated Code of Regulations to permit shareholders to appoint proxies in any manner permitted by Ohio law, hereby incorporated by reference to Exhibit 3.1(b) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 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 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. 10.2 Amendment Number 1 to the M/I Schottenstein Homes, Inc. 401(k) Profit Sharing Plan for the Economic Growth and Tax Relief Reconciliation Act of 2001 dated November 12, 2002, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. 10.3 Credit Agreement by and among M/I Schottenstein Homes, Inc., as borrower; Bank One, NA, as agent for the banks; The Huntington National Bank, as documentation agent; U.S. Bank, N.A., National City Bank, AMSouth Bank, and Suntrust Bank, as co-agents; Bank One NA, The Huntington National Bank, U.S. Bank, N.A., National City Bank, AMSouth Bank, Suntrust Bank, Comerica Bank, Fifth Third Bank, Central Ohio, PNC Bank, National Association, Washington Mutual Bank, FA, Fleet National Bank and Guaranty Bank, as banks; and Banc One Capital Markets, Inc., as lead arranger and sole book runner dated March 6, 2002, hereby incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
22
Exhibit Number Description Page No. - -------------- ---------------------------------------------------------------------- -------------- 10.4 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. 10.5 Revolving Credit Agreement by and among M/I Financial Corp., the Company and Guaranty Bank dated May 3, 2001, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.6 First Amendment to Revolving Credit Agreement by and among M/I Financial Corp., the Company and Guaranty Bank dated May 2, 2002, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.7 M/I Schottenstein Homes, Inc. 1993 Stock Incentive Plan As Amended, dated April 22, 1999, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 10.8 First Amendment to M/I Schottenstein Homes, Inc. 1993 Stock Incentive Plan As Amended, dated August 11, 1999, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 10.9 Second Amendment to the Company's 1993 Stock Incentive Plan as Amended dated February 13, 2001, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. 10.10 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. 10.11 Amendment to Executive Employment Agreement by and between the Company and Irving E. Schottenstein dated November 14, 2001, hereby incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 10.12 Company's 2001 Chief Executive 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, 2001.
23
Exhibit Number Description Page No. - -------------- ---------------------------------------------------------------------- -------------- 10.13 Company's 2001 President Bonus Program, hereby incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.14 Company's 2001 Chief Operating Officer Bonus Program, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.15 Company's 2001 Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.16 Company's 2002 Chief Executive 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, 2002. 10.17 Company's 2002 President Bonus Program, hereby incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.18 Company's 2002 Chief Operating Officer Bonus Program, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.19 Company's 2002 Chief Financial Officer Bonus Program, hereby incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.20 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. 10.21 Credit Agreement between the Company and BankBoston, N.A., the other parties which may become lenders and BankBoston, N.A., as agent, dated August 29, 1997, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
24
Exhibit Number Description Page No. - -------------- ---------------------------------------------------------------------- -------------- 10.22 First Amendment to Credit Agreement by and among M/I Schottenstein Homes, Inc., Fleet National Bank (formerly known as BankBoston, N.A.), Highland Legacy Limited and Fleet National Bank, as agent, dated September 15, 2000, hereby incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 10.23 Second Amendment to Credit Agreement by and among M/I Schottenstein Homes, Inc., Fleet National Bank (formerly known as BankBoston, N.A.), Bankers Trust Company and Fleet National Bank, as agent, dated March 6, 2002, hereby incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 10.24 Credit Agreement between M/I Schottenstein Homes, Inc. and Fleet National Bank, Bankers Trust Company, and other parties which may become lenders and Fleet National Bank, as agent and Fleet Securities, Inc. dated September 28, 2001, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. 10.25 Company's Director Deferred Compensation Plan, hereby incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.26 First Amendment to M/I Schottenstein Homes, Inc. Director Deferred Compensation Plan, dated February 16, 1999, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 10.27 Second Amendment to M/I Schottenstein Homes, Inc. Director Deferred Compensation Plan, dated July 1, 2001. (Filed herewith). 10.28 Amended and Restated M/I Schottenstein Homes, Inc. Executives' Deferred Compensation Plan, dated April 18, 2001, hereby incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.29 First Amendment to M/I Schottenstein Homes, Inc. Executives' Deferred Compensation Plan, dated July 1, 2001. (Filed herewith). 10.30 Second Amendment to M/I Schottenstein Homes, Inc. Executives' Deferred Compensation Plan dated June 19, 2002, hereby incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
25
Exhibit Number Description Page No. - -------------- ---------------------------------------------------------------------- -------------- 10.31 Collateral Assignment Split-Dollar Agreement by and among the Company and Robert H. Schottenstein, and Janice K. Schottenstein, as Trustee of the Robert H. Schottenstein 1996 Insurance Trust, dated September 24, 1997, hereby incorporated by reference to Exhibit 10.28 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.32 Collateral Assignment Split-Dollar Agreement by and among the Company and Steven Schottenstein, and Irving E. Schottenstein, as Trustee of the Steven Schottenstein 1994 Trust, dated September 24, 1997, hereby incorporated by reference to Exhibit 10.29 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.33 M/I Schottenstein Homes, Inc. Executive Officer Compensation Plan, hereby incorporated by reference to the Company's definitive Proxy Statement relating to the 1999 Annual Meeting of Shareholders. 11 Earnings Per Share Calculations. (Filed herewith.) 13 Annual Report to Shareholders for the year ended December 31, 2002. (Filed herewith.) 21 Subsidiaries of Company. (Filed herewith.) 23 Consent of Deloitte & Touche LLP. (Filed herewith.) 24 Powers of Attorney. (Filed herewith.) 99.1 Certification by Irving E. Schottenstein, Chief Executive Officer, pursuant to 10 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to M/I Schottenstein Homes, Inc. and will be retained by M/I Schottenstein Homes, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
26
Exhibit Number Description Page No. - -------------- ---------------------------------------------------------------------- -------------- 99.2 Certification by Phillip G. Creek, Chief Financial Officer, pursuant to 10 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to M/I Schottenstein Homes, Inc. and will be retained by M/I Schottenstein Homes, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
27 EX-10.27 3 l99426aexv10w27.txt EX-10.27 2ND AMENDMENT TO COMP PLAN EXHIBIT 10.27 SECOND AMENDMENT TO M/I SCHOTTENSTEIN HOMES, INC. DIRECTOR DEFERRED COMPENSATION PLAN WHEREAS, in 1997, M/I Schottenstein Homes, Inc. ("Company") adopted the M/I Schottenstein Homes, Inc. Director Deferred Compensation Plan ("Plan") to provide its Directors with an opportunity to defer all or a portion of their Eligible Compensation and to invest in the Company's Common Shares; WHEREAS, the Company also retained in Section 10 of the Plan the right to amend the Plan at any time; NOW, THEREFORE, effective July 1, 2001: 1. Plan Section 5.A is amended to read, in its entirety, as follows: Time of Payment. Distribution of a Participant's Deferred Compensation Account shall be made on or about the 50th day, but in no event later than the 60th day, after the earlier of (i) the date specified by the Participant in the Deferral Notice delivered to the Plan Administrator at the time the deferral election is made; or (ii) the date of the Participant's termination of service as a Director due to resignation, retirement, death or otherwise. 2. The Deferral Notice attached to the Plan as an exhibit shall be replaced by the Deferral Notice attached to this Amendment. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by a duly authorized officer. M/I SCHOTTENSTEIN HOMES, INC. By:________________________________ Its:_______________________________ Name (Please Print) EX-10.29 4 l99426aexv10w29.txt EX-10.29 1ST AMENDMENT TO COMP PLAN EXHIBIT 10.29 FIRST AMENDMENT TO M/I SCHOTTENSTEIN HOMES, INC. EXECUTIVES' DEFERRED COMPENSATION PLAN WHEREAS, effective January 1, 2001, M/I Schottenstein Homes, Inc. ("Company") adopted an amended and restated version of the M/I Schottenstein Homes, Inc. Executives' Deferred Compensation Plan ("Plan") to provide its Executives with an opportunity to defer all or a portion of their Eligible Compensation and to invest in the Company's Common Shares; and WHEREAS, the Company also retained in Section 10 of the Plan the right to amend the Plan at any time; NOW, THEREFORE, effective July 1, 2001: 1. Plan Section 5.A is amended to read in its entirety, as follows: A. Time of Payment. Distribution of a Participant's Deferred Compensation Account for a specific Plan Year shall be made on or about the 50th day, but in no event later than the 60th day, after the earlier of (i) the date specified by the Participant in the Deferral Notice delivered to the Plan Administrator or in any properly delivered Amendment to Deferral Notice; or (ii) the Participant's Termination Date. 2. The Deferral Notice attached to the Plan as an exhibit shall be replaced by the Deferral Notice attached to this Amendment. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by a duly authorized officer. M/I SCHOTTENSTEIN HOMES, INC. By:________________________________ Its:_______________________________ Name (Please Print) EX-11 5 l99426aexv11.txt EX-11 EARNINGS PER SHARE . . . EXHIBIT 11 EARNINGS PER SHARE CALCULATIONS (in thousands, except per share amounts)
Fiscal Year Ended ------------------------------------------------------------- Dec 31, Dec 31, Dec 31, 2002 2001 2000 --------------- --------------- --------------- Basic: Net income $ 66,612 $55,282 $44,444 ========= ======= ======= Weighted average shares outstanding 15,104 15,092 15,767 --------- --------- --------- Basic earnings per common share $ 4.41 $ 3.66 $ 2.82 ========= ========= ========= Diluted: Net income $ 66,612 $55,282 $44,444 Weighted average shares outstanding 15,104 15,092 15,767 Dilutive effect of stock options 140 186 158 Dilutive effect of deferred stock 261 252 187 --------- --------- --------- Diluted weighted average shares outstanding 15,505 15,530 16,112 ========= ========= ========= Diluted earnings per Common Share $ 4.30 $ 3.56 $ 2.76 ========= ========= =========
EX-13 6 l99426aexv13.txt EX-13 ANNUAL REPORT . . . EXHIBIT 13 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Selected Consolidated Financial Data
- ------------------------------------------------------------------------------------------------------------------ M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES (Dollars in thousands, except per share amounts) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT (YEAR ENDED DECEMBER 31): Revenue $1,033,025 $ 976,766 $ 935,039 $ 852,445 $ 739,613 Gross margin $ 249,273 $ 221,554 $ 198,972 $ 184,570 $ 151,114 Income before cumulative effect of change in accounting principle $ 66,612 $ 52,601 $ 44,444 $ 41,611 $ 27,651 Cumulative effect of change in accounting principle - net of income taxes - $ 2,681 - - - Net income $ 66,612 $ 55,282 $ 44,444 $ 41,611 $ 27,651 Net income per common share before cumulative effect of change in accounting principle: Basic $ 4.41 $ 3.49 $ 2.82 $ 2.38 $ 1.65 Diluted $ 4.30 $ 3.39 $ 2.76 $ 2.34 $ 1.63 Net income per common share: Basic $ 4.41 $ 3.66 $ 2.82 $ 2.38 $ 1.65 Diluted $ 4.30 $ 3.56 $ 2.76 $ 2.34 $ 1.63 Weighted average common shares outstanding: Basic 15,104,456 15,091,854 15,766,730 17,523,644 16,785,120 Diluted 15,505,326 15,529,844 16,112,222 17,766,378 16,975,744 Dividends per common share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.075 BALANCE SHEET (DECEMBER 31): Total assets $ 578,458 $ 612,110 $ 567,642 $ 531,562 $ 427,147 Notes and mortgage notes payable $ 41,458 $ 144,227 $ 159,219 $ 162,075 $ 105,293 Subordinated notes $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 Shareholders' equity $ 339,729 $ 279,891 $ 228,889 $ 200,512 $ 166,640 - -------------------------------------------------------------------------------------------------------------------
Shares outstanding and per share data for prior periods have been adjusted for the 2-for-1 stock split effective June 19, 2002. 22 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Selected Consolidated Quarterly Financial and Operating Data
- ------------------------------------------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES THREE MONTHS ENDED ------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, (Dollars in thousands, except per share amounts) 2002 2002 2002 2002 - ------------------------------------------------------------------------------------------------------------------- New contracts, net 907 1,059 1,081 1,083 Homes delivered 1,187 1,067 1,040 846 Backlog at end of period 2,321 2,601 2,609 2,568 Revenue $ 297,515 $ 261,509 $ 258,439 $ 215,562 Gross margin $ 68,480 $ 64,392 $ 62,467 $ 53,934 Net income $ 15,894 $ 17,901 $ 16,898 $ 15,919 Net income per common share: Basic $ 1.05 $ 1.18 $ 1.12 $ 1.06 Diluted $ 1.03 $ 1.15 $ 1.09 $ 1.03 Weighted average common shares outstanding: Basic 15,074,651 15,168,259 15,141,925 15,031,816 Diluted 15,411,328 15,529,849 15,523,667 15,498,538 Dividends per common share $ 0.025 $ 0.025 $ 0.025 $ 0.025 - ------------------------------------------------------------------------------------------------------------------
Three Months Ended ------------------------------------------------------------- December 31, September 30, June 30, March 31, (Dollars in thousands, except per share amounts) 2001 2001 2001 2001 - -------------------------------------------------------------------------------------------------------------- New contracts, net 951 906 1,214 1,376 Homes delivered 1,303 1,167 980 777 Backlog at end of period 2,331 2,683 2,944 2,710 Revenue $ 309,400 $ 266,834 $ 222,377 $ 178,155 Gross margin $ 69,133 $ 59,566 $ 52,122 $ 40,733 Income before cumulative effect of change in accounting principle $ 14,765 $ 15,012 $ 13,261 $ 9,563 Cumulative effect of change in accounting principle - net of income taxes - - - $ 2,681 Net income $ 14,765 $ 15,012 $ 13,261 $ 12,244 Net income per common share before cumulative effect of change in accounting principle: Basic $ 0.99 $ 0.99 $ 0.87 $ 0.64 Diluted $ 0.96 $ 0.96 $ 0.85 $ 0.62 Net income per common share: Basic $ 0.99 $ 0.99 $ 0.87 $ 0.82 Diluted $ 0.96 $ 0.96 $ 0.85 $ 0.79 Weighted average common shares outstanding: Basic 14,921,720 15,224,248 15,194,162 15,026,992 Diluted 15,422,662 15,711,666 15,665,218 15,511,980 Dividends per common share $ 0.025 $ 0.025 $ 0.025 $ 0.025 - --------------------------------------------------------------------------------------------------------------
23 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Segment Information - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES Our reportable segments are strategic business units that offer different products and services. The business segments are defined as homebuilding and financial services. The homebuilding operations include the development and sale of land and the construction and sale of single-family attached and detached homes. The homebuilding segment includes similar operations in several geographic regions which have been aggregated for segment reporting purposes. The financial services operations include the origination of mortgage loans and title services for purchasers of our homes. The loans and servicing rights are sold to outside mortgage lenders. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment revenue represents the elimination of revenue included in financial services revenue for fees paid by the homebuilding operations to lock in interest rates. Fees paid by the homebuilding segment to the financial services segment were at market prices for the services provided. Unallocated income before income taxes includes interest and intercompany profits from other segments. Unallocated expenses include salaries and other administrative expenses which are not identifiable with a specific segment. Unallocated assets consist primarily of cash, deferred taxes and other assets not associated with a specific business segment.
Year Ended December 31, ---------------------------------------------------- (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Revenue: Homebuilding $1,015,162 $959,295 $920,059 Financial services 23,812 22,241 19,656 Intersegment (5,949) (4,770) (4,676) - ------------------------------------------------------------------------------------------------------------------- Total Revenue $1,033,025 $976,766 $935,039 - ------------------------------------------------------------------------------------------------------------------- Depreciation and Amortization: Homebuilding $ 2,023 $ 1,455 $ 1,604 Financial services 101 113 126 Unallocated amounts 115 441 393 - ------------------------------------------------------------------------------------------------------------------- Total Depreciation and Amortization $ 2,239 $ 2,009 $ 2,123 - ------------------------------------------------------------------------------------------------------------------- Interest Expense: Homebuilding $ 13,362 $ 15,642 $ 18,098 Financial services 448 526 256 Unallocated amounts - - - - ------------------------------------------------------------------------------------------------------------------- Total Interest Expense $ 13,810 $ 16,168 $ 18,354 - ------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes: Homebuilding $ 81,920 $ 66,157 $ 52,440 Financial services 15,590 13,872 12,535 Unallocated amounts 11,690 5,013 7,589 - ------------------------------------------------------------------------------------------------------------------- Total Income Before Income Taxes $ 109,200 $ 85,042 $ 72,564 - ------------------------------------------------------------------------------------------------------------------- Income Taxes: Homebuilding $ 30,818 $ 25,690 $ 20,413 Financial services 6,080 5,291 4,635 Unallocated amounts 5,690 1,460 3,072 - ------------------------------------------------------------------------------------------------------------------- Total Income Taxes $ 42,588 $ 32,441 $ 28,120 - ------------------------------------------------------------------------------------------------------------------- Assets: Homebuilding $ 504,802 $537,871 $500,864 Financial services 59,142 54,175 50,586 Unallocated amounts 14,514 20,064 16,192 - ------------------------------------------------------------------------------------------------------------------- Total Assets $ 578,458 $612,110 $567,642 - ------------------------------------------------------------------------------------------------------------------- Capital Expenditures: Homebuilding $ 540 $ 10,090 $ 734 Financial services 251 77 47 Unallocated amounts 20 34 129 - ------------------------------------------------------------------------------------------------------------------- Total Capital Expenditures $ 811 $ 10,201 $ 910 - -------------------------------------------------------------------------------------------------------------------
24 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS CONSOLIDATED YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 REVENUE. Total revenue for 2002 was $1.0 billion, an increase of $56.3 million over 2001. The increase was the result of an increase of $55.9 million in homebuilding revenue and an increase of $1.6 million in financial services revenue. The increase in homebuilding was the result of growth of $42.8 million in housing revenue and $12.1 million in land revenue. Housing revenue increased as a result of a 6.7% increase in the average sales price of Homes Delivered. This was offset by a 2.1% decrease in the number of Homes Delivered. The increase in land revenue was primarily due to an increase in lot sales related to our exit from the Phoenix market. We also experienced increases in land sales in our Cincinnati, Orlando and Washington, D.C. markets. These increases were partially offset by decreases in Columbus and Indianapolis. The increase in financial services revenue was primarily attributable to increases in revenue earned from the sale of loans and increased earnings from title services. INCOME BEFORE INCOME TAXES. Income before income taxes increased $24.2 million over 2001. The increase related to both homebuilding and financial services, which experienced increases of $15.8 million and $1.7 million, respectively. The increase in homebuilding income was primarily due to increases in the average sales price of Homes Delivered and housing gross margins. The increase in financial services income was primarily the result of increased income from the sale of loans and the favorable interest rate environment during 2002. The increase in unallocated amounts from 2001 to 2002 was primarily due to certain administrative expenses recognized in 2001 related to exiting the Phoenix market that were not recognized in 2002. For the year ended December 31, 2001, the cumulative effect of a change in accounting principle resulted in an increase in income of $2.7 million, net of income taxes. This accounting change was the result of the January 1, 2001 adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which required us to record the value of interest rate swaps, certain loan commitments and forward sales of mortgage-backed securities at fair value. No such cumulative adjustment was required for the year ended December 31, 2002. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 REVENUE. Total revenue for 2001 was $976.8 million, an increase of $41.7 million over 2000. The increase was the result of an increase of $39.2 million in homebuilding revenue and an increase of $2.6 million in financial services revenue. The increase in homebuilding was the result of growth of $41.2 million in housing revenue offset by a decrease of $1.8 million in land revenue. Housing revenue increased as a result of a 3.9% increase in the number of Homes Delivered. The average sales price of Homes Delivered increased slightly in 2001. The decrease in land revenue was primarily due to a decrease in lot sales to outside homebuilders in the Washington, D.C. market. The increase in financial services revenue occurred as a result of increases in loan origination fees, the average loan amount, revenue earned from the sale of loans, title services and the effect of the adoption of SFAS 133. 25 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES. Income before income taxes increased $12.5 million over 2000. The increase related to both homebuilding and financial services, which experienced increases of $13.7 million and $1.3 million, respectively. The increase in homebuilding income was due to increases in the number of Homes Delivered and the housing gross margin. The increase in financial services income was primarily the result of increased income from the sale of loans due to increases in loan volume and the average loan amount, and the favorable interest rate environment during 2001. For the year ended December 31, 2001, the cumulative effect of a change in accounting principle resulted in an increase in income of $2.7 million, net of income taxes. This accounting change was the result of the January 1, 2001 adoption of SFAS 133. SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS We have experienced, and expect to continue to experience, significant seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, Homes Delivered increase substantially in the third and fourth quarters. We believe that this seasonality reflects the tendency of homebuyers 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 2002 and 2001:
THREE MONTHS ENDED --------------------------------------------------------- DEC. 31, SEPT. 30, JUNE 30, MARCH 31, (Dollars in thousands) 2002 2002 2002 2002 - ---------------------------------------------------------------------------------------- Revenue $297,515 $261,509 $258,439 $215,562 Unit data: New contracts, net 907 1,059 1,081 1,083 Homes delivered 1,187 1,067 1,040 846 Backlog at end of period 2,321 2,601 2,609 2,568 - ----------------------------------------------------------------------------------------
Three Months Ended --------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, (Dollars in thousands) 2001 2001 2001 2001 - ---------------------------------------------------------------------------------------- Revenue $309,400 $266,834 $222,377 $178,155 Unit data: New contracts, net 951 906 1,214 1,376 Homes delivered 1,303 1,167 980 777 Backlog at end of period 2,331 2,683 2,944 2,710 - ----------------------------------------------------------------------------------------
26 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- HOMEBUILDING SEGMENT The following table sets forth certain information related to our homebuilding segment:
Year Ended December 31, ------------------------------------------ (Dollars in thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------- Revenue: Housing sales $ 984,564 $941,717 $900,507 Lot and land sales 28,542 16,438 18,257 Other income 2,056 1,140 1,295 - --------------------------------------------------------------------------------------------------------- Total revenue $1,015,162 $959,295 $920,059 - --------------------------------------------------------------------------------------------------------- Revenue: Housing sales 97.0% 98.2% 97.9% Lot and land sales 2.8 1.7 2.0 Other income 0.2 0.1 0.1 - --------------------------------------------------------------------------------------------------------- Total revenue 100.0 100.0 100.0 Land and housing costs 78.7 79.3 80.8 - --------------------------------------------------------------------------------------------------------- Gross margin 21.3 20.7 19.2 General and administrative expenses 2.7 2.8 2.9 Selling expenses 6.4 6.5 6.1 - --------------------------------------------------------------------------------------------------------- Operating income 12.2 11.4 10.2 Allocated expenses 4.2 4.5 4.5 - --------------------------------------------------------------------------------------------------------- Income Before Income Taxes 8.0% 6.9% 5.7% - --------------------------------------------------------------------------------------------------------- OHIO AND INDIANA REGION: Unit data: New contracts, net 2,667 2,931 2,481 Homes delivered 2,730 2,650 2,567 Backlog at end of period 1,523 1,586 1,305 Average sales price of homes in backlog $ 231 $ 219 $ 209 Aggregate sales value of homes in backlog $ 352,000 $348,000 $273,000 Number of active subdivisions 85 87 82 - --------------------------------------------------------------------------------------------------------- FLORIDA REGION: Unit data: New contracts, net 924 900 850 Homes delivered 869 906 725 Backlog at end of period 541 486 492 Average sales price of homes in backlog $ 227 $ 213 $ 209 Aggregate sales value of homes in backlog $123,000 $103,000 $103,000 Number of active subdivisions 27 28 28 - --------------------------------------------------------------------------------------------------------- NORTH CAROLINA, VIRGINIA AND MARYLAND, AND ARIZONA REGION: Unit data: New contracts, net 539 616 696 Homes delivered 541 671 778 Backlog at end of period 257 259 314 Average sales price of homes in backlog $ 356 $ 417 $ 369 Aggregate sales value of homes in backlog $ 92,000 $108,000 $116,000 Number of active subdivisions 28 30 32 - --------------------------------------------------------------------------------------------------------- TOTAL: Unit data: New contracts, net 4,130 4,447 4,027 Homes delivered 4,140 4,227 4,070 Backlog at end of period 2,321 2,331 2,111 Average sales price of homes in backlog $ 244 $ 240 $ 233 Aggregate sales value of homes in backlog $ 567,000 $559,000 $492,000 Number of active subdivisions 140 145 142 - ---------------------------------------------------------------------------------------------------------
27 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- A home is included in "New Contracts" when our standard sales contract is executed. "Homes Delivered" represents homes for which the closing of the sale has occurred and title has transferred to the buyer. "Backlog" represents homes for which the standard sales contract has been executed, but which are not included in Homes Delivered because closings for these homes have not yet occurred as of the end of the period specified. Most cancellations of contracts for homes in Backlog occur because customers cannot qualify for financing and usually occur prior to the start of construction. Since we arrange financing with guaranteed rates for some of our customers, the incidence of cancellations after the start of construction is low. The cancellation rate for the years ended December 31, 2002, 2001 and 2000 was 21.4%, 22.1% and 18.3%, respectively. Unsold speculative homes, which are in various stages of construction, totaled 125, 105 and 107 at December 31, 2002, 2001 and 2000, respectively. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 REVENUE. Revenue for the homebuilding segment was $1.0 billion, an increase of 5.8%, or $55.9 million, from 2001 to 2002. This increase was due to a 4.5% increase in housing revenue and a 73.6% increase in land revenue. The increase in housing revenue was due to an increase of 6.7% in the average sales price of Homes Delivered. The average sales price of Homes Delivered increased in all our markets. The number of Homes Delivered decreased by 2.1% from 2001 to 2002. The largest decreases occurred in our Tampa, Charlotte and Phoenix markets. The increase in land revenue of $12.1 million was primarily attributable to lot sales relating to our exit from the Phoenix market. We also experienced increases in land sales in our Cincinnati, Orlando and Washington, D.C. markets that were partially offset by decreases in Columbus and Indianapolis. HOME SALES AND BACKLOG. New Contracts recorded in 2002 decreased 7.1% over the prior year. New contracts decreased in the majority of our markets due primarily to economic conditions and fewer subdivisions. The number of New Contracts recorded in future periods will be dependent on numerous factors, including future economic conditions, timing of land acquisitions and development, consumer confidence, number of subdivisions and interest rates available to potential home buyers. At December 31, 2002, the total sales value of our Backlog of 2,321 homes was approximately $567 million, representing a 1.4% increase in sales value and a 0.4% decrease in units compared to the levels recorded at December 31, 2001. The average sales price of homes in Backlog increased 1.8% from December 31, 2001, with increases occurring in all of our markets except Raleigh and Washington, D.C. GROSS MARGIN. The gross margin for the homebuilding segment was 21.3% for 2002, compared to 20.7% for 2001. The increase consisted of an increase in gross margin from housing sales of $22.4 million, or 11.1%, and an increase in gross margin from land and lot sales of $3.2 million. The increase in housing's gross margin was the result of acquiring and developing lots in premier locations, favorable housing economic conditions including low mortgage rates and improved operating efficiencies. The increase in land and lot sales' gross margin was due primarily to lots sold related to our exit from the Phoenix market. Lot and land gross margins can vary significantly depending on the sales price, the cost of the subdivision and the stage of development in which the sale takes place. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased from $26.7 million in 2001 to $27.1 million in 2002. As a percentage of revenue, general and administrative expenses decreased slightly from 2.8% of revenue in 2001 to 2.7% of revenue in 2002. The increase in dollars was primarily the result of increased incentive compensation due to increased earnings and homeowners' association dues to support our increase in operations. 28 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- SELLING EXPENSES. Selling expenses increased from $62.5 million, or 6.5% of total revenue, in 2001 to $64.6 million, or 6.4% of total revenue, in 2002. The increase in expense was due to increases in sales commissions paid to outside Realtors and internal salespeople as a result of the increase in the average sales price of Homes Delivered. Advertising expenses also increased slightly. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 REVENUE. Revenue for the homebuilding segment was $959.3 million, an increase of 4.3%, or $39.2 million, from 2000 to 2001. This increase was due to a 4.6% increase in housing revenue offset by a 10.0% decrease in land revenue. The increase in housing revenue was due to an increase of 3.9% in the number of Homes Delivered. Homes Delivered increased in the majority of our markets, but most significantly in Indianapolis, Tampa and Orlando. The average sales price of Homes Delivered increased slightly in 2001 to $223,000. The decrease in land revenue of $1.8 million was primarily attributable to the Washington, D.C. market, where there was a significant decrease in lot sales to outside homebuilders in comparison to 2000. HOME SALES AND BACKLOG. New Contracts recorded in 2001 increased 10.4% over the prior year. New contracts increased in the majority of our markets, but most significantly in Columbus, Indianapolis, Orlando and Cincinnati. We believe the increase was primarily attributable to the favorable interest rate environment in 2001. At December 31, 2001, the total sales value of our Backlog of 2,331 homes was approximately $559 million, representing a 13.6% increase in sales value and a 10.4% increase in units compared to the levels recorded at December 31, 2000. The average sales price of homes in Backlog increased 3.0% from December 31, 2000, with increases occurring in all of our markets except Cincinnati and Orlando. GROSS MARGIN. The gross margin for the homebuilding segment was 20.7% for 2001, compared to 19.2% for 2000. The increase consisted of an increase in gross margin from housing sales of $22.6 million, or 12.6%, offset slightly by a decrease in gross margin from land and lot sales of $2.4 million. The increase in housing's gross margin was the result of improved operating efficiencies. We have also focused on acquiring or developing lots in premier locations to obtain higher margins. The decrease in land and lot sales' gross margin was due primarily to decreased lots sold in our Washington, D.C. market compared to 2000. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased slightly from $26.1 million in 2000 to $26.7 million in 2001. As a percentage of revenue, general and administrative expenses decreased slightly from 2.9% of revenue in 2000 to 2.8% of revenue in 2001. SELLING EXPENSES. Selling expenses increased from $56.5 million, or 6.1% of total revenue, in 2000 to $62.5 million, or 6.5% of total revenue, in 2001. The increase in expense was due to increases in sales commissions paid to outside Realtors and internal salespeople as a result of the increase in Homes Delivered. Model expenses also increased slightly. 29 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- FINANCIAL SERVICES SEGMENT The following table sets forth certain information related to our financial services segment:
Year Ended December 31, ------------------------------------ (Dollars in thousands) 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Number of loans originated 3,388 3,428 3,218 Revenue: Loan origination fees $ 5,890 $ 5,599 $ 5,078 Sale of loans 10,523 9,995 8,789 Other 7,399 6,647 5,789 - ---------------------------------------------------------------------------------------------------------------- Total Revenue 23,812 22,241 19,656 General & administrative expenses 8,222 8,369 7,121 - ---------------------------------------------------------------------------------------------------------------- Income Before Income Taxes $15,590 $13,872 $12,535 - ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 REVENUE. Revenue for the year ended December 31, 2002 was $23.8 million, a 7.0% increase over the $22.2 million recorded for 2001. Loan origination fees increased 5.1% from 2001 to 2002. The increase was due to an increase in the average loan amount. At December 31, 2002, M/I Financial was operating in eight of our ten markets. In these eight markets, 90% of our Homes Delivered that were financed were through M/I Financial. Revenue from the sale of loans increased 5.2% to $10.5 million in 2002. The increase was primarily due to an increase in the average loan amount and a favorable interest rate environment. Revenue from other sources increased 11.3% from 2001 to 2002. The increase was primarily due to increased earnings from title services as a result of an increase in the number of loans closed. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the year ended December 31, 2002 were $8.2 million, a 1.7% decrease over 2001. The decrease was a result of various general and administrative expenses decreasing as a result of lower volume. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 REVENUE. Revenue for the year ended December 31, 2001 was $22.2 million, a 13.2% increase over the $19.7 million recorded for 2000. Loan origination fees increased 10.3% from 2000 to 2001. The increase was due to a 6.5% increase in the number of loans originated during 2001 compared to 2000, along with an increase in the average loan amount. At December 31, 2001, M/I Financial was operating in eight of our eleven markets. In these eight markets, 90% of our Homes Delivered that were financed were through M/I Financial. Revenue from the sale of loans increased 13.7% to $10.0 million in 2001. The increase was primarily due to a higher volume of mortgages originated during 2001 compared to 2000. The increase was also due to lower interest rates beginning in the fourth quarter of 2000 that resulted in a majority of fixed rate mortgages. We entered into an agreement in late 2000 for the sale of servicing on fixed rate mortgages that locked in favorable servicing released premiums. 30 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Revenue from other sources increased 14.8% from 2000 to 2001. This increase was primarily due to increased earnings from title services and an increase in loan application revenues. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the year ended December 31, 2001 were $8.4 million, a 17.5% increase over 2000. This was caused primarily by an increase in incentive compensation due to an increase in net income and an increase in loan application expenses. OTHER OPERATING RESULTS CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and administrative expenses increased to $26.6 million in 2002 from $22.9 million in 2001. As a percentage of total revenue, general and administrative expenses increased from 2.3% to 2.6%. Corporate general and administrative expenses increased to $22.9 million in 2001 from $18.7 million in 2000. However, as a percentage of total revenue, general and administrative expenses increased from 2.0% to 2.3%. The increase in expense was the result of various general and administrative expenses increasing as a result of an increase in profitability. INTEREST EXPENSE. Homebuilding interest expense for 2002 decreased to $13.4 million from $15.6 million in 2001. Interest expense was lower in 2002 due to a decrease in the average borrowings outstanding and a decrease in capitalized interest of $0.7 million. Homebuilding interest expense for 2001 decreased to $15.6 million from $18.1 million in 2000. Interest expense was lower in 2001 due to a decrease in the average borrowings outstanding. Interest expense also decreased due to a decrease in the weighted average interest rate. This was offset by an increase in capitalized interest of $1.9 million. INCOME TAXES. The effective tax rate increased from 38.2% to 39.0% from 2001 to 2002. The increase is primarily attributed to higher state taxes in 2002. The effective tax rate decreased from 38.8% to 38.2% from 2000 to 2001. The decrease is primarily attributed to lower state taxes in 2001. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and judgments and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. Listed below are those policies that we believe are critical and require the use of complex judgment in their application. 31 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- INVENTORIES: Inventories are recorded at cost which is not in excess of net realizable value. In addition to the costs of direct land acquisition, land development and home construction, inventory costs include capitalized interest, real estate taxes and indirect costs incurred during development and home construction. Those costs, other than capitalized interest, are charged to cost of sales as housing sales are closed. Capitalized interest is included in interest expense when the respective housing sales are closed. We assess these assets for recoverability in accordance with the provisions of SFAS 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses and other factors. If these assets are considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. REVENUE RECOGNITION: Revenue from the sale of a home is recognized when the closing has occurred and the risk of ownership is transferred to the buyer. All associated homebuilding costs are charged to costs of sales in the period when the revenues from home closings are recognized. Homebuilding costs include land and land development costs, home construction costs (including an estimate of the costs to complete home construction), previously capitalized indirect costs and estimated warranty costs. Sales commissions are included in selling, general and administrative expense when the closing has occurred. All other costs are expensed as incurred. We recognize financial services revenues associated with our title operations as homes are closed, closing services are rendered and title insurance policies are issued, all of which generally occur simultaneously as each home is closed. We recognize the majority of the revenues associated with our mortgage loan operations when the mortgage loans and related servicing rights are sold to third-party investors. We recognize mortgage loan origination fees when we close and fund the loans associated with the homes financed. All of the financial services mortgage loans and related servicing rights are sold to third-party investors. All of the underwriting risk associated with title insurance policies is transferred to third-party insurers. SELF-INSURANCE: Self-insurance accruals are made for certain claims associated with employee health care, workers' compensation and general liability insurance. These accruals include management's estimates that may be based on historical loss development factors. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. LIQUIDITY AND CAPITAL RESOURCES Our financing needs depend on sales volume, asset turnover, land acquisition and inventory balances. We have incurred substantial indebtedness, and may incur substantial indebtedness in the future, to fund the growth of our homebuilding activities. Our principal source of funds for construction and development activities has been from internally generated cash and from bank borrowings, which are primarily unsecured. See Safe Harbor Statement for further discussion of factors that could impact our source of funds. NOTES PAYABLE BANKS. At December 31, 2002, we had no bank borrowings outstanding under our Bank Credit Facility. The Bank Credit Facility permits borrowing base indebtedness not to exceed the lesser of $315 million or our borrowing base. This includes a maximum amount of $50 million in letters of credit. The Bank Credit Facility matures in March 2006. 32 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- We had $29 million outstanding as of December 31, 2002 under the M/I Financial loan agreement which permits borrowings of $30 million to finance mortgage loans initially funded by M/I Financial for our customers. The Company and M/I Financial are co-borrowers under the M/I Financial loan agreement. This agreement limits the borrowings to 95% of the aggregate face amount of certain qualified mortgages. The agreement terminates in May 2003. At December 31, 2002, we had the right to borrow up to $345 million under our credit facilities, including $30 million under the M/I Financial loan agreement. At December 31, 2002, we had $316 million of unused borrowing availability under our loan agreements. We also had $36 million of completion bonds and $15 million of letters of credit outstanding at December 31, 2002. The $100 million decrease in notes payable banks-homebuilding operations from December 31, 2001 to December 31, 2002 reflects decreased borrowings primarily attributable to increased earnings from operations. SUBORDINATED NOTES. At December 31, 2002, there were outstanding $50 million of Senior Subordinated Notes. The Notes bear interest at a fixed rate of 9.51% through August 2004 and at a slightly higher rate for two additional years, and mature in August 2006. MORTGAGE NOTES PAYABLE. At December 31, 2002, mortgage notes payable outstanding were $13 million, secured by an office building, lots and land with a recorded book value of $18 million. LAND AND LAND DEVELOPMENT. Single-family lots, land and land development costs decreased slightly from December 31, 2001 to December 31, 2002. We continue to purchase some lots from outside developers under contracts. However, we are strategically focusing on increasing raw ground purchases. We will continue to evaluate all of our alternatives to satisfy our increasing demand for lots in the most cost-effective manner. We have interests in joint ventures and limited liability companies that engage in land development activities and are recorded using the equity method of accounting. These entities have no debt on their balance sheets. UNIVERSAL SHELF REGISTRATION. In April 2002, we filed a $150 million universal shelf registration statement with the Securities and Exchange Commission. Pursuant to the filing, we may, from time to time over an extended period, offer new debt and/or equity securities. Of the equity shares, up to 1 million common shares may be sold by certain shareholders who are considered selling shareholders. This shelf registration should allow us to expediently access capital markets in the future. The timing and amount of offerings, if any, will depend on market and general business conditions. No debt or equity securities have been offered for sale as of December 31, 2002. PURCHASE OF TREASURY SHARES. On December 10, 2002, our Board of Directors authorized the repurchase of up to $50 million worth of shares of outstanding common stock. This replaces and supercedes the unused portions of all of the preexisting repurchase programs that have previously been authorized. The purchases may occur in the open market and/or in privately negotiated transactions as market conditions warrant. As of December 31, 2002 we had purchased 3.5 million shares at an average price of approximately $11 and had approximately $48 million available to repurchase outstanding common shares from our current Board approval. IMPACT OF NEW ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142, "Goodwill and Other Intangible Assets," which was effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the statement includes provisions for the reclassification of certain existing recognized intangibles such as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported 33 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The adoption of SFAS 142 did not have a significant impact on the consolidated financial statements. In August 2001, the FASB issued SFAS 144, "Accounting for Impairment or Disposal of Long-Lived Assets." While this statement supersedes SFAS 121, "Accounting for Impairment of Long-Lived Assets to be Disposed Of," it retains the fundamental provisions of SFAS 121 for recognition and impairments of assets to be held and used, and assets to be disposed of by sale. This statement was effective on January 1, 2002. The adoption of SFAS 144 did not have a significant impact on the consolidated financial statements. In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections." This statement rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that statement, SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers." This statement amends SFAS 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for the first quarter in the year ended December 31, 2003. We do not believe the adoption of SFAS 145 will have a significant impact on the consolidated financial statements. In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities included in restructurings. This Statement eliminates the definition and requirements for recognition of exit costs as defined in EITF Issue 94-3, and requires that liabilities for exit activities be recognized when incurred instead of at the exit activity commitment date. This Statement is effective for exit or disposal activities initiated after December 31, 2002. We do not believe the adoption of SFAS 146 will have a significant impact on the consolidated financial statements. In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee and also includes more detailed disclosures with respect to guarantees. FIN 45 is effective for guarantees issued or modified starting January 1, 2003 and requires additional disclosures for the year ended December 31, 2002. We do not expect the provisions of FIN 45 to have a significant impact on the consolidated financial statements. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS 123. The transition provisions and the disclosure requirements of this Statement are effective for fiscal years ending after December 15, 2002. We continue to apply the intrinsic value-based method to account for stock options and have complied with the new disclosure requirements. In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"), to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has significant variable interest. The 34 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements, none of which appear to apply to us at this time, are effective in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We do not expect the provisions of FIN 46 to have a significant impact on the consolidated financial statements. INTEREST RATES AND INFLATION Our 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 our potential market by making it more difficult for homebuyers to qualify for mortgages or to obtain mortgages at interest rates that are acceptable to them. Increases in interest rates would also increase our interest expense because the rate on the revolving loans is based on floating rates of interest. The weighted average interest rate for our outstanding debt was 8.9%, 8.3% and 8.5% for 2002, 2001 and 2000, respectively. In conjunction with our mortgage banking operations, hedging methods are used to reduce our exposure to interest rate fluctuations between the commitment date of the loan and the time the loan closes. In recent years, we have generally been able to raise prices by amounts at least equal to our cost increases and, accordingly, have not experienced any detrimental effect from inflation. When we develop lots for our own use, inflation may increase our profits because land costs are fixed well in advance of sales efforts. We are generally able to maintain costs with subcontractors from the date a home is started through the date of close. However, in certain situations, unanticipated costs may occur between the time of start and the time a home is constructed, resulting in lower gross profit margins. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 In addition to historical information, this Management's Discussion & Analysis of Financial Condition and Results of Operations contains certain forward-looking statements, including, but not limited to, statements regarding our future financial performance and financial condition. These statements involve a number of risks and uncertainties. Any forward-looking statements that we make herein and in future reports and statements are not guarantees of future performance, and actual results may differ materially from those in such forward-looking statements as a result of various factors including, but not limited to, those referred to below. GENERAL REAL ESTATE, ECONOMIC AND OTHER CONDITIONS. The homebuilding industry is significantly affected by changes in national and local economic and other conditions. Many of these conditions are beyond our control. These conditions include employment levels, changing demographics, availability of financing, consumer confidence and housing demand. In addition, homebuilders are subject to risks related to competitive overbuilding, availability and cost of building lots, availability of materials and labor, adverse weather conditions which can cause delays in construction schedules, cost overruns, changes in government regulations and increases in real estate taxes and other local government fees. Interest rate increases also adversely affect the industry as it is impossible to predict whether rates will be at levels that are attractive to prospective homebuyers. Mortgage rates are currently at historically low levels. If mortgage interest rates increase, our business could be adversely affected. 35 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- LAND DEVELOPMENT ACTIVITIES. We develop the lots for a majority of our subdivisions. Therefore, our short- and long-term financial success will be dependent upon our ability to develop these subdivisions successfully. Acquiring land and committing the financial and managerial resources to develop a subdivision involves significant risks. Before a subdivision generates any revenue, we may make material expenditures for items such as acquiring land and constructing subdivision infrastructure (roads and utilities). THE COMPANY'S MARKETS. We have operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; and the Virginia and Maryland suburbs of Washington, D.C. Adverse general economic conditions in these markets could have a material impact on our operations. In 2002, approximately 40% of our operating income was derived from operations in the Columbus market. COMPETITION. The homebuilding industry is highly competitive. We compete in each of our local market areas with numerous national, regional and local homebuilders, some of which have greater financial, marketing, land acquisition, and sales resources than we do. Builders of new homes compete not only for homebuyers, but also for desirable properties, financing, raw materials and skilled subcontractors. We also compete with the resale market for existing homes which provides certain attractions for homebuyers over the new home market. GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONSIDERATIONS. The homebuilding industry is subject to increasing local, state and Federal statutes, ordinances, rules and regulations concerning zoning, resource protection, building design, and construction and similar matters. This includes local regulations 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 also affects construction activities, including construction materials which must be used in certain aspects of building design, as well as sales activities and other dealings with home buyers. We must also obtain licenses, permits and approvals from various governmental agencies for our development activities, the granting of which are beyond our control. Furthermore, increasingly stringent requirements may be imposed on homebuilders and developers in the future. Although we cannot predict the impact on us to comply with any such requirements, such requirements could result in time-consuming and expensive compliance programs. We are also subject to a variety of local, state and Federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. The particular environmental laws, which apply to any given project, vary greatly according to the project site and the present and former uses of the property. These environmental laws may result in delays, cause us to incur substantial compliance costs (including substantial expenditures for pollution and water quality control) and prohibit or severely restrict development in certain environmentally sensitive regions. Although there can be no assurance that we will be successful in all cases, we have a general practice of requiring an environmental audit and resolution of environmental issues prior to purchasing land in an effort to avoid major environmental issues in our developments. In addition, we have been, and in the future may be, subject to periodic delays or may be precluded from developing certain projects due to building moratoriums. These moratoriums generally relate to insufficient water supplies or sewage facilities, delays in utility hookups or inadequate road capacity within the specific market area or subdivision. These moratoriums can occur prior to, or subsequent to, commencement of our operations without notice or recourse. RISK OF MATERIAL AND LABOR SHORTAGES. The residential construction industry has, from time to time, experienced significant material and labor shortages in insulation, drywall, brick, cement and certain areas of carpentry and framing, as well as fluctuations in lumber prices and supplies. Continued shortages in these areas 36 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- could delay construction of homes which could adversely affect our business. At this time, we are not experiencing any significant material or labor shortages and, therefore, do not anticipate a material effect for fiscal year 2002. SIGNIFICANT VOTING CONTROL BY PRINCIPAL SHAREHOLDERS. As of December 31, 2002, members of the Irving E. Schottenstein family owned approximately 26% of our outstanding common shares. Therefore, members of the Irving E. Schottenstein family have significant voting power. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary market risk results from fluctuations in interest rates. We are exposed to interest rate risk through the borrowings under our unsecured revolving credit facilities, which permit borrowings up to $345 million. To minimize the effect of the interest rate fluctuation, we have interest rate swap agreements with certain banks for a total notional amount of $225 million, of which $150 million to offset each other. Under the remaining $75 million, we pay fixed rates of interest. Assuming a hypothetical 10% change in short-term interest rates, interest expense would not change significantly, as the interest rate swap agreements would partially offset the impact. Additionally, M/I Financial offers fixed and adjustable rate mortgage loans to buyers of our homes. The loans are granted at current market interest rates which are guaranteed from the loan lock date through the transfer of the title of the home to the buyer. M/I Financial hedges its interest rate risk using optional and mandatory forward sales to hedge risk from the loan lock date generally to the date a loan is closed. At December 31, 2002, the notional principal amount under these forward sales agreements was $139 million. The hedging agreements outstanding at December 31, 2002 mature within 90-120 days. Gains or losses on these agreements are marked to market monthly and are recorded as revenue or expense in the consolidated statements of income. 37 INDEPENDENT AUDITORS' REPORT To the Shareholders and Directors of M/I Schottenstein Homes, Inc.: We have audited the accompanying consolidated balance sheets of M/I Schottenstein Homes, Inc. and its subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of M/I Schottenstein Homes, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Columbus, Ohio February 14, 2003 38 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Consolidated Statements of Income - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Year Ended December 31, ----------------------------------------- (Dollars in thousands, except per share amounts) 2002 2001 2000 - ----------------------------------------------------------------------------------------------- Revenue $ 1,033,025 $ 976,766 $ 935,039 Costs and expenses: Land and housing 783,752 755,212 736,067 General and administrative 61,484 57,473 51,734 Selling 64,779 62,871 56,320 Interest 13,810 16,168 18,354 - ----------------------------------------------------------------------------------------------- Total costs and expenses 923,825 891,724 862,475 - ----------------------------------------------------------------------------------------------- Income before income taxes 109,200 85,042 72,564 - ----------------------------------------------------------------------------------------------- Income taxes (credit): Current 47,628 36,751 31,059 Deferred (5,040) (4,310) (2,939) - ----------------------------------------------------------------------------------------------- Total income taxes 42,588 32,441 28,120 - ----------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 66,612 52,601 44,444 Cumulative effect of change in accounting principle - net of income taxes -- 2,681 -- - ----------------------------------------------------------------------------------------------- Net income $ 66,612 $ 55,282 $ 44,444 - ----------------------------------------------------------------------------------------------- Earnings per common share - basic: Income before cumulative effect of change in accounting principle $ 4.41 $ 3.49 $ 2.82 Cumulative effect of change in accounting principle - net of income taxes -- .17 -- - ----------------------------------------------------------------------------------------------- Net income $ 4.41 $ 3.66 $ 2.82 - ----------------------------------------------------------------------------------------------- Earnings per common share - diluted: Income before cumulative effect of change in accounting principle $ 4.30 $ 3.39 $ 2.76 Cumulative effect of change in accounting principle - net of income taxes -- .17 -- - ----------------------------------------------------------------------------------------------- Net income $ 4.30 $ 3.56 $ 2.76 - ----------------------------------------------------------------------------------------------- Weighted average shares outstanding (in thousands): Basic 15,104 15,092 15,767 Diluted 15,505 15,530 16,112 - -----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 39 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Consolidated Balance Sheets - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
December 31, ---------------------- (Dollars in thousands, except par values) 2002 2001 - ------------------------------------------------------------------------------------- ASSETS: Cash $ 953 $ 9,988 Cash held in escrow 381 560 Receivables 56,159 55,013 Inventories: Single-family lots, land and land development costs 269,863 287,110 Houses under construction 177,225 181,742 Model homes and furnishings - at cost (less accumulated depreciation: 2002 - $66; 2001 - $49) 1,948 7,761 Land purchase deposits 2,181 2,623 Building, office furnishings, transportation and construction equipment - at cost (less accumulated depreciation: 2002 - $7,798; 2001 - $7,453) 20,813 22,276 Investment in unconsolidated joint ventures and limited liability companies 20,333 22,457 Other assets 28,602 22,580 - ------------------------------------------------------------------------------------- TOTAL ASSETS $ 578,458 $ 612,110 - ------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: LIABILITIES: Accounts payable $ 58,187 $ 55,656 Accrued compensation 23,213 22,289 Customer deposits 17,089 18,487 Other liabilities 48,782 41,560 Notes payable banks - homebuilding operations -- 100,000 Note payable bank - financial services operations 28,800 30,000 Mortgage notes payable 12,658 14,227 Senior subordinated notes 50,000 50,000 - ------------------------------------------------------------------------------------- TOTAL LIABILITIES 238,729 332,219 - ------------------------------------------------------------------------------------- Commitments and Contingencies - ------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock - $.01 par value; authorized 2,000,000 shares; none outstanding -- -- Common stock - $.01 par value; authorized 38,000,000 shares; issued 17,626,123 shares 176 88 Additional paid-in capital 65,079 62,954 Retained earnings 306,970 241,956 Treasury stock - at cost - 2,834,704 and 2,688,116 shares, respectively, at December 31, 2002 and 2001 (32,496) (25,107) - ------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 339,729 279,891 - ------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 578,458 $ 612,110 - -------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 40 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Consolidated Statements of Shareholders' Equity - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Common Stock ------------------------ Additional Shares Paid-In Retained Treasury (Dollars in thousands, except per share amounts) Outstanding Amount Capital Earnings Stock - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 16,633,680 $ 88 $ 62,282 $ 145,337 $ (7,195) Net income -- -- -- 44,444 -- Dividends to shareholders, $0.10 per common share -- -- -- (1,597) -- Purchase of treasury shares (1,738,200) -- -- -- (15,568) Stock options exercised 63,800 -- (151) -- 476 Deferral of executive and director stock -- -- 771 -- -- Executive deferred stock distributions 21,054 -- (155) -- 157 - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 14,980,334 88 62,747 188,184 (22,130) Net income -- -- -- 55,282 -- Dividends to shareholders, $0.10 per common share -- -- -- (1,510) -- Purchase of treasury shares (357,400) -- -- -- (5,657) Stock options exercised 314,200 -- (640) -- 2,671 Deferral of executive and director stock -- -- 855 -- -- Executive deferred stock distributions 872 -- (8) -- 9 - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 14,938,006 88 62,954 241,956 (25,107) Net income -- -- -- 66,612 -- 2-for-1 stock split, par value unchanged -- 88 -- (88) -- Dividends to shareholders, $0.10 per common share -- -- -- (1,510) -- Income tax effect of stock options and executive deferred stock distributions -- -- 1,596 -- -- Purchase of treasury shares (381,100) -- -- -- (9,579) Stock options exercised 156,140 -- 107 -- 1,458 Deferral of executive and director stock -- -- 1,154 -- -- Executive and director deferred stock distributions 78,373 -- (732) -- 732 - ------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 14,791,419 $ 176 $ 65,079 $ 306,970 $ (32,496) =========================================================================================================================
See Notes to Consolidated Financial Statements. 41 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES
Year Ended December 31, ----------------------------------- (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 66,612 $ 55,282 $ 44,444 Adjustments to reconcile net income to net cash provided by operating activities: Loss from property disposals 71 12 165 Depreciation 2,239 2,009 2,123 Deferred income tax credit (5,040) (4,310) (2,939) Income tax benefit from stock transactions 1,596 -- -- Decrease (increase) in cash held in escrow 179 1,150 (882) Increase in receivables (1,146) (5,054) (9,971) Decrease (increase) in inventories 43,646 (10,188) 10,219 Increase in other assets (982) (1,537) (4,122) Increase (decrease) in accounts payable 2,531 (11,688) 4,146 (Decrease) increase in customer deposits (1,398) 5,045 (264) Increase in other liabilities 9,300 15,956 10,387 Equity in undistributed income of unconsolidated joint ventures and limited liability companies (1,115) (880) (802) - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 116,493 45,797 52,504 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (811) (6,105) (910) Investment in unconsolidated joint ventures and limited liability companies (14,283) (15,432) (23,287) Distributions from unconsolidated joint ventures and limited liability companies 1,859 2,226 1,016 - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (13,235) (19,311) (23,181) - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank borrowings - net of repayments (101,200) (12,500) (4,900) Principal repayments of mortgage notes payable (1,569) (7,418) (4,695) Dividends paid (1,510) (1,510) (1,597) Proceeds from exercise of stock options and deferred stock 1,565 2,032 327 Payments to acquire treasury shares (9,579) (5,657) (15,568) - ------------------------------------------------------------------------------------------------------ Net cash used in financing activities (112,293) (25,053) (26,433) - ------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash (9,035) 1,433 2,890 Cash balance at beginning of year 9,988 8,555 5,665 - ------------------------------------------------------------------------------------------------------ Cash balance at end of year $ 953 $ 9,988 $ 8,555 - ------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest - net of amount capitalized $ 13,964 $ 15,848 $ 17,870 Income taxes $ 44,217 $ 37,050 $ 29,233 NON-CASH TRANSACTIONS DURING THE YEAR: Land and lots acquired with mortgage notes payable $ -- $ 4,926 $ 6,739 Distribution of single-family lots from unconsolidated joint ventures and limited liability companies $ 15,663 $ 14,661 $ 20,225 Non-monetary exchange of fixed assets $ -- $ 4,096 -- Deferral of executive and director stock $ 1,154 $ 855 $ 771 Executive and director deferred stock distributions $ 732 $ 8 $ 155 - ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 42 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- M/I SCHOTTENSTEIN HOMES, INC. AND SUBSIDIARIES 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of M/I Schottenstein Homes, Inc. and its subsidiaries (the "Company"). All significant intercompany transactions have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is engaged primarily in the construction and sale of single-family residential property in Columbus and Cincinnati, Ohio; Tampa, Orlando and Palm Beach County, Florida; Charlotte and Raleigh, North Carolina; Indianapolis, Indiana; and the Virginia and Maryland suburbs of Washington, D.C. The Company designs, sells and builds single-family homes on finished lots, which it develops or purchases ready for home construction. The Company also purchases undeveloped land to develop into finished lots for future construction of single-family homes and for sale to others. The Company conducts mortgage banking activities through M/I Financial Corp. ("M/I Financial") that originates mortgage loans primarily for purchasers of the Company's homes. The loans and the servicing rights are sold to outside mortgage lenders. The Company also has an investment in title insurance agencies that provide title services to purchasers of the Company's homes (see Note 2). CASH AND CASH HELD IN ESCROW. Cash and cash held in escrow were primarily held in one bank at December 31, 2002 and 2001. 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 capitalized interest, are charged to cost of sales as housing sales are closed. Capitalized interest is included in interest expense when the respective housing sales are closed. Lot costs are transferred to houses under construction from land costs when construction commences. Depreciation on model home furnishings is recorded using an accelerated method over the estimated useful lives of the assets. Land and 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 or the average cost basis, when appropriate. Reserves are established for inventories where the net realizable value is deemed to be less than cost. Management believes such reserves are adequate. 43 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- INTEREST. The Company capitalizes interest during land development and home construction. Capitalized interest is charged to interest expense as the related inventory is delivered to a third party. The summary of total interest is as follows:
Year Ended December 31, ----------------------------------------------------- (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Interest capitalized, beginning of year $ 12,187 $10,337 $ 8,886 Interest incurred 13,098 18,018 19,805 Interest expensed (13,810) (16,168) (18,354) - ------------------------------------------------------------------------------------------------------------------- Interest capitalized, end of year $ 11,475 $12,187 $10,337 - -------------------------------------------------------------------------------------------------------------------
REVENUE RECOGNITION. Revenue and cost of revenue from the sale of real estate are recognized at the time title is transferred to the buyer. Discounts and other sales incentives are included as a reduction of homebuilding revenue. The following summarizes both housing and lot and land revenue and costs included in revenue and cost of revenue:
Year Ended December 31, ----------------------------------------------------- (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Housing revenue $984,564 $941,717 $900,507 Housing costs 759,207 739,535 720,974 Lot and land revenue 28,542 16,438 18,257 Lot and land costs 24,545 15,677 15,093 - -------------------------------------------------------------------------------------------------------------------
M/I Financial recognizes revenue from application fees when received, while revenue from loan origination fees is recorded when each loan closes. M/I Financial sells its loans and servicing rights to outside mortgage lenders. The revenue from these transactions is recorded when the loans are sold and the servicing is purchased by the investor. M/I Financial uses various methods to hedge the interest rate risk related to the loans it has committed to make to homebuyers (see Note 13). Hedging transactions are marked to market monthly and the resulting gains or losses are included in revenue. WARRANTY COST. The Company provides a two-year limited warranty on materials and workmanship and a thirty-year limited warranty against major structural defects. Warranty amounts are reserved as homes close to homebuyers and cover estimated material and outside labor costs incurred during the warranty period. The reserve amounts are based upon historical experience and geographic location. Warranty expense was $6,493,000, $6,773,000 and $7,061,000 for 2002, 2001 and 2000, respectively. The summary of warranty activity is as follows: YEAR ENDED DECEMBER 31, (In thousands) 2002 - ----------------------------------------------------------------------------- Warranty reserves, beginning of year $ 7,250 Warranty expense 6,493 Payments made (6,510) - ----------------------------------------------------------------------------- Warranty reserves, end of year $ 7,233 - ----------------------------------------------------------------------------- 44 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- DEPRECIATION. Depreciation of building, model and office furnishings, transportation and construction equipment is computed using both straight-line and accelerated methods based on the estimated useful lives of the assets. Depreciation expense was $2,239,000, $2,009,000 and $1,961,000 in 2002, 2001 and 2000, respectively. AMORTIZATION. The costs incurred in connection with the issuance of Subordinated Notes (see Note 9) are being amortized over the terms of the related debt. Amortization of these costs is included in interest expense. Unamortized debt issuance costs of $597,000 and $759,000 relating to the Subordinated Notes are included in other assets at December 31, 2002 and 2001, respectively. ADVERTISING. The Company expenses advertising costs as incurred. The Company expensed $9,984,000, $8,686,000 and $7,768,000 in 2002, 2001 and 2000, respectively. PER SHARE DATA. Per share data is calculated based on the weighted average number of common shares outstanding during the year. The difference between basic and diluted shares outstanding is due to the effect of dilutive stock options and deferred stock. There are no adjustments to net income necessary in the calculation of basic or diluted earnings per share. All share and per share amounts have been adjusted for the 2-for-1 stock split effective June 19, 2002. PROFIT SHARING. The Company has a deferred profit-sharing plan which covers substantially all Company employees and permits members to make contributions to the plan on a pre-tax salary 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 totaled $1,900,000, $1,600,000 and $1,425,000 in 2002, 2001 and 2000, respectively. ASSET IMPAIRMENTS. Annually, or more frequently if events or circumstances change, a determination is made by management to ascertain whether single-family lots, land and land development costs and property and equipment have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, the Company will recognize an impairment loss in an amount necessary to write down the assets to a fair value as determined from expected future discounted cash flows. We assess assets for recoverability in accordance with SFAS 144. IMPACT OF NEW ACCOUNTING STANDARDS. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which was effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the statement includes provisions for the reclassification of certain existing recognized intangibles such as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The adoption of SFAS 142 did not have a significant impact on the consolidated financial statements. In August 2001, the FASB issued SFAS 144, "Accounting for Impairment or Disposal of Long-Lived Assets." While this statement supersedes SFAS 121, "Accounting for Impairment of Long-Lived Assets to be Disposed of," it retains the fundamental provisions of SFAS 121 for recognition and impairment of assets to be held and used, and assets to be disposed of by sale. This statement was effective on January 1, 2002. The adoption of SFAS 144 did not have a significant impact on the consolidated financial statements. In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections." This statement rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that statement, SFAS 64, "Extinguishments of Debt Made to 45 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers." This statement amends SFAS 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for the first quarter in the year ended December 31, 2003. The Company does not believe the adoption of SFAS 145 will have a significant impact on the consolidated financial statements. In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities included in restructurings. This Statement eliminates the definition and requirements for recognition of exit costs as defined in EITF Issue 94-3, and requires that liabilities for exit activities be recognized when incurred instead of at the exit activity commitment date. This Statement is effective for exit or disposal activities initiated after December 31, 2002. The Company does not believe the adoption of SFAS 146 will have a significant impact on the consolidated financial statements. In November 2002, the FASB issued FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee and also includes more detailed disclosures with respect to guarantees. FIN 45 is effective for guarantees issued or modified starting January 1, 2003 and requires additional disclosures for the year ended December 31, 2002. The Company does not expect the provisions of FIN 45 to have a significant impact on the consolidated financial statements. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS 123. The transition provisions and the disclosure requirements of this Statement are effective for fiscal years ending after December 15, 2002. The Company will continue to apply the intrinsic value-based method to account for stock options and has complied with the new disclosure requirements. In January 2003, the FASB issued FASB Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"), to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements, none of which appear to apply to the Company at this time, are effective in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not expect the provisions of FIN 46 to have a significant impact on the consolidated financial statements. DEFERRED STOCK PLANS. Effective November 1, 1998, the Company adopted a non-qualified deferred compensation stock plan (the "Executives' Deferred Compensation Plan"). The purpose of the Executives' Deferred Compensation Plan (the "Plan") is to provide an opportunity for certain eligible employees of the Company to defer a 46 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- portion of their compensation and to invest in the Company's common stock. Compensation expense recorded related to the Plan was $551,000, $686,000 and $624,000 in 2002, 2001 and 2000, respectively. In 1997, the Company adopted the Director Deferred Compensation Plan to provide its directors with an opportunity to defer their director compensation and to invest in the Company's common stock. STOCK-BASED COMPENSATION. The Company accounts for its stock-based employee compensation plan, which is described more fully in Note 11, under the recognition and measurement principles of APB Option No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
(Dollars in thousands) YEAR ENDED DECEMBER 31 - ------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 ---- ---- ---- Net income, as reported $66,612 $55,282 $44,444 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 2,153 948 217 - ------------------------------------------------------------------------------------------------------------------- Pro forma net income $64,459 $54,334 $44,227 - ------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic - as reported $ 4.41 $ 3.66 $ 2.82 Basic - pro forma $ 4.26 $ 3.60 $ 2.81 Diluted - as reported $ 4.30 $ 3.56 $ 2.76 Diluted - pro forma $ 4.16 $ 3.50 $ 2.74 - -------------------------------------------------------------------------------------------------------------------
RECLASSIFICATIONS. Certain amounts in the 2000 and 2001 consolidated financial statements have been reclassified to conform with the 2002 presentation. 2. TRANSACTIONS WITH RELATED PARTIES Related parties are entities owned by, or partially owned by, certain shareholders of the Company or joint ventures and limited liability companies (see Note 4) in which investments by the Company are accounted for using the equity method. In January 2003, the Company purchased land for approximately $2,200,000 that was under the control of M/I Real Estate Co. M/I Real Estate is owned by an officer of the Company. The price and terms are equivalent to what could have been obtained from a third party and was approved by the independent Board members prior to purchase. 47 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 3. RECEIVABLES Receivables consist of the following:
December 31, --------------------------------- (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Mortgage loans to be funded $54,141 $52,853 Accounts receivable 2,018 2,160 - ------------------------------------------------------------------------------------------------------------------- Total receivables $56,159 $55,013 - -------------------------------------------------------------------------------------------------------------------
Mortgage loans to be funded relate to houses closed on or before December 31, which were subsequently funded by unrelated lending institutions. 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND LIMITED LIABILITY COMPANIES At December 31, 2002, the Company had interests varying from 33% to 50% in joint ventures and limited liability companies that engage in land development activities. These interests are recorded using the equity method of accounting. The Company receives its percentage interest of the lots developed in the form of a capital distribution. The Company received distributions of $15,663,000, $14,661,000 and $20,225,000 in developed lots at cost in 2002, 2001 and 2000, respectively, and purchased lots totaling $107,000 in 2000 from the joint ventures and limited liability companies. No such lots were purchased in 2002 or 2001. Summarized condensed combined financial information for the joint ventures and limited liability companies, which is included in the homebuilding segment, as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 is as follows: Summarized Condensed Combined Balance Sheets:
December 31, -------------------------------------- (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Assets: Single-family lots, land and land development costs $40,938 $49,458 Other assets 1,468 2,265 - ------------------------------------------------------------------------------------------------------------------- Total Assets $42,406 $51,723 - ------------------------------------------------------------------------------------------------------------------- Liabilities and Partners Equity: Liabilities: Other liabilities $ 3,408 $ 4,085 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities 3,408 4,085 - ------------------------------------------------------------------------------------------------------------------- Partners' Equity: Company's equity $20,333 22,820 Other equity 18,665 24,818 - ------------------------------------------------------------------------------------------------------------------- Total Partners' Equity 38,998 47,638 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Partners' Equity $42,406 $51,723 - -------------------------------------------------------------------------------------------------------------------
48 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Summarized Condensed Combined Statements of Operations:
Year Ended December 31, ---------------------------------------- (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Revenue $ 104 $ 139 $ 161 Costs and expenses 410 369 420 - ------------------------------------------------------------------------------------------------------------------- Loss $(306) $(230) $(259) - -------------------------------------------------------------------------------------------------------------------
Included in the Company's investment in joint ventures and limited liability companies at December 31, 2002 and 2001 is $290,000 and $379,000, respectively, of capitalized interest and other costs. Letters of credit totaling approximately $5,632,000 are outstanding at December 31, 2002 and serve as completion bonds for joint venture and limited liability company development work in progress. The Company owns a 49.9% interest in two title insurance agencies and accounts for these investments under the equity method of accounting. The total of these investments was approximately $10,000 at December 31, 2002 and 2001. Approximately $2,002,000, $1,889,000 and $1,884,000 of title insurance premiums and closing fees were paid to these agencies in 2002, 2001 and 2000, respectively. 5. LEASE COMMITMENTS The Company leases various office facilities, automobiles, model furnishings, and model homes under operating leases with remaining terms of 1 to 6 years. At December 31, 2002, the future minimum rental commitments totaled $6,653,000 under non-cancelable operating leases with initial terms in excess of one year as follows: 2003 - $3,986,000; 2004 - $1,587,000; 2005 - $488,000; 2006 - - $297,000; 2007 - $278,000; and $17,000 thereafter. The Company's total rental expense was $8,600,000, $8,603,000, and $7,594,000 for 2002, 2001 and 2000, respectively. 6. 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 shareholder 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 voting rights) and qualifications, limitations or restrictions thereon, of any series so established, including dividend rights, liquidation preferences, redemption rights and conversion privileges. 7. NOTES PAYABLE BANKS At December 31, 2002, the Company's homebuilding operations had no borrowings and letters of credit totaling $12,174,000 outstanding under a loan agreement with twelve banks. Borrowings under the loan agreement are at the Alternate Base Rate and are primarily unsecured. This agreement provides for total borrowing base indebtedness not to exceed the lesser of $315 million, including up to $50 million in outstanding letters of credit, under the revolving credit agreement or the Company's borrowing base, which is calculated based on specified percentages of certain types of assets held by the Company as of each month end. The revolving credit facility expires in March 2006. The loan agreement contains covenants that 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 49 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- of additional indebtedness that may be incurred by the Company, on the acquisition of undeveloped land and on the aggregate cost of certain types of inventory the Company can hold at any one time. At December 31, 2002, $28,800,000 was outstanding under a revolving loan agreement with a bank pursuant to which the Company was permitted to borrow up to $30 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 based on the aggregate face amount of the mortgages and contains restrictive covenants requiring M/I Financial to maintain minimum net worth and certain minimum financial ratios. Under the M/I Financial loan agreement, interest is calculated at LIBOR plus a margin. The agreement terminates in May 2003. At December 31, 2002, the Company had $316.2 million of unused borrowing availability under its loan agreements. The weighted average interest rate of the Company's total bank borrowings was 8.9%, 7.7%, and 8.3% at December 31, 2002, 2001 and 2000, respectively, which includes the interest rate swaps as discussed below. Average borrowings were $83,189,000 in 2002 and $151,847,000 in 2001. The Company has interest rate swap agreements for a total notional amount of $225 million, of which $150 million offset each other. The remaining $75 million have fixed interest rates ranging from 5.97% to 5.98% and expire in 2004. The swaps are not designated as hedges. The Company accounts for interest rate swaps in accordance with SFAS 133. This statement requires recognition of all derivative instruments in the balance sheet as either assets or liabilities and measures them at fair value. Any change in the unrealized gain or loss is recorded in current earnings. At December 31, 2002 and 2001, the Company recorded a net liability of $5,300,000 and $4,088,000, respectively, related to these derivative instruments. The mark-to-market fair value adjustment related to these instruments was recorded in general and administrative expenses in the income statement in the amount of $1,212,000 in 2002, $4,088,000 in 2001 and $0 in 2000. 8. MORTGAGE NOTES PAYABLE Mortgage notes payable of $12,658,000 and $14,227,000 at December 31, 2002 and 2001, respectively, represent mortgages collateralized by a building and land and lots (book value of $18,403,000 and $20,421,000 at December 31, 2002 and 2001, respectively). At December 31, 2002, future principle payments under these mortgages are as follows: 2003 - $1,913,000, 2004 - $1,735,000; 2005 - - $1,841,000, 2006 - $220,000, 2007 - $239,000 and $6,724,000 thereafter. Information relating to the building and land and lots is as follows:
DECEMBER 31, 2002 -------------------------------------------------- INTEREST MATURITY (In thousands) AMOUNT RATE DATE - ------------------------------------------------------------------------------------------------------------------- Building $ 7,732 8.117% 4/01/17 Land and lots 4,926 4.78% 5/31/05 - ------------------------------------------------------------------------------------------------------------------- Total $ 12,658 - - - ------------------------------------------------------------------------------------------------------------------- December 31, 2001 --------------------------------------------------- Interest Maturity (In thousands) Amount Rate Date - ------------------------------------------------------------------------------------------------------------------- Building $ 7,893 8.117% 4/01/17 Land and lots 6,334 5.00%-5.77% 5/31/05 - ------------------------------------------------------------------------------------------------------------------- Total $ 14,227 - - - -------------------------------------------------------------------------------------------------------------------
50 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 9. SUBORDINATED NOTES In August 1997, the Company issued $50,000,000 of Senior Subordinated Notes. The Senior Subordinated Notes bear interest at a fixed rate of 9.51% through August 2004 and bear interest at a slightly higher rate for two additional years, maturing in August 2006. The Senior Subordinated Notes contain covenants that include restrictions on the incurrence of additional debt, stock repurchases and the payment of dividends similar to those under the Company's bank loan agreement (see Note 7). 10. SUBSEQUENT EVENTS On November 12, 2002 and February 11, 2003, the Board of Directors approved a $0.025 per share cash dividend payable to shareholders of record of its common stock on January 2 and April 1, 2003, payable on January 23 and April 24, 2003, respectively. On December 10, 2002, the Board of Directors authorized the repurchase of up to $50 million worth of outstanding common stock. From January 1, 2003 through February 14, 2003, the Company purchased 318,300 shares of outstanding common stock at an average price of $27. 51 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 11. STOCK INCENTIVE PLAN The Company's Stock Incentive Plan includes stock option, restricted stock and stock appreciation programs, under which the maximum number of shares of common stock that may be granted under the plan in each calendar year shall be 5% of the total issued and outstanding shares of common stock as of the first day of each such year the plan is in effect. 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 at December 31, 1999 555,400 $3.38-$11.38 $ 7.19 Granted 150,700 6.69 6.69 Exercised (72,600) 3.38-9.28 5.70 Forfeited (39,700) 5.31-11.38 8.14 - ------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 2000 593,800 $3.38-$11.38 $ 7.18 Granted 231,000 16.38 16.38 Exercised (314,200) 3.38-11.38 6.47 Forfeited (2,000) 16.38 16.38 - ------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 2001 508,600 $3.38-$16.38 $ 11.76 Granted 225,500 28.55-30.76 28.57 Exercised (156,140) 3.38-16.38 10.02 Forfeited (45,000) 6.69-28.55 17.04 - ------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING AT DECEMBER 31, 2002 532,960 $5.31-$30.76 $ 18.92 - ------------------------------------------------------------------------------------------------------------------- Weighted Option Price Avg. Exercise Options exercisable at: Shares Per Share Price - ------------------------------------------------------------------------------------------------------------------- December 31, 2000 192,980 $ 3.38-$5.44 116,940 6.69-8.07 81,680 9.28-11.38 ------- Total 391,600 $ 6.74 - ------------------------------------------------------------------------------------------------------------------- December 31, 2001 82,120 $ 3.38-$6.69 46,400 8.07-9.28 81,880 11.38-16.38 ------- Total 210,400 $ 9.92 - ------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2002 85,636 $ 5.31-$9.28 88,140 11.38-16.38 42,400 28.55-30.76 ------- TOTAL 216,176 $ 14.87 - -------------------------------------------------------------------------------------------------------------------
52 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- At December 31, 2002, options outstanding have a weighted average remaining contractual life of 8.09 years. In February 2003, the Company granted options for an additional 231,000 shares with the same terms as the previous awards, at a price of $27.15, which represents the market value at the date of grant. As required under SFAS 123, the fair value of each option grant was estimated on the date of grant. The Company used the binomial option-pricing model with the following assumptions used for grants in 2002: expected volatility of 56%; risk-free interest rate of 2.78%; dividend rate of 0.01%; and an expected life of 6 years. The Company used the binomial option-pricing model with the following assumptions used for grants in 2001: expected volatility of 31.99%; risk-free interest rate of 4.90%; dividend rate of 0.15%; and an expected life of 6 years. The Company used the binomial option-pricing model with the following assumptions used for grants in 2000: expected volatility of 29.54%; risk-free interest rate of 5.11%; dividend rate of 0.28%; and an expected life of 6 years. 12. INCOME TAXES The provision for income taxes consists of the following:
December 31, --------------------------------------------------- (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Federal $34,652 $26,316 $23,781 State and local 7,936 6,125 4,339 - ------------------------------------------------------------------------------------------------------------------- Total $42,588 $32,441 $28,120 - -------------------------------------------------------------------------------------------------------------------
Reconciliations of the differences between income taxes computed at federal statutory tax rates and consolidated provision for income taxes are as follows:
December 31, --------------------------------------------------- (In thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Federal taxes at statutory rate $38,220 $29,765 $25,397 State and local taxes - net of federal tax benefit 5,158 3,981 2,820 Other (790) (1,305) (97) - ------------------------------------------------------------------------------------------------------------------- Total $42,588 $32,441 $28,120 - -------------------------------------------------------------------------------------------------------------------
53 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities are as follows:
December 31, ---------------------------------- (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Warranty, insurance and other reserves $10,592 $ 8,208 Inventory reserve 5,720 4,925 Inventories 1,912 1,415 State taxes 1,352 965 Deferred charges 1,778 249 - ------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 21,354 15,762 - ------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation 2,194 1,670 Prepaid expenses and deferred charges 778 750 - ------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 2,972 2,420 - ------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $18,382 $13,342 - -------------------------------------------------------------------------------------------------------------------
13. FINANCIAL INSTRUMENTS M/I Financial offers fixed and adjustable rate mortgage loans, primarily to buyers of the Company's homes. At December 31, 2002, M/I Financial is committed to fund $174,559,000 in mortgage loans to homebuyers. Of this total, approximately $144,353,000 are fixed rate loans and $30,206,000 are adjustable rate loan commitments. The loans are granted at current market interest rates which are guaranteed through the transfer of the title of the home to the buyer. Loan commitments that relate to the origination of mortgage loans that will be held for resale are considered derivative instruments. M/I Financial uses hedging methods to reduce its exposure to interest rate fluctuations between the lock date of the loan and the time the home closes. The method to be used is determined at the time of the loan lock based on the market conditions and alternatives available. M/I Financial's policy requires that there be no interest rate risk on loans closed and waiting to be sold. Also according to policy, the pipeline of committed loans is to be hedged at a minimum of 70% of the committed balance. At December 31, 2002, the Company has guaranteed the collectibility of nine loans to a third-party purchaser. We have estimated the potential loss under this guarantee to be a maximum of $400,000, which will expire December 2007. The Company has included reserves for this potential loss in its December 31, 2002 financial statements. 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, if any, 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 $486,000, $292,000 and $59,000 in 2002, 2001 and 2000, respectively, related to purchase commitments from outside investors to acquire mortgage loans. At December 31, 2002, the Company had approximately $36,600,000 of commitments to deliver mortgage loans to outside investors. The Company enters into forward sale agreements of mortgage-backed securities to reduce the interest rate risk associated with loans held for sale and commitments to fund loans. At December 31, 2002, the Company had forward sale agreements of mortgage-backed securities with notional amounts totaling $139,000,000 maturing within 90 - 120 days. These agreements are considered derivative instruments. Prior to the adoption of SFAS 133 54 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- on January 1, 2001, the Company deferred the related gain or loss until the related loans were closed and sold as the agreements qualified for hedge accounting. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The fair values of the loan commitments and forward sale agreements of mortgage-backed securities are recorded as derivative assets or derivative liabilities on the Company's balance sheet. At December 31, 2002 and 2001, the Company recorded a net liability of $880,000 and $1,300,000, respectively, related to these derivative instruments. The mark-to-market fair value adjustment related to these two derivative instruments of $420,000 in 2002 and $1,300,00 in 2001 is recorded in current earnings. The Company's interest rate swaps (see Note 7), were not designated as hedges under the provisions of SFAS 133. The statement requires such swaps to be recorded in the consolidated balance sheet at fair value. Changes in their fair value are recorded in the consolidated statement of income. The fair value of the Company's interest rate swaps is recorded in other liabilities and the change in their fair value is recorded in general and administrative expense. The Company's policy requires that swap contracts be used as hedges and be effective at reducing risk associated with the expense being hedged. Such contracts are designated at the inception of the contract. 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 loan and any purchase commitments recorded with that counterparty. The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 2002 and 2001. 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.
DECEMBER 31, 2002 December 31, 2001 ---------------------------------- ---------------------------------- CARRYING FAIR Carrying Fair (Dollars in thousands) AMOUNT VALUE Amount Value - ------------------------------------------------------------------------------------------------------------------- Assets: Cash, including cash in escrow $ 1,334 $ 1,334 $ 10,548 $ 10,548 Mortgage loans to be funded 54,141 57,282 52,853 54,480 Accounts receivable 2,018 2,018 2,160 2,160 Liabilities: Notes payable banks 28,800 28,800 130,000 130,000 Forward sale of mortgage-backed securities 1,396 1,396 (1,290) (1,290) Mortgage notes payable 12,658 12,658 14,227 14,227 Subordinated notes 50,000 50,000 50,000 50,000 Accounts payable 58,187 58,187 55,656 55,656 Interest rate swap agreements 5,300 5,300 4,088 4,088 Commitments to extend real estate loans (515) (515) 2,626 2,626 Other liabilities 89,084 89,084 75,622 75,622 Unrecognized Financial Instruments: Letters of credit - 432 - 515
55 2002 M/I SCHOTTENSTEIN HOMES, INC. ANNUAL REPORT Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at December 31, 2002 and 2001: 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, 2002 and 2001 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, 2002 and 2001. NOTES PAYABLE BANKS. The interest rates currently available to the Company fluctuate with the LIBOR rate of the lending institutions and thus their carrying value is a reasonable estimate of fair value. MORTGAGE NOTES PAYABLE AND SUBORDINATED NOTES. The estimated fair value was determined by comparing the interest rates and terms of the note agreements to debt instruments with similar terms and remaining maturities. COMMITMENTS TO EXTEND REAL ESTATE LOANS, FORWARD SALE OF MORTGAGE-BACKED SECURITIES AND INTEREST RATE SWAP AGREEMENTS. The fair value of these financial instruments was determined based upon market quotes at December 31, 2002 and 2001. LETTERS OF CREDIT. Letters of credit and outstanding completion bonds of $48,165,000 and $48,190,000 represent potential commitments at December 31, 2002 and 2001, respectively. 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. 14. COMMITMENTS AND CONTINGENCIES At December 31, 2002, the Company had sales agreements outstanding, some of which have contingencies for financing approval, to deliver 2,321 homes with an aggregate sales price of approximately $567,000,000. At December 31, 2002, the Company had options and contingent purchase contracts to acquire land and developed lots with an aggregate purchase price of approximately $193,525,000. Purchase of properties is contingent upon satisfaction of certain requirements by the Company and the sellers. At December 31, 2002, the Company had outstanding approximately $48,165,000 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 and expire through August 2007. The Company is involved from time to time in routine litigation. Management does not believe that the ultimate resolution of this litigation will be material to the consolidated financial statements of the Company. 15. BUSINESS SEGMENTS The business segment information for 2002, 2001 and 2000 included on page 24 of the annual report is an integral part of these consolidated financial statements. 56 2002 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 January 31, 2003, there were approximately 380 record holders of the Company's common stock. At that time there were 17,626,123 shares issued and 14,664,919 shares outstanding. The table below presents the highest and lowest prices for the Company's common stock during each of the quarters presented:
2002 HIGH LOW - -------------------------------------------------------------------------------------------------------------- FIRST QUARTER $30.85 $24.30 SECOND QUARTER 37.68 26.93 THIRD QUARTER 39.29 27.10 FOURTH QUARTER 33.28 23.00 2001 HIGH LOW - -------------------------------------------------------------------------------------------------------------- First quarter $16.87 $12.07 Second quarter 22.75 14.50 Third quarter 22.36 14.26 Fourth quarter 25.61 15.91
The highest and lowest prices for the Company's common stock from January 1, 2003 through February 14, 2003 were $30.25 and $26.43. On November 12, 2002 and February 11, 2003, the Board of Directors approved a $0.025 per share cash dividend payable to shareholders of record of its common stock on January 2 and April 1, 2003, payable on January 23 and April 24, 2003, respectively. On December 10, 2002, the Board of Directors authorized the repurchase of up to $50 million worth of outstanding common stock. From January 1, 2003 through February 14, 2003, the Company purchased 318,300 shares of outstanding common stock at an average price of $27. 57 EXECUTIVE OFFICERS DIRECTORS (CONTINUED) - -------------------------------- -------------------------------------- IRVING E. SCHOTTENSTEIN LEWIS R. SMOOT, SR. (1, 2, 3, 4) Chairman and President and Chief Executive Officer Chief Executive Officer, The Smoot Corporation ROBERT H. SCHOTTENSTEIN President NORMAN L. TRAEGER (2*, 3, 4) President, STEVEN SCHOTTENSTEIN The Discovery Group Chief Operating Officer (1) Executive Committee PHILLIP G. CREEK (2) Compensation Committee Senior Vice President, (3) Audit Committee Chief Financial Officer and (4) Executive Officer Compensation Committee Treasurer * Chairman OTHER KEY OFFICERS CORPORATE INFORMATION - -------------------------------- -------------------------------------- JAMES T. MASON CORPORATE HEADQUARTERS General Counsel 3 Easton Oval Columbus, Ohio 43219 PAUL S. ROSEN www.mihomes.com Senior Vice President STOCK EXCHANGE LISTING LLOYD T. SIMPSON New York Stock Exchange (MHO) Regional President TRANSFER AGENT AND REGISTRAR DIRECTORS EquiServe Trust Company N.A. - -------------------------------- C/O EquiServe, Inc. IRVING E. SCHOTTENSTEIN (1*, 2) 150 Royall Street Chairman and Canton, MA 02021 Chief Executive Officer (781) 575-3420 www.EquiServe.com FRIEDRICH K.M. BOHM (2, 3, 4*) Managing Partner and INDEPENDENT AUDITORS Chief Executive Officer, Deloitte & Touche LLP NBBJ Columbus, Ohio PHILLIP G. CREEK (1, 2) ANNUAL MEETING Senior Vice President, The Annual Meeting of Shareholders will be held Chief Financial Officer and at 9:00 A.M. on April 22, 2003, at the offices of Treasurer the Company, 3 Easton Oval, Columbus, Ohio THOMAS D. IGOE (2, 3*, 4) FORM 10-K Retired Senior Vice President, Shareholders may receive a copy of the Company's Bank One NA annual report to the Securities and Exchange Commission on Form 10-K without charge by writing to: JEFFREY H. MIRO (2, 4) Chairman, Investor Relations Miro, Weiner and Kramer M/I Schottenstein Homes, Inc. 3 Easton Oval ROBERT H. SCHOTTENSTEIN (1, 2) Suite 500 President Columbus, OH 43219 STEVEN SCHOTTENSTEIN (1, 2) Chief Operating Officer
58 EX-21 7 l99426aexv21.txt EX-21 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE COMPANY 1. M/I Financial Corp., an Ohio corporation. M/I Financial Corp. is wholly-owned by the Company. 2. M/I Homes, Inc., an Arizona corporation. M/I Homes, Inc. is wholly-owned by the Company. 3. MHO, LLC, an Arizona limited liability corporation. MHO, LLC is wholly-owned by M/I Homes, Inc. 4. M/I Homes Construction, Inc., an Arizona corporation. M/I Homes Construction, Inc. is wholly-owned by the Company. 5. M/I Schottenstein Homes Service Corp., an Ohio Corporation. M/I Schottenstein Homes Service Corp. is wholly-owned by the Company. 6. 601RS, LLC, an Ohio limited liability corporation. 601RS, LLC is wholly-owned by the Company. 7. M/I Properties, LLC, an Ohio limited liability corporation. M/I Properties, LLC is wholly-owned by the Company. 8. Northeast Office Venture, LLC, a Delaware limited liability corporation. Northeast Office Venture, LLC is wholly-owned by the Company. 9. M/I Title Agency Ltd., an Ohio limited liability company. 90% LLC owned by the Company. 10. Washington Metro Residential Title Agency LLC, a Virginia limited liability corporation. 70% LLC owned by the Company. 11. M/I Homes First Indiana LLC, an Indiana limited liability company. M/I Homes First Indiana LLC is wholly-owned by the Company. 12. M/I Homes Second Indiana LLC, an Indiana limited liability company. M/I Homes Second Indiana LLC is wholly-owned by the Company. 13. M/I Homes of Indiana, L.P., an Indiana limited partnership. M/I Homes First Indiana LLC owns 99% of M/I Homes of Indiana, L.P.; M/I Homes Second Indiana LLC owns the remaining 1% of M/I Homes of Indiana, L.P. 14. M/I Homes of Florida, LLC, a Florida limited liability company. M/I Homes of Florida, LLC is wholly-owned by the Company. 1 15. M/I Homes of Tampa, LLC, a Florida limited liability company. M/I Homes of Tampa, LLC is wholly-owned by M/I Homes of Florida, LLC. 16. M/I Homes of Orlando, LLC, a Florida limited liability company. M/I Homes of Orlando, LLC is wholly-owned by M/I Homes of Florida, LLC. 17. M/I Homes of West Palm Beach, LLC, a Florida limited liability company. M/I Homes of West Palm Beach, LLC is wholly-owned by M/I Homes of Florida, LLC. 18. MHO Holdings, LLC, a Florida limited liability company. MHO Holdings, LLC is wholly-owned by M/I Homes of Florida, LLC. 2 EX-23 8 l99426aexv23.txt EX-23 INDEPENDENT AUDITORS EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-76518, No. 333-70135, No. 333-82673, No. 333-35978 and No. 333-40256 on Form S-8 and No. 333-85662 on Form S-3 of M/I Schottenstein Homes, Inc. of our reports dated February 14, 2003, appearing in and incorporated by reference in this Annual Report on Form 10-K of M/I Schottenstein Homes, Inc. for the year ended December 31, 2002. /s/ Deloitte & Touche LLP - --------------------------------- Deloitte & Touche LLP Columbus, Ohio March 31, 2003 EX-24 9 l99426aexv24.txt EX-24 POA EXHIBIT 24 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 Phillip G. Creek, 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacities indicated above, the 2002 Form 10-K and any and all amendments to such 2002 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 EXHIBIT 24 POWER OF ATTORNEY I, Robert H. Schottenstein, am President and a director of M/I Schottenstein Homes, Inc. (the "Company"), and I do hereby constitute and appoint Phillip G. Creek 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 2002 Form 10-K and any and all amendments to such 2002 Form 10-K; and I do hereby ratify and confirm all that the said attorney and agent, or her substitute or substitutes, shall do or cause to be done by virtue hereof. /s/ Robert H. Schottenstein ----------------------------------------------------- Robert H. Schottenstein President and Director EXHIBIT 24 POWER OF ATTORNEY I, Steven Schottenstein, am Chief Operating Officer and a director of M/I Schottenstein Homes, Inc. (the "Company"), and I do hereby constitute and appoint Robert H. Schottenstein and Phillip G. Creek, 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 2002 Form 10-K and any and all amendments to such 2002 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 Chief Operating Officer and Director EXHIBIT 24 POWER OF ATTORNEY I, Phillip G. Creek, am Chief Financial Officer (principal financial officer) and a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein my true and lawful attorney and agent, with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as principal financial officer 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 2002 Form 10-K and any and all amendments to such 2002 Form 10-K; and I do hereby ratify and confirm all that the said attorney and agent, or his substitute or substitutes shall do or cause to be done by virtue hereof. /s/ Phillip G. Creek ----------------------------------------------------- Phillip G. Creek Chief Financial Officer (principal financial officer) and Director EXHIBIT 24 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 Phillip G. Creek, 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 2002 Form 10-K and any and all amendments to such 2002 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 EXHIBIT 24 POWER OF ATTORNEY I, Friedrich K. M. Bohm, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Phillip G. Creek, 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 2002 Form 10-K and any and all amendments to such 2002 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. M. Bohm -------------------------------------------- Friedrich K. M. Bohm Director EXHIBIT 24 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 Phillip G. Creek, 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 2002 Form 10-K and any and all amendments to such 2002 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 EXHIBIT 24 POWER OF ATTORNEY I, Jeffrey H. Miro, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Phillip G. Creek, 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 2002 Form 10-K and any and all amendments to such 2002 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ Jeffrey H. Miro -------------------------------------------- Jeffrey H. Miro Director EXHIBIT 24 POWER OF ATTORNEY I, Thomas D. Igoe, a director of M/I Schottenstein Homes, Inc. (the "Company"), do hereby constitute and appoint Robert H. Schottenstein and Phillip G. Creek, 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, 2002 (the "2002 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 2002 Form 10-K and any and all amendments to such 2002 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/ Thomas D. Igoe -------------------------------------------- Thomas D. Igoe Director EX-99.1 10 l99426aexv99w1.txt EX-99.1 CERTIFICATION OF SCHOTTENSTEIN EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of M/I Schottenstein Homes, Inc. (the "Company") of Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Irving E. Schottenstein, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of the section 13(a) of 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Irving E. Schottenstein Date: March 31, 2003 - ----------------------------------------------- Irving E. Schottenstein Chairman and Chief Executive Officer EX-99.2 11 l99426aexv99w2.txt EX-99.2 CERTIFICATION FOR CREEK EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of M/I Schottenstein Homes, Inc. (the "Company") of Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Phillip G. Creek, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of the section 13(a) of 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Phillip G. Creek Dated: March 31, 2003 - ----------------------------------------------- Phillip G. Creek Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----