NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. Basis of Presentation
The
accompanying Unaudited Condensed Consolidated Financial Statements (the
“financial statements”) of M/I Homes, Inc. and its Subsidiaries (“the Company”)
and notes thereto have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission for interim financial
information. The financial statements include the accounts of M/I Homes, Inc.
and its subsidiaries. All intercompany transactions have been eliminated.
Certain reclassifications have been made to the 2005 financial statements to
conform to the 2006 presentation. Results for the interim period are not
necessarily indicative of results for a full year. In the opinion of management,
the accompanying financial statements reflect all adjustments (all of which
are
normal and recurring in nature) necessary for a fair presentation of financial
results for the interim periods presented.
These
financial statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2005.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosures of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during that period. Actual results could differ from these estimates and have
a
significant impact on the financial condition and results of operations and
cash
flows. With regard to the Company, estimates and assumptions are inherent in
calculations relating to inventory valuation, property and equipment
depreciation, valuation of derivative financial instruments, accounts payable
on
inventory, accruals for costs to complete, accruals for warranty claims,
accruals for self-insured general liability claims, litigation, accruals for
health care and workers’ compensation, accruals for guaranteed or indemnified
loans, stock-based compensation expense, income taxes and contingencies. Items
that could have a significant impact on these estimates and assumptions include
the risks and uncertainties listed in the “Risk Factors” contained within
Management’s Discussion and Analysis of Financial Condition and Results of
Operations as permitted by the Private Securities Litigation Reform Act of
1995
and in Item 1A. Risk Factors included in Part II.
NOTE
2. Stock-Based Compensation
On
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) 123R, “Share-Based Payment”
(“SFAS
123(R)”),
which
requires that companies measure and recognize compensation expense at an amount
equal to the fair value of share-based payments granted under compensation
arrangements. Prior to January 1, 2006, the Company accounted for its
stock-based compensation plans under the recognition and measurement principles
of Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued
to Employees,” and related interpretations, and recognized no compensation
expense for stock option grants since all options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The
Company adopted SFAS 123(R) using the “modified prospective” method, which
results in no restatement of prior period amounts. Under this method, the
provisions of SFAS 123(R) apply to all awards granted or modified after the
date
of adoption. In addition, compensation expense must be recognized for any
unvested stock option awards outstanding as of the date of adoption on a
straight-line basis over the remaining vesting period. The Company calculates
the fair value of options using a Black-Scholes option pricing model. For the
three months ended March 31, 2006, the Company’s compensation expense related to
stock option grants was $0.9 million ($0.6 million after tax and $0.04 per
share). SFAS 123(R) also requires the benefits of tax deductions in excess
of
recognized compensation expense to be reported in the Statement of Cash Flows
as
a financing cash inflow rather than an operating cash inflow. In addition,
SFAS
123(R) required a modification to the Company’s calculation of the dilutive
effect of stock option awards on earnings per share. For companies that adopt
SFAS 123(R) using the “modified prospective” method, disclosure of pro forma
information for periods prior to adoption must continue to be made.
Stock
Incentive Plan
As
of
March 31, 2006, the Company has a Stock Incentive Plan approved by the Company’s
shareholders, that includes stock options, 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 with vesting
accelerated upon the employee’s death or disability or upon a change of control
of the Company. Shares issued upon option exercise are from treasury
shares.
Following
is a summary of stock option activity as of March 31, 2006, and for the
three-month period then ended, relating to the stock options awarded under
the
Stock Incentive Plan. This information has been provided for interim financial
reporting as required for adoption of a new accounting standard in an interim
period:
|
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (Years)
|
Aggregate
Intrinsic
Value (a) ($000’s)
|
|
Options
outstanding at December 31, 2005
|
780,900
|
$41.09
|
|
|
|
Granted
|
367,500
|
41.45
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Options
outstanding at March 31, 2006
|
1,148,400
|
$41.20
|
8.27
|
$8,862
|
|
|
|
Options
exercisable at March 31, 2006
|
363,820
|
$33.27
|
6.73
|
$5,437
|
|
(a)
|
Intrinsic
value is defined as the amount by which the fair value of the underlying
stock exceeds the exercise price of the option.
|
The
aggregate intrinsic value of options exercised during the three months ended
March 31, 2005 was approximately $2.2 million. There were no options exercised
during the three months ended March 31, 2006.
The
fair
value of options granted during the three months ended March 31, 2006 and 2005
was established at the date of grant using a Black-Scholes pricing model with
the weighted average assumptions as follows:
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Expected
dividend yield
|
|
0.20
|
%
|
|
0.23
|
%
|
|
Risk-free
interest rate
|
|
4.35
|
%
|
|
3.77
|
%
|
|
Expected
volatility
|
|
34.8
|
%
|
|
29.2
|
%
|
|
Expected
term (in years)
|
|
6.5
|
|
|
6
|
|
|
Weighted
average grant date fair value of options granted during the
period
|
|
$17.71
|
|
|
$19.38
|
|
The
risk-free interest rate was based upon the U.S. Treasury five-year constant
maturities rate at the date of the grant. Expected volatility was determined
based on historical volatility of the Company’s common shares over the expected
term of the option.
For
stock
options granted in 2006, the Company has elected to apply the simplified method
for “plain vanilla” options to determine the expected term, as provided by the
Securities
and Exchange Commission’s Staff Accounting Bulletin Number 107.
Total
compensation expense that has been charged against income relating to the Stock
Incentive Plan was $0.9 million for the three months ended March 31, 2006.
The
total income tax benefit recognized in the Condensed Consolidated Statement
of
Income for this plan was $0.3 million for the three months ended March 31,
2006.
A
s
of
March 31, 2006, there was a total of $12.4 million of unrecognized compensation
expense related to unvested stock option awards that will be recognized as
expense as the awards vest over a weighted average period of 2.4 years.
The
following table sets forth the effect on net income and earnings per share
as if
SFAS 123(R) had been applied to the three month period ended March 31,
2005:
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
(In
thousands, except per share amounts)
|
2005
|
|
|
Net
income, as reported
|
$16,746
|
|
|
Less:
Total stock-based employee compensation expense determined under
a fair
value based method
|
|
for
all awards, net of related income tax effect
|
(424
|
)
|
|
Pro
forma net income
|
$16,322
|
|
|
|
|
Earnings
per share:
|
|
Basic
- as reported
|
$
1.18
|
|
|
Basic
- pro forma
|
$
1.15
|
|
|
Diluted
- as reported
|
$
1.16
|
|
|
Diluted
- pro forma
|
$
1.13
|
|
Deferred
Compensation Plans
As
of
March 31, 2006, the Company also has an Executives’ Deferred Compensation Plan
(the “Executive Plan”) and a Director Deferred Compensation Plan (the “Director
Plan”). The Director Plan and Executive Plan (together the “Plans”) provide an
opportunity for the Company’s directors and certain eligible employees of the
Company to defer a portion of their cash compensation to invest in the Company’s
common shares. Compensation expense deferred into the Plans totaled $0.8 million
and $0.7 million for the three months ended March 31, 2006 and 2005,
respectively. The portion of deferred cash compensation is invested in
fully-vested equity units in the Plans. One equity unit is the equivalent of
one
common share. Equity units and the related dividends will be converted and
distributed to the employee or director in the form of common shares at the
earlier of their elected distribution date or termination of service as an
employee or director of the Company. As of March 31, 2006, there were a total
of
117,647 equity units outstanding under the Plans. The aggregate intrinsic value
of these units was approximately $2.0 million as of March 31, 2006. Common
shares are issued from treasury shares upon distribution of deferred
compensation from the Plans.
NOTE
3. I
mpact
of New Accounting Standards
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share-Based Payment,” which revised SFAS No. 123, “Accounting for
Stock-Based Compensation” and superceded APB Opinion No. 25, “Accounting for
Stock Issued to Employees.” SFAS 123(R) requires the cost resulting from all
share-based payment transactions be recognized in the financial statements,
and
establishes fair value as the measurement objective in accounting for
share-based payment arrangements.
In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
Number 107 (“SAB 107”) that provided additional guidance to public companies
relating to share-based payment transactions and the implementation of SFAS
123(R). On January 1, 2006, the Company adopted SFAS 123(R) using the “modified
prospective” method. As further discussed under Note 2, “Stock-Based
Compensation,” the adoption of SFAS 123(R) resulted in $0.9 million of
compensation expense for the three months ended March 31, 2006.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments” (“SFAS 155”), which amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”) and SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities” (“SFAS 140”). SFAS 155
improves
financial reporting by eliminating the exemption from applying SFAS 133 to
interest in securitized financial assets so that similar instruments are
accounted for similarly regardless of the form of the instrument.
SFAS 155
also improves financial reporting by allowing an entity to elect fair value
measurement at acquisition, at issuance, or when a previously recognized
financial instrument is subject to a remeasurement event, on an
instrument-by-instrument basis, in cases in which a derivative would otherwise
be bifurcated. At the adoption of SFAS 155
,
any
difference between the total carrying amount of the individual components of
any
existing hybrid financial instrument and the fair value of the combined hybrid
financial instrument should be recognized as a cumulative-effect adjustment
to
beginning retained earnings.
SFAS
155
is effective January 1, 2007 for calendar year-end companies, with earlier
adoption permitted.
The
Company has not completed its assessment of the impact of SFAS 155, but does
not
anticipate a significant impact on the Company’s consolidated financial
condition, results of operations or cash flows.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS 156”), which also amends SFAS No. 140. SFAS 156 requires an
entity to recognize a servicing asset or servicing liability each time the
entity enters into a servicing contract for financial assets that it has sold,
or when the entity acquires or assumes an obligation to service a financial
asset, when the related financial asset is not also recorded on the consolidated
financial statements of the servicer entity. Under SFAS 156, servicing assets
and liabilities must be initially recognized at fair value with subsequent
measurement using either the amortization method or fair value method as
prescribed in SFAS 156. SFAS 156 is effective January 1, 2007 for calendar
year-end companies, with earlier adoption permitted.
The
Company has not completed its assessment of the impact of SFAS 156, but does
not
anticipate a significant impact on the Company’s consolidated financial
condition, results of operations or cash flows.
NOTE
4. Inventory
A
summary
of inventory is as follows:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
Single-family
lots, land and land development costs
|
|
$
862,404
|
|
|
$
754,530
|
|
|
Homes
under construction
|
|
341,729
|
|
|
294,363
|
|
|
Model
homes and furnishings - at cost (less accumulated depreciation: March
31,
2006 - $149;
|
|
|
|
|
|
|
|
December
31, 2005 - $211)
|
|
1,868
|
|
|
1,455
|
|
|
Community
development district infrastructure (Note 10)
|
|
9,065
|
|
|
7,634
|
|
|
Land
purchase deposits
|
|
12,716
|
|
|
14,058
|
|
|
Consolidated
inventory not owned (Note 11)
|
|
3,882
|
|
|
4,092
|
|
|
Total
inventory
|
|
$1,231,664
|
|
|
$1,076,132
|
|
Single-family
lots, land and land development costs include raw land that the Company has
purchased to develop into lots, costs incurred to develop the raw land into
lots
and lots for which development has been completed but have not yet been sold
or
committed to a third party for construction of a home.
Houses
under construction include homes that are finished and ready for delivery and
homes in various stages of construction.
Model
homes and furnishings include homes that are under construction or have been
completed and are being used as sales models. The amount also includes the
net
book value of furnishings included in our model homes.
Depreciation on model home furnishings is recorded using an accelerated method
over the estimated useful life of the assets, typically seven
years.
Land
purchase deposits include both refundable and non-refundable amounts paid to
third party sellers relating to the purchase of land.
NOTE
5. Capitalized Interest
The
Company capitalizes interest during land development and home construction.
Capitalized interest is charged to cost of sales as the related inventory is
delivered to a third party. The summary of capitalized
interest
is as follows
:
|
|
|
Three
Months Ended
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
|
Capitalized
interest, beginning of period
|
|
$19,233
|
|
$15,289
|
|
|
Interest
capitalized to inventory
|
|
6,094
|
|
1,587
|
|
|
Capitalized
interest charged to cost of sales
|
|
(857
|
)
|
(1,833
|
)
|
|
Capitalized
interest, end of period
|
|
$24,470
|
|
$15,043
|
|
|
Interest
incurred
|
|
$
9,255
|
|
$
3,450
|
|
NOTE
6. Property and Equipment
The
Company records property and equipment at cost and subsequently depreciates
the
assets using both straight-line and accelerated methods. Following are the
major
classes of depreciable assets and their estimated useful lives:
|
|
March
31,
|
|
December
31,
|
|
|
(In
thousands)
|
2006
|
|
2005
|
|
|
Land,
building and improvements
|
$11,824
|
|
$11,824
|
|
|
Office
furnishings, leasehold improvements and computer equipment and computer
software
|
13,091
|
|
11,433
|
|
|
Transportation
and construction equipment
|
22,520
|
|
22,520
|
|
|
Property
and equipment
|
47,435
|
|
45,777
|
|
|
Accumulated
depreciation
|
(12,176
|
)
|
(11,270
|
)
|
|
Property
and equipment, net
|
$35,259
|
|
$34,507
|
|
|
|
|
Estimated
Useful
Lives
|
|
Building
and improvements
|
|
35
years
|
|
Office
furnishings, leasehold improvements and computer equipment
|
|
3-7
years
|
|
Transportation
and construction equipment
|
|
5-20
years
|
Depreciation
expense was approximately $0.8 million and $0.6 million for the three-month
periods ended March 31, 2006 and 2005, respectively.
NOTE
7. Investment in Unconsolidated Limited Liability Companies
Unconsolidated
Limited Liability Companies - Homebuilding.
At March
31, 2006, the Company had interests ranging from 33% to 50% in limited liability
companies (“LLCs”) that do not meet the criteria of variable interest entities
because each of the entities has sufficient equity at risk to permit the entity
to finance its activities without additional subordinated support from the
equity investors, and several of these LLCs have outside financing that is
not
guaranteed by the Company. These LLCs engage in land acquisition and development
activities for the purpose of selling or distributing (in the form of a capital
distribution) developed lots to the Company and its partners in the entity.
In
certain of these LLCs, the Company and its partner in the entity have provided
the lender environmental indemnifications and guarantees of the completion
of
land development and minimum net worth levels of certain of the Company’s
subsidiaries as more fully described in Note 8 below.
These
entities have assets totaling $164.6 million and liabilities totaling $60.2
million, including third party debt of $55.9 million, as of March 31, 2006.
The
Company’s maximum exposure related to its investment in these entities as of
March 31, 2006 is the amount invested of $50.7 million plus letters of credit
of
$4.7 million and the obligation under the guarantees and indemnifications.
Included
in the Company’s investment in limited liability companies at March 31, 2006 and
December 31, 2005 are $0.9 million and $0.8 million, respectively, of
capitalized interest and other costs. The Company does not have a controlling
interest in these LLCs; therefore, they are recorded using the equity method
of
accounting.
Unconsolidated
Limited Liability Company - Title Operations
.
As of
March 31, 2006, M/I Financial owns a 49.9% interest in one unconsolidated title
insurance agency that engages in title and closing services for the Company.
The
Company’s maximum exposure related to this investment is limited to the amount
invested, which was approximately $4,000 and $19,000 at March 31, 2006 and
December 31, 2005, respectively. The total assets and corresponding total
liabilities and partner’s equity for our unconsolidated title agency at March
31, 2006 and December 31, 2005, was approximately $8,000 and $5,000,
respectively.
NOTE
8.
Guarantees
and Indemnifications
Warranty
The
Company provides a two-year limited warranty on materials and workmanship and
a
thirty-year limited warranty against major structural defects. Warranty amounts
are accrued as homes close to homebuyers and are intended to cover estimated
material and outside labor costs to be incurred during the warranty period.
The
accrual amounts are based upon historical experience and geographic location.
The summary of warranty activity is as follows:
|
|
Three
Months Ended
|
|
|
March
31,
|
|
March 31,
|
|
|
(In
thousands)
|
2006
|
|
2005
|
|
|
Warranty
accrual, beginning of period
|
$13,940
|
|
$13,767
|
|
|
Warranty
expense on homes delivered during the period
|
1,955
|
|
1,837
|
|
|
Changes
in estimates for pre-existing warranties
|
(203
|
)
|
(306
|
)
|
|
Settlements
made during the period
|
(2,207
|
)
|
(1,936
|
)
|
|
Warranty
accrual, end of period
|
$13,485
|
|
$13,362
|
|
Guarantees
and Indemnities
In
the
ordinary course of business, M/I Financial enters into agreements that guarantee
certain purchasers of its mortgage loans that M/I Financial will repurchase
a
loan if certain conditions occur, primarily if the mortgagor does not meet
those
conditions of the loan within the first six months after the sale of the loan.
Loans totaling approximately $91.8 million and $67.2 million were covered under
the above guarantee as of March 31, 2006 and December 31, 2005, respectively.
A
portion of the revenue paid to M/I Financial for providing the guarantee on
the
above loans was deferred at March 31, 2006, and will be recognized in income
as
M/I Financial is released from its obligation under the guarantee. M/I Financial
has not repurchased any loans under the above agreements in 2006 or 2005, but
has provided indemnifications to third party investors in lieu of repurchasing
certain loans. The total of these loans indemnified was approximately $2.4
million and $2.6 million as of March 31, 2006 and December 31, 2005,
respectively, relating to the above agreements. The risk associated with the
guarantees and indemnities above is offset by the value of the underlying
assets. The Company has accrued management’s best estimate of the probable loss
on the above loans.
M/I
Financial has also guaranteed the collectibility of certain loans to third-party
insurers of those loans for periods ranging from five to thirty years. The
maximum potential amount of future payments is equal to the outstanding loan
value less the value of the underlying asset plus administrative costs incurred
related to foreclosure on the loans, should this event occur. The total of
these
costs are estimated to be $2.6 million and $2.8 million at March 31, 2006 and
December 31, 2005, respectively, and would be offset by the value of the
underlying assets. The Company has accrued management’s best estimate of the
probable loss on the above loans.
The
Company has also provided certain other guarantees and indemnifications. The
Company has provided an environmental indemnification to an unrelated third
party seller of land in connection with the purchase of that land by the
Company. In addition, the Company has provided environmental indemnifications,
guarantees for the completion of land development, a loan maintenance and
limited payment guaranty, and minimum net worth guarantees of certain the
Company’s subsidiaries in connection with outside financing provided by lenders
to certain of our 50% owned LLCs. Under the environmental indemnifications,
the
Company and its partner in the LLC are jointly and severally liable for any
environmental claims relating to the property that are brought against the
lender. Under the land development completion guarantees, the Company and its
partner in the LLC are jointly and severally liable to incur any and all costs
necessary to complete the development of the land in the event that the LLC
fails to complete the project. The maximum amount that the Company could be
required to pay under the completion guarantees was approximately $21.9 million
and $26.7 million as of March 31, 2006 and December 31, 2005, respectively.
The
risk associated with these guarantees is offset by the value of the underlying
assets.
Under
the
loan maintenance guaranty, the Company and its LLC partner have jointly and
severally agreed to the third party lender to fund any shortfall, in the event
the ratio of the loan balance to the current fair market value of the property
under development by the LLC is below a certain threshold. As of March 31,
2006,
the total maximum amount of future payments the Company could be required to
make under the loan maintenance guaranty was approximately $10.0 million. Under
the above guarantees and indemnifications, the LLC operating agreements provide
recourse against our LLC partners for 50% of any actual liability associated
with the environmental indemnifications, completion guarantees and loan
maintenance guaranty.
The
Company has recorded a liability relating to the guarantees and indemnities
described above totaling $2.7 million and $2.8 million at March 31, 2006 and
December 31, 2005, respectively, which is management’s best estimate of the fair
value of the Company’s liability.
The
Company has also provided a guarantee of the performance and payment obligations
of its wholly-owned subsidiary, M/I Financial, up to an aggregate principle
amount of $13.0 million. The guarantee was provided to a government-sponsored
enterprise to which M/I Financial delivers loans.
NOTE
9. Commitments and Contingencies
At
March
31, 2006, the Company had sales agreements outstanding, some of which have
contingencies for financing approval, to deliver 3,112 homes with an aggregate
sales price of approximately $1.1 billion. Based on our current housing gross
margin of 25.3% plus variable selling costs of 4.2% of revenue, we estimate
payments totaling approximately $849.4 million to be made in 2006 relating
to
those homes. At March 31, 2006, the Company also had options and contingent
purchase agreements to acquire land and developed lots with an aggregate
purchase price of approximately $391.0 million. Purchase of properties is
contingent upon satisfaction of certain requirements by the Company and the
sellers.
At
March
31, 2006, the Company had outstanding approximately $176.4 million of completion
bonds and standby letters of credit that expire at various times through March
2011. Included in this total are $133.4 million of performance bonds and $25.1
million of performance letters of credit that serve as completion bonds for
land
development work in progress (including the Company’s $3.8 million share of our
LLCs’ letters of credit); $15.0 million of financial letters of credit, of which
$10.0 million represent deposits on land and lot purchase agreements; and $2.9
million of financial bonds.
At
March
31, 2006, the Company ha
d
outstanding $3.3 million of corporate promissory notes. These notes are due
and
payable in full upon default of the Company under agreements to purchase land
or
lots from third parties. No interest or principal is due unless and until the
time of default. In the event that the Company performs under these purchase
agreements without default, the notes will become null and void and no payment
will be required.
At
March
31, 2006, the Company had $0.3 million of certificates of deposit included
in
Other Assets that have been pledged as collateral for mortgage loans sold to
third parties, and, therefore, are restricted from general use.
The
Company and certain of its subsidiaries have been named as defendants in various
claims, complaints and other legal actions. Certain of the liabilities resulting
from these actions are covered by insurance. While management currently believes
that the ultimate resolution of these matters, individually and in the
aggregate, will not have a material adverse effect on the Company’s financial
position or overall trends in results of operations, such matters are subject
to
inherent uncertainties. The Company has recorded a liability to provide for
the
anticipated costs, including legal defense costs, associated with the resolution
of these matters. However, there exists the possibility that the costs to
resolve these matters could differ from the recorded estimates and, therefore,
have a material adverse impact on the Company’s net income for the periods in
which the matters are resolved.
NOTE
10. Community Development District Infrastructure and Related
Obligations
A
Community Development District and/or Community Development Authority (“CDD”) is
a unit of local government created under various state and/or local statutes.
The statutes allow CDDs to be created to encourage planned community development
and to allow for the construction and maintenance of long-term infrastructure
through alternative financing sources, including the tax-exempt markets. A
CDD
is generally created through the approval of the local city or county in which
the CDD is located and is controlled by a Board of Supervisors representing
the
landowners within the CDD. CDDs may utilize bond financing to fund construction
or acquisition of certain on-site and off-site infrastructure improvements
near
or within these communities. CDDs are also granted the power to levy special
assessments to impose ad valorem taxes, rates, fees and other charges for the
use of the CDD project. An allocated share of the principal and interest on
the
bonds issued by the CDD is assigned to and constitutes a lien on each parcel
within the community (“Assessment”). The owner of each such parcel is
responsible for the payment of the Assessment on that parcel. If the owner
of
the parcel fails to pay the Assessment, the CDD may foreclose on the lien
pursuant to powers conferred to the CDD under applicable state laws and/or
foreclosure procedures. In connection with the development of certain of the
Company’s communities, CDDs have been established and bonds have been issued to
finance a portion of the related infrastructure. Following are details relating
to the CDD bond obligations issued and outstanding:
|
Issue
Date
|
Maturity
Date
|
Interest
Rate
|
Principal
Amount
(In
thousands)
|
|
5/1/2004
|
5/1/2035
|
6.00%
|
$
9,665
|
|
7/15/2004
|
12/1/2022
|
6.00%
|
4,755
|
|
7/15/2004
|
12/1/2036
|
6.25%
|
10,060
|
|
3/1/2006
|
5/1/2037
|
5.35%
|
22,685
|
|
Total
CDD bond obligations issued and outstanding as of March 31,
2006
|
$47,165
|
In
accordance with EITF Issue 91-10, “Accounting for Special Assessments and Tax
Increment Financing,” the Company records a liability, net of cash held by the
district available to offset the particular bond obligation, for the estimated
developer obligations that are fixed and determinable and user fees that are
required to be paid or transferred at the time the parcel or unit is sold to
an
end user. The Company reduces this liability by the corresponding Assessment
assumed by property purchasers and the amounts paid by the Company at the time
of closing and the transfer of the property. The Company has recorded a $9.1
million liability related to these CDD bond obligations as of March 31, 2006,
along with the related inventory infrastructure.
In
addition, at March 31, 2006, the Company had outstanding a $1.2 million CDD
bond
obligation in connection with the purchase of land. This obligation bears
interest at a rate of 5.5% and matures November 1, 2010. As lots are closed
to
third parties, the Company will repay the CDD bond obligation associated with
each lot.
NOTE
11. Consolidated Inventory Not Owned and Related Obligation
In
the
ordinary course of business, the Company enters into land option contracts
in
order to secure land for the construction of homes in the future. Pursuant
to
these land option contracts, the Company will provide a deposit to the seller
as
consideration for the right to purchase land at different times in the future,
usually at predetermined prices. Under FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities” (“FIN 46(R)”), if the entity
holding the land under option is a variable interest entity, the Company’s
deposit (including letters of credit) represents a variable interest in the
entity. The Company does not guarantee the obligations or performance of the
variable interest entity.
In
applying the provisions of FIN 46(R), the Company evaluated all land option
contracts and determined that the Company was subject to a majority of the
expected losses or entitled to receive a majority of the expected residual
returns under a contract. As the primary beneficiary under this contract, the
Company is required to consolidate the fair value of the variable interest
entity.
As
of
March 31, 2006, the Company had recorded $3.9 million within Inventory on the
Unaudited Condensed Consolidated Balance Sheet, representing the fair value
of
land under contract. The corresponding liability has been classified as
Obligation for Consolidated Inventory Not Owned on the Unaudited Condensed
Consolidated Balance Sheet.
NOTE
12. Notes Payable Banks
On
April
27, 2006, M/I Financial and the Company entered into the First Amended and
Restated Revolving Credit Agreement (“MIF Credit Facility”). The MIF Credit
Facility was a replacement of M/I Financial’s existing credit agreement, which
expired on April 27, 2006. The MIF Credit Facility provides M/I Financial with
$40.0 million maximum borrowing availability, except for the period December
15,
2006 through January 15, 2007 when the maximum borrowing availability is
increased to $65.0 million. The maximum borrowing availability is limited to
95%
of eligible mortgage loans. In determining eligible mortgage loans, the MIF
Credit Facility provides limits on certain types of loans. The borrowings under
the MIF Credit Facility are at Prime Rate or LIBOR plus 135 basis points, with
a
commitment fee on the unused portion of the MIF Credit Facility of 0.20%. The
MIF Credit Facility expires April 26, 2007. Under the terms of the MIF Credit
Facility, M/I Financial is required to maintain tangible net worth of $3.5
million and maintain certain financial ratios.
At
March
31, 2006, there was $24.5 million outstanding under the existing M/I Financial
loan agreement with $4.3 million of availability under the borrowing base
calculation. As of March 31, 2006, the Company was in compliance with all
restrictive covenants of the M/I Financial loan agreement.
NOTE
13. Earnings Per Share
Earnings
per share is calculated based on the weighted average number of common shares
outstanding during each period. The difference between basic and diluted shares
outstanding is due to the effect of dilutive stock options and deferred
compensation. There are no adjustments to net income necessary in the
calculation of basic or diluted earnings per share.
|
|
Three
Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
(In
thousands, except per share amounts)
|
2006
|
|
2005
|
|
Basic
weighted average shares outstanding
|
14,110
|
|
14,238
|
|
Effect
of dilutive securities:
|
|
Stock
option awards
|
82
|
|
139
|
|
Deferred
compensation awards
|
121
|
|
121
|
|
Diluted
average shares outstanding
|
14,313
|
|
14,498
|
|
|
|
Net
income
|
$16,378
|
|
$16,746
|
|
|
|
Earnings
per share:
|
|
Basic
|
$
1.16
|
|
$
1.18
|
|
Diluted
|
$
1.14
|
|
$
1.16
|
|
Anti-dilutive
options not included in the calculation of diluted earnings per
share
|
680
|
|
-
|
NOTE
14. Purchase of Treasury Shares
On
November 8, 2005, the Company obtained authorization from the Board of Directors
to repurchase up to $25 million worth of its outstanding common shares. The
repurchase program has no expiration date, and was publicly announced on
November 10, 2005. The purchases may occur in the open market and/or in
privately negotiated transactions as market conditions warrant.
During
the three-month period ended March 31, 2006, the Company repurchased 333,500
shares. As of March 31, 2006, the Company had approximately $11.4 million
available to repurchase outstanding common shares from the Board approval.
NOTE
15. Dividends
On
April
20, 2006, the Company paid to shareholders of record of its common stock on
April 3, 2006, a cash dividend of $0.025 per share.
O
n
April
27, 2006, the Board of Directors approved a $0.025 per share cash dividend
payable to shareholders of record on July 3, 2006, which will be paid on July
20, 2006. Total dividends paid in 2006 through April 20 were approximately
$712,000.
NOTE
16. Operating and Reporting Segments
The
Company’s chief operating decision makers evaluate the Company’s performance on
a consolidated basis and by evaluating our two segments, homebuilding operations
and financial services operations. The homebuilding operations include the
acquisition and development of land, the sale and construction of single-family
attached and detached homes and the sale of lots to third parties. The
homebuilding operations include similar operations in several geographic regions
that have been aggregated for segment reporting purposes. The financial services
operations include the origination and sale of mortgage loans and title and
insurance agency services for purchasers of the Company’s
homes.
In
conformity with SFAS No. 131, “Disclosure about Segments of an Enterprise and
Related Information” (“SFAS 131”), the Company’s segment information is
presented on the basis that the chief operating decision makers use in
evaluating segment performance. The accounting policies of the segments, in
total, are the same as those described in the Summary of Significant Accounting
Policies included in our Annual Report on Form 10-K for the year ended December
31, 2005. Eliminations consist of fees paid by the homebuilding operations
relating to loan origination and title fees for its homebuyers that are included
in financial services’ revenue; the homebuilding segment’s housing costs include
these fees paid to financial services.
During
the fourth quarter of 2005, the Company’s chief operating decision makers made a
decision to change how the total business was viewed to include corporate and
other, previously shown separately within the Company’s segment reporting,
within the homebuilding segment. The chief operating decision makers made this
change because they believe this is a better way to view the Company’s results,
and will also provide more comparable information with the homebuilding
industry. As required under SFAS 131, the Company has restated 2005’s segment
information to be consistent with the 2006 segment reporting.
|
|
Three
Months Ended
|
|
|
March
31,
|
|
March 31,
|
|
|
(In
thousands)
|
2006
|
|
2005
|
|
|
Revenue:
|
|
Homebuilding
|
$253,327
|
|
$235,591
|
|
|
Financial
services
|
6,987
|
|
7,691
|
|
|
Eliminations
|
(1,259
|
)
|
(1,883
|
)
|
|
Total
revenue
|
$259,055
|
|
$241,399
|
|
|
|
|
Income
before income taxes:
|
|
Homebuilding
|
$
22,349
|
|
$
22,149
|
|
|
Financial
services
|
4,067
|
|
5,304
|
|
|
Total
income before income taxes
|
$
26,416
|
|
$
27,453
|
|
M/I
HOMES, INC. AND SUBSIDIARIES
ITEM
2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
OVERVIEW
M/I
Homes, Inc. (“the Company”) is one of the nation’s leading builders of
single-family homes, having
delivered
nearly 65,000 homes since our inception in 1976. The Company’s homes are
marketed and sold under the trade names M/I Homes, Showcase Homes and Shamrock
Homes. The Company has homebuilding operations in Columbus and Cincinnati,
Ohio;
Indianapolis, Indiana; Tampa, Orlando and West Palm Beach, Florida; Charlotte
and Raleigh, North Carolina; Delaware; and the Virginia and Maryland suburbs
of
Washington, D.C. In 2005, the latest year for which information is available,
we
were the 21
st
largest
U.S. single-family homebuilder (based on homes delivered) as ranked by
Builder
Magazine
.
Included
in this Management’s Discussion and Analysis of Financial Condition and Results
of Operations are the following topics relevant to the Company’s performance and
financial condition:
|
●
|
Information
Relating to Forward-Looking Statements
|
|
●
|
Our
Application of Critical Accounting Estimates and
Policies
|
|
●
|
Our
Results of Operations
|
|
●
|
Discussion
of Our Liquidity and Capital Resources
|
|
●
|
Discussion
of Our Utilization of Off-Balance Sheet Arrangements
|
|
●
|
Impact
of Interest Rates and Inflation
|
|
●
|
Discussion
of Risk Factors
|
FORWARD-LOOKING
STATEMENTS
Certain
information included in this report or in other materials we have filed or
will
file with the Securities and Exchange Commission (the “SEC”) (as well as
information included in oral statements or other written statements made or
to
be made by us) contains or may contain forward-looking statements,
including, but not limited to, statements regarding our future financial
performance and financial condition. Words such as “expects,” “anticipates,”
“targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” variations of such words and similar expressions are intended to
identify such forward-looking statements. 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 relating to the economic environment,
interest rates, availability of resources, competition, market concentration,
land development activities and various governmental rules and regulations,
as
more fully discussed in the “Risk Factors” section of Management’s Discussion
and Analysis of Financial Condition and Results of Operations and as set forth
in Item 1A. Risk Factors. Except as required by applicable law or the rules
and
regulations of the SEC, we undertake no obligation to publicly update any
forward-looking statements or risk factors, whether as a result of new
information, future events or otherwise. However, any further disclosures made
on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should
be consulted. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995, and all of our forward-looking statements are
expressly qualified in their entirety by the cautionary statements contained
or
referenced in this section.
APPLICATION
OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The
preparation of financial statements in conformity with accounting principles
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 estimates that we believe are
critical and require the use of complex judgment in their
application.
Revenue
Recognition.
Revenue
from the sale of a home is recognized when the closing has occurred, title
has
passed and an adequate initial and continuing investment by the homebuyer is
received, in accordance with Statement of Financial Accounting Standard (“SFAS”)
No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”), or when the loan has
been sold to a third party investor. Revenue for homes that close to the buyer
having a deposit of 5% or greater, those financed by third parties, and all
home
closings insured under FHA or VA government-insured programs are recorded in
the
financial statements on the date of closing. Revenue related to all other home
closings initially funded by our wholly-owned subsidiary, M/I Financial, Corp.
(“M/I Financial”), is recorded on the date that M/I Financial sells the loan to
a third party investor, because the receivable from the third party investor
is
not subject to future subordination and the Company has transferred to this
investor the usual risks and rewards of ownership that is in substance a sale
and does not have a substantial continuing involvement with the home, in
accordance with SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). All
associated homebuilding costs are charged to cost 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 construction), previously capitalized indirect costs
and
estimated warranty costs. All other costs are expensed as incurred.
We
recognize the majority of the revenue associated with our mortgage loan
operations when the mortgage loans and related servicing rights are sold to
third party investors. We defer the application and origination fees, net of
costs, and recognize them as revenue, along with the associated gains or losses
on the sale of the loans and related servicing rights, when the loans are sold
to third party investors in accordance with SFAS No. 91, “Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans.”
The revenue recognized is reduced by the fair value of the related guarantee
provided to the investor. The guarantee fair value is recognized in revenue
when
the Company is released from its obligation under the guarantee. Generally,
all
of the financial services mortgage loans and related servicing rights are sold
to third party investors within two weeks of origination. We recognize financial
services revenue associated with our title operations as homes are closed,
closing services are rendered and title policies are issued, all of which
generally occur simultaneously as each home is closed. All of the underwriting
risk associated with title insurance policies is transferred to third party
insurers.
Inventories.
We
use
the specific identification method for the purpose of accumulating costs
associated with home construction. Inventories are recorded at cost, unless
they
are determined to be impaired, in which case the impaired inventories are
written down to fair value less cost to sell in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” In addition to
the costs of direct land acquisition, land development and related costs (both
incurred and estimated to be incurred) and home construction costs, inventories
include capitalized interest, real estate taxes and certain indirect costs
incurred during land development and home construction. Such costs are charged
to cost of sales simultaneously with revenue recognition, as discussed above.
When a home is closed, we typically have not yet paid all incurred costs
necessary to complete the home. As homes close, we compare the home construction
budget to actual recorded costs to date to estimate the additional costs to
be
incurred from our subcontractors related to the home. We record a liability
and
a corresponding charge to cost of sales for the amount we estimate will
ultimately be paid related to that home. We monitor the accuracy of such
estimate by comparing actual costs incurred in subsequent months to the
estimate. Although actual costs to complete in the future could differ from
the
estimate, our method has historically produced consistently accurate estimates
of actual costs to complete closed homes.
Consolidated
Inventory Not Owned.
We
enter
into land option agreements in the ordinary course of business in order to
secure land for the construction of houses in the future. Pursuant to these
land
option agreements, we provide a deposit to the seller as consideration for
the
right to purchase land at different times in the future, usually at
predetermined prices. If the entity holding the land under option is a variable
interest entity, the Company’s deposit (including letters of credit) represents
a variable interest in the entity, and we must use our judgment to determine
if
we are the primary beneficiary of the entity. Factors considered in determining
whether we are the primary beneficiary include the amount of the deposit in
relation to the fair value of the land, expected timing of our purchase of
the
land and assumptions about projected cash flows. We consider our accounting
policies with respect to determining whether we are the primary beneficiary
to
be critical accounting policies due to the judgment required.
Investment
in Unconsolidated Limited Liability Companies.
We
invest in entities that acquire and develop land for distribution or sale to
us
in connection with our homebuilding operations. In our judgment, we have
determined that these entities generally do not meet the criteria of variable
interest entities because they have sufficient equity to finance their
operations. We must use our judgment to determine if we have substantive control
over these entities. If we were to determine that we have substantive control
over an entity, we would be required to consolidate the entity. Factors
considered in determining whether we have substantive control or exercise
significant influence over an entity include risk and reward sharing, experience
and financial condition of the other partners, voting rights, involvement in
day-to-day capital and operating decisions and continuing involvement. In the
event an entity does not have sufficient equity to finance its operations,
we
would be required to use judgment to determine if we were the primary
beneficiary of the variable interest entity. We consider our accounting policies
with respect to determining whether we are the primary beneficiary or have
substantive control or exercise significant influence over an entity to be
critical accounting policies due to the judgment required. Based on the
application of our accounting policies, these entities are accounted for by
the
equity method of accounting.
Guarantees
and Indemnities.
Guarantee
and indemnity liabilities are established by charging the applicable income
statement or balance sheet line, depending on the nature of the guarantee or
indemnity, and crediting a liability. M/I Financial provides a limited-life
guarantee on loans sold to certain third parties, and estimates its actual
liability related to the guarantee, and any indemnities subsequently provided
to
the purchaser of the loans in lieu of loan repurchase, based on historical
loss
experience. Actual future costs associated with loans guaranteed or indemnified
could differ materially from our current estimated amounts. The Company has
also
provided certain other guarantees and indemnifications in connection with the
purchase and development of land, including environmental indemnifications,
guarantees of the completion of land development and minimum net worth
guarantees of certain subsidiaries. The Company estimates these liabilities
based on the estimated cost of insurance coverage or estimated cost of acquiring
a bond in the amount of the exposure. Actual future costs associated with these
guarantees and indemnifications could differ materially from our current
estimated amounts.
Warranty.
Warranty
accruals are established by charging cost of sales and crediting a warranty
accrual for each home closed. The amounts charged are estimated by management
to
be adequate to cover expected warranty-related costs for materials and labor
required under the Company’s warranty programs. Accruals for warranties under
our two-year limited warranty program and our 20-year (for homes closed prior
to
1998) and 30-year structural warranty program are established as a percentage
of
average sales price and on a per unit basis, respectively, and are based upon
historical experience by geographic area and recent trends. Factors that are
given consideration in determining the accruals include: 1) the historical
range
of amounts paid per average sales price on a home; 2) type and mix of amenity
packages added to the home; 3) any warranty expenditures included in the above
not considered to be normal and recurring; 4) timing of payments; 5)
improvements in quality of construction expected to impact future warranty
expenditures; 6) actuarial estimates prepared by an independent third party,
which considers both Company and industry data; and 7) conditions that may
affect certain projects and require a different percentage of average sales
price for those specific projects.
Changes
in estimates for pre-existing warranties occur due to changes in the historical
payment experience, and are also due to differences between the actual payment
pattern experienced during the period and the historical payment pattern used
in
our evaluation of the warranty accrual balance at the end of each quarter.
Actual future warranty costs could differ materially from our currently
estimated amount.
Self-insurance.
Self-insurance accruals are made for estimated liabilities associated with
employee health care, Ohio workers’ compensation and general liability
insurance. Our self-insurance limit for employee health care is $250,000 per
claim per year for fiscal 2006, with stop loss insurance covering amounts in
excess of $250,000 up to $1,750,000 per claim per year. Our self-insurance
limit
for workers’ compensation is $400,000 per claim with stop loss insurance
covering all amounts in excess of this limit. The accruals related to employee
health care and workers’ compensation are based on historical experience and
open cases. Our general liability claims are insured by a third party; the
Company generally has a $7.5 million deductible (previously $5.0 million through
March 31, 2006) per occurrence and in the aggregate, with lower deductibles
for
certain types of claims. The Company records a general liability accrual for
claims falling below the Company’s deductible. The general liability accrual
estimate is based on an actuarial evaluation of our past history of claims
and
other industry specific factors. The Company has recorded expenses totaling
$1.6
million, for all self-insured and general liability claims for each of the
three
months ended March 31, 2006 and 2005. Because of the high degree of judgment
required in determining these estimated accrual amounts, actual future costs
could differ from our current estimated amounts.
Stock-Based
Compensation.
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), “Share
Based Payment” (“SFAS 123(R)”), which requires that companies measure and
recognize compensation expense at an amount equal to the fair value of
share-based payments granted under compensation arrangements. We calculate
the
fair value of stock options using the Black-Scholes option pricing model.
Determining the fair value of share-based awards at the grant date requires
judgment in developing assumptions, which involve a number of variables. These
variables include, but are not limited to, the expected stock price volatility
over the term of the awards, the expected dividend yield and the expected term
of the option. In addition, we also use judgment in estimating the number of
share-based awards that are expected to be forfeited. Prior to January 1, 2006,
we accounted for stock option grants using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees,” and recognized no compensation expense for stock
option grants since all options granted had an exercise price equal to the
market value of the underlying common shares on the date of grant.
Derivative
Financial Instruments.
The
Company has the following types of derivative financial instruments: mortgage
loans held for sale and interest rate lock commitments (“IRLCs”). Mortgage loans
held for sale consist primarily of single-family residential loans
collateralized by the underlying property. All mortgage loans are committed
to
third-party investors at the date of funding and are typically sold to such
investors within two weeks of funding. The commitments associated with funded
loans are designated as fair value hedges of the risk of changes in the overall
fair value of the related loans. Accordingly, changes in the value of derivative
instruments are recognized in current earnings, as are changes in the value
of
the loans. The net gain or loss is included in financial services revenue.
To
meet financing needs of our home-buying customers, M/I Financial is party
to
interest rate IRLCs, which are extended to customers who have applied for
a
mortgage loan and meet certain defined credit and underwriting criteria.
In
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”) and related Derivatives Implementation Group
conclusions, the Company classifies and accounts for IRLCs as non-designated
derivative instruments at fair value with gains and losses recorded in current
earnings. M/I Financial manages interest rate risk related to its IRLC loans
through the use of forward sales of mortgage-backed securities (“FMBSs”), use of
best-efforts whole loan delivery commitments and the occasional purchase
of
options on FMBSs in accordance with Company policy. These instruments are
considered non-designated derivatives and are accounted for at fair value,
with
gains or losses recorded in current earnings.
RESULTS
OF OPERATIONS
The
Company’s chief operating decision makers evaluate the Company’s performance on
a consolidated basis and by evaluating our two segments, homebuilding operations
and financial services operations. The homebuilding operations include the
acquisition and development of land, the sale and construction of single-family
attached and detached homes and the occasional sale of lots to third parties.
The homebuilding operations include similar operations in several geographic
regions that have been aggregated for segment reporting purposes. The financial
services operations include the origination and sale of mortgage loans and
title
and insurance agency services for purchasers of the Company’s
homes.
In
conformity with SFAS No. 131, “Disclosure about Segments of an Enterprise and
Related Information” (“SFAS 131”), the Company’s segment information is
presented on the basis that the chief operating decision makers use in
evaluating segment performance. The accounting policies of the segments, in
total, are the same as those described in the Summary of Significant Accounting
Policies included in our Annual Report on Form 10-K for the year ended December
31, 2005. Eliminations consist of fees paid by the homebuilding operations
relating to loan origination and title fees for its homebuyers that are included
in financial services’ revenue; the homebuilding segment’s housing costs include
these fees paid to financial services.
During
the fourth quarter of 2005, the Company’s chief operating decision makers made a
decision to change how the total business was viewed to include corporate and
other, previously shown separately within the Company’s segment reporting,
within the homebuilding segment. The chief operating decision makers made this
change because they believe this is a better way to view the Company’s results,
and will also provide more comparable information with the homebuilding
industry. As required under SFAS 131, the Company has restated 2005’s segment
information to be consistent with the 2006 segment reporting.
Highlights
and Trends for the Three Months Ended March 31, 2006
|
●
|
Homes
delivered for the three months ended March 31, 2006 increased 7%
when
compared to 2005, and the average sales price of homes delivered
also
increased 7%, from $278,000 to $298,000. Partially offsetting the
above
were decreases in revenue from the outside sale of land to third
parties,
which declined 81% from $8.7 million to $1.7 million along with a
67%
decrease in the impact of deferred revenue from the home closings
with
low-down payment loans that were not yet sold to a third party. The
impact
for this deferred revenue was $11.3 million during the first quarter
of
2005 and $3.7 million in 2006. We currently estimate that homes delivered
during 2006 to be approximately 4,750, with homes delivered during
the
second half of the year to be substantially higher than during the
first
half of the year.
|
|
|
19
|
|
●
|
Income
before taxes declined $1.0 million and 4% from 2005. This decline
was the
result of higher selling, general and administrative costs in our
homebuilding operations and higher interest expense, which more than
offset increases in revenue and gross margins. Compared to 2005’s first
quarter, general and administrative costs increased for the following
reasons: 1) $1.1 million as a result of our increased land investment
and
related development activities, primarily due to increased real estate
taxes and homeowner’s association dues resulting from increased land
position; 2) $1.8 million increase in personnel, systems, insurance
and
infrastructure costs to aid in our growth objectives; 3) $0.9 million
expense for stock options resulting from new accounting requirements
under
SFAS 123(R); and 4) $0.9 million for amortization of intangibles
and
administrative costs related to our July 2005 acquisition of Shamrock
Homes. Selling expenses also increased $4.0 million compared to 2005’s
first quarter, primarily due to $1.3 million higher advertising and
marketing costs relating to our community count growth and promotions
to
stimulate sales in certain markets and $1.3 million increase in spending
on models and sales offices due to our higher community count. Also
contributing to the increase in selling expenses was $0.7 million
increase
due to mix of closings with higher realtor co-op participation and
$0.4
million relating to inclusion in 2006 of Shamrock Homes selling expenses.
|
|
|
|
|
●
|
New
contracts in the first quarter increased 5% when compared to the
first
quarter of 2005, driven by our Florida and North Carolina markets,
with
the Midwest being flat compared to 2005 and Washington, D.C. being
down
approximately 30%. Our March 2006 new contracts declined 22% compared
to
March 2005, and we are continuing to see declining new contracts,
in
particular in our Midwest, Washington, D.C. and certain Florida markets
where competitive pressures have increased as a result of significant
competitor discounting and available inventory levels. For the first
quarter 2006, our cancellation rate increased to 24.9% compared to
18.6%
in 2005’s first quarter and 21.2% for 2005’s annual period, which we also
believe this increase in cancellations was the result of the increase
in
available home inventory in certain markets, primarily in our Washington,
D.C. and Columbus markets.
|
|
|
|
|
●
|
For
the first quarter of 2006, our mortgage capture rate was 76%, compared
to
82% in 2005’s first quarter. We expect to experience continued downward
pressure on our mortgage company’s capture rate, as a result of lower
refinance volume for outside lenders and increased competition. This
could
negatively affect earnings due to the lower capture
rate.
|
|
|
|
|
●
|
We
continue to focus on our land supply, and
currently
plan to purchase approximately $200 million of land in 2006. For
the three
months ended March 31, 2006, we purchased approximately $110 million
of
land, including $4 million for land purchased by an unconsolidated
limited
liability company in which we hold an interest.
|
|
|
|
|
●
|
We
are experiencing a slightly lower effective tax rate for 2006, primarily
as a result of the manufacturing credit established by the 2004 American
Jobs Creation Act. The decrease is also due to a change in the state
of
Ohio’s tax laws, which phases out the Ohio income tax and replaces it
with
a gross receipts tax, which is classified as general and administrative
expense.
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March 31,
|
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
Homebuilding
|
|
$253,327
|
|
|
$235,591
|
|
|
Financial
services
|
|
6,987
|
|
|
7,691
|
|
|
Eliminations
|
|
(1,259
|
)
|
|
(1,883
|
)
|
|
Total
revenue
|
|
$259,055
|
|
|
$241,399
|
|
|
Income
before income
taxes:
|
|
Homebuilding
|
|
$
22,349
|
|
|
$ 22,149
|
|
|
Financial
services
|
|
4,067
|
|
|
5,304
|
|
|
Total
income before income taxes
|
|
$
26,416
|
|
|
$
27,453
|
|
|
|
|
Other
company financial
information:
|
|
Interest
expense
|
|
$
3,161
|
|
|
$
1,863
|
|
|
Effective
tax rate
|
|
38.0
|
%
|
|
39.0
|
%
|
|
Total
gross margin %
|
|
27.3
|
%
|
|
25.2
|
%
|
|
Total
operating margin %
|
|
11.4
|
%
|
|
12.1
|
%
|
As
discussed above, during the fourth quarter of 2005, the Company’s chief
operating decision makers made a decision to change how the total business
was
viewed to include corporate and other, previously shown separately within the
Company’s segment reporting, within the homebuilding segment. This homebuilding
segment change also resulted in a change in the components within homebuilding.
Housing revenue represents revenue generated from the delivery of homes to
homebuyers, land revenue consists of the sale of land and lots to external
parties and other revenue consists of revenue related to the timing of homes
delivered with low-down payment loans (buyers put less than 5% down) funded
by
the Company’s financial services operations, not yet sold to a third party. In
accordance with SFAS 66 and SFAS 140, recognition of such sales must be deferred
until the related loan is sold to a third party.
|
|
Three
Months Ended
|
|
|
March
31,
|
|
March 31,
|
|
|
(Dollars
in thousands)
|
2006
|
|
2005
|
|
|
Revenue:
|
|
Housing
|
$247,990
|
|
$215,527
|
|
|
Land
|
1,650
|
|
8,739
|
|
|
Other
|
3,687
|
|
11,325
|
|
|
Total
revenue
|
$253,327
|
|
$235,591
|
|
|
Revenue:
|
|
Housing
|
97.9
|
%
|
91.5
|
%
|
|
Land
|
0.7
|
|
3.7
|
|
|
Other
|
1.4
|
|
4.8
|
|
|
Total
revenue
|
100.0
|
|
100.0
|
|
|
Land
and housing costs
|
74.8
|
|
77.5
|
|
|
Gross
margin
|
25.2
|
|
22.5
|
|
|
General
and administrative expenses
|
6.9
|
|
5.1
|
|
|
Selling
expenses
|
8.3
|
|
7.2
|
|
|
Operating
income
|
10.0
|
|
10.2
|
|
|
Interest
|
1.2
|
|
0.8
|
|
|
Income
before income taxes
|
8.8
|
%
|
9.4
|
%
|
|
Ohio
and Indiana Region
|
|
Unit
data:
|
|
New
contracts
|
640
|
|
643
|
|
|
Homes
delivered
|
369
|
|
416
|
|
|
Backlog
at end of period
|
1,211
|
|
1,537
|
|
|
Average
sales price of homes in backlog
|
$
281
|
|
$
277
|
|
|
Aggregate
sales value of homes in backlog
|
$340,000
|
|
$426,000
|
|
|
Number
of active communities
|
90
|
|
89
|
|
|
Florida
Region
|
|
Unit
data:
|
|
New
contracts
|
321
|
|
287
|
|
|
Homes
delivered
|
365
|
|
247
|
|
|
Backlog
at end of period
|
1,496
|
|
1,136
|
|
|
Average
sales price of homes in backlog
|
$
376
|
|
$ 296
|
|
|
Aggregate
sales value of homes in backlog
|
$562,000
|
|
$336,000
|
|
|
Number
of active communities
|
33
|
|
18
|
|
|
North
Carolina, Delaware and Washington, D.C. Region
|
|
Unit
data:
|
|
New
contracts
|
176
|
|
148
|
|
|
Homes
delivered
|
98
|
|
112
|
|
|
Backlog
at end of period
|
405
|
|
318
|
|
|
Average
sales price of homes in backlog
|
$
429
|
|
$
475
|
|
|
Aggregate
sales value of homes in backlog
|
$174,000
|
|
$151,000
|
|
|
Number
of active communities
|
32
|
|
23
|
|
|
Total
|
|
Unit
data:
|
|
New
contracts
|
1,137
|
|
1,078
|
|
|
Homes
delivered
|
832
|
|
775
|
|
|
Backlog
at end of period
|
3,112
|
|
2,991
|
|
|
Average
sales price of homes in backlog
|
$
346
|
|
$
305
|
|
|
Aggregate
sales value of homes in backlog
|
$1,076,000
|
|
$913,000
|
|
|
Number
of active communities
|
155
|
|
130
|
|
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.
“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. In
our
Ohio and Indiana region (“Midwest”), most cancellations of contracts for homes
in backlog occur because customers cannot qualify for financing and usually
occur prior to the start of construction. In our other markets, cancellations
are generally more the result of the available inventory in the market and
more
aggressive discounting by competitors causing buyers to cancel. The cancellation
rate for the quarters ended March 31, 2006 and March 31, 2005 was
24.
9%
and
18.6%, respectively. Unsold speculative homes, which are in various stages
of
construction, totaled 395 and 186 at March 31, 2006 and 2005, respectively.
During 2005, the Company increased its investment in unsold speculative homes.
In the Midwest, the increase was primarily for competitive purposes, to provide
potential homebuyers with more flexibility. In our other markets, the increase
was the result of both an increase in our number of communities and the desire
to build and showcase new product lines.
Three
Months Ended March 31, 2006 Compared to Three Months Ended March 31,
2005
Revenue.
Revenue
for the homebuilding segment was $253.3 million, an increase of 8% and $17.7
million from 2005, driven by a 15% increase in housing revenue ($32.5 million).
The increase in housing revenue was due to increases in both the number of
homes
delivered, up 7% from 775 to 832, and an increase in the average sales price
of
homes delivered, also up 7% from $278,000 in 2005 to $298,000 in 2006. The
increase in homes delivered was driven by our Florida markets, where homes
delivered were 48% higher than 2005, and the average sales price of homes
delivered increased in all of our markets except Indianapolis and Cincinnati.
Partially offsetting the increase in housing revenue was a $7.0 million decrease
in land revenue, primarily due to only $0.2 million of third party land sales
in
Washington, D.C. during the first quarter of 2006 compared to $4.1 million
of
land revenue in Washington, D.C. in 2005 from the sale of 31 lots. Land revenue
can vary significantly from period to period, given that management
opportunistically determines the particular land or lots to be sold directly
to
third parties. In addition, the timing of homes delivered with low-down payment
loans (buyers put less than 5% down) funded by the Company’s financial services
operations, not yet sold to a third party resulted in a $7.6 million decrease
in
revenue compared to 2005. In accordance with SFAS 66 and SFAS 140, recognition
of such sales must be deferred until the related loan is sold to a third party.
The impact for change in this deferred revenue was $11.3 million during the
first quarter of 2005 and $3.7 million in 2006.
Home
Sales and Backlog.
New
contracts in the first quarter of 2006 increased 5% over the prior year, from
1,078 to 1,137 driven by the 12% increase in our Florida region and a 56%
increase in our North Carolina markets. In the Midwest, 2006’s new contracts
were virtually flat compared to 2005. There was also a decline of 32% in our
Washington, D.C. new contracts, which we believe is due to an overall increase
in available housing in that market. 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 communities and interest rates available to potential homebuyers.
At
March 31, 2006, our backlog consisted of 3,112 homes, with an approximate sales
value of $1.1 billion. This represents a 4% increase in units and an 18%
increase in sales value from March 31, 2005. The average sales price of homes
in
backlog increased by 13%, with increases occurring in seven of our nine markets.
This increase in the average sales price of homes in backlog is attributable
partially to the overall increase in sales prices of our new contracts due
to
customers selecting more options, along with the mix of homes in backlog at
the
end of the quarter including more homes than the prior year within our Florida
markets, where our homes carry higher sales prices than in our Midwest
region.
Gross
Margin.
The
gross
margin for the homebuilding segment was 25.2% for the first quarter of 2006
compared to 22.5% in 2005’s first quarter. Housing gross margin increased from
22.9% to 25.3% and land gross margin decreased from 14.3% to 9.3%. The increase
in housing’s gross margin was driven by improved gross margins in our Florida
markets, along with the impact of the geographical mix of homes delivered in
our
various markets, partially offset by an expected decrease in gross margins
in
the Midwest due to economic factors. Land gross margins can vary significantly
depending on the sales price, the cost of the community and the stage of
development in which the sale takes place.
General
and Administrative Expenses.
General
and administrative expenses increased from $12.1 million and 5.1% of revenue
in
the first quarter of 2005 to $17.4 million and 6.9% of revenue in the first
quarter of 2006. The increase was primarily due to the following: 1) $1.1
million as a result of our increased land investment and related development
activities, primarily due to increased real estate taxes and homeowner’s
association dues resulting from increased land position; 2) $1.4 million
increase in personnel, systems, insurance and infrastructure costs to aid in
our
growth objectives; 3) $0.9 million expense for stock options resulting from
new
accounting requirements under SFAS 123(R); and 4) $0.9 million for amortization
of intangibles and administrative costs related to our July 2005 acquisition
of
Shamrock Homes.
Selling
Expenses.
Selling
expenses increased from $16.9 million and 7.2% of revenue in the first quarter
of 2005 to $20.9 million and 8.3% of revenue in the first quarter of 2006.
The
increase in expense was primarily due to $1.3 million higher advertising and
marketing costs relating to our community count growth and promotions to
stimulate sales in certain markets and $1.3 million increase in spending on
models and sales offices due to our higher community count. Also contributing
to
the increase in selling expenses was $0.7 million increase due to the mix of
closings with higher realtor co-op participation and $0.4 million relating
to
inclusion in 2006 of Shamrock Homes selling expenses.
Financial
Services Operations
The
following table sets forth certain information related to the financial services
operations:
|
|
Three
Months Ended
|
|
|
March
31,
|
|
March
31,
|
|
(Dollars
in thousands)
|
2006
|
|
2005
|
|
Number
of loans originated
|
521
|
|
565
|
|
Value
of loans originated
|
$120,462
|
|
$125,570
|
|
Revenue
|
$
6,987
|
|
$
7,691
|
|
General,
administrative and interest expenses
|
2,920
|
|
2,387
|
|
Income
before income taxes
|
$
4,067
|
|
$
5,304
|
Three
Months Ended March 31, 2006 Compared to Three Months Ended March 31,
2005
Revenue.
Mortgage
and title operations revenue decreased 9%, from $7.7 million in 2005’s first
quarter to $7.0 million in the first quarter of 2006. This decrease was
primarily driven by an 8% decrease in the number of loans originated. In
addition, increased competition and a lower capture rate resulted in reduced
margins. The average loan amount was $231,000 in the first quarter of 2006
compared to $222,000 in the 2005 comparable period. At March 31, 2006, M/I
Financial operated in eight of our nine markets. In these eight markets,
approximately 76% of our homes delivered during the first quarter of 2006 that
were financed were through M/I Financial, compared to 82% in the first quarter
of 2005. As a result of lower refinance volume for outside lenders, resulting
in
increased competition for M/I’s homebuyer customer, during 2006 we expect to
experience continued downward pressure on our capture rate and margins, which
could negatively affect earnings.
General
,
Administrative and Interest Expenses.
General
and administrative expenses for the quarter ended March 31, 2006 were $2.9
million, a 22% increase over the 2005 amount of $2.4 million. The increase
was
primarily due to $0.3 million higher total payroll and incentive-related costs
due to associates added for our new West Palm Beach title operation and Shamrock
Homes mortgage branch that did not exist in 2005’s first quarter, along with the
expense associated with stock options, as required under SFAS 123(R), which
did
not exist in 2005’s first quarter.
LIQUIDITY
AND CAPITAL RESOURCES
For
the
three months ended March 31, 2006, our $106.0 million investment in land
(excluding land purchased by our unconsolidated LLCs reported as investing
activities) and the payment of 2005’s annual incentive compensation contributed
to our $97.4 million operating cash outflow. Partially offsetting this cash
outflow was $37.4 million provided by a decrease in mortgage loans held for
sale
and $15.1 million provided by an increase in accounts payable resulting from
our
increased backlog. For the three months ended March 31, 2006, we used $8.4
million of cash through our investing activities, primarily for investment
in
unconsolidated LLCs. Some of these unconsolidated LLCs also obtained outside
financing that is not reflected in our borrowings - refer to Note 7 of our
Unaudited Condensed Consolidated Financial Statements for additional discussion
of borrowings by unconsolidated LLCs. For the three months ended March 31,
2006,
our financing activities provided $91.0 million of cash, including $105.5
million of borrowings (net of repayments) under our revolving Credit Facility,
of which $13.2 million was used to repurchase 333,500 of the Company’s common
shares.
Our
financing needs depend on sales volume, asset turnover, land acquisition,
inventory balances and growth targets. We have incurred substantial
indebtedness, and may incur substantial indebtedness in the future, to fund
the
growth of our homebuilding activities. During 2006, we currently project to
purchase approximately $200 million of land, funded from ongoing operating
activities and by our
existing
$735 million Credit Facility (with the ability to increase such amount by an
additional $15 million pursuant to an accordion feature). We continue to
purchase some lots from outside developers under agreements. However, we are
strategically purchasing land to support our planned growth, and continue to
evaluate potential new limited liability company arrangements and business
acquisitions on an opportunistic basis. We will continue to evaluate all of
our
alternatives to satisfy our demand for lots in the most cost-effective
manner.
Our
principal source of funds for acquisition and development activities has been
from internally generated cash and from bank borrowings, which are primarily
unsecured. We believe that our available financing is adequate to support
operations through September 2008 when our Credit Facility expires; however,
we
continue to evaluate various sources of funding to meet our long-term borrowing
needs. Please refer to our discussion of Forward-Looking Statements and Risk
Factors below for further discussion of risk factors that could impact our
source of funds.
Included
in the table below is a summary of our available sources of cash as of March
31,
2006:
|
(In
thousands)
|
Expiration
Date
|
|
Outstanding
Balance
|
Available
Amount
|
|
|
Notes
payable banks - homebuilding (a)
|
|
9/26/2008
|
|
$387,000
|
|
$
87,025
|
|
|
Notes
payable bank - financial services (b)
|
|
4/26/2007
|
|
$
24,500
|
|
$
4,300
|
|
|
Senior
notes
|
|
4/1/2012
|
|
$200,000
|
|
-
|
|
|
Universal
shelf registration (c)
|
|
-
|
|
-
|
|
$150,000
|
|
(a)
The
Credit Facility also provides for an additional $15 million of borrowing
availability upon request by the Company and approval by the applicable lenders
included in the Credit Facility.
(b)
On
April 27, 2006, the financial services’ existing credit agreement was amended
and restated. The expiration date of the Amended and Restated Credit Agreement
is April 26, 2007.
(c)
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.
Notes
Payable Banks - Homebuilding.
At
March
31, 2006, the Company’s homebuilding operations had borrowings totaling $387.0
million, financial letters of credit totaling $15.0 million and performance
letters of credit totaling $21.3 million outstanding under our amended and
restated credit agreement, which was increased from $725 million to $735 million
in February 2006 (the “Credit Facility”). Under the terms of the Credit
Facility, the $735 million capacity includes a maximum amount of $100 million
in
outstanding letters of credit. The Credit Facility matures in September 2008.
Borrowing availability is determined based on the lesser of: (1) Credit Facility
loan capacity less Credit Facility borrowings (including cash borrowings and
letters of credit) or (2) lesser of Credit Facility capacity and calculated
borrowing base, less borrowing base indebtedness (including cash borrowings
under the Credit Facility, senior notes, financial letters of credit and the
10%
commitment on the M/I Financial credit agreement). As of March 31, 2006, the
Credit Facility capacity was $735 million, compared to the calculated borrowing
base of $693.1 million; the borrowing base indebtedness was $606.1 million
and
the resulting borrowing availability was $87.0 million. Borrowings under the
Credit Facility are unsecured and are at the Alternate Base Rate plus a margin
ranging from zero to 37.5 basis points, or at the Eurodollar Rate plus a margin
ranging from 100 to 200 basis points. The Alternate Base Rate is defined as
the
higher of the Prime Rate, the Base CD Rate plus 100 basis points, or the Federal
Funds Rate plus 50 basis points. The Credit Facility also provides for the
ability to increase the loan capacity up to $750 million upon request by the
Company and approval by the lender(s). The Company is required under the Credit
Facility to maintain a certain amount of tangible net worth, and as of March
31,
2006, had approximately $152.0 million available for payment of dividends.
As of
March 31, 2006, the Company was in compliance with all restrictive covenants
of
the Credit Facility.
Note
Payable Bank - Financial Services.
At March
31, 2006, we had $24.5 million outstanding under the existing M/I Financial
loan
agreement, which permitted borrowings of $40 million to finance mortgage loans
initially funded by M/I Financial for our customers. M/I Homes, Inc. and M/I
Financial are co-borrowers under the M/I Financial loan agreement. The agreement
limits the borrowings to 95% of the aggregate face amount of certain qualified
mortgages and, as of March 31, 2006, the borrowing base was $28.8 million with
$4.3 million of availability. Borrowings under the M/I Financial credit
agreement are at the Prime Rate or at the Eurodollar Rate plus a margin of
150
basis points. As of March 31, 2006, the Company was in compliance with all
restrictive covenants of the M/I Financial loan agreement.
On
April
27, 2006, M/I Financial and the Company entered into the First Amended and
Restated Revolving Credit Agreement (“MIF Credit Facility”). The MIF Credit
Facility was a replacement of M/I Financial’s existing credit agreement, which
expired on April 27, 2006. The MIF Credit Facility provides M/I Financial with
$40.0 million maximum borrowing availability, except for the period December
15,
2006 through January 15, 2007 when the maximum borrowing availability is
increased to $65.0 million. The maximum borrowing availability is limited to
95%
of eligible mortgage loans. In determining eligible mortgage loans, the MIF
Credit Facility provides limits on certain types of loans. The borrowings under
the MIF Credit Facility are at Prime Rate or LIBOR plus 135 basis points, with
a
commitment fee on the unused portion of the MIF Credit Facility of 0.20%. The
MIF Credit Facility expires April 26, 2007. Under the terms of the MIF Credit
Facility, M/I Financial is required to maintain tangible net worth of $3.5
million and maintain certain financial ratios.
Senior
Notes.
At
March
31, 2006, there were $200 million of 6.875% senior notes outstanding. The notes
are due April 2012. As of March 31, 2006, the Company was in compliance with
all
restrictive covenants of the notes.
Universal
Shelf Registration.
In
April
2002, we filed a $150 million universal shelf registration statement with the
SEC. 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 March 31, 2006.
Weighted
Average Borrowings.
For
the
three months ended March 31, 2006 and 2005, our weighted average borrowings
outstanding were $532.0 million and $287.9 million, respectively, with a
weighted average interest rate of 7.0% and 4.8%, respectively. The increase
in
borrowings resulted from the issuance of our senior notes, with our increased
borrowing needs being the result of higher land purchases and backlog. The
increase in the weighted average interest rate was due to the addition of our
6.875% fixed rate senior notes at the end of March 2005 and the overall market
increase in interest rates, which have impacted our variable rate borrowings.
Offsetting the above increases was an increase of $4.5 million in the amount
of
interest capitalized during the first quarter 2006, compared to 2005’s first
quarter.
OFF-BALANCE
SHEET ARRANGEMENTS
Our
primary use of off-balance sheet arrangements is for the purpose of securing
the
most desirable lots on which to build homes for our homebuyers in a manner
that
we believe reduces the overall risk to the Company. Our off-balance sheet
arrangements relating to our homebuilding operations include unconsolidated
LLCs, land option agreements, guarantees and indemnifications associated with
acquiring and developing land and the issuance of letters of credit and
completion bonds. Additionally, in the ordinary course of business, our
financial services operations issue guarantees and indemnities relating to
the
sale of loans to third parties.
Unconsolidated
Limited Liability Companies.
In the
ordinary course of business, the Company periodically enters into arrangements
with third parties to acquire land and develop lots. These arrangements include
the creation by the Company of LLCs, with the Company’s interest in these
entities ranging from 33% to 50%. These entities engage in land development
activities for the purpose of distributing or selling developed lots to the
Company and its partners in the entity. These entities generally do not meet
the
criteria of variable interest entities (“VIEs”), because the equity at risk is
sufficient to permit the entity to finance its activities without additional
subordinated support from the equity investors; however, we must evaluate each
entity to determine whether it is or is not a VIE. If an entity were determined
to be a VIE, we also evaluate whether or not we are the primary beneficiary.
These evaluations are initially performed when each new entity is created and
upon any events that require reconsideration of the entity.
As
of
March 31, 2006, we have determined that the LLCs in which we have an interest
are not VIEs, and we also have determined that we do not have substantive
control over any of these entities; therefore, our homebuilding LLCs are
recorded using the equity method of accounting.
The
Company believes its maximum exposure related to any of these entities as of
March 31, 2006 to be the amount invested of $50.7 million plus our $4.7 million
share of letters of credit totaling $9.0 million, that serve as completion
bonds
for the development work in progress, and our obligations under guarantees
and
indemnifications provided in connection with these entities.
During
2006, we anticipate entering into additional LLCs in our higher growth, higher
investment markets, in order to increase our homebuilding activities in those
markets, while sharing the risk with our partner in each respective entity.
In
addition to our homebuilding LLCs, M/I Financial also
owns a
49.9% interest in one unconsolidated title insurance agency that engages in
title and closing services for the Company.
Further
details relating to our unconsolidated LLCs are included in Note 7 of our
Unaudited Condensed Consolidated Financial Statements.
Land
Option Agreements.
In the
ordinary course of business, the Company enters into land option agreements
in
order to secure land for the construction of homes in the future. Pursuant
to
these land option agreements, the Company will provide a deposit to the seller
as consideration for the right to purchase land at different times in the
future, usually at predetermined prices. Because the entities holding the land
under option often meet the criteria for variable interest entities, the Company
evaluates all land option agreements to determine if it is necessary to
consolidate any of these entities. The Company currently believes that its
maximum exposure as of March 31, 2006 related to these agreements to be the
amount of the Company’s outstanding deposits, which totaled $26.0 million,
including cash deposits of $12.7 million, letters of credit of $10.0 million
and
corporate promissory notes of $3.3 million. Further details relating to our
land
option agreements are included in Note 11 of our Unaudited Condensed
Consolidated Financial Statements.
Letters
of Credit and Completion Bonds.
The
Company provides standby letters of credit and completion bonds for development
work in progress,
deposits
on land and lot purchase agreements and miscellaneous deposits. As of March
31,
2006, the Company has outstanding approximately $176.4 million of completion
bonds and standby letters of credit, including those related to LLCs and land
option agreements discussed above.
Guarantees
and Indemnities
.
In the
ordinary course of business, M/I Financial enters into agreements that guarantee
purchasers of its mortgage loans that M/I Financial will repurchase a loan
if
certain conditions occur. M/I Financial has also provided indemnifications
to
certain third party investors and insurers in lieu of repurchasing certain
loans. The risk associated with the guarantees and indemnities above is offset
by the value of the underlying assets, and the Company accrues its best estimate
of the probable loss on these loans. Additionally, the Company has provided
certain other guarantees and indemnities in connection with the acquisition
and
development of land by our homebuilding operations. Refer to Note 8 of our
Unaudited Condensed Consolidated Financial Statements for additional details
relating to our guarantees and indemnities.
INTEREST
RATES AND INFLATION
Our
business is significantly affected by general economic conditions of the United
States of America and, particularly, by the impact of interest rates. Higher
interest rates may decrease our potential market by making it more difficult
for
homebuyers to qualify for mortgages or to obtain mortgages at interest rates
that are acceptable to them. The impact of increased rates can be offset, in
part, by offering variable rate loans with lower interest rates.
In
conjunction with our mortgage financing services, 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; however, in 2006, we may not be able to raise prices by amounts
equal to our cost increases and may experience lower gross margins. 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 construction is started on
a
home through the delivery date. However, in certain situations, unanticipated
costs may occur between the time of start and the delivery date, resulting
in
lower gross profit margins.
RISK
FACTORS
Factors
That May Affect Our Future Results (Cautionary Statements Under the Private
Securities Litigation Reform Act of 1995):
The
following cautionary discussion of risks, uncertainties and possible inaccurate
assumptions relevant to our business includes factors we believe could cause
our
actual results to differ materially from expected and historical results. Other
factors beyond those listed below, including factors unknown to us and factors
known to us which we have not currently determined to be material, could also
adversely affect us.
General
Real Estate, Economic and Other Conditions Could Adversely Affect Our
Business.
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 governmental regulations and increases in real estate taxes and
other
local government fees. During the past two years, we have experienced certain
delays caused by weather conditions and delays in regulatory processes in
certain markets may continue to have an impact on the number of new contracts
and homes delivered during 2006. In addition, our Midwest markets continue
to be
impacted by softness in the local economy which has impacted, and is expected
to
continue to impact, housing demand and gross margins in these markets. As a
result of these economic conditions, we have offered and may continue to offer
certain sales incentives, which will reduce our gross margins on homes delivered
in these markets in 2006. During the first quarter of 2006, we experienced
a
slight slowing in the local market conditions in the Washington, D.C. market
and
in our Florida region, which could negatively impact the number of new
contracts, homes delivered and gross margins in these markets.
Availability
and Affordability of Residential Mortgage Financing Could Adversely Affect
Our
Business.
Our
business is significantly affected 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. Mortgage rates are currently close to historically
low levels. If mortgage interest rates increase, or experience substantial
volatility, our business could be adversely affected.
The
Occurrence of Natural Disasters Could Adversely Affect Our
Business.
Several
of our growth markets, specifically our operations in Florida and North
Carolina, are situated in geographical areas that are regularly impacted by
severe storms, hurricanes and flooding. The occurrence of these or other natural
disasters can cause delays in the completion of, or increase the cost of,
developing one or more of our communities, and as a result could adversely
impact our results of operations.
Material
and Labor Shortages Could Adversely Affect Our
Business.
T
he
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. Any shortages of long duration in these areas could delay
construction of homes, which could adversely affect our business. During 2005,
we experienced material and labor shortages in our Florida markets due to the
recent homebuilding growth and the hurricane rebuilding efforts impacting those
markets, which has slightly lengthened the house production process; however,
we
do not anticipate a material effect for the year 2006.
Our
Future Growth May Require Additional Capital, Which May be
Unavailable.
Our
operations require a significant amount of cash because of the length of time
from when we acquire land or lots to when we complete construction of the
related homes and deliver those homes to our homebuyers. We may be required
to
seek additional capital, whether from sales of equity or debt or additional
bank
borrowings, to fund the future growth of our business. The ability for us to
secure the needed capital to fund our future growth at terms that are acceptable
to us may be impacted by factors beyond our control.
Our
Business is Dependent on the Availability of Land and Lots that Meet Our Land
Investment Criteria.
The
continued availability of undeveloped land and developed or partially developed
lots that meet our land acquisition criteria depends on a number of factors
outside our control, including general land availability, competition with
other
homebuilders and land buyers for desirable property, inflation in land prices
and regulatory requirements, such as zoning and allowable density. In the event
that we are unable to acquire suitable land or the cost of land substantially
increases, the number of homes that we can deliver or the margins on those
homes
may decline and adversely impact our results of operations.
We
Commit Significant Resources to Land Development Activities Which Involve
Significant Risks.
We
develop the lots for a majority of our communities. Therefore, our short-term
and long-term financial success will be dependent upon our ability to develop
these communities successfully. Acquiring land and committing the financial
and
managerial resources to develop a subdivision involves significant risks. Before
a community generates any revenue, we may make material expenditures for items
such as acquiring land and constructing infrastructure (roads and
utilities).
Competition
in Our Industry Could Adversely Affect Our Business.
The
homebuilding industry is highly competitive. We compete in each of our local
markets 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 existing home resale market that provides certain
attractions for homebuyers over the new home market. We believe that the resale
market is becoming more of a competitive factor than in the past, particularly
in markets that have had more investor buyers, such as Washington, D.C., Tampa
and West Palm Beach. In addition, the mortgage financing industry is very
competitive. M/I Financial competes with outside lenders for the capture of
our
homebuyers. Competition typically increases during periods in which there is
a
decline in the refinance activity within the industry. During the first quarter
of 2006, M/I Financial experienced a decline in its capture rate and
profitability due to competitive pressure, which could continue in 2006 and
could negatively impact the results of M/I Financial.
Governmental
Regulation and Environmental Considerations Could Adversely Affect Our
Business.
The
homebuilding industry is subject to increasing local, state and federal
statutes, ordinances, rules and regulations concerning zoning, resource
protection, building design and construction, and similar matters. This includes
local regulations that impose restrictive zoning and density requirements in
order to limit the number of homes that can eventually be built within the
boundaries of a particular location. Such regulation also affects construction
activities, including construction materials that must be used in certain
aspects of building design, as well as sales activities and other dealings
with
homebuyers. We must also obtain licenses, permits and approvals from various
governmental agencies for our development activities, the granting of which
are
beyond our control. Furthermore, increasingly stringent requirements may be
imposed on homebuilders and developers in the future. Although we cannot predict
the impact on us to comply with any such requirements, such requirements could
result in time-consuming and expensive compliance programs. 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.
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 that 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
resolution of environmental issues prior to purchasing land in an effort to
avoid major environmental issues in our developments.
In
addition to the laws and regulations that relate to our homebuilding operations,
M/I Financial is subject to a variety of laws and regulations concerning the
underwriting, servicing and sale of mortgage loans.
We
are Dependent on the Services of Certain Key
Employees.
Our
future success depends, in part, on our ability to attract, train and retain
skilled personnel. If we are unable to retain our key employees or attract,
train and retain other skilled personnel in the future, it could impact our
growth strategy and result in additional expenses of identifying and training
new personnel. Competition for qualified personnel is intense in many of our
markets.
We
Are Dependent on a Limited Number of Markets.
We
have
operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa,
Orlando and West Palm Beach, Florida; Charlotte and Raleigh, North Carolina;
Delaware; and the Virginia and Maryland suburbs of Washington, D.C. Adverse
general economic conditions in any of these markets, in particular Columbus,
Tampa, Orlando, West Palm Beach and Washington, D.C., could have a material
impact on our operations.
ITEM
3:
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
primary market risk results from fluctuations in interest rates. We are exposed
to interest rate risk through the borrowings under our unsecured revolving
credit facilities, including the MIF Credit Facility, which permit borrowings
up
to $775 million as of March 31, 2006, subject to availability constraints.
Additionally, M/I Financial is exposed to interest rate risk associated with
its
mortgage loan origination services.
Interest
rate lock commitments (“IRLCs”) are extended to home-buying customers who have
applied for mortgages and who meet certain defined credit and underwriting
criteria. Typically, the IRLCs will have a duration of less than nine months;
however, in certain markets, the duration could extend to twelve months. Some
IRLCs are committed to a specific third-party investor through use of
best-effort whole loan delivery commitments matching the exact terms of the
IRLC
loan. The notional amount of the committed IRLCs and the best efforts contracts
was $45.6 million and $52.8 million at March 31, 2006 and December 31, 2005,
respectively. At March 31, 2006, the fair value of the committed IRLCs resulted
in a liability of $0.4 million and the related best efforts contracts resulted
in an asset of $0.4 million. At December 31, 2005, the fair value of the
committed IRLCs resulted in a liability of $0.6 million and the fair value
of
the related best efforts contracts resulted in an asset of $0.6 million. For
the
three months ended March 31, 2006 and March 31, 2005, we recognized less than
$0.1 million income and $0.3 million expense relating, respectively, to marking
these committed IRLCs and the related best efforts contracts to market.
Uncommitted IRLCs are considered derivative instruments under SFAS 133 and
are
fair value adjusted, with the resulting gain or loss recorded in current
earnings. At March 31, 2006 and December 31, 2005, the notional amount of the
uncommitted IRLC loans was $67.0 million and $32.1 million, respectively. The
fair value adjustment related to these commitments, which is based on quoted
market prices, resulted in a $0.9 million liability and $0.3 million liability
at March 31, 2006 and December 31, 2005, respectively. For the three months
ended March 31, 2006 and 2005, we recognized $0.6 million expense and $0.5
million expense, respectively, relating to marking these commitments to market.
Forward
sales of mortgage-backed securities (“FMBSs”) are used to protect uncommitted
IRLC loans against the risk of changes in interest rates between the lock date
and the funding date. FMBSs related to uncommitted IRLCs are classified and
accounted for as non-designated derivative instruments, with gains and losses
recorded in current earnings. Immediately prior to or concurrent with funding
uncommitted IRLC loans, we enter into a commitment with a third party investor
to buy the specific IRLC loan. At March 31, 2006, the notional amount under
the
FMBSs was $69.0 million, and the related fair value adjustment, which is based
on quoted market prices, resulted in a $0.5 million asset. At December 31,
2005,
the notional amount under the FMBSs was $33.0 million, and the related fair
value adjustment resulted in a liability of $0.2 million. For the three months
ended March 31, 2006 and 2005, we recognized $0.7 million income and $0.3
million income, respectively, relating to marking these FMBSs to market.
The
following table provides the expected future cash flows and current fair values
of our other assets and liabilities that are subject to market risk as interest
rates fluctuate, as of March 31, 2006:
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Interest
|
Expected
Cash Flows by Period
|
|
Fair
|
|
(Dollars
in thousands)
|
Rate
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
Total
|
Value
|
|
ASSETS:
|
|
Mortgage
loans held for sale:
|
|
|
|
|
|
|
|
|
|
Fixed
rate
|
5.97%
|
$26,783
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
$
26,783
|
$
26,048
|
|
Variable
rate
|
5.04%
|
4,098
|
-
|
-
|
-
|
-
|
-
|
4,098
|
3,967
|
|
|
|
|
|
LIABILITIES:
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate
|
6.92%
|
$
168
|
$
240
|
$
261
|
$283
|
$306
|
$205,853
|
$207,111
|
$191,667
|
|
Variable
rate
|
6.25%
|
-
|
24,500
|
387,000
|
-
|
-
|
-
|
411,500
|
411,500
|
|
|
ITEM
4: CONTROLS AND PROCEDURES
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
An
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures was performed under the supervision, and
with
the participation, of the Company's management, including the chief executive
officer and the chief financial officer. Based on that evaluation, the Company's
management, including the chief executive officer and chief financial officer,
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report.
Changes
in Internal Control over Financial Reporting
During
2005, the Company began the implementation of a new computer system that will
be
used by our homebuilding operations to manage production of homes and will
be
integrated with our existing accounting system. The implementation is expected
to be phased into each of our homebuilding divisions over approximately a
two-year period. During the first quarter of 2006, the new system was
implemented in two of our homebuilding divisions (in addition to previously
being implemented in two divisions during 2005), resulting in changes in our
internal
control over financial reporting. In addition, during the first quarter of
2006,
the Company began the implementation of a new computer system that will be
used
by our mortgage company to process customer loan applications. The
implementation is expected to be phased into our branch mortgage operations
during 2006. During the first quarter of 2006, the new system was implemented
in
three of our mortgage company branches. The implementation of these new systems
for our homebuilding and mortgage operations included deploying resources to
mitigate internal control risks and perform additional verifications and testing
to ensure continuing integrity of data used in financial reporting. We believe
we have taken the necessary steps to establish and maintain effective internal
controls over financial reporting during the period of change.
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.
Part
II - Other Information
Item
1. Legal Proceedings
- none.
Item
1A. Risk Factors
There
have been no material changes in our risk factors as previously disclosed in
our
Form 10-K for the year ended December 31, 2005 in response to Item
1A.
to Part
I of such Form 10-K, except as follows:
Economic
Conditions.
During
the first quarter of 2006, we experienced a slight slowing in the local market
conditions in the Washington, D.C. market and in our Florida region, which
could
negatively impact the number of new contracts, homes delivered and gross margins
in these markets.
Competition.
We
believe that the resale home market is becoming more of a competitive factor
than in the past, particularly in markets that have had more investor buyers,
such as Washington, D.C., Tampa and West Palm Beach. Also during the first
quarter of 2006, M/I Financial experienced a decline in its capture rate and
profitability due to competitive pressure, which could continue in 2006 and
could negatively impact the results of M/I Financial.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
On
November 8, 2005, the Company obtained authorization from the Board of Directors
to repurchase up to $25 million worth of its outstanding common shares. The
repurchase program has no expiration date, and was publicly announced on
November 10, 2005. The purchases may occur in the open market and/or in
privately negotiated transactions as market conditions warrant.
During
the three-month period ended March 31, 2006, the Company repurchased 333,500
shares. As of March 31, 2006, the Company had approximately $11.4 million
available to repurchase outstanding common shares from the November 2005 Board
approval.
|
|
Total
Number of Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced
Program
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the
Program
|
|
January
1 to January 31, 2006
|
194,300
|
|
$39.32
|
|
194,300
|
|
$16,967,500
|
|
February
1 to February 28, 2006
|
25,000
|
|
39.50
|
|
25,000
|
|
$15,980,000
|
|
March
1 to March 31, 2006
|
114,200
|
|
40.10
|
|
114,200
|
|
$11,401,000
|
|
Total
|
333,500
|
|
$39.60
|
|
333,500
|
|
$11,401,000
|
Item
3. Defaults Upon Senior Securities
-
none.
Item
4. Submission of Matters to a Vote of Security Holders
On
April
27, 2006, the Company held its 2006 annual meeting of shareholders. The
shareholders voted on the following proposals:
|
1)
|
To
elect three directors to serve until the 2009 annual meeting of
shareholders and until their successors have been duly elected and
qualified.
|
|
2)
|
To
consider and vote upon a proposal to approve the adoption of the
2006
Director Equity Incentive Plan.
|
|
3)
|
To
ratify the appointment of Deloitte & Touche LLP as the Company’s
independent registered public accounting firm for the 2006 fiscal
year.
|
The
results of the voting are as follows:
|
1.
|
Election
of Directors
|
|
|
|
|
|
|
|
For
|
Withheld
|
|
|
|
|
Yvette
McGee Brown
|
|
13,199,947
|
118,433
|
|
|
Thomas
D. Igoe
|
|
13,200,258
|
118,122
|
|
|
Steven
Schottenstein
|
|
13,146,077
|
172,303
|
|
|
|
|
All
three directors were elected.
|
|
|
|
|
|
|
2.
|
To
consider and vote upon a proposal to approve the adoption of the
2006
Director Equity Incentive Plan:
|
|
|
|
|
For
|
|
|
9,846,260
|
|
|
Against
|
|
|
1,729,017
|
|
|
Abstain
|
|
|
45,319
|
|
|
Broker
Non-Votes
|
|
|
1,697,783
|
|
|
|
|
The
proposal was approved.
|
|
|
|
|
|
|
3.
|
To
ratify the appointment of Deloitte & Touche LLP as the independent
registered public accounting firm for fiscal year 2006:
|
|
|
|
|
For
|
|
|
13,222,529
|
|
|
Against
|
|
|
90,827
|
|
|
Abstain
|
|
|
5,024
|
|
|
|
|
The
proposal was approved.
|
|
|
|
Item
5. Other Information
-
none.
Item
6. Exhibits
The
exhibits required to be filed herewith are set forth below.
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
3.1
|
|
Amendment
to Article First of the Company’s Amended and Restated Articles of
Incorporation dated January 9, 2004.
|
|
|
|
10.1
|
|
Third
Amendment to the Company’s 1993 Stock Incentive Plan as Amended dated
April 27, 2006.
|
|
|
|
31.1
|
|
Certification
by Robert H. Schottenstein, Chief Executive Officer, pursuant to
Item 601
of Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
31.2
|
|
Certification
by Phillip G. Creek, Chief Financial Officer, pursuant to Item 601
of
Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.1
|
|
Certification
by Robert H. Schottenstein, Chief Executive Officer, pursuant to
18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
|
|
32.2
|
|
Certification
by Phillip G. Creek, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
M/I
Homes, Inc.
|
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
|
May
5, 2006
|
|
By:
|
/s/
Robert H. Schottenstein
|
|
|
|
|
|
|
Robert
H. Schottenstein
|
|
|
|
|
|
|
|
Chairman,
Chief Executive Officer
|
|
|
|
|
|
|
and
President
|
|
|
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
|
May
5, 2006
|
|
By:
|
/s/
Ann Marie W. Hunker
|
|
|
|
|
|
|
Ann
Marie W. Hunker
|
|
|
|
|
|
|
|
Corporate
Controller
|
|
|
|
|
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT
INDEX
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
3.1
|
|
Amendment
to Article First of the Company’s Amended and Restated Articles of
Incorporation dated January 9, 2004.
|
|
|
|
|
|
10.1
|
|
Third
Amendment to the Company’s 1993 Stock Incentive Plan as Amended dated
April 27, 2006.
|
|
|
|
|
|
31.1
|
|
Certification
by Robert H. Schottenstein, Chief Executive Officer, pursuant to
Item 601
of Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
31.2
|
|
Certification
by Phillip G. Creek, Chief Financial Officer, pursuant to Item 601
of
Regulation S-K as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
32.1
|
|
Certification
by Robert H. Schottenstein, Chief Executive Officer, pursuant to
18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
|
|
|
|
32.2
|
|
Certification
by Phillip G. Creek, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
|
|