<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19891
SCHULER HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware 99-0293125
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
828 Fort Street Mall, Suite 400
Honolulu, Hawaii 96813-4321
(Address of principal executive offices) (Zip code)
(808) 521-5661
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock July 31, 1996
--------------------- --------------
$.01 par value 20,828,777
<PAGE>
SCHULER HOMES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report............................. 3
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995.............................................. 4
Consolidated Statements of Income - Three and six months
ended June 30, 1996 and 1995................................... 5
Consolidated Statements of Cash Flows - Six
months ended June 30, 1996 and 1995............................ 6
Notes to Consolidated Financial
Statements..................................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 10
PART II. OTHER INFORMATION................................................. 19
SIGNATURES.................................................................. 20
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Schuler Homes, Inc.
We have reviewed the accompanying interim consolidated balance sheet of Schuler
Homes, Inc. as of June 30, 1996, and the related consolidated statements of
income for the three-month and six-month periods ended June 30, 1996 and 1995,
and the consolidated statements of cash flows for the six-month periods ended
June 30, 1996 and 1995. These financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles. See Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Schuler Homes, Inc. as of December
31, 1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in our
report dated March 11, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1995, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
ERNST & YOUNG LLP
Honolulu, Hawaii
August 9, 1996
3
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................... $ 863,000 $ 6,147,000
Receivables......................................................................... 819,000 960,000
Prepaid income taxes................................................................ 237,000 557,000
Amount due from affiliate (Note 5).................................................. 24,000 25,000
Real estate inventories (Note 3).................................................... 254,351,000 246,478,000
Investments in unconsolidated joint ventures........................................ 11,941,000 11,390,000
Deposits............................................................................ 50,000 1,001,000
Deferred offering costs............................................................. 1,513,000 1,628,000
Notes receivable (Note 2)........................................................... 1,660,000 1,329,000
Deferred income taxes (Note 6)...................................................... 10,163,000 1,818,000
Other assets........................................................................ 1,771,000 1,009,000
------------ ------------
Total assets........................................................................ $283,392,000 $272,342,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................................................................... $ 519,000 $ 1,013,000
Accrued expenses.................................................................... 3,923,000 3,197,000
Notes payable to bank (Note 4)...................................................... 60,040,000 36,781,000
6 1/2% convertible subordinated debentures due 2003................................. 57,500,000 57,500,000
------------ ------------
Total liabilities................................................................... 121,982,000 98,491,000
Commitments and contingencies (Notes 4 and 7)
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares authorized;
20,874,177 shares issued at June 30, 1996 and December 31, 1995................ 209,000 209,000
Additional paid-in capital....................................................... 93,096,000 93,096,000
Retained earnings................................................................ 68,420,000 80,546,000
Treasury stock, at cost; 45,400 shares at June 30, 1996 (Note 9)................. (315,000) --
------------ ------------
Total stockholders' equity.......................................................... 161,410,000 173,851,000
------------ ------------
Total liabilities and stockholders' equity.......................................... $283,392,000 $272,342,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
4
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Residential real estate sales.................. $ 29,820,000 $26,762,000 $ 49,785,000 $63,381,000
Cost and expense
Residential real estate sales............. 24,010,000 19,752,000 40,223,000 46,430,000
Inventory impairment loss (Note 3)........ 23,910,000 -- 23,910,000 --
Selling and commissions................... 2,263,000 1,607,000 3,806,000 3,355,000
General and administrative................ 1,121,000 1,013,000 2,027,000 1,991,000
------------ ----------- ------------ -----------
Total costs and expenses 51,304,000 22,372,000 69,966,000 51,776,000
Income from unconsolidated joint ventures...... 12,000 340,000 100,000 658,000
------------ ----------- ------------ -----------
Operating income (loss)........................ (21,472,000) 4,730,000 (20,081,000) 12,263,000
Other income................................... 40,000 113,000 201,000 218,000
------------ ----------- ------------ -----------
Income (loss) before provision
for income taxes........................ (21,432,000) 4,843,000 (19,880,000) 12,481,000
Provision (credit) for income taxes............ (8,358,000) 1,887,000 (7,754,000) 4,866,000
------------ ----------- ------------ -----------
Net income (loss).......................... $(13,074,000) $ 2,956,000 $(12,126,000) $ 7,615,000
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net income (loss) per share:
Primary..................................... $ (0.63) $ 0.14 $ (0.58) $ 0.36
------------ ----------- ------------ -----------
Fully diluted............................... $ (0.63) $ 0.14 $ (0.58) $ 0.35
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
See accompanying notes.
5
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
1996 1995
-------- --------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................................... $(12,126,000) $ 7,615,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Inventory impairment loss......................................... 23,910,000 --
Depreciation and amortization expense............................. 94,000 62,000
Income from unconsolidated joint venture
(undistributed).............................................. (111,000) (722,000)
Sales financed by Company......................................... (653,000) (127,000)
Principal payments of notes receivable............................ 105,000 103,000
Changes in assets and liabilities:
Decrease in receivables........................................... 141,000 40,740,000
(Increase) decrease in prepaid income taxes....................... 320,000 (1,419,000)
(Increase) in real estate inventories............................. (31,566,000) (19,749,000)
Decrease in deposits.............................................. 951,000 90,000
(Increase) in other assets........................................ (839,000) --
(Decrease) in accounts payable.................................... (494,000) (441,000)
Increase (decrease) in accrued expenses........................... 726,000 (1,892,000)
(Decrease) in contract restructuring cost payable................. -- (7,979,000)
Change in deferred income taxes................................... (8,345,000) 3,157,000
------------ ------------
Net cash provided by (used in) operating activities................... (27,887,000) 19,438,000
INVESTING ACTIVITIES
Investments in unconsolidated joint ventures.......................... -- (157,000)
Advances to unconsolidated joint venture.............................. (3,076,000) (160,000)
Repayments of advances to unconsolidated joint venture................ 2,612,000 131,000
Capital distributions from unconsolidated joint venture............... 24,000 169,000
Purchase of furniture, fixtures, and equipment........................ (17,000) (82,000)
------------ ------------
Net cash provided by (used in) investing activities.............. (457,000) (99,000)
FINANCING ACTIVITIES
Principal payments on note payable to other........................... -- (10,500,000)
Proceeds from bank borrowings......................................... 77,143,000 56,217,000
Principal payments on bank borrowings................................. (53,884,000) (67,504,000)
Advances to affiliate................................................. (62,000) (57,000)
Repayment of advances to affiliate.................................... 63,000 68,000
Net decrease in deferred offering costs............................... 115,000 115,000
Reacquisition of the Company's common stock........................... (315,000) --
------------ ------------
Net cash provided by (used in) financing activities.............. 23,060,000 (21,661,000)
------------ ------------
(Decrease) in cash.................................................... (5,284,000) (2,322,000)
Cash and cash equivalents (restricted) at beginning of period......... 6,147,000 7,855,000
------------ ------------
Cash and cash equivalents (restricted) at end of period............... $ 863,000 $ 5,533,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
6
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included.
These financial statements should be read in conjunction with the
Notes to Consolidated Financial Statements for the year ended
December 31, 1995 contained in the Company's 1995 annual report on
Form 10-K.
Certain amounts in the consolidated statements of income for the
three and six months ended June 30, 1995 have been reclassified to
conform to the 1996 presentation.
The Company has experienced, and expects to continue to experience,
significant variability in quarterly sales and net income. The
results of any interim period are not necessarily indicative of the
results that can be expected for the entire year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
In June 1996, the Company formed Schuler Homes of California, Inc.,
a wholly-owned California corporation, for the development and sale
of homes in California.
2. Notes Receivable
Notes receivable consist primarily of notes receivable on seller
financed sales (recorded in accordance with FASB Statement 66,
"Accounting for Sales of Real Estate") of residential units and
residential lots. The notes provide for terms and conditions
similar to those offered by financial institutions and are
collateralized by the residential units and residential lots sold.
Certain of the notes are collateralized by second mortgages
relating to homebuyers who purchased homes as part of the Company's
"zero-down" sales program. Sales and profit recognition on such
transactions are deferred until the down payment requirement for
sales recognition is met.
3. Real Estate Inventories
During the fourth quarter of 1995, the Company changed its method
of accounting for the carrying amount of its real estate
inventories by adopting FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." Under the new standard, inventories which are
substantially completed are carried at the lower of cost or fair
value less cost to sell. Fair value is determined by applying a
risk adjusted discount rate to estimates of future cash flows,
resulting in a lower value than under the net realizable value
method previously required. In addition, land held for future
development or inventories under current development are adjusted
to fair value, only if an impairment to their value is indicated.
7
<PAGE>
The estimates of future cash flows require significant judgment
relating to the level of sales prices, rate of new home sales,
amount of marketing costs and price discounts needed in order to
stimulate sales, rate of increase in the cost of building materials
and labor, introduction of building code modifications, and level
of consumer confidence in Hawaii's economy, among other items.
Accordingly, there exists at any date, a reasonable possibility
that changes in estimates will occur in subsequent periods.
During the quarterly period ended June 30, 1996, the Company
recognized an impairment loss of $23,910,000, primarily related to
(a) an increase in completed inventories due to the substantial
completion of a high-rise project and (b) the decline experienced
by the Company during the quarter in the rate of new home sales
contracts entered into, which resulted in a more conservative
outlook with respect to the estimate of future cash flows for
certain other completed projects, on some of which, impairment
losses were recognized in 1995.
Approximately $52,289,000 of total inventory at June 30, 1996
represents completed inventory. The remaining inventory represents
construction in progress and land held for future development.
4. Notes Payable to Bank
At June 30, 1996, $49,960,000 of the Company's line of credit is
unused, of which $702,000 is restricted as to withdrawal for
project expenses and $209,000 is restricted as to withdrawal for
outstanding but unused letters of credit.
In March 1996, the Company executed a new Credit Agreement, which
replaced the $50,000,000 line of credit with a $110,000,000
unsecured revolving line of credit facility on March 29, 1996. The
facility expires on July 1, 1998 and includes an option for the
lenders to extend the term for an additional year. The Company can
select an interest rate of either LIBOR (1, 2, 3 or 6 month term)
plus 1.75% or prime for each borrowing. If the Company's leverage
ratio, as defined, exceeds 1 to 1, the interest rate increases to
LIBOR plus 2.25% and prime plus 0.50%. The Company's ability to
draw upon its line of credit is dependent upon meeting certain
financial ratios and covenants. As of June 30, 1996, the Company
met such financial ratios and covenants.
The Company paid interest (relating to notes payable to bank and
the convertible subordinated debentures) of approximately
$1,006,000 during the quarter ended June 30, 1996. Interest
incurred and capitalized to real estate inventories during the
quarter ended June 30, 1996 was approximately $2,071,000. The
difference between the amount of interest paid and the amount
capitalized is comprised of accrued interest payable.
5. Related Party Transactions
The Company charged $24,000 for the quarter ended June 30, 1996 to
James K. Schuler & Associates, Inc. (an affiliate) under the
management agreement entered into between the Company and James K.
Schuler & Associates, Inc., pursuant to which certain management
and administrative personnel of the Company will perform certain
functions for James K. Schuler & Associates, Inc., to be reimbursed
by James K. Schuler & Associates, Inc. At June 30, 1996, the
$24,000 was included in Amount due from affiliate. Subsequent to
June 30, 1996, the receivable was paid in full.
6. Income Taxes
During the three months ended June 30, 1996, the Company paid
income taxes of $310,000.
8
<PAGE>
The primary component of the Company's deferred income taxes at
June 30, 1996 is a result of the inventory impairment loss
recognized for financial reporting purposes during the quarterly
period ended June 30, 1996 but not deducted for tax purposes (Note
3).
7. Commitments and Contingencies
The Company is from time to time involved in routine litigation or
threatened litigation arising in the ordinary course of its
business. Such matters, if decided adversely to the Company, would
not, in the opinion of management, have a material adverse effect
on the financial condition of the Company.
In April 1996, the Company was served with a lawsuit by owners of
units and the Association of Owners at Fairway Village at
Waikele, who seek to have a class of all owners certified. The
complaint alleges material construction defects and deficiencies,
misrepresentation regarding the cost of insurance, breach of
covenant of good faith and fair dealing, among other allegations.
The complaint does not specify an amount of damages, but includes
a claim for punitive damages, among other claims. The Company is
currently evaluating the merits of the complaint. If this
lawsuit were decided adversely to the Company, it could have a
material adverse effect on the Company's business, financial
condition and operating results.
During June 1996, the Company entered into a contract to purchase
for approximately $2,500,000, land for residential development,
subject to certain contingencies. In August 1996, the
contingencies were removed and the Company committed to purchase
the land.
8. Net Income Per Share
Primary earnings per share for the quarter and six-month period
ended June 30, 1996 were computed using the weighted average number
of common shares outstanding during the periods of 20,865,307 and
20,869,742, respectively. Primary earnings per share for the
quarter and six-month period ended June 30, 1995 were computed
using the weighted average number of common shares outstanding
during the periods of 20,874,177.
Fully diluted earnings per share for the quarter and six-month
period ended June 30, 1995 were computed by adding to net income
the interest charges of $242,000 and $611,000 (net of related
income taxes), respectively, applicable to convertible subordinated
debentures, and dividing by 23,508,167, which represents the
weighted average number of shares assuming conversion of all
convertible subordinated debentures. The computation for the three
and six months ended June 30, 1996 resulted in amounts less than
the primary net loss per share. Accordingly, the primary net loss
per share is also presented as the fully diluted net loss per
share.
9. Treasury Stock
In May 1996, the Company adopted a stock repurchase program to
reacquire up to an aggregate of $5,000,000 of its outstanding
common stock through December 31, 1996. During the quarterly
period ended June 30, 1996, the Company repurchased 45,400 shares
at a cost of $315,000.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those risks discussed herein,
and other risks detailed in the Company's Annual Report on Form 10-K and other
documents filed by the Company with the Securities and Exchange Commission from
time to time.
OVERVIEW
For the quarter ended June 30, 1996, sales of residential real
estate increased to $29.8 million from sales of $26.8 million during the 1995
second quarter. During the 1996 second quarter, the Company posted a net loss
of $13.1 million, which includes a non-cash after-tax charge of $14.6 million in
conjunction with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (FASB Statement No. 121). The Company posted net income of $3.0
million during the 1995 second quarter.
For the first half of 1996, the Company reported sales of
residential real estate of $49.8 million, a decrease from sales of $63.4 million
during the first half of 1995. Net loss was $12.1 million or $0.58 per share
during the six months ended June 30, 1996, as compared to net income of $7.6
million or $0.35 per share during the same period in the prior year.
Excluding the impact of the inventory impairment loss in the second
quarter of 1996, net income was $1.5 million or $0.07 per share during the
second quarter of 1996 and $2.5 million or $0.12 per share during the first half
of 1996.
Aside from the inventory impairment loss, the financial results for
the second quarter of 1996 as compared to the second quarter of 1995 reflect a
higher cost of residential real estate sold as a percentage of sales, offset in
part by more closings of home sales and higher average sales prices of home
sales closed. Cost of residential real estate sold as a percentage of sales
increased to 80.5% in the second quarter of 1996 from 73.8% in the second
quarter of 1995, approximately half of the increase being attributable to an
increased level of price discounts to homebuyers, with the remainder
attributable to higher construction and inventory carrying costs. Sales and
marketing costs represented approximately 7.6% and 6.0% of sales during the
second quarters of 1996 and 1995, respectively. The Company anticipates that
this increased level of costs will continue to affect its operating results
throughout the balance of 1996.
During the first quarter of 1996, the rate of new home sales
experienced by the Company improved over the sales rate experienced during the
latter part of 1995. However, during the second quarter of 1996, the Company
experienced a decline in the rate of new home sales contracts entered into, as
compared to the preceding quarter. If sales rates persist at their current
levels or decline, the Company's financial results in 1996 will be adversely
affected by fewer closings of homes sales, lower revenues and continued pressure
on margins as compared to the Company's 1995 financial results. In particular,
as a result of the slow home sales rates experienced in the second quarter of
1996, the Company believes that the number of home sales closed, revenues and
net income for the third quarter of 1996 will be below the levels achieved in
the second quarter of 1996, exclusive of the second quarter FASB Statement No.
121 non-cash charge.
10
<PAGE>
The following table sets forth, for the periods indicated, the
percentage of the Company's sales represented by each income statement line item
presented. Certain amounts in the consolidated statement of income for the
three and six months ended June 30, 1995 have been reclassified to conform to
the 1996 presentation.
<TABLE>
<CAPTION>
Three Months Ended June 30, Percentage Change in
--------------------------- Dollar Amounts From
1996 1995 1995 to 1996
---- ---- ------------
<S> <C> <C> <C>
Residential real estate sales........... 100.0% 100.0% 11.4%
Costs and expenses
Residential real estate sales...... 80.5 73.8 21.6
Inventory impairment loss.......... 80.2 -- N/A
Selling and commissions............ 7.6 6.0 40.8
General and administrative......... 3.7 3.8 10.7
----- -----
Total costs and expenses........ 172.0 83.6 129.3
Income from unconsolidated
joint ventures....................... 0.0 1.3 (96.5)
----- -----
Operating income (loss)................. (72.0) 17.7 (554.0)
Other income............................ 0.1 0.4 (64.6)
----- -----
Income (loss) before provision for
income taxes.................... (71.9) 18.1 (542.5)
Provision for income taxes.............. (28.0) 7.1 (542.9)
----- -----
Net income (loss)....................... (43.9)% 11.0% (542.3)
----- -----
----- -----
<CAPTION>
Six Months Ended June 30, Percentage Change in
--------------------------- Dollar Amounts From
1996 1995 1995 to 1996
---- ---- ------------
<S> <C> <C> <C>
Residential real estate sales........... 100.0% 100.0% (21.5)%
Costs and expenses
Residential real estate sales...... 80.8 73.2 (13.4)
Inventory impairment loss.......... 48.0 -- N/A
Selling and commissions............ 7.6 5.3 13.4
General and administrative......... 4.1 3.1 1.8
----- -----
Total costs and expenses........ 140.5 81.6 35.1
Income from unconsolidated
joint ventures....................... 0.2 1.0 (84.8)
----- -----
Operating income (loss)................. (40.3) 19.4 (263.8)
Other income............................ 0.4 0.3 (7.8)
----- -----
Income (loss) before provision for
income taxes.................... (39.9) 19.7 (259.3)
Provision for income taxes.............. (15.6) 7.7 (259.4)
----- -----
Net income (loss)....................... (24.3)% 12.0% (259.2)
----- -----
----- -----
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
SALES OF RESIDENTIAL REAL ESTATE
The Company's sales of residential real estate (revenues) for the quarter
ended June 30, 1996 were approximately $29.8 million as compared to
approximately $26.8 million during the quarter ended June 30, 1995. This
represents an increase of approximately $3.0 million or 11.4%.
This increase in revenues is attributable to an increased number of home
sales closed at higher average home sales prices. Including joint venture
project closings, the Company closed a total of 153 sales during the quarter
ended June 30, 1996, compared to the closing of 141 sales during the quarter
ended June 30, 1995, respectively. Excluding joint venture projects, the
closings of 125 units at an average sales price of $239,000 were included in
revenues recognized during the quarter ended June 30, 1996, as compared to
118 closings at an average sales price of $227,000 during the quarter ended
June 30, 1995. In the second quarter of 1996, sales and profit recognition
on 17 homes sold pursuant to the Company's "zero-down" sales program was
deferred until the down payment requirement for sales recognition is met.
The Company's notes receivable increased by $331,000 during the second
quarter of 1996 primarily as a result of second mortgages provided by the
Company to homebuyers who purchased homes as part of the Company's "zero-down"
sales program. To the extent the Company provides financing to purchasers of
its homes and residential lots, it becomes subject to the risks inherent with
such practices, including possible defaults by the purchasers. At June 30,
1996, the Company had approximately $1.7 million of customer financing
outstanding from 28 buyers.
The Company's sales of residential real estate (revenues) were $49.8
million for the six months ended June 30, 1996 compared to $63.4 million
during the same period in 1995. Excluding joint venture projects, included
in revenues for the first half of 1996 were 211 closings at an average sales
price of $236,000 compared to 272 closings at an average sales price of
$233,000 in the first half of 1995.
The difference in the average sales price of homes closed during the second
quarter and first half of 1996 as compared to the second quarter and first half
of 1995, primarily relates to the different mix of projects in which closings
occurred during the corresponding periods, and increases in sales price
discounts allowed in order to stimulate home sales activity.
During the first quarter of 1996, the rate of new home sales experienced
by the Company improved over the sales rate experienced during the latter
part of 1995. However, during the second quarter of 1996, the Company
experienced a decline in the rate of new home sales contracts entered into,
as compared to the preceding quarter. If sales rates persist at their
current levels or decline, the Company's financial results in 1996 will be
adversely affected by fewer closings of homes sales, lower revenues and
continued pressure on margins as compared to the Company's 1995 financial
results. In particular, as a result of the slow home sales rates experienced
in the second quarter of 1996, the Company believes that the number of home
sales closed, revenues and net income for the third quarter of 1996 will be
below the levels achieved in the second quarter of 1996, exclusive of the
second quarter FASB Statement No. 121 non-cash charge. The Company's
historical financial performance is not necessarily a meaningful indicator of
future results and, in general, the Company's financial results will vary
from development to development.
12
<PAGE>
Historically, Hawaii's unemployment rate has generally been lower than the
U.S. national average. However, in recent years Hawaii's unemployment rate has
been comparable to the national average. Any increases in Hawaii's unemployment
rate or lack of job growth may adversely affect future demand for new homes. In
addition, increases in mortgage rates impact the homebuyer's ability to qualify
for mortgage loans, which could adversely affect demand for new homes.
Increases in mortgage rates may also reduce the sales price ceilings established
on homes which are subject to governmentally imposed affordable housing
requirements. The affordable prices are generally determined at a price at
which a purchaser earning up to 140% of the local median income is able to
satisfy specified mortgage criteria.
COSTS AND EXPENSES - RESIDENTIAL REAL ESTATE SALES
Cost of residential real estate sales represents the acquisition and
development costs for a particular phase of a project attributable to the homes
sold in that phase. Acquisition and development costs primarily include land
acquisition costs, sitework and construction payments to contractors,
engineering and architectural costs, loan fees, interest and other indirect
costs attributable to development and project management activities and
miscellaneous construction costs.
Cost of residential real estate sales increased to approximately $24.0
million during the quarter ended June 30, 1996 from approximately $19.8 million
during the same period in 1995, representing an increase of approximately $4.2
million or 21.6%. This increase in the second quarter of 1996 as compared to
the second quarter of 1995 is the result of more closings of home sales and a
higher cost of residential real estate sales as a percentage of sales.
Cost of residential real estate sales as a percentage of sales increased to
80.5% in the first quarter of 1996 from 73.8% in the second quarter of 1995,
approximately half of the increase being attributable to an increased level of
price discounts to homebuyers, with the remainder attributable to higher
construction and inventory carrying costs. The Company anticipates this
increased level of costs will continue to affect its operating results in future
periods and no assurances can be given that costs will not increase to even
greater levels than reached in the past.
The cost of residential real estate sold decreased from approximately $46.4
million during the six months ended June 30, 1995 to approximately $40.2 million
during the same period in 1996, representing a decrease of approximately $6.2
million or 13.4%. The decrease reflects the lower number of sales closed,
partially offset by a higher cost of the units closed as a percentage of sales.
The cost of residential real estate sold as a percentage of sales increased
from 73.2% for the six months ended June 30, 1995 to 80.8% for the six months
ended June 30, 1996. The increase in the cost of residential real estate sold
as a percentage of sales was primarily due to the same factors mentioned above,
which caused the increase in the cost of residential real estate sold as a
percentage of sales from the second quarter of 1995 to the second quarter of
1996.
Total interest incurred during each of the quarters ended June 30, 1996 and
1995 was approximately $2.1 million and $1.3 million, respectively.
Substantially all amounts incurred were capitalized to development projects.
Interest capitalized to projects is expensed through cost of residential real
estate sales as sales are closed and revenue is recognized in the particular
project.
13
<PAGE>
Average debt outstanding was approximately $120.3 million and $74.4 million
during the second quarters of 1996 and 1995, respectively. The Company's
average interest rate on its debt for the quarters ended June 30, 1996 and 1995
was approximately 6.9% and 7.0%, respectively. The Company's notes payable bear
interest based on prime or LIBOR. Changes in the prime or LIBOR rates will
affect the amount of interest being capitalized to inventory and subsequently
expensed through cost of residential real estate sales as sales are closed and
revenue is recognized.
COSTS AND EXPENSES - INVENTORY IMPAIRMENT LOSS
During the fourth quarter of 1995, the Company changed its method of
accounting for the carrying amount of its real estate inventories by adopting
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." Under the new standard, inventories
which are substantially completed are carried at the lower of cost or fair value
less cost to sell. Fair value is determined by applying a risk adjusted
discount rate to estimates of future cash flows, resulting in a lower value than
under the net realizable value method previously required. In addition, land
held for future development or inventories under current development are
adjusted to fair value, only if an impairment to their value is indicated.
The estimates of future cash flows require significant judgment relating
to the level of sales prices, rate of new home sales, amount of marketing
costs and price discounts needed in order to stimulate sales, rate of
increase in the cost of building materials and labor, introduction of
building code modifications, and level of consumer confidence in Hawaii's
economy, among other items. Accordingly, there exists at any date, a
reasonable possibility that changes in estimates will occur in subsequent
periods.
The financial results for the second quarter of 1996 included a non-cash
charge pursuant to FASB Statement No. 121. The FASB Statement No. 121 non-cash
charge had a net after-tax impact of $14.6 million or $0.70 per share in the
second quarter of 1996, resulting in a net after-tax loss of $13.1 million or
$0.63 per share for the quarter and a net loss of $12.1 million or $0.58 per
share for the six month period. The second quarter 1996 charge relates
principally to the Company's completed inventories at June 30, 1996. While the
Company has been working to reduce completed inventories in its projects, the
current real estate environment and other factors dictate that the Company adopt
a more conservative outlook with respect to the future performance of its
currently completed inventories.
The Company's completed inventories increased during the second quarter of
1996 primarily due to the substantial completion of the second high-rise
building at the Company's Country Club Village project located in Salt Lake on
Oahu. The Company has postponed the construction of the third and last high-
rise building in order to reduce completed inventories in this project in the
future.
COST AND EXPENSES - SELLING AND COMMISSIONS
Sales and marketing costs represented approximately 7.6% and 6.0% of sales
of residential real estate during the quarters ended June 30, 1996 and 1995,
respectively. Such costs represented approximately 7.6% and 5.3% of residential
real estate sales during the 6 months ended June 30, 1996 and 1995,
respectively. The increase is a result of increases in sales incentives offered
to buyers, and general increases in sales and marketing costs, specifically
relating to higher commissions and advertising costs incurred.
14
<PAGE>
COSTS AND EXPENSES - GENERAL AND ADMINISTRATIVE
General and administrative expense includes salaries, office and other
administrative costs. Indirect costs attributable to specific projects are
capitalized and deducted as part of cost of residential real estate sales.
General and administrative expenses increased by $108,000 or 10.7% during
the second quarter of 1996 and by $36,000 or 1.8% during the first half of 1996
as compared to the same periods in 1995 primarily due to increased insurance and
payroll costs. As a percentage of sales, general and administrative expense
decreased from 3.8% during the quarter ended June 30, 1995 to 3.7% during the
quarter ended June 30, 1996, which reflects the higher number of sales closed
during the 1996 second quarter, as compared to the same period in 1995. As a
percentage of sales, general and administrative expense increased from 3.1%
during the first half of 1995 to 4.1% during the first half of 1996, which
reflects the lower number of sales closed during the first half of 1996, as
compared to the first half of 1995.
INCOME FROM UNCONSOLIDATED JOINT VENTURES
Income from unconsolidated joint ventures primarily represents the
Company's 50% interest in the operations of Waiakoa Estates Subdivision Joint
Venture and Iao Partners, the joint ventures developing the Waiakoa Kai Estates
and Iao Parkside projects, respectively. The decrease in this income during the
first half of 1995 to the same period in 1996 is primarily the result of the
closing of fewer homes during the first half of 1996 as compared to the
comparable period in 1995, and lower profit margins realized for the Iao
Parkside project during the first half of 1996 as compared to the first half of
1995, due to increases in construction and sales and marketing costs.
OTHER INCOME
Other income is primarily composed of interest income earned on cash
balances and notes receivable. The decrease in other income from $113,000 in
the second quarter of 1995 to $40,000 in the second quarter of 1996 is primarily
due to lower cash balances in the second quarter of 1996.
PROVISION (CREDIT) FOR INCOME TAXES
The Company's effective income tax rate for the second quarters of 1996 and
1995 was 39%.
The FASB Statement No. 121 inventory impairment loss of $23.9 million
($14.6 million after-tax) is not currently deductible for tax purposes,
producing an increase in deferred taxes of $9.3 million during the second
quarter of 1996.
VARIABILITY OF RESULTS
The Company has experienced, and expects to continue to experience,
significant variability in sales and net income. For example, the Company's
sales of residential real estate for the first and second quarters of 1996 were
$20.0 million and $29.8 million, respectively, while net income for the 1996
first quarter was $948,000 and net loss for the 1996 second quarter was $13.1
million (net of a $14.6 million after-tax charge relating to FASB Statement No.
121). In addition, the Company's sales
15
<PAGE>
of residential real estate for each of the four quarters ended December 31,
1995, ranged from approximately $26.8 million to $39.5 million and for each of
the four quarters ended December 31, 1994, ranged from approximately $36.0
million to $80.8 million. The Company's net income (loss) for each of the four
quarters ended December 31, 1995, ranged from a loss of approximately $3.1
million (after giving effect to a $5.7 million after-tax charge relating to FASB
Statement No. 121 in the fourth quarter of 1995) to net income of $4.7 million
and for each of the four quarters ended December 31, 1994, net income ranged
from approximately $6.3 million to $8.9 million. Factors that contribute to
variability of the Company's results include: (i) the timing of home closings,
a substantial portion of which historically have occurred in the last month of
each quarter; (ii) the Company's ability to continue to acquire additional land
on favorable terms for future developments; (iii) the condition of Hawaii's real
estate market and Hawaii's economy in general; (iv) the cyclical nature of the
homebuilding industry and changes in prevailing interest rates; (v) cost of
material and labor; and (vi) delays in construction schedules caused by timing
of inspections and approval by regulatory agencies, including zoning approvals
and receipt of entitlements, the timing of completion of necessary public
infrastructure, the timing of utility hookups and adverse weather conditions.
The Company's historical financial performance is not necessarily a meaningful
indicator of future results and, in general, the Company's financial results
will vary from development to development.
The Company has from time to time considered its possible expansion into
selected residential housing markets of the United States mainland and into
certain foreign countries and into other homebuilding related industries.
The Company has and would consider the acquisition of or joint venture with
an existing company, as well as its own acquisition and development of
homebuilding projects in certain areas, in order to facilitate its possible
expansion. In June 1996, the Company formed Schuler Homes of California,
Inc., a wholly-owned California corporation, for the development and sale of
homes in California. In August, 1996, the Company committed to the purchase
of a parcel of land in California for $2.5 million. The Company has no
experience in the development of homes in California. Accordingly, no
assurances can be given that the Company will be able to successfully
establish operations in California or elsewhere outside of its existing
Hawaiian markets or that such expansion will not adversely affect its results
of operations.
BACKLOG
The Company's homes are generally offered for sale in advance of their
construction upon applicable regulatory approval and sold pursuant to standard
sales contracts. The Company's standard sales contract may be cancelled by the
buyer at any time prior to closing. The Company does not recognize revenues on
homes covered by such contracts until the sales are closed. Homes covered by
such sales contracts are considered by the Company as its backlog.
The following table sets forth the Company's backlog (for both homes and
residential lots) at June 30, 1996 and 1995.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
--------------------- -----------------------
Aggregate Aggregate
Number Sales Value Number Sales Value
----- ------------ ------ -----------
<S> <C> <C> <C> <C>
Homes........................... 149 $35,025,000 224 $54,097,000
Lots............................ 6 978,000 17 2,594,000
--- ----------- --- -----------
155 $36,003,000 241 $56,691,000
--- ----------- --- -----------
--- ----------- --- -----------
</TABLE>
The Company has observed an increase in its historical cancellation rates,
which the Company believes to be attributable to uncertainty of prospective
homebuyers as to, and to their general lack of confidence in, the Hawaiian
economy. The Company's historical cancellation experience (which prior to 1995
had been nominal) may not be indicative of cancellations in future periods.
16
<PAGE>
The average sales prices of the homes comprising backlog at June 30, 1996
and 1995 were $235,000 and $242,000, respectively. Due to the ability of buyers
to cancel their sales contracts, no assurances can be given that homes or
residential lots in backlog will result in actual closings. Backlog data
includes all of the backlog of Waiakoa Estates Subdivision Joint Venture and Iao
Partners, the Company's two joint ventures developing the Waiakoa Kai Estates
and Iao Parkside projects, respectively.
LIQUIDITY AND CAPITAL RESOURCES
In March 1996, the Company executed a new Credit Agreement, which replaces
the $50 million line of credit with a $110 million unsecured revolving line of
credit facility on March 29, 1996. The lenders include First Hawaiian Bank
(arranger and agent), Bank of Hawaii, Bank of America, Bank of Boston, and
National Bank of Detroit. The facility expires on July 1, 1998 and includes an
option for the lenders to extend the term for an additional year. The Company
can select an interest rate of either LIBOR (1, 2, 3 or 6 month term) plus 1.75%
or prime for each borrowing. If the Company's leverage ratio, as defined,
exceeds 1 to 1, the interest rate increases to LIBOR plus 2.25% and prime plus
0.50%. The Company's ability to draw upon its line of credit is dependent upon
meeting certain financial ratios and covenants.
Companies in the homebuilding industry are generally highly leveraged and
require significant up-front expenditures. Accordingly, the Company incurs
substantial indebtedness to finance its homebuilding and development activities.
At June 30, 1996, the Company had bank notes payable of approximately $60.0
million. Peak outstanding debt, including bank borrowings and the Convertible
Subordinated Debentures, during the quarter ended June 30, 1996 was $126
million. In order to service these obligations and fund its ongoing operations,
the Company has used proceeds from its initial public offering, the offering of
convertible subordinated debentures, secondary offering of common stock, cash
flow from operations, its available bank credit facilities and financing by the
seller of land purchased. The Company's business and earnings are substantially
dependent on its ability to obtain debt financing on acceptable terms. To date,
all of the Company's bank borrowings have been from First Hawaiian Bank. With
the establishment of the new $110 million facility, the Company has expanded its
banking relationships to include four major banks in addition to First
Hawaiian Bank. Although the Company has in the past been able to obtain credit
facilities on acceptable terms and believes virtually all of its currently
planned construction projects will be funded by a combination of cash flow from
operations and bank or other financing, no assurance can be given that it will
be able to obtain such bank or other debt financing or that any such financing
will be on terms acceptable to the Company. Further, the availability of
borrowed funds to homebuilders, especially for land acquisition and construction
financing, has been severely restricted and in some cases eliminated entirely.
In compliance with federal guidelines, certain lenders are now requiring
increased equity commitments by borrowers in connection with both new loans and
the extension of existing loans.
During the first half of 1996, the Company advanced $3.1 million to Iao
Partners, a joint venture in which the Company has a 50% interest, for the
development of the Iao Parkside project. During the period, the Company was
repaid $2.6 million, as the closing of home sales occurred.
During April 1996, the Company purchased two parcels of land located in
West Oahu for approximately $31 million, utilizing its line of credit. At July
31, 1996, the Company had bank notes payable of approximately $61.9 million.
17
<PAGE>
The Company currently has a commitment to purchase a parcel of land for
approximately $2.5 million. The Company expects to utilize a combination of
cash flow from operations and bank financing to purchase the land parcel. The
Company intends to consummate the purchase of the land parcel in late 1996.
However, no assurances can be given that the purchase will be completed or that
the land under purchase option will be acquired.
The Company believes that cash flow from operations, and borrowings under
its credit facilities will provide adequate cash to fund the Company's
operations at least through 1996.
Certain of the Company's currently planned projects, as well as future
projects, are anticipated to be longer term in nature than those developed in
the past by the Company. The increased length of such projects further exposes
the Company to the risks inherent in the homebuilding industry, including
reductions in the value of land inventory.
In May 1996, the Company adopted a stock repurchase program to reacquire up
to an aggregate of $5,000,000 of its outstanding common stock through December
31, 1996. During the quarterly period ended June 30, 1996, the Company
repurchased 45,400 shares at a cost of $315,000.
18
<PAGE>
SCHULER HOMES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time involved in routine litigation or
threatened litigation arising in the ordinary course of its business. Such
matters, if decided adversely to the Company, would not, in the opinion of
management, have a material adverse effect on the financial condition of
the Company.
In April 1996, the Company was served with a lawsuit by owners of units
and the Association of Owners at Fairway Village at Waikele, who seek to
have a class of all owners certified. The complaint alleges material
construction defects and deficiencies, misrepresentation regarding the
cost of insurance, breach of covenant of good faith and fair dealing,
among other allegations. The complaint does not specify an amount of
damages, but includes a claim for punitive damages, among other claims.
The Company is currently evaluating the merits of the complaint. If
this lawsuit were decided adversely to the Company, it could have a
material adverse effect on the Company's business, financial condition
and operating results.
Items 2 and 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held an Annual Meeting of Stockholders on May 20, 1996.
(b) At the Annual Meeting of Stockholders, the following director was elected:
Bert T. Kobayashi
(c) At the Annual Meeting of Stockholders, the following matters were voted
upon:
(1) A proposal to ratify the selection of Ernst & Young LLP as independent
auditors for fiscal year 1996.
Affirmative votes: 19,070,127
Negative votes: 5,900
Abstain: 700
(2) A proposal to elect Bert T. Kobayashi to the board of directors.
Affirmative votes: 19,001,992
Withhold authority: 74,735
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
EXHIBIT NUMBER DOCUMENT DESCRIPTION
-------------- --------------------
10.1 Contract for Purchase and Sale of Real
Property between the Company and Investek
Properties Company, LLC, dated June 19,
1996.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K for the
quarter ended June 30, 1996.
19
<PAGE>
SCHULER HOMES, INC.
SIGNATURES
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 thereto duly authorized.
SCHULER HOMES, INC.
Date: August 27, 1996 By: /s/ James K. Schuler
-------------------------------------
James K. Schuler
Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: August 27, 1996 By: /s/ Pamela S. Jones
-------------------------------------
Pamela S. Jones
Senior Vice President of Finance,
Chief Financial Officer and
Director (principal financial officer)
Date: August 27, 1996 By: /s/ Douglas M. Tonokawa
-------------------------------------
Douglas M. Tonokawa
Vice President of Finance,
Chief Accounting Officer
(principal accounting officer)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION
-------------- --------------------
10.1* Contract for Purchase and Sale of Real
Property between the Company and Investek
Properties Company, LLC, dated June 19,
1996.
27.1* Financial Data Schedule.
- -------------
*NOTE: The above exhibits were filed with the Form 10-Q for the quarterly
period ended June 30, 1996 and thus are not filed as part of this
Form 10-Q/A for the quarterly period ended June 30, 1996.
