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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
AS AMENDED BY AMENDMENT NO. 1 THERETO PURSUANT TO FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 0-19891
SCHULER HOMES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 99-0293125
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
</TABLE>
828 FORT STREET MALL, 4TH FLOOR
HONOLULU, HAWAII 96813
(Address of principal executive offices)(Zip code)
(808) 521-5661
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 14, 1997 was $46,110,000.
The number of shares outstanding of each of the registrant's classes of common
stock on March 14, 1997 was as follows:
COMMON STOCK (PAR VALUE $.01 PER SHARE) 20,100,177 shares
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company's 1997 Annual Meeting to be
filed hereafter (incorporated into Part III hereof).
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PART I
ITEM 1. BUSINESS.
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
anticipated by such 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 this Form 10-K and other documents filed by the Company
with the Securities and Exchange Commission from time to time.
GENERAL
Schuler Homes, Inc. (the "Company") is one of the leading developers of
affordably priced residential housing in Hawaii. The Company's Hawaii
developments primarily consist of single-family homes and multi-family homes,
such as condominiums and town homes and, to a lesser extent, residential lots.
The Company has historically conducted all of its business in the state of
Hawaii. However, the Company has, for some time, been exploring opportunities
for expansion into the mainland United States in the interest of increasing the
long-term value of its shareholders. In this regard, in late 1996, the Company
expanded to the Northern California and Pacific Northwest regions by starting
homebuilding operations which will build single-family homes targeted for the
entry-level and first-time move-up buyer. In addition, on January 8, 1997, the
Company acquired Melody Homes, Inc., a leading homebuilder in the Denver
metropolitan area of Colorado, and Melody Mortgage Company, a mortgage brokerage
firm for Melody home buyers. Melody's homes are also targeted for the
entry-level and first-time move-up buyer.
Hawaii was one of the country's fastest growing economies in the late
1980's, which contributed to a strong Hawaiian residential real estate market
and the Company's growth in revenues from $78.7 million in 1992 to $217.3
million in 1994. However, by the mid-1990's, Hawaii's economy stagnated. The
Company believes that Hawaii's prolonged economic stagnation, combined with a
general lack of consumer confidence, has contributed to the slowdown in Hawaii's
residential real estate market. The Company's revenues, generated solely in
Hawaii, totaled $132.9 million and $93.6 million in 1995 and 1996, respectively.
This slowdown has led to the Company's expansion efforts into the U.S. mainland.
The Company believes that its focus on affordably priced housing, together
with its significant land acquisition, architectural, construction and marketing
skills, allows it to effectively compete in the entry-level and first time
move-up niche of Hawaii's homebuilding industry. The Company's affordable homes
in Hawaii are generally priced at levels that either (i) are at or below
ceilings established under applicable governmental land use policies, (See
"Government Regulation and Environmental Matters--Hawaii's Affordable Housing
Requirements), or (ii)represent the low to moderate end of the market for a home
in a particular locality. The Company has developed and closed the sales of
4,618 homes and 174 lots in Hawaii from its inception in March, 1988 through
December 31, 1996, of which 512 home and lot sales were closed during the twelve
months ended December 31, 1996. As of December 31, 1996, the Company owned zoned
and entitled land and inventories in Hawaii for approximately 3,800 additional
homes and lots.
In its effort to expand its homebuilding operations to Northern California
and the Pacific Northwest (Vancouver, Washington and Portland, Oregon), the
Company has purchased or committed to purchase several parcels of land in
California and Washington for an aggregate of $8.5 million, for the development
of approximately 268 single-family homes as of December 31, 1996. In the normal
course of business, the Company has continued to evaluate land parcels to
purchase in Northern California and the Pacific Northwest and, as of March 14,
1997, has entered into contracts to purchase land for the development of
approximately 430 homes for $14 million, in addition to the land under purchase
contracts as of December 31, 1996. However, these contracts contain certain
conditions precedent and, accordingly, there can be no assurance that such land
purchases will be consummated. By minimizing committed capital and
2
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hiring employees with local homebuilding expertise, the Company believes it can
mitigate the risks associated with expansion into new markets. However, no
assurances can be given that the Company will be able to successfully establish
operations outside of its Hawaiian markets or that such expansion will not
adversely affect its results of operations.
The Company's acquisition of Melody Homes, a 44-year old company with a
track record of profitability, provides the Company with an operation in Denver,
Colorado with a strong reputation, management team and land position. Melody has
developed and closed the sales of 14,140 homes in Colorado since its inception
through December 31, 1996, of which 639 home sales were closed in 1996. At
December 31, 1996, Melody owned or controlled (through pending purchase or
option agreements) land zoned and entitled for the development of approximately
2,895 homes. Although the Company and Melody share similar target market niches
and management styles, no assurances can be given that the Company will be able
to successfully manage its more geographically diverse operations.
The Company's recent expansion to markets in the mainland United States
further exposes the Company to risks inherent in those markets. For example, as
a result of the Company's acquisition of Melody, it will encounter construction
issues and risks such as expansive soils and extreme seasonal weather conditions
(dissimilar to those encountered in Hawaii).
The Company will continue to consider its expansion into additional selected
residential housing markets of the United States mainland and into certain
foreign countries and into other 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 expansion. When selecting new markets to
enter, the Company considers regional economic conditions and job growth, land
availability and the local land development process, consumer tastes and
competition from other builders of new homes and secondary homes sales activity.
THE HOMEBUILDING INDUSTRY
Historically, most sectors of the homebuilding industry have been cyclical
and have been significantly affected by changes in general economic conditions,
levels of consumer confidence and income, housing demand, interest rates and
availability of financing. For example, the Company believes that many of these
factors had an impact on the slower home sales rates, the higher level of sale
price discounts and lower profitability experienced by the Company in 1996 and
1995 in Hawaii as compared to previous years. In addition, real estate
developers such as the Company are subject to various risks such as competitive
overbuilding, availability and cost of materials and labor, environmental risks,
delays in construction schedules caused by strikes, weather and other factors
not within a developer's control, cost overruns, lack of infrastructure (such as
roads, water, sewage facilities and utilities), changes in government regulation
and increases in real estate taxes and other local government fees. For example,
among other items, (i) the Company's Puhi project on Kauai was delayed in the
past primarily due to the effects of the 1992 Hurricane Iniki and Kauai's
economy is still in the process of recovering from the effects of Hurricane
Iniki, (ii) the Company and other homebuilders nationwide have, in the past,
experienced volatility in lumber costs and increases in the cost of other
building materials and (iii) the Company has experienced delays and cost
overruns at its Salt Lake project on Oahu due to the use of a new construction
system. See "--Construction." In addition, the Company's Hawaii operations are
particularly susceptible to delays caused by strikes affecting the shipping and
transportation of building materials necessary for the Company's business. For
example, the Company's home closing and construction schedules were subject to
delays in early 1994 due to two labor strikes not directly involving the
Company, which occurred in April 1994.
3
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MARKETS
THE HAWAII HOUSING MARKET
Prior to 1996, the Company conducted all of its business in the State of
Hawaii. Although Hawaii was one of the country's fastest growing economies in
the late 1980s, the Company believes that the recessions in the United States,
particularly in California, and Japan have contributed to a slowdown in Hawaii's
economy during the 1990s. After adjusting for inflation, Hawaii's gross state
product grew by 0.2% in 1992 to 1994, and 0.5% in 1995, after having grown by
18.9% between 1986 and 1990. Estimated growth in gross state product in 1996 has
been reported at approximately 1.0%. The Company's 1996 and 1995 closings of
home sales and year end backlog reflects a reduction in the rate of new home
sales in 1996 and 1995 as compared to previous years, which the Company believes
to be the result of the general uncertainty of prospective home buyers as to,
and to their lack of confidence in, Hawaii's economy. Any continued prolonged
economic stagnation or downturn in Hawaii could have a material adverse effect
on the Company's business.
NEW MARKETS
The Company reviewed a number of factors in evaluating its entrance into the
Northern California, Pacific Northwest and Denver, Colorado markets. These
factors included economic and real estate conditions, historical and projected
population growth, the number of new jobs created or projected to be created,
the number of housing starts in previous periods, building lot availability and
price, housing inventory, level of competition, and home sales absorption rates.
PRODUCT DESCRIPTION
The Company maintains the flexibility to alter its product mix within a
given market depending on market conditions and, in determining its product mix,
considers demographic trends, demand for a particular type of product, margins,
timing and the economic strength of the market. While remaining responsive to
market opportunities within the industry, the Company has focused, and intends
to continue to focus, its business primarily on entry-level and first move-up
housing in the form of single family detached homes, townhouses and
condominiums. The Company attempts to maximize efficiency by using standardized
design plans whenever possible and sharing design plans among markets.
In view of the Company's recent expansion into new markets, its number and
location of active projects, home designs and product mix will change during
1997 when compared with prior years.
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The following table presents information relating to the Company's projects
which were complete at December 31, 1996, all of which are located in Hawaii:
TABLE I
<TABLE>
<CAPTION>
GOVERNMENTAL
AFFORDABLE ACTUAL AVERAGE
HOUSING INITIAL TOTAL NUMBER PRICE PER
PROJECT TYPE REQUIREMENT CLOSING OF HOMES/LOTS CLOSING
<S> <C> <C> <C> <C> <C>
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Kihei Villages Phase 1................... Condominium No 12/88 128 $ 95,000
Kihei Villages Phase 2................... Condominium No 4/89 100 $ 96,000
Kamani Trees Phase 1..................... Single-Family No 3/90 84 $ 136,000
Kihei Villages Phase 4................... Condominium Yes 6/90 80 $ 105,000
Kamani Trees Phase 2..................... Single-Family No 7/90 53 $ 151,000
Kihei Villages Phase 3................... Condominium No 10/90 68 $ 128,000
Kihei Villages Phase 5................... Condominium No 4/91 76 $ 133,000
Waikele Phase 1 (Ho'omaka Villages)...... Condominium Yes 5/91 244 $ 132,000
Waikele Phase 2 (Ho'omalu at Waikele).... Condominium Yes 11/91 54 $ 165,000
Kihei Villages Phase 6................... Condominium No 11/91 80 $ 149,000
Southpointe at Waiakoa Phase 1........... Condominium No 3/92 124 $ 130,000
Southpointe at Waiakoa Phase 1........... Single-Family No 5/92 10 $ 238,000
Waikele Phase 3 (Parkview at Waikele).... Condominium Yes 6/92 80 $ 148,000
Waikele Phase 4 (Ho'okumu Villages)...... Condominium Yes 12/92 136 $ 140,000
Waikele Phase 5 (Fairway Villages)....... Condominium Yes 12/92 112 $ 193,000
Waikele Phase 5 (Fairway Villages)....... Condominium No 3/93 96 $ 274,000
Puhi Phases 1 and 3 (Hokulei Villages)... Single-Family Yes 4/93 209 $ 150,000
Waikele Phase 7 (Mahi Ko)................ Condominium Yes 8/93 228 $ 140,000
Waikele Phase 6 (The Greens at
Waikele)................................ Condominium No 9/93 56 $ 284,000
Makakilo Phase I (Westview at
Makakilo)............................... Condominium Yes 12/93 20 $ 132,000
Makakilo Phase 2 (Westview at
Makakilo)............................... Condominium Yes 3/95 12 $ 127,000
Waikele Parcel 10 (Highlands)............ Condominium No 12/94 118 $ 219,000
Waikele Phase 8 (The Champions).......... Single-Family No 9/93 117 $ 374,000
Makakilo Phase I (Westview at
Makakilo)............................... Condominium No 12/93 128 $ 188,000
Waikele Phase 9 (Park Glen).............. Condominium Yes 3/94 204 $ 217,000
Waikele Parcel 10 (Highland View
Estates)................................ Single-Family No 12/94 35 $ 414,000
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TOTAL.................................... 2,652
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</TABLE>
5
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The following table presents information relating to the Company's projects
which were in process (i.e. initial closings had commenced or homes had been
sold pursuant to standard sales contracts) at December 31, 1996; all of which
are located in Hawaii:
TABLE II
<TABLE>
<CAPTION>
HOMES/ LOTS
SUBJECT TO
GOVERNMENTAL ACTUAL HOMES/LOTS PENDING SALES AVERAGE
AFFORDABLE HOUSING INITIAL TOTAL NUMBER CLOSED AT CONTRACTS AT PRICE PER
PROJECT TYPE REQUIREMENT CLOSING OF HOMES/LOTS 12/31/96 12/31/96(1) CLOSING(2)
<S> <C> <C> <C> <C> <C> <C> <C>
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Lawai Gardens(4)..... Lots No 12/91 71 55 -- $ 152,000
Waiakoa Kai
Estates(4)(5)...... Lots No 3/92 120 72 4 $ 164,000
Southpointe at
Waiakoa Phase 2.... Condominium No(3) 6/92 108 104 1 $ 129,000
Southpointe at
Waiakoa Phase 3.... Condominium No(3) 10/92 104 102 1 $ 132,000
Naniakea Estates(4).. Lots No 1/93 49 47 -- $ 127,000
Puhi Phase 2
(Halelani)......... Condominium Yes 9/93 116 115 1 $ 110,000
Iao Parkside(6)...... Condominium Yes 12/93 480 345 3 $ 131,000
Ma'ili Kai Phase I
(Lokelani)......... Duplex No(3) 2/94 222 208 2 $ 209,000
Waikele Phase 11
(Royal Pines)...... Single-Family No 6/94 126 125 1 $ 363,000
Puhi Phase 4
(Halelani)......... Condominium Yes 6/94 84 79 -- $ 110,000
Waikele Phase 10
(Signatures)....... Single-Family No 9/94 67 65 -- $ 377,000
Salt Lake (Country
Club Village)(8)... Condominium No 9/94 832 400 11 $ 238,000
Makakilo Phase 2
(Westview)......... Condominium No(3) 11/94 160 132 4 $ 189,000
Ma'ili Kai Phase 1A
(Pualani).......... Single-Family No(3) 6/95 27 17 1 $ 224,000
Ma'ili Kai Phase 1A
(Pualani).......... Single-Family Yes 6/95 58 36 3 $ 227,000
Puhi Phase 5
(Halelani)......... Condominium Yes 9/95 92 32 2 $ 109,000
Waikele Parcel 9
(Village on the
Green.............. Condominium No 9/95 282 116 11 $ 243,000
Waikele Phase 13 (The
Tropics)........... Single-Family No 3/96 195 54 9 $ 290,000
KulaLei.............. Single-Family No 7/96 193 36 19 $ 255,000
Waikele Parcel 9
(Classics)......... Single-Family No (7) 180 -- 5 --
--
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TOTAL................ 3,566 2,140 78
--
--
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</TABLE>
SEE ACCOMPANYING NOTES ON NEXT PAGE.
6
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(1) Homes/lots subject to pending sales contracts refers to sales contracts that
have not yet closed. As such contracts are subject to certain conditions
being satisfied and may be canceled by the buyer at any time, no assurances
can be given that homes/lots subject to pending sales contracts will result
in closings.
(2) Based on closings through December 31, 1996.
(3) Although the homes in this project are not subject to governmentally imposed
affordable price limitations, the Company believes that a majority of the
homes will nevertheless be sold at prices that fall within governmental
affordable price guidelines.
(4) From time to time the Company offers house/lot packages for sale in these
lot developments.
(5) Represents 100% of the Company's 50%-owned joint venture, and includes 12
residential lots to be sold to the county for self-help housing.
(6) Represents 100% of the Company's interest in Iao Partners, the Company's
50%-owned joint venture.
(7) Initial closing is anticipated to occur in 1997.
(8) The Company postponed the timing of the construction of the last high-rise
building (159 condominiums). See "Construction."
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The following table presents information relating to the Company's currently
planned projects for its Hawaii, Northern California and Pacific Northwest
divisions. Except as indicated below, the Company owns the land (or has purchase
contracts in place for such land) for these planned projects:
TABLE III
<TABLE>
<CAPTION>
GOVERNMENTAL
AFFORDABLE ANTICIPATED
HOUSING INITIAL TOTAL NUMBER OF
PROJECT TYPE REQUIREMENT CLOSING(1) HOMES/ LOTS(2)
<S> <C> <C> <C> <C>
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OWNED AT DECEMBER 31, 1996:
Hawaii
Waikele Phase 12 (Parcel 15)................ Condominium Yes 1997 270
Ma'ili Kai Phase 2.......................... Single-Family/Duplex No(3) 1997 616
Ma'ili Kai Phase 2.......................... Condominium Yes 1997 384
Kapolei Knolls.............................. Single-Family No 1998 425
Makakilo Phase 3............................ Condominium Yes 1999 18
Makakilo Phase 3............................ Condominium No(3) 1999 162
Puhi Phase 6................................ Condominium Yes 1999 124
Puhi Phase 7................................ Condominium Yes 1999 88
Pacific Northwest
Cedar Ridge................................. Single-Family No 1997 25
PENDING LAND PURCHASE CONTRACTS AT
DECEMBER 31, 1996(4):
Northern California
Livermore................................... Single-Family No 1997 78
Rio Vista................................... Single-Family No 1997 75
Pacific Northwest
Cedar Ridge................................. Single-Family No 1997 90
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TOTAL....................................... 2,355
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</TABLE>
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(1) Anticipated closing dates are based upon the Company's current estimates and
forecasts, and therefore are subject to change.
(2) Total number of homes/lots represents homes and lots currently planned for
development, subject to regulatory approvals, over the life of the project,
subject to change in future periods.
(3) Although the homes in this project are not subject to governmentally imposed
affordable price limitations, the Company believes that a majority of the
homes will nevertheless be sold at prices that fall within governmentally
affordable price guidelines.
(4) The pending purchase contracts for Livermore, Rio Vista and Cedar Ridge
contain certain conditions precedent and, accordingly, there can be no
assurance that such land purchases will be consummated. The Company
anticipates, however, that each of the contemplated purchases will be
completed in 1997.
PROJECT DESCRIPTIONS
HAWAII
WAIKELE
Waikele is a multi-phase residential development located in Waipahu, Oahu.
This project is part of AMFAC/JMB Hawaii, Inc.'s 577-acre Waikele master planned
community which contains commercial and retail centers, an 18-hole golf course,
park sites and an elementary school site. Waikele is less than one mile from a
major freeway, four miles from a regional shopping center and twelve miles from
Honolulu. The
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Company plans to build a total of 2,600 homes at Waikele. The two and three
bedroom town homes range in size from 650 to 1,390 square feet with sales prices
ranging from $79,000 to $330,000. The majority of the three and four bedroom
single-family homes will be located on a golf course and range in size from
1,180 to 2,100 square feet, and sales prices ranging from $254,000 to $445,000.
Revenue from Waikele through December 31, 1996 was approximately $404.5 million.
MAKAKILO
The three phases of the Makakilo project include 500 two and three bedroom
town homes ranging in size from 650 to 920 square feet. Sales prices range from
$105,000 to $220,000. This ocean-view Makakilo property is located in West Oahu,
on the hillside overlooking Oahu's planned second city of Kapolei. The 38-acre
site is located close to schools and shopping and has easy access to a major
freeway. Revenue from Phases 1 and 2 of this project was approximately $51.3
million through December 31, 1996.
SALT LAKE
The Salt Lake project (Country Club Village) is currently planned to include
832 two and three bedroom condominiums, ranging in size from 860 to 1100 square
feet and in price from $204,000 to $320,000. Construction of the last phase of
the project (159 condo units) has been postponed until market conditions
improve. The project features separate parking structures and contemplates a
landscaped promenade fronting the golf course and waterway. The Salt Lake
property is located adjacent to the Honolulu Country Club golf course and is
within ten minutes of downtown Honolulu. The Salt Lake project on Oahu involves
the construction of high-rise condominium structures of up to 22 levels, which
is a departure from the Company's historical emphasis on low-rise construction.
At this project, the Company used a pre-cast concrete construction system which
was new to both the Company and the State of Hawaii. Revenue from this project
through December 31, 1996 was approximately $94.1 million.
MA'ILI KAI
The Ma'ili Kai project is currently planned to include a total of
approximately 1,307 homes, including 384 town homes and 923 single-family homes
(detached and duplex). The homes range in size from approximately 900 to 1,500
square feet. The project is located 9 miles west of Oahu's planned second city
of Kapolei and is marketed as a community which provides the comfort of country
living. Revenue from this project was approximately $52.9 million through
December 31, 1996.
KULA LEI
The Kula Lei project consists of 193 improved lots which are part of the Ewa
master planned community being developed by Gentry Development Company and
Gentry Homes, Ltd. The project is planned to include three and four bedroom
single-family homes ranging in size from 1,000 to 1,500 square feet and ranging
in price from $225,000 to $280,000. Revenue from this project through December
31, 1996 was approximately $6.7 million.
KAPOLEI KNOLLS
The Kapolei Knolls project consists of 79 acres of land located in the
planned second city of Kapolei on Oahu located close to schools, shopping
centers and access to a major freeway. The project is planned to include
approximately 425 single-family homes, many with views of the ocean. The homes
are anticipated to range in size from 1,100 to 1,900 square feet and to range in
price from $275,000 to $375,000. In March 1997, the Company commenced site work
on this property.
9
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PUHI
Puhi is a multi-phase, single-family home and low-rise garden condominium
project located on 67 acres in Lihue, Kauai. This FHA approved project will
consist of 713 units, including 20 homes which were sold to the County of Kauai.
Puhi is part of Grove Farm Properties, Inc.'s 562 acre master planned golf
course community, the plans for which include public parks, a shopping center,
an 18-hole golf course and a school site. The 189 single-family homes in this
project, which were sold to the public, ranged in size from 864 to 1,130 square
feet and were priced from $135,000 to $186,000, the last of which were sold and
closed in 1994. The 504 two and three bedroom low-rise garden condominium units
in this project will range in size from 650 to 960 square feet and are currently
expected to sell from $80,000 to $140,000. The project has easy access to a
major highway and is within one-half mile of a regional shopping center and
one-and-a-half miles from Lihue, Kauai, the county seat. Revenue from the first
five phases of this project was approximately $53.4 million through December 31,
1996.
IAO PARKSIDE
The Iao Parkside project is a 480 unit low-rise garden condominium
development on 28 acres located in Wailuku, Maui, the county seat. The one, two
and three bedroom condominiums will range in size from 550 to 960 square feet
and sales prices are expected to range from $96,000 to $170,000. The project is
located two miles from downtown Wailuku and surrounds the 10 acre Wailuku
Community Center and Recreation Park. The project is being developed as part of
the Company's 50% joint venture with C. Brewer Homes, Inc., one of the largest
landowners in Hawaii. Revenue from this project totaled approximately $45.2
million through December 31, 1996. The Company includes 50% of the net income
related to this revenue in Income from Unconsolidated Joint Ventures on its
Consolidated Statements of Operations.
SOUTHPOINTE AT WAIAKOA
Southpointe at Waiakoa is a three-phase, 336 unit low-rise garden
condominium community on 15 acres located in Kihei, Maui. Ten single-family
detached homes were also built in Southpointe. Southpointe is close to schools,
shopping and state beach parks and is located one mile from the Company's Kihei
Villages community. The two bedroom condominiums range in size from 650 to 750
square feet and sales prices have ranged from $115,000 to $142,000. The
single-family homes range in size from 1,124 to 1,350 square feet and sales
prices ranged from $229,000 to $255,000. On-site amenities will include a
recreation center, a barbecue and picnic area and a children's play area.
Revenue from all three phases of this project was approximately $44.9 million
through December 31, 1996.
KIHEI VILLAGES
Kihei Villages is a 532 unit FHA approved low-rise garden condominium
project located on a 21-acre site in Kihei, Maui. The two bedroom, 750 square
foot units were priced from $79,000 to $179,000. On-site recreational amenities
include a clubhouse, barbecue and picnic area and a children's play area. This
community is directly across from a large county beach park with easy access to
major highways. Revenue from all six phases of this project was approximately
$61.0 million through December 31, 1992. This project was completed and sold out
in 1992.
KAMANI TREES
Kamani Trees consists of 135 FHA approved single-family detached condominium
homes and two lots in Kailua-Kona, Hawaii. Kamani Trees was the Company's first
single-family detached condominium home development that was not subject to
imposed governmental affordable housing requirements. These homes pre-sold
within three months of the Company's first pre-sale advertisement and revenue
from this project
10
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was approximately $19.1 million. These two and three bedroom, two bath homes
range in size from 864 to 1,250 square feet and sold for $115,000 to $169,000.
This project was completed and sold out in 1990.
WAIAKOA KAI ESTATES
Waiakoa Kai Estates consists of 120 single-family market-rate lots, 12 of
which will be sold to the county for self-help housing, located on 25 acres in
Kihei, Maui. The lots range in size from 7,500 to 10,600 square feet and are
currently priced from $150,000 to $190,000. Waiakoa Kai Estates was developed as
part of the Company's 50% joint venture with United Realty, Inc., a Hawaii
corporation ("United Realty"). The Company includes 50% of the net income of
Waiakoa Estates Subdivision Joint Venture in Income from Unconsolidated Joint
Ventures on its Consolidated Statements of Operations.
LAWAI GARDENS
Lawai Gardens is a subdivision of approximately 26 acres in Lawai, Kauai.
The project consists of 71 single-family market-rate lots ranging in size from
10,000 to 62,700 square feet, which are currently priced from $114,000 to
$145,000.
NANIAKEA ESTATES
Naniakea Estates consists of 49 single-family market-rate lots on
approximately 20 acres in Hilo, Hawaii. These lots range in size from 15,000 to
20,000 square feet and are priced from $90,000 to $115,000.
NORTHERN CALIFORNIA
The Company's projects in Northern California on land located in Livermore
and in Rio Vista which is under pending purchase contracts, will include
single-family homes ranging in size from 1,200 to 2,500 square feet and ranging
in sales price from $120,000 to $285,000.
PACIFIC NORTHWEST
The Company is planning residential developments in the Vancouver,
Washington and Portland, Oregon area. The Cedar Ridge project on land, a portion
of which is owned and a portion of which is under a pending purchase contract,
will include single-family homes ranging in size from 1,700 to 2,300 square feet
and ranging in sales price from $158,000 to $185,000. This project is located in
Vancouver, Washington.
MELODY HOMES--DENVER, COLORADO
On January 8, 1997, the Company acquired Melody Homes, Inc., a leading
homebuilder in the Denver metropolitan area of Colorado, and Melody Mortgage
Company, a mortgage brokerage firm for Melody home buyers. Melody's homes are
targeted for the entry-level and first-time move-up buyer. Melody builds homes
ranging in size from 900 to 2,500 square feet, and in price from $109,000 to
$175,000. As of December 31, 1996, Melody had twelve subdivisions under
development, land owned for the development of 2,215 homes and land under
pending purchase contracts or option agreements for the development of 680
homes.
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LAND ACQUISITION AND DEVELOPMENT
The Company selects its land for development based upon a variety of
factors, including: internal and external demographic and marketing studies;
financial and legal reviews as to the feasibility of the proposed project; the
ability to secure necessary financing and required government approvals and
entitlements; environmental due diligence and management's judgment as to the
real estate market, economic trends and the Company's experience in a particular
market. As part of the Company's ongoing land acquisition policy, it actively
seeks to purchase land that is already zoned for residential development.
The Company generally utilizes options or land purchase agreements to obtain
control of desired parcels and typically funds the purchase price with a 50% to
100% cash down payment with the balance, if any, provided by a commercial bank
or seller financing. The Company's purchase agreements are typically subject to
numerous conditions, including, but not limited to, the Company's ability to
obtain any necessary governmental approvals. During the contingency period, the
Company also confirms the availability of utilities, completes its marketing
feasibility studies, verifies site and construction costs, reviews and approves
soil and environmental reports and arranges for project financing, if necessary.
Certain of the Company's land purchase agreements require the Company to
make additional payments to the seller if the average sales price or the final
number of all homes exceeds an amount stated in such agreements. See Note 10 to
Notes to Consolidated Financial Statements.
The Company has occasionally granted a profit participation interest in
certain of its projects to individuals involved in locating, structuring and
assisting in the management of the particular project.
The Company sometimes enters into partnerships or joint ventures to purchase
land and develop its communities where such arrangements are necessary to
acquire the land or appear to be otherwise economically advantageous to the
Company. The Company generally has not used partnerships or joint venture
arrangements as a method of raising capital for the development of projects,
although such arrangements may be used for purposes of expansion into other
geographic areas or other related businesses. In August 1989, the Company
entered into a joint venture partnership with United Realty for the development
of real property on Maui (Waiakoa Kai Estates) owned by United Realty. In
October 1992, the Company entered into a partnership (Iao Partners) with C.
Brewer Homes, Inc. to develop 480 affordable condominiums in Wailuku, Maui, on
land purchased from C. Brewer Homes, Inc. by the Company and subsequently
contributed to the partnership.
The Company's home development projects have typically taken one to four
years to develop, depending on the project's size, the Company's strategy with
respect to the particular project, regulatory approvals, economic conditions,
and geological conditions at the site. Larger projects are divided into phases,
with each phase generally taking six months to one year to complete. The Company
has typically acquired interests in tracts of land that require site
improvements prior to construction and are suitable for a subdivision comprised
of between 50 and 800 buildable units. Certain of the Company's currently
planned projects in Hawaii are anticipated to be longer term in nature and to
include a larger number of buildable units. For example, the Company's Ma'ili
Kai project is estimated to take approximately six to ten years to complete and
to include approximately 1,300 homes. The increased length and size of such
projects further exposes the Company to risks inherent in the homebuilding
industry including reductions in the value of land inventory. The larger
projects generally will have offsite and infrastructure requirements to be
fulfilled prior to the construction of homes, which increase the amount of cash
expended at the beginning of the project.
Although the Company's principal focus is the construction and sale of
affordable entry-level or first-time move-up residential housing, from time to
time the Company offers residential lots for sale in Hawaii. The Company's
approach towards residential lot sales is to acquire parcels of land which it
then subdivides for such purpose in those instances where it perceives an
attractive market opportunity. The Company does not anticipate that residential
lot sales will constitute a significant amount of revenues in the future.
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In the late 1980's and early 1990's, the need for affordable housing in
Hawaii exceeded available supply. This shortage resulted from several factors
including foreign investment, real estate speculation, the high concentration of
land ownership in the hands of relatively few landowners, the low percentage of
land allocated for residential use, and environmental and infrastructure
constraints. To promote affordable housing and provide relief to Hawaii's
affordable housing crisis, several formal and informal governmental policies
have been implemented at both the state and county level. In particular, as a
condition to rezoning land for urban development, it is the current practice of
the Hawaii Land Use Commission to negotiate agreements with residential
developers to offer for sale to eligible buyers a portion (typically from 10% to
60%) of the total number of units in a project at affordable prices (usually
determined as a price at which a purchaser earning up to 140% of the local
median income is able to satisfy specified mortgage criteria). To ensure that
homes sold pursuant to a governmentally imposed affordable housing requirement
remain affordable to other eligible buyers and to prevent speculation, counties
typically impose multi-year transfer restrictions on purchasers of the Company's
affordable homes.
The Company has historically acquired a portion of its land in Hawaii from
land developers who have agreed with the state or county authorities that a part
of their projects will consist of affordable housing with specified price
limitations. In negotiating the purchase price for such land, the Company has
been able to secure land prices that were lower than prices for comparable land
that is not subject to affordable housing price limitations (See "Government
Regulation and Environmental Matters--Affordable Housing Requirements"). The
Company then developed and offered for sale homes that satisfy the land
developer's agreed upon affordable housing requirement.
The Company has also acquired land which is not subject to governmentally
imposed price limitations when it perceives an opportunity to develop and sell
quality market-rate housing. The Company generally develops homes on such land
which tend to be at the higher end of the Company's pricing structure yet still
at the low to moderate end of the overall market. During recent years, an
increasing percentage of the land acquired by the Company has not been subject
to governmentally imposed price limitations. The Company anticipates that this
trend will continue.
CONSTRUCTION
In the past, all construction of homes developed by the Company was
performed by general contractors who typically entered into a fixed-price
contract for the construction of specific residential developments. However,
during 1995, the general contractor on several of the Company's Hawaii projects
assigned its subcontracts to the Company. As a result, Lokelani Construction
Corporation (LCC), a previously inactive Hawaii general contractor wholly-owned
by the Company, became the general contractor for the affected Hawaii projects.
In addition, the Company is using LCC as the general contractor for certain of
its other Hawaii projects and plans to use LCC on future Hawaii projects. The
Company anticipates that it will operate as its own general contractor in
Northern California and the Pacific Northwest, which is also consistent with
Melody's operations. Although the Company believes that it has the ability to
operate as a general contractor, it has little historical experience to draw
upon and, consequently, no assurances can be given that unanticipated cost
increases or delays will not be experienced.
Engineering, site preparation and environmental impact analysis work is
subcontracted to independent firms that are familiar with local requirements.
The general contractor is responsible for the general management of the
construction process, coordinates the activities of all subcontractors,
suppliers and building inspectors and generally follows design plans prepared by
consulting architects and engineers who are retained by the Company and whose
designs are geared to the local market. The Company employs an in-house
architect as well as independent architectural firms to ensure that home designs
are cost-efficient and conform to the Company's strategies. Company employees
monitor the construction of each project, participate in all material design and
building decisions, subject the contractors' and subcontractors' work to quality
and cost controls and monitor compliance with zoning and building codes. In
addition, the
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Company works closely with contractors and subcontractors on purchasing,
architectural design, site planning, coordinating governmental approvals,
contract management and closings. The Company will sometimes require its general
contractors and/or subcontractors to post a lien-free completion and performance
construction bond.
Although the Company has ongoing relationships with several general
contractors and subcontractors, approximately 51% of the homes constructed in
Hawaii for the Company since its inception have been completed by Hawaiian
Dredging Construction Company ("HDCC"), a division of Dillingham Construction
Pacific, Ltd. HDCC is one of the largest general contractors in Hawaii. In 1996,
approximately 35% of the homes constructed for the Company were completed by
HDCC. The Company currently anticipates that a substantial portion of its
projects in Hawaii will be completed by HDCC in the foreseeable future. The
Company selects HDCC for many of its projects because it believes that HDCC's
efficiency and familiarity with the Company's development objectives and design
plans have been and will continue to be important elements of the Company's
success. However, the Company believes that it could engage other general
contractors, including the Company's wholly-owned construction company, LCC, if
necessary. No assurances can be given that the use of contractors other than
HDCC would not adversely affect the Company's operations or financial results.
Construction time for the Company's homes depends on the time of year,
availability of labor, materials and supplies and other factors. See
"--Government Regulation and Environmental Matters." The Company seeks to
establish home designs that are standardized and utilize pre-fabricated
components. This standardization helps permit on-site mass production and bulk
purchasing of material by the contractors and subcontractors engaged by the
Company, thus reducing costs and expensive change orders. However, from time to
time the Company develops new designs to replace or augment existing ones as
part of its continuing efforts to assure that its homes are responsive to
current consumer preferences. For new designs, the Company has engaged a number
of unaffiliated architectural firms in addition to its in-house architect. The
Company's homes include town homes, condominiums and single-family homes, which
have ranged in size from approximately 650 to 2,500 square feet. The Company
typically completes the construction of a home within two and one-half to nine
months from commencement of building construction.
The Company generally provides limited warranties of at least one to two
years for workmanship and materials and for longer periods with respect to
structural components. Because the Company contracts its homebuilding work to
qualified contractors or subcontractors who provide the Company with an
indemnity and a lien release prior to receiving payment from the Company for
their work, claims relating to workmanship and materials are generally the
primary responsibility of the Company's contractors or subcontractors. However,
to the extent that warranty claims are not covered by the Company's contractors
or subcontractors, the Company has established an allowance to cover warranty
expenses. The Company's historical experience is that such warranty expenses
generally fall within the allowance established although no assurances can be
given that this will be the experience in the future.
In addition, for homes closed from early 1990 until October 7, 1994,
Melody's structural warranty coverage was with the Home Owners Warranty
Corporation ("HOW"). On October 7, 1994, the Commonwealth of Virginia placed HOW
under temporary receivership, and a permanent injunction followed on October 17,
1994. Terms of the injunction allowed policies that were effective prior to
October 7, 1994, to be honored for their full term. It is Melody's understanding
that HOW is currently paying approximately 50% of the costs associated with
claims made under the HOW policies. Concurrent with the above, Melody entered
into an agreement with Residential Warranty Corporation to provide its home
buyers with equally suitable coverage for homes closed subsequent to October 7,
1994. The Company, based upon its due diligence in connection with the
acquisition of Melody, believes that claims under Melody's warranty programs are
substantially covered by Melody's warranty accruals or insurance. However, no
assurances can be given that the Company will not incur future claims in excess
of warranty accruals or insurance coverage.
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The Company's Salt Lake project (Country Club Village) on Oahu involves the
construction of high-rise condominium structures of up to 22 levels, which is a
departure from the Company's historical emphasis on low-rise construction. At
this project, the Company used a pre-cast concrete construction system which is
new to both the Company and the State of Hawaii. Furthermore, where it is
believed to be cost-effective and efficient, the Company has used steel building
components in certain of its projects, which represents a departure from the
traditional wood-frame method of construction. The Company experienced a
slippage in the number of closings during the last half of 1994 due largely to
construction delays related to the finish work on home modules built through the
use of a new pre-cast concrete construction system at the Salt Lake project. No
assurances can be given that the departure from the Company's historical
emphasis on low-rise construction, the use of the new pre-cast concrete
construction system and the use of steel building components will not result in
reduced buyer acceptance of the Company's projects, delays in construction
schedules and higher construction costs.
In late 1994, the Company initiated arbitration proceedings in Honolulu
against the general contractor at its Salt Lake project. The arbitration
proceedings primarily pertained to claims made by (i) the general contractor for
additional compensation attributable to changes made in the scope of work
originally contemplated by the construction contract, partially offset by
reductions authorized by the Company and (ii) each party for losses incurred in
the administration of this contract. While the Company believes that most of the
claims asserted by the general contractor in the arbitration proceeding were
without merit, the Company also began to recognize that its ability to work with
the joint venture contractor in an efficient and cost-productive manner had been
eroded by the existence of the arbitration proceeding. On the basis of these and
other factors, the Company engaged in settlement discussions with the general
contractor and the parties reached a settlement of the dispute in February 1995.
This resolution resulted in the Company incurring a pre-tax charge in the 1994
fourth quarter of $8.0 million, which was paid in February 1995.
As part of the settlement, a new construction contract for the remaining
portion of the Salt Lake project (encompassing three high-rise buildings of 628
units) was entered into by the Company with the U.S. Subsidiary of Daewoo
Corporation. Daewoo holds the rights necessary to use the innovative, pre-cast
concrete construction system utilized at the Salt Lake project. The Company's
construction contract with Daewoo includes a guaranteed maximum cost provision
for the project's completion. The first high-rise building of 230 condominiums
was completed in November, 1995. The second high-rise building of 239
condominiums was completed in August, 1996.
During 1996, the Company negotiated with Daewoo to delete from the
construction contract the last high-rise building at the Salt Lake project in
order to enable the Company to postpone the construction of this building until
the completed inventory at this project is reduced. Accordingly, it is possible
that the total construction costs eventually incurred on this building could
exceed the costs under the construction contract with Daewoo.
Due to the reduction in the rate of new home sales in Hawaii in 1996 and
1995 as compared to previous years and the Company's contractual commitments to
construct homes in Hawaii, particularly at its Salt Lake project, completed
inventory comprised a larger component of total inventory as of December 31,
1996 as compared to December 31, 1994.
MARKETING AND SALES
Substantially all the Company's homes are sold by commissioned sales
personnel who typically work from sales offices located at each subdivision, as
well as by cooperating independent brokers. Company personnel are available to
assist prospective buyers by providing them with floor plans and price
information. Historically, the Company had not found it necessary to spend a
significant amount to advertise and market its properties, nor had it found it
necessary to make extensive use of model homes. However, as a result of the
increase in the portion of the Company's projects which are not subject to
governmentally imposed price limitations, the increases in mortgage interest
rates during certain periods,
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the slower Hawaii economy, and increased competition for home buyers among
Hawaii's homebuilders, the Company has found it necessary to use advertising and
models more frequently. In addition, the Company is finding it necessary to
utilize certain sales incentives (such as providing decorator items, second
mortgages, interest rate buydowns and the reimbursement of closing and escrow
costs) and price discounts in order to market its homes.
The rate of new home sales in 1996 and 1995 was lower than the rate of new
home sales experienced in previous years, which the Company believes to be the
result of the general uncertainty of prospective home buyers as to, and to their
lack of confidence in, Hawaii's economy. Although the Company believes that the
Hawaiian economy has shown signs of recovery, particularly in the tourism
industry, the Company's rate of new home sales has not improved. If new home
sales rates persist at their current levels or decline further, the Company's
financial results will be adversely affected by fewer closings of home sales,
lower revenues and continued pressure on margins.
For homes sold in Hawaii under government-imposed price limitations (See
"Government Regulation and Environmental Matters--Hawaii's Affordable Housing
Requirements), the Company is generally required to sell its homes only to
owner-occupants by lottery or on a first-come, first-served basis. If after 180
days, a home subject to governmentally imposed price limitations has not been
purchased by a qualified purchaser or the county, the Company may request county
authorities to permit the Company to sell the home to any other purchaser at the
affordable price, although no assurances can be given that the county
authorities will grant this permission.
The Company's objective is to price its homes very competitively and to
market its homes in advance of construction, in an effort to minimize levels of
unsold inventory upon completion of a project. The Company accomplishes these
pre-sales by publishing a pre-sale advertisement and entering into pre-
construction sales contracts with the purchasers. The sales contracts generally
provide for requisite mortgage approval within a specified period, and the
Company attempts to minimize cancellations by requiring a refundable cash
deposit of approximately $2,000 to $10,000 and by training its sales force to
assess the qualification of potential home buyers.
Due to the lower sales rates experienced in Hawaii in 1996 and 1995 as
compared to previous years, and the Company's contractual commitments to
construct homes in Hawaii, particularly at its high-rise condominium project
(Country Club Village) in Salt Lake on Oahu, completed unsold inventory
comprised a larger component of total inventory as of December 31, 1996 as
compared to previous years. At December 31, 1996, the Company had 273 completed
homes at Country Club Village and 515 completed homes company-wide (of which 50
were subject to pending sales contracts), as compared to 172 completed homes at
December 31, 1994 (of which 101 were subject to pending sales contracts).
Historically, the Company has focused extensively on the sale of low-rise,
multi-family condominiums in Hawaii. Since 1993, the Company has expanded its
operations to include the sale of an increased number of single-family homes and
a higher proportion of its Hawaii sales of homes on Oahu priced at the low to
moderate end of the market as opposed to those subject to governmentally imposed
price limitations. The Company is currently offering single-family homes for
sale on Oahu, with prices ranging from $199,000 to $445,000. As a result, the
Company expects that prices for a portion of its homes and lots will exceed
current lending limits for FHA insured loans, which has historically been the
method by which the majority of its home sales have been financed. The
unavailability of FHA insured loans could adversely affect demand for such
homes. No assurances can be given that the Company will experience the same
degree of success in selling its homes and lots that it has experienced in the
past.
For fiscal years ended 1996, 1995 and 1994, approximately 13%, 12% and 33%,
respectively, of the Company's total revenue in those periods were attributable
to homes sold by the Company on land originally acquired from land developers
with specified affordable housing requirements (See "Government Regulation and
Environmental Matters--Hawaii's Affordable Housing Requirements). The balance of
such revenues was attributable primarily to affordably priced homes sold by the
Company on land not
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subject to specified governmentally imposed affordable housing requirements. The
Company anticipates that total revenue attributable to homes sold by the Company
on land originally acquired by land developers with specified affordable housing
requirements will continue to comprise a smaller percentage of total revenues
than in 1994 and prior years. The Company anticipates that approximately 33% of
the homes to be developed on land in Hawaii, which is owned by the Company or
subject to pending land purchase contracts at December 31, 1996, will be subject
to governmentally-imposed affordable housing requirements.
CUSTOMER FINANCING
Historically, a substantial portion of the Company's housing projects have
met applicable FHA requirements and FHA financing has been provided to the
majority of the purchasers of the Company's homes. The current FHA financing
limit on the island of Maui is $204,250, $241,425 on Oahu and $187,300 on each
of the islands of Hawaii and Kauai. The current range of FHA financing limits
for various markets in California, Washington, Oregon and Colorado are $101,000
to $161,000, $85,000 to $161,000, $85,000 to $151,000 and $82,000 to $161,000,
respectively. Loans are generally permitted for up to 90%-97% of the value of
the home. The Company expects that the prices for a portion of its homes and
lots will exceed current lending limits for FHA insured loans and, accordingly,
purchasers in these developments will be required to obtain conventional
mortgage financing. The unavailability of FHA insured loans could adversely
affect demand for such homes. No assurances can be given that the Company will
experience the same degree of success in selling these homes and lots that it
has experienced in the past.
Increases in mortgage interest rates impact a home buyer's ability to
qualify for mortgage loans. The Company believes that future increases in
mortgage rates could contribute to further reductions in its new home sales
rates. Increases in mortgage rates may also reduce the sales price ceilings
established on homes which are subject to governmentally imposed affordable
housing requirements in Hawaii. The affordable prices in Hawaii 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.
In certain limited circumstances, the Company may attempt to minimize
potential risks relating to the availability of customer financing by purchasing
mortgage financing commitments that lock in the availability of funds and
interest rates at specified levels for a certain period of time. Since
substantially all home buyers utilize long-term mortgage financing to purchase a
home, adverse economic conditions, increases in unemployment and high mortgage
rates may deter and eliminate a substantial number of potential home buyers from
the Company's markets in the future.
The Company has occasionally provided financing pursuant to agreements of
sale and second mortgages to purchasers of its homes and residential lots.
During 1996, the Company's notes receivable increased to $3.9 million at
December 31, 1996 from $1.3 million a year earlier, primarily as a result of
second mortgages provided by the Company to home buyers who purchased homes as
part of the Company's "zero-down" sales incentive program. To the extent the
Company provides financing to its customers, it becomes subject to the risks
inherent with such practices, including possible defaults by the purchasers.
COMPETITION
The homebuilding industry is highly competitive. Homebuilders compete for
desirable properties, financing, raw materials and skilled labor. The Company
competes for residential sales with other developers, governmentally built or
subsidized housing units, individual resales of existing homes and condominiums,
and available rental housing. Competition for the acquisition of raw land is
particularly intense in Hawaii, largely due to the concentration of land
ownership and the limited supply of land available for development. Hawaii's
large landowners could also expand their direct involvement in the affordable
market segment, thereby increasing competition and reducing the supply of land
available to
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the Company. In addition, many of the Company's competitors have greater
financial and other resources than the Company. The Company is one of the
leading developers of affordable homes in Hawaii, and believes it competes
favorably as a result of price, its development expertise, its knowledge of the
Hawaii real estate market and the local governmental permitting and approval
process, and its favorable reputation in Hawaii's homebuilding industry. The
Company believes that its focus on the affordable housing sector, together with
its significant land acquisition, architectural, construction and marketing
skills, have provided it with competitive advantages in Hawaii's homebuilding
industry particularly since there are very few homebuilders in Hawaii of a size
comparable to that of the Company. However, the Company as a result of its
recent expansion activities, will encounter many more competitors in its new
markets of Northern California, the Pacific Northwest and Colorado.
The Company believes that the general uncertainty of prospective home buyers
as to, and to their lack of confidence in, Hawaii's economy has caused a
slowdown in Hawaii's home sales rates, which has increased the competition for
home buyers among Hawaii's homebuilders.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
GENERAL. In developing a project, the Company must obtain the approval of
numerous governmental authorities regulating such matters as permitted land uses
and levels of density and the installation of utility services such as
electricity, water and waste disposal. Several governmental authorities have
imposed fees as a means of defraying the cost of providing certain governmental
services to developing areas. The Company has historically, for the most part,
purchased land which is fully entitled and zoned for residential development.
Because the Company historically has generally purchased land that has already
been zoned for residential development, restrictive zoning issues have not had a
material adverse effect on the Company's development activities. However, there
is no assurance that these and other restrictions will not adversely affect the
Company in the future, especially to the extent that it purchases land not
already zoned for development.
The Company is also subject to local, state and federal statutes and rules
regulating environmental matters, protection and preservation of archeological
finds, zoning, building design and density requirements which limit the number
of homes that can be built within a particular project, and fees imposed to
defray the cost of providing certain governmental services to developing areas.
These laws may result in delays, cause the Company to incur substantial
compliance costs and prohibit or severely restrict development in certain
environmentally or archaeologically sensitive regions or areas.
The Company may be subject to additional costs, delays or may be precluded
entirely from developing its projects because of government regulations that
could be imposed in the future due to unforeseen health, safety, welfare,
archeological or environmental concerns. Environmental regulations can also have
an adverse impact on the availability and price of certain raw materials such as
lumber. Hawaii, in particular, has some of the strictest land use, environmental
and agricultural laws in the United States, and the rezoning of land for urban
development is a difficult and time-consuming process.
To varying degrees, certain permits and approvals will be required to
complete the residential developments in progress or currently being planned by
the Company. The ability of the Company to obtain necessary approvals and
permits for these projects is often beyond the Company's control and could
restrict or prevent the development of otherwise desirable property. The length
of time necessary to obtain permits and approvals increases the carrying costs
of unimproved property acquired for the purpose of development and construction
and could delay the timing of the closing of its sales. In addition, the
continued effectiveness of permits already granted is subject to factors such as
changes in policies, rules and regulations and their interpretation and
application.
HAWAII'S AFFORDABLE HOUSING REQUIREMENTS. To promote affordable housing,
governmental agencies in Hawaii have implemented various formal and informal
policies at both the state and county level. As a condition to rezoning land for
urban development, it is the current practice of the Hawaii Land Use
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Commission to negotiate agreements with residential land developers for the
provision of affordable housing. Generally, these conditions require developers
of residential projects to offer for sale to eligible buyers a portion
(typically from 10% to 60%) of the total number of units in the project at
affordable prices (usually determined as a price at which a purchaser earning up
to 140% of the local median income is able to satisfy specified mortgage
criteria). In addition to the state requirements, a developer often has to
comply with affordable housing requirements imposed by the appropriate county
governmental agencies during the county land use approval process. Generally,
the county further defines the state's requirement, and is often times more
restrictive than the state. For example, counties typically require that 10% of
the total number of proposed housing units be affordable to families earning 80%
or less of the county's median income. For purposes of determining whether a
home is affordable, the Hawaii Land Use Commission and the counties generally
assume a 33% income-to-loan ratio, a monthly amount for common area expenses and
taxes, a 30-year loan with an interest rate reflecting then current market
conditions and various other factors. Based upon this affordability criterion,
specific price limitations are generally imposed on the homes that may satisfy a
developer's affordable housing requirement. Increases in mortgage interest rates
may decrease the sales price at which affordable homes may be sold thereby
potentially reducing the profitability of affordable housing projects.
This affordable housing policy has historically been an important factor in
the Company's ability to purchase land at prices that enable it to profitably
sell its homes at the governmentally imposed price levels. In addition, many
state and local government policies encourage the construction of affordable
housing by providing expedited permit processing and other development and
financing tools. These policies may be subject to change in the future depending
upon factors outside the Company's control, including changes in Hawaii's
economy or real estate market and changes in the views of Hawaii's residents and
political leaders with regard to affordable housing. Hawaii's affordable housing
policies are the subject of intense political debate, and the regulators charged
with implementing these policies have indicated that these policies may be
modified to offer greater flexibility in their implementation. Because a portion
of the Company's focus is on Hawaii's affordable housing market, any material
changes in the current policies of the Hawaii Land Use Commission and the
various county authorities with regard to affordable housing conditions or
related policies could adversely affect the Company's operations and financial
results.
To ensure that homes sold pursuant to a governmentally imposed affordable
housing requirement remain affordable to other eligible buyers and to prevent
speculation, counties typically impose transfer restrictions on purchasers of
the Company's affordable homes. These restrictions generally provide that if the
home is to be sold or transferred within a one- to ten-year period following its
original sale, the county has the option to purchase ("buy-back") the home on a
formula price basis. The formula prevents the owner from disposing of the home
at the market price but is designed to provide the owner with (i) the owner's
original cost, (ii) the cost of any improvements added by the owner, and (iii)
simple interest on the original cost and capital improvements at the rate of one
percent a year. Agreements entered into between developers and Hawaii government
agencies may also provide for a shared appreciation arrangement whereby the
state or county shares with the owner in the appreciation of the affordable
home.
County housing agencies in Hawaii are also provided with expedited
development powers. County housing agencies may request the appropriate county
authorities to provide exemptions from planning, zoning, construction standards
for subdivisions and development of affordable housing.
BONDS AND OTHER OBLIGATIONS
The Company is frequently required, in connection with the development of
its projects, to obtain performance or maintenance bonds or letters of credit in
lieu thereof. The amount of such obligations outstanding at any time varies in
accordance with the Company's pending development activities. In the event any
such obligations are drawn upon, the Company would be obligated to reimburse the
issuing surety company or bank. At February 28, 1997, there was approximately
$22.4 million in bond obligations and letters of credit outstanding for such
purposes, $3.1 of which relates to Melody Homes.
19
<PAGE>
EMPLOYEES
At December 31, 1996, the Company employed 71 persons in Hawaii, of whom 31
were executive, project management and administrative personnel, 36 were sales
and marketing, escrow, and customer service/warranty personnel and 4 were
construction workers, who assist with punchlist clearing and other miscellaneous
tasks. At December 31, 1996, the Northern California and Pacific Northwest
divisions employed 3 and 1 persons, respectively. At December 31, 1996, Melody
Homes employed 104 persons in Colorado of whom 52 were executive, project
management and administrative personnel, 46 were sales and marketing, escrow,
and customer service/warranty personnel and 6 were construction workers.
Although none of the Company's employees are covered by collective bargaining
agreements, certain of the employees of contractors which the Company engages
are represented by labor unions or are subject to collective bargaining
arrangements. The Company believes that its relations with its employees and
contractors are good.
The Company's success is highly dependent upon the performance of its senior
management and, in particular, its President and controlling stockholder, James
K. Schuler. The loss of the services of such key personnel would have a material
adverse effect on the Company.
At February 28, 1997, Mr. Schuler owned approximately 57% of the Company's
outstanding Common Stock. Due to this ownership position, Mr. Schuler has the
ability to control the affairs and policies of the Company and has the ability
to elect a sufficient number of directors to control the Board and to approve or
disapprove most matters submitted to a vote of stockholders. Furthermore, Mr.
Schuler may have conflicts of interest with other stockholders with respect to
the affairs and policies of the Company. Mr. Schuler's ownership position,
together with the anti-takeover effects of certain provisions contained in the
Company's Certificate of Incorporation and Bylaws and the repurchase option of
the holders of the Company's Convertible Subordinated Debentures due 2003 (the
"Debentures"), may have the effect of delaying, deferring or preventing a change
in control of the Company. These factors could have a depressant effect on the
market price of the Company's Debentures and Common Stock.
EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to executive officers who are also directors of the Company, the
following executive officers are not directors and are elected by and serve at
the discretion of the Board of Directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- -------------------------------------------------
<S> <C> <C>
Harvey L. Goth...................... 64 Senior Vice President of Acquisitions
Peter M. Aiello..................... 50 Vice President of Design
Mary K. Flood....................... 51 Vice President of Sales and Marketing
Douglas M. Tonokawa................. 38 Vice President of Finance and Chief Accounting
Officer
</TABLE>
Harvey L. Goth has been the Company's Senior Vice President of Acquisitions
since May 1992. Prior to joining the Company, Mr. Goth was President of Malama
Pacific Corporation from October 1991 to May 1992 and Executive Vice President
of Blackfield Hawaii Corporation from April 1983 to May 1988. Mr. Goth was a
development consultant from May 1988 to October 1991 in Hawaii and Nevada.
Malama Pacific Corporation is a real estate development company and subsidiary
of Hawaiian Electric Industries. Blackfield Hawaii Corporation, also a real
estate developer, was a subsidiary of Pacific Enterprises.
Peter M. Aiello has been the Company's Vice President of Design since April
1993. From 1991 to April 1993, Mr. Aiello served as the Company's Director of
Design and Development. Prior to joining the Company, Mr. Aiello served as an
independent architectural consultant in Hawaii from 1989 to 1991. From 1986 to
1989, Mr. Aiello was the principal of Peter M. Aiello and Associates, a San
Francisco architectural firm. Mr. Aiello is a licensed architect in the states
of Hawaii and California.
20
<PAGE>
Mary K. Flood joined the Company as Director of Sales and Marketing in
February 1993. In April 1994, she became the Company's Vice President of Sales
and Marketing. From 1984 to February 1993, Ms. Flood held several management
positions with Towne Realty and its subsidiaries: Vice President of Sales and
Marketing for Towne Realty Brokerage Services, Inc. in Honolulu; Vice President
of Marketing for Emerald Marketing, Inc. in Florida; Vice President of Sales and
Marketing for Mountain Valley Homes in California; Vice President of Sales and
Marketing for Towne Realty in Arizona; and President of Towne and Country Realty
in Wisconsin.
Douglas M. Tonokawa joined the Company as Vice President of Finance in
September 1992. From 1982 to September 1992, Mr. Tonokawa was employed at Ernst
& Young, a national accounting firm, where he reached the level of Senior
Manager. Mr. Tonokawa is a member of the Hawaii Society of Certified Public
Accountants and the American Institute of Certified Public Accountants.
ITEM 2. PROPERTIES.
At its headquarters in Honolulu, the Company leases approximately 7,300
square feet of office space pursuant to a lease expiring in October 1998. The
Company also leases approximately 2,700 square feet of space for its other
offices in Hawaii, Northern California and the Pacific Northwest under leases
expiring between 1997 and 1999. The Company believes that its office space for
its corporate headquarters in Hawaii is suitable and adequate for its needs in
the foreseeable future. However, the Company anticipates that as the Northern
California and Pacific Northwest divisions expand, office space expansion will
also be necessary.
Melody Homes owns its office building for its corporate headquarters of
11,225 square feet, and leases 1,938 square feet for its Decorating Center under
a lease which expires in November, 1997. In addition, Melody Mortgage leases
2,470 square feet of office space for its mortgage operations, under a lease
which expires in November, 1997. The Company believes that Melody's office space
is suitable and adequate for its needs in the near future. However, if the
Colorado homebuilding operations expand, office expansion may also be necessary.
ITEM 3. 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 of 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 believes the claims to be
largely without merit, or that meritorious defenses exist, and the litigation is
being vigorously defended. However, this litigation is at an early stage of
discovery. 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.
Prior to its acquisition by the Company, Melody was joined in a class-action
lawsuit related to the use of polybutylene plumbing systems and certain alleged
defects and deficiencies of such systems. In September 1995, the Denver District
Court stayed the action pending the resolution of two similar "national class
actions" involving the same group of Plaintiffs as well as manufacturers of
polybutylene plumbing systems. The Denver case was stayed to await a
finalization of the settlement agreed to in the courts of Tennessee and Alabama,
which required the assignment of Plaintiffs' claims to the manufacturers of
polybutylene. The Company believes the claims against Melody are without merit
and, even if shown to be meritorious, insurance coverage will be available to
offset a material portion of any related claims.
21
<PAGE>
While the Company presently believes that Melody will not incur any material
cost due to this lawsuit, since the litigation is at a very early stage, it can
give no assurance that this litigation, if adversely determined to Melody, would
not have a material adverse effect on the Company's business, financial
condition and operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted during the fourth quarter of 1996 to vote of
security-holders, through the solicitation of proxies or otherwise.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the NASDAQ National Market
under the symbol "SHLR" since March 20, 1992. The following table shows the high
and low closing sales prices for the Common Stock of the Company for the periods
indicated, as reported by the NASDAQ National Market. These prices do not
include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C> <C>
1995
Quarter ended March 31, 1995........................................................ $ 14.125 $ 10.000
Quarter ended June 30, 1995......................................................... 13.375 9.625
Quarter ended September 30, 1995.................................................... 13.375 11.250
Quarter ended December 31, 1995..................................................... 12.250 7.188
1996
Quarter ended March 31, 1996........................................................ $ 8.875 $ 6.500
Quarter ended June 30, 1996......................................................... 8.000 5.938
Quarter ended September 30, 1996.................................................... 7.250 5.875
Quarter ended December 31, 1996..................................................... 8.875 5.500
1997
Quarter ended March 31, 1997 (through March 14, 1997)............................... $ 6.875 $ 5.500
</TABLE>
The closing sale price of the Company's Common Stock as reported on the
NASDAQ National Market on March 14, 1997 was $5.50 per share. As of March 14,
1997, there were 213 holders of record of the Company's Common Stock. The
Company estimates that as of March 14, 1997, there were approximately 1,800
beneficial holders of the Company's Common Stock.
DIVIDENDS
The Company anticipates that all future earnings will be retained to finance
the continuing development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, the success of the
Company's development activities, capital requirements, the general financial
condition of the Company and general business conditions. Payment of dividends
is also restricted by the Company's credit facility.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the
consolidated financial statements, related notes thereto and other financial
data included elsewhere herein. These historical results are not necessarily
indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Residential real estate sales (1)........ $ 93,645 $ 132,897 $ 217,266 $ 167,275 $ 78,749
Costs and expenses
Residential real estate sales (2)........ 76,612 101,356 159,568 113,669 53,689
Inventory impairment loss (3)............ 23,910 9,405 -- -- --
Selling and commissions.................. 7,767 7,333 7,912 4,216 1,683
General and administrative............... 4,179 4,167 3,510 2,319 1,065
-------------- -------------- -------------- --------------- ---------------
Total costs and expenses................. 112,468 122,261 170,990 120,204 56,437
Income from unconsolidated joint
ventures............................... 157 967 3,307 1,522 905
-------------- -------------- -------------- --------------- ---------------
Operating income (loss).................. (18,666) 11,603 49,583 48,593 23,217
Other income (expense)................... (9) 462 502 434 879
-------------- -------------- -------------- --------------- ---------------
Income (loss) before provision for income
taxes.................................. (18,675) 12,065 50,085 49,027 24,096
Provision (credit) for income taxes...... (7,289) 4,703 19,336 19,076 7,386
-------------- -------------- -------------- --------------- ---------------
Net income(loss)......................... $ (11,386) $ 7,362 $ 30,749 $ 29,951 $ 16,710
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Net income (loss) per share (primary).... $ (0.55) $ 0.35 $ 1.47 $ 1.49
-------------- -------------- -------------- ---------------
-------------- -------------- -------------- ---------------
Weighted average shares outstanding
(primary).............................. 20,583,860 20,874,177 20,867,215 20,084,606
Net income (loss) per share (fully
diluted)(4)............................ $ (0.55) $ 0.35 1.37 $ 1.37
-------------- -------------- -------------- ---------------
-------------- -------------- -------------- ---------------
Weighted average shares outstanding
(fully diluted)(4) N/A N/A 23,501,205 22,494,325
PRO FORMA INCOME STATEMENT DATA(5):
Income before provision for income
taxes.................................. $ 24,096
Provision for income taxes............... 8,992
---------------
Net income............................... $ 15,104
---------------
---------------
Net income per share..................... $ 0.80
---------------
---------------
Weighted average shares outstanding...... 18,856,663
OPERATING DATA:
Number of sales closed(6)................ 512(7) 635(8) 1,143(9) 994(10) 579(11)
Average sales price(6)................... $ 225,000(7) $ 225,000(8) $ 212,000(9) $ 179,000(10) $ 143,000(11)
</TABLE>
See accompanying notes on next page
24
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 1,619 $ 6,147 $ 7,855 $ 39,879 $ 6,349
Real estate inventories.................. 236,569 246,478 209,123 147,486 86,830
Total assets............................. 267,158 272,342 279,678 214,147 114,282
Notes payable to bank.................... 44,690 36,781 27,717 13,548 17,375
Note payable to others................... -- -- 14,583 -- --
Subordinated note payable to majority
stockholder............................ -- -- -- -- 8,696
Total stockholders' equity............... 157,465 173,851 166,489 135,296 85,858
</TABLE>
- ------------------------------
(1) Revenue from a sale is recognized upon the closing of the sale and when the
down payment requirement has been met. See Notes 1 and 2 of Notes to
Consolidated Financial Statements.
(2) Includes a pretax contract dispute resolution cost of $8.0 million in 1994.
See Note 14 of Notes to Consolidated Financial Statements.
(3) Represents a non-cash charge pursuant to Financial Accounting Standards
Board Statement No. 121. See Notes 1 and 3 of Notes to Consolidated
Financial Statements.
(4) Computed by adding interest charged to cost of residential real estate sold
which is applicable to the Convertible Subordinated Debentures (net of
related income taxes) to net income and dividing by the weighted average
number of shares outstanding, assuming conversion of all Convertible
Subordinated Debentures. The computation of fully diluted earnings per share
for 1996 and 1995 excludes the impact of the Convertible Subordinated
Debentures, since they would have an antidulitive effect.
(5) The pro forma income statement data reflect the effects on the historical
income statement data for each of the periods presented as if the Company
had not been treated as an S Corporation for income tax purposes (assuming a
36% to 38% combined effective tax rate).
(6) Includes the closing of sales for which revenues are included in "Sales of
residential real estate" on the Company's Consolidated Statements of
Operations, 100% of the closings of sales from unconsolidated joint ventures
for which the Company's share of net income is included in "Income from
unconsolidated joint ventures" on the Company's Consolidated Statements of
Operations, and the closings under the Company's "zero-down" sales program
(started in 1996), for which revenue and profit recognition were deferred
until the down payment requirement is met.
(7) Includes the closing of 13 sales in the residential lot projects included in
sales of residential real estate at an average sales price of $159,000, the
closing of 6 sales in the residential lot project included in income from
unconsolidated joint ventures at an average sales price of $119,000 and the
closing of 70 "zero-down" sales at an average sales price of $210,000.
(8) Includes the closing of 10 sales in the residential lot projects included in
sales of residential real estate at an average sales price of $143,000 and
the closing of 2 sales in the residential lot project included in income
from unconsolidated joint ventures at an average sales price of $189,000.
(9) Includes the closing of 17 sales in the residential lot projects included in
sales of residential real estate at an average sales price of $141,000 and
the closing of 8 sales in the residential lot project included in income
from unconsolidated joint ventures at an average sales price of $162,000.
(10) Includes the closing of 28 sales in the residential lot projects included
in sales of residential real estate at an average sales price of $132,000
and the closing of 30 sales in the residential lot project included in
income from unconsolidated joint ventures at an average sales price of
$167,000.
(11) Includes the sale of 35 sales in the residential lot projects included in
sales of residential real estate at an average sales price of $135,000 and
the closing of 26 sales in the residential lot projects included in income
from unconsolidated joint ventures at an average sales price of $160,000.
25
<PAGE>
ITEM 7. 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 this Form 10-K and other documents filed by the
Company with the Securities and Exchange Commission from time to time.
OVERVIEW
The Company's sales of residential real estate decreased from $132.9 million
in 1995 to $93.6 million in 1996 a decrease of 29.5%. Sales of residential real
estate decreased from $217.3 million in 1994 to $132.9 million 1995, a decrease
of 38.8%.
In 1996, the Company posted net income of $3.2 million prior to the impact
of a $14.6 million non-cash after-tax charge to net income ($23.9 million before
tax) pursuant to Financial Accounting Standards Board Statement No. 121 (FASB
121). Subsequent to the impact of the FASB 121 charge, the 1996 net loss totaled
$11.4 million. In 1995 and 1994, net income totaled $7.4 million and $30.7
million, respectively.
The Company's 1996 operating results, when compared to 1995 results, reflect
fewer closings of home sales and lower profit margins as a result of the
slowdown in Hawaii's residential real estate market. The Company's cost of
residential real estate sales as a percentage of sales increased from 76.3% in
1995 to 81.8% in 1996. The increase is attributable to reductions in sales
prices (due to price discounts and interest rate buy-downs) and higher
construction costs and inventory carrying costs. Sales and marketing costs for
1996 represented approximately 8.3% of sales, as compared to 5.5% in 1995. The
Company anticipates that the increased level of costs will continue to impact
its profit margins throughout 1997.
The Company's 1996 closings of home sales and year-end backlog reflects a
reduction in the rate of new home sales as compared to previous years, which the
Company believes to be the result of the general uncertainty of prospective home
buyers as to, and to their lack of confidence in, Hawaii's economy. If new home
sales rates persist at their current levels or decline further, the Company's
financial results will be adversely affected by fewer closings of home sales,
lower revenues and continued pressure on margins.
The following table sets forth, for the periods indicated, the percentage of
the Company's sales represented by each income statement line item presented.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN DOLLAR
YEAR ENDED DECEMBER 31, AMOUNTS FROM
------------------------------------- ------------------------------
1996 1995 1994 1995 TO 1996 1994 TO 1995
----------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Residential real estate sales......................... 100.0% 100.0% 100.0% (29.5)% (38.8)%
Costs and expenses
Residential real estate sales....................... 81.8 76.3 73.5 (24.4) (36.5)
Inventory impairment loss........................... 25.5 7.1 -- 154.2 --
Selling and commissions............................. 8.3 5.5 3.6 5.9 (7.3)
General and administrative.......................... 4.5 3.2 1.6 0.3 18.7
----------- ----------- -----------
Total costs and expenses.............................. 120.1 92.1 78.7 (8.0) (28.5)
Income from unconsolidated joint ventures............. 0.2 0.8 1.5 (83.8) (70.8)
----------- ----------- -----------
Operating income (loss)............................. (19.9) 8.7 22.8 (260.9) (76.6)
Other income (expense)................................ -- 0.4 0.2 36.8 8.0
----------- ----------- -----------
Income (loss) before provision
income taxes...................................... (19.9) 9.1 23.0 (254.8) (75.8)
Provision (credit) for income taxes................... (7.8) 3.5 8.9 (255.0) (75.6)
----------- ----------- -----------
Net income (loss)................................... (12.1)% 5.6% 14.1% (254.7)% (75.9)%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
26
<PAGE>
RESULTS OF OPERATIONS
RESIDENTIAL REAL ESTATE SALES
The Company's sales of residential real estate in 1996 were $93.6 million, a
decrease of $39.3 million or 29.5% as compared to 1995 sales of $132.9 million.
Sales of residential real estate in 1995 of $132.9 million decreased by $84.4
million or 38.8% over 1994 sales of residential real estate of $217.3 million.
The decreases from year to year are primarily attributable to fewer closings of
home sales.
Included in residential real estate sales (revenues recognized) are the
closings of 392, 559 and 951 sales (excluding the closing of 52,76 and 192
sales, which represent 100% of the sales in the Company's 50% joint venture
projects) at an average sales price of $238,000, $238,000 and $228,000 (net of
sales price discounts) during 1996, 1995 and 1994, respectively. The average
sales price of homes and lots closed during periods is reflective of the
different mix of projects in which closings occurred, offset in part by
increases in sales price discounts allowed, particularly in 1995 and 1996, in
order to stimulate home sales activity.
The number of home sales closed in 1996 and 1995 is significantly lower than
the number of home sales closed in 1994, primarily as a result of the reduction
in home sales rates in 1996 and 1995 as compared to 1994. The Company believes
the reduction in the rate of new home sales to be the result of the general
uncertainty of prospective home buyers as to, and to their lack of confidence
in, Hawaii's economy. Although the Company believes that the Hawaiian economy
has shown signs of recovery, particularly in the tourism industry, the Company's
rate of new home sales has not improved. If new home sales rates persist at
their current levels or decline further, the Company's financial results will be
adversely affected by fewer closings of home sales, lower revenues and continued
pressure on margins.
Historically, the Company had focused extensively on the sale of low-rise,
multi-family condominiums. During the past few years, the Company has expanded
its operations to include the sale of an increased number of single-family homes
and a higher proportion of sales of homes on Oahu priced at the low to moderate
end of the market as opposed to those subject to governmentally imposed price
limitations. Both of these factors have increased the average sales price of the
Company's home sales closed in previous years. For example, the Company is
currently offering single-family homes for sale on Oahu, with prices ranging
from $199,000 to $445,000. As a result of the increase in the average price per
home, the Company expects that prices for a portion of its homes and lots will
exceed current lending limits for FHA insured loans, which has historically been
the method by which the majority of its home sales have been financed. The
unavailability of FHA insured loans could adversely affect demand for such
homes. No assurances can be given that the Company will experience the same
degree of success in selling its homes and lots that it has experienced in the
past.
For fiscal years ended 1996, 1995 and 1994, approximately 13%, 12% and 33%,
respectively, of the Company's total revenue in those periods were attributable
to homes sold by the Company on land originally acquired from land developers
with specified affordable housing requirements. The balance of such revenues was
attributable primarily to affordably priced homes sold by the Company on land
not subject to specified governmentally imposed affordable housing requirements.
The Company anticipates that total revenue attributable to homes sold by the
Company on land originally acquired by land developers with specified affordable
housing requirements will comprise a smaller percentage of total revenues in the
future than in 1994. The Company anticipates that approximately 33% of homes to
be developed on land which is owned by the Company in Hawaii or subject to
pending land purchase contracts at December 31, 1996 will be subject to
specified governmentally imposed affordable housing requirements. 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. See "Item 1. Business--The Homebuilding Industry."
27
<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 home buyer'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 in
Hawaii. 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 decreased to approximately $76.6
million during 1996 from approximately $101.4 million during 1995, representing
a decrease of approximately $24.7 million or 24.4%. This decrease in 1996 as
compared to 1995 is the result of a lower number of closings of home sales,
offset in part by 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
81.8% in 1996 from 76.3% in 1995, approximately half of the increase being
attributable to an increased level of price discounts to home buyers, 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.
Cost of residential real estate sales decreased to approximately $101.4
million during 1995 from approximately $159.6 million during the same period in
1994, representing a decrease of approximately $58.2 million or 36.5%. The
decrease in the cost of residential real estate sold resulted from the lower
number of sales closed in 1995, offset in part by an increase in cost of
residential real estate sold as a percentage of sales to 76.3% in 1995 from
73.5% in 1994. The 2.8% increase in cost of residential real estate sales as a
percentage of sales relates to increases in construction costs largely
attributable to building code changes, higher materials and labor costs and the
expiration in 1994 of certain excise tax exemptions, and to increased financing
costs as a component of inventory which reflects the slower inventory turnover
rate in 1995 as compared to 1994.
During the quarter ended June 30, 1995, the general contractor on several of
the Company's projects assigned its subcontracts to the Company. As a result,
Lokelani Construction Corporation (LCC), a previously inactive general
contractor wholly-owned by the Company, became the general contractor for the
affected projects. In addition, the Company is using LCC as the general
contractor for one of its new phases at the Waikele project and plans to use LCC
on future projects. Although the Company believes that it has the ability to
operate as a general contractor and successfully complete these projects, it has
little historical experience to draw upon and, consequently, no assurances can
be given that unanticipated cost increases or delays will not be experienced.
The Company's Salt Lake project involves the construction of high-rise
condominium structures of up to 22 levels, which is a departure from the
Company's historical emphasis on low-rise construction. At this project, the
Company used a pre-cast concrete construction system which is new to both the
Company and the State of Hawaii. Although this system of high-rise construction
may be less costly than traditional high-rise construction methods, the pre-cast
method is more expensive than low-rise construction. As a result, the profit
margins for this project are lower than those experienced at most of the
Company's other projects.
28
<PAGE>
In late 1994, the Company initiated arbitration proceedings in Honolulu
against the general contractor at its Salt Lake project. The arbitration
proceedings primarily pertained to claims made by (I) the general contractor for
additional compensation attributable to changes made to the scope of work
originally contemplated by the construction contract, partially offset by
reductions authorized by the Company and (ii) each party for losses incurred in
the administration of the contract. While the Company believes that most of the
claims asserted by the general contractor in the arbitration proceedings were
without merit, the Company also began to recognize that its ability to work with
the joint venture contractor in an efficient and cost-productive manner had been
eroded by the existence of the arbitration proceeding. On the basis of these and
other factors, the Company engaged in settlement discussions with the general
contractor and the parties reached a settlement of the dispute in February,
1995. This resolution resulted in the Company incurring a pre-tax charge in the
1994 fourth quarter of $8.0 million, which was paid in February, 1995.
Total interest incurred during 1996, 1995 and 1994 was approximately $7.9
million, $5.8 million, and $6.6 million, respectively. All amounts incurred,
except for approximately $270,000 in 1996, were capitalized to development
projects. The increase in interest incurred from 1995 to 1996 is primarily the
result of higher average debt outstanding. The decrease in interest incurred
from 1994 to 1995 is primarily the result of a decrease in average debt
outstanding offset in part by higher interest rates. Average debt outstanding in
1996, 1995 and 1994 was approximately $112 million, $83.0 million and $99.7
million, respectively. The Company's average interest rate for 1996, 1995 and
1994 was approximately 7.0%, 7.0% and 6.6%, 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 adopted Financial Accounting
Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which changes
the method that companies must use to value long-lived assets, including
homebuilding inventories. Previously, accounting standards required companies to
carry inventories at the lower of cost or net realizable value. Under the new
standard, inventories which are substantially completed are carried at the lower
of cost or fair value less selling cost, determined by applying a risk adjusted
discount rate to estimates of future cash flows, a more conservative measurement
than net realizable value. Also under the new standard, land held for future
development or inventories under current development are adjusted to fair value,
only if an impairment to their value is indicated.
Pursuant to the adoption of FASB Statement No. 121, the Company recognized
an impairment loss of $9.4 million ($5.7 million after-tax) in 1995, which
relates to completed inventories at December 31, 1995. The Company's completed
inventory comprised a larger component of total inventory as of December 31,
1995 as compared to December 31, 1994, with substantially all of the increase
occurring during the fourth quarter of 1995. During 1996, the Company recognized
an impairment loss of $23.9 million, ($14.6 million after-tax) 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 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.
No losses were recognized on land held for future development or inventories
under current development. However, further decline in new home sales could
result in the recognition of additional impairment losses in the future.
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,
29
<PAGE>
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 Company's completed inventories increased during 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.
COSTS AND EXPENSES--SELLING AND COMMISSIONS
Sales and marketing costs represented approximately 8.3%, 5.5% and 3.6% of
sales of residential real estate during 1996, 1995 and 1994, 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 as a percentage of sales.
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 expense remained relatively stable in 1996 as
compared to 1995. General and administrative expense increased by $657,000 or
18.7% during 1995 as compared to 1994 primarily due to the increase of
development activities throughout 1994 and corresponding increase in the number
of administrative and executive employees, the expansion of the Company's office
space in November 1993, and higher insurance costs in 1995. As a percentage of
sales of residential real estate, general and administrative expense was 4.5%,
3.2 and 1.6% during 1996, 1995 and 1994, respectively, reflecting the decrease
in sales of residential real estate experienced from year to year.
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, joint ventures developing the Waiakoa Kai Estates and Iao Parkside
projects, respectively. The decrease in this income during 1995 and 1996 is
primarily the result of the closing of fewer homes, the deferral of profit under
a "zero-down" sales program and lower profit margins realized for the Iao
Parkside project, due to increases in construction and sales and marketing
costs.
OTHER INCOME (EXPENSE)
Other income is primarily composed of interest income earned on cash
balances and notes receivable. Other income was $292,000, $462,000, and $502,000
in 1996, 1995 and 1994, respectively. The fluctuations between years is
primarily the result of varying cash and notes receivable balances during the
periods. Offsetting the other income in 1996 is approximately $301,000 of
financing costs (including primarily interest of approximately $270,000)
expensed and not capitalized in 1996.
PROVISION FOR INCOME TAXES
The effective combined tax rates were approximately 39.0% in 1996 and 1995
and 38.6% in 1994.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share was $(0.55) primary and fully diluted in 1996,
$0.35 (primary and fully diluted) in 1995 and $1.47 (primary) and $1.37 (fully
diluted) in 1994. Weighted average common shares outstanding increased from
20,867,215 (primary) and 23,501,205 (fully diluted) in 1994 to 20,874,177
(primary) in 1995 to 20,583,860 (primary) in 1996. The decrease in weighted
average shares outstanding is
30
<PAGE>
primarily due to the repurchase of 774,000 shares of the Company's Common Stock
during 1996. The computation of fully diluted earnings per share for the year
ended December 31, 1996 and 1995 excludes the impact of the convertible
debentures, since they would have an antidulitive effect.
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 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, 1996, ranged from approximately $20.0
million to $29.8 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 the $5.7 million after-tax charge relating to
FASB 121) to net income of $4.7 million and for each of the four quarters ended
December 31, 1996, ranged from a net loss of approximately $13.1 million (after
giving effect to the $14.6 million after-tax charge relating to FASB 121) to net
income of $948,000. Factors that contribute to variability of the Company's
results include: the timing of home closings, a substantial portion of which
historically have occurred in the last month of each quarter; the Company's
ability to continue to acquire additional land on favorable terms for future
developments; the condition of Hawaii's real estate market and Hawaii's economy
in general; the cyclical nature of the homebuilding industry and changes in
prevailing interest rates; costs of material and labor; and 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 expanded into other selected residential housing markets of
the United States (see "Item 1. Business--General") and it will continue to
consider further expansion into other selected residential housing markets of
the United States mainland and into certain foreign countries and into other
homebuilding related industries. No assurances can be given that the Company
will be able to successfully establish operations 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 canceled 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 December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------- -------------------------- --------------------------
AGGREGATE AGGREGATE AGGREGATE
NUMBER SALES VALUE NUMBER SALES VALUE NUMBER SALES VALUE
------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Homes................................. 74 $ 17,644,000 126 $ 29,019,000 220 $ 51,440,000
Lots.................................. 4 633,000 11 1,903,000 24 3,793,000
--
------------- --- ------------- --- -------------
78 $ 18,277,000 137 $ 30,922,000 244 $ 55,233,000
--
--
------------- --- ------------- --- -------------
------------- --- ------------- --- -------------
</TABLE>
The reduction in backlog as of December 31, 1996 and 1995 as compared to
backlog as of December 31, 1994 reflects the lower rate of new home sales and
higher cancellation rates experienced by the Company in 1996 and 1995 as
compared to 1994, which the Company believes to be attributable to the
uncertainty of prospective home buyers as to, and to their general lack of
confidence in, the Hawaiian
31
<PAGE>
economy. The Company's historical cancellation experience (which prior to 1995
had been nominal) may not be indicative of cancellations in future periods.
Due to the lower sales rates experienced in 1996 and 1995 as compared to
1994, the portion of inventory representing completed inventory increased from
$27.6 million as of December 31, 1994 to $65.7 million and $77.0 million as of
December 31, 1996 and 1995, respectively. At December 31, 1996, $40.8 million of
the completed inventory exists as a result of the Company's contractual
commitment to construct homes at its high-rise condominium project (Country Club
Villages) in Salt Lake on Oahu.
The average sales prices of the homes comprising backlog at December 31,
1996, 1995, and 1994 were $238,000, $230,000 and $234,000, 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 100% of the backlog of Waiakoa Estates Subdivision Joint
Venture and Iao Partners, the Company's two joint ventures developing the
Waiakoa Kai Estate and Iao Parkside projects, respectively.
INFLATION
The Company, as well as the homebuilding industry in general, may be
adversely affected during periods of high inflation, primarily because of higher
land acquisition, land development and construction costs. In addition, higher
mortgage interest rates may significantly affect the affordability of permanent
mortgage financing to prospective purchasers. Inflation also increases the
Company's interest costs and costs of labor and materials. The Company attempts
to pass through to its buyers any increases in its costs through increased
selling prices and, to date, inflation has not had a material adverse impact on
the Company's results of operations. However, the recently observed reduction in
sale rates in Hawaii may inhibit the Company's ability to pass through to its
buyers any increases in its costs in the future. There is no assurance that
inflation will not have a material adverse impact on the Company's future
results of operations.
FASB STATEMENT NO. 121
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." There was no cumulative effect of
adopting FASB Statement No. 121. See "--Results of Operations--Costs and
Expenses--Inventory Impairment Loss."
LIQUIDITY AND CAPITAL RESOURCES
In early 1993, the Company issued $57.5 million in 6.5% Convertible
Subordinated Debentures due 2003. The net proceeds to the Company from this
offering were approximately $55.2 million. The Debentures are convertible into
Common Stock of the Company at any time prior to maturity, unless previously
redeemed, at $21.83 per share, subject to adjustment in certain events.
In the fourth quarter of 1993, the Company consummated a public offering of
805,000 shares of its Common Stock. The net proceeds to the Company from this
offering were approximately $18.5 million.
In March 1996, the Company executed a new Credit Agreement, which replaced
the $50 million line of credit with a $110 million unsecured revolving line of
credit facility on March 29, 1996. This facility was amended in January 1997 to
authorize the use of the line for the acquisition of Melody Homes and Mortgage.
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%. In October 1996, the Company entered into an interest rate
swap to pay LIBOR of 5.89% (fixed over 5 years) on $30 million while receiving
in return an interest payment at a floating one-month LIBOR. However, if the
one-month LIBOR resets at or above 8%, the swap reverses for that payment period
and no interest payments are exchanged. The Company's
32
<PAGE>
ability to draw upon its line of credit is dependent upon meeting certain
financial ratios and covenants. As of December 31, 1996, the Company met such
financial ratios and covenants. At December 31, 1996, $65.3 million of the
Company's line of credit was unused, of which $836,000 is restricted to
withdrawal for specific project costs and letters of credit. At February 28,
1997, $24.1 million is available to borrow on the line of credit, of which $0.8
million is restricted to withdrawal for specific project costs and letters of
credit. In March 1997, the Company increased its line of credit by approximately
$27.6 million from $110 million to $137.6 million, and extended the facility to
July 1, 1999, with an option for the lenders to extend the term for an
additional year.
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 December 31, 1996, notes payable to its bank amounted to approximately $44.7
million. Peak borrowings in 1996, including bank borrowings and the Company's
Convertible Subordinated Debentures due 2003 were $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. Prior to 1996, all
of the Company's bank borrowings had been from First Hawaiian Bank. With the
establishment of the $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 that 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 new 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 April 1996, the Company purchased two parcels of land located in West
Oahu for approximately $31 million, utilizing its line of credit.
The Company currently has under construction a 193-unit project in Ewa,
Oahu, called KulaLei. The Company plans to develop this project as a
wholly-owned project, and not through Iao Partners, an existing joint venture,
as had been anticipated earlier.
During the period from January 1, 1997 to March 14, 1997, the Company closed
the purchase of several parcels of land in Northern California and the Pacific
Northwest for a total of $7.5 million. In addition, as of March 14, 1997, the
Company had entered into contracts to purchase several parcels of land in
Hawaii, Northern California and the Pacific Northwest for an aggregate of
approximately $15.7 million. No assurances can be given that any of these land
parcels will be acquired.
The Company believes that cash flow from operations, and borrowings under
its current and anticipated credit facilities will provide adequate cash to fund
the Company's operations at least through 1997.
In May 1996, the Company adopted a stock repurchase program to reacquire up
to an aggregate of $5 million of its outstanding common stock through December
31, 1996. In September 1996, the Company completed its repurchase of 774,000
shares at a cost of $5 million.
On January 8, 1997, the Company completed the acquisition of Melody Homes,
Inc. ("Melody"), a homebuilder in the Denver metropolitan area, and Melody
Mortgage Company, a mortgage brokerage firm for Melody home buyers. The Company
funded the purchase and refinanced a portion of Melody's loans using its current
unsecured revolving line of credit facility. Upon the finalization of the
increase in the Company's unsecured revolving line of credit, all of Melody's
loans were refinanced by the Company's line of credit.
As of February 28, 1997, total loans outstanding (including Melody loans)
equaled $158.7 million, comprised of $57.5 million in convertible subordinated
debentures and notes payable to banks of $101.2 million.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................... 35
Consolidated Balance Sheets, December 31, 1996 and 1995................ 36
Consolidated Statements of Operations for years ended December 31,
1996, 1995 and 1994.................................................. 37
Consolidated Statements of Stockholders' Equity for years ended
December 31, 1996, 1995 and 1994..................................... 38
Consolidated Statements of Cash Flows for years ended December 31,
1996, 1995 and 1994.................................................. 39
Notes to Consolidated Financial Statements............................. 40
</TABLE>
SCHEDULES
All schedules have been omitted as the required information is inapplicable
or the information is presented in the financial statements or related notes.
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Schuler Homes, Inc.
We have audited the accompanying consolidated balance sheets of Schuler
Homes, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Schuler Homes,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Honolulu, Hawaii
March 7 , 1997
35
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................ $ 1,619,000 $ 6,147,000
Receivables (Note 1)............................................................. 425,000 517,000
Prepaid income taxes............................................................. 2,604,000 557,000
Amount due from affiliate (Note 7)............................................... 26,000 25,000
Real estate inventories (Note 3)................................................. 236,569,000 246,478,000
Investments in unconsolidated joint ventures (Note 9)............................ 11,611,000 11,833,000
Deposits......................................................................... 483,000 1,001,000
Deferred offering costs (Note 9)................................................. 1,399,000 1,628,000
Notes receivable (Note 2)........................................................ 3,944,000 1,329,000
Deferred income taxes (Note 6)................................................... 7,356,000 1,818,000
Other assets..................................................................... 1,122,000 1,009,000
-------------- --------------
Total assets..................................................................... $ 267,158,000 $ 272,342,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................................. $ 593,000 $ 1,013,000
Accrued expenses................................................................. 6,910,000 3,197,000
Notes payable to bank (Note 5)................................................... 44,690,000 36,781,000
Convertible subordinated debentures (Note 9)..................................... 57,500,000 57,500,000
-------------- --------------
Total liabilities................................................................ 109,693,000 98,491,000
Commitments and contingencies (Notes 5 and 10)
Stockholders' equity (Notes 1, 8 and 9):
Common stock, $.01 par value; 30,000,000
shares authorized; 20,874,177 shares issued
at December 31, 1996 and 1995................................................ 209,000 209,000
Additional paid-in capital..................................................... 93,096,000 93,096,000
Retained earnings.............................................................. 69,160,000 80,546,000
Treasury stock, at cost; 774,000 shares at December 31, 1996................... (5,000,000) --
-------------- --------------
Total stockholders' equity....................................................... 157,465,000 173,851,000
-------------- --------------
Total liabilities and stockholders' equity....................................... $ 267,158,000 $ 272,342,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
36
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Residential real estate sales................................... $ 93,645,000 $ 132,897,000 $ 217,266,000
Costs and expenses
Residential real estate sales................................. 76,612,000 101,356,000 159,568,000
Inventory impairment loss (Note 3)............................ 23,910,000 9,405,000 --
Selling and commissions....................................... 7,767,000 7,333,000 7,912,000
General and administrative (Note 7)........................... 4,179,000 4,167,000 3,510,000
-------------- -------------- --------------
Total costs and expenses...................................... 112,468,000 122,261,000 170,990,000
Income from unconsolidated joint ventures (Note 4).............. 157,000 967,000 3,307,000
-------------- -------------- --------------
Operating income (loss)....................................... (18,666,000) 11,603,000 49,583,000
Other income (expense).......................................... (9,000) 462,000 502,000
-------------- -------------- --------------
Income (loss) before provision for income taxes............... (18,675,000) 12,065,000 50,085,000
Provision (credit) for income taxes (Note 6).................... (7,289,000) 4,703,000 19,336,000
-------------- -------------- --------------
Net income (loss)............................................. $ (11,386,000) $ 7,362,000 $ 30,749,000
-------------- -------------- --------------
-------------- -------------- --------------
Net income (loss) per share (Note 11):
Primary......................................................... $ (0.55) $ 0.35 $ 1.47
-------------- -------------- --------------
-------------- -------------- --------------
Fully diluted................................................... $ (0.55) $ 0.35 $ 1.37
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
37
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------------ ---------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993..... 20,845,497 $ 209,000 $ 92,652,000 $ 42,435,000 $ -- $ 135,296,000
Issuance of common stock from
exercise of stock options (Note
8)............................. 28,680 -- 444,000 -- -- 444,000
Net income....................... -- -- -- 30,749,000 -- 30,749,000
------------ ---------- ------------- -------------- ------------- --------------
Balance at December 31, 1994..... 20,874,177 209,000 93,096,000 73,184,000 -- 166,489,000
Net income....................... -- -- -- 7,362,000 -- 7,362,000
------------ ---------- ------------- -------------- ------------- --------------
Balance at December 31, 1995..... 20,874,177 209,000 93,096,000 $ 80,546,000 -- $ 173,851,000
Reacquisition of the Company's
common stock................... (774,000) -- -- -- (5,000,000) (5,000,000)
Net loss......................... -- -- -- (11,386,000) -- (11,386,000)
------------ ---------- ------------- -------------- ------------- --------------
Balance at December 31, 1996..... 20,100,177 $ 209,000 $ 93,096,000 $ 69,160,000 $ (5,000,000) $ 157,465,000
------------ ---------- ------------- -------------- ------------- --------------
------------ ---------- ------------- -------------- ------------- --------------
</TABLE>
See accompanying notes.
38
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................... $ (11,386,000) $ 7,362,000 $ 30,749,000
Adjustment to reconcile net income to net cash used in operating
activities:
Depreciation and amortization expense......................... 187,000 147,000 116,000
Income from unconsolidated joint venture (undistributed)...... (72,000) (1,067,000) (3,028,000)
Sales financed by Company..................................... (152,000) (245,000) (12,000)
Principal payments of notes receivable........................ 190,000 424,000 947,000
Changes in assets and liabilities:
(Increase) decrease in receivables............................ 92,000 40,628,000 (36,781,000)
(Increase) in prepaid income taxes............................ (2,047,000) (557,000) --
(Increase) decrease in deposits............................... 518,000 (901,000) 4,200,000
(Increase) decrease in real estate inventories................ 11,746,000 (36,286,000) (37,616,000)
(Increase) decrease in other assets........................... (261,000) 27,000 107,000
Increase (decrease) in accounts payable....................... (420,000) 158,000 (755,000)
(Decrease) in accrued expenses................................ (777,000) (1,358,000) (548,000)
Change in deferred income taxes............................... (5,538,000) (418,000) (2,490,000)
Increase (decrease) in contract dispute resolution cost
payable..................................................... -- (7,979,000) 7,979,000
-------------- -------------- --------------
Net cash used in operating activities......................... (7,920,000) (65,000) (37,132,000)
INVESTING ACTIVITIES
Investments in unconsolidated joint ventures.................... -- (205,000) (178,000)
Advances to unconsolidated joint ventures....................... (4,082,000) (562,000) (1,761,000)
Repayments of advances to unconsolidated joint ventures......... 4,248,000 239,000 1,615,000
Capital distributions from unconsolidated joint venture......... 128,000 4,301,000 231,000
Purchase of property and equipment.............................. (39,000) (141,000) (188,000)
-------------- -------------- --------------
Net cash provided by (used in) investing activities........... 255,000 3,632,000 (281,000)
FINANCING ACTIVITIES
Proceeds from bank borrowings................................... 115,723,000 151,021,000 140,303,000
Principal payments on bank borrowings........................... (107,814,000) (141,957,000) (126,134,000)
Principal payments on note payable to others.................... -- (14,583,000) (9,438,000)
Advances to affiliates.......................................... (116,000) (109,000) (163,000)
Repayment of advances from affiliates........................... 115,000 123,000 147,000
Decrease in deferred offering costs............................. 229,000 230,000 230,000
Proceeds from issuance of common stock from exercise of stock
options........................................................ -- -- 444,000
Reacquisition of the Company's common stock..................... (5,000,000) -- --
-------------- -------------- --------------
Net cash provided by (used in) financing activities........... 3,137,000 (5,275,000) 5,389,000
-------------- -------------- --------------
(Decrease) in cash.............................................. (4,528,000) (1,708,000) (32,024,000)
Cash and cash equivalents (restricted) at beginning of period... 6,147,000 7,855,000 39,879,000
-------------- -------------- --------------
Cash and cash equivalents at end of period...................... $ 1,619,000 $ 6,147,000 $ 7,855,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
39
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Schuler Homes, Inc. (the Company) was incorporated in Hawaii in March 1988
and, during January 1992, was reincorporated in Delaware. On March 20,1992, the
Company sold 5,175,000 shares of common stock at $15.50 per share through an
initial public offering, raising $73,224,000, net of total offering costs of
$6,989,000. In late 1993, the Company sold 805,000 shares of common stock at
$24.25 per share through a public offering, raising $18,545,000, net of total
offering costs $976,000.
The Company is engaged in the development and sale of residential real
estate in Hawaii, and has recently initiated operations in California, Oregon
and the state of Washington.
The Company has ownership interests in the following entities:
Schuler Homes of California, Inc., a wholly-owned subsidiary incorporated in
California--This entity has committed to acquire land for the development
and sale of residential real estate in California. This entity was formed in
June, 1996.
Schuler Homes of Washington, Inc., a wholly-owned subsidiary incorporated in
the state of Washington--This entity has purchased land and is committed to
purchase land for the development and sale of residential real estate in the
state of Washington. This entity was formed in August, 1996.
Schuler Homes of Oregon, Inc., a wholly-owned subsidiary incorporated in
Oregon--This entity is in the process of identifying land to acquire for the
development and sale of residential real estate in Oregon. This entity was
formed in October, 1996.
Schuler Realty/Maui, Inc., a wholly-owned subsidiary incorporated in
Hawaii--This entity provides sales services in connection with the Company's
projects on the island of Maui.
Schuler Realty/Oahu, Inc., a wholly-owned subsidiary incorporated in
Hawaii--This entity provides sales services in connection with the Company's
projects on the island of Oahu.
Lokelani Construction Corporation, a wholly-owned subsidiary incorporated in
Delaware--This entity serves as the general contractor on certain of the
Company's projects. See Note 3.
Waiakoa Estates Subdivision Joint Venture (WESJV), an unincorporated joint
venture--The Company has a 50% interest in WESJV, which is engaged in the
development and sale of residential lots on the island of Maui.
Iao Partners (Iao), a general partnership--The Company has a 50% interest in
Iao, which is engaged in the development and sale of residential projects on
the island of Maui.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
40
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other
short-term investments (less than 3 months) to be cash equivalents.
RECEIVABLES
Receivables consist primarily of proceeds from sales which closed shortly
prior to year-end and were received from escrow by the Company shortly after
year-end and. At December 31, 1994, the contractor for one of the Company's
projects had not signed the lien indemnity for the title insurance company. To
protect itself against liens, while still providing clear title to the buyers of
homes developed by the Company, the title company had not released sales
proceeds to the Company. At December 31, 1994, there were sales proceeds in
escrow on this project of $40,700,000. Subsequent to December 31, 1994, the lien
indemnity was signed and the full amount of the sales proceeds was released from
escrow (Note 14).
REAL ESTATE INVENTORIES
Real estate inventories consist of raw land, lots under development, houses
under construction and completed homes. Prior to 1995, these assets were carried
at the lower of cost or estimated net realizable value. Estimated net realizable
value represented management's estimates, based on management's plans and
intentions, of sale prices less disposition costs, assuming that disposition
occurred in the normal course of business. 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. There was no cumulative effect of
adopting FASB Statement No. 121.
The estimates of future cash flows require significant judgment relating to
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 economic and real estate market conditions in general. Accordingly, there
exists at any date, a reasonable possibility that changes in estimates will
occur in subsequent periods.
All direct and indirect land costs, all development and construction costs,
and applicable carrying charges (primarily interest) are capitalized to real
estate projects during the development period. The capitalized costs are
assigned to individual components of projects based on specific identification,
if practicable, or allotted based on relative sales value (in accordance with
FASB Statement No. 67, "Accounting for Costs and Initial Rental Operations of
Real Estate Projects"). Selling expenses and other marketing costs are expensed
in the period incurred and are included in cost of residential real estate sold
in the accompanying consolidated statements of operations.
41
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNCONSOLIDATED JOINT VENTURES
Investments in unconsolidated joint ventures consist of the Company's
interest in real estate ventures, and are accounted for using the equity method.
DEPOSITS
Deposits consist of amounts paid relating to potential purchases of land.
SALES AND PROFIT RECOGNITION
A sale is generally recorded and profit recognized when closings have
occurred and a buyer has met down payment and continuing investment criteria
required by generally accepted accounting principles.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for the years ended
December 31, 1995 and 1994 have been reclassified to conform to the 1996
presentation.
2. NOTES RECEIVABLE
Notes receivable consist primarily of notes receivable on seller financed
sales 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 home buyers who
purchased homes as part of the Company's "zero-down" sales program. Revenue and
profit recognition on such transactions are deferred until the down payment
requirement for revenue and profit recognition is met. Revenue and gross profit
deferred on such transactions during the year ended December 31, 1996 was
$14,731,000 and $2,005,000, respectively. Cash of $11,200,000 was received from
buyers' third party lenders in connection with "zero-down" sales during the year
ended December 31, 1996.
3. REAL ESTATE INVENTORIES
Real estate inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Unimproved land held for future development.................. $ 40,940,000 $ 42,221,000
Development projects in progress............................. 129,967,000 127,240,000
Completed inventory (including lots held for sale)........... 65,662,000 77,017,000
-------------- --------------
$ 236,569,000 $ 246,478,000
-------------- --------------
-------------- --------------
</TABLE>
Completed inventory includes residential units which are substantially ready
for occupancy.
In February 1994, the Company purchased land for future residential
development on the island of Oahu for approximately $48,000,000, including a
note payable of $25,000,000 to the seller. The interest
42
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. REAL ESTATE INVENTORIES (CONTINUED)
rate on the note was at the prime rate and was secured by a mortgage on the
purchased land. The Company made a principal payment of $10,000000 in August
1994, and final payment on the note was made in 1995. The purchased property
included 73 homes at various stages of completion in the construction process.
Incidental to this transaction, the seller transferred ownership of 100% of the
common stock of Lokelani Construction Corporation, the contractor for the 73
homes in progress, to the Company. The assets and operations of Lokelani
Construction Corporation were not material to the Company in February 1994.
Pursuant to the adoption of FASB Statement No. 121, the Company recognized
an impairment loss of $9,405,000 in 1995, which relates to completed inventories
at December 31, 1995. The Company's completed inventory comprised a larger
component of total inventory as of December 31, 1995 as compared to December 31,
1994, with substantially all of the increase occurring during the fourth quarter
of 1995. During 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 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. No losses were recognized on land held for future
development or inventories under current development.
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
Condensed combined financial information as of December 31, 1996, 1995 and
1994 and for the years then ended are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Assets (primarily real estate inventories)...... $ 17,074,000 $ 17,189,000 $ 20,281,000
Liabilities..................................... 155,000 272,000 190,000
------------- ------------- -------------
Equity.......................................... $ 16,919,000 $ 16,917,000 $ 20,091,000
------------- ------------- -------------
------------- ------------- -------------
Revenues........................................ 6,657,000 10,472,000 25,023,000
Expenses........................................ 6,166,000 8,347,000 18,950,000
------------- ------------- -------------
Net income...................................... $ 491,000 $ 2,125,000 $ 6,073,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Company's investment in WESJV includes $400,000 paid to the other
venturer under an option agreement, which gave the Company the right for a
certain period, as defined, to require the other venturer to contribute the land
to WESJV for its project. A portion of the option payment is amortized as sales
occur. In addition, the Company earns management fees from WESJV and Iao. The
option fee amortization and management fees are included in income from
unconsolidated joint ventures in the accompanying consolidated statements of
operations.
Investment in unconsolidated joint ventures includes accrued but unpaid
partnership management fees due from the Company's 50% general partner in Iao of
$513,000 and $443,000 at December 31, 1996 and 1995, respectively. The Iao
partnership agreement provides for the payment of the partnership management
fees to the Company from the cash flow of Iao.
43
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES (CONTINUED)
As of December 31, 1996, none of the $5,062,000, which represents the
Company's cumulative share of Iao's profits, has been distributed.
Included in liabilities are advances from the Company to its unconsolidated
joint ventures of $0, $243,000 and $53,000 at December 31, 1996, 1995 and 1994,
respectively.
5. NOTES PAYABLE TO BANK
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%. In October 1996, the Company entered into an interest rate
swap to pay LIBOR of 5.89% (fixed over 5 years) on $30,000,000, while receiving
in return an interest payment at a floating one-month LIBOR.
However, if the one-month LIBOR resets at or above 8%, the swap reverses for
that payment period and no interest payments are exchanged. The interest rate
differential to be received or paid is recognized during the period as an
adjustment to interest incurred. The Company's ability to draw upon its line of
credit is dependent upon meeting certain financial ratios and covenants. As of
December 31, 1996, the Company met such financial ratios and covenants.
The Company's notes payable at December 31, 1996 and 1995 consist of
borrowings under various credit facilities. At December 31, 1996, the Company's
bank borrowings were at interest rates of prime of 8.25% and LIBOR plus 1.75%,
of 7.3% to 7.4%. At December 31, 1996, $65,310,000 of the Company's lines of
credit is unused, of which $627,000 is restricted as to withdrawal for project
expenses and $209,000 is restricted for outstanding but unused letters of
credit.
The interest amounts in this paragraph relate to notes payable to bank and
others and the convertible subordinated debentures. The Company paid interest of
approximately $7,972,000, $5,877,000 and $5,763,000 during the years ended
December 31, 1996, 1995 and 1994, respectively. Interest capitalized to real
estate inventories during 1996, 1995 and 1994 was approximately $7,595,000,
$5,833,000 and $6,621,000, respectively. The difference between the amounts of
interest paid and the amounts capitalized is comprised of accrued interest
payable and interest of $270,000 expensed (included in Other income (expense))
and not capitalized in 1996.
The following information relates to notes payable to bank at December 31,
1996 and 1995 and interest thereon during the years then ended:
<TABLE>
<CAPTION>
AVERAGE DAILY
WEIGHTED AVERAGE MAXIMUM AMOUNT AMOUNT WEIGHTED AVERAGE
INTEREST RATE AT OUTSTANDING OUTSTANDING INTEREST RATE
END OF THE YEAR DURING THE YEAR DURING THE YEAR DURING THE YEAR*
------------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
1996...................... 7.5% $ 68,467,000 $ 54,529,000 7.5%
-- --
-- --
--------------- ---------------
--------------- ---------------
1995...................... 8.2% $ 46,431,000 $ 17,379,000 8.4%
-- --
-- --
--------------- ---------------
--------------- ---------------
</TABLE>
* Computed by dividing related interest charged by the average daily amount
outstanding during the year.
44
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INCOME TAXES
The following summarizes the provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Currently payable
Federal........................................... $ (1,480,000) $ 4,335,000 $ 18,469,000
State............................................. (271,000) 786,000 3,357,000
------------- ------------ -------------
(1,751,000) 5,121,000 21,826,000
Deferred
Federal........................................... (4,687,000) (354,000) (2,107,000)
State............................................. (851,000) (64,000) (383,000)
------------- ------------ -------------
(5,538,000) (418,000) (2,490,000)
------------- ------------ -------------
Provision for income taxes........................ $ (7,289,000) $ 4,703,000 $ 19,336,000
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The provision for income taxes on adjusted historical income differs from
the amounts computed by applying the applicable Federal statutory rates due to
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Provision (credit) for federal income taxes at the
statutory rate.................................. $ (6,559,000) $ 4,237,000 $ 17,590,000
Provision (credit) for state income taxes, net of
federal income tax benefits..................... (727,000) 470,000 1,950,000
Other............................................. (3,000) (4,000) (204,000)
------------- ------------ -------------
Provision (credit) for income taxes............... $ (7,289,000) $ 4,703,000 $ 19,336,000
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
Deferred income taxes are the result of provisions of the tax laws that
either require or permit certain items of income or expense to be reported for
tax purposes in different periods than they are reported for financial reporting
purposes. The primary components of the Company's deferred income taxes relate
to capitalized interest and inventory impairment losses (Note 3). At December
31, 1996, the total deferred tax liabilities (primarily resulting from
capitalized interest) and total deferred tax assets (primarily resulting from
inventory impairment losses) are $2,177,000 and $9,533,000, respectively.
Income tax payments of $585,000, $5,750,000 and $24,025,000 were made during
1996, 1995 and 1994, respectively.
45
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. RELATED PARTY TRANSACTIONS
James K. Schuler, the Company's chief executive officer, was the Company's
sole stockholder prior to the initial public offering and owns a majority of the
common shares outstanding as of December 31, 1996 and 1995.
The Company and an affiliate wholly-owned by Mr. Schuler, have a management
agreement pursuant to which certain management and administrative personnel of
the Company perform certain functions for the affiliate. The affiliate
reimburses the Company on a quarterly basis for its cost of providing such
services. During 1996, 1995 and 1994, $116,000, $109,000 and $162,000 was
charged to the affiliate by the Company pursuant to this agreement. At December
31, 1996, $26,000, which was charged for the quarter then ended, is included in
the amount due from affiliates. Such amount was subsequently paid in full by the
affiliate.
During 1994, one unit of residential real estate was purchased by an officer
of the Company. The Company believes that the aggregate sales price for this
unit of $395,000 represents its fair market value.
At December 31, 1996, Mr. Schuler, as an individual, had notes receivable
and accrued interest thereon totaling approximately $552,000 from a consultant
to the Company.
8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
The Company sponsors a 401(k) defined contribution retirement savings plan
that covers substantially all employees of the Company after completion of one
year of service. Company contributions to this plan, which include amounts based
on a percentage of employee contributions as well as discretionary
contributions, were $116,000, $106,000 and $66,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
In January 1992, the Company adopted a stock option plan (the "Plan"). Under
the Plan, option to purchase an aggregate of not more than 1,000,000 shares of
common stock may be granted from time to time to key employees, officers and
directors of the Company. The options vest 25% one year after being granted.
Thereafter, vesting occurs pro rata each month until 100% vesting is attained
four years after the grant date. The maximum term of the options granted is 10
years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation", requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.6%
and 6.0%; dividend yields of 0% and 0%; volatility factors of the expected
market price of the Company's common stock of 0.33 and 0.33; and a weighted-
average expected life of the option of 4 years.
46
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
The Black-Scholes option valuation model used was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
applying FASB Statement No. 123 on pro forma net income (loss) for 1995 and 1996
are not likely to be representative of the effects for future years, since the
1995 and 1996 pro forma net income (loss) amounts reflect expense for only one
year's vesting and two years vesting, respectively. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
Pro forma net income (loss)..................................... $ (11,508,000) $ 7,282,000
Pro forma net income (loss) per share:
Primary......................................................... $ (0.56) $ 0.35
Fully diluted................................................... $ (0.56) $ 0.35
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year.............. 325,489 $ 14 249,131 $ 19 207,761 $ 16
Granted..................................... 88,500 6 157,150 10 78,350 25
Exercised................................... -- -- -- -- (28,680) 15
Forfeited................................... (44,104) 12 (80,792) 23 (8,300) 23
------------- --------- ---------
Outstanding--end of year.................... 369,885 $ 12 325,489 $ 14 249,131 $ 19
------------- --------- ---------
------------- --------- ---------
Exercisable at end of year.................. 202,126 $ 15 129,770 $ 16 72,362 $ 16
Weighted-average fair value of options
granted during the year................... $ 2.15 $ 3.77 N/A
</TABLE>
47
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
Exercise prices for options outstanding as of December 31, 1996 ranged from
$6 to $26. The following is additional information relating to the options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
EXERCISE PRICES LESS THAN EXERCISE PRICES GREATER THAN
$12 $12
-------------------------- -----------------------------
<S> <C> <C>
Options outstanding
Number of options...................................... 207,350 162,535
Weighted average exercise price........................ $ 8.63 $ 16.25
Weighted average remaining contractual life............ 9 years 5.8 years
Options currently exercisable
Number of options...................................... 48,795 153,331
Weighted average exercise price........................ $ 10.51 $ 16.06
</TABLE>
In early 1995, option holders were permitted to receive new options in
exchange for certain of their existing outstanding options (covering up to an
aggregate of approximately 85,000 shares of Common Stock). Options for 55,800
shares were exchanged in March 1995 at a new exercise price of $11.00. The new
options became subject to a new vesting schedule and the existing options were
canceled.
9. CONVERTIBLE SUBORDINATED DEBENTURES
On January 28, 1993, the Company issued $50,000,000 principal amount of
6 1/2% Convertible Subordinated Debentures, which are due January 15, 2003. On
February 25, 1993, the related over-allotment option for an additional
$7,500,000 was exercised in full. The Debentures are convertible at any time
prior to maturity into shares of the Company's common stock at a conversion
price of $21.83 per share, subject to adjustment under certain conditions. The
Company received net proceeds from the offering of approximately $55,200,000
(net of offering costs of approximately $2,300,000). The Company used a portion
of such proceeds to purchase $51,500,000 of additional land inventory for
residential development, using the balance of $3,700,000 to repay a portion of
the Company's borrowings under its line of credit. The offering costs are being
amortized over the term of the debentures using the interest method.
10. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company had under contract to purchase for
approximately $7,530,000, land for future residential development. Those
purchases were completed subsequent to December 31, 1996. In addition,
subsequent to December 31, 1996, the Company entered into contracts to purchase
several parcels of land for future residential development for an aggregate of
approximately $15,730,000, subject to certain contingencies.
Certain of the Company's land purchase agreements require the Company to
make additional payments to the seller if the average sales price or number of
homes built on such land exceeds an amount stated in such purchase agreements.
Amounts paid pursuant to these agreements have not been significant.
One of the agreements for land purchased during early 1993 includes a
provision for the Company to pay the previous owner of the land additional
amounts if the number of units developed exceeds 580. The Company may develop up
to 832 units for sale. The Company is obligated to pay an additional $20,000 for
48
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
each residential unit in excess of 580 residences. Accordingly, the Company may
be obligated to pay the previous owner of the land an additional $5,040,000. The
additional payments are earned by the previous owners upon the issuance of a
certificate of occupancy for each excess unit. Such payments are payable at the
closing of the sale of each excess unit. The payments are secured by a
subordinated mortgage on a portion of the purchased land. As of December 31,
1996, the Company has paid $240,000 and accrued $1,620,000, for a total of
$1,860,000 related to the construction of 93 units in excess of 580.
In April 1996, the Company was served with a lawsuit by owners of units and
the Association of Owners of 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 believes the claims to be
largely without merit, or that meritorious defenses exist, and the litigation is
being vigorously defended. However, this litigation is at an early stage of
discovery. 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.
11. NET INCOME (LOSS) PER SHARE
Primary net income (loss) per share for the years ended December 31, 1996,
1995 and 1994 were computed using the weighted average number of common shares
outstanding during the period of 20,583,860, 20,874,177 and 20,867,215,
respectively.
Fully diluted earnings per share for the year ended December 31, 1994 were
computed by adding to net income the interest charged to cost of residential
real estate sold of $1,445,000 (net of related income taxes) which is applicable
to convertible subordinated debentures, and dividing by 23,501,205, which
represents the weighted average number of shares assuming conversion of all
convertible subordinated debentures. The computation of fully diluted net income
(loss) per share for the years ended December 31, 1996 and 1995 resulted in
amounts less than the primary net income (loss) per share. Accordingly, the
primary net income (loss) per share is also presented as the fully diluted net
income (loss) per share.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Notes receivable: The carrying amount of the Company's notes receivable
approximate their fair value, since the interest rate currently being
offered on new notes is similar to the interest rates on existing notes.
Accrued interest payable (included in accrued expenses) and notes
payable to bank: The carrying amounts of the Company's accrued interest
payable and notes payable to bank approximate their fair value.
49
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Convertible subordinated debentures: The fair value of $43,844,000 for
the Company's convertible subordinated debentures is based on the quoted
market price of 76.25 at December 31, 1996.
Interest rate swap: The estimated fair value at December 31, 1996 is a
liability of approximately $299,000 and is based on a bank quote. Credit
loss from counterparty nonperformance is not anticipated.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1996 and
1995 are presented in the following summary:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
SEPTEMBER
MARCH 31 JUNE 30 30 DECEMBER 31
----------- --------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Sales............................................ $ 19,965 $ 29,820 $ 21,953 $ 21,907
Operating income (loss).......................... 1,391 (21,472) 742 673
Pre-tax income (loss)............................ 1,552 (21,432) 787 418
Net income (loss)................................ 948 (13,074) 485 255
Earnings (loss) per share (fully diluted)........ 0.05 (0.63) 0.02 0.01
1995
Sales............................................ $ 36,619 $ 26,762 $ 29,975 $ 39,541
Operating income (loss).......................... 7,533 4,730 4,612 (5,272)
Pre-tax income (loss)............................ 7,638 4,843 4,739 (5,155)
Net income (loss)................................ 4,659 2,956 2,891 (3,144)
Earnings (loss) per share (fully diluted)........ 0.21 0.14 0.14 (0.15)
</TABLE>
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.
14. RESOLUTION OF CONTRACT DISPUTE
In late 1994, the Company initiated arbitration proceedings in Honolulu
against the general contractor at its Salt Lake project. The arbitration
proceedings primarily pertained to claims made by (i) the general contractor for
additional compensation attributable to changes made to the scope of work
originally contemplated by the construction contract, partially offset by
reductions authorized by the Company and (ii) each party for losses incurred in
the administration of the contract. While the Company believes that most of the
claims asserted by the general contractor in the arbitration proceeding were
without merit, the Company also began to recognize that its ability to work with
the joint venture contractor in an efficient and cost-productive manner had been
eroded by the existence of the arbitration proceeding. On the basis of these and
other factors, the Company engaged in settlement discussions with the general
contractor and the parties reached a settlement of the dispute in February 1995.
This resolution resulted in the Company incurring a pre-tax charge in the 1994
fourth quarter of $7,979,000,
50
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. RESOLUTION OF CONTRACT DISPUTE (CONTINUED)
which is included in Cost of Residential Real Estate Sold for the year ended
December 31, 1994. The $7,979,000 was paid in February 1995.
15. SUBSEQUENT EVENT (UNAUDITED)
On January 8, 1997, the Company completed the acquisition of the common
stock of Melody Homes, Inc., a Colorado homebuilder, and Melody Mortgage
Company, a mortgage brokerage firm for Melody home buyers. The consideration of
approximately $24,100,000 consisted of cash. The transaction will be accounted
for under the purchase method of accounting, wherein approximately $9,500,000 in
goodwill will be recognized by the Company after recording approximately
$5,000,000 ($1,000,000 is included in the $24,100,000 paid to Melody's former
parent; $4,000,000 paid to certain other former Melody shareholders) for a
covenant not to compete and other purchase adjustments necessary to allocate the
purchase price to the value of assets acquired and liabilities assumed. Goodwill
and the covenant not to compete will be amortized over a 20-year period.
Combined revenue for Melody Homes, Inc. and Melody Mortgage Company was
approximately $97,000,000 for the year ended June 30, 1996.
Prior to its acquisition by the Company, Melody was joined in a class-action
lawsuit related to the use of polybutylene plumbing systems and certain alleged
defects and deficiencies of such systems. In September 1995, the Denver District
Court stayed the action pending the resolution of two similar "national class
actions" involving the same group of Plaintiffs as well as manufacturers of
polybutylene plumbing systems. The Denver case was stayed to await a
finalization of the settlement agreed to in the courts of Tennessee and Alabama,
which required the assignment of Plaintiffs' claims to the manufacturers of
polybutylene. The Company believes the claims against Melody are without merit
and, even if shown to be meritorious, insurance coverage will be available to
offset a material portion of any related claims. While the Company presently
believes that Melody will not incur any material cost due to this lawsuit, since
the litigation is at a very early stage, it can give no assurance that this
litigation, if adversely determined to Melody, would not have a material adverse
effect on the Company's business, financial condition and operating results.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The Company's Proxy Statement for its 1997 Annual Meeting of Stockholders,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, will be incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K, provides the information
required under Part III (Items 10, 11, 12 and 13), except for the information
with respect to the Company's executive officers who are not directors, which is
included in "Item 1. Business--Executive Officers of the Registrant."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
See "Item 8. Financial Statements and Supplementary Data."
(b) REPORTS ON FORM 8-K.
None.
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- -------------------- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
2.1 Stock Purchase Agreement among the Company, Falcon Development Corporation, Madison B. Graves, Jacob
D. Bingham, Fred L. Ahlstrom and Mark S. Doppe, dated January 8, 1997. (Incorporated by reference to
the Company's Current Report on Form 8-K dated January 8, 1997; Commission file number 0-19891.)
3.1 Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 of the
Company's registration statement under the Securities Act on Form S-1, Registration Statement No.
33-45485.)
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 of the Company's registration
statement under the Securities Act on Form S-1, Registration Statement No. 33-55858.)
4.1 Indenture between the Company and Bishop Trust Company, Limited, as Trustee, dated as of January 15,
1993. (Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K dated
January 21, 1993; Commission file number 0-19891.)
4.2 Form of Debenture (included in Exhibit 4.1).
4.3 Specimen of Common Stock certificate. (Incorporated by reference to Exhibit 4.1 of the Company's
registration statement under the Securities Act on Form S-1, Registration No. 33-45485.)
10.1 Form of Indemnification Agreement between the Company and its directors and certain officers.
(Incorporated by reference to Exhibit 10.1 of the Company's registration statement under the
Securities Act on Form S-1, Registration No. 33-45485.)
+ 10.2 1992 Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.2 of the Company's 1992
Annual Report on Form 10-K; Commission file number 0-19891.)
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- -------------------- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
+ 10.3 Form of Stock Option Agreement. (Incorporated by reference to Exhibit 28.2 of the Company's
registration statement under the Securities Act on Form S-8, Registration No. 33-53044.)
+ 10.4 Form of Non-Employee Director Automatic Option Grant Agreement. (Incorporated by reference to Exhibit
28.3 of the Company's registration statement under the Securities Act on Form S-8, Registration No.
33-53044.)
+ 10.5 Management Agreement dated as of January 31, 1992 between the Company and James K. Schuler &
Associates, Inc. (Incorporated by reference to Exhibit 10.8 of the Company's registration statement
under the Securities Act on Form S-1, Registration No. 33-45485.)
+ 10.6 Employment Agreement dated as of January 31, 1992 between the Company and James K. Schuler.
(Incorporated by reference to Exhibit 10.10 of the Company's registration statement under the
Securities Act on Form S-1, Registration No. 33-45485.)
10.7 Joint Venture Agreement between the Company and United Realty, Inc. dated as of August 26, 1989.
(Incorporated by reference to Exhibit 10.54 of the Company's registration statement under the
Securities Act on Form S-1, Registration No. 33-45485.)
10.8 Partnership Agreement between the Company and C. Brewer Properties, Inc. dated as of October 15,
1992. (Incorporated by reference to Exhibit 10.75 of the Company's registration statement under the
Securities Act on Form S-1, Registration No. 33-55858.)
10.9 Purchase Agreement between the Company and Itoman Hawaii, Inc. dated October 13, 1992. (Incorporated
by reference to Exhibit 10.78 of the Company's registration statement under the Securities Act on
Form S-1, Registration No. 33-55858.)
10.10 Agreement among the Company, Palailai Holdings, Inc. and Malama Mohala Corp. dated November 4, 1992.
(Incorporated by reference to Exhibit 10.79 of the Company's registration statement under the
Securities Act on Form S-1, Registration No. 33-55858.)
10.11 Purchase Agreement (Parcel 15) between the Company and AMFAC Property Development Corp. dated July
14, 1992. (Incorporated by reference to Exhibit 10.82 of the Company's registration statement under
the Securities Act on Form S-1, Registration No. 33-55858.)
10.12 Purchase Agreement (Parcel 20) between the Company and AMFAC Property Development Corp. dated July
14, 1992. (Incorporated by reference to Exhibit 10.83 of the Company's registration statement under
the Securities Act on Form S-1, Registration No. 33-55858.)
10.13 Lease between the Company and AALL Hawaii Holdings dated May 14, 1993 (i.e., lease of premises
located at 828 Fort Street Mall, 4th Floor, Honolulu, Hawaii). (Incorporated by reference to Exhibit
10.3 of the Company's Quarterly Report on Form 10-Q dated June 30, 1993; Commission file number
0-19891.)
10.14 Amendment dated April 9, 1993 to Purchase Agreement (Parcel 15) between the Company and AMFAC
Property Development Corp., a Hawaii Corporation. (Incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K dated April 30, 1993; Commission file number 0-19891.)
10.15 Amendment dated April 9, 1993 to Purchase Agreement (Parcel 20) between the Company and AMFAC
Property Development Corp., a Hawaii Corporation. (Incorporated by reference to Exhibit 10.4 of the
Company's Current Report on Form 8-K dated April 30, 1993; Commission file number 0-19891.)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- -------------------- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
10.16 Purchase Agreement (Parcel 9) dated July 30, 1993 between the Company and AMFAC Property Development
Corp., a Hawaii Corporation. (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q dated September 30, 1993; Commission file number 0-19891.)
+ 10.17 Schuler Homes, Inc. 401(k) Retirement Savings Plan (005) dated July 20, 1993, which amends in full
the Schuler Homes, Inc. Profit Sharing Plan (005), originally effective November 1, 1989.
(Incorporated by reference to Exhibit 10.6 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1993; Commission file number 0-19891.)
+ 10.18 Amendment to the Schuler Homes, Inc. 401(k) Retirement Savings Plan (005) (Sections 2.1 and 2.2)
effective September 1, 1993. (Incorporated by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-Q dated September 30, 1993; Commission file number 0-19891.)
10.19 Letter Agreement between the Company and Lokelani Ma'ili Kai, Ltd. and P.H. Property Development
Company, dated January 24, 1994. (Incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K dated March 2, 1994; Commission file number 0-19891.)
10.20 Addendum to Letter Agreement dated January 24, 1994 between the Company and Lokelani Ma'ili Kai, Ltd.
and P.H. Property Development Company, dated February 18, 1994. (Incorporated by reference to Exhibit
10.2 of the Company's Current Report on Form 8-K dated March 2, 1994; Commission file number
0-19891.)
10.21 Campbell Square Office Lease dated April 11, 1994 between the Company and the Trustees Under the Will
and of the Estate of James Campbell, Deceased. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q/A dated June 30, 1994; Commission file number 0-19891.)
10.22 First Amendment to Promissory Note (Salt Lake) between the Company and First Hawaiian Bank dated June
8, 1994. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated June 30,
1994; Commission file number 0-19891.)
10.23 Additional Loan Note (Salt Lake) between the Company and First Hawaiian Bank dated June 8, 1994.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated June 30, 1994;
Commission file number 0-19891.)
10.24 Loan Agreement (Salt Lake) between the Company and First Hawaiian Bank dated June 8, 1994.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated June 30, 1994;
Commission file number 0-19891.)
10.25 Additional Charge Mortgage; Restatement of Real Property Mortgage; Security Agreement; Assignment of
Rents; and Financing Statement (Salt Lake) between the Company and First Hawaiian Bank dated June 8,
1994. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated June 30, 1994;
Commission file number 0-19891.)
10.26 Security Agreement (Salt Lake) between the Company and First Hawaiian Bank dated June 8, 1994.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated June 30, 1994;
Commission file number 0-19891.)
+ 10.27 Amendment to the Schuler Homes, Inc. 401(k) Retirement Savings Plan (005) (Sections 1.5(a) and 1.11,
effective January 1, 1994; and Sections 2.1 and 2.2, effective September 16, 1994). (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated September 30, 1994;
Commission file number 0-19891.)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- -------------------- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
10.28 Agreement for Increased Density on Parcels 10, 15, 16 and 20 between the Company and AMFAC Property
Development Corp. dated December 12, 1994. (Incorporated by reference to Exhibit 10.82 of the
Company's 1994 Annual Report on Form 10-K; Commission file number 0-19891.)
10.29 Amendment to Loan Documents (Salt Lake) between the Company and First Hawaiian Bank, dated March 10,
1995. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31, 1995;
Commission file number 0-19891.)
10.30 Second Amendment to Promissory Note (Salt Lake) between the Company and First Hawaiian Bank dated
July 5, 1995. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated
September 30, 1995; Commission file number 0-19891.)
10.31 First Amendment to First Additional Loan Note (Salt Lake) between the Company and First Hawaiian Bank
dated July 5, 1995. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated
September 30, 1995; Commission file number 0-19891.)
10.32 Second Additional Loan Note (Salt Lake) between the Company and First Hawaiian Bank dated July 5,
1995. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated September 30,
1995; Commission file number 0-19891.)
10.33 Loan Agreement (Salt Lake) between the Company and First Hawaiian Bank dated July 5, 1995.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated September 30, 1995;
Commission file number 0-19891.)
10.34 Second Additional Charge Mortgage; Restatement of Additional Charge Mortgage and Restatement of Real
Property Mortgage; Security Agreement; Assignment of Rents; and Financing Statement (Salt Lake)
between the Company and First Hawaiian Bank dated July 5, 1995. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q dated September 30, 1995; Commission file number 0-19891.)
10.35 Security Agreement (Salt Lake) between the Company and First Hawaiian Bank dated July 5, 1995.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated September 30, 1995;
Commission file number 0-19891.)
10.36 Agreement (Kapolei Knolls) between the Company and Finance Realty, Ltd. dated September 11, 1995.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated September 30, 1995;
Commission file number 0-19891.)
10.37 Agreement between Waiakoa Estates Subdivision Joint Venture and Betsill Brothers Construction, Inc.
dated September 16, 1995. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q
dated September 30, 1995; Commission file number 0-19891.)
10.38 Amended and Restated Purchase and Sale Agreement between the Company and Gentry Development Company
and Gentry Homes, Ltd., dated November 20, 1995. (Incorporated by reference to the Company's 1995
Annual Report on Form 10-K; Commission file number 0-19891.)
10.39 Fourth Amendment to Loan Documents (Line of Credit) between the Company and First Hawaiian Bank dated
December 29, 1995. (Incorporated by reference to the Company's 1995 Annual Report on Form 10-K;
Commission file number 0-19891.)
10.40 Pledge and Security Agreement (CCV 5 Interim Funding) between the Company and First Hawaiian Bank,
dated February 26, 1996. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q
dated March 31, 1996; Commission file number 0-19891.)
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- -------------------- -----------------------------------------------------------------------------------------------------
<C> <S> <C>
10.41 Credit Agreement between the Company, certain Banks, and First Hawaiian Bank, dated March 29, 1996.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31, 1996;
Commission file number 0-19891.)
10.42 Promissory Note between the Company, certain Banks, and First Hawaiian Bank, dated March 29, 1996.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31, 1996;
Commission file number 0-19891.)
10.43 Negative Pledge Agreement between the Company, certain Banks, and First Hawaiian Bank, dated March
29, 1996. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated March 31,
1996; Commission file number 0-19891.)
10.44 Contract for Purchase and Sale of Real Property between the Company and Investek Properties Company,
LLC, dated June 19, 1996. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q
dated June 30, 1996; Commission file number 0-19891.)
10.45 Real Estate Purchase Agreement between Schuler Homes of California, Inc. and Frank J. Andrews, Jr.,
dated August 20, 1996. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q
dated September 30, 1996; Commission file number 0-19891.)
10.46 Option Agreement between Schuler Homes of California, Inc. and Frank J. Andrews, Jr., dated August
20, 1996. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q dated September
30, 1996; Commission file number 0-19891.)
10.47 Real Estate Purchase and Sale Agreement between the Company and Coop Family Limited Partnership,
dated September 20, 1996. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q
dated September 30, 1996; Commission file number 0-19891.)
21 Subsidiaries of the Registrant. Incorporated by reference to Note 1 of Notes to Consolidated
Financial Statements included in Item 8 of this Form 10-K.)
* 23.1 Consent of Independent Auditors.
* 27 Financial Data Schedule
99.1 Supplement No. 1 to Credit Agreement between the Company, certain Banks and First Hawaiian Bank,
dated January 8, 1997. (Incorporated by reference to the Company's Current Report on Form 8-K dated
January 8, 1997; Commission file number 0-19891.)
99.2 Security Agreement between Melody Homes, Inc. and Melody Mortgage Company, and First Hawaiian Bank,
dated January 8, 1997. (Incorporated by reference to the Company's Current Report on Form 8-K dated
January 8, 1997; Commission file number 0-19891.)
99.3 Amended and Restated Loan Agreement between Melody Homes, Inc. and Bank One, dated November 25, 1996.
(Incorporated by reference to the Company's Current Report on Form 8-K dated January 8, 1997;
Commission file number 0-19891.)
99.4 Modification Agreement between Melody Homes, Inc. and Bank One, dated January 8, 1997. (Incorporated
by reference to the Company's Current Report on Form 8-K dated January 8, 1997; Commission file
number 0-19891.)
99.5 News release dated January 8, 1997 regarding the completion of the acquisition of Melody Homes and
Mortgage. (Incorporated by reference to the Company's Current Report on Form 8-K dated January 8,
1997; Commission file number 0-19891.)
</TABLE>
- ------------------------
* Filed herewith
+ Management contract, compensatory plan or arrangement
(d) SEE ITEM 14(1C).
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCHULER HOMES, INC.
By: /s/ JAMES K. SCHULER
-----------------------------------------
James K. Schuler
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: April 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ JAMES K. SCHULER President and Chief
- ------------------------------ Executive Officer April 15, 1997
James K. Schuler (principal executive
officer)
/s/ MICHAEL T. JONES Executive Vice President
- ------------------------------ of Operations and April 15, 1997
Michael T. Jones Director
Senior Vice President of
/s/ PAMELA S. JONES Finance, Chief Financial
- ------------------------------ Officer and Director April 15, 1997
Pamela S. Jones (principal financial
officer)
/s/ MARTIN T. HART
- ------------------------------ Director April 15, 1997
Martin T. Hart
/s/ BERT T. KOBAYASHI, JR.
- ------------------------------ Director April 15, 1997
Bert T. Kobayashi, Jr.
57
