<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19891
SCHULER HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware 99-0293125
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
828 Fort Street Mall, Suite 400
Honolulu, Hawaii 96813-4321
(Address of principal executive offices) (Zip code)
(808) 521-5661
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 1997
--------------------- ---------------
$.01 par value 20,100,177
<PAGE>
SCHULER HOMES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report............... 3
Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996.................................. 4
Consolidated Statements of Income - Three and nine
months ended September 30, 1997 and 1996........... 5
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1997 and 1996........... 6
Notes to Consolidated Financial Statements........... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 11
PART II. OTHER INFORMATION.................................... 19
SIGNATURES.......................................................... 20
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Schuler Homes, Inc.
We have reviewed the accompanying interim consolidated balance sheet of
Schuler Homes, Inc. as of September 30, 1997, and the related consolidated
statements of income for the three-month and nine-month periods ended
September 30, 1997 and 1996, and the consolidated statements of cash flows
for the nine-month periods ended September 30, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying interim consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles. See Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Schuler Homes, Inc. as of
December 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated March 7, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1996, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
Honolulu, Hawaii
November 12, 1997
3
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 2) . . . . . . . . . . . . $ 546,000 $ 1,619,000
Receivables . . . . . . . . . . . . . . . . . . . . . . . 899,000 425,000
Prepaid income taxes . . . . . . . . . . . . . . . . . . . 2,805,000 2,604,000
Amount due from affiliate (Note 5) . . . . . . . . . . . . 23,000 26,000
Real estate inventories (Note 3) . . . . . . . . . . . . . 294,512,000 236,569,000
Investments in unconsolidated joint ventures (Note 1). . . 14,891,000 11,611,000
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 483,000
Deferred offering costs. . . . . . . . . . . . . . . . . . 1,228,000 1,399,000
Notes receivable (Note 2). . . . . . . . . . . . . . . . . 2,228,000 3,944,000
Deferred income taxes . . . . . . . . . . . . . . . . . . 4,402,000 7,356,000
Intangibles (Note 7) . . . . . . . . . . . . . . . . . . . 13,922,000 --
Other assets . . . . . . . . . . . . . . . . . . . . . . . 4,329,000 1,122,000
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $339,985,000 $267,158,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 9,747,000 $ 593,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 8,096,000 6,910,000
Notes payable to banks (Note 4). . . . . . . . . . . . . . 101,770,000 44,690,000
Note payable to others (Note3) . . . . . . . . . . . . . . 1,713,000 ---
6-1/2% convertible subordinated debentures due 2003. . . . 57,500,000 57,500,000
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 178,826,000 109,693,000
Commitments and contingencies (Notes 4 and 9)
Stockholders' equity (Note 10):
Common stock, $.01 par value; 30,000,000 shares authorized;
20,874,177 shares issued at September 30, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . . 209,000 209,000
Additional paid-in capital. . . . . . . . . . . . . . . 93,096,000 93,096,000
Retained earnings. . . . . . . . . . . . . . . . . . . . 72,854,000 69,160,000
Treasury stock, at cost; 774,000 shares at September 30,
1997 and December 31, 1996 . . . . . . . . . . . . . . (5,000,000) (5,000,000)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . 161,159,000 157,465,000
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . $339,985,000 $267,158,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
4
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Residential real estate sales. . . . . . . $61,057,000 $21,953,000 $163,509,000 $ 71,738,000
Costs and expense
Residential real estate sales. . . . . . .48,683,000 18,122,000 132,168,000 58,345,000
Inventory impairment loss . . . . . . . . -- -- --- 23,910,000
Selling and commissions. . . . . . . . . . 4,731,000 2,042,000 12,497,000 5,848,000
General and administrative . . . . . . . . 3,898,000 1,061,000 10,197,000 3,088,000
----------- ----------- ------------ -----------
Total costs and expenses . . . . . . . .57,312,000 21,225,000 154,862,000 91,191,000
Income from unconsolidated joint ventures
(Note 1). . . . . . . . . . . . . . . . 176,000 14,000 192,000 114,000
----------- ----------- ------------ -----------
Operating income (loss) . . . . . . . . . 3,921,000 742,000 8,839,000 (19,339,000)
Other income (expense) (Note 4). . . . . . .(1,088,000) 45,000 (2,885,000) 246,000
----------- ----------- ------------ -----------
Income (loss) before provision for
income taxes. . . . . . . . . . . . . . . 2,833,000 787,000 5,954,000 (19,093,000)
Provision (credit) for income taxes
(Note 6). . . . . . . . . . . . . . . . . 1,075,000 302,000 2,260,000 (7,452,000)
----------- ----------- ------------ -----------
Net income (loss). . . . . . . . . . . . .$1,758,000 $ 485,000 $3,694,000 $(11,641,000)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income (loss) per share (Note 8):
Primary. . . . . . . . . . . . . . . . $ 0.09 $ 0.02 $ 0.18 $ (0.56)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Fully diluted . . . . . . . . . . . . $ 0.09 $ 0.02 $ 0.18 $ (0.56)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See accompanying notes.
5
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1996
------------ --------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . $3,694,000 $(11,641,000)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense. . . . 896,000 142,000
Income from unconsolidated joint ventures. . (26,000) (144,000)
Sales financed by Company. . . . . . . . . . -- (86,000)
Principal payments of notes receivable . . . 1,591,000 130,000
Changes in assets and liabilities, net of
effects from purchase of Melody Homes
and Mortgage:
Decrease in receivables. . . . . . . . . . 635,000 182,000
(Increase) in prepaid income taxes . . . . (201,000) (1,271,000)
(Increase) decrease in real estate
inventories. . . . . . . . . . . . . . . (17,081,000) 1,465,000
Decrease in deposits . . . . . . . . . . . 283,000 841,000
(Increase) in other assets . . . . . . . . (1,506,000) (332,000)
Increase (decrease) in accounts payable. . 4,380,000 (440,000)
Increase (decrease) in accrued expenses. . 1,079,000 (1,375,000)
Change in deferred income taxes. . . . . . 2,954,000 (6,477,000)
---------- ------------
Net cash provided by (used in)
operating activities. . . . . . . . . . (3,302,000) (19,006,000)
INVESTING ACTIVITIES
Payment for purchase of Melody Homes and
Mortgage, net of cash acquired. . . . . . . . (29,508,000) --
Investment in unconsolidated joint ventures . . (3,172,000) --
Advances to unconsolidated joint venture . . . . (180,000) (3,765,000)
Repayments of advances to unconsolidated
joint venture . . . . . . . . . . . . . . . . . 98,000 3,882,000
Capital distributions from unconsolidated
joint venture . . . . . . . . . . . . . . . . . -- 115,000
Purchase of furniture, fixtures, and
equipment . . . . . . . . . . . . . . . . . . . (597,000) (39,000)
---------- ------------
Net cash provided by (used in)
investing activities. . . . . . . . . . (33,359,000) 193,000
FINANCING ACTIVITIES
Proceeds from bank borrowings. . . . . . . . . 159,481,000 97,158,000
Principal payments on bank borrowings. . . . . (124,068,000) (79,174,000)
Advances to affiliate. . . . . . . . . . . . . (73,000) (89,000)
Repayment of advances to affiliate . . . . . . 77,000 87,000
Net decrease in deferred offering costs. . . . 171,000 172,000
Reacquisition of the Company's common stock. . . -- (5,000,000)
---------- ------------
Net cash provided by (used in)
financing activities. . . . . . . . . . 35,588,000 13,154,000
---------- ------------
Increase (decrease) in cash. . . . . . . . . . (1,073,000) (5,659,000)
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . . . 1,619,000 6,147,000
---------- ------------
Cash and cash equivalents at end of
period. . . . . . . . . . . . . . . . . . . . $ 546,000 $ 488,000
---------- ------------
---------- ------------
See accompanying notes
6
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
These financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements for the year ended December 31, 1996
contained in the Company's 1996 annual report on Form 10-K.
The Company has experienced, and expects to continue to experience,
significant variability in quarterly sales and net income. The results of
any interim period are not necessarily indicative of the results that can
be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company entered into an interest-rate swap agreement to modify the
interest characteristics of its outstanding debt. This agreement involves
the exchange of amounts based on a fixed interest rate for amounts based on
variable interest rates over the life of the agreement without an exchange
of the notional amount upon which the payments are based. The differential
to be paid or received as interest rates change is accrued and recognized
as an adjustment of interest incurred related to the debt (the accrual
accounting method). The fair value of the swap agreement is not
recognized in the financial statements. In the event of the termination of
the interest-rate swap agreement, gains and losses would be deferred as an
adjustment to the carrying amount of the outstanding debt and amortized as
an adjustment to interest incurred related to the debt over the remaining
term of the original contract life of the terminated swap agreement. In
the event of the early extinguishment of a designated debt obligation, any
realized or unrealized gain or loss from the swap would be recognized in
income coincident with the extinguishment.
On July 31, 1997, the Company (through a new wholly-owned subsidiary, SHLR
of Washington, Inc., incorporated in the state of Washington) acquired a
49% interest in a homebuilder in the state of Washington. The Company has
an option to purchase the remaining 51% interest, subject to certain
contingencies. In connection with this acquisition, the Company entered
into an agreement to make revolving loans to the acquiree in an aggregate
principal amount of up to $5,000,000. The Company accounts for this
investment as an unconsolidated joint venture under the equity method of
accounting.
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
7
<PAGE>
is satisfied. Cumulative revenue and gross profit remaining deferred on
such transactions as of September 30, 1997 are $6,681,000 and $866,000,
respectively. In March 1997, the Company sold second mortgage notes of
approximately $2,500,000, resulting in the recognition of sales and gross
profit of approximately $11,303,000 and $817,000 (net of discount and
collection reserve relating to sale), respectively (includes five sales
which closed during the first quarter of 1997). The collection reserve
results in a restriction on the Company's cash in the amount of
approximately $506,000.
3. Real Estate Inventories
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. In
addition, land held for future development or inventories under current
development are adjusted to fair value, only if an impairment to their
value is indicated.
The estimates of future cash flows require significant judgment relating to
the level of sales prices, rate of new home sales, amount of marketing
costs and price discounts needed in order to stimulate sales, rate of
increase in the cost of building materials and labor, introduction of
building code modifications, and level of consumer confidence, among other
items. Accordingly, there exists at any date, a reasonable possibility
that changes in estimates will occur in subsequent periods.
Real estate inventories at September 30, 1997 consist of the following:
Unimproved land held for future development . . . . . . $ 41,553,000
Development projects in progress. . . . . . . . . . . . 203,907,000
Completed inventory (including lots held for sale). . . 49,052,000
------------
$294,512,000
-------------
-------------
Completed inventory includes residential units which are substantially
ready for occupancy.
The Company has a note payable to a land seller with a principal balance of
$1,713,000 at September 30, 1997, which relates to land purchased for
future residential development. The note is secured by a mortgage on the
purchased land.
4. Notes Payable to Banks
At September 30, 1997, $36,000,000 of the Company's line of credit is
unused, of which $3,224,000 is restricted as to withdrawal for outstanding
but unused letters of credit.
In March 1997, the Company amended its Credit Agreement, increasing the
unsecured revolving line of credit facility from $110,000,000 to
$137,600,000. The facility expires on July 1, 1999 and includes an option
for the lenders to extend the term for an additional year. The Company can
select an interest rate based on either LIBOR (1, 2, 3 or 6 month term) or
prime for each borrowing. Based on the Company's leverage ratio, as
defined, the interest rate may vary from LIBOR plus 1.5% to 2% or prime
plus 0% to 0.25%. At September 30, 1997, the Company's outstanding
borrowings were at interest rates of LIBOR plus 1.75% (7.4% ) and prime
plus 0% (8.5%). The Company's ability to draw upon its line of credit is
dependent upon meeting certain financial ratios and covenants.
The Company paid interest (relating to notes payable to bank and the
convertible subordinated debentures) of approximately $4,000,000 during the
quarter ended September 30, 1997. Interest incurred during the quarter
ended September 30, 1997 totaled $3,063,000, of which approximately
$2,208,000 was capitalized to real estate inventories and approximately
$855,000 was expensed ($816,000 included in Other income (expense) and
$39,000 included in Income from unconsolidated joint ventures) and not
capitalized. The difference between the amount of interest paid
8
<PAGE>
and the amount incurred is comprised of accrued interest payable.
Interest, previously capitalized to real estate inventories, expensed as
a component of cost of residential real estate sales during the quarter
ended September 30, 1997 totaled $1,558,000.
5. Related Party Transactions
The Company charged $23,000 for the quarter ended September 30, 1997 to
James K. Schuler & Associates, Inc. (an affiliate) under the management
agreement entered into between the Company and James K. Schuler &
Associates, Inc., pursuant to which certain management and administrative
personnel of the Company will perform certain functions for James K.
Schuler & Associates, Inc., to be reimbursed by James K. Schuler &
Associates, Inc. At September 30, 1997, the $23,000 was included in Amount
Due from Affiliate. Subsequent to September 30, 1997, the receivable was
paid in full.
From time to time, the Company engages the law firms in which directors of
the Company are partners. During the quarterly period ended September 30,
1997, legal fees of approximately $3,000 to such firms were incurred by the
Company.
6. Income Taxes
During the three months ended September 30, 1997, the Company paid income
taxes of $220,000.
7. Acquisition of Melody Homes, Inc. and Melody Mortgage Company
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 (excludes $4,000,000 of the
covenant-not-to-compete paid to certain former Melody shareholders and
certain other acquisition related costs) consisted of cash, in addition to
liabilities assumed of approximately $26,500,000. The transaction has been
accounted for under the purchase method of accounting, wherein goodwill and
a covenant-not-to-compete in the combined amount of approximately
$14,500,000 has been recognized by the Company after recording 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 are being amortized over a 20-year period.
Accumulated amortization at September 30, 1997 is approximately $542,000.
In connection with his consultation services relating to the acquisition of
Melody, the Company paid a fee of $90,000 to Mr. Martin T. Hart, a member
of the Company's Board of Directors. Combined revenue for Melody Homes,
Inc. and Melody Mortgage Company was approximately $97,000,000 for the year
ended June 30, 1996.
8. Net Income (Loss) Per Share
Primary earnings per share for the quarter and nine-month period ended
September 30, 1997 were computed using the weighted average number of
common shares outstanding during the periods of 20,100,177. Primary
earnings per share for the quarter and nine-month period ended September
30, 1996 were computed using the weighted average number of common shares
outstanding during the periods of 20,495,780 and 20,745,088, respectively.
The computation of fully diluted earnings per share for the quarters and
nine-month periods ended September 30, 1997 and 1996 resulted in amounts
greater than the primary earnings per share. Accordingly, the primary
earnings per share is also presented as the fully diluted earnings per
share.
9
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of Statement
No. 128 on the calculation of primary and fully diluted earnings per share
for the quarters and nine-month periods ended September 30, 1997 and 1996
is not material.
9. Commitments and Contingencies
At September 30, 1997, the Company had under contract to purchase for
approximately $1,028,000, land for residential development.
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 sought 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. However,
this litigation is at an early stage of discovery. Based upon its current
understanding of the lawsuit, the Company believes (at this early stage of
litigation) the claims to be largely without merit, or that meritorious
defenses, together with potential third party defendants and insurance
coverage, exist to offset a material portion of the related claims. The
Court has denied the motion to certify the class, and the litigation
continues to be vigorously defended. However, 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.
10. Stockholders' Equity
During the first quarter of 1997, options to purchase approximately 222,500
shares of common stock were approved to be granted. In addition, a plan
was approved to permit option holders to effectively reprice certain of
their outstanding options (covering up to an aggregate of approximately
271,000 shares of common stock). This plan would allow option holders to
receive new options for the same number of shares covered by their existing
options at an exercise price equal to $5.625. Any such new options would
be subject to a new vesting schedule and the existing options would be
canceled.
In July, 1997, non-statutory stock options to purchase 15,000 shares of
common stock were approved to be granted.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, the matters discussed
in this report contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those risks
discussed herein, and other risks detailed in the Company's Annual Report on
Form 10-K and other documents filed by the Company with the Securities and
Exchange Commission from time to time.
OVERVIEW
For the quarter ended September 30, 1997, sales of residential real
estate (revenue) were $61.1 million and operating income was $3.9 million,
compared to revenues of $22.0 million and operating income of $742,000 during
the third quarter last year. Net income was $1.8 million ($0.09 per share)
for the quarter ended September 30, 1997, as compared to net income of
$485,000 ($0.02 per share) during the 1996 third quarter.
For the first nine months of 1997, the Company reported sales of
residential real estate of $163.5 million, compared to sales of $71.7
million during the first nine months of 1996. Net income was $3.7 million or
$0.18 per share during the nine months ended September 30, 1997, as compared
to net loss of $11.6 million or $0.56 per share during the same period in the
prior year. During the 1996 second quarter, the Company posted a net loss of
$13.1 million, which includes a non-cash after-tax charge of $14.6 million in
conjunction with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". Excluding the impact of the inventory impairment loss in
the second quarter of 1996, net income was $2.9 million or $0.14 per share
during the first nine months of 1996.
On January 8, 1997, the Company acquired Melody Homes, Inc., a leading
homebuilder and 43-year old company in the Denver metropolitan area of
Colorado, and Melody Mortgage Company, a mortgage brokerage firm for Melody
home buyers. The Company's Colorado operations have positively impacted the
Company's 1997 financial results with strong sales rates and margins, while
the Company's Hawaii operations and financial results continue to reflect
weaknesses in Hawaii's market and resulting declines in homes sales rates,
prices and profit margins. The Company anticipates that the Hawaii
division's financial results will continue to be adversely affected by fewer
closings of home sales, lower revenues and reduced margins in 1997 as
compared to 1996.
On July 31, 1997, the Company acquired a 49% interest in Stafford Homes
(Stafford), a homebuilder in the greater Seattle/Puget Sound area of
Washington state. The Company has an option to purchase the remaining 51%
interest in Stafford, subject to certain contingencies. The Stafford
homebuilding companies, founded by Brien Stafford in 1967, focus primarily on
the entry-level, and first and second move-up markets. The Company's income
from unconsolidated joint ventures was positively impacted by approximately
$150,000, related to the Company's share of Stafford's 1997 third quarter
earnings.
11
<PAGE>
The following table sets forth, for the periods indicated, the percentage of
the Company's sales represented by each income statement line item presented.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN
THREE MONTHS ENDED SEPTEMBER 30, DOLLAR AMOUNTS FROM
-------------------------------- --------------------
1997 1996 1996 TO 1997
------ ------ ------------
<S> <C> <C> <C>
Residential real estate sales. . . . . . . . 100.0% 100.0% 178.1%
Costs and expenses
Residential real estate sales. . . . . . . 79.7 82.5 168.6
Selling and commissions. . . . . . . . 7.7 9.3 131.7
General and administrative . . . . . . . . 6.5 4.9 267.4
---- ----
Total costs and expenses . . . . . . . 93.9 96.7 170.0
Income from unconsolidated joint ventures. . 0.3 0.1 1,157.1
---- ----
Operating income . . . . . . . . . . . . . 6.4 3.4 428.4
Other income (expense) . . . . . . . . . . . (1.8) 0.2 (2,517.8)
---- ----
Income before provision for
income taxes . . . . . . . . . . . . . . . 4.6 3.6 260.0
Provision for income taxes . . . . . . . . . 1.7 1.4 256.0
---- ----
Net income . . . . . . . . . . . . . . . . 2.9% 2.2% 262.5%
---- ----
---- ----
<CAPTION>
PERCENTAGE CHANGE IN
NINE MONTHS ENDED SEPTEMBER 30, DOLLAR AMOUNTS FROM
------------------------------- --------------------
1997 1996 1996 TO 1997
------ ------ ------------
Residential real estate sales. . . . . . . . 100.0% 100.0% 127.9%
Costs and expenses
Residential real estate sales. . . . . . 80.8 81.3 126.5
Inventory impairment loss. . . . . . . . -- 33.3 (100.0)
Selling and commissions. . . . . . . . . 7.7 8.2 113.7
General and administrative . . . . . . . 6.2 4.3 230.2
---- ----
Total costs and expenses . . . 94.7 127.1 69.8
Income from unconsolidated joint ventures. . 0.1 0.2 68.4
---- ----
Operating income (loss) . . . . . . . . . 5.4 (26.9) 145.7
Other income (expense) . . . . . . . . . . . (1.8) 0.3 (1,272.8)
---- ----
Income (loss) before provision for
income taxes . . . . . . . . . . . . . . 3.6 (26.6) 131.2
Provision (credit) for income taxes. . . . . 1.4 (10.4) 130.3
---- ----
Net income (loss). . . . . . . . . . . . 2.2% ( 16.2)% 131.7%
---- ----
---- ----
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS
SALES OF RESIDENTIAL REAL ESTATE
The Company's sales of residential real estate (revenues) increased
during the quarter and nine months ended September 30, 1997 as compared to
the same periods in 1996, primarily reflecting a larger number of sales
closed in 1997 at lower average sales prices than in 1996. The increased
number of closings came primarily from the Colorado division (acquired in
January of 1997), as the number of sales closed in the Hawaii division
declined in 1997 as compared to 1996. In addition, the Company's California
division closed its first 3 home sales during the quarter ended September 30,
1997. The average revenue recognized per unit in 1997 is lower than in 1996
primarily due to (1) the lower average sales prices of homes in Colorado as
compared to homes in Hawaii, and (2) the increased level of price discounts
and sales incentives offered to prospective home buyers in Hawaii.
The Company's sales of residential real estate (revenues) for the quarter
ended September 30, 1997 were approximately $61.1 million as compared to
approximately $22.0 million during the quarter ended September 30, 1996.
This represents an increase of approximately $39.1 million or 178.1%. For
the third quarter of 1997, the revenues are related to 368 sales closed
(excludes 52 sales closed by the Company's joint ventures and 3 sales closed
under the Company's "zero-down" sales program) during the quarter. The
average revenue recognized was $166,000 per unit for the third quarter of
1997 compared to the 1996 third quarter average of $236,000. Revenue and
profit recognition on "zero-down" sales are deferred until the down payment
requirement for revenue and profit recognition is satisfied.
The Company's sales of residential real estate (revenues) were $163.5
million for the nine months ended September 30, 1997, compared to $71.7
million during the same period in 1996, an increase of 127.9%. For the nine
months ended September 30, 1997, the revenues are related to 919 sales
closed (excludes 62 sales closed by the Company's joint ventures and 19 sales
closed under the Company's "zero-down" sales program). For the first nine
months of 1997, approximately $10.1 million of total revenue is related to 53
sales that closed in 1996 under the Company's "zero-down" sales program, for
which the second mortgage notes were sold during the 1997 first quarter.
Pre-tax profit of $762,000 was recognized in connection with the sale of the
53 second mortgages. Revenue and profit recognition on these "zero-down"
sales was deferred in 1996 until the requirements for revenue and profit
recognition were satisfied, which occurred during the first quarter of 1997.
The average revenue recognized was $178,000 per unit for the first nine
months of 1997, compared to the first nine months of 1996 average of $236,000.
The following table sets forth the number of sales closed during the
quarter and nine months ended September 30, 1997 and 1996, which includes
closings of homes and lots sold pursuant to the Company's "zero-down" sales
program and 100% of the sales closed at projects developed by the Company's
joint ventures in Hawaii and Washington.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
1997 1996 1997 1996
-------- --------- ---------- ---------
<S> <C> <C> <C> <C>
California 3 -- 3 --
Colorado 288 -- 703 --
Hawaii 93(1) 129(3) 255(4) 381(5)
Pacific Northwest 39(2) -- 39(2) --
---- ----- ----- ----
Total 423 129 1,000 381
---- ----- ----- ----
---- ----- ----- ----
</TABLE>
(1) Includes 3 closings under the Company's "zero-down" sales program and 13
closings by the Company's joint ventures.
(2) Includes 39 closings by the Company's joint venture.
(3) Includes 25 closings under the Company's "zero-down" sales program and 11
closings by the Company's joint ventures.
13
<PAGE>
(4) Includes 19 closings under the Company's "zero-down" sales program and 23
closings by the Company's joint ventures.
(5) Includes 42 closings under the Company's "zero-down" sales program and 35
closings by the Company's joint ventures.
The number of Hawaii home sales closed in the first nine months of 1997
has declined as compared to the first nine months of 1996, primarily as a
result of the reduction in home sales rates during the periods, which have
been declining since 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. The Company anticipates that the Hawaii
division's financial results will continue to be adversely affected by fewer
closings of home sales, lower revenues and reduced margins in 1997 as
compared to 1996.
During 1995 and 1996, Hawaii's unemployment rate has been higher than the
national average. Jobs in Hawaii declined by approximately 0.5% to 2.0% per
year from 1992 through 1996. Any increases in Hawaii's unemployment rate or
continued lack of job growth may further 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, such as project management
activities, and miscellaneous construction costs.
Cost of residential real estate sales increased to approximately $48.7
million during the quarter ended September 30, 1997 from approximately $18.1
million during the same period in 1996, representing an increase of
approximately $30.6 million or 168.6%. This increase in the third quarter
of 1997 as compared to the third quarter of 1996 is primarily the result of
the increased number of home sales closed in the third quarter of 1997 as
compared to the third quarter of 1996.
Cost of residential real estate sales as a percentage of sales of 79.7%
in the third quarter of 1997 decreased from 82.5% in the third quarter of
1996, and reflects higher profit margins realized in the Company's Colorado
division offset by lower profit margins realized by Hawaii projects as a
result of the higher level of price discounts and sales incentives offered to
prospective home buyers in Hawaii. The Company anticipates that an increased
level of price discounts and sales incentives offered by its Hawaii division
will continue to affect its operating results in future periods and no
assurances can be given that they will not increase to even greater levels
than reached in the past.
The cost of residential real estate sold increased from approximately
$58.3 million during the nine months ended September 30, 1996 to
approximately $132.2 million during the same period in 1997, representing an
increase of approximately $73.9 million or 126.5%, primarily reflecting the
larger volume of home sales closed in 1997 as compared to 1996.
The cost of residential real estate sold as a percentage of sales
decreased from 81.3% for the nine months ended September 30, 1996 to 80.8%
for the nine months ended September 30, 1997. The decrease in the cost of
residential real estate sold as a percentage of sales reflects higher margins
realized by the Colorado division offset by the lower margins realized by the
Hawaii division including the impact of the recognition of costs related to
the 53 "zero-down" sales deferred in 1996 and recognized in the first quarter
of 1997 as a result of the sale of the related second mortgages.
14
<PAGE>
Total interest incurred during each of the quarters ended September 30,
1997 and 1996 was approximately $3.1 million and $2.0 million, respectively.
All amounts incurred were, except for approximately $855,000 in the third
quarter of 1997, capitalized to development projects. Interest capitalized
to projects is expensed through cost of residential real estate sales as
sales are closed and revenue is recognized in the particular project.
Average debt outstanding was approximately $167.5 million and $116.8
million during the third quarters of 1997 and 1996, respectively. The
Company's average interest rate on its debt for the quarters ended September
30, 1997 and 1996 was approximately 7.3% and 7.0%, respectively. The
Company's notes payable bear interest based on prime or LIBOR. Changes in
the prime or LIBOR rates will affect the amount of interest being capitalized
to inventory and subsequently expensed through cost of residential real
estate sales as sales are closed and revenue is recognized.
COSTS AND EXPENSES - SELLING AND COMMISSIONS
Sales and marketing costs represented approximately 7.7% and 9.3% of
sales of residential real estate during the quarters ended September 30, 1997
and 1996, respectively. Such costs represented approximately 7.7% and 8.2%
of residential real estate sales during the nine months ended September 30,
1997 and 1996, respectively. The decrease in the third quarter of 1997 and
nine months then ended is primarily the result of the lower relative level of
selling and commission costs incurred by the Company's Colorado division, as
compared to the Hawaii division, offset in part by increases in the level of
selling and commission costs in Hawaii.
COSTS AND EXPENSES - GENERAL AND ADMINISTRATIVE
General and administrative expense includes salaries, office and other
administrative costs. Indirect costs attributable to specific projects are
capitalized and deducted as part of cost of residential real estate sales.
General and administrative expenses increased by $2.8 million or 267.4%
during the third quarter of 1997 and by $7.1 million or 230.2% during the
first nine months of 1997 as compared to the same periods in 1996 primarily
due to the addition of the Colorado division and the start-up of operations
in Northern California and the Pacific Northwest. As a percentage of sales,
general and administrative expense increased from 4.9% during the quarter
ended September 30, 1996 to 6.5% during the quarter ended September 30, 1997
and from 4.3% during the first nine months of 1996 to 6.2% during the first
nine months of 1997, which is a result of the same items mentioned in the
preceding sentence.
INCOME FROM UNCONSOLIDATED JOINT VENTURES
Income from unconsolidated joint ventures primarily represents the
Company's 49% interest in the operations of Stafford Homes. Also included is
the Company's 50% interest in the operations of two joint ventures in Hawaii.
The increase in this income from the first nine months of 1996 to the same
period in 1997 is primarily the result of the acquisition of the 49% interest
in Stafford Homes on July 31, 1997.
OTHER INCOME (EXPENSE)
Other income (expense) is primarily composed of interest income of
$50,000 and $45,000 earned on cash balances and notes receivable during the
quarters ended September 30, 1997 and 1996, respectively, offset in the 1997
third quarter by a) approximately $910,000 of financing costs (primarily
including interest of $855,000) expensed and not capitalized resulting from
reduced construction activity in Hawaii and the acquisition of Melody Homes
and Mortgage, and b) amortization of goodwill and the covenant-not-to-compete
of $181,000 also associated with the acquisition of Melody Homes
15
<PAGE>
and Mortgage.
Other income (expense) is primarily composed of interest income earned on
cash balances and notes receivable during the nine months ended September 30,
1997 and 1996, respectively, offset in the first nine months of 1997 by the
same items mentioned in the preceding paragraph.
PROVISION (CREDIT) FOR INCOME TAXES
The Company's effective income tax rate for the third quarters of 1997
and 1996 was approximately 37.9% and 38.4%, respectively. The lower effective
tax rate in the third quarter of 1997 primarily reflects the lower Colorado
state income tax rate as compared to Hawaii's state income tax rate.
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 net 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 the real estate markets and economies in states in which the
Company operates; 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'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 in 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. 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.
16
<PAGE>
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 September 30, 1997 and 1996, which includes homes and
lots sold pursuant to the Company's "zero-down" sales program and 100% of the
backlog related to projects developed by the Company's joint ventures in
Hawaii and Washington.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------------- -------------------------
AGGREGATE AGGREGATE
NUMBER SALES VALUE NUMBER SALES VALUE
------- ------------- ------ ------------
<S> <C> <C> <C> <C>
California 16 $ 2,180,000 - $ -
Colorado 344 51,225,000 - -
Hawaii (1) 96 26,321,000 121 27,629,000
Pacific Northwest (2) 61 12,991,000 - -
------ ----------- ------ -----------
Total 517 $92,717,000 121 $27,629,000
------ ----------- ------ -----------
------ ----------- ------ -----------
</TABLE>
(1) Includes 6 units and 14 units in backlog at the Company's joint venture
projects in Hawaii at September 30, 1997 and September 30, 1996,
respectively.
(2) Includes 47 units in backlog at the Company's joint venture projects in
Washington at September 30, 1997.
The Company has observed an increase in its historical cancellation rates
in Hawaii, which the Company believes to be attributable to uncertainty of
prospective home buyers as to, and to their general lack of confidence in,
the Hawaiian economy. The Company's historical cancellation experience
(which prior to 1995 had been nominal) may not be indicative of cancellations
in future periods.
The average sales prices of the homes and lots comprising backlog at
September 30, 1997 and 1996 were $179,000 and $228,000, respectively. The
decrease in average sales prices primarily reflects the lower average sales
prices in Colorado, as compared to Hawaii and the increased level of sales
price discounts and sales incentives offered in Hawaii. 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 the Company's joint ventures in Hawaii
and Washington.
LIQUIDITY AND CAPITAL RESOURCES
In March 1997, the Company amended its Credit Agreement, increasing the
unsecured revolving line of credit facility from $110 million to $137.6
million, and adding Bank One, Arizona, N.A. to the lending group. The
facility expires on July 1, 1999 and includes an option for the lenders to
extend the term for an additional year. The Company can select an interest
rate based on either LIBOR (1, 2, 3 or 6 month term) or prime for each
borrowing. Based on the Company's leverage ratio, as defined, the interest
rate may vary from LIBOR plus 1.5% to 2% or prime plus 0% to 0.25%. The
Company's current rate is LIBOR plus 1.75% or prime plus 0%. The Company's
ability to draw upon its line of credit is dependent upon meeting certain
financial ratios and covenants. At October 31, 1997, the Company had bank
notes payable of approximately $102.4
17
<PAGE>
million.
On January 8, 1997, the Company completed the acquisition of Melody
Homes, Inc. ("Melody"), a homebuilder in the Denver metropolitan area of
Colorado, 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 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.
The Company has a note payable to a land seller with a principal balance
of approximately $1.7 million at September 30, 1997, which relates to land
purchased for future residential development. The note is secured by a
mortgage on the purchased land.
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 September 30, 1997, the Company had bank notes payable of
approximately $101.8 million. Peak outstanding debt, including bank
borrowings and the Convertible Subordinated Debentures, during the quarter
ended September 30, 1997 was $172.8 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 sellers of land
purchased. The Company's business and earnings are substantially dependent
on its ability to obtain debt financing on acceptable terms. Although the
Company has in the past been able to obtain credit facilities on acceptable
terms and believes virtually all of its currently planned construction
projects will be funded by a combination of cash flow from operations and
bank or other financing, no assurance can be given that it will be able to
obtain such bank or other debt financing or that any such financing will be
on terms acceptable to the Company. Further, the availability of borrowed
funds to homebuilders, especially for land acquisition and construction
financing, has been severely restricted and in some cases eliminated
entirely. In compliance with federal guidelines, certain lenders are now
requiring increased equity commitments by borrowers in connection with both
new loans and the extension of existing loans.
The Company believes that cash flow from operations, and borrowings under
its credit facilities will provide adequate cash to fund the Company's
operations at least through 1998.
At October 31, 1997, the Company has a commitment to purchase a parcel of
land for approximately $1 million, including land to be acquired for
development by the Company. The Company expects to utilize a combination of
cash flow from operations and bank financing to purchase the land parcel.
The Company intends to consummate the purchase of the land parcel in 1997.
However, no assurances can be given that the purchase will be completed or
that the land under purchase option will be acquired.
On July 31, 1997 the Company (through a new wholly-owned subsidiary, SHLR
of Washington, Inc., incorporated in the state of Washington) acquired a 49%
interest in a homebuilder in the state of Washington. The Company has an
option to purchase the remaining 51% interest, subject to certain
contingencies. In connection with this acquisition, the Company entered into
an agreement to make revolving loans to the acquiree in an aggregate
principal amount of up to $5 million.
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.
18
<PAGE>
SCHULER HOMES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time involved in routine litigation or
threatened litigation arising in the ordinary course of its business.
Such matters, if decided adversely to the Company, would not, in the
opinion of management, have a material adverse effect on the financial
condition of the Company.
In April 1996, the Company was served with a lawsuit by owners of
units and the Association of Owners of Fairway Village at Waikele, who
sought 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. However, this litigation is at an early stage of
discovery. Based upon its current understanding of the lawsuit, the
Company believes (at this early stage of litigation) the claims to be
largely without merit, or that meritorious defenses, together with
potential third party defendants and insurance coverage, exist to
offset a material portion of the related claims. The Court has denied
the motion to certify the class, and the litigation continues to be
vigorously defended. However, 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.
Item 2. Changes in Securities
A non-statutory stock option for 15,000 shares of Common Stock was
approved to be granted to Mr. Brien Stafford, president of Stafford
Homes, at an exercise price of $5.875 per share. Each option will
become exercisable for 25% of the option shares after 12 months of
continued service from the date of grant. The balance of the option
shares will become exercisable in a series of 36 successive equal
monthly installments upon the optionee's completion of each additional
month of service measured from the first anniversary of the date of
grant. The options have a 10-year life and expire on July 30, 2007.
Exemption from the requirement to file a registration statement is
claimed under Section 4(2) of the Securities Act of 1933.
Items 3 through 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Number Document Description
-------------- ---------------------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K for the
quarter ended September 30, 1997.
19
<PAGE>
SCHULER HOMES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SCHULER HOMES, INC.
Date: November 12, 1997 By: /s/ James K. Schuler
-----------------------------
James K. Schuler
Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: November 12, 1997 By: /s/ Pamela S. Jones
-----------------------------
Pamela S. Jones
Senior Vice President of Finance,
Chief Financial Officer and
Director (principal financial officer)
Date: November 12, 1997 By: /s/ Douglas M. Tonokawa
-----------------------------
Douglas M. Tonokawa
Vice President of Finance,
Chief Accounting Officer
(principal accounting officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements and notes thereto included in the
Company's Form 10-Q for the quarterly period ended September 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 546,000
<SECURITIES> 0
<RECEIVABLES> 899,000
<ALLOWANCES> 0
<INVENTORY> 294,512,000
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 339,985,000
<CURRENT-LIABILITIES> 0
<BONDS> 57,500,000
0
0
<COMMON> 209,000
<OTHER-SE> 93,096,000
<TOTAL-LIABILITY-AND-EQUITY> 339,985,000
<SALES> 61,057,000
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 57,312,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,833,000
<INCOME-TAX> 1,075,000
<INCOME-CONTINUING> 1,758,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,758,000
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
