<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 June 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 July 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 - June 30, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Income - Three and six months
ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - Six
months ended June 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 June 30, 1997, and the related consolidated
statements of income for the three-month and six-month periods ended June 30,
1997 and 1996, and the consolidated statements of cash flows for the
six-month periods ended June 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
August 12, 1997
3
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents (Note 2) . . . . . . . $ 506,000 $ 1,619,000
Receivables . . . . . . . . . . . . . . . . . . 915,000 425,000
Prepaid income taxes . . . . . . . . . . . . . . 2,810,000 2,604,000
Amount due from affiliate (Note 5) . . . . . . . 19,000 26,000
Real estate inventories (Note 3) . . . . . . . . 291,068,000 236,569,000
Investments in unconsolidated joint ventures . . 11,657,000 11,611,000
Deposits . . . . . . . . . . . . . . . . . . . . 200,000 483,000
Deferred offering costs. . . . . . . . . . . . . 1,285,000 1,399,000
Notes receivable (Note 2). . . . . . . . . . . . 2,095,000 3,944,000
Deferred income taxes. . . . . . . . . . . . . . 5,235,000 7,356,000
Intangibles (Note 7) . . . . . . . . . . . . . . 14,103,000 --
Other assets . . . . . . . . . . . . . . . . . . 3,750,000 1,122,000
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . $333,643,000 $267,158,000
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . . . . . . . $ 2,363,000 $ 593,000
Accrued expenses . . . . . . . . . . . . . . . . . . . 8,804,000 6,910,000
Notes payable to banks (Note 4). . . . . . . . . . . . 103,900,000 44,690,000
Note payable to others (Note 3). . . . . . . . . . . . 1,675,000 ---
6-1/2% convertible subordinated debentures due 2003. . 57,500,000 57,500,000
------------ --------------
Total liabilities. . . . . . . . . . . . . . . . . . . 174,242,000 109,693,000
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
June 30, 1997 and December 31, 1996 . . . . . . . 209,000 209,000
Additional paid-in capital. . . . . . . . . . . . . 93,096,000 93,096,000
Retained earnings . . . . . . . . . . . . . . . . . 71,096,000 69,160,000
Treasury stock, at cost; 774,000 shares at
June 30, 1997 and December 31, 1996 . . . . . . . (5,000,000) (5,000,000)
------------ --------------
Total stockholders' equity . . . . . . . . . . . . . . 159,401,000 157,465,000
------------ --------------
Total liabilities and stockholders' equity . . . . . . $333,643,000 $267,158,000
------------ --------------
------------ --------------
</TABLE>
See accompanying notes.
4
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Residential real estate sales. . . . . . . . . . . . $52,457,000 $ 29,820,000 $102,452,000 $ 49,785,000
Costs and expenses . . . . . . . . . . . . . . . . .
Residential real estate sales. . . . . . . . . . . 42,021,000 24,010,000 83,485,000 40,223,000
Inventory impairment loss . . . . . . . . . . . . --- 23,910,000 --- 23,910,000
Selling and commissions. . . . . . . . . . . . . . 4,303,000 2,263,000 7,766,000 3,806,000
General and administrative . . . . . . . . . . . . 3,379,000 1,121,000 6,299,000 2,027,000
----------- ------------ ------------ ------------
Total costs and expenses . . . . . . . . . . . . 49,703,000 51,304,000 97,550,000 69,966,000
Income from unconsolidated joint ventures. . . . . . 9,000 12,000 16,000 100,000
----------- ------------ ------------ ------------
Operating income (loss). . . . . . . . . . . . . . 2,763,000 (21,472,000) 4,918,000 (20,081,000)
Other income (expense) . . . . . . . . . . . . . . . (898,000) 40,000 (1,797,000) 201,000
----------- ------------ ------------ ------------
Income (loss) before provision for income taxes. . 1,865,000 (21,432,000) 3,121,000 (19,880,000)
Provision (credit) for income taxes (Note 6) . . . . 706,000 (8,358,000) 1,185,000 (7,754,000)
----------- ------------ ------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . $ 1,159,000 $(13,074,000) $ 1,936,000 $(12,126,000)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Net income (loss) per share (Note 8):
Primary. . . . . . . . . . . . . . . . . . . . . . $ 0.06 $ (0.63) $ 0.10 $ (0.58)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Fully diluted. . . . . . . . . . . . . . . . . . . $ 0.06 $ (0.63) $ 0.10 $ (0.58)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
See accompanying notes.
5
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,936,000 $(12,126,000)
Adjustments to reconcile net income to net cash provided by. . . . . . . . . . . . .
operating activities:
Inventory impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 23,910,000
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . 573,000 94,000
Income from unconsolidated joint ventures . . . . . . . . . . . . . . . . . . . 7,000 (111,000)
Sales financed by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . (262,000) (653,000)
Principal payments of notes receivable. . . . . . . . . . . . . . . . . . . . . 1,615,000 105,000
Changes in assets and liabilities, net of effects from purchase of Melody Homes
and Mortgage:
Decrease in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619,000 141,000
(Increase) decrease in prepaid income taxes . . . . . . . . . . . . . . . . . . (206,000) 320,000
(Increase) in real estate inventories . . . . . . . . . . . . . . . . . . . . . (13,860,000) (31,566,000)
Decrease in deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,000 951,000
(Increase) in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,039,000) (839,000)
(Decrease) in accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . (3,004,000) (494,000)
Increase in accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 2,344,000 726,000
Change in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 2,121,000 (8,345,000)
----------- -----------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . (8,873,000) (27,887,000)
INVESTING ACTIVITIES
Payment for purchase of Melody Homes and Mortgage, net of cash acquired. . . . . . . (29,508,000) ---
Advances to unconsolidated joint venture . . . . . . . . . . . . . . . . . . . . . . (122,000) (3,076,000)
Repayments of advances to unconsolidated joint venture . . . . . . . . . . . . . . . 70,000 2,612,000
Capital distributions from unconsolidated joint venture. . . . . . . . . . . . . . . --- 24,000
Purchase of furniture, fixtures, and equipment . . . . . . . . . . . . . . . . . . . (344,000) (17,000)
----------- -----------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . (29,904,000) (457,000)
FINANCING ACTIVITIES
Proceeds from bank borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,191,000 77,143,000
Principal payments on bank borrowings. . . . . . . . . . . . . . . . . . . . . . . . (67,648,000) (53,884,000)
Advances to affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48,000) (62,000)
Repayment of advances to affiliate . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 63,000
Net decrease in deferred offering costs. . . . . . . . . . . . . . . . . . . . . . . 114,000 115,000
Reacquisition of the Company's common stock. . . . . . . . . . . . . . . . . . . . . --- (315,000)
----------- -----------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . 37,664,000 23,060,000
----------- -----------
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,113,000) (5,284,000)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . 1,619,000 6,147,000
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . $ 506,000 $ 863,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
6
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
These financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements for the year ended December 31, 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.
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
satisfied. 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. Cumulative revenue and gross profit remaining
deferred on such transactions as of June 30, 1997 are $6,096,000 and
$785,000, respectively.
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
7
<PAGE>
other items. Accordingly, there exists at any date, a reasonable
possibility that changes in estimates will occur in subsequent periods.
Real estate inventories at June 30, 1997 consist of the following:
Unimproved land held for future development . . . . . . . 62,971,000
Development projects in progress. . . . . . . . . . . . . 174,620,000
Completed inventory (including lots held for sale). . . . 53,477,000
------------
$291,068,000
------------
------------
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
$1,675,000 at June 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 June 30, 1997, $33,700,000 of the Company's line of credit is unused, of
which $178,000 is restricted as to withdrawal for project expenses and
$3,026,000 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 June 30, 1997, the Company's outstanding borrowings
were at interest rates of LIBOR plus 1.75% (7.5% ) 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 $1,993,000 during the
quarter ended June 30, 1997. Interest incurred during the quarter ended
June 30, 1997 totaled $2,978,000, of which approximately $2,272,000 was
capitalized to real estate inventories and approximately $706,000 was
expensed (included in Other income (expense)) and not capitalized. The
difference between the amount of interest paid 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 June 30, 1997 totaled
$1,435,000.
5. Related Party Transactions
The Company charged $19,000 for the quarter ended June 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 June 30,
1997, the $19,000 was included in Amount Due from Affiliate. Subsequent to
June 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 June 30, 1997,
legal fees of approximately $33,000 to such firms were incurred by the
Company.
6. Income Taxes
During the three months ended June 30, 1997, the Company paid income taxes
of $235,000.
8
<PAGE>
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 June 30, 1997 is approximately $362,000.
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 six-month period ended June
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 six-month period ended June 30, 1996 were computed
using the weighted average number of common shares outstanding during the
periods of 20,865,307 and 20,869,742, respectively.
The computation of fully diluted earnings per share for the quarters and
six-month periods ended June 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.
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 six-month periods ended June 30, 1997 and 1996 is not
material.
9. Commitments and Contingencies
At June 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.
9
<PAGE>
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.
11. Subsequent Event
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.
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 June 30, 1997, sales of residential real estate
(revenue) were $52.5 million and operating income was $2.8 million, compared to
revenues of $29.8 million and an operating loss of $21.5 million during the
second quarter last year. Net income was $1.2 million ($0.06 per share) for the
quarter ended June 30, 1997. 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".
For the first half of 1997, the Company reported sales of residential real
estate of $102.5 million, compared to sales of $49.8 million during the first
half of 1996. Net income was $1.9 million or $0.10 per share during the six
months ended June 30, 1997, as compared to net loss of $12.1 million or $0.58
per share during the same period in the prior year. Excluding the impact of the
inventory impairment loss in the second quarter of 1996, net income was $1.5
million or $0.07 per share during the second quarter of 1996 and $2.5 million or
$0.12 per share during the first half of 1996.
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.
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>
Three months ended June 30, Percentage Change in
--------------------------- Dollar Amounts From
1997 1996 1996 to 1997
---- ---- ------------
<S> <C> <C> <C>
Residential real estate sales. . . . . . . . . . . . 100.0% 100.0% 75.9%
Costs and expenses
Residential real estate sales . . . . . . . . . . 80.1 80.5 75.0
Inventory impairment loss . . . . . . . . . . . . --- 80.2 (100.0)
Selling and commissions . . . . . . . . . . . . . 8.2 7.6 90.1
General and administrative. . . . . . . . . . . . 6.4 3.7 201.4
-------- ---------
Total costs and expenses . . . . . . . . . . . 94.7 172.0 (3.1)
Income from unconsolidated joint ventures. . . . . . --- --- (25.0)
-------- ---------
Operating income (loss) . . . . . . . . . . . . . 5.3 (72.0) 112.9
Other income (expense) . . . . . . . . . . . . . . . (1.7) 0.1 (2,345.0)
-------- ---------
Income (loss) before provision for income taxes. . . 3.6 (71.9) 108.7
Provision (credit) for income taxes. . . . . . . . . 1.4 (28.0) 108.4
-------- ---------
Net income (loss) . . . . . . . . . . . . . . . . 2.2% (43.9)% 108.9
-------- ---------
-------- ---------
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, Percentage Change in
--------------------------- Dollar Amounts From
1997 1996 1996 to 1997
---- ---- ------------
<S> <C> <C> <C>
Percentage Change in Dollar Amounts From
1996 to 1997
Residential real estate sales. . . . . . . . . . . . 100.0% 100.0% 105.8%
Costs and expenses
Residential real estate sales . . . . . . . . . . 81.5 80.8 107.6
Inventory impairment loss . . . . . . . . . . . . --- 48.0 (100.0)
Selling and commissions . . . . . . . . . . . . . 7.6 7.6 104.0
General and administrative. . . . . . . . . . . . 6.1 4.1 210.8
-------- ---------
Total costs and expenses . . . . . . . . . . . 95.2 140.5 39.4
Income from unconsolidated joint ventures. . . . . . --- 0.2 (84.0)
-------- ---------
Operating income (loss) . . . . . . . . . . . . . 4.8 (40.3) 124.5
Other income (expense) . . . . . . . . . . . . . . . (1.8) 0.4 (994.0)
-------- ---------
Income (loss) before provision for income taxes. . . 3.0 (39.9) 115.7
Provision (credit) for income taxes. . . . . . . . . 1.1 (15.6) 115.3
-------- ---------
Net income (loss) . . . . . . . . . . . . . . . . 1.9% ( 24.3)% 116.0
-------- ---------
-------- ---------
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS
SALES OF RESIDENTIAL REAL ESTATE
The Company's sales of residential real estate (revenue) increased during
the quarter and six months ended June 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 solely 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. 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 for the quarter ended June
30, 1997 were approximately $52.5 million as compared to approximately $29.8
million during the quarter ended June 30, 1996. This represents an increase
of approximately $22.6 million or 75.9%. For the second quarter of 1997, the
revenues are related to 324 sales closed (excludes 5 sales closed by the
Company's joint ventures and 7 sales closed under the Company's "zero-down"
sales program) during the quarter. The average revenue recognized was
$162,000 per unit for the second quarter of 1997 compared to the 1996 second
quarter average of $239,000. 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 $102.5
million for the six months ended June 30, 1997, compared to $49.8 million
during the same period in 1996, an increase of 105.8%. For the first six
months of 1997, the revenues include approximately $10.1 million 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 $176,000 per unit for the first six months
of 1997, compared to the first six months of 1996 average of $233,000.
The following table sets forth the number of sales closed during the
quarter and six months ended June 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 50% owned
joint ventures.
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
- --------------------------------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Hawaii 89 153 162 252
Colorado 247 -- 414 --
---- ---- ---- ----
Total 336 153 576 252
---- ---- ---- ----
---- ---- ---- ----
- --------------------------------------------------------------------------------
The number of Hawaii home sales closed in the first six months of 1997
has declined as compared to the first six 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.
13
<PAGE>
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 increased to approximately $42.0
million during the quarter ended June 30, 1997 from approximately $24.0
million during the same period in 1996, representing an increase of
approximately $18.0 million or 75.0%. This increase in the second quarter
of 1997 as compared to the second quarter of 1996 is primarily the result of
the increased number of home sales closed in the second quarter of 1997 as
compared to the second quarter of 1996.
Cost of residential real estate sales as a percentage of sales of 80.1%
in the second quarter of 1997 was relatively comparable to the 80.5% in the
second 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
$40.2 million during the six months ended June 30, 1996 to approximately
$83.5 million during the same period in 1997, representing an increase of
approximately $43.3 million or 107.6%, 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
increased from 80.8% for the six months ended June 30, 1996 to 81.5% for the
six months ended June 30, 1997. The increase 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.
Total interest incurred during each of the quarters ended June 30, 1997
and 1996 was approximately $3.0 million and $2.1 million, respectively. All
amounts incurred were, except for approximately $706,000 in the second
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 $164.4 million and $120.3
million during the second quarters of 1997 and 1996, respectively. The
Company's average interest rate on its debt for the quarters ended June 30,
1997 and 1996 was approximately 7.3% and 6.9%, respectively. The Company's
notes payable bear interest based on prime or LIBOR. Changes in the prime or
LIBOR rates will affect the amount of interest being capitalized to inventory
and subsequently expensed through cost of residential real estate sales as
sales are closed and revenue is recognized.
COSTS AND EXPENSES - INVENTORY IMPAIRMENT LOSS
During the fourth quarter of 1995, the Company changed its method of
accounting for the carrying amount of its real estate inventories by adopting
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." Under the new standard,
inventories which are substantially completed are carried at the lower of
cost or fair value less cost to sell. Fair value is determined by applying a
risk adjusted discount rate to estimates of future cash flows, resulting in a
lower value than under the net realizable value method previously required.
In addition, land held for future development or inventories under current
development are adjusted to fair value, only if an impairment to their value
is indicated.
14
<PAGE>
The estimates of future cash flows require significant judgment relating
to the level of sales prices, rate of new home sales, amount of marketing
costs and price discounts needed in order to stimulate sales, rate of
increase in the cost of building materials and labor, introduction of
building code modifications, and level of consumer confidence in Hawaii's
economy, among other items. Accordingly, there exists at any date, a
reasonable possibility that changes in estimates will occur in subsequent
periods.
The financial results for the second quarter of 1996 included a non-cash
charge pursuant to FASB Statement No. 121. The FASB Statement No. 121
non-cash charge had a net after-tax impact of $14.6 million or $0.70 per
share in the second quarter of 1996, resulting in a net after-tax loss of
$13.1 million or $0.63 per share for the quarter and a net loss of $12.1
million or $0.58 per share for the six month period. The second quarter 1996
charge relates principally to the Company's completed inventories at June 30,
1996. While the Company had been working to reduce completed inventories in
its projects, the then current real estate environment and other factors
dictated that the Company adopt a more conservative outlook with respect to
the future performance of its completed inventories. The Company's completed
inventories increased during the second quarter of 1996 primarily due to the
substantial completion of the second high-rise building at the Company's
Country Club Village project located in Salt Lake on Oahu. The Company has
postponed the construction of the third and last high-rise building in order
to reduce completed inventories in this project in the future.
COST AND EXPENSES - SELLING AND COMMISSIONS
Sales and marketing costs represented approximately 8.2% and 7.6% of
sales of residential real estate during the quarters ended June 30, 1997 and
1996, respectively. Such costs represented approximately 7.6% of
residential real estate sales during the six months ended June 30, 1997 and
1996. The increase in the second quarter of 1997 is a result of 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 $2.3 million or 201.4%
during the second quarter of 1997 and by $4.3 million or 210.8% during the
first half 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 3.7% during the quarter
ended June 30, 1996 to 6.4% during the quarter ended June 30, 1997 and from
4.1% during the first half of 1996 to 6.1% during the first half of 1997,
which is a result of the same items mentioned in the preceeding sentence.
INCOME FROM UNCONSOLIDATED JOINT VENTURES
Income from unconsolidated joint ventures primarily represents the
Company's 50% interest in the operations of Waiakoa Estates Subdivision Joint
Venture and Iao Partners, the joint ventures developing the Waiakoa Kai
Estates and Iao Parkside projects, respectively. The decrease in this income
from the first half of 1996 to the same period in 1997 is primarily the
result of the closing of fewer homes during the first half of 1997 as
compared to the comparable period in 1996, and lower profit margins realized
for the Iao Parkside project during the first half of 1997 as compared to the
first half of 1996.
OTHER INCOME (EXPENSE)
Other income (expense) is primarily composed of interest income of
$90,000 and $40,000 earned on cash balances and notes receivable during the
quarters ended June 30, 1997 and 1996, respectively, offset in the 1997
second quarter by a) approximately $754,000 of financing costs (primarily
including interest of $706,000) expensed and not capitalized resulting from
the acquisition of Melody Homes and Mortgage and reduced construction
activity in Hawaii, and b) amortization of goodwill and the
covenant-not-to-compete of $178,000 also associated with the acquisition of
Melody Homes and Mortgage.
Other income (expense) is primarily composed of interest income earned on
cash balances and notes receivable during
15
<PAGE>
the six months ended June 30, 1997 and 1996, respectively, offset in the
first six 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 second quarters of 1997
and 1996 was approximately 37.9% and 39%, respectively. The lower
effective tax rate in the second 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.
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 June 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 50% owned joint
ventures.
June 30, 1997 June 30, 1996
------------- -------------
16
<PAGE>
Aggregate Aggregate
Number Sales Value Number Sales Value
------ ----------- ------ ------------
Hawaii 106 25,336,000 155 36,003,000
Colorado 383 57,294,000 --- ---
Pacific Northwest 2 345,000 --- ---
------ ----------- ------ ------------
Total 491 $82,975,000 155 $36,003,000
------ ----------- ------ ------------
------ ----------- ------ ------------
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 June
30, 1997 and 1996 were $169,000 and $232,000, 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 Waiakoa Estates Subdivision Joint Venture and
Iao Partners, the Company's two joint ventures developing the Waiakoa Kai
Estates and Iao Parkside projects, respectively.
LIQUIDITY AND CAPITAL RESOURCES
In March 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 July 31, 1997, the Company had bank
notes payable of approximately $108.9 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 June 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 June 30, 1997, the Company had bank notes payable of approximately $103.9
million. Peak outstanding debt, including bank borrowings and the Convertible
Subordinated Debentures, during the quarter ended June 30, 1997 was $170.9
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
17
<PAGE>
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 1997.
At July 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.
Items 2 and 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held an Annual Meeting of Stockholders on May 23, 1997.
(b) At the Annual Meeting of Stockholders, the following directors were
elected:
Pamela S. Jones
Martin T. Hart
(c) At the Annual Meeting of Stockholders, the following matters were voted
upon:
(1) A proposal to ratify the selection of Ernst & Young LLP as
independent auditors for fiscal year 1997.
Affirmative votes: 20,060,148
Negative votes: 10,700
Abstain: 1,000
(2) A proposal to elect Pamela S. Jones to the board of directors.
Affirmative votes: 20,056,048
Withhold authority: 15,800
(3) A proposal to elect Martin T. Hart to the board of directors.
Affirmative votes: 20,056,048
Withhold authority: 15,800
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Number Document Description
-------------- --------------------
27.1 Financial Data Schedule.
19
<PAGE>
(b) Reports on Form 8-K. There were no reports on Form 8-K for the
quarter ended June 30, 1997.
SCHULER HOMES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SCHULER HOMES, INC.
Date: August 12, 1997 By: /s/ James K. Schuler
--------------------------
James K. Schuler
Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: August 12, 1997 By: /s/ Pamela S. Jones
--------------------------
Pamela S. Jones
Senior Vice President of Finance,
Chief Financial Officer and
Director (principal financial officer)
Date: August 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 JUNE 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 506,000
<SECURITIES> 0
<RECEIVABLES> 915,000
<ALLOWANCES> 0
<INVENTORY> 291,068,000
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 333,643,000
<CURRENT-LIABILITIES> 0
<BONDS> 57,500,000
0
0
<COMMON> 209,000
<OTHER-SE> 93,096,000
<TOTAL-LIABILITY-AND-EQUITY> 333,643,000
<SALES> 52,457,000
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<INCOME-PRETAX> 1,865,000
<INCOME-TAX> 706,000
<INCOME-CONTINUING> 1,159,000
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,159,000
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
