<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
SCHULER HOMES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1531 99-0293125
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
828 FORT STREET MALL, 4TH FLOOR
HONOLULU, HAWAII 96813
(808) 521-5661
(Address, including Zip Code, and Telephone Number, including Area Code,
of Registrant's Principal Executive Offices)
PAMELA S. JONES
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
828 FORT STREET MALL, 4TH FLOOR
HONOLULU, HAWAII 96813
(808) 521-5661
(Name, address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)
------------------
COPIES TO:
THOMAS A. BEVILACQUA, ESQ.
NORA L. GIBSON, ESQ.
BROBECK, PHLEGER & HARRISON LLP
TWO EMBARCADERO ROAD
2200 GENG ROAD
PALO ALTO, CA 94303
(650) 424-0160
------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
9% Senior Notes due 2008...................... $100,000,000 100% $100,000,000 $29,500
</TABLE>
(1) Pursuant to Rule 457(f)(2) of the Securities Act of 1933, as amended, the
registration fee has been estimated based on the book value of the
securities to be received by the Registrant in exchange for the securities
to be issued hereunder in the Exchange Offer described herein.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 25, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY AN
OFFER BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTIVE SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE SHOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE>
PROSPECTUS
SCHULER HOMES, INC.
[LOGO]
OFFER FOR ALL OUTSTANDING
9% SENIOR NOTES DUE 2008
IN EXCHANGE FOR
9% SENIOR NOTES DUE 2008
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
------------------------
Schuler Homes, Inc., a Delaware corporation ("Schuler Homes" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange its 9% Senior Notes due
2008 (the "Notes"), which have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to a Registration Statement (as
defined herein), of which this Prospectus is a part, for a like principal amount
of its outstanding 9% Senior Notes due 2008 (the "Old Notes"), of which $100.0
million principal amount is outstanding.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
, 1998 unless the Exchange Offer is extended (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time on the Expiration Date. The Notes will be issued and delivered
promptly after the Expiration Date. The Exchange Offer is not conditioned upon
any principal amount of the Old Notes being tendered for exchange. See "The
Exchange Offer." Old Notes may be tendered only in integral multiples of $1,000.
The Company has agreed to pay the expenses of the Exchange Offer.
The Notes will be obligations of the Company evidencing the same debt as the
Old Notes and will be entitled to the benefits of the same indenture, dated as
of May 6, 1998 (the "Indenture"), between the Company and U.S. Trust Company of
California, N.A., as trustee (the "Trustee"). The form and terms of the Notes
are substantially the same as the form and terms of the Old Notes except that
the Notes have been registered under the Securities Act. See "The Exchange
Offer."
The Notes will bear interest from May 6, 1998. Holders of Old Notes whose
Old Notes are accepted for exchange will be deemed to have waived the right to
receive any payment in respect of interest on the Old Notes accrued up until the
date of the issuance of the Notes. Such waiver will not result in the loss of
interest income to such Holders, since the Notes will bear interest from the
issue date of the Old Notes.
Interest on the Notes will be payable semi-annually on April 15 and October
15 of each year, commencing on October 15, 1998. The Notes will mature on April
15, 2008. Except as set forth below, the Notes will not be redeemable prior to
April 15, 2003. Thereafter, the Notes will be redeemable at the option of the
Company, in whole or in part, at the redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the date of redemption. In addition, at
any time on or prior to April 15, 2001, the Company may, subject to certain
requirements, redeem up to 35% of the original aggregate principal amount of the
Notes with the net cash proceeds of one or more Equity Offerings (as defined
herein), at 109.000% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of redemption; PROVIDED, that at least $65
million of Notes remain outstanding immediately after any such redemption. Upon
the occurrence of a Change of Control (as defined herein), each holder of the
Notes may require the Company to repurchase such holder's Notes, in whole or in
part, at 101% of the principal amount thereof plus accrued and unpaid interest,
if any, to the date of repurchase. See "Description of Notes -- Change of
Control."
Each broker-dealer that receives Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Notes. The Letter of
Transmittal states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Notes received in exchange for Old Notes where such Old Notes
were acquired by such broker-dealer as a result of market-making or other
trading activities. The Company has agreed that for a period of 180 days after
consummation of the Exchange Offer, it will make this Prospectus, as it may be
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
There has been no public market for the Old Notes. If a market for the Notes
should develop, the Notes could trade at a discount from their principal amount.
The Company does not intend to list the Notes on a national securities exchange
or quotation system. There can be no assurance that an active public market for
the Notes will develop.
--------------------------
SEE "RISK FACTORS" WHICH BEGINS ON PAGE 15 OF THIS PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISKS THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN
CONNECTION WITH THIS EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE."
--------------------------
The date of this Prospectus is , 1998.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-4 (herein, together with all
amendments and exhibits, referred to as the "Registration Statement") under the
Securities Act with respect to the Notes offered hereby. This Prospectus, which
forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which have
been omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Notes offered hereby,
reference is made to the Registration Statement. Statements contained in this
Prospectus as to the contents of certain documents filed as exhibits to the
Registration Statement are not necessarily complete and, in each case, are
qualified by reference to the document so filed.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. The
Registration Statement and such reports and other information can be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional offices of the Commission: New York Regional office, Seven
World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional
office, Citicorp Center, 500 West Madison Street, 14th Floor, Chicago, Illinois
60601. Copies of such material can be obtained from the Public Reference Section
of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission also maintains an Internet Web Site at
www.sec.gov that contains reports and other information.
The Company intends to furnish to each holder of the Notes annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year. The Company also will furnish to each holder of the Notes such other
reports as may be required by applicable law.
The principal executive offices of the Company are located at 828 Fort
Street Mall, 4th Floor, Honolulu, Hawaii 96813, and its telephone number is
(808) 521-5661.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27a OF THE SECURITIES ACT AND SECTION 21e OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS
OF HISTORICAL FACT INCLUDED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION,
STATEMENTS REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION, BUSINESS STRATEGY,
BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE
OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING
STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "ESTIMATES," "ANTICIPATE," "BELIEVE,"
"SHOULD," "PLANS" OR "CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR
SIMILAR TERMINOLOGY. WITHOUT LIMITING THE FOREGOING, FORWARD-LOOKING STATEMENTS
ARE SET FORTH HEREIN UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS." ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT
SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS
("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING: (I) THE
HOMEBUILDING
2
<PAGE>
INDUSTRY MARKET CONDITIONS; (II) INTEREST RATES AND MORTGAGE FINANCING; (III)
THE RISKS RELATED TO LEVERAGE AND THE POTENTIAL ADVERSE EFFECT OF INDEBTEDNESS
ON FUTURE OPERATIONS; (IV) GEOGRAPHIC CONCENTRATION AND THE RISKS OF EXPANSION;
(V) THE VARIABILITY OF RESULTS; (VI) COMPETITION; (VII) GOVERNMENT REGULATION
AND ENVIRONMENTAL MATTERS; (VIII) NATURAL DISASTERS; (IX) RISKS OF MATERIAL AND
LABOR SHORTAGES; (X) WARRANTY RISKS; AND (XI) LITIGATION. ALL SUBSEQUENT WRITTEN
AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS
ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONARY STATEMENTS.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-19891) pursuant to the Exchange Act are incorporated herein by reference and
made a part of this Prospectus:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1997.
2. The Company's Quarterly Report on Form 10-Q for the Quarter ended March
31, 1998.
3. The Company's current report on Form 8-K filed April 17, 1998.
4. The Company's current report on Form 8-K filed May 7, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Exchange Offer contemplated hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date such documents are filed. Any statement contained herein or in a document
incorporated by reference or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for all purposes of this Prospectus to
the extent that a statement contained herein or in any subsequently filed
document which also is incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON WRITTEN OR ORAL
REQUEST, WITHOUT CHARGE, TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS IS
DELIVERED, FROM PAMELA S. JONES, SECRETARY, SCHULER HOMES, INC., 828 FORT STREET
MALL, 4TH FLOOR, HONOLULU, HAWAII 96813, (TELEPHONE NO. (808) 521-5661).
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT WHERE OTHERWISE INDICATED, THE
"COMPANY" OR "SCHULER HOMES" MEANS SCHULER HOMES, INC. AND ITS SUBSIDIARIES.
THE COMPANY
OVERVIEW
Schuler Homes designs, constructs, markets and sells single-family
residences, townhomes and condominiums primarily to entry-level and first-time
move-up buyers. The Company operates in five geographic markets: Colorado,
Hawaii, Northern California, Oregon and Washington, four of which are among the
strongest housing markets in the United States. The Company offers a variety of
homes generally at prices ranging from approximately $125,000 to over $375,000,
with an average sales price of $172,000 in 1997.
Prior to 1997, the Company operated solely in the Hawaii market, one of the
country's strongest residential housing markets in the late 1980s and early
1990s. Due to a decline in the Hawaiian economy which negatively impacted the
Hawaiian residential housing market in the mid-1990s, the Company adopted a
strategic expansion plan in late 1996 and early 1997 designed to geographically
diversify the Company's operations outside of the Hawaii market and to improve
the Company's overall return on invested capital. The expansion plan provided
for the redeployment of capital generated by the Hawaii division to housing
markets in the Western United States that have experienced significant
population and employment growth in recent years. As a result of its aggressive
diversification efforts, the Company reported significantly improved financial
results in 1997 with revenues and EBITDA (as defined) of $229.6 million and
$23.5 million, respectively, as compared to $93.6 million and $10.0 million,
respectively, in 1996. In addition, in 1997 the Company (i) reduced its
completed and unsold housing inventory in Hawaii by approximately 37%, (ii)
generated approximately $32 million in cash flow in Hawaii, and (iii) derived
approximately 63% of its revenues from sales in markets outside of Hawaii.
Schuler Homes is one of the two largest builders of single-family
residences, townhomes and condominiums in Hawaii. Since inception in March 1988
through December 31, 1997, the Company closed the sales of 5,162 homes and lots,
of which 371 home and lot sales were closed during fiscal 1997. As of December
31, 1997, the Company had land zoned and entitled for 3,153 homes in Hawaii
supported by the requisite infrastructure, which the Company believes provides
it with a significant competitive advantage in the future given both the
concentration of land ownership and the lack of zoned and entitled property in
Hawaii.
Schuler Homes entered the Denver, Colorado homebuilding market in January
1997 through the purchase of Melody Homes, Inc. ("Melody"), a homebuilder for
over 45 years and one of the largest builders in the Denver market, and Melody
Mortgage Co. ("Melody Mortgage"), a mortgage brokerage firm for Melody home
buyers. The Company believes it is well-positioned to continue benefiting from
the growing Denver housing market as a result of its strong land position
(approximately 5,567 lots owned or controlled as of December 31, 1997) and its
local market knowledge. During 1997, Melody's deliveries of homes increased by
approximately 49% to 950 homes and its revenues increased by approximately 52%
to $141.2 million. In addition, at December 31, 1997, Melody's backlog was 267
units, or $41.3 million, compared to 219 units, or $32.2 million at December 31,
1996.
The Company also established two new homebuilding operations in Northern
California and Oregon in late 1996. In 1997, the Company delivered 24 new homes
in these markets, and as of December 31, 1997, these divisions owned or
controlled 824 lots. Also, the Company further expanded its operations in the
Pacific Northwest by acquiring a 49% interest in July 1997 (with an option to
purchase the remaining 51% subject to certain performance contingencies) in
Stafford Homes ("Stafford"), a homebuilder for over 30 years in the greater
Seattle/Puget Sound area of Washington. During 1997, Stafford delivered 160
homes (82 since July 1), and as of December 31, 1997, owned or controlled 923
lots.
4
<PAGE>
BUSINESS STRATEGY
The Company's objective is to provide its customers with homes that
incorporate quality and value while seeking to maximize its return on invested
capital. To achieve this objective, the Company has developed a business
strategy which focuses on the following elements:
GEOGRAPHIC DIVERSIFICATION IN ATTRACTIVE GROWTH MARKETS. The Company has
successfully expanded its operations from Hawaii to Colorado, Northern
California, Oregon and Washington through acquisitions and new start-up
operations. The Company believes that these markets provide the opportunity for
superior returns based on their favorable prospects for economic, population and
employment growth. As part of its strategy to further diversify geographically,
the Company continues to evaluate market expansion opportunities, including
potential acquisitions of homebuilding companies, joint ventures with existing
companies as well as its own acquisition and development of homebuilding
projects in certain areas.
LEADING MARKET SHARES IN PRINCIPAL MARKETS. The Company seeks to achieve
leading market shares in its principal markets, currently Denver, Colorado and
Hawaii. Based on unit sales during 1997, the Company was the second largest
homebuilder in both Denver and Hawaii.
FOCUS ON BROAD ENTRY-LEVEL AND FIRST TIME MOVE-UP MARKET. The Company
designs homes that appeal to a wide variety of home buyers with a primary focus
on high-quality, single-family residences, townhomes and condominiums for
entry-level and first-time move-up buyers. The Company maintains the flexibility
to alter its product mix within a given market depending on market conditions
and, in determining its product mix, considers demographic trends, demand for a
particular type of product, margins, timing and the economic strength of the
market. The Company believes that its focus on high-quality housing has helped
it develop a positive reputation with homebuyers, landowners and, in Hawaii,
governmental regulators. The average selling prices of the Company's units
closed during the year ended December 31, 1997 were $220,000 in Hawaii and
$149,000 in its mainland markets.
MAINTAIN STRICT COST CONTROLS. The Company believes that maintaining
stringent cost controls is a key factor in improving profitability. The Company
controls costs and reduces risks by: (i) generally purchasing land that is
already zoned for residential development; (ii) seeking to begin construction
only after the "pre-sale" of homes to be developed (e.g., execution of a sales
contract and receipt of home buyer deposits); (iii) utilizing prefabricated
building materials and standardized design plans; (iv) utilizing experienced
contractors; and (v) using its leading and long-standing market position in the
Denver and Hawaii markets to obtain volume discounts on construction materials
and favorable pricing from contractors.
COMMITMENT TO CUSTOMER SATISFACTION. The Company is committed to providing
customer satisfaction through quality construction and customer service.
Division managers are responsible for the quality of construction and the level
of customer satisfaction in their respective markets. In the Company's two
largest markets, Colorado and Hawaii, customer satisfaction surveys indicated
that 98% (survey conducted by Company) and 97% (survey conducted by outside
third party), respectively, of customers in 1997 responded that they were
satisfied with their purchase and would recommend a Company home to a friend.
EXPERIENCED MANAGEMENT AND DECENTRALIZED OPERATIONS. The Company's senior
corporate officers and division managers average over 25 years in the
homebuilding business. Each division is run by a local manager. One of the
essential criteria is the individual's in-depth familiarity with the geographic
area within which the division operates. Major decisions by division managers,
including decisions regarding selection of parcels of land for purchase and
development, are made in conjunction with the corporate officers of the Company,
and thereafter, each division manager conducts the operations of the division as
a separate profit center with bonuses based on pre-tax earnings, returns on
invested capital and performance against the financial budgets and operating
plans of their respective divisions.
5
<PAGE>
RECENT DEVELOPMENTS
Schuler Homes recently announced operating results, unit closings and
backlog for the first quarter of 1998. The Company generated revenues of $55.5
million for the quarter ended March 31, 1998, an 11.0% increase from revenues of
$50.0 million during the first quarter of last year. During the quarter ended
March 31, 1998, the Company closed the sale of 326 units in its consolidated
entities, a 38.7% increase from closings of 235 units in its consolidated
entities during the first quarter of last year. Furthermore, during the first
quarter of 1998, the Company closed 64 units in its unconsolidated entities
versus 5 units during the first quarter of last year; such increase was
principally attributable to the inclusion of home sales from Stafford, in which
the Company acquired an ownership interest in July 1997. EBITDA during the first
quarter of 1998 was $6.7 million, a 61.8% increase from EBITDA of $4.1 million
during the first quarter of last year, and operating income during the first
quarter of 1998 was $4.3 million, a 99.2% increase from operating income of $2.2
million during the first quarter of last year. Net income during the first
quarter of 1998 was $2.0 million ($0.10 per share), a 157.5% increase from net
income of $0.8 million ($0.04 per share) during the first quarter of last year.
Gross margin improved during the first quarter of 1998 with cost of
residential real estate sold representing 79.1% of revenues compared to 82.9% of
revenues in the first quarter of last year. The improvement in gross margin is
largely attributable to higher average selling prices in the Company's Colorado
operation and higher gross margins in the Company's Hawaiian operation due to
lower recognition of deferred revenues pursuant to the Company's "zero down"
sales program. Operating margins improved to 7.7% of revenues in the first
quarter of 1998 from 4.3% of revenues in the first quarter of last year. The
improvement in operating margin was primarily due to the increase in the
Company's gross margin and to the contribution of $327,000 in income from its
unconsolidated joint venture ownership interest in Stafford.
At March 31, 1998, the Company's backlog was 553 units with an aggregate
sales value of $105.5 million, compared to backlog at December 31, 1997 of 408
units with an aggregate sales value of $76.1 million, and backlog at March 31,
1997 of 468 units with an aggregate sales value of $78.9 million. In addition,
at March 31, 1998, the Company's cash and cash equivalents, total debt and
stockholders' equity amounted to approximately $5.3 million, $158.6 million and
$165.4 million, respectively.
For the twelve months ended March 31, 1998, the Company's revenues and
EBITDA were $235.1 million and $26.1 million, respectively. The ratios of EBITDA
to interest incurred and total debt (net of cash) to EBITDA for the twelve
months ended March 31, 1998 were 2.2x and 5.9x, respectively.
------------------
THE COMPANY WAS INCORPORATED UNDER THE LAWS OF THE STATE OF HAWAII IN 1988
AND REINCORPORATED IN DELAWARE IN 1992. THE PRINCIPAL EXECUTIVE OFFICES OF THE
COMPANY ARE LOCATED AT 828 FORT STREET MALL, 4TH FLOOR, HONOLULU, HAWAII, 96813,
AND ITS TELEPHONE NUMBER IS (808) 521-5661.
6
<PAGE>
THE OLD NOTES OFFERING
<TABLE>
<S> <C>
Old Notes....................... The Old Notes were sold by the Company (the "Old Notes
Offering") on April 30, 1998 (the "Original Issue Date")
to BancAmerica Robertson Stephens, Jefferies & Company,
Inc., NationsBanc Montgomery Securities, LLC and Dillon
Read Inc. (the "Initial Purchasers") pursuant to a
Purchase Agreement dated April 30, 1998 (the "Purchase
Agreement"). The Initial Purchasers subsequently reoffered
the Old Notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act to a
limited number of institutional "Accredited Investors" (as
defined in Rule 501(A)(1), (2), (3) or (7) under the
Securities Act).
Registration Rights Agreement... Pursuant to the Purchase Agreement, the Company and the
Initial Purchasers entered into a Registration Rights
Agreement dated as of April 30, 1998 (the "Registration
Rights Agreement"), which grants the holders of the Old
Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
rights, which terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
The Exchange Offer.............. $1,000 principal amount of Notes will be issued in
exchange for each $1,000 amount of Old Notes validly
tendered pursuant to the Exchange Offer. As of the date
hereof, $100.0 million in aggregate principal amount of
Old Notes are outstanding. The Company will issue the
Notes to tendering holders of Old Notes promptly after the
Expiration Date.
Resales......................... Based on an interpretation by the staff of the Commission
set forth in Morgan Stanley & Co., Incorporated, SEC
No-Action Letter (available June 5, 1991) (the "Morgan
Stanley Letter"), Exxon Capital Holdings Corporation, SEC
No-Action Letter (available May 13, 1988) (the "Exxon
Capital Letter") and similar letters, the Company believes
that Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold
and otherwise transferred by any person receiving such
Notes, whether or not such person is the holder (other
than any such holder or other person which is (i) a
broker-dealer that receives Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired
by such broker-dealer as a result of market-making or
other trading activities, or (ii) an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act (collectively, "Restricted Holders"))
without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that
(a) such Notes are acquired in the ordinary course of
business of such holder or other person (b) neither such
holder nor such other person is engaged in or intends to
engage in a distribution of such Notes and (c) neither
such holder nor other person has any arrangement or
understanding with any person to participate in the
distribution of such Notes. If any person were to be
participating in the Exchange Offer for the purposes of
participating in a distribution of the Notes in a manner
not permitted by the
</TABLE>
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<S> <C>
Commission's interpretation, such person (a) could not
rely upon the Morgan Stanley Letter, the Exxon Capital
Letter or similar letters and (b) must comply with the
registration and prospectus delivery of Securities Act in
connection with a secondary resale transaction. Each
broker or dealer that receives Notes for its own account
in exchange for Old Notes that were acquired by such
broker or dealer as a result of market-making or other
activities, must acknowledge that it will deliver a
prospectus in connection with any sale of such Notes. See
"Plan of Distribution."
Expiration Date................. 5:00 p.m., New York City time, on , 1998 unless the
Exchange Offer is extended, in which the term "Expiration
Date" means the latest date and time to which the Exchange
Offer is extended.
Accrued Interest on the Notes
and Old Notes................. The Notes will bear interest from May 6, 1998. Holders of
Old Notes whose Old Notes are accepted for exchange will
be deemed to have waived the right to receive any payment
in respect of interest on such Old Notes accrued to the
date of issuance of the Notes.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain customary
conditions. The conditions are limited and relate in
general to proceedings which have been instituted or laws
which have been adopted that might impair the ability of
the Company to proceed with the Exchange Offer. As of the
date of this Prospectus, none of these events had
occurred, and the Company believes their occurrence to be
unlikely. If any such conditions exist prior to the
Expiration Date, the Company may (a) refuse to accept any
Old Notes and return all previously tendered Old Notes,
(b) extend the Exchange offer or (c) waive such
conditions. See "The Exchange Offer -- Conditions."
Procedures for Tendering
Notes......................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be exchanged and
any other required documentation to the Exchange Agent (as
defined) at the address set forth herein and therein.
Tendered Old Notes, the Letter of Transmittal and
accompanying documents must be received by the Exchange
Agent by 5:00 p.m. New York City time, on the Expiration
Date. See "The Exchange Offer -- Procedures for
Tendering." By executing the Letter of Transmittal, each
holder will represent to the Company that, among other
things, the Notes acquired pursuant to be Exchange Offer
are being obtained in the ordinary course of business of
the person receiving such Notes, whether or not such
person is the holder, that neither the holder nor any such
other person is engaged in or intends to engage in a
distribution of the Notes or has an arrangement or
understanding with any person to participate in the
distribution of such Notes, and that neither the holder
nor any such other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company.
</TABLE>
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<S> <C>
Special Procedures for
Beneficial Holders............ Any beneficial holder whose Old Notes are registered in
the name of its broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender in the
Exchange Offer should contact such registered holder
promptly and instruct such registered holder to tender on
its behalf. If such beneficial holder wishes to tender on
its own behalf, such beneficial holder must, prior to
completing and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in
such holder's name or obtain a properly completed bond
power from the registered holder. The transfer of record
ownership may take considerable time. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes and a properly completed
Letter of Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date may tender their Old Notes according
to the guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights............... Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
Untendered Old Notes;
Consequences of Failure to
Exchange...................... Following the consummation of the Exchange Offer, holders
of Old Notes who do not tender their Old Notes will not
have any further exchange rights and such Old Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for
such Old Notes could be adversely affected.
The Old Notes that are not exchanged pursuant to the
Exchange Offer will remain restricted securities.
Accordingly, such Old Notes may be resold only (i) to the
Company, (ii) pursuant to Rule 144A or Rule 144 under the
Securities Act or pursuant to another exemption under the
Securities Act, (iii) outside the United States to a
foreign person pursuant to the requirements of Rule 904
under the Securities Act or (iv) pursuant to an effective
registration statement under the Securities Act. See "The
Exchange Offer -- Consequences of Failure to Exchange."
Acceptance of Old Notes and
Delivery of Notes............. Subject to certain conditions, the Company will accept for
exchange any and all Old Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Notes issued pursuant to
the Exchange Offer will be delivered promptly after the
Expiration Date. See "The Exchange Offer -- Terms of the
Exchange Offer."
Certain Federal Income Tax
Consequences.................. The exchange of Old Notes for Notes pursuant to the
Exchange Offer will not be a taxable event for federal
income tax purposes. A holder's
</TABLE>
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<S> <C>
holding period for Notes will include the holding period
for Old Notes. For a discussion summarizing certain U.S.
federal income tax consequences to holders of the Notes,
see "Certain Federal Income Tax Consequences."
Federal and State Regulatory
Requirements.................. Other than compliance with state securities or "blue sky"
laws, there are no federal or state regulatory
requirements that must be met prior to consummation of the
Exchange Offer.
Rights of Dissenting Holders.... Holders of Old Notes do not have any appraisal or
dissenting rights under the Delaware General Corporation
Law in connection with the Exchange Offer. See "The
Exchange Offer."
Exchange Agent.................. U.S. Trust Company of California, N.A. is serving as
exchange agent (the "Exchange Agent") in connection with
the Exchange Offer. Deliveries by hand should be addressed
to U.S. Trust Company of California, N.A. c/o United
States Trust Company of New York, 111 Broadway, Lower
Level, New York, NY, 10006, Attention: Corporate Trust and
Agency Services. Deliveries by overnight courier or
express mail should be addressed to U.S. Trust Company of
California, N.A. c/o United States Trust Company of New
York, 770 Broadway, 13th Floor, New York, NY 10003,
Attention: Corporate Trust and Agency Services, and
deliveries by first class mail should be addressed to U.S.
Trust Company of California, N.A c/o United States Trust
Company of New York, P.O. Box 841, Peter Cooper Station,
New York, NY 10276-0841, Attention: Corporate Trust and
Agency Services. For information with respect to the
Exchange Offer, contact the Exchange Agent at telephone
number (800) 225-2398 or facsimile number (212) 420-6155.
Use of Proceeds................. The Company will not receive any proceeds from the
Exchange Offer. See "Use of Proceeds." The Company has
agreed to bear the expenses of the Exchange Offer pursuant
to the Registration Rights Agreement (as defined). No
underwriter is being used in connection with the Exchange
Offer.
SUMMARY OF TERMS OF NOTES
The Exchange Offer constitutes an offer to exchange up to $100.0 million aggregate
principal amount of the Notes for up to an equal aggregate principal amount of Old Notes.
The Notes will be obligations of the Company evidencing the same indebtedness as the Old
Notes, and will be entitled to the benefit of the same indenture (the "Indenture"). The form
and terms of the Notes are substantially the same as the form and terms of the Old Notes
except that the Notes have been registered under the Securities Act. See "Description of the
Notes."
COMPARISON WITH OLD NOTES
Freely Transferable............. The Notes will be freely transferable under the Securities
Act by holders who are not Restricted Holders. Restricted
Holders are restricted from transferring the Notes without
compliance with the registration and prospectus delivery
requirements of the Securities Act. The Notes will be
identical in all material respects (including interest
rate, maturity and restrictive covenants) to the Old
Notes, with
</TABLE>
10
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<S> <C>
the exception that the Notes will be registered under the
Securities Act. See "The Exchange Offer -- Terms of the
Exchange Offer."
Registration Rights............. The holders of Old Notes currently are entitled to certain
registration rights pursuant to the Registration Rights
Agreement, dated as of April 30, 1998 (the "Registration
Rights Agreement"), by and among the Company, BancAmerica
Robertson Stephens, Jefferies & Company, Inc. NationsBanc
Montgomery Securities LLC and SBC Warburg Dillon Read
Inc., the initial purchasers of the Old Notes
(collectively, the "Initial Purchasers"), including the
right to cause the Company to register the Old Notes under
the Securities Act if the Exchange Offer is not
consummated prior to the Exchange Offer Termination Date
(as defined). See "The Exchange Offer -- Conditions."
However, pursuant to the Registration Rights Agreement,
such registration rights will expire upon consummation of
the Exchange Offer. Accordingly, holders of Old Notes who
do not exchange their Old Notes for Notes in the Exchange
Offer will not be able to reoffer, resell or otherwise
dispose of their Old Notes unless such Old Notes are
subsequently registered under the Securities Act or unless
an exemption from the registration requirements of the
Securities Act is available.
TERMS OF THE NOTES
Maturity Date................... April 15, 2008.
Interest Payment Dates.......... April 15 and October 15 of each year, commencing on
October 15, 1998.
Optional Redemption............. The Notes may be redeemed, in whole or in part, at any
time on or after April 15, 2003 at the option of the
Company, at the redemption prices set forth herein, plus,
in each case, accrued and unpaid interest, if any, to the
date of redemption. In addition, at any time prior to
April 15, 2001, the Company may, subject to restrictions
in the Indenture, at its option, redeem up to 35% in
aggregate principal amount of the Notes issued under the
Indenture at a redemption price of 109% of the principal
amount thereof, plus accrued and unpaid interest to the
date of redemption, with the net cash proceeds of an
Equity Offering, provided that not less than 65% of the
aggregate principal amount of the Notes issued under the
Indenture remain outstanding immediately after the
occurrence of such redemption.
Offers to Purchase.............. In the event of a Change of Control, each Holder will have
the right to require the Company to repurchase such
Holder's Notes, in whole or in part, at a price of 101% of
the aggregate principal amount thereof, plus accrued and
unpaid interest to the date of repurchase. In addition,
the Company will, under certain circumstances, be
obligated to make an offer to repurchase a portion of the
Notes in the event of the Company's failure to maintain a
minimum Consolidated Net Worth or in the event of certain
asset sales.
Ranking......................... The Notes will be general unsecured obligations of the
Company and will rank senior in right of payment to all
existing and future
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<S> <C>
subordinated Indebtedness of the Company and will rank
PARI PASSU in right of payment with all other current and
future senior unsecured Indebtedness of the Company,
including Indebtedness outstanding under the Company's
Revolving Credit Facility. As of December 31, 1997, after
giving effect to the Exchange Offer, the aggregate amount
of outstanding Indebtedness of the Company would have been
$157.5 million, of which approximately $100.0 million
would have constituted Senior Debt.
Subsidiary Guarantees........... The Notes will be unconditionally and jointly and
severally guaranteed, on a senior unsecured basis, by the
Company's Restricted Subsidiaries, and each of the
Company's material future Restricted Subsidiaries. The
Guarantees will be general unsecured obligations of each
Guarantor and will rank senior in right of payment to all
existing and future subordinated Indebtedness and PARI
PASSU with such Guarantor's other existing and future
senior unsecured Indebtedness.
Certain Covenants............... The Indenture will, among other things, limit the ability
of the Company and its Restricted Subsidiaries to: (i)
incur additional indebtedness; (ii) create liens; (iii)
make certain restricted payments; (iv) sell assets; (v)
enter into transactions with Related Persons; (vi) make
certain payments affecting Restricted Subsidiaries; and
(vii) merge, consolidate or transfer substantially all of
their assets.
</TABLE>
RISK FACTORS
The homebuilding industry is cyclical and is significantly affected by
changes in economic and other conditions, such as variability in real estate
values and the availability and cost of mortgage financing for the Company's
customers. A majority of the Company's markets have been, and are expected to
continue to be, sensitive to such changes in economic conditions. For a
discussion of these and other factors that should be considered in evaluating an
investment in the Notes, see "Risk Factors."
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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA
The following table sets forth summary consolidated historical and operating
information of the Company for the periods indicated. The Company's summary
consolidated historical financial information was derived from the Company's
Consolidated Financial Statements. The information presented below should be
read in conjunction with "Selected Consolidated Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and related
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT
AVERAGE SALES PRICE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Residential real estate sales (1)................................................ $ 229,624 $ 93,645 $ 132,897
Cost and expenses:
Residential real estate sales.................................................. 184,843 76,612 101,356
Inventory impairment loss (2).................................................. -- 23,910 9,405
Selling and commissions........................................................ 17,268 7,767 7,333
General and administrative..................................................... 13,596 4,179 4,167
--------- --------- ---------
Total costs and expenses..................................................... 215,707 112,468 122,261
Income (loss) from unconsolidated joint ventures................................. (136) 157 967
--------- --------- ---------
Operating income (loss)...................................................... 13,781 (18,666) 11,603
Other income (expense)........................................................... (4,261) (9) 462
--------- --------- ---------
Income (loss) before provision for income taxes.............................. 9,520 (18,675) 12,065
Provision (credit) for income taxes.............................................. 3,634 (7,289) 4,703
--------- --------- ---------
Net income (loss)............................................................ $ 5,886 $ (11,386) $ 7,362
--------- --------- ---------
--------- --------- ---------
OTHER FINANCIAL DATA:
EBITDA (3)....................................................................... $ 23,500 $ 9,958 $ 25,995
EBIT (4)......................................................................... 19,693 8,752 24,899
Interest incurred................................................................ 11,845 7,865 5,833
Ratio of EBITDA to interest incurred............................................. 2.0x 1.3x 4.5x
SELECTED OPERATING DATA:
Unit closings
Consolidated:
Colorado..................................................................... 950 -- --
Hawaii (5)................................................................... 343 460 559
Northern California.......................................................... 15 -- --
Oregon....................................................................... 9 -- --
--------- --------- ---------
Total...................................................................... 1,317 460 559
Unconsolidated Joint Ventures:
Hawaii (6)................................................................... 28 52 76
Washington (7)............................................................... 82 -- --
--------- --------- ---------
Total...................................................................... 1,427 512 635
--------- --------- ---------
--------- --------- ---------
Average sales price
Consolidated:
Colorado..................................................................... $ 149,000 $ -- $ --
Hawaii (5)................................................................... 228,000 234,000 238,000
Northern California.......................................................... 141,000 -- --
Oregon....................................................................... 179,000 -- --
Total...................................................................... 169,000 234,000 238,000
Unconsolidated Joint Ventures:
Hawaii (6)................................................................... 130,000 126,000 136,000
Washington (7)............................................................... 223,000 -- --
Total...................................................................... 172,000 225,000 225,000
Backlog at period end, units (8)................................................... 408 78 137
Backlog at period end, aggregate sales value (8)................................... $ 76,125 $ 18,277 $ 30,922
</TABLE>
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<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
----------------------
<S> <C> <C>
AS
ADJUSTED
ACTUAL (9)
--------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Inventories.............................................................................. $ 291,081 $ 291,081
Total assets............................................................................. 340,571 346,867
Revolving Credit Facility................................................................ 91,077 0
9% Senior Notes due 2008................................................................. -- 98,407
6.50% Convertible Subordinated Debentures due 2003....................................... 57,500 57,500
Other indebtedness....................................................................... 2,627 --
Total debt............................................................................... 151,204 155,907
Total stockholders' equity............................................................... 163,355 163,355
</TABLE>
- ------------
(1) Revenue from a sale is recognized upon the closing of the sale and when the
down payment requirement has been met. See Notes 1 and 2 of Notes to
Consolidated Financial Statements.
(2) Represents non-cash charges pursuant to Financial Accounting Standards Board
Statement No. 121. See Notes 1 and 3 of Notes to Consolidated Financial
Statements.
(3) EBITDA means income (loss) before provision for income taxes, plus (i)
interest expensed, (ii) amortization of capitalized interest included in
cost of sales, (iii) depreciation and amortization and (iv) inventory
impairment losses. EBITDA is a widely accepted financial indicator of a
company's availability to service debt. However, EBITDA should not be
considered as an alternative to operating income or to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of the
Company's operating performance or as a measure of liquidity.
(4) EBIT means EBITDA less depreciation and amortization.
(5) Includes homes and lots sold pursuant to the Company's "zero-down" sales
program in Hawaii. Approximately $3.4 million and $14.7 million of revenues
associated with 18 and 70 "zero-down" closings were deferred in 1997 and
1996, respectively. These revenues are recognized when the related notes
receivable have been paid in full.
(6) Reflects 100% of the information with respect to the Company's two 50% owned
joint ventures in Hawaii, Iao Partners and Waiakoa Estates Subdivision Joint
Venture.
(7) Reflects 100% of the information with respect to Stafford in which the
Company acquired a 49% interest in July 1997. The number of sales closed for
the year ended December 31, 1997 would have been 160 if the Company had an
ownership interest in Stafford Homes for the entire year.
(8) Represents homes/lots subject to pending sales contracts that have not yet
closed. As such contracts are subject to certain conditions being satisfied
and may be canceled by the buyer at any time, no assurances can be given
that homes/lots subject to pending sales contracts will result in closings.
(9) As adjusted to reflect the issuance and sale of the Old Notes and the
application of the net proceeds therefrom. See "Capitalization."
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RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING SPECIFIC RISK
FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE
TENDERING OLD NOTES IN EXCHANGE FOR THE NOTES OFFERED HEREBY. THIS PROSPECTUS
INCLUDES FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT ITS
PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS
ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH PLANS, INTENTIONS OR
EXPECTATIONS WILL BE ACHIEVED. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE INCLUDED IN OR SUGGESTED BY ANY FORWARD-LOOKING
STATEMENTS ARE SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. ALL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE RISK FACTORS SET FORTH
BELOW.
HOMEBUILDING INDUSTRY MARKET CONDITIONS
The homebuilding industry is cyclical and affected by changes in general and
local economic and other conditions including employment levels, demographic
considerations, availability of financing, interest rate levels, consumer
confidence and housing demand. The risks inherent to homebuilders in purchasing
and developing land increase as consumer demand for housing decreases. Because
of the long-term financial commitment involved in purchasing a home, general
economic uncertainties tend to result in more caution on the part of home
buyers, which, in turn, tends to result in fewer home purchases. In addition,
homebuilders are subject to various risks, many of them outside the control of
the homebuilder including competitive overbuilding, availability and cost of
building lots, availability and cost of materials and labor, adverse weather
conditions which can cause delays in construction schedules, cost overruns,
changes in government regulations, and increases in real estate taxes and other
local government fees and the level of interest rates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition, the recent downturn and continued uncertainty in Asian financial
markets, including the devaluation of various Asian currencies, could have an
adverse impact on the Colorado, Hawaii, California, Oregon or Washington
economies and the demand for homes in those states.
The development, construction and sale of homes are subject to various risks
including, among others, the continued availability of suitable undeveloped land
at reasonable prices. The homebuilding industry is also subject to the potential
for significant variability and fluctuations in real estate values. Although the
Company believes that its projects are currently reflected on the Company's
balance sheet at or below the fair value, no assurances can be given that, in
the future, write-downs will not be material in amount.
INTEREST RATES; MORTGAGE FINANCING
Virtually all purchasers of the Company's homes finance their purchases with
mortgage financing from lenders. In general, housing demand is adversely
affected by increases in interest rates, unavailability of mortgage financing,
increasing housing costs and unemployment. If mortgage interest rates increase
and the ability of prospective buyers to finance home purchases is adversely
affected, the Company's residential real estate sales, gross margins and net
income and the market prices of the Company's securities may be adversely
impacted. The Company's homebuilding activities are also dependent upon the
availability and cost of mortgage financing for buyers of homes owned by
potential customers so those customers ("move-up buyers") can sell their homes
and purchase a home from the Company. In addition, the Company believes that the
availability of Federal Housing Administration ("FHA") mortgage financing is an
important factor in marketing many of its homes. Any limitations or restrictions
on the availability of such financing could adversely affect the Company's
residential real estate sales. Furthermore, changes in Federal income tax laws
may affect demand for new homes. Proposals have been publicly discussed to
eliminate or limit the deductibility of mortgage interest for Federal income tax
purposes and to eliminate or limit tax-free rollover treatment provided under
current law where proceeds of the sale of a principal residence are reinvested
in a new principal residence. Enactment of such proposals may have an adverse
effect on the homebuilding industry in general, and demand for the Company's
products in particular. No prediction can be made whether any such proposals
will be enacted and, if enacted, the particular form such laws would take.
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LEVERAGE; POTENTIAL ADVERSE EFFECT OF INDEBTEDNESS ON FUTURE OPERATIONS
As of December 31, 1997, after giving effect to the issuance of the Old
Notes and the application of the net proceeds therefrom, the outstanding
indebtedness of the Company would have been $157.5 million and the Company would
have had stockholders' equity of approximately $163.4 million. In addition,
subject to restrictions in the indenture (the "1993 Indenture") governing the
Company's 6 1/2% Convertible Subordinated Debentures due 2003 (the "1993
Subordinated Notes") and the indenture governing the Notes, the Company may
incur additional indebtedness in the future, a portion of which may be secured.
The degree to which the Company is leveraged could have an adverse impact on the
Company, including (i) increased vulnerability to adverse general economic and
market conditions, (ii) impaired ability to expand and to respond to increased
competition, (iii) impaired ability to obtain additional financing for future
working capital, capital expenditures, general corporate or other purposes and
(iv) requiring that a significant portion of cash provided by operating
activities be used for the payment of debt obligations, thereby reducing funds
available for operations and future business opportunities.
The Company's ability to make required debt service payments in the future
will depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control, as well as the availability of
borrowing under the Revolving Credit Facility or any successor bank credit
facility. The Company will require substantial amounts of cash to fund scheduled
payments of principal and interest on its outstanding Indebtedness, contingent
earnout payments with respect to certain acquisitions, as well as future capital
expenditures and any increased working capital requirements. If the Company is
unable to meet its cash requirements out of cash flow from operations and its
available borrowings, there can be no assurance that it will be able to obtain
alternative financing or that it will be permitted to do so under the terms of
the Revolving Credit Facility or other debt instruments. In the absence of such
financing, the Company's ability to respond to changing business and economic
conditions, to make future acquisitions, to absorb adverse operating results or
to fund capital expenditures or increased working capital requirements may be
adversely affected. If the Company does not generate sufficient cash flow from
operations to repay the Notes at maturity, it could attempt to refinance the
Notes; however, no assurance can be given that such a refinancing would be
available on terms acceptable to the Company, if at all. In addition, there can
be no assurance that the Company will have available the financial resources
necessary to repurchase any or all Notes tendered upon a Change in Control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness."
GEOGRAPHIC CONCENTRATION; RISKS OF EXPANSION
The Company's operations are situated in Colorado, Hawaii, Northern
California, Oregon and Washington. Adverse general economic conditions in these
markets could have a material adverse impact on the operations of the Company.
In 1997, approximately 61% of the Company's revenues and a significant portion
of the Company's operating income were derived from operations in its Colorado
market. In addition, at December 31, 1997, approximately 74% of the Company's
total inventories were located in Hawaii. The Company's performance could be
significantly affected by changes in the Colorado and Hawaii markets.
In 1997, the Company significantly expanded its operations, moving into the
Colorado, Northern California, Oregon and Washington markets, thus exposing the
Company to risks inherent in those markets. New markets may prove to be less
stable and may involve delays, problems and expenses, including construction
issues and risks such as expansive soils and extreme seasonal weather
conditions, not typically found by the Company in the Hawaii market, with which
it is most familiar. See "Business." No assurances can be given that the Company
will be able to successfully establish operations outside of its existing
markets or that such expansion will not adversely affect its results of
operations.
Since inception, the Company has experienced substantial sales growth. While
the Company has recently expanded its management and administrative personnel in
the land acquisition, construction management,
16
<PAGE>
financial and administrative areas, the Company anticipates hiring additional
personnel and enhancing its management information systems to meet anticipated
future growth. There can be no assurance that such expansion or enhancement can
be accomplished on a timely and cost-effective basis without disrupting the
Company's operations. Further, there can be no assurance that such growth will
continue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
VARIABILITY OF RESULTS
The Company has experienced, and expects to continue to experience,
significant variability in sales and net income. 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 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, and from fiscal quarter to fiscal
quarter.
COMPETITION
The development and sale of residential properties is highly competitive and
fragmented. The Company competes for residential sales on the basis of a number
of interrelated factors, including location, reputation, amenities, design,
quality and price, with numerous national, regional and local builders,
including some builders with greater financial resources. The Company also
competes for residential sales with individual resales of existing homes and
available rental housing. The Company believes that it compares favorably to
other builders in the markets in which it operates, due primarily to (i) its
experience within its geographic markets, (ii) its responsiveness to market
conditions, and (iii) its reputation for quality design, construction and
service. Competition is particularly intense when the Company enters or starts
operations in a new market area until its reputation becomes firmly established
in that area.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
GENERAL. In developing a project, the Company must obtain the approval of
numerous governmental authorities regulating such matters as permitted land uses
and levels of density and the installation of utility services such as
electricity, water and waste disposal. Several governmental authorities have
imposed fees as a means of defraying the cost of providing certain governmental
services to developing areas. Because the Company historically has generally
purchased land that has already been zoned and fully entitled for residential
development, restrictive zoning issues have not had a material adverse effect on
the Company's development activities. However, there is no assurance that these
and other restrictions will not adversely affect the Company in the future,
especially to the extent that it purchases land not already zoned for
development. The Company is also subject to local, state and federal statutes
and rules regulating environmental matters, protection and preservation of
archeological finds, zoning, building design and density requirements which
limit the number of homes that can be built within a particular project, and
fees imposed to defray the cost of providing certain governmental services to
developing areas. These laws may result in delays, cause the Company to incur
substantial compliance costs and prohibit or severely restrict development in
certain environmentally or archaeologically sensitive regions or areas.
The Company may be subject to additional costs, delays or may be precluded
entirely from developing its projects because of government regulations that
could be imposed in the future due to unforeseen health, safety, welfare,
archeological or environmental concerns. Environmental regulations can also have
an adverse impact on the availability and price of certain raw materials such as
lumber. Hawaii, in particular, has some of the
17
<PAGE>
strictest land use, environmental and agricultural laws in the United States,
and the rezoning of land for urban development is a difficult and time-consuming
process.
To varying degrees, certain permits and approvals will be required to
complete the residential developments in progress or currently being planned by
the Company. The ability of the Company to obtain necessary approvals and
permits for these projects is often beyond the Company's control and could
restrict or prevent the development of otherwise desirable property. The length
of time necessary to obtain permits and approvals increases the carrying costs
of unimproved property acquired for the purpose of development and construction
and could delay the timing of the closing of its sales. In addition, the
continued effectiveness of permits already granted is subject to factors such as
changes in policies, rules and regulations and their interpretation and
application.
HAWAII'S AFFORDABLE HOUSING REQUIREMENTS. To promote affordable housing,
governmental agencies in Hawaii have implemented various formal and informal
policies at both the state and county level. As a condition to rezoning land for
urban development, it is the current practice of the Hawaii Land Use Commission
to negotiate agreements with residential land developers for the provision of
affordable housing. Generally, these conditions require developers of
residential projects to offer for sale to eligible buyers a portion, typically
from 10% to 60%, of the total number of units in the project at affordable
prices usually determined as a price at which a purchaser earning up to 140% of
the local median income is able to satisfy specified mortgage criteria. In
addition to the state requirements, a developer often has to comply with
affordable housing requirements imposed by the appropriate county governmental
agencies during the county land use approval process. Generally, the county
further defines the state's requirement, and is often times more restrictive
than the state. Based upon this affordability criterion, specific price
limitations are generally imposed on the homes that may satisfy a developer's
affordable housing requirement. Increases in mortgage interest rates may
decrease the sales price at which affordable homes may be sold thereby
potentially reducing the profitability of affordable housing projects.
Because a portion of the Company's focus is on Hawaii's affordable housing
market, any material changes in the current policies of the Hawaii Land Use
Commission and the various county authorities with regard to affordable housing
conditions or related policies could adversely affect the Company's operations
and financial results. See "Business -- Government Regulation and Environmental
Matters."
DEPENDENCE ON JAMES K. SCHULER
The Company's success is highly dependent upon the continuing services of
its President and Chief Executive Officer, James K. Schuler. The loss of the
services of James K. Schuler could have a material adverse effect on the
Company.
NATURAL DISASTERS
The climates and geology of many of the states in which the Company operates
present special risks of natural disasters. To the extent that hurricanes,
severe storms, earthquakes, droughts, floods, wildfires or other natural
disasters or similar events occur, the homebuilding industry in general, and the
Company's business in particular, in such states may be adversely affected.
Demand in certain of the Company's markets is significantly influenced by
weather, particularly weekend weather, which is when the majority of the
Company's sales are initiated. In addition, adverse weather conditions may delay
the timing of site improvements and foundation work, among other construction
processes. Meteorologists are currently predicting that a severe weather
phenomenon, known as "El Nino," which has impacted the U.S. in 1997 and early
1998 will continue to impact the U.S. in 1998, which may result in unusually
cool and wet conditions in several of the Company's markets. The Company's
results of operations could be materially adversely affected by this or other
weather patterns which result in unseasonably cool temperatures, rain or snow,
water shortages or floods.
18
<PAGE>
RISK OF MATERIAL AND LABOR SHORTAGES
The Company is not presently experiencing any serious material or labor
shortages; however, the residential construction industry in the past has, from
time to time, experienced serious material and labor shortages, including
shortages in insulation, drywall, certain carpentry work and cement supply.
Delays in construction of homes and higher costs due to these shortages and
fluctuating lumber prices could have an adverse effect upon the Company's
operations. The Company is also susceptible to delays caused by strikes
affecting shipping and transportation of building materials necessary for the
Company's business, particularly in Hawaii because of its remote location. In
addition, many of the Company's contractors are represented by labor unions or
collective bargaining agreements. No assurances can be given that the
renegotiation of such agreements would not lead to a disruption of the Company's
operations and an increase in its construction costs.
WARRANTY RISKS
The Company generally provides limited warranties of at least one to two
years for workmanship and materials and for longer periods with respect to
structural components. Because the Company contracts its homebuilding work to
qualified contractors or subcontractors who provide the Company with an
indemnity and a lien release prior to receiving payment from the Company for
their work, claims relating to workmanship and materials are generally the
primary responsibility of the Company's contractors or subcontractors. However,
to the extent that warranty claims are not covered by the Company's contractors
or subcontractors, the Company has established a reserve to cover warranty
expenses. The Company's historical experience is that such warranty expenses
generally fall within the reserve established although no assurances can be
given that this will be the experience in the future. From time to time, where
deemed appropriate, the Company purchases structural warranty coverage from
third party insurers.
For homes closed from early 1990 until October 7, 1994, Melody's structural
warranty coverage was with the Home Owners Warranty Corporation ("HOW"). On
October 7, 1994, the Commonwealth of Virginia placed HOW under temporary
receivership, and a permanent injunction followed on October 17, 1994. Terms of
the injunction allowed policies that were effective prior to October 7, 1994, to
be honored for their full term. It is Melody's understanding that HOW is
currently paying approximately 50% of the costs associated with claims made
under the HOW policies. Concurrent with the above, Melody entered into an
agreement with Residential Warranty Corporation to provide its home buyers with
equally suitable coverage for homes closed subsequent to October 7, 1994. The
Company, based upon its due diligence in connection with the acquisition of
Melody, believes that claims under Melody's warranty programs are substantially
covered by Melody's warranty accruals or insurance. However, no assurances can
be given that the Company will not incur future claims in any of its markets in
excess of warranty accruals or insurance coverage.
CONTROL OF THE COMPANY
At March 31, 1998, James K. Schuler owned approximately 54% of the Company's
Common Stock. Due to this ownership position, Mr. Schuler has the ability to
control the affairs and policies of the Company and has the ability to elect a
sufficient number of directors to control the Board and to approve or disapprove
any matter submitted to a vote of stockholders. Mr. Schuler's ownership
position, together with the anti-takeover effects of certain provisions
contained in the Company's Certificate of Incorporation and Bylaws and the
repurchase option of the Holders of the Notes and the 1993 Subordinated Notes,
may have the effect of delaying, deferring or preventing a change in control of
the Company. These factors could have a negative effect on the market price of
the Notes offered hereby. See "Principal Stockholders" and "Certain
Transactions."
FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Guarantors, at the time it incurred the indebtedness evidenced by the
Notes or its Guarantee, as the case may be, (i)(a) was or is insolvent or
rendered insolvent by reason of
19
<PAGE>
such occurrence or (b) was or is engaged in a business or transaction for which
the assets remaining with the Company or such Guarantor constituted unreasonably
small capital or (c) intended or intends to incur, or believed or believes that
it would incur, debts beyond its ability to pay such debts as they mature, and
(ii) the Company or such Guarantor received or receives less than reasonably
equivalent value or fair consideration for the incurrence of such indebtedness,
the Notes and the Guarantee could be voided, or claims in respect of the Notes
or the Guarantees could be subordinated to all other debts of the Company or
such Guarantor, as the case may be. The voiding or subordination of any of such
pledges or other security interests or of any such indebtedness could result in
an Event of Default (as defined in the Indenture) with respect to such
indebtedness, which could result in acceleration thereof. In addition, the
payment of interest and principal by the Company pursuant to the Notes or the
payment of amounts by a Guarantor pursuant to a Guarantee could be voided and
required to be returned to the person making such payment, or to a fund for the
benefit of the creditors of the Company or such Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the fair saleable value of all of its assets at a fair valuation or
if the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
To the extent any Guarantees were voided as a fraudulent conveyance or held
unenforceable for any other reason, Holders of Notes would cease to have any
claim in respect of such Guarantor and would be creditors solely of the Company
and any Guarantor whose Guarantee was not voided or held unenforceable. In such
event, the claims of the Holders of Notes against the issuer of an invalid
Guarantee would be subject to prior payment of all liabilities and preferred
stock claims of such Guarantor. There can be no assurance that, after providing
for all prior claims and preferred stock interests, if any, there would be
sufficient assets to satisfy the claims of the Holders of Notes relating to any
voided portions of any of the Guarantees.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to
repurchase all of the outstanding Notes at 101% of the aggregate principal
amount thereof and all of the outstanding 1993 Subordinated Notes at specified
prices, in both cases, plus accrued and unpaid interest, if any, to the
repurchase date. There can be no assurance that the Company will have sufficient
funds available or will be permitted by its other indebtedness agreements to
repurchase the Notes and the 1993 Subordinated Notes upon the occurrence of a
Change of Control. The Change of Control purchase feature of the Notes and the
1993 Subordinated Notes may in certain circumstances make it more difficult or
discourage a takeover of the Company and, thus, the removal of incumbent
management. The Change of Control purchase feature, however, is not the result
of management's knowledge of any specific effort to obtain control of the
Company by means of a merger, tender offer, solicitation or otherwise, or part
of a plan by management to adopt a series of anti-takeover provisions. The term
"Change of Control" is limited to certain specified transactions and may not
include other events that might adversely affect the financial condition of the
Company or result in a downgrade of the credit rating (if any) of the Notes nor
would the requirement that the Company offer to repurchase the Notes upon a
Change of Control necessarily afford Holders of the Notes protection in the
event of a highly leveraged reorganization, merger or similar transaction
involving the Company. See "Description of Certain Indebtedness" and
"Description of the Notes -- Change of Control."
LITIGATION
In April 1996, the Company was served with a purported class action
complaint by owners of units and the Association of Owners of Fairway Village at
Waikele alleging, among other things, material construction defects and
deficiencies, misrepresentations regarding the cost of insurance and breach of a
covenant of good faith and fair dealing. The complaint does not specify an
amount of damages, but includes a claim for punitive damages.
20
<PAGE>
Although this litigation is at an early stage of discovery, based on its current
understanding of the lawsuit, the Company believes the claims to be largely
without merit and that potential third party defendants and insurance coverage
exist to offset a material portion of any damages from the alleged claims. The
court has denied the motion to certify the class, and the litigation continues
to be vigorously defended. A court date has been set for April 1999. If this
lawsuit were decided adversely to the Company in all material respects, it could
have a material adverse effect on the Company's business, financial condition
and results of operations.
LACK OF PUBLIC MARKET FOR THE NOTES
The Notes will be new securities for which there is currently no public
market. The Company does not intend to list the Notes on any national securities
exchange or quotation system. The Initial Purchasers have advised the Company
that they currently intend to make a market in the Notes but they are not
obligated to do so and, if commenced, may discontinue such market making at any
time. Accordingly, there can be no assurance as to the development of any market
or liquidity of any market that may develop for the Notes. To the extent that
Old Notes are tendered and accepted in the Exchange Offer, the aggregate
principal amount of Old Notes outstanding will decrease, with the resulting
decrease in the liquidity of the market therefor.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Notes pursuant
to the Exchange Offer will continue to be subject to the restrictions on
transfer of the Old Notes set forth in the legend thereon as a consequence of
the issuance of the Old Notes pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act. In general,
Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company currently
does not anticipate that it will register the Old Notes under the Securities
Act.
21
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. In
consideration of issuing the Notes as contemplated in this Prospectus, the
Company will receive in exchange Old Notes of like principal amount, the terms
of which are identical in all material respects to the Notes. The Old Notes
surrendered in exchange for Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Notes will not result in any increase in
the indebtedness of the Company. The Company has agreed to bear the expenses of
the Exchange Offer pursuant to the Registration Rights Agreement. No underwriter
is being used in connection with the Exchange Offer.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1997 and as adjusted to give effect to the sale by the
Company of the Old Notes and the application of the net proceeds therefrom. This
table should be read in conjunction with the Consolidated Financial Statements,
including the notes thereto, included in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current maturities):
Revolving Credit Facility (1)...................................... $ 91,077 $ 0
9% Senior Notes due 2008........................................... -- 98,407
Notes payable to others............................................ 2,627 --
6.50% Convertible Subordinated Debentures due 2003................. 57,500 57,500
---------- -----------
Total long-term debt............................................... 151,204 155,907
Stockholders' Equity:
Common stock, $.01 par value; 30,000,000 shares authorized;
20,874,927 shares issued and 20,100,927 shares outstanding....... 209 209
Additional paid-in capital......................................... 93,100 93,100
Retained earnings.................................................. 75,046 75,046
Treasury stock, at cost (774,000 shares)........................... (5,000) (5,000)
---------- -----------
Total stockholders' equity......................................... 163,355 163,355
---------- -----------
Total capitalization............................................. $ 314,559 $ 319,262
---------- -----------
---------- -----------
</TABLE>
- ------------
(1) The Revolving Credit Facility provides for senior unsecured revolving
borrowings of up to $137.6 million. As of March 31, 1998, outstandings under
the Revolving Credit Facility were $98.4 million. As of such date and on a
pro forma basis to reflect the sale by the Company of the Old Notes and the
use of proceeds therefrom, the Company would have had availability of
approximately $63 million (net of $3.2 million restricted for outstanding
but unused letters of credit) under the Revolving Credit Facility pursuant
to borrowing base requirements.
22
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The selected consolidated historical financial data set forth below for and
as of the five years ended December 31, 1997, have been derived from the audited
Consolidated Financial Statements of the Company. The following selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto appearing elsewhere in this
Prospectus, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The financial data for the three-month periods ended
March 31, 1998 and 1997 are derived from unaudited financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1998. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included herein or incorporated by reference.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Residential real estate sales (1)................ $ 55,512 $ 49,995 $ 229,624 $ 93,645 $ 132,897 $ 217,266 $ 167,275
Cost and expenses:
Residential real estate sales.................. 43,887 41,464 184,843 76,612 101,356 159,568 113,669
Inventory impairment loss (2).................. -- -- -- 23,910 9,405 -- --
Selling and commissions........................ 3,920 3,463 17,268 7,767 7,333 7,912 4,216
General and administrative..................... 3,770 2,920 13,596 4,179 4,167 3,510 2,319
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses..................... 51,577 47,847 215,707 112,468 122,261 170,990 120,204
Income (loss) from unconsolidated joint
ventures....................................... 358 7 (136) 157 967 3,307 1,522
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)...................... 4,293 2,155 13,781 (18,666) 11,603 49,583 48,593
Other income (expense)........................... (1,036) (899) (4,261) (9) 462 502 434
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision for income
taxes...................................... 3,257 1,256 9,520 (18,675) 12,065 50,085 49,027
Provision (credit) for income taxes.............. 1,256 479 3,634 (7,289) 4,703 19,336 19,076
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............................ $ 2,001 $ 777 $ 5,886 $ (11,386) $ 7,362 $ 30,749 $ 29,951
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Ratio of earnings to fixed charges (3)........... 2.0x 1.3x 1.8x 1.1x 4.1x 7.3x 9.1x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
MARCH 31, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................................. $ 5,305 $ 3,842 $ 1,619 $ 6,147 $ 7,855 $ 39,879
Inventories........................................... 291,004 291,081 238,358 247,506 209,123 147,486
Total assets.......................................... 341,373 340,571 268,947 273,370 279,678 214,147
Revolving Credit Facility............................. 98,400 91,077 44,690 36,781 27,717 13,548
6.50% Convertible Subordinated Debentures due 2003.... 57,500 57,500 57,500 57,500 57,500 57,500
Other indebtedness.................................... 2,697 2,627 -- -- 14,583 --
Total debt............................................ 158,597 151,204 102,190 94,281 99,800 71,048
Total stockholders' equity............................ 165,356 163,355 157,465 173,851 166,489 135,296
</TABLE>
- ------------
(1) Revenue from a sale is recognized upon the closing of the sale and when the
down payment requirement has been met. See Notes 1 and 2 of Notes to
Consolidated Financial Statements.
(2) Represents non-cash charges pursuant to Financial Accounting Standards Board
Statement No. 121. See Notes 1 and 3 of Notes to Consolidated Financial
Statements.
(3) For purposes of calculating this ratio, fixed charges consist of interest
incurred (interest expense plus capitalized interest), estimated rent
expense as representative of the interest portion of rentals, and
amortization of debt expense, and earnings consist of earnings (loss) before
income taxes and discontinued operations and before (i) interest expensed,
(ii) amortization of capitalized interest in cost of sales, (iii) income
from unconsolidated joint ventures, (iv) depreciation and amortization, (v)
non-recurring non-cash charges of approximately $23.9 million and $9.4
million in 1996 and 1995, respectively, (vi) estimated rent expense as
representative of the interest portion of rentals and amortization of debt
expense, and includes income distributions from unconsolidated joint
ventures.
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<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the sale of Old Notes to the Initial Purchasers pursuant
to the Purchase Agreement, dated April 30, 1998, among the Company, BancAmerica
Robertson Stephens, Jefferies & Company, Inc., NationsBanc Montgomery Securities
LLC and SBC Warburg Dillon Read Inc., (collectively, the "Initial Purchasers"),
the holders of the Old Notes became entitled to the benefits of the Registration
Rights Agreement.
Under the Registration Rights Agreement, the Company became obligated to (a)
file a registration statement in connection with a registered exchange offer
within 60 days after April 30, 1998, the date the Old Notes were issued (the
"Issue Date"), and (b) cause the registration statement relating to such
registered exchange offer to become effective within 120 days after the Issue
Date. The Exchange Offer being made hereby, if consummated within the required
time periods, will satisfy the Company's obligations under the Registration
Rights Agreement. This Prospectus, together with the Letter of Transmittal, is
being sent to all such beneficial Holders known to the Company.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in the
Morgan Stanley Letter, the Exxon Capital Letter and similar letters, the Company
believes that Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by any person
who received such Notes, whether or not such person is the holder (other than
Restricted Holders) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Notes are acquired
in the ordinary course of such holder's or other person's business, neither such
holder nor such other person is engaged in or intends to engage in any
distribution of the Notes and such holders or other persons have no arrangement
or understanding with any person to participate in the distribution of such
Notes.
If any person were to be participating in the Exchange Offer for the
purposes of participating in a distribution of the Notes in a manner not
permitted by the Commission's interpretation, such person (a) could not rely
upon the Morgan Stanley Letter, the Exxon Capital Letter or similar letters and
(b) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
Each broker-dealer that receives Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Notes received in exchange for Old Notes where such Old Notes
were acquired by such broker-dealer as result of market-making activities or
other trading activities. The Company has agreed that, for a period of 180 days
after consummation of the Exchange Offer, it will make this Prospectus, as it
may be amended or supplemented from time to time, available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. See "Use
of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer
pursuant to the Registration Rights Agreement. No underwriter is being used in
connection with the Exchange Offer.
24
<PAGE>
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the Notes from the Company and
delivering Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain conditions set forth herein under
"-- Conditions" without waiver by the Company, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes,
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes in connection with the Exchange Offer. See
"-- Fees and Expenses."
In the event the Exchange Offer is consummated, the Company will not be
required to register the Old Notes. In such event, holders of Old Notes seeking
liquidity in their investment would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act. See "Risk
Factors -- Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENT
The term "Expiration Date" shall mean the expiration date set forth on the
cover page of this Prospectus, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will issue a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period of time.
The Company reserves the right (a) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
"Conditions" shall have occurred and shall not have been waived by the Company
(if permitted to be waived by the Company), by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (b) to amend the
terms of the Exchange Offer in any manner deemed by it to be advantageous to the
holders of the Old Notes. Any such delay in acceptance, extension, termination
or amendment will be followed as promptly as practicable by oral or written
notice thereof. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment and the Company may extend the Exchange Offer, depending
upon the significance of the amendment and the manner of disclosure to holders
of the Old Notes, if the Exchange Offer would otherwise expire during such
extension period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NOTES
The Notes will bear interest from May 6, 1998 payable semiannually on April
15 and October 15 of each year, commencing October 15, 1998, at the rate of 9%
per annum. Holders of Old Notes whose Old Notes are accepted for exchange will
be deemed to have waived the right to receive any payment in respect of interest
on the Old Notes accrued up until the date of the issuance of the Notes.
25
<PAGE>
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by instruction 2 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents. To be validly tendered, such
documents must reach the Exchange Agent on or before 5:00 p.m., New York City
time, on the Expiration Date.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
Holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery to the Exchange Agent on or before 5:00 p.m.
New York City time, on the Expiration Date. No Letter of Transmittal or Old
Notes should be sent to the Company.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of its
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on its behalf. If such beneficial holder wishes to
tender on its own behalf, such registered holder must, prior to completing and
executing the Letter of Transmittal and delivering its Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States (an "Eligible Institution") unless the Old Notes tendered pursuant
thereto are tendered (a) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (b) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case signed
as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority so to act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes the Company's acceptance of which would, in
the opinion of counsel for the Company, be unlawful.
26
<PAGE>
The Company also reserves the right to waive any irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. None of the Company, the
Exchange Agent or any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Old Notes, nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost to such holder by the Exchange
Agent to the tendering holders of Old Notes, unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth under "-- Conditions," to terminate the
Exchange Offer in accordance with the terms of the Registration Rights Agreement
and (b) to the extent permitted by applicable law, purchase Old Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers will differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (a) the Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of such holder or other person, (b) neither
such holder nor such other person is engaged in or intends to engage in a
distribution of the Notes (c) neither such holder or other person has any
arrangement or understanding with any person to participate in the distribution
of such Notes, and (d) such holder or other person is not an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company or, if such holder
or other person is such an affiliate, will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
Each broker-dealer that receives Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Notes received in exchange for Old Notes where such Old Notes
were acquired by such broker-dealer as result of market-making activities or
other trading activities. The Company has agreed that, for a period of 180 days
after consummation of the Exchange Offer, it will make this Prospectus, as it
may be amended or supplemented from time to time, available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
The Old Notes were issued on May 6, 1998 and there is no public market for
them at present. To the extent Old Notes are tendered and accepted in the
Exchange Offer, the principal amount of outstanding Old Notes will decrease with
a resulting decrease in the liquidity in the market therefor. Following the
consummation of the Exchange Offer, holders of Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the Old Notes could be adversely affected.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (a) whose Old Notes are not
immediately available or (b) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if: (i) the tender is made through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby,
27
<PAGE>
and guaranteeing that, within three business days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes to be tendered in proper form for transfer and any
other documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly completed
and executed Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing all tendered Old Notes in proper form for transfer
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (a) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"), (b)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (c) be signed by the Depositor
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the Depositor withdrawing the tender and (d) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Notes will be issued with respect thereto unless the Old
Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange, any Notes for any Old Notes,
and may terminate or amend the Exchange Offer before the acceptance of any Old
Notes for exchange, if the Exchange Offer violates any applicable law or
interpretation by the staff of the Commission.
If the Company determines in its sole discretion that the foregoing
condition exists, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering holders, (ii) extend the Exchange Offer
and retain all Old Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of holders who tendered such Old Notes to
withdraw their tendered Old Notes, or (iii) waive such condition, if
permissible, with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the holders, and
the Company will extend the Exchange Offer as required by applicable law.
Pursuant to the Registration Rights Agreement, if an Exchange Offer shall
not be consummated prior to the Exchange Offer Termination Date, the Company
will be obligated to cause to be filed with the Commission a shelf registration
statement with respect to the Old Notes (the "Shelf Registration Statement") as
promptly as practicable after the Exchange Offer Termination Date and thereafter
use its best efforts to have the Shelf Registration Statement declared
effective.
28
<PAGE>
"Exchange Offer Termination Date" means the date on which the earliest of
any of the following events occurs: (a) applicable interpretations of the staff
of the Commission do not permit the Company to effect the Exchange Offer, (b)
any holder of Notes notifies the Company that either (i) such holder is not
eligible to participate in the Exchange Offer or (ii) such holder participates
in the Exchange Offer and does not receive freely transferable Notes in exchange
for tendered Old Notes or (c) the Exchange Offer is not consummated within 150
days after the Issue Date.
If any of the conditions described above exist, the Company will refuse to
accept any Old Notes and will return all tendered Old Notes to exchanging
holders of the Old Notes.
EXCHANGE AGENT
U.S. Trust Company of California, N.A. has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal and
deliveries of completed Letters of Transmittal with tendered Old Notes should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
OVERNIGHT COURIER OR EXPRESS MAIL: BY FIRST CLASS MAIL:
U.S. TRUST COMPANY OF CALIFORNIA, N.A. U.S. TRUST COMPANY OF CALIFORNIA, N.A.
c/o UNITED STATES TRUST COMPANY OF NEW YORK c/o UNITED STATES TRUST COMPANY OF NEW YORK
770 BROADWAY, 13TH FLOOR P.O. BOX 841, PETER COOPER STATION
NEW YORK, NY 10003 NEW YORK, NY 10276-0841
ATTN: CORPORATE TRUST AND AGENCY SERVICES ATTN: CORPORATE TRUST AND AGENCY SERVICES
BY HAND
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
c/o UNITED STATES TRUST COMPANY OF NEW YORK
111 BROADWAY, LOWER LEVEL
NEW YORK, NY 10006
ATTN: CORPORATE TRUST AND AGENCY SERVICES
BY FACSIMILE:
(For Eligible Institutions Only)
(212) 420-6155
TELEPHONE NUMBER:
(800) 225-2398
</TABLE>
The Company will indemnify the Exchange Agent and its agents for any loss,
liability or expense incurred by them, including reasonable costs and expenses
of their defense, except for any such loss, liability or expense caused by
negligence or bad faith.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations
29
<PAGE>
may be made by officers and regular employees of the Company and its affiliates
in person, by telephone or facsimile.
The Company will not make any payments to brokers, dealers, or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes, and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and expenses, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Notes (or Old Notes for principal amounts not tendered or accepted
for exchange) are to be delivered to, or are to be registered or issued in the
name of, any person other than the registered holder of the Old Notes tendered,
or if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Company will not recognize any gain or loss for accounting purposes upon
the consummation of the Exchange Offer. The expense of the Exchange Offer will
be amortized by the Company over the term of the Notes under GAAP.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Notes pursuant
to the Exchange Offer will continue to be subject to the provisions in the
Indenture regarding transfer and exchange of the Old Notes and the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act. In general, the Old Notes may not be offered or sold, unless registered
under the Securities Act. The Company does not currently anticipate that it will
register Old Notes under the Securities Act. See "Summary -- Consequences of
Exchanging Old Notes Pursuant to the Exchange Offer."
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Schuler Homes designs, constructs, markets and sells single-family
residences, townhomes and condominiums primarily to entry level and first-time
move-up buyers. The Company operates in five geographic markets: Colorado,
Hawaii, Northern California, Oregon and Washington.
The year ended December 31, 1997 represented a year of significant growth
for the Company. Prior to 1997, all of the Company's revenues were generated
from operations in Hawaii. Hawaii was one of the country's strongest new
residential housing markets in the late 1980s and early 1990s. However, by the
mid-1990s, the slowdown in Hawaii's economy led to a weakness in the Hawaiian
housing market, which resulted in declines in home sales rates, prices and
profit margins. To improve operating results and returns on invested capital,
the Company implemented a strategic plan designed to diversify the Company's
operations into multiple high growth housing markets within the Western United
States. The Company's strategy involved redeployment of capital from its Hawaii
operations, generated by cash flows attributable to the sales of homes from the
Company's existing Hawaiian land inventory, to these high growth markets.
In 1997 the Company's financial results reflected the benefits of its
expansion efforts. From 1996 to 1997 revenues grew 145.2% from $93.6 million to
$229.6 million, the number of units closed increased from 512 to 1,427 and gross
profit and operating margins improved.
RESULTS OF OPERATIONS
SELECTED FINANCIAL INFORMATION
The table below presents certain items in the Company's statements of
operations data expressed as a percentage of total residential real estate sales
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Residential real estate sales.......................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Residential real estate sales........................................................ 80.5 81.8 76.3
Inventory impairment loss............................................................ -- 25.5 7.1
Selling and commissions.............................................................. 7.5 8.3 5.5
General and administrative........................................................... 5.9 4.5 3.2
--------- --------- ---------
Total costs and expenses............................................................... 93.9 120.1 92.1
Income (loss) from unconsolidated joint ventures....................................... (0.1) 0.2 0.8
--------- --------- ---------
Operating income (loss)................................................................ 6.0% (19.9)% 8.7%
--------- --------- ---------
--------- --------- ---------
</TABLE>
31
<PAGE>
OPERATING DATA
The operating data shown below shows certain data regarding units closed,
average sales prices of units closed, and backlog.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT
AVERAGE SALES PRICE DATA)
<S> <C> <C> <C>
SELECTED OPERATING DATA:
Unit closings
Consolidated:
Colorado................................................................ 950 -- --
Hawaii (1).............................................................. 343 460 559
Northern California..................................................... 15 -- --
Oregon.................................................................. 9 -- --
---------- ---------- ----------
Total................................................................. 1,317 460 559
Unconsolidated Joint Ventures:
Hawaii (2).............................................................. 28 52 76
Washington (3).......................................................... 82 -- --
---------- ---------- ----------
Total................................................................. 1,427 512 635
---------- ---------- ----------
---------- ---------- ----------
Average sales price
Consolidated:
Colorado................................................................ $ 149,000 $ -- $ --
Hawaii (1).............................................................. 228,000 234,000 238,000
Northern California..................................................... 141,000 -- --
Oregon.................................................................. 179,000 -- --
Total................................................................. 169,000 234,000 238,000
Unconsolidated Joint Ventures:
Hawaii (2).............................................................. 130,000 126,000 136,000
Washington (3).......................................................... 223,000 -- --
Total................................................................. 172,000 225,000 225,000
Backlog at period end, units (4).............................................. 408 78 137
Backlog at period end, aggregate sales value (4).............................. $ 76,125 $ 18,277 $ 30,922
</TABLE>
- ------------
(1) Includes homes and lots sold pursuant to the Company's "zero-down" sales
program in Hawaii. Approximately $3.4 million and $14.7 million of revenues
associated with 18 and 70 "zero-down" closings were deferred in 1997 and
1996, respectively. These revenues are recognized when the related notes
receivable have been paid in full.
(2) Reflects 100% of the information with respect to the Company's two 50% owned
joint ventures in Hawaii, Iao Partners and Waiakoa Estates Subdivision Joint
Venture.
(3) Reflects 100% of the information with respect to Stafford in which the
Company acquired a 49% interest in July 1997. The number of sales closed for
the year ended December 31, 1997 would have been 160 if the Company had an
ownership interest in Stafford for the entire year.
(4) Represents homes/lots subject to pending sales contracts that have not yet
closed. As such contracts are subject to certain conditions being satisfied
and may be canceled by the buyer at any time, no assurances can be given
that homes/lots subject to pending sales contracts will result in closings.
32
<PAGE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
RESIDENTIAL REAL ESTATE SALES
The Company's sales of residential real estate (revenues) in 1997 were
$229.6 million, an increase of 145.2% as compared to 1996 revenues of $93.6
million. The increase in revenues reflects a larger number of unit sales closed
in 1997 relative to 1996, partially offset by lower average sales prices in 1997
than in 1996. The increased number of unit closings in 1997 relative to 1996
came primarily from the Colorado division (acquired in January of 1997),
partially offset by lower unit sales in the Hawaii division. In addition, the
Company's Northern California and Oregon divisions closed their first 15 and 9
home sales, respectively, during 1997. The Company's average sales price per
unit declined in 1997 to $172,000, a 23.6% decline from an average sales price
per unit of $225,000 in 1996. The decrease in the average sales price per unit
was attributable to the lower average sales prices of homes in Colorado relative
to Hawaii, and to a lesser extent, an increased level of price discounts offered
to prospective home buyers in Hawaii. During 1997, the Company recognized $10.1
million of deferred revenue related to 53 of the 70 sales that closed in 1996
pursuant to the Company's "zero-down" sales program, in which the Company
provided new home buyers with second mortgages of up to 20% of the purchase
price. Revenue and profit recognition on these "zero-down" sales was deferred
until the requirements for revenue and profit recognition were satisfied, which
occurred during the first quarter of 1997 when the second mortgages were sold.
The Company's revenues in 1996 were $93.6 million, a decrease of 29.5% as
compared to 1995 revenues of $132.9 million. The decrease in revenues reflect
lower unit sales closed in 1996 relative to 1995 and the deferral of revenue
related to 70 sales that closed in 1996 pursuant to the Company's "zero-down"
sales program.
COSTS AND EXPENSES -- RESIDENTIAL REAL ESTATE SALES
Cost of residential real estate sales represents the acquisition and
development costs of a project attributable to the homes closed. Acquisition and
development costs include primarily 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 in 1997 was $184.8 million, an
increase of 141.3% as compared to cost of residential real estate sales in 1996
of $76.6 million. This increase reflects a higher level of unit and dollar sales
closed in 1997 relative to 1996. As a percentage of revenues, cost of
residential real estate sold decreased in 1997 to 80.5% from 81.8% in 1996. This
decrease reflects higher gross margins realized by the Colorado division,
partially offset by lower gross margins realized by the Hawaii division,
including the impact of the recognition of costs related to "zero-down" sales
deferred in 1996 and recognized in 1997 as a result of the sale of the related
second mortgages.
Cost of residential real estate sales in 1996 was $76.6 million, a decrease
of 24.4% as compared to cost of residential real estate sales in 1995 of $101.4
million. This decrease reflects a lower number of unit sales in 1996 relative to
1995. As a percentage of revenues, cost of residential real estate sold
increased in 1996 to 81.8% from 76.3% in 1995. This increase reflects an
increased level of price discounts to home buyers and higher construction and
inventory carrying costs.
COSTS AND EXPENSES -- INVENTORY IMPAIRMENT LOSS
During the fourth quarter of 1995, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which changes
the method that companies must use to value long-lived assets, including
homebuilding inventories. Previously, accounting standards required companies to
carry inventories at the lower of cost or net realizable value. Under the new
standard, inventories which are substantially completed are carried at the lower
of cost or fair value less selling cost, determined by applying a risk adjusted
discount rate to
33
<PAGE>
estimates of future cash flows, a more conservative measurement than net
realizable value. Also, under the new standard, land held for future development
or inventories under current development are adjusted to fair value, only if an
impairment to their value is indicated.
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 the level of consumer confidence, among other items. While the Company did
not recognize a FASB 121 charge in 1997, no assurances can be given that changes
in estimates will not occur in subsequent periods.
During 1996, the Company recognized a non-cash impairment loss in its Hawaii
division of $23.9 million, ($14.6 million after-tax) primarily related to (i) an
increase in completed inventories 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 and (ii) the decline experienced by the Company in the rate
of new home sales contracts entered into, which resulted in a more conservative
outlook with respect to the estimate of future cash flows for certain other
completed projects on some of which impairment losses were recognized in 1995.
The Company's completed and unsold inventories in its wholly owned projects in
Hawaii have declined by 37.0% at December 31, 1997 as compared to December 31,
1996. In addition, the Company postponed the construction of the third and last
high-rise building at Country Club Village in order to reduce completed
inventories in this project in the future.
During 1995, the Company recognized a non-cash impairment loss in its Hawaii
division of $9.4 million ($5.7 million after-tax), which related to completed
inventories at December 31, 1995. The Company's completed inventory comprised a
larger component of total inventory at December 31, 1995 as compared to December
31, 1994, with substantially all of the increase occurring during the fourth
quarter of 1995. No losses were recognized in 1996 or 1995 on land held for
future development or inventories under current development.
COSTS AND EXPENSES -- SELLING AND COMMISSIONS
Selling and commissions expense represents the selling and marketing costs
associated with the sale of homes. Such costs include commissions, sales
incentives offered to buyers, advertising costs, model and sales office costs
and other general sales and marketing costs.
Selling and commissions expense in 1997 was $17.3 million, an increase of
122.3% as compared to selling and commissions expense in 1996 of $7.8 million.
The increase in selling and commissions expense reflects a higher level of unit
and dollar sales closed in 1997 than in 1996, primarily due to the acquisition
of the Colorado division. As a percentage of revenues, selling and commissions
expense decreased to 7.5% in 1997 from 8.3% in 1996. This decrease is primarily
the result of the lower level of selling and commissions costs incurred by the
Colorado division relative to the Hawaii division, partially offset by increases
in the selling and commissions costs in Hawaii.
Selling and commissions expense in 1996 was $7.8 million, an increase of
5.9% as compared to selling and commissions expense in 1995 of $7.3 million. The
increase in selling and commissions expense reflects increases in sales
incentives offered to buyers and increases in sales and marketing costs, both in
the Hawaii division. As a percentage of revenues, selling and commissions
expense increased to 8.3% in 1996 from 5.5% in 1995. This increase reflects the
above-mentioned increases in the total costs relative to a lower level of
revenues.
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 in 1997 were $13.6 million, an increase
of 225.3% as compared to general and administrative expenses in 1996 of $4.2
million. The increase in general and administrative expenses reflect the
addition of the Colorado division and the start-up of operations in Northern
California and Oregon.
34
<PAGE>
As a percentage of revenues, general and administrative expenses increased to
5.9% in 1997 from 4.5% in 1996. This increase reflects the above-mentioned
increases and higher costs relative to revenues in the Hawaii division.
General and administrative expenses in 1996 and 1995 were $4.2 million for
each year. As a percentage of revenues, general and administrative expenses
increased to 4.5% in 1996 from 3.2% in 1995. This increase reflects the decrease
in revenues in 1996 relative to 1995.
INCOME FROM UNCONSOLIDATED JOINT VENTURES
Income from unconsolidated joint ventures represents the Company's 49%
interest in the operations of Stafford and its 50% interest in the operations of
two joint ventures in Hawaii. The decrease in this income in 1997 relative to
1996 is primarily the result of the Company's share of a loss recognized by one
of its Hawaii joint ventures, Iao Partners, of $397,000, which was driven by the
Company's share of a FASB 121 charge of $522,000. This loss was offset in part
by the Company's share of income since the date of acquisition (July 1997) of
$329,000 in Stafford. The decrease in this income from 1996 relative to 1995 is
primarily the result of a reduction of income from the Hawaii joint ventures due
to fewer closings and increased construction and sales and marketing costs.
OTHER INCOME (EXPENSE)
Other income (expense) represents: (i) interest incurred less interest
capitalized to inventory; (ii) amortization of financing fees, net of amounts
capitalized to inventory; and (iii) amortization of goodwill and of a
covenant-not-to-compete, both as a result of the Melody acquisition; less
interest income. Other income (expense) in 1997 is primarily comprised of: (i)
$3.0 million in interest incurred net of interest capitalized to inventory; plus
(ii) $0.3 million of amortization of financing fees; plus (iii) amortization of
goodwill and the covenant-not-to-compete of $0.7 million; plus (iv) other
miscellaneous expenses of $0.6 million, less $0.3 million of interest income.
PROVISION (CREDIT) FOR INCOME TAXES
The effective combined tax rates were approximately 38.2% in 1997 and 39.0%
in 1996 and 1995. The lower effective income tax rate for 1997 primarily
reflects lower Colorado state income tax rate as compared to Hawaii's state
income tax rate.
35
<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 December 31, 1997, 1996, and 1995, 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>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ -------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER SALES VALUE NUMBER SALES VALUE NUMBER SALES VALUE
----------- ----------- ------------- ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Consolidated:
Colorado (1)................................ 267 $ 41,284 -- $ -- -- $ --
Hawaii...................................... 67 19,774 71 17,204 116 28,013
Northern California......................... 14 1,905 -- -- -- --
Oregon...................................... 14 2,676 -- -- -- --
-- -- --
----------- ----------- -----------
Total......................................... 362 65,639 71 17,204 116 28,013
Unconsolidated Joint Ventures:
Hawaii...................................... 3 398 7 1,073 21 2,909
Washington (2).............................. 43 10,088 -- -- -- --
-- -- --
----------- ----------- -----------
Total......................................... 408 $ 76,125 78 $ 18,277 137 $ 30,922
-- -- --
-- -- --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------
(1) The Colorado market was added in 1997 as a result of the acquisition of
Melody in January 1997. Colorado backlog at December 31, 1996 approximated
219 units with an aggregate sales value of $32.2 million.
(2) The Washington market was added in 1997 as a result of the Company's
acquisition of a 49% interest in Stafford in July 1997. Washington backlog
at December 31, 1996 approximated 39 units with an aggregate sales value of
$9.3 million.
The reduction in unit backlog in Hawaii from 1995 to 1996 and, to a lesser
extent, from 1996 to 1997 reflects the lower rate of unit sales which the
Company believes to be attributable to the general lack of confidence by
prospective home buyers in the Hawaii economy. The average sales prices of the
homes and lots comprising backlog for consolidated projects in Hawaii at
December 31, 1997, 1996 and 1995 were $295,000, $242,000 and $241,000,
respectively. The increase in average sales prices in 1997 relative to 1996
primarily reflects a higher number of single-family homes relative to townhomes
and condominiums in 1997 backlog for consolidated projects in Hawaii as compared
to 1996 Hawaii backlog.
The increase in backlog in Colorado from 1996 to 1997 reflects a higher rate
of new home sales and an increase in the average sales prices of the homes sold.
These improvements are related to a greater number of projects under development
and a strong overall housing market in the Denver metropolitan area.
Due to the ability of buyers to cancel their sales contracts, no assurance
can be given that homes in backlog will result in actual closings.
VARIABILITY OF RESULTS
The Company has experienced, and expects to continue to experience,
significant variability in sales and net income. 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
36
<PAGE>
to continue to acquire additional land on favorable terms for future
developments; the condition of the real estate markets and economies 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, and from fiscal quarter to fiscal quarter.
YEAR 2000 COMPLIANCE
The Company has assessed the vulnerability of its computer systems to the
"Year 2000 issue" and the cost of addressing Year 2000 compliance. Modifications
and replacements of computer systems, primarily the replacement of computer
software, to attain Year 2000 compliance have begun, and the Company expects to
attain Year 2000 compliance and institute appropriate testing of its
modifications and replacements before the Year 2000 date change. Presently, the
Company does not believe that Year 2000 compliance will result in material
investments by the Company, nor does the Company anticipate the Year 2000 issue
will have material adverse effects on the business operations or financial
performance of the Company. There can be no assurance, however, that the Year
2000 issue will not adversely affect the Company and its business.
The Company has also initiated discussions with parties with whom it does
business to ensure that those parties have appropriate plans to remediate Year
2000 issues where their systems impact the Company's operations. The Company is
assessing the extent to which its operations are vulnerable should these
organizations fail to properly remediate the computer systems.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its liquidity and capital resources to, among other things,
(i) support its operations, including its inventories of homes, home sites and
land; (ii) provide working capital; (iii) fund market expansion, including
acquisitions, investments in and advances to joint ventures, and start-up
operations; and (iv) make interest payments on outstanding debt.
CAPITAL RESOURCES
The Company anticipates continuing to acquire land for use in its future
homebuilding operations, including finished lots and partially developed land.
The Company currently intends to acquire a portion of the land inventories
required in future periods through takedowns of lots subject to option contracts
entered into in prior periods and under new option contracts. The use of option
contracts lessens the Company's land-related risk and improves liquidity.
Because of increased demand for partially developed and finished lots in certain
of the markets where the Company builds homes, the Company's ability to acquire
lots using option contracts has been reduced or has become more expensive. See
"Risk Factors."
In connection with the purchase of its 49% interest in Stafford, the Company
entered into an agreement to make loans available to Stafford in an aggregate
principal amount of up to $5.0 million (of which $1.5 million was outstanding on
December 31, 1997). In addition, the Company has an option to purchase the
remaining 51% interest in Stafford based on a pre-determined formula, subject to
certain contingencies. If the Company acquired a majority interest in Stafford,
which may occur as early as January 1999, the Company may refinance or assume
Stafford's existing debt. As of December 31, 1997, Stafford's total assets were
approximately $37.0 million and notes payable were approximately $26.7 million,
of which $1.5 million was outstanding to the Company.
The Company anticipates that it has adequate financial resources to satisfy
its current and near-term capital requirements based on its current capital
resources and additional liquidity available under the Revolving Credit
Facility. The Company believes that it can meet its long-term capital needs
(including, among other
37
<PAGE>
things, meeting future debt payments and refinancing or paying off other
long-term debt as it becomes due) from operations and external financing
sources, assuming that no significant adverse changes in the Company's business,
or general economic conditions, occur as a result of the various risk factors
described elsewhere herein, in particular, increases in interest rates. See
"Risk Factors."
LINES OF CREDIT AND NOTES PAYABLE
In March 1997, the Company amended its Revolving Credit Facility, increasing
the amount of the Revolving Credit Facility from $110.0 million to $137.6
million. The Revolving Credit Facility expires on July 1, 1999 and includes an
option for the lenders to extend the term for an additional year. The Revolving
Credit Facility contains covenants, including certain financial covenants and
also contains provisions which may, in certain circumstances, limit the amount
the Company may borrow. At December 31, 1997, $46.5 million of the Company's
line of credit was unused, of which $6.4 million is restricted to withdrawal for
specific project costs and letters of credit.
In April 1998, the Company amended certain provisions of its Revolving
Credit Facility to provide for the issuance of the Old Notes.
On May 6, 1998, the Company consummated its offering of $100 million
aggregate principal amount of Old Notes, which are due April 15, 2008. The
Company received net proceeds from the offering of approximately $97.3 million
(net of discounts and estimated offering costs of approximately $2.7 million).
The Company used such proceeds to repay a portion of the Company's borrowings
under its line of credit. The offering costs will be amortized over the term of
the notes using the interest method.
The Company has no material commitments or off-balance sheet financing
arrangements that would tend to affect future liquidity. 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.
Inflation has not had a material adverse impact on the Company's results of
operations during the years ended December 31, 1997, 1996 and 1995.
38
<PAGE>
BUSINESS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS PROSPECTUS CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE RISKS DISCUSSED UNDER THE
CAPTION "RISK FACTORS."
OVERVIEW
Schuler Homes designs, constructs, markets and sells single-family
residences, townhomes and condominiums primarily to entry-level and first-time
move-up buyers. The Company operates in five geographic markets: Colorado,
Hawaii, Northern California, Oregon and Washington, four of which are among the
strongest housing markets in the United States. The Company offers a variety of
homes generally at prices ranging from approximately $125,000 to over $375,000,
with an average sales price of $172,000 in 1997.
Prior to 1997, the Company operated solely in the Hawaii market, one of the
country's strongest residential housing markets in the late 1980s and early
1990s. Due to a decline in the Hawaiian economy which negatively impacted the
Hawaiian residential housing market in the mid-1990s, the Company adopted a
strategic expansion plan in late 1996 and early 1997 designed to geographically
diversify the Company's operations outside of the Hawaii market and to improve
the Company's overall return on invested capital. The expansion plan provided
for the redeployment of capital generated by the Hawaii division to housing
markets in the Western United States that have experienced significant
population and employment growth in recent years. As a result of its aggressive
diversification efforts, the Company reported significantly improved financial
results in 1997 with revenues and EBITDA of $229.6 million and $23.5 million,
respectively as compared to $93.6 million and $10.0 million, respectively, in
1996. In addition, in 1997 the Company (i) reduced its completed and unsold
housing inventory in Hawaii by approximately 37%, (ii) generated approximately
$32 million in cash flow in Hawaii, and (iii) derived approximately 63% of its
revenues from sales in markets outside of Hawaii.
Schuler Homes is one of the two largest builders of single-family
residences, townhomes and condominiums in Hawaii. Since inception in March 1988
through December 31, 1997, the Company closed the sales of 5,162 homes and lots,
of which 371 home and lot sales were closed during fiscal 1997. As of December
31, 1997, the Company had land zoned and entitled for 3,153 homes in Hawaii
supported by the requisite infrastructure, which the Company believes provides
it with a significant competitive advantage in the future given both the
concentration of land ownership and the lack of zoned and entitled property in
Hawaii.
Schuler Homes entered the Denver, Colorado homebuilding market in January
1997 through the purchase of Melody, a homebuilder for over 45 years and one of
the largest builders in the Denver market, and Melody Mortgage, a mortgage
brokerage firm for Melody home buyers. The Company believes it is
well-positioned to continue benefiting from the growing Denver housing market as
a result of its strong land position (approximately 5,567 lots owned or
controlled as of December 31, 1997) and its local market knowledge. During 1997,
Melody's deliveries of homes increased by approximately 49% to 950 homes and its
revenues increased by approximately 52% to $141.2 million. In addition, at
December 31, 1997, Melody's backlog was 267 units, or $41.3 million, compared to
219 units, or $32.2 million at December 31, 1996.
The Company also established two new homebuilding operations in Northern
California and Oregon in late 1996. In 1997, the Company delivered 24 new homes
in these markets, and as of December 31, 1997, these divisions owned or
controlled 824 lots. Also, the Company further expanded its operations in the
Pacific Northwest by acquiring a 49% interest in July 1997 (with an option to
purchase the remaining 51% subject to certain performance contingencies) in
Stafford, a homebuilder for over 30 years in the greater Seattle/Puget Sound
area of Washington. During 1997, Stafford delivered 160 homes (82 since July 1),
and as of December 31, 1997, owned or controlled 923 lots.
39
<PAGE>
BUSINESS STRATEGY
The Company's objective is to provide its customers with homes that
incorporate quality and value while seeking to maximize its return on invested
capital. To achieve this objective, the Company has developed a business
strategy which focuses on the following elements:
GEOGRAPHIC DIVERSIFICATION IN ATTRACTIVE GROWTH MARKETS. The Company has
successfully expanded its operations from Hawaii to Colorado, Northern
California, Oregon and Washington through acquisitions and new start-up
operations. The Company believes that these markets provide the opportunity for
superior returns based on their favorable prospects for economic, population and
employment growth. As part of its strategy to further diversify geographically,
the Company continues to evaluate market expansion opportunities, including
potential acquisitions of homebuilding companies, joint ventures with existing
companies as well as its own acquisition and development of homebuilding
projects in certain areas.
LEADING MARKET SHARES IN PRINCIPAL MARKETS. The Company seeks to achieve
leading market shares in its principal markets, currently Denver, Colorado and
Hawaii. Based on unit sales during 1997, the Company was the second largest
homebuilder in both Denver and Hawaii.
FOCUS ON BROAD ENTRY-LEVEL AND FIRST TIME MOVE-UP MARKET. The Company
designs homes that appeal to a wide variety of home buyers with a primary focus
on high-quality, single-family residences, townhomes and condominiums for
entry-level and first-time move-up buyers. The Company maintains the flexibility
to alter its product mix within a given market depending on market conditions
and, in determining its product mix, considers demographic trends, demand for a
particular type of product, margins, timing and the economic strength of the
market. The Company believes that its focus on high-quality housing has helped
it develop a positive reputation with homebuyers, landowners and, in Hawaii,
governmental regulators. The average selling prices of the Company's units
closed during the year ended December 31, 1997 were $220,000 in Hawaii and
$149,000 in its mainland markets.
MAINTAIN STRICT COST CONTROLS. The Company believes that maintaining
stringent cost controls is a key factor in improving profitability. The Company
controls costs and reduces risks by: (i) generally purchasing land that is
already zoned for residential development; (ii) seeking to begin construction
only after the "pre-sale" of homes to be developed (e.g., execution of a sales
contract and receipt of home buyer deposits); (iii) utilizing prefabricated
building materials and standardized design plans; (iv) utilizing experienced
contractors; and (v) using its leading and long-standing market position in the
Denver and Hawaii markets to obtain volume discounts on construction materials
and favorable pricing from contractors.
COMMITMENT TO CUSTOMER SATISFACTION. The Company is committed to providing
customer satisfaction through quality construction and customer service.
Division managers are responsible for the quality of construction and the level
of customer satisfaction in their respective markets. In the Company's two
largest markets, Colorado and Hawaii, customer satisfaction surveys indicated
that 98% (survey conducted by Company) and 97% (survey conducted by outside
third party), respectively, of customers in 1997 responded that they were
satisfied with their purchase and would recommend a Company home to a friend.
EXPERIENCED MANAGEMENT AND DECENTRALIZED OPERATIONS. The Company's senior
corporate officers and division managers average over 25 years in the
homebuilding business. Each division is run by a local manager. One of the
essential criteria is the individual's in-depth familiarity with the geographic
area within which the division operates. Major decisions by division managers,
including decisions regarding selection of parcels of land for purchase and
development, are made in conjunction with the corporate officers of the Company,
and thereafter, each division manager conducts the operations of the division as
a separate profit center with bonuses based on pre-tax earnings, returns on
invested capital and performance against the financial budgets and operating
plans of their respective divisions.
40
<PAGE>
MARKETS
The Company operates in five geographic markets: Colorado, Hawaii, Northern
California, Oregon and Washington, four of which are among the strongest housing
markets in the United States.
<TABLE>
<CAPTION>
YEAR
GEOGRAPHIC AREA MARKETS ENTERED
- --------------------------------------------------------- ------------------------- ---------
<S> <C> <C>
Colorado (1)............................................. Denver 1997
Fort Collins 1997
Hawaii................................................... Maui 1988
Hawaii 1989
Oahu 1990
Kauai 1992
Northern California...................................... Bay Area 1996
Oregon................................................... Portland, Oregon 1996
Vancouver, Washington 1996
Washington (2)........................................... Greater Puget Sound 1997
</TABLE>
- ------------
(1) Entrance into the Colorado markets was a result of the acquisition of Melody
in January 1997.
(2) Entrance into the Washington market was a result of the acquisition of a 49%
interest in Stafford in July 1997.
41
<PAGE>
PROJECT AND PRODUCT DESCRIPTIONS
The Company has focused, and intends to continue to focus, its business
primarily on entry-level and first-time move-up housing in the form of
single-family residences, and, to a lesser extent, townhomes and condominiums.
The Company attempts to maximize efficiency by using standardized design plans
whenever possible and sharing design plans among markets. However, the Company
maintains the flexibility to alter its product mix within a given market
depending on market conditions and, in determining its product mix, considers
demographic trends, demand for a particular type of product, margins, timing and
the economic strength of the market. As a result of the Company's recent
expansion into new markets during 1997, the number and location of its active
projects increased and its home designs and product mix expanded and changed.
The following table presents information relating to the Company's home and
lot closings and land position as of and for the year ended December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997 AS OF DECEMBER 31, 1997
------------------------ -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE TOTAL NUMBER OF NUMBER OF BUILDING SITES
NUMBER OF SALES PROJECTS FOR PROJECTS IN OWNED OR
MARKET SALES CLOSED PRICE DEVELOPMENT (1) SALES STAGE (2) CONTROLLED (3)(4)
- ---------------------------- ------------- --------- --------------------- ------------------- -----------------
Consolidated:
Colorado.................. 950 $ 149,000 20 11 5,567
Hawaii (7)................ 343 228,000 13 11 3,010
Northern California....... 15 141,000 4 1 415
Oregon.................... 9 179,000 5 1 409
- -
----- ------
Total....................... 1,317 169,000 42 24 9,401
Unconsolidated Joint
Ventures:
Hawaii (8)................ 28 130,000 2 2 143
Washington (9)............ 82 223,000 16 7 923
- -
----- ------
Total....................... 1,427 172,000 60 33 10,467
- -
- -
----- ------
----- ------
<CAPTION>
<S> <C> <C>
HOMES UNDER
MARKET CONSTRUCTION (5) BACKLOG (6)
- ---------------------------- ------------------- ---------------
Consolidated:
Colorado.................. 200 267
Hawaii (7)................ 116 67
Northern California....... 25 14
Oregon.................... 25 14
-- --
Total....................... 366 362
Unconsolidated Joint
Ventures:
Hawaii (8)................ 0 3
Washington (9)............ 83 43
-- --
Total....................... 449 408
-- --
-- --
</TABLE>
- ------------
(1) Reflects the total number of projects owned or under option or similar
contract and includes projects with homes in the sales stage, projects under
construction and projects in various stages of planning.
(2) Represents the number of active projects in which home or lot sales closed
or standard sales contracts were entered into with homebuyers.
(3) Represents the estimated number of homes/lots relating to land owned or
under option or similar contracts. The amounts are based on current
management estimates, which are subject to change. Although the Company
currently intends to consummate the purchase of the parcels under purchase
options or similar contracts, no assurances can be given that the purchase
will be completed or that the land under purchase option will be acquired.
In addition, this category includes Homes Under Construction and Backlog.
(4) For consolidated projects, includes 36 model homes and 14 completed and
unsold homes in the Colorado, Northern California and Oregon markets, and 33
model homes and 268 completed and unsold homes in the Hawaii market,
including approximately 64 homes rented and 141 homes held for sale in the
Company's highrise condominium project in Oahu. For unconsolidated joint
ventures, includes 7 model homes and 56 completed and unsold homes in
Hawaii, and 7 model homes and 33 completed and unsold homes in Washington.
(5) Includes certain homes reflected in Backlog.
(6) Represents homes/lots subject to pending sales contracts that have not yet
closed. As such contracts are subject to certain conditions being satisfied
and may be canceled by the buyer at any time, no assurances can be given
that homes/lots subject to pending sales contracts will result in closings.
(7) Includes homes and lots sold pursuant to the Company's "zero-down" sales
program in Hawaii. Approximately $3.4 million of revenues associated with 18
"zero-down" closings were deferred in 1997 until the related notes
receivables are paid in full.
(8) Reflects 100% of the information with respect to the Company's two 50% owned
joint ventures in Hawaii, Iao Partners and Waiakoa Estates Subdivision Joint
Venture.
(9) Reflects 100% of the information with respect to Stafford in which the
Company acquired a 49% interest in July, 1997. The number of sales closed
for the year ended December 31, 1997 would have been 160 if the Company had
an ownership interest in Stafford for the entire year.
42
<PAGE>
LAND ACQUISITION AND DEVELOPMENT
GENERAL. The Company selects its land for development based upon a variety
of factors, including: (i) internal and external demographic and marketing
studies; (ii) financial and legal reviews as to the feasibility of the proposed
project; (iii) the ability to secure necessary financing and required government
approvals and entitlements; (iv) environmental due diligence and management's
judgment as to the real estate market economic trends; and (v) the Company's
experience in a particular market. As part of the Company's ongoing land
acquisition policy, it actively seeks to purchase land that is already zoned for
residential development.
The Company generally utilizes options or land purchase agreements to obtain
control of desired parcels of land. The Company's purchase and option agreements
are typically subject to numerous conditions, including, but not limited to, the
Company's ability to obtain any necessary governmental approvals. During the
contingency period, the Company also confirms the availability of utilities,
completes its marketing feasibility studies, verifies site and construction
costs, reviews and approves soil and environmental reports and arranges for
project financing, if necessary.
The Company also enters into partnerships or joint ventures to purchase land
and develop its communities where such arrangements are necessary to acquire the
land or appear to be otherwise economically advantageous to the Company. The
Company generally has not used partnerships or joint venture arrangements as a
method of raising capital for the development of projects, although such
arrangements may be used for purposes of expansion into other geographic areas
or other related businesses.
Although the Company's principal focus is the construction and sale of
single-family and townhome residential housing, from time to time the Company
offers residential lots for sale where it perceives an attractive market
opportunity. The Company does not anticipate that residential lot sales will
constitute a significant amount of revenues in the future.
MAINLAND U.S. The Company's homebuilding projects in the mainland United
States have typically taken one to four years to develop, depending on the
project's size, the Company's strategy with respect to the particular project,
regulatory approvals, economic conditions, and geological conditions at the
site. Larger projects are divided into phases, with each phase generally taking
six months to one year to complete. The Company has typically acquired interests
in tracts of land that require site improvements prior to construction and are
suitable for a subdivision comprised of between 50 and 500 buildable units.
HAWAII. The Company's strategy in Hawaii is to develop projects of a
similar size and of the same general profile as in the mainland U.S. However,
certain of the Company's currently planned projects in Hawaii are anticipated to
be longer term in nature and to include a larger number of buildable units than
those in the mainland United States. These larger projects generally will have
offsite and infrastructure requirements to be fulfilled prior to the
construction of homes, which increase the amount of cash expended at the
beginning of the project. The increased length and size of such projects further
exposes the Company to risks inherent in the homebuilding industry, including
reductions in the value of land inventory. However, the Company believes its
inventory of zoned and entitled land, for approximately 3,153 homes as of
December 31, 1997, supported by the requisite infrastructure provides a
significant competitive advantage in the future given both the concentration of
land ownership and the lack of zoned and entitled property with completed
infrastructure in Hawaii. In addition, certain of the Company's land purchase
agreements in Hawaii require the Company to make additional payments to the
seller if the average sales price or the final number of all homes exceeds an
amount stated in such agreements. The Company also has occasionally granted a
profit participation interest in certain of its projects to individuals involved
in locating, structuring and assisting in the management of the particular
project.
CONSTRUCTION
The Company primarily acts as its own general contractor with its
supervisory employees coordinating all work on its projects. From time to time
the Company will hire independent general contractors on its projects in
43
<PAGE>
Hawaii, particularly for its townhome and condominium projects. The general
contractors are responsible for the general management of the construction
process, coordinating the activities of all subcontractors, suppliers and
building inspectors and following design plans generally prepared by consulting
architects and engineers who are retained by the Company and whose designs are
geared to the local market. Company employees monitor the construction of each
project, participate in all material design and building decisions, subject the
contractors' and subcontractors' work to quality and cost controls and monitor
compliance with zoning and building codes. In addition, the Company works
closely with contractors and subcontractors on engineering, site preparation,
environmental impact analysis, purchasing, architectural design, site planning,
coordinating governmental approvals, contract management and closings. The
Company will sometimes require its general contractors and/or subcontractors to
post lien-free completion and performance construction bonds. The Company
believes that its relations with its contractors are good.
The Company's homes include single-family residences, townhomes and
condominiums, which have ranged in size from approximately 540 to 3,500 square
feet. The Company typically completes the construction of a home within two to
four months from commencement of building construction. Construction time for
the Company's homes depends on the time of year, availability of labor,
materials and supplies and other factors. See "-- Government Regulation and
Environmental Matters." The Company seeks to utilize standardized home designs
and pre-fabricated components wherever feasible. This standardization
facilitates efficiencies in the on-site construction of homes and helps permit
on-site mass production and bulk purchasing of materials by the contractors and
subcontractors engaged by the Company, thus reducing costs and expensive change
orders. However, from time to time, the Company develops new designs to replace
or augment existing ones as part of its continuing efforts to assure that its
homes are responsive to current consumer preferences. For new designs, the
Company has engaged a number of unaffiliated architectural firms in addition to
its in-house architect. Where it is believed to be cost-effective and efficient,
the Company has used steel building components in certain of its projects, which
represents a departure from the traditional wood-frame method of construction.
SALES AND MARKETING
The Company sells its homes primarily through commissioned employees who
typically work from a sales office located at each project, as well as through
cooperating independent brokers. In all instances, Company personnel are
available to assist prospective buyers by providing them with floor plans,
pricing information, financing options, tours of model homes and the selection
of options and upgrades. The Company generally does not permit changes in home
design, but home buyers are afforded the opportunity to select, at additional
cost, various optional amenities such as prewiring options, upgraded carpet
quality, varied interior and exterior color schemes and finishes and
occasionally some room configurations. The Company focuses on increasing
customer satisfaction through the use of its own design centers in the majority
of its markets to help customers select features and options on their homes.
Sales personnel are also trained by the Company and attend periodic meetings to
be updated on the availability of financing, construction schedules, marketing
and advertising plans, which the Company believes results in a sales force with
extensive knowledge of the Company's operating policies and housing products.
The Company also makes extensive use of advertising to market its homes,
including print, radio and television, in addition to other promotional
activities such as direct mail and the placement of strategically located sign
boards in the immediate areas of its developments.
The Company's objective is to price its homes very competitively and to
market its homes in advance of construction, in an effort to minimize levels of
unsold inventory upon completion of a project. The Company accomplishes
pre-sales by entering into pre-construction sales contracts with its customers.
The sales contracts generally provide for requisite mortgage approval within a
specified period, and the Company attempts to minimize cancellations by
requiring a cash deposit of approximately $2,000 to $10,000 and by training its
sales force to assess the qualifications of potential home buyers.
The Company generally does not use sales incentives in order to attract home
buyers. However, the use of sales incentives (such as landscaping and certain
interior home options and upgrades) has been used in Hawaii,
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and may, from time to time, be used in certain other markets, depending largely
on prevailing economic and competitive market conditions.
The Company normally builds, decorates, furnishes and landscapes between one
to five model homes for each project and maintains on-site sales offices. At
December 31, 1997, the Company owned and maintained 83 model homes. The Company
believes that model homes play a particularly important role in the Company's
marketing efforts. Consequently, the Company expends a significant effort to
create an attractive atmosphere at its model homes. The Company also uses a
cross-referral program that encourages sales personnel to direct customers to
other Company projects based on the customer's needs.
In addition, the Company maintains a customer service department which is
responsible for pre-closing and post-closing customer needs. Prior to closing, a
Company employee accompanies the buyer on a home orientation and inspection
tour. Post-closing, a Company employee follows up with the customer, to ensure
satisfaction, to answer questions and to help resolve any problems, including
responding to warranty requests.
CUSTOMER FINANCING
The Company assists its home buyers in obtaining financing from mortgage
lenders offering qualified home buyers a variety of financing options, including
a wide variety of conventional and FHA financing programs. The Company also
provides customer financing in the Colorado market through Melody Mortgage.
Melody Mortgage provides mortgage originations only, and does not retain or
service the mortgages that it originates. The mortgages are funded by one of a
number of mortgage lenders arranged by Melody Mortgage. All of Melody Mortgage's
revenues are derived from mortgages on homes built by the Company and no third
party loans are arranged for homes not built by the Company.
In certain limited circumstances, the Company may attempt to minimize
potential risks relating to the availability of customer financing by purchasing
mortgage financing commitments that lock in the availability of funds and
interest rates at specified levels for a certain period of time. Also, the
Company has occasionally provided financing pursuant to agreements of sale and
second mortgages to purchasers of its homes and residential lots in Hawaii. The
Company had notes receivable of $2.4 million at December 31, 1997 primarily
comprised of second mortgages provided by the Company to home buyers who
purchased homes as part of the Company's "zero-down" sales incentive program in
Hawaii. To the extent the Company provides financing to its customers, it
becomes subject to the risks inherent with such practices, including possible
defaults by the purchasers. The Company believes that it has established
adequate reserves to cover these risks and the Company does not record the
related revenue and profit until the second mortgage is fully paid.
WARRANTY PROGRAM
The Company generally provides limited warranties of at least one to two
years for workmanship and materials and for longer periods with respect to
structural components. Because the Company contracts its homebuilding work to
qualified contractors or subcontractors who provide the Company with an
indemnity and a lien release prior to receiving payment from the Company for
their work, claims relating to workmanship and materials are generally the
primary responsibility of the Company's contractors or subcontractors. However,
to the extent that warranty claims are not covered by the Company's contractors
or subcontractors, the Company has established a reserve to cover warranty
expenses. The Company's historical experience is that such warranty expenses
generally fall within the reserve established although no assurances can be
given that this will be the experience in the future. From time to time, where
deemed appropriate, the Company purchases structural warranty coverage from
third party insurers. See "Risk Factors -- Warranty Risks."
INTEREST IN STAFFORD AND JOINT VENTURES
On July 31, 1997, the Company acquired a 49% interest in Stafford, a
30-year-old homebuilder in the greater Seattle/Puget Sound area of Washington
State. The Company has an option to purchase the remaining 51% interest, subject
to certain contingencies. The Company believes that the joint venture
arrangement
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provided an opportunity for the Company to strategically expand into the
Seattle/Puget Sound area, an attractive housing market, through a company with
an excellent reputation, a strong and local management team and a significant
land base.
In addition, the Company has a 50% interest in Waiakoa Estates Subdivision
Joint Venture, an unincorporated joint venture which is engaged in the
development and sale of residential lots on the island of Maui and has a 50%
interest in Iao Partners, a general partnership which is engaged in the
development and sale of an "affordable" townhome residential project on the
island of Maui.
As part of its strategy to further diversify geographically, the Company
continues to evaluate market expansion opportunities, including potential
acquisitions of homebuilding companies. The Company would consider strategic
investments or joint ventures, as it has in the past, in order to facilitate
expansion, especially into new geographic markets.
COMPETITION
The development and sale of residential properties is highly competitive and
fragmented. The Company competes for residential sales on the basis of a number
of interrelated factors, including location, reputation, amenities, design,
quality and price, with numerous national, regional and local builders,
including some builders with greater financial resources. The Company also
competes for residential sales with individual resales of existing homes and
available rental housing. The Company believes that it compares favorably to
other builders in the markets in which it operates, due primarily to (i) its
experience within its geographic markets, (ii) its responsiveness to market
conditions, and (iii) its reputation for quality design, construction and
service. See "Risk Factors -- Competition."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
GENERAL. In developing a project, the Company must obtain the approval of
numerous governmental authorities regulating such matters as permitted land uses
and levels of density and the installation of utility services such as
electricity, water and waste disposal. Several governmental authorities have
imposed fees as a means of defraying the cost of providing certain governmental
services to developing areas. Because the Company historically has generally
purchased land that has already been zoned and fully entitled for residential
development, restrictive zoning issues have not had a material adverse effect on
the Company's development activities. The Company is also subject to local,
state and federal statutes and rules regulating environmental matters,
protection and preservation of archeological finds, zoning, building design and
density requirements which limit the number of homes that can be built within a
particular project, and fees imposed to defray the cost of providing certain
governmental services to developing areas. These laws may result in delays,
cause the Company to incur substantial compliance costs and prohibit or severely
restrict development in certain environmentally or archaeologically sensitive
regions or areas.
The Company may be subject to additional costs, delays or may be precluded
entirely from developing its projects because of government regulations that
could be imposed in the future due to unforeseen health, safety, welfare,
archeological or environmental concerns. Environmental regulations can also have
an adverse impact on the availability and price of certain raw materials such as
lumber. Hawaii, in particular, has some of the strictest land use, environmental
and agricultural laws in the United States, and the rezoning of land for urban
development is a difficult and time-consuming process.
To varying degrees, certain permits and approvals will be required to
complete the residential developments in progress or currently being planned by
the Company. The ability of the Company to obtain necessary approvals and
permits for these projects is often beyond the Company's control and could
restrict or prevent the development of otherwise desirable property. The length
of time necessary to obtain permits and approvals increases the carrying costs
of unimproved property acquired for the purpose of development and construction
and could delay the timing of the closing of its sales. In addition, the
continued effectiveness of permits already
46
<PAGE>
granted is subject to factors such as changes in policies, rules and regulations
and their interpretation and application.
HAWAII'S AFFORDABLE HOUSING REQUIREMENTS. To promote affordable housing,
governmental agencies in Hawaii have implemented various formal and informal
policies at both the state and county level. As a condition to rezoning land for
urban development, it is the current practice of the Hawaii Land Use Commission
to negotiate agreements with residential land developers for the provision of
affordable housing. Generally, these conditions require developers of
residential projects to offer for sale to eligible buyers a portion typically
from 10% to 60%, of the total number of units in the project at affordable
prices usually determined as a price at which a purchaser earning up to 140% of
the local median income is able to satisfy specified mortgage criteria. In
addition to the state requirements, a developer often has to comply with
affordable housing requirements imposed by the appropriate county governmental
agencies during the county land use approval process. Generally, the county
further defines the state's requirement, and is often times more restrictive
than the state. For purposes of determining whether a home is affordable, the
Hawaii Land Use Commission and the counties generally assume a 33%
income-to-loan ratio, a monthly amount for common area expenses and taxes, a
30-year loan with an interest rate reflecting then current market conditions and
various other factors. To ensure that homes sold pursuant to a governmentally
imposed affordable housing requirement in Hawaii remain affordable to other
eligible buyers and to prevent speculation, counties typically impose transfer
restrictions on purchasers of the Company's affordable homes. Agreements entered
into between developers and Hawaii government agencies may also provide for a
shared appreciation arrangement whereby the state or county shares with the
owner in the appreciation of the affordable home. Based upon this affordability
criterion, specific price limitations are generally imposed on the homes that
may satisfy a developer's affordable housing requirement. Increases in mortgage
interest rates may decrease the sales price at which affordable homes may be
sold thereby potentially reducing the profitability of affordable housing
projects.
Because a portion of the Company's focus is on Hawaii's affordable housing
market, any material changes in the current policies of the Hawaii Land Use
Commission and the various county authorities with regard to affordable housing
conditions or related policies could adversely affect the Company's operations
and financial results. See "Risk Factors -- Government Regulation and
Environmental Matters."
EMPLOYEES
At December 31, 1997, the Company employed 204 persons, of whom 107 were
executive, project management and administrative personnel, 81 were sales and
marketing, escrow, and customer service/warranty personnel and 16 were
construction workers, who assist with punchlist clearing and other miscellaneous
tasks. Although none of the Company's employees are covered by collective
bargaining agreements, certain of the employees of contractors which the Company
engages are represented by labor unions or are subject to collective bargaining
arrangements. The Company believes that it has good relationships with its
employees and contractors.
PROPERTIES
The Company leases approximately 7,300 square feet of office space for its
corporate headquarters in Honolulu, Hawaii, pursuant to leases expiring in
October 1998. The Company is evaluating the extension of such leases. The
Company believes that its office space for its corporate headquarters in Hawaii
is suitable and adequate for its needs for the foreseeable future or that
adequate space will be readily available. The Company also leases approximately
3,300 square feet of space for its other offices in Hawaii and Northern
California under leases expiring between 1999 and 2000. In addition, the Company
leases office space in Vancouver, Washington on a month-to-month basis. However,
the Company currently anticipates that as the Northern California and Oregon
divisions expand, additional office space will be required.
The Company owns an 11,225 square foot building in Colorado where Melody
operates and has its corporate headquarters. In addition, the Company leases
1,938 square feet under a lease expiring in November
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1998 for its design center in Colorado. Melody Mortgage also leases 2,470 square
feet of office space for its mortgage operations, under a lease which expires in
November 1998. The Company believes that the Colorado office space is suitable
and adequate for its needs for the immediate future. However, if the Colorado
homebuilding operations expand, office expansion will also be necessary.
LEGAL PROCEEDINGS
In April 1996, the Company was served with a purported class action
complaint by owners of units and the Association of Owners of Fairway Village at
Waikele alleging, among other things, material construction defects and
deficiencies, misrepresentations regarding the cost of insurance and breach of a
covenant of good faith and fair dealing. The complaint does not specify an
amount of damages, but includes a claim for punitive damages. Although this
litigation is at an early stage of discovery, based on its current understanding
of the lawsuit, the Company believes the claims to be largely without merit and
that potential third party defendants and insurance coverage exist to offset a
material portion of any damages from the alleged claims. The court has denied
the motion to certify the class, and the litigation continues to be vigorously
defended. A court date has been set for April 1999. If this lawsuit were decided
adversely to the Company in all material respects, it could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is also from time to time involved in routine 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.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information as of March 31, 1998 with
respect to each person who is a director, executive officer or key employee of
the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
James K. Schuler..................................... 59 Chairman of the Board, President and Chief Executive
Officer
Michael T. Jones..................................... 38 Executive Vice President of Operations
Harvey L. Goth....................................... 65 Senior Vice President of Acquisition and Development
Pamela S. Jones...................................... 37 Senior Vice President of Finance, Chief Financial
Officer and Director
David L. Oyler....................................... 48 Vice President/Division President -- Melody Homes,
Inc.
Michael S. McKissick................................. 52 Vice President/Division Manager -- Northern
California and Oregon
Douglas M. Tonokawa.................................. 39 Vice President of Finance and Chief Accounting
Officer
Martin T. Hart....................................... 63 Director
Bert T. Kobayashi.................................... 57 Director
Thomas A. Bevilacqua................................. 41 Director
</TABLE>
JAMES K. SCHULER. Mr. Schuler was the founder of the Company and has been
the Company's Chairman of the Board, President and Chief Executive Officer since
the Company's incorporation in Delaware in January 1992. From 1988 to January
1992, Mr. Schuler served as Chairman of the Board, President and Chief Executive
Officer of JPS Hawaii, Inc., the predecessor of the Company. Since 1973 he has
been President of James K. Schuler & Associates, Inc., a private single- and
multi-family development company that constructed homes in Hawaii, California,
Washington and Texas ("JKS").
MICHAEL T. JONES. Mr. Jones has been the Company's Executive Vice President
of Operations of the Hawaii division since January 1992. From July 1988 to
January 1992, Mr. Jones served as Executive Vice President of Real Estate
Development and Marketing of JPS Hawaii, Inc., the predecessor of the Company.
From 1983 to June 1988, Mr. Jones was Construction Project Manager for Pacific
West Sport & Racquet Clubs, a developer and operator of athletic and
recreational facilities, and Vice President of Real Estate Development for JKS.
HARVEY L. GOTH. Mr. Goth has been the Company's Senior Vice President of
Acquisition and Development since May 1992. Prior to joining the Company, Mr.
Goth was President of Malama Pacific Corporation from October 1991 to May 1992
and Executive Vice President of Blackfield Hawaii Corporation from April 1983 to
May 1988. Mr. Goth was a development consultant from May 1988 to October 1991 in
Hawaii and Nevada. Malama Pacific Corporation is a real estate development
company and subsidiary of Hawaiian Electric Industries. Blackfield Hawaii
Corporation, also a real estate developer, was a subsidiary of Pacific
Enterprises.
PAMELA S. JONES. Ms. Jones has been the Company's Senior Vice President of
Finance and Chief Financial Officer since January 1992. From July 1988 to
January 1992, Ms. Jones served as Vice President of Finance and Chief Financial
Officer of JPS Hawaii, Inc. From September 1983 to May 1988, Ms. Jones worked as
a Certified Public Accountant as Manager for the Seattle, Washington office of
Touche Ross & Co., a national accounting
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firm. Ms. Jones is a member of the Washington Society of Certified Public
Accountants and the American Institute of Certified Public Accountants.
DAVID L. OYLER. Mr. Oyler has served as the Vice President/Division
President of Melody Homes, Inc. since 1994. He joined Melody Homes, Inc. in
August, 1974 and has held the positions of Assistant Manager of Land
Development, Vice President of Land Development, Company Safety Officer and
Executive Vice President.
MICHAEL S. MCKISSICK. Mr. McKissick has served as the Vice
President/Division Manager of the Company's Northern California operations since
1996 and the Oregon operations since January 1997. From 1988 to 1995, Mr.
McKissick served as President and Chief Executive Officer of MSM Development
Corporation. From 1981 to 1988, Mr. McKissick served as President of Presley of
Northern California, Inc. Mr. McKissick is licensed as a land surveyor and
general contractor in California.
DOUGLAS M. TONOKAWA. Mr. Tonokawa joined the Company as Vice President of
Finance in September 1992 and has also served as Chief Accounting Officer since
1996. From 1982 to September 1992, Mr. Tonokawa was employed at Ernst & Young, a
national accounting firm, where he reached the level of Senior Manager. Mr.
Tonokawa is a member of the Hawaii Society of Certified Public Accountants and
the American Institute of Certified Public Accountants.
MARTIN T. HART. Mr. Hart has served as a director of the Company since
April 1992. Mr. Hart is a private investor and has owned and managed a number of
companies over the years. Most recently, Mr. Hart was an owner and the
co-manager of the Lake Catamount joint venture, which was sold in 1996. Mr. Hart
serves as a director of P.J. America, a food service company, Pacific Financial
Group Bank Holding Company, a bank holding company, MassMutual Corporate
Investors, an investment company, MassMutual Participation Investors, Inc., an
investment company, Optical Securities Group, Inc., a manufacturer of security
systems, T-Netix, Inc., a communications company and Ardent Software, Inc., a
data management company.
BERT T. KOBAYASHI. Mr. Kobayashi has served as a director of the Company
since June 1992. Mr. Kobayashi is a senior partner of the Honolulu law firm
Kobayashi, Sugita & Goda. Mr. Kobayashi has been a Director of First Hawaiian
Bank since 1976 and has served as a director of FHB Holding Company, Inc., the
parent company of First Hawaiian Bank, since 1990.
THOMAS A. BEVILACQUA. Mr. Bevilacqua has been a director of the Company
since April 1997. Mr. Bevilacqua is a partner of Brobeck, Phleger & Harrison LLP
and serves on that firm's Executive Committee. Mr. Bevilacqua is a director of
E*Trade Online Ventures.
Pamela S. Jones is the daughter of James K. Schuler. Michael T. Jones and
Pamela S. Jones are husband and wife.
CLASSIFIED BOARD
The members of the Board of Directors of Schuler Homes are classified into
three classes, one of which is elected at each Annual Meeting of Stockholders to
hold office for a three-year term and until successors of such class have been
elected and qualified.
BOARD COMMITTEES
The Company has an Audit Committee and a Compensation Committee of the Board
of Directors. There is no nominating committee or committee performing the
functions of such committee. The Audit Committee meets with the Company's
financial management and its independent accountants and reviews internal
control conditions, audit plans and results, and financial reporting procedures.
This Committee currently consists of Michael T. Jones, Martin T. Hart and Bert
T. Kobayashi. The Compensation Committee reviews and approves
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the Company's compensation arrangements for key employees and administers the
1992 Stock Option Plan. This Committee currently consists of Martin T. Hart and
Bert T. Kobayashi.
DIRECTOR COMPENSATION
Non-employee members of the Board are each paid an annual retainer fee of
$20,000 plus a fee of $500 per Board meeting and are reimbursed for all
out-of-pocket costs incurred in connection with their attendance at such
meetings. Upon joining the Board, each non-employee Board member also receives
an option grant for 20,000 shares of Common Stock under the Company's 1992 Stock
Option Plan. Similar automatic option grants in the amount of 5,000 shares are
made annually to each individual who continues to serve as a non-employee Board
member on the date of each subsequent Annual Meeting of Stockholders.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of March 31,
1998 by (i) each person known by the Company to be the beneficial owner of more
than five percent of the outstanding shares of the Company's Common Stock, (ii)
each director of the Company, (iii) certain executive officers of the Company
and (iv) all executive officers and directors of the Company as a group. All
shares are subject to the named person's sole voting and investment power except
where otherwise indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED COMMON STOCK
- ------------------------------------------------------------------------------ ----------------- -----------------
<S> <C> <C>
James K. Schuler (1)(2) ...................................................... 10,882,528 54.1%
828 Fort Street Mall, 4th Floor
Honolulu, Hawaii 96813
Loomis, Sayles & Company, L.P. (3) ........................................... 1,713,459 8.5%
One Financial Center
Boston, MA 02111
Franklin Resources, Inc. (4) ................................................. 1,705,000 8.5%
777 Mariners Island Boulevard
San Mateo, California 94404
State of Wisconsin Investment Board (5) ...................................... 1,520,000 7.6%
P.O. Box 7842
Madison, Wisconsin 53707
Dimensional Fund Advisors Inc. (6) ........................................... 1,318,200 6.6%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Michael T. Jones (7) ......................................................... 60,519 (8)
Harvey L. Goth (9) ........................................................... 10,163 (8)
Pamela S. Jones (2)(10) ...................................................... 60,519 (8)
David L. Oyler (11) .......................................................... 15,000 (8)
Martin T. Hart (12) .......................................................... 16,258 (8)
Bert T. Kobayashi (13) ....................................................... 17,667 (8)
Thomas A. Bevilacqua (14) .................................................... 5,417 (8)
All directors and executive officers as a group (9 persons) (2)(15) .......... 11,015,926 54.8%
</TABLE>
- ------------
(1) Excludes 29,501 shares, of which Mr. Schuler has no voting or investment
power, owned by Mr. Schuler's wife.
(2) Excludes 400,000 shares held by a nonprofit corporation for which Mr.
Schuler and Ms. Jones serve as directors. The other four directors consist
of Mr. Schuler's wife and three of their respective children not sharing
the same household. Each of Mr. Schuler and Ms. Jones disclaims beneficial
ownership of such shares.
(3) Information as of December 31, 1997, per Schedule 13G filed pursuant to
Rule 13d-1(b) or 13d-2(b) of the Securities Exchange Act of 1934, as
amended. Loomis, Sayles & Company, L.P. had sole voting power with respect
to 1,472,278 shares.
(4) Information as of December 31, 1997, per Schedule 13G filed pursuant to
Rule 13d-1(b) or 13d-2(b) of the Securities Exchange Act of 1934, as
amended. Such shares are owned by one or more closed-end
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<PAGE>
investment companies or other managed accounts which are advised by
subsidiaries of Franklin Resources, Inc. ("FRI"), which subsidiaries have
sole voting and investment power over such shares. The Schedule 13G was
filed by FRI, Charles B. Johnson and Rupert H. Johnson, Jr., (each of whom
owns in excess of 10% of the outstanding Common Stock of FRI), both with
the same address, and Templeton Investment Counsel, Inc. (investment
adviser to Franklin Resources, Inc.), 500 E. Broward Blvd., Suite 2100, Ft.
Lauderdale, FL 33394.
(5) Information as of December 31, 1997 per Schedule 13G filed pursuant to Rule
13d-1(b) or 13d-2(b) of the Securities Exchange Act of 1934, as amended.
The State of Wisconsin Investment Board retains sole voting and dispositive
power for all shares.
(6) Information as of December 31, 1997 per Schedule 13G filed pursuant to Rule
13d-1(b) or 13d-2(b) of the Securities Exchange Act of 1934, as amended.
Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 1,318,200 shares of
Schuler Homes stock as of December 31, 1997, all of which shares are held
in portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
(7) Includes (i) 1 share, of which Mr. Jones has no voting or investment power,
owned by Ms. Jones, (ii) 9,200 shares, of which Mr. Jones and Ms. Jones
have shared voting and investment power, held by Mr. Jones and Ms. Jones as
custodian for their children, (iii) 24,492 shares which Mr. Jones has the
option to purchase within 60 days of March 31, 1998, and (iv) 22,325 shares
which Ms. Jones has the option to purchase within 60 days of March 31,
1998.
(8) Less than 1%.
(9) Represents 10,163 shares which Mr. Goth has the option to purchase within
60 days of March 31, 1998.
(10) Includes (i) 1 share, of which Ms. Jones has no voting or investment
power, owned by Mr. Jones, (ii) 9,200 shares, of which Mr. Jones and Ms.
Jones have shared voting and investment power, held by Mr. Jones and Ms.
Jones as custodian for their children, (iii) 22,325 shares which Ms. Jones
has the option to purchase within 60 days of March 31, 1998, and (iv)
24,492 shares which Mr. Jones has the option to purchase within 60 days of
March 31, 1998.
(11) Includes 10,000 shares which Mr. Oyler has the option to purchase within
60 days of March 31, 1998.
(12) Represents 16,258 shares which Mr. Hart has the option to purchase within
60 days of March 31, 1998.
(13) Includes 16,667 shares which Mr. Kobayashi has the option to purchase
within 60 days of March 31, 1998.
(14) Represents 5,417 shares which Mr. Bevilacqua has the option to purchase
within 60 days of March 31, 1998.
(15) Includes shares which the directors and executive officers have the option
to purchase within 60 days of March 31, 1998. Does not include an
aggregate of 253,821 shares issuable upon exercise of stock options which
are not currently exercisable and will not be exercisable within 60 days
of March 31, 1998. See also footnotes 7 and 10 above.
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<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING JAMES K. SCHULER
The Company and JKS have entered into a management agreement pursuant to
which certain management and administrative personnel of the Company will
perform certain functions for JKS. JKS will reimburse the Company on a quarterly
basis for its cost in providing such services. During fiscal 1997, $97,000 was
charged to JKS by the Company pursuant to this agreement.
From time to time, James K. Schuler has made loans to certain vendors or
parties related to vendors which do business with the Company. In particular, as
of December 31, 1997, Mr. Schuler had notes receivable and accrued interest
thereon totaling $750,000 from a consultant to Schuler Homes.
TRANSACTIONS WITH DIRECTORS
From time to time, the Company has engaged the law firm of Kobayashi, Sugita
& Goda to perform legal work. Bert T. Kobayashi, a director of the Company since
June 1992, is a senior partner of this Honolulu law firm. During fiscal 1997,
$20,000 in legal fees to Kobayashi, Sugita & Goda were incurred by the Company.
From time to time, the Company has engaged the law firm of Brobeck, Phleger
& Harrison LLP to perform legal work. Thomas A. Bevilacqua, a director of the
Company since April 1997, is a partner of this law firm. During fiscal 1997,
$302,000 in legal fees to Brobeck, Phleger & Harrison LLP were incurred by the
Company.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
REVOLVING CREDIT FACILITY
In March 1997, the Company amended its unsecured revolving line of credit
(the "Revolving Credit Facility") to increase the committed amount from $110.0
million to $137.6 million. The Revolving Credit 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 ability to draw upon the Revolving
Credit Facility is dependent upon meeting certain financial ratios and
covenants. As of December 31, 1997, the Company met such financial ratios and
covenants.
In April 1998, the Company amended certain provisions of its Revolving
Credit Facility to provide for the issuance of the Old Notes.
1993 SUBORDINATED NOTES
On January 28, 1993, the Company issued $50.0 million principal amount of
1993 Subordinated Notes, which are due January 15, 2003. On February 25, 1993,
the related over-allotment option for an additional $7.5 million was exercised
in full. The 1993 Subordinated Notes are convertible at any time prior to
maturity into shares of the Company's common stock at a conversion price of
$21.83 per share, subject to adjustment under certain conditions. The Company
received net proceeds from the offering of approximately $55.2 million (net of
offering costs of approximately $2.3 million). The Company used a portion of
such proceeds to purchase $51.5 million of additional land inventory for
residential development, using the balance of $3.7 million to repay other
indebtedness. The offering costs are being amortized over the term of the
debentures using the interest method. The 1993 Subordinated Notes are
subordinated to all existing and future Senior Indebtedness, including the Notes
offered hereby. In addition, upon the occurrence of a change of control, the
1993 Subordinated Notes shall have the right, at the holder's option, to require
the Company to repurchase all of such other holder's 1993 Subordinated Notes, or
any portion thereof that is an integral multiple of $1,000, on the date that is
45 days after the date of a Company Notice (as defined in the 1993 Indenture),
at a price equal to 100% of the principal amount of the 1993 Subordinated Notes
to be repurchased, subject to certain conditions.
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DESCRIPTION OF NOTES
The Old Notes were and the Notes will be issued under an Indenture dated as
of May 6, 1998 (the "Indenture") among the Company, the Guarantors and U.S.
Trust Company of California, N.A., as trustee (the "Trustee"). The terms of the
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), and Holders of the Old Notes and the Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete, and where reference is made to particular provisions of the Indenture,
such provisions are incorporated by reference as part of such summary, which is
qualified in its entirety by such reference. Certain terms used herein are
defined under "Certain Definitions" below. For purposes of this summary, the
term "Company" refers only to Schuler Homes, Inc. and not to any of its
Subsidiaries. A copy of the Indenture is filed as an exhibit to the Registration
Statement.
GENERAL
The Notes will mature on April 15, 2008, are general unsecured Obligations
of the Company and will rank senior in right of payment to all existing and
future subordinated Indebtedness of the Company and will rank PARI PASSU with
the Company's other existing and future senior unsecured Indebtedness. The Notes
will be limited to $175.0 million in aggregate principal amount, $100.0 million
of which will be issued in the Exchange Offer and the remainder of which will
remain available for future issuance with identical terms and conditions as the
Notes, subject to compliance with the covenants contained in the Indenture. As
of December 31, 1997, after giving pro forma effect to the offering of the Old
Notes, and the application of the net proceeds therefrom, the aggregate amount
of outstanding Indebtedness of the Company and its Subsidiaries would have been
$157.5 million, of which approximately $100.0 million would have constituted
Senior Debt.
Since the operations of the Company are currently conducted in part through
its Subsidiaries, the cash flow and the consequent ability to service debt of
the Company, including the Notes, are dependent, in part, upon the earnings of
its Subsidiaries and the distribution of those earnings to the Company, whether
by dividends, loans or otherwise. The payment of dividends and the making of
loans and advances to the Company by its Subsidiaries may be subject to
statutory or contractual restrictions, are contingent upon the earnings of those
Subsidiaries and are subject to various business considerations.
Each Note will bear interest at the rate per annum shown on the cover page
of this Prospectus from May 6, 1998. Interest on the Notes will be payable on
each April 15 and October 15 (each an "Interest Payment Date"), commencing
October 15, 1998, to Holders of record at the close of business on the April 1
and October 1 immediately preceding such Interest Payment Date. Interest on the
Notes will be computed on the basis of a 360-day year consisting of twelve
30-day months.
GUARANTEES
The Company's payment Obligations under the Notes will be unconditionally
and jointly and severally guaranteed (the "Guarantees") by the Guarantors. The
Guarantee of each Guarantor will be general unsecured Obligations of each
Guarantor and will rank senior in right of payment to all existing and future
subordinated Indebtedness of such Guarantor and will rank PARI PASSU with such
Guarantor's other existing and future senior unsecured Indebtedness. The
Obligations of each Guarantor under its Guarantee will be limited with the
intention that such Guarantee not constitute a fraudulent conveyance under
applicable law. See "Risk Factors -- Fraudulent Conveyance Statutes."
The Indenture provides that each Restricted Subsidiary (other than, in the
Company's discretion, any Restricted Subsidiary with a Consolidated Tangible Net
Worth of not more than $5.0 million) will be a Guarantor and, at the Company's
discretion, any Unrestricted Subsidiary may be a Guarantor.
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The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving person) another
corporation, Person or entity, whether or not affiliated with such Guarantor
unless: (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the Obligations of such Guarantor, pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture, the Registration Rights Agreement and
the Guarantees; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; and (iii) the Company would be permitted by
virtue of the Company's pro forma Consolidated Coverage Ratio, immediately after
giving effect to such transaction, to Incur at least $1.00 of additional
Indebtedness pursuant to the Consolidated Coverage Ratio test set forth in the
covenant described below under the caption "Certain Covenants -- Limitation on
Additional Indebtedness."
Notwithstanding the foregoing, the Indenture provides that in the event of a
sale or other disposition of all of the assets of any Guarantor, by way of
merger, consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any Obligations under its
Guarantee; provided that the Net Proceeds of such sale or other disposition are
applied in accordance with the applicable provisions of the Indenture. See
"Certain Covenants -- Limitation on Asset Sales."
OPTIONAL REDEMPTION
The Notes will not be redeemable at the option of the Company prior to April
15, 2003. Thereafter, the Notes will be redeemable, at the Company's option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at the following redemption prices (expressed in percentages
of principal amount), plus accrued and unpaid interest and Additional Interest
(as defined below), if any, to the applicable redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12-month period
commencing on April 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2003............................................................................. 104.500%
2004............................................................................. 103.000%
2005............................................................................. 101.500%
2006 and thereafter.............................................................. 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to April 15, 2001, the
Company may on any one or more occasions redeem up to 35% of the aggregate
principal amount of Notes issued under the Indenture at a redemption price of
109% of the principal amount thereof, plus accrued and unpaid interest and
Additional Interest, if any, to the redemption date, with the net cash proceeds
of one or more Equity Offerings; PROVIDED that not less than 65% of the
aggregate principal amount of Notes issued under the Indenture remain
outstanding immediately after the occurrence of such redemption (excluding Notes
held by the Company and its Subsidiaries); and PROVIDED, FURTHER, that such
redemption shall occur within 45 days of the date of the closing of such Equity
Offering.
If less than all of the Notes are to be redeemed, the Trustee will select
the Notes to be redeemed on a pro rata basis, by lot or by such other method as
the Trustee in its sole discretion shall deem to be fair and appropriate.
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CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder shall have the right
to require that the Company repurchase all or a portion of such Holder's Notes
at a purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest and Additional Interest, if any, to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date), in
accordance with the provisions of the next paragraph.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (i) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount outstanding at the repurchase date plus accrued and unpaid
interest and Additional Interest, if any, to the date of repurchase (subject to
the right of Holders of record on the relevant record date to receive interest
on the relevant interest payment date); (ii) the circumstances and relevant
facts and relevant financial information regarding such Change of Control; (iii)
the repurchase date (which shall be no earlier than 30 days nor later than 60
days from the date such notice is mailed); and (iv) the instructions determined
by the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes repurchased.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the covenants described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenants described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its Obligations under the covenants
described hereunder by virtue thereof.
Existing and future Indebtedness of the Company contains or may contain
prohibitions of certain events which would constitute a Change of Control or
require such Indebtedness to be repurchased upon a Change of Control. The
Revolving Credit Facility provides that certain change of control events with
respect to the Company would constitute a default thereunder. In addition, the
Company's 1993 Subordinated Notes require the Company to repurchase the 1993
Subordinated Notes at the Holder's option upon the occurrence of certain change
of control events. The Company may elect to repurchase the 1993 Subordinated
Notes for cash or Common Stock. Such repurchase obligation, however, does not
arise when (i) the closing price for the Common Stock for any 5 trading days
within 10 consecutive trading days ending immediately before such change of
control transaction equals or exceeds 105% of the conversion price of the 1993
Subordinated Notes or (ii) at least 90% of the consideration to be paid for the
Common Stock in connection with the change of control transaction consists of
common stock traded on a national securities exchange or the Nasdaq National
Market and, as a result of the transaction, the 1993 Subordinated Notes become
convertible into such Common Stock. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Notes could cause a default
under such Indebtedness, even if the Change of Control itself does not, due to
the financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the Holders upon a repurchase may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any repurchases
required in connection with a Change of Control. The Company's failure to
purchase the Notes in connection with a Change in Control would result in a
default under the Indenture which could, in turn, constitute a default under
other Indebtedness.
CERTAIN COVENANTS
MAINTENANCE OF CONSOLIDATED NET WORTH
In the event that the Company's Consolidated Net Worth at the end of each of
any two consecutive fiscal quarters (the last day of such second fiscal quarter
being referred to as the "Trigger Date") is less than $75.0 million (the
"Minimum Net Worth"), then the Company shall make an offer to all Holders (a
"Net Worth Offer") to acquire on a pro rata basis on the date (the "Net Worth
Repurchase Date") that is 45 days following the date of the Net Worth Notice (as
defined below) Notes in an aggregate principal amount equal to 10% of the
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aggregate amount of the Notes issued under the Indenture (or if less than 10% of
the initial aggregate principal amount of the Notes issued are then outstanding,
all the Notes outstanding at the time) (the "Net Worth Offer Amount") at a
purchase price of 100% of the principal amount thereof, plus accrued interest
and Additional Interest, if any, to the Net Worth Repurchase Date (the "Net
Worth Price"). The Company may credit against the Net Worth Offer Amount the
principal amount of Notes acquired by the Company prior to the relevant Trigger
Date through purchase, optional redemption or exchange. No credit shall be made
for any mandatory repurchase, including without limitation, repurchases pursuant
to a Net Worth Offer, a Change of Control or a Net Proceeds Offer (as defined
below). The Company, however, may not credit a specific Note in more than one
Net Worth Offer. In no event shall the Consolidated Net Worth for any fiscal
quarter included in the calculation of Minimum Net Worth which results in the
making of a Net Worth Offer be counted toward the determination of whether the
Company is required to make a subsequent Net Worth Offer. The Company shall
notify the Trustee promptly after the occurrence of any of the events specified
in this provision and shall notify the Trustee in writing if its Consolidated
Net Worth is equal to or less than the Minimum Net Worth for any fiscal quarter.
Within 30 days after the Trigger Date, the Company, or, at the request of
the Company, the Trustee, shall give notice of the Net Worth Offer to each
Holder (the "Net Worth Notice"). To accept a Net Worth Offer a Holder shall
deliver to the Company (or to a trustee designated by the Company for such
purpose), on or before the 30th day after the date of the Net Worth Notice, a
written notice of the Holder's acceptance of such offer, together with the Notes
with respect to which the offer is being accepted, duly endorsed for transfer to
the Company. Such written notice may be withdrawn upon further written notice
delivered to such trustee on or prior to the third day preceding the Net Worth
Repurchase Date.
If the Net Worth Repurchase Date is between a regular record date for the
payment of interest and the next succeeding interest payment date, any Note to
be repurchased must be accompanied by funds equal to the interest payable on
such succeeding interest payment date on the principal amount to be repurchased
(unless such Note shall have been called for redemption, in which case no such
payment shall be required), and the interest on the principal amount of the Note
being repurchased will be paid on such next succeeding interest payment date to
the registered Holder of such Note on the immediately preceding record date. A
Note repurchased on an interest payment date need not be accompanied by any
payment, and the interest on the principal amount of the Note being repurchased
will be paid on such interest payment date to the registered Holder of such Note
on the immediately preceding record date.
If any repurchase pursuant to the foregoing provisions constitutes a tender
offer as defined under the Exchange Act, the Company will comply with the
requirements of Rule 14e-1 and any other tender offer rules under the Exchange
Act which then may be applicable.
LIMITATION ON ADDITIONAL INDEBTEDNESS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, Incur any Indebtedness unless, after giving effect
thereto, either (i) the ratio of Indebtedness of the Company and its Restricted
Subsidiaries to Consolidated Tangible Net Worth of the Company and its
Restricted Subsidiaries is less than 2.0 to 1; or (ii) the Consolidated Coverage
Ratio exceeds 2.0 to 1.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may Incur:
(i) Indebtedness under one or more Bank Credit Facilities in an amount
not in excess of $125.0 million;
(ii) Indebtedness Incurred as of the Issuance Date;
(iii) Indebtedness represented by Notes issued on the Issuance Date and
the related Guarantees;
(iv) Obligations Incurred under letters of credit, escrow agreements and
surety bonds in the ordinary course of business;
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(v) Indebtedness Incurred solely for the purpose of Refinancing or
repaying any existing Indebtedness so long as (A) the principal amount of
such new Indebtedness does not exceed the principal amount of the existing
Indebtedness Refinanced or repaid (plus the premiums or other payments
required to be paid in connection with such Refinancing or repayment and the
expenses Incurred in connection therewith), (B) the maturity of such new
Indebtedness is not earlier than that of the existing Indebtedness to be
Refinanced or repaid, (C) such new Indebtedness, determined as of the date
of Incurrence, has an Average Life at least equal to the remaining Average
Life of the Indebtedness to be Refinanced or repaid, (D) the new
Indebtedness is subordinate to the Notes to the same extent as the
Indebtedness being Refinanced and contains restrictions on payment upon the
occurrence of a default on Senior Debt at least as restrictive in all
material respects as the restrictions on payment contained in the
Indebtedness being Refinanced, and (E) the existing and new Indebtedness are
Obligations of the same entity; and
(vi) Other Indebtedness Incurred (in addition to Indebtedness permitted
by any other clause of this paragraph) in an aggregate principal amount at
any time outstanding not to exceed $25.0 million.
LIMITATION ON LIENS
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary to, issue, assume, guarantee or suffer to exist any
Indebtedness secured by any mortgage, pledge, lien or other encumbrance of any
nature (herein collectively referred to as a "lien" or "liens") upon any
property of the Company or any Restricted Subsidiary, or on any shares of stock
of any Restricted Subsidiary, without in any such case effectively providing
that the Notes (together with, if the Company shall so determine, any other
Indebtedness of the Company or such Restricted Subsidiary ranking PARI PASSU
with the Notes) shall be secured equally and ratably with such Indebtedness,
except that the foregoing restrictions shall not apply to:
(i) liens existing on the Issuance Date;
(ii) pledges, guarantees and deposits under workers' compensation laws,
unemployment insurance laws or similar legislation, good faith deposits
under bids, tenders or contracts, deposits to secure public or statutory
obligations or appeal or similar bonds, and liens created by special
assessment districts used to finance infrastructure improvements;
(iii) liens existing on property or assets of any entity on the date on
which it becomes a Restricted Subsidiary, which secured Indebtedness is not
incurred in contemplation of such entity becoming a Restricted Subsidiary,
provided that such liens are not extended to other property or assets of
such Restricted Subsidiary, any other Restricted Subsidiary or the Company;
(iv) liens on or leases of model home units;
(v) the replacement of any of the items set forth in clauses (i) through
(iv) above, PROVIDED that (A) the principal amount of the Indebtedness
secured by liens shall not be increased, (B) such Indebtedness, determined
as of the date of Incurrence, has an Average Life at least equal to the
remaining Average Life of the Indebtedness to be Refinanced, (C) the
maturity of such Indebtedness is not earlier than that of the Indebtedness
to be Refinanced, and (D) the liens shall be limited to the property or part
thereof which secured the lien so replaced or property substituted therefor
as a result of the destruction, condemnation or damage of such property;
(vi) liens or priorities Incurred in the ordinary course of business,
such as, without limitation, laborers', employees', carriers', mechanics',
vendors', and landlords', liens or priorities;
(vii) liens for certain taxes and certain survey and title exceptions;
(viii) liens arising out of judgments or awards against the Company or
any Restricted Subsidiary with respect to which the Company or such
Restricted Subsidiary is in good faith prosecuting an appeal or proceeding
for review and with respect to which it has secured a stay of execution
pending such appeal or proceeding for review;
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(ix) liens on property owned by any Homebuilding Joint Venture PROVIDED
that the Indebtedness secured by such liens is Non-Recourse Indebtedness;
and
(x) liens which would otherwise be subject to the foregoing
restrictions which, when the Indebtedness relating to those liens is added
to all other then outstanding Indebtedness to the Company and its Restricted
Subsidiaries secured by liens and not listed in clauses (i) through (ix)
above, does not exceed 20% of Consolidated Tangible Net Worth.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that the Company will not, nor will it permit any
Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend on, or make any distribution in respect
of, or purchase, redeem or otherwise acquire or retire for value, any
Capital Stock of the Company other than through the issuance solely of the
Company's own Capital Stock (other than Disqualified Stock) or rights
thereto;
(ii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value prior to scheduled principal payments
or at maturity, Indebtedness of the Company or any Restricted Subsidiary
which is expressly subordinated in right of payment to the Notes unless the
Company or the Restricted Subsidiary, as the case may be, uses the proceeds
of a substantially contemporaneous Incurrence of new Indebtedness permitted
by clause (v) of the Limitation on Additional Indebtedness to make such
principal payment on, or redeem, repurchase, defease or otherwise acquire or
retire for value such prior Indebtedness; or
(iii) make any Restricted Investment (such payments or any other actions
described in (i), (ii) and (iii), being referred to herein collectively as,
"Restricted Payments") unless:
(A) at the time of, and after giving effect to, the proposed
Restricted Payment, no Event of Default (and no event that, after notice
or lapse of time, or both, would become an Event of Default) shall have
occurred and be continuing,
(B) the Company is able to Incur an additional $1.00 in Indebtedness
pursuant to the first paragraph of the covenant described under "--
Limitation on Additional Indebtedness" and
(C) at the time of, and after giving effect thereto, the sum of the
aggregate amount expended (or with respect to guarantees or similar
arrangements the amount then guaranteed) for all such Restricted Payments
(the amount expended for such purposes, if other than in cash, to be
determined by the Board of Directors of the Company, whose determination
shall be conclusive and evidenced by a resolution of such Board of
Directors filed with the Trustee) subsequent to December 31, 1997 shall
not exceed the sum of (1) 50% of the aggregate Consolidated Net Income
(or, in case such aggregate Consolidated Net Income shall be a deficit,
minus 100% of such deficit) of the Company accrued on a cumulative basis
subsequent to December 31, 1997; (2) the aggregate net proceeds including
the fair market value of the property other than cash (as determined by
the Board of Directors of the Company, whose determination shall be
conclusive and evidenced by a resolution of such Board of Directors filed
with the Trustee), received by the Company from the issuance or sale,
after the Issuance Date, of Capital Stock (other than Disqualified Stock)
of the Company, including Capital Stock (other than Disqualified Stock)
of the Company issued subsequent to the Issuance Date or upon the
conversion of Indebtedness of the Company issued subsequent to the
Issuance Date and initially issued for cash; (3) an amount equal to the
sum of (a) 100% of dividends or distributions (the fair value of which,
if other than cash, to be determined by the Board of Directors, in good
faith) paid to the Company (or any Restricted Subsidiary) by an
Unrestricted Subsidiary, Homebuilding Joint Venture or any other Person
in which the Company (or any Restricted Subsidiary), directly or
indirectly, has an ownership interest but less than an 80% ownership
interest and (b) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets
of an Unrestricted Subsidiary at
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the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; PROVIDED, HOWEVER, that the foregoing sum shall not exceed,
in the case of any Unrestricted Subsidiary, the amount of Restricted
Investments previously made (and treated as a Restricted Payment) by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary; and
(4) $10.0 million.
The foregoing shall not prevent (i) the payment of any dividend within 60
days after the date of declaration thereof, if at said date of declaration the
making of such payment would have complied with the provisions of this
limitation on dividends; PROVIDED, HOWEVER, that such dividend shall be included
in future calculations of Restricted Payments; (ii) the retirement of any shares
of the Company's Capital Stock by exchange for, or out of proceeds of the
substantially concurrent sale of, other shares of its Capital Stock (other than
Disqualified Stock); PROVIDED, HOWEVER, that the aggregate net proceeds from
such sale shall be excluded from the calculation of the amounts under clause
(C)(2) of the immediately preceding paragraph; (iii) the redemption, repayment,
repurchase, defeasance or other retirement of Indebtedness with proceeds
received from the substantially concurrent sale of shares of the Company's
Capital Stock (other than Disqualified Stock); PROVIDED, HOWEVER, that the
aggregate net proceeds from such sale shall be excluded from the calculation of
the amounts under clause (C)(2) of the immediately preceding paragraph.
LIMITATION ON ASSET SALES
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, consummate an Asset
Disposition, unless
(i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Disposition at least equal
to the fair market value (as determined in good faith by the board of
directors of the Company or the Restricted Subsidiary, as the case may be)
of the assets disposed of, and
(ii) the consideration of such Asset Disposition consists of at least
75% cash; PROVIDED, that (x) the amount of liabilities assumed by the
transferee, (y) any notes or other Obligations received by the Company or
such Restricted Subsidiary and immediately converted into cash or (z) with
respect to the sale or other disposition of all of the capital stock of any
Restricted Subsidiary, the amount of liabilities that remain the obligation
of such Restricted Subsidiary subsequent to such sale or other disposition,
shall be deemed to be "cash."
Within 12 months from the date that any Asset Disposition is consummated,
the Net Proceeds thereof will be reinvested in Additional Assets or applied to
the redemption or repurchase of Indebtedness of the Company which ranks senior
or PARI PASSU with the Notes or Indebtedness of a Restricted Subsidiary which is
not subordinated to other debt of such Restricted Subsidiary (which, in each
case, will be a permanent reduction of such Indebtedness). To the extent that
the Net Proceeds of an Asset Disposition are not so applied, the Company or such
Restricted Subsidiary, as the case may be, will, within 30 days from the
expiration of such 12-month period, use the remaining Net Proceeds (less any
amounts used to pay reasonable fees and expenses connected with the Net Proceeds
Offer) to make an offer to repurchase the Notes at a price equal to 100% of the
principal amount thereof, plus accrued interest and Additional Interest, if any,
to the Net Proceeds Repurchase Date ("a Net Proceeds Offer").
Notwithstanding the foregoing, the Net Proceeds of an Asset Disposition are
not required to be applied in accordance with the preceding paragraph, unless
and until the aggregate Net Proceeds of all such Asset Dispositions in a
12-month period exceeds $5.0 million.
To accept a Net Proceeds Offer a holder shall deliver to the Company (or to
a trustee designated by the Company for such purpose) on or before the 30th day
after the date of the Net Proceeds Offer (the "Net Proceeds Repurchase Date"), a
written notice of the Holder's acceptance of the Net Proceeds Offer, together
with any Notes with respect to which the offer is being accepted, duly endorsed
for transfer to the Company. Such written notice may be withdrawn upon further
written notice to such trustee on or prior to the third day preceding the Net
Proceeds Repurchase Date.
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If the Net Proceeds Repurchase Date is between a regular record date for the
payment of interest and the next succeeding interest payment date, any Note to
be repurchased must be accompanied by funds equal to the interest payable on
such succeeding interest payment date on the principal amount to be repurchased
(unless such Note shall have been called for redemption, in which case no such
payment shall be required), and the interest on the principal amount of the Note
being repurchased will be paid on such next succeeding interest payment date to
the registered holder of such Note on the immediately preceding record date. A
Note repurchased on an interest payment date need not be accompanied by any
payment, and the interest on the principal amount of the Note being repurchased
will be paid on such interest payment date to the registered holder of such Note
on the immediately preceding record date.
If any repurchase pursuant to the foregoing provision constitutes a tender
offer as defined under the Exchange Act, the Company will comply with the
requirements of Rule 14e-1 and any other tender offer rules under the Exchange
Act which then may be applicable.
Any amount of Net Proceeds remaining after a Net Proceeds Offer shall be
returned by the Trustee to the Company and may be used by the Company for any
purpose not inconsistent with the Indenture.
LIMITATION ON TRANSACTIONS WITH RELATED PERSONS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into any transaction or series of related
transactions with Related Persons of the Company unless: (i) such transactions
are between or among the Company and its Restricted Subsidiaries; or (ii) such
transactions are in the ordinary course of business and consistent with past
practice or (iii) the terms of such transactions are fair and reasonable to the
Company or such Restricted Subsidiary, as the case may be, and are at least as
favorable as the terms which could be obtained by the Company or the Restricted
Subsidiary, as the case may be, in a comparable transaction made on an
arm's-length basis between Persons who are not Related Persons. In the event of
any transaction or series of transactions occurring subsequent to the date of
issuance of the Notes with a Related Person which involves in excess of $1.0
million and is not permitted under clause (i) of the preceding sentence, all of
the disinterested members of the Board of Directors shall by resolution
determine that such transaction or series of transactions meets the criteria set
forth in clause (iii) of the preceding sentence. In the event of any transaction
or series of transactions occurring subsequent to the Issuance Date with a
Related Person which involves in excess of $10.0 million and is not permitted
under clause (i) above, the Company will be required to deliver to the Trustee
an opinion of an Independent Financial Advisor to the effect that the
transaction is fair to the Company or the relevant Restricted Subsidiary, as the
case may be, from a financial point of view. Notwithstanding the foregoing, such
provisions do not prohibit and will not apply to (1) any Restricted Payment
which is permitted by the "Limitation on Restricted Payments" covenant or (2)
the payment of compensation to directors of the Company who are not employees of
the Company and wages and other compensation to officers or employees of the
Company or any of its Subsidiaries in the ordinary course of business consistent
with prior practice.
LIMITATION ON PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary (i) to pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (ii) to make any loans or advances to the Company or (iii) to
transfer any of its property or assets to the Company, except: (A) any
encumbrance or restriction pursuant to an agreement in effect at or entered into
on the Issuance Date; (B) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary which was entered into on or prior to the
date on which such Restricted Subsidiary was acquired by the Company (other than
as consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and
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outstanding on such date; (C) any encumbrance or restriction pursuant to an
agreement effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (A) or (B) of this covenant (or effecting a
Refinancing of such Refinancing Indebtedness pursuant to this clause (C)) or
contained in any amendment to an agreement referred to in clause (A) or (B) of
this covenant or this clause (C); PROVIDED, HOWEVER, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any such
Refinancing agreement or amendment are no more restrictive in any material
respect than the encumbrances and restrictions with respect to such Restricted
Subsidiary contained in such agreements; (D) any such encumbrance or restriction
consisting of customary contractual non-assignment provisions to the extent such
provisions restrict the transfer of rights, duties or Obligations under such
contract; (E) in the case of clause (iii) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages; (F) any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered into
for the sale or disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such sale or
disposition; and (G) any restriction imposed by applicable law.
LIMITATION ON DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary to be designated as an
Unrestricted Subsidiary unless the Company and its remaining Restricted
Subsidiaries would thereafter be permitted to (i) Incur at least $1.00 of
Indebtedness pursuant to the first paragraph of the covenant described under "--
Limitation on Additional Indebtedness" above and (ii) make a Restricted Payment
of at least $1.00 pursuant to the first paragraph of the covenant described
under "-- Limitation on Restricted Payments" above.
The Company will not permit any Unrestricted Subsidiary to be designated as
a Restricted Subsidiary unless such Subsidiary has outstanding no Indebtedness
except such Indebtedness as the Company could permit it to become liable for
immediately after becoming a Restricted Subsidiary under the provisions of the
covenant described under "-- Limitation on Additional Indebtedness" above.
LIMITATION ON MERGERS AND SALES OF ASSETS BY THE COMPANY
The Indenture provides that the Company may not consolidate with, merge into
or transfer all or substantially all of its assets to another Person unless (i)
such Person (if other than the Company) is a corporation organized under the
laws of the United States or any state thereof or the District of Columbia and
expressly assumes all the Obligations of the Company under the Indenture and the
Notes; (ii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; (iii) the Consolidated
Net Worth of the obligor of the Notes immediately after such transaction
(exclusive of any adjustments to Consolidated Net Worth relating to transaction
costs and accounting adjustments resulting from such transaction) is not less
than the Consolidated Net Worth of the Company immediately prior to such
transaction; and (iv) the surviving corporation would be able to Incur at least
an additional $1.00 of Indebtedness pursuant to the first paragraph of the
covenant described under "-- Limitation on Additional Indebtedness" above.
LIMITATION ON BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to
engage in any business other than a Related Business.
REPORTS TO HOLDERS OF THE NOTES
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it will continue to furnish the information required thereby
to the Commission. The Indenture provides that even if the Company is entitled
under the Exchange Act not to furnish such information to the Commission or to
the Holders of the Notes, it will nonetheless continue to furnish information
under Section 13 or 15(d) of the Exchange Act to the Commission and the Trustee
as if it were subject to such periodic reporting requirements.
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EVENTS OF DEFAULT
The Indenture provides that, if an Event of Default specified therein shall
have occurred and be continuing, with respect to the Notes, the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes may
declare the principal amount of the Notes to be immediately due and payable.
Under certain circumstances, the holders of a majority in aggregate principal
amount of the Notes may rescind such a declaration.
Under the Indenture, an Event of Default is defined as, with respect to the
Notes, any of the following: (i) default in payment of the principal of any
Note; (ii) default in payment of any interest on any Note when due, continuing
for 30 days; (iii) failure by the Company to comply with its other agreements in
the Notes or the Indenture for the benefit of the holders of the Notes upon the
receipt by the Company of notice of such Default by the Trustee or the holders
of at least 25% in aggregate principal amount of the Notes and the Company's
failure to cure such Default within 45 days after receipt by the Company of such
notice; (iv) certain events of bankruptcy or insolvency; (v) default under any
mortgage, indenture (including the Indenture) or instrument under which is
issued or which secures or evidences Indebtedness of the Company or any
Restricted Subsidiary (other than Non-Recourse Indebtedness) which default
constitutes a failure to pay principal of such Indebtedness in an amount of $5.0
million or more when due and payable (other than as a result of acceleration) or
results in Indebtedness (other than Non-Recourse Indebtedness) in the aggregate
of $5.0 million or more becoming or being declared due and payable before it
would otherwise become due and payable; and (vi) entry of a final judgment for
the payment of money against the Company or any Restricted Subsidiary in an
amount of $5.0 million or more which remains undischarged or unstayed for a
period of 60 days after the date on which the right to appeal such judgment has
expired or becomes subject to an enforcement proceeding.
The Trustee shall give notice to holders of the Notes of any continuing
Default known to the Trustee within 90 days after the occurrence thereof;
provided, that the Trustee may withhold such notice, as to any Default other
than a payment Default, if it determines in good faith that withholding the
notice is in the interests of the Holders.
The Holders of a majority in principal amount of the Notes may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee with
respect to the Notes, provided that such directions shall not be in conflict
with any law or the Indenture and subject to certain other limitations. Before
proceeding to exercise any right or power under the Indenture at the direction
of such Holders, the Trustee shall be entitled to receive from such Holders
reasonable security or indemnity satisfactory to it against the costs, expenses
and liabilities which might be Incurred by it in complying with any such
direction. No Holder of Notes will have any right to pursue any remedy with
respect to the Indenture or the Notes, unless (i) such Holder shall have
previously given the Trustee written notice of a continuing Event of Default
with respect to the Notes; (ii) the Holders of at least 25% in aggregate
principal amount of the Notes shall have made a written request to the Trustee
to pursue such remedy; (iii) such Holder or Holders have offered to the Trustee
reasonable indemnity satisfactory to the trustee; (iv) the Holders of a majority
in aggregate principal amount of the Notes have not given the Trustee a
direction inconsistent with such request within 60 days after receipt of such
request; and (v) the Trustee shall have failed to comply with the request within
such 60-day period.
Notwithstanding the foregoing, the right of any Holder of any Note to
receive payment of the principal of and interest in respect of such Note on the
Stated Maturity expressed in such Note or to institute suit for the enforcement
of any such payments shall not be impaired or adversely affected without such
Holder's consent. The Holders of at least a majority in aggregate principal
amount of the Notes may waive an existing Default with respect to the Notes and
its consequences, other than (i) any Default in any payment of the principal of
or interest on any Note or (ii) any Default in respect of certain covenant or
provisions in the Indenture which may not be modified without the consent of the
Holder of each Note as described in "Modification and Waiver" below.
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MODIFICATION AND WAIVER
The Company and the Trustee may execute a supplemental indenture without the
consent of the Holders of the Notes (i) to add to the covenants, agreements and
Obligations of the Company for the benefit of the Holders of all the Notes or to
surrender any right or power conferred in the Indenture upon the Company; (ii)
to evidence the succession of another corporation to the Company and the
assumption by it of the Obligations of the Company under the Indenture and the
Notes; [(iii) to establish the form or terms of the Notes as permitted by
Sections (2.01 and 2.03(a)) of the Indenture], (iv) to provide for the
acceptance of appointment under the Indenture of a successor Trustee with
respect to the Notes and to add to or change any provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the trusts
by more than one Trustee; (v) to cure any ambiguity, defect or inconsistency;
(vi) to secure the Notes; or (vii) to make any other change that does not
adversely affect the rights of any Holder.
With the consent of the Holders of not less than a majority in aggregate
principal amount of the Notes, the Company and the Trustee may also execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the indenture with respect to the Notes or modify
in any manner the rights of the Holders of the Notes, provided that no such
supplemental indenture will, without the consent of the Holder of each such Note
affected thereby (i) change the Stated Maturity of the principal of, or any
installment of principal or interest on, any Note or any premium payable upon
redemption thereof; (ii) reduce the principal amount of, or the rate of interest
on, any Note; (iii) change the place or currency of payment of principal or
interest, if any, on any Note; (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to any Note; (v) reduce the
above-stated percentage of Holders of the Notes necessary to modify or amend the
Indenture; or (vi) modify the foregoing requirements or reduce the percentage in
principal amount of Notes necessary to waive any covenant or past default.
Holders of not less than a majority in principal amount of the Notes may waive
certain past Defaults and may waive compliance by the Company with certain of
the restrictive covenants described above with respect to the Notes.
DEFEASANCE
Under the terms of the Indenture, the Company, at its option, (a) will be
discharged from any and all obligations in respect of the Notes (except in each
case for certain obligations to register the transfer or exchange of Notes,
replace stolen, lost or mutilated Notes, maintain paying agencies and hold
moneys for payment in trust) or (b) need not comply with the covenants of the
Indenture nor be subject to the operation of the cross acceleration provisions
described under "Events of Default," in each case, if the Company irrevocably,
deposits with the Trustee, in trust, money or U.S. government obligations which
through the payment of interest thereon and Additional Interest, if any, and
principal thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and interest on the Notes on the dates such
payments are due in accordance with the terms of the Notes.
To exercise either option above, the Company is required to deliver to the
Trustee an opinion of counsel that the holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
defeasance and will be subject to Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such defeasance
had not occurred.
In the event the Company exercises its options under clause (b) of the
second preceding paragraph and the Notes are declared due and payable because of
the occurrence of any Event of Default (other than the cross acceleration
provisions described under "Events of Default" which will be inapplicable), the
amount of money and U.S. government obligations on deposit with the Trustee will
be sufficient to pay amounts due on the Notes at the time of their stated
maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, the Company
shall remain liable for such payments.
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DISCHARGE
The Company may satisfy and discharge Obligations under the Indenture with
respect to the Notes by delivering to the Trustee for cancellation all
outstanding Notes or depositing with the Trustee, after such outstanding Notes
have become due and payable, cash sufficient to pay at Stated Maturity all of
the outstanding Notes and paying all other sums payable under the Indenture with
respect to the Notes.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes, or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company or any Guarantor in the Indenture or in any
of the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company, any Guarantor or any successor Person
thereof. Each Holder, by accepting such Notes waives and releases all such
liability.
GOVERNING LAW
The Indenture, the Notes and the Guarantees will be governed by the laws of
the State of New York.
THE TRUSTEE
The Trustee is U.S. Trust Company of California, N.A. The Company has
appointed the Trustee as Registrar and Paying Agent for the Notes.
The Indenture provides that if an Event of Default occurs (and is not
cured), the Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent Person in the conduct of his own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of a holder of Notes, unless
such holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
TRANSFER AND EXCHANGE
A Holder will be able to transfer or Notes only in accordance with the
provisions of the Indenture. The registrar of the Notes may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents,
and to pay any taxes and fees required by law or permitted by the Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; or (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or another Restricted Subsidiary; provided,
however, that any such Restricted Subsidiary is primarily engaged in a Related
Business.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares and, to the
extent required by local ownership laws in foreign countries, shares owned by
foreign shareholders); (ii) all or substantially all the assets of any division,
business segment or comparable line of business of the Company or
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any Restricted Subsidiary; or (iii) any other assets of the Company or any
Restricted Subsidiary having a fair market value (as determined in good faith by
the Board of Directors) in excess of $500,000 disposed of in a single
transaction or series of related transactions outside of the ordinary course of
business of the Company or such Restricted Subsidiary (other than, in the case
of (i), (ii) and (iii) above, a disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment (assuming the exercise by the obligor of
such Indebtedness of all unconditional (other than as to the giving of notice)
extension options of each such scheduled payment date) of such Indebtedness
multiplied by the amount of such principal payment by (ii) the sum of all such
principal payments.
"Bank Credit Facility" means the Revolving Credit Facility and any bank (or
similar financial institution) credit agreement or credit facility entered into
in the future by the Company or any Restricted Subsidiary, as any of the same
may be amended, waived, modified, Refinanced or replaced from time to time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in any place where payments of
principal or interest are made under the Indenture or other locations are
authorized or obligated by law or executive order to close.
"Capitalized Lease Obligations" means any obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), is or becomes the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for
purposes of this clause such person or group shall be deemed to have
"beneficial ownership" of all shares that any such person or group has the
right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of (A) more than 50% of
the total voting power of the Voting Stock of the Company or (B) greater
total voting power of the Voting Stock of the Company than held by the
Schuler Family;
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by a
majority vote of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the sale
of all or substantially all the assets of the Company to another Person,
other than any such sale to one or more Restricted Subsidiaries, and in the
case of any such merger or consolidation, the securities of the Company that
are outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of the Company are
changed into or exchanged for cash, securities or property, unless pursuant
to such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving
corporation, or a parent corporation that owns all of the Capital Stock of
such surviving corporation, that represent immediately after such
transaction, at least a majority of the aggregate voting power of the Voting
Stock of the surviving corporation or such parent corporation, as the case
may be.
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"Consolidated Coverage Ratio" with respect to the Company as of any date of
determination means the ratio of the Company's EBITDA to its Consolidated
Interest Incurred for the four fiscal quarters ending immediately prior to the
date of determination. Notwithstanding clause (ii) of the definition of
Consolidated Net Income, if the Indebtedness which is being Incurred is Incurred
in connection with an acquisition by the Company or a Restricted Subsidiary, the
Consolidated Coverage Ratio shall be determined after giving effect to both the
Consolidated Interest Incurred related to the Incurrence of such Indebtedness
and the EBITDA as if the acquisition had occurred at the beginning of the four
fiscal quarter period (x) of the Person becoming a Restricted Subsidiary or (y)
in the case of an acquisition of assets that constitute substantially all of an
operating unit or business, relating to the assets being acquired by the Company
or a Restricted Subsidiary.
"Consolidated Interest Expense" of the Company means, for any period, the
aggregate amount of interest which, in accordance with GAAP, would be included
on an income statement for the Company and its Restricted Subsidiaries on a
consolidated basis, whether expensed directly, or included as a component of
cost of goods sold, or allocated to joint ventures or otherwise (including, but
not limited to, imputed interest included on Capitalized Lease Obligations, all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, the net costs associated with
Hedging Obligations, amortization of other financing fees and expenses, the
interest portion of any deferred payment obligation, amortization of discount or
premium, if any, and all other non-cash interest expense), plus the product of
(i) cash dividends paid on any Preferred Stock of the Company, times (ii) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective aggregate federal, state and local tax rate of
the Company, expressed as a decimal.
"Consolidated Interest Incurred" of the Company means, for any period, (i)
the aggregate amount of interest which, in accordance with GAAP, would be
included on an income statement for the Company and its Restricted Subsidiaries
on a consolidated basis, whether expensed directly, or included as a component
of cost of goods sold, or allocated to joint ventures or otherwise (including,
but not limited to, imputed interest included on Capitalized Lease Obligations,
all commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing, the net costs associated
with Hedging Obligations, amortization of discount or premium, if any, and all
other non-cash interest expense), plus (or minus, if negative) (ii) the
difference between capitalized interest for such period and the interest
component of cost of goods sold for such period, plus (iii) the product of (A)
cash dividends paid on any Preferred Stock of the Company, times (B) a fraction,
the numerator of which is one and the denominator of which is one minus the then
current effective aggregate federal, state and local tax rate of the Company,
expressed as a decimal.
"Consolidated Net Income" for any period, means the aggregate of the Net
Income of the Company and its Restricted Subsidiaries for such period, on a
consolidated basis, determined in accordance with GAAP, provided that (i) the
Net Income of any Person in which the Company or any Restricted Subsidiary has,
a joint interest with a third party (other than an Unrestricted Subsidiary)
shall be included only to the extent of the lesser of (A) the amount of
dividends or distributions actually paid to the Company or a Restricted
Subsidiary or (B) the Company's direct or indirect proportionate interest in the
Net Income of such Person, provided that, so long as the Company or a Restricted
Subsidiary has an unqualified legal right to require the payment of a dividend
or distribution, Net Income shall be determined solely pursuant to clause (B);
(ii) the Net Income of any Person acquired in a pooling of interests transaction
for any period prior to the date of such acquisition shall be excluded; and
(iii) the Net Income of any Unrestricted Subsidiary shall be included only to
the extent of the amount of dividends or distributions (the fair value of which,
if other than in cash, to be determined by the Board of Directors, in good
faith) by such Subsidiary to the Company or to any of its consolidated
Restricted Subsidiaries; (iv) the Net Income of any Unrestricted Subsidiary, any
Homebuilding Joint Venture or any other Person in which the Company or any
Restricted Subsidiary has a joint interest with a third party that is not
existing on December 31, 1997 shall be included only to the extent that the
aggregate amount of dividends or distributions (the fair value of which, if
other than cash, to be determined by the Board of Directors, in good faith) by
such Subsidiary or Homebuilding Joint Venture to the Company or to any of its
consolidated Restricted Subsidiaries exceeds the aggregate amount of unpaid
loans or advances and unreturned capital contributions
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made by the Company or any Restricted Subsidiary in or to such Subsidiary or
Homebuilding Joint Venture; and (v) all non-cash items (other than income tax
expense, depreciation expense, amortization expense and any item that will
require cash payments in the future and for which an accrual reserve is, or is
required by GAAP to be, made) decreasing Consolidated Net Income shall be added
back in calculating Consolidated Net Income and all non-cash items increasing
Consolidated Net Income shall be deducted in calculating Consolidated Net
Income.
"Consolidated Net Worth" with respect to the Company means the consolidated
stockholders' equity of the Company and its Restricted Subsidiaries, as
determined in accordance with GAAP.
"Consolidated Tangible Net Worth" with respect to the Company means
Consolidated Net Worth, less the Intangible Assets of the Company and its
Restricted Subsidiaries.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, that portion of any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the Holder
thereof, in whole or in part, in each case on or prior to the final maturity
date of the Notes; provided that Capital Stock that would be "Disqualified
Stock" solely by virtue its containing a customary requirement that the issuer
offer to repurchase such Capital Stock upon a change of control of the issuer
will not be deemed to be "Disqualified Stock."
"EBITDA" of the Company for any period means the sum of Consolidated Net
Income plus Consolidated Interest Expense plus, without duplication, the
following to the extent deducted in calculating such Consolidated Net Income:(i)
income tax expense, (ii) depreciation expense and (iii) amortization expense, in
each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of and the depreciation and amortization
of, a Subsidiary of the Company shall be added to Consolidated Net Income to
compute EBITDA only to the extent (and in the same proportion) that the net
income of such Subsidiary was included in calculating Consolidated Net Income.
"Equity Offering" means any public or private sale of equity securities
(excluding Disqualified Stock) of the Company other than any private sales to
Related Persons of the Company.
"GAAP" means generally accepted accounting principles as in effect on the
date hereof.
"Guarantors" means (i) Schuler Homes of California, Inc., Schuler Homes of
Washington, Inc., Melody Homes, Inc., Schuler Realty/Maui, Inc., Schuler
Realty/Oahu, Inc., Lokelani Construction Corporation, Melody Mortgage Co., SHLR
of Washington, Inc. and Schuler Homes of Oregon, Inc., (ii) any other Guarantors
under any Bank Credit Facility, (iii) any other Subsidiary existing on the
Issuance Date which is a Restricted Subsidiary, and (iv) any other Person that
executes a Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"Hedging Obligations" of any Person means the net Obligations of such Person
pursuant to any Interest Rate Agreement or any foreign exchange contract,
currency swap agreement or other similar agreement to which such Person is a
party or a beneficiary.
"Holder" means the Person in whose name a Note is registered on the register
for the Notes.
"Homebuilding Joint Venture" means any Person in which the Company or any of
its Subsidiaries has an ownership interest but less than an 80% ownership
interest that, in each case, was formed for and is engaged in homebuilding
operations.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary; provided further, however, that
in the case of a discount security, neither the accrual of
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interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness. The term "Incurrence" when used as a noun shall have
a correlative meaning.
"Indebtedness" means on any date of determination (without duplication), (i)
the principal of and premium (if any) in respect of (A) indebtedness of such
Person for money borrowed and (B) indebtedness evidenced by notes, debentures,
bonds or other similar instruments for the payment of which such Person is
responsible or liable; (ii) all Capitalized Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the deferred purchase
price of property or services, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding accounts payable and accrued expenses arising in the ordinary course
of business and which are not more than 90 days past due or are in dispute)
which would appear as a liability on a balance sheet of a Person prepared on a
consolidated basis in accordance with GAAP, which purchase price or obligation
is due more than six months after the date of placing such property in service
or taking delivery and title thereto or the completion of such services
(provided that, in the case of obligations of an acquired Person assumed in
connection with an acquisition of such Person, such obligations would constitute
Indebtedness of such Person); (iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following receipt by such Person of a demand for reimbursement following payment
on the letter of credit); (v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock; (vi) all obligations of the type referred to in clauses (i) through (v)
of other Persons and all dividends of other Persons for the payment of which, in
either case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any guarantee; (vii) all
obligations of the type referred to in clauses (i) through (vi) of other Persons
secured by any lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount of
the obligation so secured; and (viii) to the extent not otherwise included in
this definition, Hedging Obligations of such Person. The amount of Indebtedness
of any Person at any date shall be (a) the outstanding balance at such date of
all unconditional Obligations as described above, (b) the maximum reasonably
anticipated liability, upon the occurrence of the contingency, other than a
contingency solely within the control of such Person, giving rise to the
obligation, of any contingent obligations as described above (in the case of
clauses other than (iii)) and the amount shown as a liability on a balance sheet
of a Person as described in clause (iii) above, in each case at such date;
provided, however, that the amount outstanding at any time of any Indebtedness
issued with original issue discount shall be deemed to be the face amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such indebtedness at such time as determined in conformity with
generally accepted accounting principles.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Related Persons do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Intangible Assets" means the amount (to the extent reflected in determining
consolidated stockholders' equity) of (A) all write-ups (other than write-ups of
tangible assets of a going concern business made within twelve months after the
acquisition of such business) in the book value of any asset owned by the
Company or any Restricted Subsidiary, and (B) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
compensate the Company or any Restricted Subsidiary for fluctuations in interest
rates.
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"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extensions
of credit (including by way of guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person.
"Issuance Date" means the date of issuance of $100.0 million of Notes in the
Offering.
"Mortgage" means a first priority mortgage or first priority deed of trust
on improved real property.
"Net Income" of any Person means the net income (loss) of such Person,
determined in accordance with GAAP as in effect on the date of issuance of the
Notes; excluding, however, from the determination of Net Income all gains (to
the extent that they exceed all losses) realized upon the sale or other
disposition (including, without limitation, dispositions pursuant to sale
leaseback transactions) of any real property or equipment of such Person, which
is not sold or otherwise disposed of in the ordinary course of business, or of
any capital stock of such Person or its subsidiaries owned by such Person.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Disposition
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Disposition),
net of the direct costs relating to such Asset Disposition (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any related expenses Incurred as a result thereof, taxes paid
or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), amounts required to be
applied to the repayment of Senior Debt secured by a lien on the asset or assets
that were the subject of such Asset Disposition and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
"Non-Recourse Indebtedness" means Indebtedness or other obligations secured
by a lien on property to the extent that the liability for such Indebtedness or
other obligations is limited to the security of the property without liability
on the part of the Company or any Subsidiary (other than the Subsidiary which
holds title to such property) for any deficiency.
"Obligations" means any principal, interest (including interest accruing
after the commencement of any bankruptcy, reorganization, insolvency or similar
proceeding relating to the Company or any of its Subsidiaries whether or not
allowed as a claim in such proceeding), penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Person" means an individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
partnership, trust, unincorporated organization, or government or any agency or
political subdivision thereof.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Refinance" means, in respect of Indebtedness, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness
in exchange or replacement for, such Indebtedness. "Refinancing" shall have a
correlative meaning.
"Related Business" means any line or lines of business or business activity
reasonably related to (x) the homebuilding business or (y) a business or
business activity of the Company and/or its Restricted Subsidiaries conducted on
the Issuance Date.
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"Related Person" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Restricted Investment" means any loan, advance, capital contribution or
transfer (including by way of guaranty or other similar arrangement) in or to
any Unrestricted Subsidiary, Homebuilding Joint Venture or any Person in which
the Company, directly or indirectly, has an ownership interest but less than 80%
ownership interest; provided, however, that loans, advances, capital
contributions or transfers (including by way of guaranty or other similar
arrangement) to a Homebuilding Joint Venture shall be counted as a Restricted
Investment only to the extent that the aggregate at any one time outstanding of
all such amounts expended (or with respect to guaranties or similar arrangement
the amounts then guaranteed) exceed, subsequent to December 31, 1997, $25.0
million in the aggregate for all Homebuilding Joint Ventures. Restricted
Investment shall include the fair market value of the net assets of any
Restricted Subsidiary that at any time is designated an Unrestricted Subsidiary.
Any property transferred to an Unrestricted Subsidiary, and the net assets of a
Restricted Subsidiary that is designated an Unrestricted Subsidiary, shall be
valued at fair market value at the time of such transfer, in each case as
determined by the Board of Directors of the Company in good faith. Restricted
Investment shall not include any loan, advance, capital contribution or transfer
made for the purpose of acquiring an ownership interest in a Person and
immediately designating such person as a Restricted Subsidiary, and if required
a Guarantor.
"Restricted Subsidiary" means any Subsidiary in which the Company, directly
or indirectly, has an 80% or greater ownership interest that has not been
designated an Unrestricted Subsidiary.
"Revolving Credit Facility" means that certain Amended and Restated Credit
Agreement, dated April 29, 1998, among the Company, its Subsidiaries named
therein and First Hawaiian Bank and Bank of America National Trust and Savings
Association, as may be further amended, modified, renewed, refunded, extended,
replaced or Refinanced from time to time.
"Schuler Family" means James K. Schuler, his wife, their respective
descendants, any trust for the benefits of any of the foregoing persons, at
least 50% of the trustees of which are members of the Schuler Family or any
other trust or charitable foundation, the majority of the trustees of which are
members of the Schuler Family.
"Senior Debt" means (i) all Indebtedness now or hereafter outstanding under
the Bank Credit Facility; (ii) any other Indebtedness permitted to be Incurred
by the Company under the terms of the Indenture, unless the instrument under
which such Indebtedness is Incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Notes and (iii) all Obligations
with respect to the foregoing. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (v) Indebtedness which is classified as
Non-Recourse Indebtedness or any unsecured claim arising in respect hereof by
reason of application of section 1111(b)(1) of the U.S. bankruptcy code, (w) any
liability for any federal, state, local or other taxes owed or owing by the
Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other
Related Persons, (y) any trade payables or (z) any Indebtedness that is Incurred
in violation of the Indenture.
"Subsidiary" means a corporation, a majority of the capital stock with
voting power to elect directors of which is directly or indirectly owned by the
Company and its Subsidiaries, or any Person in which the Company and its
Subsidiaries has at least a majority ownership interest.
"Unrestricted Subsidiary" means (i) any Subsidiary in which the Company,
directly or indirectly, has less than an 80% ownership interest provided that
such Subsidiary is not a Homebuilding Joint Venture; (ii) any Subsidiary in
which the Company, directly or indirectly, has an 80% or greater ownership
interest, which, in accordance with the provisions of the Indenture, has been
designated in a resolution adopted by the Board of Directors of the Company as
an Unrestricted Subsidiary, in each case unless and until such Subsidiary shall,
in
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accordance with the provisions of the Indenture, be designated by a resolution
of the Company as a Restricted Subsidiary; and (iii) any Subsidiary in which the
Company, directly or indirectly, has an 80% or greater ownership interest, a
majority of the voting stock of which shall at the time be owned directly or
indirectly by one or more Unrestricted Subsidiaries. At the Issuance Date, the
Company will not have designated any Subsidiaries as Unrestricted Subsidiaries.
"Voting Stock", with respect to any Person, means securities of any class of
Capital Stock of such Person entitling the Holders thereof (whether at all times
or only so long as no senior class of stock has voting power by reason of any
contingency) to vote in the election of members of the board of directors of
such Person.
"Wholly Owned Subsidiary" means a Subsidiary, all of the capital stock
(whether or not voting, but exclusive of directors' qualifying shares) of which
is owned by the Company or a Wholly Owned Subsidiary.
"1993 Subordinated Notes" means the Company's $57.5 million 6 1/2%
Convertible Subordinated Debentures due 2003.
BOOK-ENTRY; DELIVERY AND FORM
The Notes will initially be represented by one or more Notes in registered
global form (the "Global Notes"). The Global Notes will be deposited with the
Trustee as custodian for, and registered in the name of Cede and Co., as nominee
of DTC (such nominee being referred to herein as the "Global Note Holder"). DTC
will maintain the Notes in denominations of $1,000 and integral multiples
thereof through its book-entry facilities.
Notwithstanding the foregoing, Notes that are issued as described below
under "-- Certificated Securities" will be issued in the form of registered
definitive certificates (the "Certificated Securities"). Upon the transfer of
Certificated Securities, such Certificated Securities may, unless the Global
Notes have previously been exchanged for Certificated Securities, be exchanged
for an interest in the Global Notes representing the principal amount of Notes
being transferred.
DTC has advised the Initial Purchasers and the Company that it is a
limited-purpose trust company that was created to hold securities for its
participating organizations (collectively, the "Participants" or the "DTC's
Participants") and to facilitate the clearance and settlement of transactions in
such securities between Participants through electronic book-entry changes in
accounts of its Participants. DTC's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or "DTC's Indirect Participants")
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly. Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through DTC's Participants or
DTC's Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchasers with portions of the principal amount of
the Global Notes and (ii) ownership of the Notes evidenced by the Global Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the interests of DTC's
Participants), DTC's Participants and DTC's Indirect Participants.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in the Global Notes will be limited to such
extent. Investors in the Global Notes may hold their interest therein directly
through DTC, if they are Participants in such system, or through Indirect
Participants.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced by the
Global Notes will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the
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Trustee thereunder. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records of DTC or for
maintaining, supervising or reviewing any records of DTC relating to the Notes.
Payments in respect of the principal, premium, if any, and interest on any
Notes registered in the name of the Global Note holder on the applicable record
date will be payable by the Trustee to or at the direction of the Global Note
Holder in its capacity as the registered holder under the Indenture. Under the
terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of DTC to immediately credit the
accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of DTC. Payments by DTC's Participants
and DTC's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of DTC's Participants or DTC's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Notes may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). In addition, if (i) the Company notifies the
Trustee in writing that DTC is no longer willing or able to act as a depositary
and the Company is unable to locate a qualified successor within 90 days or (ii)
the Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Notes in the form of Certificated Securities under the
Indenture, then, upon surrender by the Global Note Holder of its Global Notes,
Notes in such form will be issued to each person that the Global Note Holder and
DTC identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or DTC in identifying the beneficial owners of Notes and the
Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Global Note Holder or DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Notes (including principal, premium, if any, and interest) be made
by wire transfer of immediately available funds to the accounts specified by the
Global Note Holder. With respect to Certificated Securities, the Company will
make all payments of principal, premium, if any, and interest by wire transfer
of immediately available funds to the accounts specified by the holders thereof
or, if no such account is specified, by mailing a check to each such holder's
registered address. The Company expects that secondary trading in the
Certificated Securities will also be settled in immediately available funds.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The discussion set forth in this summary is based on the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and
proposed Treasury regulations thereunder ("Treasury Regulations"), and
administrative and judicial interpretations thereof, all as in effect on the
date hereof and all of which are subject to change (possibly on a retroactive
basis). Legislative, judicial or administrative changes or interpretations may
be forthcoming that could affect the tax consequences to Holders of Old Notes
and Notes.
This summary is for general information only and does not purport to address
all of the federal income tax consequences that may be applicable to a Holder of
Old Notes or Notes. The tax treatment of a Holder of Old Notes or Notes may vary
depending on its particular situation. For example, certain Holders, including
individual retirement and other tax-deferred accounts, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and individuals who are not citizens or residents of the United
States, may be subject to special rules not discussed below. In addition, this
discussion addresses the tax consequences to the initial Holders of the Old
Notes and Notes and not the tax consequences to subsequent transferees of the
Old Notes and Notes.
EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL
INCOME TAX CONSEQUENCES SET FORTH BELOW AND ANY OTHER FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR NOTES AND OF HOLDING AND
DISPOSING OF THE OLD NOTES AND NOTES.
EXCHANGE OFFER
Under Section 1001 of the Code modifications in debt instruments may in
certain cases be deemed to constitute a taxable exchange of the existing debt
instrument for a new debt instrument. The Internal Revenue Service (the "IRS")
has issued Regulations providing rules for determining when a modification of a
debt instrument constitutes a taxable exchange. Because the terms of the Notes
do not modify significantly the terms of the Old Notes, each Note will be viewed
as a continuation of the corresponding Old Note, the issuance of the Note will
be disregarded for federal income tax purposes, and a Holder exchanging an Old
Note for a Note (as well as a non-exchanging Holder) will not recognize any gain
or loss as a result of the Exchange (or the Exchange Offer).
STATED INTEREST
A Holder of an Old Note or a Note will be required to report as income for
federal income tax purposes interest earned on an Old Note or a Note in
accordance with the Holder's method of tax accounting. A Holder of an Old Note
or a Note using the accrual method of accounting for tax purposes is, as a
general rule, required to include interest in ordinary income as such interest
accrues, while a cash basis Holder must include interest income when cash
payments are received (or made available for receipt) by such Holder.
ORIGINAL ISSUE DISCOUNT
If the Notes are issued with original issue discount ("OID") within the
meaning of Sections 1272 and 1273 of the Code and the pertinent Treasury
Regulations, Holders of the Old Notes and Notes generally will be required to
include such OID in gross income as it accrues. The total amount of OID, if any,
with respect to each Note will be any excess of its "stated redemption price at
maturity" over its "issue price;" provided that a Note will not be deemed to
have OID if such excess is less than 1/4 of 1% of the Note's stated redemption
price at maturity multiplied by the number of complete years to its maturity
from its issue date. The "issue price" of the Notes (or a particular issue of
Notes) will be the first price at which a substantial amount of such Notes are
sold. The "stated redemption price at maturity" of the Notes will be the sum of
all payments provided by the Notes other than "qualified stated interest"
payments. The term "qualified stated interest" generally means stated interest
that is unconditionally payable in cash or property (other than debt instruments
of the issuer) at least annually at a single fixed rate. A Holder of an Old Note
or a Note issued with OID would be required to include
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the OID in income for federal income tax purposes as it accrues under a
"constant yield method," regardless of such Holder's method of accounting for
tax purposes. The Company will furnish to the IRS and to record Holders of the
Old Notes and the Notes information with respect to the OID, if any, accruing
during the calendar year (as well as interest paid during that year).
SALE, EXCHANGE, OR REDEMPTION OF A NOTE
Upon the sale, exchange (other than pursuant to the Exchange as discussed
above), or redemption of an Old Note or a Note, a Holder will recognize taxable
gain or loss equal to the difference between (i) the amount of cash and the fair
market value of property received (other than amounts received attributable to
interest not previously taken into account, which amount will be treated as
interest received), and (ii) the Holder's adjusted tax basis in the Old Note or
a Note. A Holder's adjusted tax basis in an Old Note or Note generally will
equal the cost of the Old Note or Note to the Holder, increased by the amount of
any OID previously included in income by the Holder with respect to the Old Note
or Note and reduced by any payments previously received by the Holder with
respect to the Old Note or Note, other than qualified stated interest payments,
and by any premium amortization deductions previously claimed by the Holder.
Provided that the Old Note or Note is a capital asset in the hands of the Holder
and has been held for more than one year, any gain or loss recognized by the
Holder will generally be a long-term capital gain or loss. The recently enacted
20% maximum tax rate on long-term capital gains applies only to assets held by
individuals for more than 18 months although capital assets held for more than
one year by individuals will continue to qualify for the 28% maximum tax rate.
BACKUP WITHHOLDING
Under the backup withholding rules, a Holder of an Old Note or a Note may be
subject to a backup withholding at the rate of 31% on interest paid on the Old
Note or Note or on any other cash payment with respect to the sale or redemption
of the Old Note or Note, unless (i) such Holder is a corporation or comes under
certain other exempt categories and when required demonstrates this fact or (ii)
such Holder provides a correct taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules in the Treasury
Regulations.
The Company will report to the Holders of the Old Notes and Notes and to the
IRS the amount of any "reportable payments" for each calendar year and the
amount of tax withheld, if any, with respect to payments on the Old Notes and
Notes.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against the Holder's federal income tax liability, provided
that the required information is furnished to the IRS.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER SHOULD
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE
EXCHANGE, OWNERSHIP, AND DISPOSITION OF THE NOTES AND NOTES (INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS).
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PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Company or any
affiliate of the Company) may exchange such Old Notes for Notes pursuant to the
Exchange Offer; PROVIDED, that each broker-dealer that receives Notes for its
own account in exchange for Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-making or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any resale
of such Notes. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Notes
received in exchange for Old Notes where such Old Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that for a period of 180 days after consummation of the Exchange Offer,
it will make this Prospectus, as it may be amended or supplemented from time to
time, available to any broker-dealer for use in connection with any such resale.
In addition, until , 1998, all dealers effecting transactions in the
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Notes by
broker-dealers or any other holder of Notes. Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Notes or a combination of
such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Notes. Any broker-dealer
that resells Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after consummation of the Exchange Offer, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer and to the Company's performance of, or
compliance with, the Registration Rights Agreement (other than commissions or
concessions of any brokers or dealers) and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
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LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Brobeck, Phleger & Harrison LLP, Palo Alto, California. Thomas A. Bevilacqua,
a partner of Brobeck, Phleger & Harrison LLP, serves as a director of the
Company.
INDEPENDENT AUDITORS
The consolidated financial statements of Schuler Homes, Inc. as of December
31, 1997 and December 31, 1996 and for each of the three fiscal years in the
period ended December 31, 1997, included in this Prospectus, have been audited
by Ernst & Young LLP, independent auditors, as stated in their report appearing
herein.
With respect to the unaudited consolidated interim financial information for
the three-month periods ended March 31, 1998 and March 31, 1997, incorporated by
reference in this Prospectus, Ernst & Young LLP have reported that they have
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report, included in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
and incorporated herein by reference, states that they did not audit and they do
not express an opinion on that interim financial information. Accordingly, the
degree of reliance on their report on such information should be restricted
considering the limited nature of the review procedures applied. The independent
auditors are not subjected to the liability provisions of Section 11 of the
Securities Act of 1933 (the "Act") for their report on the unaudited interim
financial information because that report is not a "report" or a "part" of the
Registration Statement prepared or certified by the auditors within the meaning
of Sections 7 and 11 of the Act.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets, December 31, 1997 and 1996.................................................... F-3
Consolidated Statements of Operations for years ended December 31, 1997, 1996 and 1995..................... F-4
Consolidated Statements of Stockholders' Equity for years ended December 31, 1997, 1996 and 1995........... F-5
Consolidated Statements of Cash Flows for years ended December 31, 1997, 1996 and 1995..................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Schuler Homes, Inc.
We have audited the accompanying consolidated balance sheets of Schuler
Homes, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Schuler Homes,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Honolulu, Hawaii
March 5, 1998
F-2
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1996
-------------- --------------
ASSETS
Cash and cash equivalents (restricted -- Note 2)................................. $ 3,842,000 $ 1,619,000
Receivables...................................................................... 880,000 425,000
Prepaid income taxes............................................................. 1,682,000 2,604,000
Amount due from affiliate (Note 7)............................................... 24,000 26,000
Real estate inventories (Note 3)................................................. 291,081,000 238,358,000
Investments in unconsolidated joint ventures (Note 4)............................ 16,026,000 11,611,000
Deposits......................................................................... 1,691,000 483,000
Deferred offering costs, net (Note 9)............................................ 1,171,000 1,399,000
Notes receivable (Note 2)........................................................ 2,406,000 3,944,000
Deferred income taxes (Note 6)................................................... 4,002,000 7,356,000
Intangibles, net (Note 1)........................................................ 13,742,000 --
Other assets..................................................................... 4,024,000 1,122,000
-------------- --------------
Total assets..................................................................... $ 340,571,000 $ 268,947,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................................................. $ 12,805,000 $ 593,000
Accrued expenses................................................................. 13,207,000 8,699,000
Notes payable to bank (Note 5)................................................... 91,077,000 44,690,000
Notes payable to others.......................................................... 2,627,000 --
Convertible subordinated debentures (Note 9)..................................... 57,500,000 57,500,000
-------------- --------------
Total liabilities................................................................ 177,216,000 111,482,000
Commitments and contingencies (Notes 5 and 10)
Stockholders' equity (Notes 1, 8 and 9):
Common stock, $.01 par value; 30,000,000 shares authorized; 20,874,927 and
20,874,177 shares issued at December 31, 1997 and 1996, respectively......... 209,000 209,000
Additional paid-in capital..................................................... 93,100,000 93,096,000
Retained earnings.............................................................. 75,046,000 69,160,000
Treasury stock, at cost; 774,000 shares at December 31, 1997 and 1996.......... (5,000,000) (5,000,000)
-------------- --------------
Total stockholders' equity....................................................... 163,355,000 157,465,000
-------------- --------------
Total liabilities and stockholders' equity....................................... $ 340,571,000 $ 268,947,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
-------------- -------------- --------------
Residential real estate sales.................................... $ 229,624,000 $ 93,645,000 $ 132,897,000
Costs and expenses:
Residential real estate sales.................................. 184,843,000 76,612,000 101,356,000
Inventory impairment loss (Note 3)............................. -- 23,910,000 9,405,000
Selling and commissions........................................ 17,268,000 7,767,000 7,333,000
General and administrative (Note 7)............................ 13,596,000 4,179,000 4,167,000
-------------- -------------- --------------
Total costs and expenses......................................... 215,707,000 112,468,000 122,261,000
Income (loss) from unconsolidated joint ventures (Note 4)........ (136,000) 157,000 967,000
-------------- -------------- --------------
Operating income (loss).......................................... 13,781,000 (18,666,000) 11,603,000
Other income (expense)........................................... (4,261,000) (9,000) 462,000
-------------- -------------- --------------
Income (loss) before provision for income taxes.................. 9,520,000 (18,675,000) 12,065,000
Provision (credit) for income taxes (Note 6)..................... 3,634,000 (7,289,000) 4,703,000
-------------- -------------- --------------
Net income (loss)................................................ $ 5,886,000 $ (11,386,000) $ 7,362,000
-------------- -------------- --------------
-------------- -------------- --------------
Net income (loss) per share (Note 11):
Basic.......................................................... $ 0.29 $ (0.55) $ 0.35
-------------- -------------- --------------
-------------- -------------- --------------
Diluted........................................................ $ 0.29 $ (0.55) $ 0.35
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- --------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... 20,874,177 $ 209,000 $93,096,000 $73,184,000 $ -- $166,489,000
Net income............................. -- -- -- 7,362,000 -- 7,362,000
--------- --------- ---------- ----------- ---------- -----------
Balance at December 31, 1995........... 20,874,177 209,000 93,096,000 80,546,000 -- 173,851,000
Reacquisition of the Company's common
stock................................ (774,000) -- -- -- (5,000,000) (5,000,000)
Net loss............................... -- -- -- (11,386,000) -- (11,386,000)
--------- --------- ---------- ----------- ---------- -----------
Balance at December 31, 1996........... 20,100,177 209,000 93,096,000 69,160,000 (5,000,000) 157,465,000
Issuance of common stock from exercise
of stock options (Note 8)............ 750 -- 4,000 -- -- 4,000
Net income............................. -- -- -- 5,886,000 -- 5,886,000
--------- --------- ---------- ----------- ---------- -----------
Balance at December 31, 1997........... 20,100,927 $ 209,000 $93,100,000 $75,046,000 $(5,000,000) $163,355,000
--------- --------- ---------- ----------- ---------- -----------
--------- --------- ---------- ----------- ---------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
-------------- -------------- --------------
OPERATING ACTIVITIES:
Net income (loss)................................................ $ 5,886,000 $ (11,386,000) $ 7,362,000
Adjustment to reconcile net income to net cash used in operating
activities:
Depreciation and amortization expense.......................... 2,883,000 814,000 715,000
(Income) loss from unconsolidated joint ventures............... 143,000 (72,000) (1,067,000)
Sales financed by Company...................................... -- (152,000) (245,000)
Principal payments of notes receivable......................... 2,303,000 190,000 424,000
Changes in assets and liabilities:
(Increase) decrease in receivables............................. 654,000 92,000 40,628,000
(Increase) decrease in prepaid income taxes.................... 922,000 (2,047,000) (557,000)
(Increase) decrease in deposits................................ (1,208,000) 518,000 (901,000)
(Increase) decrease in real estate inventories................. (12,775,000) 10,358,000 (37,882,000)
(Increase) decrease in other assets............................ (1,295,000) (261,000) 27,000
Increase (decrease) in accounts payable........................ 7,438,000 (420,000) 158,000
Increase (decrease) in accrued expenses........................ 3,696,000 (16,000) (330,000)
Change in deferred income taxes................................ 3,354,000 (5,538,000) (418,000)
Increase (decrease) in contract dispute resolution cost
payable...................................................... -- -- (7,979,000)
-------------- -------------- --------------
Net cash provided by (used in) operating activities.......... 12,001,000 (7,920,000) (65,000)
INVESTING ACTIVITIES:
Payment for purchase of Melody Homes and Mortgage, net of cash
acquired....................................................... (29,508,000) -- --
Investments in unconsolidated joint ventures..................... (2,980,000) -- (205,000)
Advances to unconsolidated joint ventures........................ (1,724,000) (4,082,000) (562,000)
Repayments of advances to unconsolidated joint ventures.......... 145,000 4,248,000 239,000
Capital distributions from unconsolidated joint ventures......... -- 128,000 4,301,000
Purchase of property and equipment............................... (664,000) (39,000) (141,000)
-------------- -------------- --------------
Net cash provided by (used in) investing activities.......... (34,731,000) 255,000 3,632,000
FINANCING ACTIVITIES:
Proceeds from bank borrowings.................................... 223,147,000 115,723,000 151,021,000
Principal payments on bank borrowings............................ (198,427,000) (107,814,000) (141,957,000)
Principal payments on note payable to others..................... -- -- (14,583,000)
Advances to affiliates........................................... (98,000) (116,000) (109,000)
Repayment of advances from affiliates............................ 99,000 115,000 123,000
Decrease in deferred offering costs.............................. 228,000 229,000 230,000
Proceeds from issuance of common stock from exercise of stock
options........................................................ 4,000 -- --
Reacquisition of the Company's common stock...................... -- (5,000,000) --
-------------- -------------- --------------
Net cash provided by (used in) financing activities.......... 24,953,000 3,137,000 (5,275,000)
-------------- -------------- --------------
Increase (decrease) in cash...................................... 2,223,000 (4,528,000) (1,708,000)
Cash and cash equivalents (restricted) at beginning of period.... 1,619,000 6,147,000 7,855,000
-------------- -------------- --------------
Cash and cash equivalents (restricted) at end of period.......... $ 3,842,000 $ 1,619,000 $ 6,147,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Schuler Homes, Inc. (the Company) was incorporated in Hawaii in March 1988
and, during January 1992, was reincorporated in Delaware. The Company is engaged
in the development and sale of residential real estate in the following states:
Colorado, Hawaii, Northern California, Oregon and Washington.
On January 8, 1997, the Company completed the acquisition of the common
stock of Melody Homes, Inc., a Colorado homebuilder (Melody), and Melody
Mortgage Company (Melody Mortgage), 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.
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 Stafford Homes (Stafford). The Company has an option to purchase the
remaining 51% interest, subject to certain contingencies.
The Company has ownership interests in the following entities:
- Melody Homes, Inc., a wholly-owned subsidiary incorporated in Delaware --
This entity is engaged in the development and sale of residential real estate in
Colorado.
- Melody Mortgage Co., a wholly-owned subsidiary incorporated in Colorado
- -- This entity is a mortgage brokerage firm for Melody home buyers.
- Schuler Homes of California, Inc., a wholly-owned subsidiary incorporated
in California -- This entity is engaged in the development and sale of
residential real estate in California. This entity was formed in June, 1996.
- Schuler Homes of Washington, Inc., a wholly-owned subsidiary incorporated
in the state of Washington -- This entity is engaged in the development and sale
of residential real estate in the state of Washington. This entity was formed in
August, 1996.
- Schuler Homes of Oregon, Inc., a wholly-owned subsidiary incorporated in
Oregon -- This entity is engaged in the development and sale of residential real
estate in Oregon. This entity was formed in October, 1996.
- SHLR of Washington, Inc., a wholly-owned subsidiary incorporated in the
state of Washington -- This entity owns a 49% interest in SSHI LLC (dba Stafford
Homes), which is engaged in the development and sale of residential real estate
in the state of Washington.
- Schuler Realty/Maui, Inc., a wholly-owned subsidiary incorporated in
Hawaii -- This entity provides sales services in connection with the Company's
projects on the island of Maui.
- Schuler Realty/Oahu, Inc., a wholly-owned subsidiary incorporated in
Hawaii -- This entity provides sales services in connection with the Company's
projects on the island of Oahu.
F-7
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- Lokelani Construction Corporation, a wholly-owned subsidiary incorporated
in Delaware -- This entity serves as the general contractor on certain of the
Company's projects.
- Waiakoa Estates Subdivision Joint Venture (WESJV), an unincorporated
joint venture -- The Company has a 50% interest in WESJV, which is engaged in
the development and sale of residential lots on the island of Maui.
- Iao Partners (Iao), a general partnership -- The Company has a 50%
interest in Iao, which is engaged in the development and sale of residential
projects on the island of Maui.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other
short-term investments (less than 3 months) to be cash equivalents.
REAL ESTATE INVENTORIES
Real estate inventories consist of raw land, lots under development, houses
under construction and completed homes. Prior to 1995, these assets were carried
at the lower of cost or estimated net realizable value. Estimated net realizable
value represented management's estimates, based on management's plans and
intentions, of sale prices less disposition costs, assuming that disposition
occurred in the normal course of business. During the fourth quarter of 1995,
the Company changed its method of accounting for the carrying amount of its real
estate inventories by adopting FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Under the new standard, inventories which are substantially completed are
carried at the lower of cost or fair value less cost to sell. Fair value is
determined by applying a risk adjusted discount rate to estimates of future cash
flows, resulting in a lower value than under the net realizable value method
previously required. In addition, land held for future development or
inventories under current development are adjusted to fair value, only if an
impairment to their value is indicated. There was no cumulative effect of
adopting FASB Statement No. 121.
The estimates of future cash flows require significant judgment relating to
level of sales prices, rate of new home sales, amount of marketing costs and
price discounts needed in order to stimulate sales, rate of increase in the cost
of building materials and labor, introduction of building code modifications,
and economic and real estate market conditions in general. Accordingly, there
exists at any date, a reasonable possibility that changes in estimates will
occur in subsequent periods.
All direct and indirect land costs, all development and construction costs,
and applicable carrying charges (primarily interest) are capitalized to real
estate projects during the development period. The capitalized costs
F-8
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are assigned to individual components of projects based on specific
identification, if practicable, or allotted based on relative sales value (in
accordance with FASB Statement No. 67, "Accounting for Costs and Initial Rental
Operations of Real Estate Projects"). Selling expenses and other marketing costs
are expensed in the period incurred and are included in cost of residential real
estate sold in the accompanying consolidated statements of operations.
UNCONSOLIDATED JOINT VENTURES
Investments in unconsolidated joint ventures consist of the Company's
interest in real estate ventures, and are accounted for using the equity method.
DEPOSITS
Deposits consist of amounts paid relating to potential purchases of land.
INTANGIBLES
Intangibles consist of goodwill and the covenant not-to-compete, which
resulted from the acquisition of Melody. The intangibles are being amortized on
a straight-line basis over a 20-year period. Accumulated amortization at
December 31, 1997 is approximately $723,000.
SALES AND PROFIT RECOGNITION
A sale is generally recorded and profit recognized when closings have
occurred and a buyer has met down payment and continuing investment criteria
required by generally accepted accounting principles.
INTEREST RATE SWAP
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.
RECLASSIFICATIONS
Certain amounts in the unconsolidated financial statements for the years
ended December 31, 1996 and 1995 have been reclassified to conform to the 1997
presentation.
F-9
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist primarily of notes receivable on seller financed
sales of residential units and residential lots in Hawaii. The notes provide for
terms and conditions similar to those offered by financial institutions and are
collateralized by the residential units and residential lots sold. Certain of
the notes are collateralized by second mortgages relating to home buyers who
purchased homes as part of the Company's "zero-down" sales program. Revenue and
profit recognition on such transactions are deferred until the down payment
requirement for revenue and profit recognition is met. 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 the 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. Revenue and gross profit deferred on such
transactions during the year ended December 31, 1997 was $3,443,000 and
$493,000, respectively. Cash of $2,395,000 was received from buyers' third party
lenders in connection with "zero-down" sales during the year ended December 31,
1997.
3. REAL ESTATE INVENTORIES
Real estate inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1996
-------------- --------------
Unimproved land held for future development.................. $ 42,955,000 $ 40,940,000
Development projects in progress............................. 205,060,000 131,756,000
Completed inventory (including lots held for sale)........... 43,066,000 65,662,000
-------------- --------------
$ 291,081,000 $ 238,358,000
-------------- --------------
-------------- --------------
</TABLE>
Completed inventory includes residential units which are substantially ready
for occupancy.
Pursuant to the adoption of FASB Statement No. 121, the Company recognized
an impairment loss of $9,405,000 in 1995, which related to completed inventories
at December 31, 1995. The Company's completed inventory comprised a larger
component of total inventory as of December 31, 1995 as compared to December 31,
1994, with substantially all of the increase occurring during the fourth quarter
of 1995. During 1996, the Company recognized an impairment loss of $23,910,000,
primarily related to a) an increase in completed inventories due to the
substantial completion of a high-rise project and b) the decline experienced by
the Company in the rate of new home sales contracts entered into, which resulted
in a more conservative outlook with respect to the estimate of future cash flows
for certain other completed projects, on some of which, impairment losses were
recognized in 1995. No losses were recognized on land held for future
development or inventories under current development.
The Company has notes payable to land sellers with a principal balance of
$2,627,000 at December 31, 1997, which relate to land purchased for future
residential development. The notes are secured by mortgages on the purchased
land.
F-10
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
Condensed combined financial information as of December 31, 1997, 1996 and
1995 and for the years then ended are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Assets (primarily real estate inventories)...... $ 53,298,000 $ 17,074,000 $ 17,189,000
Liabilities..................................... 30,452,000 155,000 272,000
------------- ------------- -------------
Equity.......................................... $ 22,846,000 $ 16,919,000 $ 16,917,000
------------- ------------- -------------
------------- ------------- -------------
Revenues........................................ $ 22,011,000 $ 6,657,000 $ 10,472,000
Expenses........................................ 22,071,000 6,166,000 8,347,000
------------- ------------- -------------
Net income (loss)............................... $ (60,000) $ 491,000 $ 2,125,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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 Stafford. 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. At December 31, 1997,
outstanding loans pursuant to this agreement totaled $1,500,000. The Company
accounts for this investment as an unconsolidated joint venture under the equity
method of accounting. The increase in amounts on the above table from 1996 to
1997 is due primarily to the acquisition of a 49% interest in Stafford.
The Company's investment in WESJV includes $400,000 paid to the other
venturer under an option agreement, which gave the Company the right for a
certain period, as defined, to require the other venturer to contribute the land
to WESJV for its project. A portion of the option payment is amortized as sales
occur. In addition, the Company earns management fees from WESJV and Iao. The
option fee amortization and management fees are included in income from
unconsolidated joint ventures in the accompanying consolidated statements of
operations.
Investment in unconsolidated joint ventures includes accrued but unpaid
partnership management fees due from the Company's 50% general partner in Iao of
$583,000 and $513,000 at December 31, 1997 and 1996, respectively. The Iao
partnership agreement provides for the payment of the partnership management
fees to the Company from the cash flow of Iao.
The Company's loss from unconsolidated joint ventures in 1997 is primarily
the result of the Company's share of the loss recognized by Iao of $397,000,
offset in part by the Company's share of the income of Stafford of $329,000. As
of December 31, 1997, the Company's cumulative share of the undistributed
profits of its joint ventures is $6,756,000.
Included in liabilities are advances from the Company to its unconsolidated
joint ventures of $1,521,000, $0 and $243,000 at December 31, 1997, 1996 and
1995, respectively.
5. NOTES PAYABLE TO BANK
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
F-11
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE TO BANK (CONTINUED)
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 ability to draw upon its
line of credit is dependent upon meeting certain financial ratios and covenants.
As of December 31, 1997, the Company met such financial ratios and covenants.
In October 1996, the Company entered into an interest rate swap to pay LIBOR
of 5.89% (fixed over 5 years) on $30,000,000, while receiving in return an
interest payment at a floating one-month LIBOR. However, if the one-month LIBOR
resets at or above 8%, the swap reverses for that payment period and no interest
payments are exchanged. The interest rate differential to be received or paid is
recognized during the period as an adjustment to interest incurred.
The Company's notes payable at December 31, 1997 consist of borrowings under
its credit facilities. At December 31, 1997, the Company's bank borrowings were
at interest rates of prime (8.5%) and LIBOR plus 1.75%, (7.875% to 8.0%). At
December 31, 1997, $46,523,000 of the Company's lines of credit is unused, of
which $6,447,000 is restricted for outstanding but unused letters of credit.
The interest amounts in this paragraph relate to notes payable to bank and
others and the convertible subordinated debentures. The Company paid interest of
approximately $11,644,000, $7,972,000 and $5,877,000 during the years ended
December 31, 1997, 1996 and 1995, respectively. Interest incurred during 1997,
1996 and 1995 was approximately $11,845,000, $7,865,000 and $5,833,000,
respectively. All of such interest was capitalized to real estate inventories
except for $2,985,000 and $270,000 in 1997 and 1996, respectively, which was
expensed and not capitalized, as such interest related to assets which did not
meet the requirements for capitalization. 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 1997, 1996 and 1995
totaled $6,666,000, $3,247,000 and $3,430,000, respectively.
The following information relates to notes payable to bank at December 31,
1997 and 1996 and interest thereon during the years then ended:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE MAXIMUM AMOUNT AVERAGE DAILY WEIGHTED AVERAGE
INTEREST RATE AT OUTSTANDING DURING AMOUNT OUTSTANDING INTEREST RATE
END OF THE YEAR THE YEAR DURING THE YEAR DURING THE YEAR*
--------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C> <C>
1997............................... 7.9% $ 113,600,000 $ 104,739,000 7.7%
-- --
-- --
------------------ -------------------
------------------ -------------------
1996............................... 7.5% $ 68,467,000 $ 54,529,000 7.5%
-- --
-- --
------------------ -------------------
------------------ -------------------
</TABLE>
* Computed by dividing related interest charged by the average daily amount
outstanding during the year.
F-12
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The following summarizes the provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Currently payable:
Federal.......................................... $ 343,000 $ (1,480,000) $ 4,335,000
State............................................ (61,000) (271,000) 786,000
------------ ------------ ------------
282,000 (1,751,000) 5,121,000
Deferred:
Federal.......................................... 2,843,000 (4,687,000) (354,000)
State............................................ 509,000 (851,000) (64,000)
------------ ------------ ------------
3,352,000 (5,538,000) (418,000)
------------ ------------ ------------
Provision (credit) for income taxes................ $ 3,634,000 $ (7,289,000) $ 4,703,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The provision for income taxes on adjusted historical income differs from
the amounts computed by applying the applicable Federal statutory rates due to
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Provision (credit) for federal income taxes at the
statutory rate................................... $ 3,343,000 $ (6,559,000) $ 4,237,000
Provision (credit) for state income taxes, net of
federal income tax benefits...................... 290,000 (727,000) 470,000
Other.............................................. 1,000 (3,000) (4,000)
------------ ------------ ------------
Provision (credit) for income taxes................ $ 3,634,000 $ (7,289,000) $ 4,703,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred income taxes are the result of provisions of the tax laws that
either require or permit certain items of income or expense to be reported for
tax purposes in different periods than they are reported for financial reporting
purposes. The primary components of the Company's deferred income taxes relate
to capitalized interest and inventory impairment losses (Note 3). At December
31, 1997, the total deferred tax liabilities (primarily resulting from
capitalized interest) and total deferred tax assets (primarily resulting from
inventory impairment losses) are $2,581,000 and $6,583,000, respectively.
Income tax payments of $455,000, $585,000 and $5,750,000 were made during
1997, 1996 and 1995, respectively.
7. RELATED PARTY TRANSACTIONS
James K. Schuler, the Company's chief executive officer, was the Company's
sole stockholder prior to the initial public offering and owns a majority of the
common shares outstanding as of December 31, 1997 and 1996.
The Company and an affiliate wholly-owned by Mr. Schuler, have a management
agreement pursuant to which certain management and administrative personnel of
the Company perform certain functions for the affiliate. The affiliate
reimburses the Company on a quarterly basis for its cost of providing such
services. During
F-13
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
1997, 1996 and 1995, $97,000, $116,000 and $109,000 was charged to the affiliate
by the Company pursuant to this agreement. At December 31, 1997, $24,000, which
was charged for the quarter then ended, is included in the amount due from
affiliates. Such amount was subsequently paid in full by the affiliate.
From time to time, the Company engages the law firms in which directors of
the Company are partners. During 1997, 1996 and 1995, legal fees of
approximately $322,000, $60,000 and $110,000, respectively, to such firms were
incurred by the Company.
At December 31, 1997 and 1996, Mr. Schuler, as an individual, had notes
receivable and accrued interest thereon totaling approximately $750,000 and
$680,000, respectively, from a consultant to the Company.
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.
8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
The Company sponsors a 401(k) defined contribution retirement savings plan
that covers substantially all employees of the Company after completion of one
year of service. Company contributions to this plan, which include amounts based
on a percentage of employee contributions as well as discretionary
contributions, were $89,000, $116,000, and $106,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
In January 1992, the Company adopted a stock option plan (the "Plan"). Under
the Plan, options to purchase an aggregate of not more than 1,000,000 shares of
common stock may be granted from time to time to key employees, officers and
directors of the Company. The options vest 25% one year after being granted.
Thereafter, vesting occurs pro rata each month until 100% vesting is attained
four years after the grant date. The maximum term of the options granted is 10
years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.4%, 6.0% and 6.6%; dividend yields of 0%, 0% and 0%; volatility factors of the
expected market price of the Company's common stock of 0.32, 0.33 and 0.33; and
a weighted-average expected life of the option of 3.25 years, 4 years and 4
years.
The Black-Scholes option valuation model used was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and
F-14
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
applying FASB Statement No. 123 on pro forma net income (loss) for 1997, 1996
and 1995 are not likely to be representative of the effects for future years,
since the 1997, 1996 and 1995 pro forma net income (loss) amounts reflect
expense for only one, two and three years vesting, respectively. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------------- ------------
<S> <C> <C> <C>
Pro forma net income (loss)....................... $ 5,122,000 $ (11,508,000) $ 7,282,000
Pro forma net income (loss) per share:
Basic........................................... $ 0.25 $ (0.56) $ 0.35
Diluted......................................... 0.25 (0.56) 0.35
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ------------- --------- -------------
Outstanding -- beginning of year............... 369,885 $ 12 325,489 $ 14 249,131 $ 19
Granted........................................ 523,501 6 88,500 6 157,150 10
Exercised...................................... (750) 6 -- -- -- --
Forfeited...................................... (281,551) 13 (44,104) 12 (80,792) 23
-- --
--------- ----- --------- ---------
Outstanding -- end of year..................... 611,085 $ 6 369,885 $ 12 325,489 $ 14
-- --
-- --
--------- ----- --------- ---------
--------- ----- --------- ---------
Exercisable at end of year..................... 39,889 $ 10 202,126 $ 15 129,770 $ 16
Weighted-average fair value of options granted
during the year.............................. $ 1.80 $ 2.15 $ 3.77
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$6 to $26. At December 31, 1997, there are 593,251 and 17,834 options
outstanding with weighted average exercise prices of $6 and $15, respectively.
In 1997, option holders were permitted to receive new options in exchange
for certain of their existing outstanding options (covering up to an aggregate
of approximately 271,000 shares of Common Stock). Options for 256,000 shares
were exchanged in 1997 at a new exercise price of $5.625. The new options became
subject to a new vesting schedule and the existing options were canceled.
F-15
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CONVERTIBLE SUBORDINATED DEBENTURES
On January 28, 1993, the Company issued $50,000,000 principal amount of
6 1/2% Convertible Subordinated Debentures, which are due January 15, 2003. On
February 25, 1993, the related over-allotment option for an additional
$7,500,000 was exercised in full. The Debentures are convertible at any time
prior to maturity into shares of the Company's common stock at a conversion
price of $21.83 per share, subject to adjustment under certain conditions. The
Company received net proceeds from the offering of approximately $55,200,000
(net of offering costs of approximately $2,300,000). The Company used a portion
of such proceeds to purchase $51,500,000 of additional land inventory for
residential development, using the balance of $3,700,000 to repay a portion of
the Company's borrowings under its line of credit. The offering costs are being
amortized over the term of the debentures using the interest method.
10. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company had under contract to purchase for
approximately $5,450,000, land for future residential development. Those
purchases were completed subsequent to December 31, 1997.
Certain of the Company's land purchase agreements require the Company to
make additional payments to the seller if the average sales price or number of
homes built on such land exceeds an amount stated in such purchase agreements.
Amounts paid pursuant to these agreements have not been significant.
One of the agreements for land purchased during early 1993 includes a
provision for the Company to pay the previous owner of the land additional
amounts if the number of units developed exceeds 580. The Company may develop up
to 832 units for sale. The Company is obligated to pay an additional $20,000 for
each residential unit in excess of 580 residences. Accordingly, the Company may
be obligated to pay the previous owner of the land an additional $5,040,000. The
additional payments are earned by the previous owners upon the issuance of a
certificate of occupancy for each excess unit. Such payments are payable at the
closing of the sale of each excess unit. The payments are secured by a
subordinated mortgage on a portion of the purchased land. As of December 31,
1997, the Company has paid $660,000 and accrued $1,200,000, for a total of
$1,860,000 related to the construction of 93 units in excess of 580.
In April 1996, the Company was served with a purported class action
complaint by owners of units and the Association of Owners of Fairway Village at
Waikele, alleging among other things material construction defects and
deficiencies, misrepresentations regarding the cost of insurance and breach of a
covenant of good faith and fair dealing. The complaint does not specify an
amount of damages, but includes a claim for punitive damages. Although this
litigation is at an early stage of discovery, based upon its current
understanding of the lawsuit, the Company believes the claims to be largely
without merit and that potential third party defendants and insurance coverage
exist to offset a material portion of any damage from the related claims. The
Court has denied the motion to certify the class, and the litigation continues
to be vigorously defended. A court date has a been set for April, 1999. If this
lawsuit were decided adversely to the Company in all respects, it could have a
material adverse effect on the Company's business, financial condition and
operating results.
The Company is also 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.
11. NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which requires companies to change the method
currently used to compute earnings per share and
F-16
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET INCOME (LOSS) PER SHARE (CONTINUED)
restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. The
employee stock options outstanding had no impact on the computation of diluted
earnings per share. The convertible subordinated debentures were not included in
the computation of diluted earnings per share because the effect would be
antidilutive. The application of Statement No. 128 results in no change to
earnings per share amounts previously presented for 1996 and 1995.
Basic net income (loss) per share for the years ended December 31, 1997,
1996 and 1995 were computed using the weighted average number of common shares
outstanding during the period of 20,100,267, 20,583,860 and 20,874,177,
respectively.
The computation of diluted net income(loss) per share for the years ended
December 31, 1997, 1996 and 1995 resulted in amounts greater than the basic net
income (loss) per share. Accordingly, the basic net income (loss) per share is
also presented as the diluted net income (loss) per share.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Notes receivable: The carrying amount of the Company's notes receivable
approximate their fair value, since the interest rate currently being
offered on new notes is similar to the interest rates on existing notes.
Accrued interest payable (included in accrued expenses) and notes
payable to bank: The carrying amounts of the Company's accrued interest
payable and notes payable to bank approximate their fair value.
Convertible subordinated debentures: The fair value of $50,313,000 for
the Company's convertible subordinated debentures is based on the quoted
market price of 87.5 at December 31, 1997.
Interest rate swap: The estimated fair value at December 31, 1997 is a
liability of approximately $197,000 and is based on a bank quote. Credit
loss from counterparty nonperformance is not anticipated.
F-17
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1997 and
1996 are presented in the following summary:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------ ------------
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Sales..................................... $ 49,958 $ 52,457 $ 61,057 $ 66,152
Operating income (loss)................... 2,155 2,763 3,963 4,900
Pre-tax income (loss)..................... 1,256 1,865 2,833 3,566
Net income (loss)......................... 777 1,159 1,758 2,192
Earnings (loss) per share (diluted)....... 0.04 0.06 0.09 0.11
1996
Sales..................................... $ 19,965 $ 29,820 $ 21,953 $ 21,907
Operating income (loss)................... 1,391 (21,472) 742 673
Pre-tax income (loss)..................... 1,552 (21,432) 787 418
Net income (loss)......................... 948 (13,074) 485 255
Earnings (loss) per share (diluted)....... 0.05 (0.63) 0.02 0.01
</TABLE>
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year. Certain immaterial reclassifications
have been made to the quarterly financial information to conform to the year end
presentation.
F-18
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or by the Initial Purchasers. This
Prospectus does not constitute an offer to sell, or solicitation of an offer to
buy, to any person in any jurisdiction where such an offer or solicitation would
be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 15
Use of Proceeds........................................................... 22
Capitalization............................................................ 22
Selected Consolidated Historical Financial Data........................... 23
The Exchange Offer........................................................ 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 31
Business.................................................................. 39
Management................................................................ 49
Principal Stockholders.................................................... 52
Certain Transactions...................................................... 54
Description of Certain Indebtedness....................................... 55
Description of the Notes.................................................. 56
Certain Federal Income Tax Considerations................................. 76
Plan of Distribution...................................................... 78
Legal Matters............................................................. 79
Independent Auditors...................................................... 79
Index to Consolidated Financial Statements................................ F-1
</TABLE>
[LOGO]
SCHULER HOMES, INC.
$100,000,000
9% SENIOR NOTES DUE 2008
IN EXCHANGE FOR
9% SENIOR NOTES DUE 2008
------------------
PROSPECTUS
, 1998
------------------------
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the state of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation in the performance of his duty. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.
In accordance with Delaware Law, the certificate of incorporation of the
Company contains a provision to limit the personal liability of the directors of
the Registrant for violations of their fiduciary duty. This provision eliminates
each director's liability to the Registrant or its stockholders for monetary
damages except (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.
Article 5 of the Bylaws of the Registrant provides for indemnification of
the officers and directors of the Registrant to the fullest extent permitted by
applicable law.
The Company has entered into indemnification agreements with its directors
and officers. These agreements provide substantially broader indemnity rights
than those provided under the Delaware Law and the Company's Bylaws. The
indemnification agreements are not intended to deny or otherwise limit
third-party or derivative suits against the Company or its directors or
officers, but if a director or officer were entitled to indemnity or
contribution under the indemnification agreement, the financial burden of a
third-party suit would be borne by the Company, and the Company would not
benefit from derivative recoveries against the director or officer. Such
recoveries would accrue to the benefit of the Company but would be offset by the
Company's obligations to the director or officer under the indemnification
agreement.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------
<C> <S>
4.1 Indenture between the Company and Bishop Trust Company, Limited, as Trustee, dated as of January
15, 1993. (Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K
dated January 21, 1993; Commission file number 0-19891).
4.2 Form of Debenture (included in Exhibit 4.1).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------
<C> <S>
4.3 Indenture between the Company and U.S. Trust Company of California, N.A., as Trustee, dated as of
May 6, 1998. (Incorporated by reference to Exhibit 4.4 of the Company's Quarterly Report on Form
10-Q dated March 31, 1998; Commission file number 0-19891).
4.4 Form of Notes (included in Exhibit 4.3). (Incorporated by reference to Exhibit 4.5 of the Company's
Quarterly Report on Form 10-Q dated March 31, 1998; Commission file number 0-19891.)
4.5 Registration Rights Agreement dated as of April 30, 1998 between the Company and the Initial
Purchasers.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
12 Statement regarding computation of earnings to fixed charges.
15 Acknowledgement of Independent Accountants.
23.1 Consent of Brobeck, Phleger & Harrison LLP (contained in the opinion filed as Exhibit 5.1).
23.2 Consent of Independent Auditors.
24.1 Power of Attorney (contained on the signature page of this Registration Statement).
25.1 Form T-1 Statement of Eligibility of U.S. Trust Company of California, N.A.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
Financial Statement Schedules
[None.]
ITEM 22. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement; provided, however, that (i) and (ii) do not apply if
the Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by (i) and (ii) is
contained in periodic reports filed by the Registrant pursuant to Section 13
or Section 15 of the Securities Exchange Act of 1934 that are incorporated
by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange
II-2
<PAGE>
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
3. The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
4. The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement, relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
5. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
6. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
7. The undersigned registrant hereby undertakes to file an application for
the purpose of determining eligibility of the Trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Honolulu,
Hawaii, on this 25th day of June, 1998.
<TABLE>
<S> <C> <C>
SCHULER HOMES, INC.
By: /s/ JAMES K. SCHULER
-----------------------------------------
James K. Schuler
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James K. Schuler and Pamela S. Jones, and each of
them his attorneys-in-fact, each with the power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration Statement,
and to sign any registration statement for the same offering covered by this
registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto in all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming that such
attorneys-in-fact and agents or any of them, or his, her, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended. This
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board,
/s/ JAMES K. SCHULER President and Chief
- ------------------------------ Executive Officer June 25, 1998
James K. Schuler (principal executive
officer)
/s/ MICHAEL T. JONES Executive Vice President
- ------------------------------ of Operations and June 25, 1998
Michael T. Jones Director
Senior Vice President of
/s/ PAMELA S. JONES Finance, Chief Financial
- ------------------------------ Officer and Director June 25, 1998
Pamela S. Jones (principal financial
officer)
Vice President of Finance,
/s/ DOUGLAS M. TONOKAWA Chief Accounting Officer
- ------------------------------ (principal accounting June 25, 1998
Douglas M. Tonokawa officer)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MARTIN T. HART
- ------------------------------ Director June 25, 1998
Martin T. Hart
/s/ BERT T. KOBAYASHI, JR.
- ------------------------------ Director June 25, 1998
Bert T. Kobayashi, Jr.
/s/ THOMAS A. BEVILACQUA
- ------------------------------ Director June 25, 1998
Thomas A. Bevilacqua
</TABLE>
II-5
<PAGE>
Exhibit 4.5
------------------------
REGISTRATION RIGHTS AGREEMENT
Dated as of April 30, 1998
by and among
SCHULER HOMES, INC.
the SUBSIDIARY GUARANTORS PARTY HERETO
and
BANCAMERICA ROBERTSON STEPHENS
JEFFERIES & COMPANY, INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
SBC WARBURG DILLON READ INC.
-----------------------
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of April 30, 1998, by and among Schuler Homes, Inc., a Delaware
corporation (the "Company"), the Subsidiary Guarantors (as defined herein) and
BancAmerica Roberston Stephens, Jefferies & Company, Inc., NationsBanc
Montgomery Securities LLC and SBC Warburg Dillon Read Inc. (the "Initial
Purchasers").
This Agreement is made pursuant to the Purchase Agreement, dated April 30,
1998 (the "Purchase Agreement"), by and among the Company, the Initial
Purchasers and the Subsidiary Guarantors which provides for the sale by the
Company to the Initial Purchasers of an aggregate of $100 million principal
amount of the Company's 9% Senior Notes due 2008 (the " Senior Notes"). In
order to induce the Initial Purchasers to purchase the Senior Notes, the Company
has agreed to provide the registration rights set forth in this Agreement. The
execution and delivery of this Agreement is a condition to the obligations of
the Initial Purchaser set forth in Section 9(k) of the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings:
ACT: The Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
ADDITIONAL INTEREST: As defined in Section 5.
BROKER-DEALER: Any broker or dealer registered under the Exchange Act.
CLOSING DATE: The Closing Date as defined in the Purchase Agreement.
Commission: The Securities and Exchange Commission.
CONSUMMATE: A Registered Exchange Offer shall be deemed "Consummated" for
purposes of this Agreement upon the occurrence of (i) the filing and
effectiveness under the Act of the Exchange Offer Registration Statement
relating to the Exchange Notes to be issued in the Exchange Offer, (ii) the
maintenance of such Registration Statement continuously effective and the
keeping of the Exchange Offer open for a period not less than the minimum period
required pursuant to Section 3(a) hereof, and (iii) the delivery by the Company
to the Registrar under the Indenture of Exchange Notes in the same aggregate
principal amount as the aggregate principal amount of Senior Notes that were
tendered by Holders thereof pursuant to the Exchange Offer.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
1
<PAGE>
EXCHANGE NOTES: The Company's 9% Senior Notes due 2008 to be issued
pursuant to the Indenture in the Exchange Offer.
EXCHANGE OFFER: The registration by the Company under the Act of the
Exchange Notes pursuant to a Registration Statement pursuant to which the
Company offers the Holders of all outstanding Transfer Restricted Securities the
opportunity to exchange all such outstanding Transfer Restricted Securities held
by such Holders for Exchange Notes in an aggregate principal amount equal to the
aggregate principal amount of the Transfer Restricted Securities tendered in
such exchange offer by such Holders.
EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement relating
to the Exchange Offer, including the related Prospectus.
EXEMPT RESALES: The transactions in which the Initial Purchaser proposes
to sell the Senior Notes to certain "qualified institutional buyers," as such
term is defined in Rule 144A under the Act.
HOLDERS: As defined in Section 2(b) hereof.
INDEMNIFIED HOLDER: As defined in Section 8(a) hereof.
INITIAL PURCHASERS: As defined in the preamble hereto.
INDENTURE: The Indenture, dated as of May 6, 1998, among the Company, U.S.
Trust Company of California, N.A., as trustee (the "Trustee"), and the
Subsidiary Guarantors, pursuant to which the Notes are to be issued, as such
Indenture is amended or supplemented from time to time in accordance with the
terms thereof.
INTEREST PAYMENT DATE: As defined in the Indenture and the Notes.
ISSUE DATE: The date of this Agreement.
NASD: National Association of Securities Dealers, Inc.
NOTES: The Senior Notes and the Exchange Notes.
PERSON: An individual, partnership, corporation, trust or unincorporated
organization, or a government or agency or political subdivision thereof.
PROSPECTUS: The prospectus included in a Registration Statement, as
amended or supplemented by any prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material incorporated by
reference into such Prospectus.
RECORD HOLDER: With respect to any Interest Payment Date relating to
Notes, each Person who is a Holder of Notes on the record date with respect to
the Interest Payment Date on which such Damages Payment Date shall occur.
2
<PAGE>
REGISTRATION DEFAULT: As defined in Section 5 hereof.
REGISTRATION STATEMENT: Any registration statement of the Company relating
to (a) an offering of Exchange Notes pursuant to an Exchange Offer or (b) the
registration for resale of Transfer Restricted Securities pursuant to the Shelf
Registration Statement, which is filed pursuant to the provisions of this
Agreement, in each case, including the Prospectus included therein, all
amendments and supplements thereto (including post-effective amendments) and all
exhibits and material incorporated by reference therein.
SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof.
SPECIAL COUNSEL: Gibson, Dunn & Crutcher LLP, special counsel to the
Initial Purchasers or such other special counsel as may be designated by the
Holders of a majority in aggregate principal amount of the Transfer Restricted
Securities outstanding.
SUBSIDIARY GUARANTORS: Those entities listed on Exhibit A hereto and by
this reference incorporated herein.
TIA: The Trust Indenture Act of 1939, as amended, as in effect on the date
of the Indenture.
TRANSFER RESTRICTED SECURITIES: Each Senior Note, until the earliest to
occur of (a) the date on which such Senior Note is exchanged in the Exchange
Offer and entitled to be resold to the public by the Holder thereof without
complying with the prospectus delivery requirements of the Act, (b) the date on
which such Senior Note has been effectively registered under the Act and
disposed of in accordance with a Shelf Registration Statement and (c) the date
on which such Senior Note is distributed to the public pursuant to Rule 144
under the Act or by a Broker-Dealer pursuant to the "Plan of Distribution"
contemplated by the Exchange Offer Registration Statement (including delivery of
the Prospectus contained therein).
UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A registration in
which securities of the Company are sold to an underwriter for reoffering to the
public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) TRANSFER RESTRICTED SECURITIES. The securities entitled to the
benefits of this Agreement are the Transfer Restricted Securities.
(b) HOLDERS OF TRANSFER RESTRICTED SECURITIES. A Person is deemed to be a
holder of Transfer Restricted Securities (each, a "Holder") whenever such Person
beneficially owns Transfer Restricted Securities, PROVIDED that only Transfer
Restricted Securities of Holders who are registered holders of Transfer
Restricted Securities shall be counted for purposes of calculating any
proportion of Holders of Transfer Restriction Securities entitled to take action
or give notice pursuant to this Agreement.
3
<PAGE>
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permissible under applicable
law or Commission policy, the Company and the Subsidiary Guarantors shall (i)
cause to be filed with the Commission as soon as practicable after the Issue
Date, but in no event later than 60 days after the Issue Date, a Registration
Statement under the Act relating to the Exchange Notes and the Exchange Offer,
(ii) use their best efforts to cause such Registration Statement to become
effective at the earliest possible time, but in no event later than 120 days
after the Issue Date, (iii) in connection with the foregoing, (A) file all
pre-effective amendments to such Registration Statement as may be necessary in
order to cause such Registration Statement to become effective, (B) if
applicable, file a post-effective amendment to such Registration Statement
pursuant to Rule 430A under the Act and (C) cause all necessary filings in
connection with the registration and qualification of the Exchange Notes to be
made under the Blue Sky laws of such jurisdictions as are necessary to permit
Consummation of the Exchange Offer, (iv) upon the effectiveness of such
Registration Statement, commence the Exchange Offer, (v) cause the Exchange
Offer to remain open for not less than 30 days (or longer if required by
applicable law) after the date that notice of the Exchange Offer is mailed to
the Holders, (vi) cause the Exchange Offer to be Consummated on the earliest
practicable date after the Exchange Offer Registration Statement has become
effective, but in no event later than 150 days after the Issue Date and (vii)
cause the Exchange Offer to comply with all applicable federal and state
securities laws. The Exchange Offer shall be on the appropriate form permitting
registration of the Exchange Notes to be offered in exchange for the Transfer
Restricted Securities and to permit resales of Notes held by Broker-Dealers as
contemplated by Section 3(b) below.
Each Holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that at the time of the Consummation of the
Exchange Offer such Holder will have no arrangement or understanding with any
person to participate in the distribution (within the meaning of the Act) of the
Exchange Notes and that such Holder is not an affiliate of the Company or the
Subsidiary Guarantors within the meaning of the Act or that if it is an
affiliate, that it will comply with the registration and delivery requirements
of the Act to the extent possible.
(b) The Company shall indicate in a "Plan of Distribution" section
contained in the Prospectus contained in the Exchange Offer Registration
Statement that any Broker-Dealer who holds Notes that are Transfer Restricted
Securities and that were acquired for its own account as a result of
market-making activities or other trading activities (other than Transfer
Restricted Securities acquired directly from the Company) may exchange such
Transfer Restricted Securities pursuant to the Exchange Offer; however, such
Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act
and must, therefore, deliver a prospectus meeting the requirements of the Act in
connection with any resales of the Exchange Notes received by such Broker-Dealer
in the Exchange Offer, which prospectus delivery requirement may be satisfied by
the delivery by such Broker-Dealer of the Prospectus contained in the Exchange
Offer Registration Statement. Such "Plan of Distribution" section shall also
contain all other information with respect to such resales by Broker-Dealers
that the Commission may require in order to permit such resales pursuant
thereto, but such "Plan of Distribution" shall not name any
4
<PAGE>
such Broker-Dealer or disclose the amount of Senior Notes held by any such
Broker-Dealer except to the extent required by the Commission as a result of a
change in policy after the date of this Agreement.
The Company acknowledges that, pursuant to current interpretations by the
Commission's staff of Section 5 of the Act, in the absence of an applicable
exemption therefrom, (i) each Holder which is a broker-dealer electing to
exchange Transfer Restricted Securities, acquired for its own account as a
result of market making activities or other trading activities, for Exchange
Notes (an "Exchanging Dealer"), may be deemed an "underwriter" within the
meaning of the Act, and is required to deliver a prospectus containing the
information set forth in Annex A hereto on the cover, in Annex B hereto in the
"Exchange Offer Procedures" section and the "Purpose of the Exchange Offer"
section, and in Annex C hereto in the "Plan of Distribution" section of such
prospectus in connection with a sale of any such Exchange Notes received by such
Exchanging Dealer pursuant to the Exchange Offer and (ii) an Initial Purchaser
that elects to sell Exchange Notes acquired in exchange for Transfer Restricted
Securities constituting any portion of an unsold allotment is required to
deliver a prospectus containing the information required by Items 507 or 508 of
Regulation S-K under the Act, as applicable, in connection with such sale.
The Company and the Subsidiary Guarantors shall use their best efforts to
keep the Exchange Offer Registration Statement continuously effective and to
amend and supplement the Prospectus contained therein in order to permit such
Prospectus to be lawfully delivered by all persons subject to the prospectus
delivery requirements of the Act for such period of time as such persons must
comply with such requirements in order to resell the Exchange Notes, PROVIDED
that (i) in the case where the Prospectus must be delivered by an Exchanging
Dealer or an Initial Purchaser, such period shall be the lesser of 180 days and
the date on which all Exchanging Dealer and the Initial Purchaser have sold all
Exchange Notes held by them and (ii) the Company shall make the Prospectus
available to any broker-dealer for use in connection with any resale of any
Exchange Notes for a period of not less than 90 days after the Consummation of
the Exchange Offer. The Company shall be deemed not to have used its best
efforts to keep the Exchange Offer Registration Statement effective during the
requisite period if it voluntarily takes any action that would result in, or
refuses to take such action where such failure to act would result in, Holders
of Notes covered thereby not able to offer and sell such securities during that
period, unless such action or inaction is required by applicable law.
The Company shall provide sufficient copies of the latest version of such
Prospectus to Broker-Dealers promptly upon request at any time during such
period in order to facilitate such resales.
SECTION 4. SHELF REGISTRATION
(a) SHELF REGISTRATION. If (i) the Exchange Offer is not permitted by
applicable law or Commission policy (after the procedures set forth in Section
6(a) below have been complied with) (ii) the Exchange Notes would not, upon
receipt, be tradable by any Holder which is not an affiliate of the Company
without restriction under the Act and without restrictions under
5
<PAGE>
applicable Blue Sky or state securities laws, (iii) any Holder is not eligible
to participate in the Exchange Offer, (iv) the Initial Purchasers so request
with respect to any Transfer Restricted Securities not eligible to be exchange
for Exchange Notes in the Exchange Offer or (v) for any reason the Exchange
Offer is not Consummated within 150 days after the issuance date, then the
Company shall promptly deliver to the Holders and the Trustee written notice
thereof, and the Company and the Subsidiary Guarantors shall:
(x) cause to be filed a shelf registration statement pursuant to Rule
415 under the Act, which may be an amendment to the Exchange Offer
Registration Statement (in either event, the "SHELF REGISTRATION
STATEMENT"), as promptly as practicable but in no event later than the 60th
day after the date on which the Company determines that it is required to
file the Shelf Registration Statement, which Shelf Registration Statement
shall provide for resales of all Transfer Restricted Securities the Holders
of which shall have provided the information required pursuant to Section
4(b) hereof; and
(y) use their best efforts to cause such Shelf Registration Statement
to be declared effective by the Commission on or before the 150th day after
the Issue Date.
The Company and the Subsidiary Guarantors shall use their best efforts to keep
such Shelf Registration Statement continuously effective, supplemented and
amended as required by the provisions of Sections 6(b) and (c) hereof to the
extent necessary to ensure that it is available for resales of Notes by the
Holders of Transfer Restricted Securities entitled to the benefit of this
Section 4(a), and to ensure that it conforms with the requirements of this
Agreement, the Act and the policies, rules and regulations of the Commission as
announced from time to time, for a period of two years following the Issue Date
or such shorter period which will terminate when all Transfer Restricted
Securities covered by the Shelf Registration Statement are no longer Transfer
Restricted Securities.
(b) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH THE
SHELF REGISTRATION STATEMENT. No Holder of Transfer Restricted Securities
may include any of its Transfer Restricted Securities in any Shelf
Registration Statement pursuant to this Agreement unless and until such
Holder furnishes to the Company in writing, within 20 days after receipt of a
request therefor, such information as the Company may reasonably request for
use in connection with any Shelf Registration Statement or Prospectus or
preliminary Prospectus included therein. No Holder of Transfer Restricted
Securities shall be entitled to Additional Interest pursuant to Section 5
hereof unless and until such Holder shall have used its best efforts to
provide all such reasonably requested information. Each Holder as to which
any Shelf Registration Statement is being effected agrees to furnish promptly
to the Company all information required to be disclosed in order to make the
information previously furnished to the Company by such Holder not materially
misleading.
SECTION 5. ADDITIONAL INTEREST
(a) REGISTRATION DEFAULT. If (i) within 60 days after the Issue Date,
neither the Exchange Offer Registration Statement nor the Shelf Registration
Statement has been filed with the Commission, (ii) within 120 days after the
Issue Date, the Exchange Offer Registration
6
<PAGE>
Statement has not been declared effective, (iii) within 150 days after the Issue
Date, the Registered Exchange Offer has not been Consummated, (iv) within 150
days after the Issue Date, the Shelf Registration Statement has not been
declared effective if a Shelf Registration Statement is required to be filed
pursuant to Section 4 of this Agreement or (v) after a Registration Statement
has been declared effective, such Registration Statement ceases to be effective
or fails to be usable for its intended purpose during the respective periods
specified herein that such Registration Statement is to be kept continuously
effective, without being succeeded immediately by a post-effective amendment to
such Registration Statement that cures such failure and that is itself
immediately declared effective (each such event referred to in clauses (i)
through (v), a "Registration Default"), the Company and the Subsidiary
Guarantors hereby jointly and severally agree to pay interest ("Additional
Interest") to each Holder of Transfer Restricted Securities in addition to the
stated interest thereon, payable on the Interest Payment Date, which will accrue
thereon, from and including the date on which any such Registration Default
shall occur but excluding the date on which all Registration Defaults shall have
been cured.
(b) RATE OF ADDITIONAL INTEREST. Additional Interest shall accrue on the
principal amount of the Transfer Restricted Securities at a rate of 0.50% per
annum during the 90-day period immediately following the occurrence of any
Registration Default and shall increase by 0.25% per annum at the end of each
subsequent 90-day period, but in no event shall such rate exceed 2.00% per
annum.
(c) CURE OF REGISTRATION DEFAULT. A Registration Default will have been
deemed cured (i) upon the filing of a Registration Statement with the Commission
(in the case of Section 5(a)(i) above), (ii) upon the effectiveness of the
Exchange Offer Registration Statement (in the case of Section 5(a)(ii) above),
(iii) upon the Consummation of the Registered Exchange Offer (in the case of
Section 5(a)(iii) above), (iv) upon the effectiveness of the Shelf Registration
Statement (in the case of Section 5(a)(iv) above) or (v) upon the effectiveness
of the Registration Statement which had ceased to remain effective (in the case
of Section 5(a)(v) above). Following the cure of all Registration Defaults
relating to any particular Transfer Restricted Securities, the accrual of
Additional Interest with respect to such Transfer Restricted Securities will
cease.
The Company shall notify the Trustee within one business day after each and
every date on which an event occurs in respect of which Additional Interest is
required to be paid (an "Event Date"). Additional Interest shall be paid by
depositing with the Trustee, in trust, for the benefit of the Holders thereof,
on or before the applicable Interest Payment Date, immediately available funds
in sums sufficient to pay the Additional Interest then due to Holder of Senior
Notes entitled to receive the interest payment to be paid on such Interest
Payment Date. Each obligation to pay Additional Interest shall be deemed to
accrue on the applicable Event Date. The amount of Additional Interest will be
determined by multiplying the applicable Additional Interest rate by the
principal amount of the Senior Notes, multiplied by a fraction, the numerator of
which is the number of days such Additional Interest rate was applicable during
such period (determined on the basis of a 360-day year comprised of twelve
30-day months), and the denominator of which is 360.
7
<PAGE>
All obligations of the Company and the Subsidiary Guarantors set forth in
this section that are outstanding with respect to any Transfer Restricted
Security at the time such security ceases to be a Transfer Restricted Security
shall survive until such time as all such obligations with respect to such
Security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) EXCHANGE OFFER REGISTRATION STATEMENT. In connection with the
Exchange Offer, the Company and the Subsidiary Guarantors shall comply with the
applicable provisions of Section 6(c) below, shall use their best efforts to
effect such exchange to permit the sale of Transfer Restricted Securities being
sold in accordance with the intended method or methods of distribution thereof.
As a condition to its participation in the Exchange Offer pursuant to the
terms of this Agreement, each Holder of Transfer Restricted Securities shall
furnish, upon the request of the Company, prior to the Consummation thereof, a
written representation to the Company (which may be contained in the letter of
transmittal contemplated by the Exchange Offer Registration Statement) to the
effect that (A) it is not an affiliate of the Company, (B) it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution of the Exchange Notes to be issued
in the Exchange Offer and (C) it is acquiring the Exchange Notes in its ordinary
course of business. In addition, all such Holders of Transfer Restricted
Securities shall otherwise cooperate in the Company's preparations for the
Exchange Offer.
(b) SHELF REGISTRATION STATEMENT. In connection with the Shelf
Registration Statement, the Company and the Subsidiary Guarantors shall comply
with the applicable provisions of Section 6(c) below and shall use their best
efforts to effect such registration to permit the sale of the Transfer
Restricted Securities being sold in accordance with the intended method or
methods of distribution thereof, and pursuant thereto the Company will as
expeditiously as possible prepare and file with the Commission a Registration
Statement relating to the registration on any appropriate form under the Act,
which form shall be available for the sale of the Transfer Restricted Securities
in accordance with the intended method or methods of distribution thereof.
(c) GENERAL PROVISIONS. In connection with any Registration Statement and
any Prospectus required by this Agreement to permit the sale or resale of
Transfer Restricted Securities (including, without limitation, any Registration
Statement and the related Prospectus required to permit resales of Notes by
Broker-Dealers), the Company shall:
(i) use its best efforts to keep such Shelf Registration Statement
and, to the extent applicable, any Exchange Offer Registration Statement,
continuously effective and provide all requisite financial statements
(including, if required by the Act or any regulation thereunder, financial
statements of the Subsidiary Guarantors) for the period specified in
Section 3 or 4 of this Agreement, as applicable; upon the occurrence of any
event that would cause any such Registration Statement or the Prospectus
contained therein (A) to contain a material misstatement or omission or (B)
not to be effective and
8
<PAGE>
usable for resale of Transfer Restricted Securities during the period
required by this Agreement, the Company shall file promptly an appropriate
amendment to such Registration Statement, in the case of clause (A),
correcting any such misstatement or omission, and, in the case of either
clause (A) or (B), use its best efforts to cause such amendment to be
declared effective and such Registration Statement and the related
Prospectus to become usable for their intended purpose(s) as soon as
practicable thereafter;
(ii) prepare and file with the Commission such amendments and
post-effective amendments to the Registration Statement as may be necessary
to keep the Registration Statement effective for the applicable period set
forth in Section 3 or 4 hereof, as applicable, or such shorter period as
will terminate when all Transfer Restricted Securities covered by such
Registration Statement have been sold; cause the Prospectus to be
supplemented by any required Prospectus supplement, and as so supplemented
to be filed pursuant to Rule 424 under the Act, and to comply fully with
the applicable provisions of Rules 424 and 430A under the Act in a timely
manner; and comply with the provisions of the Act with respect to the
disposition of all securities covered by such Registration Statement during
the applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration
Statement or supplement to the Prospectus;
(iii) advise the Special Counsel promptly and, if requested, to
confirm such advice in writing, (A) when the Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect to
any Registration Statement or any post-effective amendment thereto, when
the same has become effective, (B) of any request by the Commission for
amendments to the Registration Statement or amendments or supplements to
the Prospectus or for additional information relating thereto, (C) of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement under the Act or of the suspension by any
state securities commission of the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction, or the initiation of
any proceeding for any of the preceding purposes, (D) of the existence of
any fact or the happening of any event that makes any statement of a
material fact made in the Registration Statement the Prospectus, any
amendment or supplement thereto, or any document incorporated by reference
therein untrue, or that requires the making of any additions to or changes
in the Registration Statement or the Prospectus in order to make the
statements therein not misleading. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption from
qualification of the Transfer Restricted Securities under state securities
or Blue Sky laws, the Company and the Subsidiary Guarantors shall use their
best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time;
(iv) furnish to the Special Counsel, before filing with the
Commission, copies of the Registration Statement or any Prospectus included
therein (including all
9
<PAGE>
documents incorporated by reference after the initial filing of such
Registration Statement), which documents will be subject to the review of
the Special Counsel for a period of at least five business days, and with
respect to amendments or supplements thereto, at least two business days
prior thereto, and the Company will not file any such Registration
Statement or Prospectus or any amendment or supplement to any such
Registration Statement or Prospectus (including all such documents
incorporated by reference) to which the Special Counsel shall reasonably
object within three business days after the receipt thereof, unless such
Registration Statement or amendment thereto or the Prospectus or any
supplement thereto is required to be filed by applicable law. A selling
Holder or underwriter shall be deemed to have reasonably objected to such
filing if such Registration Statement, amendment, Prospectus or supplement,
as applicable, as proposed to be filed, contains a material misstatement or
omission;
(v) in the case of a Shelf Registration Statement and, to the extent
applicable, any Exchange Offer Registration Statement, make available at
reasonable times during normal business hours for inspection by a
representative of the Holders of Transfer Restricted Securities, Special
Counsel and any accountant retained by such Holders, in a manner designed
to permit underwriters to satisfy their due diligence investigation under
the Act, all financial and other records, pertinent corporate documents and
properties of the Company and the Subsidiary Guarantors and cause the
Company's and the Subsidiary Guarantors' officers, directors and employees
to supply all information reasonably requested by any such representative,
attorney or accountant in connection with such Registration Statement
subsequent to the filing thereof and prior to its effectiveness; PROVIDED,
HOWEVER, that such Persons shall first agree in writing with the Company
that any information that is reasonably and in good faith designated by the
Company in writing as confidential at the time of delivery of such
information shall be kept confidential by such persons, unless and to the
extent that (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities, (ii) disclosure of such information is required by law
(including any disclosure requirements pursuant to federal securities laws
in connection with the filing of the Shelf Registration Statement or the
use of any prospectus), (iii) such information becomes generally available
to the public other than as a result of a disclosure or failure to
safeguard such information by such person or (iv) such information becomes
available to such person from a source other than the Company and its
subsidiaries and such source is not bound by a confidentiality agreement;
(vi) if reasonably requested by any selling Holders or Special
Counsel, promptly incorporate in any Registration Statement or Prospectus,
pursuant to a supplement or post-effective amendment if necessary, such
information as such selling Holders or Special Counsel may reasonably
request to have included therein as may be required by applicable law,
including, without limitation, information relating to the "Plan of
Distribution" of the Transfer Restricted Securities, information with
respect to the principal amount of Transfer Restricted Securities being
sold to such underwriter(s), if any, the purchase price being paid therefor
and any other terms of the offering of the Transfer Restricted Securities
to be sold in such offering; and make all required filings of
10
<PAGE>
such Prospectus supplement or post-effective amendment as soon as
practicable after the Company is notified of the matters to be incorporated
in such Prospectus supplement or post-effective amendment;
(vii) cause the Transfer Restricted Securities covered by the
Registration Statement to be rated with the appropriate rating agencies, if
so requested by the Holders of a majority in aggregate principal amount of
Notes covered thereby;
(viii) in the case of a Shelf Registration Statement and, to the
extent applicable, an Exchange Offer Registration Statement, furnish to
each selling Holder and Special Counsel, without charge, at least one copy
of the Registration Statement, at the earliest time practicable under the
circumstances after first filed with the Commission, and of each amendment
thereto, including all documents incorporated by reference therein and all
exhibits (including exhibits incorporated therein by reference);
(ix) in the case of a Shelf Registration Statement and, to the extent
applicable, an Exchange Offer Registration Statement, deliver to each
selling Holder, the Initial Purchasers, each of the Exchanging Dealers, and
Special Counsel, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement
thereto as such Persons reasonably may request; the Company and the
Subsidiary Guarantors hereby consent to the use of the Prospectus and any
amendment or supplement thereto by each of the selling Holders and each of
the underwriter(s), if any, in connection with the offering and the sale of
the Transfer Restricted Securities covered by the Prospectus or any
amendment or supplement thereto;
(x) in the case of a Shelf Registration Statement and, to the extent
applicable, any Exchange Offer Registration Statement, enter into, and
cause the Subsidiary Guarantors to enter into, such customary agreements
(including an underwriting agreement), and make, and cause the Subsidiary
Guarantors to make, such representations and warranties, and take all such
other actions in connection therewith in order to expedite or facilitate
the disposition of the Transfer Restricted Securities pursuant to any
Registration Statement contemplated by this Agreement, all to such extent
as may be reasonably requested by Special Counsel or the Holders of a
majority of the Transfer Restricted Securities being sold in connection
with any sale or resale pursuant to any Registration Statement contemplated
by this Agreement; and whether or not an underwriting agreement is entered
into and whether or not the registration is an Underwritten Registration,
the Company and the Subsidiary Guarantors shall:
(A) furnish to each selling Holder and each underwriter, if any,
in such substance and scope as reasonably satisfactory to Special
Counsel and as are customarily made by issuers to underwriters in
primary underwritten offerings, upon the date of the Consummation of
the Shelf Registration Statement:
(1) a certificate, dated the date of effectiveness of the
Shelf Registration Statement, signed by (y) the President or any
Vice President and (z) a principal financial or accounting
officer of the Company and the
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Subsidiary Guarantors, confirming, as of the date thereof, the
matters set forth in Sections 9(a), (b), (c) and (d) of the
Purchase Agreement and such other matters as such parties may
reasonably request;
(2) an opinion, dated the date of effectiveness of the
Shelf Registration Statement, of counsel for the Company and the
Subsidiary Guarantors, covering the matters set forth in Section
9(f) of the Purchase Agreement and such other matter as such
parties may reasonably request, and in any event including a
statement to the effect that such counsel has participated in
conferences with officers and other representatives of the
Company, representatives of the independent public accountants
for the Company, the Initial Purchasers' representatives and the
Initial Purchasers' counsel in connection with the preparation of
such Registration Statement and the related Prospectus and have
considered the matters required to be stated therein and the
statements contained therein, although such counsel has not
independently verified the accuracy, completeness or fairness of
such statements; and that such counsel advises that, on the basis
of the foregoing (relying as to materiality to a large extent
upon facts provided to such counsel by officers and other
representatives of the Company and without independent check or
verification), no facts came to such counsel's attention that
caused such counsel to believe that the applicable Registration
Statement, at the time such Registration Statement or any
post-effective amendment thereto became effective, contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading, or that the Prospectus
contained in such Registration Statement as of its date contained
an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading. Without limiting the foregoing, such counsel may
state further that such counsel assumes no responsibility for,
and has not independently verified, the accuracy, completeness or
fairness of the financial statements, notes and schedules and
other financial data included in any Registration Statement
contemplated by this Agreement or the related Prospectus; and
(3) a customary "comfort letter," dated as of the date of
the Shelf Registration Statement, from the Company's independent
accountants, in the customary form and covering matters of the
type customarily covered in comfort letters by underwriters in
connection with primary underwritten offerings, and affirming the
matters set forth in the comfort letters delivered pursuant to
Section 9(h) of the Purchase Agreement, without exception;
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(B) set forth in full or incorporate by reference in the
underwriting agreement, if any, the indemnification provisions and
procedures of Section 8 hereof with respect to all parties to be
indemnified pursuant to said Section; and
(C) deliver such other documents and certificates as may be
reasonably requested by such parties to evidence compliance with
clause (A) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company
pursuant to this clause (xi), if any.
If at any time the representations and warranties of the Company and
the Subsidiary Guarantors contemplated in clause (A)(1) above cease to be
true and correct, the Company or the Subsidiary Guarantors shall so advise
each selling Holder and Special Counsel promptly and, if requested by such
Persons, shall confirm such advice in writing;
(xi) prior to any public offering of Transfer Restricted Securities,
to use its best efforts to cooperate with, and cause the Subsidiary
Guarantors to use their best efforts to cooperate with, the selling Holders
and Special Counsel in connection with the registration and qualification,
or exemption from such registration or qualification, of the Transfer
Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as the selling Holders or underwriter(s), if any, may
reasonably request in writing and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of
the Transfer Restricted Securities covered by the Shelf Registration
Statement; PROVIDED, HOWEVER, that neither the Company nor the Subsidiary
Guarantors shall be required to register or qualify as a foreign
corporation where it is not now so qualified or to take any action that
would subject it to the service of process in suits or to taxation, other
than as to matters and transactions relating to the Registration Statement,
in any jurisdiction where it is not now so subject;
(xii) shall issue, upon the request of any Holder of Senior Notes
covered by the Shelf Registration Statement, Exchange Notes, having an
aggregate principal amount equal to the aggregate principal amount of
Senior Notes surrendered to the Company by such Holder in exchange therefor
or being sold by such Holder; such Exchange Notes to be registered in the
name of such Holder or in the name of the purchaser(s) of such Senior
Notes, as the case may be; in return, the Senior Notes held by such Holder
shall be surrendered to the Company for cancellation;
(xiii) in the case of a Shelf Registration Statement and, to the
extent applicable, an Exchange Offer Registration Statement, cooperate
with, and cause the Subsidiary Guarantors to cooperate with, the selling
Holders and the underwriter(s), if any, to facilitate the timely
preparation and delivery of certificates representing Transfer Restricted
Securities to be sold and not bearing any restrictive legends; and enable
such Transfer Restricted Securities to be in such denominations and
registered in such names, in all cases consistent with the requirements set
forth in the Indenture, as the Holders or
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the underwriter(s), if any, may request at least two business days prior to
any sale of Transfer Restricted Securities made by such underwriter(s);
(xiv) use its best efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities in the United
States as may be necessary to enable the seller or sellers thereof or the
underwriter(s), if any, to consummate the disposition of such Transfer
Restricted Securities, subject to the proviso contained in clause (xii)
above;
(xv) if any fact or event contemplated by clause (c)(iii)(D) above
shall exist or have occurred, as promptly as practicable thereafter prepare
and file with the Commission a supplemental or post-effective amendment to
the Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchasers of Transfer Restricted
Securities, the Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(xvi) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of the Registration Statement
and provide the Trustee under the Indenture with printed certificates for
the Transfer Restricted Securities which are in a form eligible for deposit
with the Depository Trust Company;
(xvii) in the case of a Shelf Registration Statement and, to the
extent applicable, an Exchange Offer Registration Statement, cooperate and
assist in any filings required to be made with the NASD and in the
performance of any reasonable due diligence investigation by any
underwriter that is required to be retained in accordance with the rules
and regulations of the NASD, and use its reasonable best efforts to cause
such Registration Statement to become effective and approved by such
governmental agencies or authorities as may be necessary to enable the
Holders selling Transfer Restricted Securities to consummate the
disposition of such Transfer Restricted Securities;
(xviii) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and in the case of a Shelf
Registration Statement and, to the extent applicable, an Exchange Offer
Registration Statement, make generally available to its security holders,
as soon as practicable, a consolidated earnings statement meeting the
requirements of Rule 158 (which need not be audited) for the twelve-month
period (A) commencing at the end of any fiscal quarter in which Transfer
Restricted Securities are sold to underwriters in a firm or best efforts
Underwritten Offering or (B) if not sold to underwriters in such an
offering, beginning with the first month of the Company's first fiscal
quarter commencing after the effective date of the Registration Statement;
(xix) cause the Indenture to be qualified under the TIA not later
than the effective date of the first Registration Statement required by
this Agreement and, in
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connection therewith, cooperate, and cause the Subsidiary Guarantors to
cooperate, with the Trustee and the Holders of Notes to effect such changes
to the Indenture as may be required for such Indenture to be so qualified
in accordance with the terms of the TIA; and execute, and cause the
Subsidiary Guarantors to execute , and use its best efforts to cause the
Trustee to execute, all documents that may be required to effect such
changes and all other forms and documents required to be filed with the
Commission to enable such Indenture to be so qualified in a timely manner;
(xx) cause all Transfer Restricted Securities covered by the
Registration Statement to be listed on each securities exchange on which
similar securities issued by the Company are then listed if requested by
the Holders of a majority in aggregate principal amount of Senior Notes or
the managing underwriter(s), if any; and
(xxi) provide promptly to each Holder upon request each document
filed with the Commission pursuant to the requirements of Section 13 and
Section 15 of the Exchange Act.
The Company may require each seller of Transfer Restricted Securities under
a Shelf Registration Statement to furnish to the Company such information
regarding the distribution of such Transfer Restricted Securities as the Company
may from time to time reasonably request in writing and each Holder in acquiring
such Transfer Restricted Securities agrees to supply such information to the
Company promptly upon request.
Each Holder agrees by acquisition of a Transfer Restricted Security that,
in the event of a Shelf Registration Statement or, to the extent applicable, the
Exchange Offer Registration Statement, upon receipt of any notice from the
Company of the existence of any fact of the kind described in Section
6(c)(iii)(D) hereof, such Holder will forthwith discontinue disposition of
Transfer Restricted Securities covered by the applicable Registration Statement
or Prospectus until such Holder's receipt of the copies of the supplemental or
amended Prospectus contemplated by Section 6(c)(xvi) hereof, or until it is
advised in writing (the "Advice") by the Company that the use of the Prospectus
may be resumed, and has received copies of any additional or supplemental
filings that are incorporated by reference in the Prospectus. If so directed by
the Company, each Holder will deliver to the Company (at the Company's expense)
all copies, other than permanent file copies then in such Holder's possession,
of the Prospectus covering such Transfer Restricted Securities that was current
at the time of receipt of such notice. In the event the Company shall give any
such notice, the time period regarding the effectiveness of such Registration
Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended
by the number of days during the period from and including the date of the
giving of such notice pursuant to Section 6(c)(iii)(D) hereof to and including
the date when each selling Holder covered by such Registration Statement shall
have received the copies of the supplemented or amended Prospectus contemplated
by Section 6(c)(xvi) hereof or shall have received the Advice.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's or the Subsidiary Guarantors'
performance of or compliance with this Agreement will be borne by the Company or
the
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Subsidiary Guarantors, regardless of whether a Registration Statement becomes
effective, including without limitation: (i) all Commission, stock exchange or
NASD registration and filing fees; (ii) all fees and expenses of compliance with
federal securities and state Blue Sky or securities laws; (iii) all expenses of
printing (including printing certificates for the Exchange Notes to be issued in
the Exchange Offer and printing of Prospectuses), messenger and delivery
services and telephone; (iv) all fees and disbursements of counsel for the
Company, the Subsidiary Guarantors and, subject to Section 7(b) below, the
Holders of Transfer Restricted Securities; (v) all application and filing fees
in connection with listing Notes on a national securities exchange or automated
quotation system pursuant to the requirements hereof; and (vi) all fees and
disbursements of independent certified public accountants of the Company and the
Subsidiary Guarantors (including the expenses of any special audit and comfort
letters required by or incident to such performance).
The Company will, in any event, bear its and the Subsidiary Guarantors'
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), the expenses
of any annual audit and the fees and expenses of any Person, including special
experts, retained by the Company.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company will reimburse the
Initial Purchasers and the Holders of Transfer Restricted Securities being
tendered in the Exchange Offer and/or resold pursuant to the "Plan of
Distribution" contained in the Exchange Offer Registration Statement or
registered pursuant to the Shelf Registration Statement, as applicable, for the
reasonable fees and disbursements of Special Counsel to the Holders of Transfer
Restricted Securities, but excluding fees of counsel to underwriters and
underwriting discounts and commissions and transfer taxes, if any, relating to
the sale or disposition of Transfer Restricted Securities by a Holder thereof.
SECTION 8. INDEMNIFICATION
(a) The Company and the Subsidiary Guarantors, jointly and severally,
agree to indemnify and hold harmless (i) each Holder of Transfer Restricted
Securities, each Initial Purchaser and each Exchanging Dealer and (ii) each
person, if any, who controls (within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act) any Holder of Transfer Restricted Securities,
Initial Purchaser or Exchanging Dealer (any of the persons referred to in this
clause (ii) being hereinafter referred to as a "controlling person") and (iii)
the respective officers, directors, partners, employees, representatives and
agents of any Holder of Transfer Restricted Securities, Initial Purchaser or
Exchanging Dealer or any controlling person (any person referred to in clause
(i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Holder"),
from and against any and all losses, claims, damages, liabilities and judgments
(including, without limitation any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement or Prospectus (or any
amendment or supplement thereto) provided by the Company or any Guarantor to any
Holder of
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Transfer Restricted Securities, Initial Purchaser or Exchanging Dealer or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or judgments are
caused by an untrue statement or omission or alleged untrue statement or
omission that is made in reliance upon and in conformity with information
relating to any of the persons referred to in clause (i), (ii) or (iii) above
furnished in writing to the Company by any such person expressly for use
therein; PROVIDED, HOWEVER, that the foregoing indemnity agreement with respect
to any preliminary prospectus shall not inure to the benefit of any Holder of
Transfer Restricted Securities, Initial Purchaser or Exchanging Dealer from whom
the person asserting any such losses, claims, damages or liabilities purchased
Transfer Restricted Securities, or any person controlling such Holder of
Transfer Restricted Securities, Initial Purchaser or Exchanging Dealer, if a
copy of a final prospectus (as so amended or supplemented) was not sent or given
by or on behalf of such Person, or if required by law to have been so delivered,
at or prior to the written confirmation of the sale of the Transfer Restricted
Securities to such Person, and if a final prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities.
In case any action or proceeding (including any governmental or regulatory
investigation or proceeding) shall be brought or asserted against any of the
Indemnified Holders with respect to which indemnity may be sought against the
Company or the Subsidiary Guarantors, such Indemnified Holder (or the
Indemnified Holder controlled by such controlling person) shall promptly notify
the Company and the Subsidiary Guarantors in writing, PROVIDED, that the failure
to give such notice shall not relieve the Company or the Subsidiary Guarantors
of its obligations pursuant to this Agreement. Such Indemnified Holder shall
have the right to employ its own counsel in any such action and the fees and
expenses of such counsel shall be paid, as incurred, by the Company and the
Subsidiary Guarantors (regardless of whether it is ultimately determined that an
Indemnified Holder is not entitled to indemnification hereunder). The Company
shall be liable for any settlement of any such action or proceeding effected
with the Company's prior written consent, which consent shall not be withheld
unreasonably, and the Company agrees to indemnify and hold harmless any
Indemnified Holder from and against any loss, claim, damage, liability or
expense by reason of any settlement of any action effected with the written
consent of the Company. The Company shall not, without the prior written
consent of each Indemnified Holder, settle or compromise or consent to the entry
of judgment in or otherwise seek to terminate any pending or threatened action,
claim, litigation or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not any Indemnified Holder is a
party thereto), unless such settlement, compromise, consent or termination
includes an unconditional release of each Indemnified Holder from all liability
arising out of such action, claim, litigation or proceeding.
(b) In connection with any Shelf Registration Statement and, to the extent
applicable, an Exchange Offer Registration Statement, each Holder of Transfer
Restricted Securities agrees, severally and not jointly, to indemnify and hold
harmless the Initial Purchasers and the Company and the Subsidiary Guarantors,
and their respective directors, officers, and any person controlling (within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company,
and the respective officers, directors, partners, employees, representatives and
agents of each
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such person, to the same extent as the foregoing indemnity from the Company and
the Subsidiary Guarantors to each of the Indemnified Holders, but only with
respect to claims and actions based on information relating to such Holder
furnished in writing by such Holder expressly for use in any Registration
Statement or Prospectus. In case any action or proceeding shall be brought
against the Company, the Subsidiary Guarantors, the Initial Purchasers or their
respective directors or officers or any such controlling person in respect of
which indemnity may be sought against a Holder of Transfer Restricted
Securities, such Holder shall have the rights and duties given the Company and
the Company or its directors or officers or such controlling person shall have
the rights and duties given to each Holder by the preceding paragraph. In no
event shall the liability of any selling Holder hereunder be greater in amount
than the dollar amount of the proceeds received by such Holder upon the sale of
the Transfer Restricted Securities giving rise to such indemnification
obligation.
The Initial Purchasers agree, severally and not jointly, to indemnify
and hold harmless the Company, the Subsidiary Guarantors, the Holders of
Transfer Restricted Securities and their respective directors, officers and
any person controlling (within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act) the Company, and the respective officers,
directors, employees, representatives and agents of each such Person, to the
same extent as the foregoing indemnity from the Company and the Subsidiary
Guarantors to each of the Indemnified Holders, but only with respect to
claims and actions based upon information relating to such Initial Purchaser
furnished in writing by such Initial Purchaser expressly for use in any
Registration Statement or Prospectus. In case any action or proceeding shall
be brought against the Company, the Subsidiary Guarantors, Holders of
Transfer Restricted Securities or their respective directors or officers or
any such controlling person in respect of which indemnity may be sought
against an Initial Purchaser, such Initial Purchaser shall have the rights
and duties given to each Initial Purchaser by paragraph two of Section 8(a).
In no event shall the liability of any Initial Purchaser hereunder be greater
than the dollar amount of the proceeds received by such Initial Purchaser
upon the sale of the Transfer Restricted Securities giving rise to such
indemnification obligation.
(c) If the indemnification provided for in this Section 8 is unavailable
to an indemnified party under Section 8(a) or Section 8(b) hereof (other than by
reason of exceptions provided in those Sections) in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Holders on the other hand from their sale of
Transfer Restricted Securities or if such allocation is not permitted by
applicable law, the relative fault of the Company on the one hand and of the
Indemnified Holder on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of the
Company and the Subsidiary Guarantors on the one hand and of the Indemnified
Holder on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the
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Subsidiary Guarantors or by the Indemnified Holder and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by a party as a result
of the losses, claims, damages, liabilities and expenses referred to above shall
be deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any action or claim.
The Company, the Subsidiary Guarantors and each Holder of Transfer
Restricted Securities agree that it would not be just and equitable if
contribution pursuant to this Section 8(c) were determined by pro rata
allocation (even if the Holders were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities or expenses referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, none of the Holders (nor its
related Indemnified Holders) shall be required to contribute, in the aggregate,
any amount in excess of the amount by which the total discount received by such
Holder with respect to the Senior Notes exceeds the amount of any damages which
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. The Holders' obligations to contribute pursuant
to this Section 8(c) are several in proportion to the respective principal
amount of Senior Notes held by each of the Holders hereunder and not joint.
SECTION 9. RULE 144A
The Company hereby agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding, to make available to any Holder or
beneficial owner of Transfer Restricted Securities in connection with any sale
thereof and any prospective purchaser of such Transfer Restricted Securities
from such Holder or beneficial owner, the information required by Rule
144A(d)(4) under the Act in order to permit resales of such Transfer Restricted
Securities pursuant to Rule 144A.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration hereunder unless
such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on
the basis provided in any underwriting arrangements approved by the Persons
entitled hereunder to approve such arrangements and (b) completes and executes
all reasonable questionnaires, powers of attorney, indemnities, underwriting
agreements, lock-up letters and other documents required under the terms of such
underwriting arrangements.
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SECTION 11. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering. In any such Underwritten Offering, the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Holders of a majority in
aggregate principal amount of the Transfer Restricted Securities included in
such offering; PROVIDED, that such investment bankers and managers must be
reasonably satisfactory to the Company.
SECTION 12. MISCELLANEOUS
(a) REMEDIES. The Company and the Subsidiary Guarantors agree that
monetary damages (including the liquidated damages contemplated hereby) would
not be adequate compensation for any loss incurred by reason of a breach by it
of the provisions of this Agreement and hereby agree to waive the defense in any
action for specific performance that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. The Company will not, and will cause the
Subsidiary Guarantors not to, on or after the date of this Agreement enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Neither the Company nor the Subsidiary Guarantors have
previously entered into any agreement granting any registration rights with
respect to its securities to any Person. The rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to the holders of the Company's securities under any agreement in
effect on the date hereof.
(c) ADJUSTMENTS AFFECTING THE NOTES. The Company will not take any
action, or permit any change to occur, with respect to the Notes that would
materially and adversely affect the ability of the Holders to Consummate any
Exchange Offer.
(d) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of the then outstanding aggregate
principal amount of Transfer Restricted Securities. Notwithstanding the
foregoing, a waiver or consent to departure from the provisions hereof that
relates exclusively to the rights of Holders whose securities are being tendered
pursuant to the Exchange Offer and that does not affect directly or indirectly
the rights of other Holders whose securities are not being tendered pursuant to
such Exchange Offer may be given by the Holders of a majority of the then
outstanding aggregate principal amount of Transfer Restricted Securities being
tendered or registered.
(e) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
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(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Company:
Schuler Homes, Inc.
828 Fort Street Mall, 4th Floor
Honolulu, HI 96813
Telecopier No.: (808) 538-1476
Attention: Chief Financial Officer
With a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Telecopier No.: (650) 496-2885
Attention: Thomas A. Bevilacqua, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Transfer Restricted Securities; PROVIDED, HOWEVER, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities from such Holder.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
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<PAGE>
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(j) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) ENTIRE AGREEMENT. This Agreement together with the other Operative
Documents (as defined in the Purchase Agreement) is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the Transfer Restricted Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
22
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
SCHULER HOMES, INC.
By:
-----------------------------------------------
Name: James K. Schuler
Title: President and Chief Executive Officer
SCHULER HOMES OF CALIFORNIA, INC.
SCHULER HOMES OF OREGON, INC.
SCHULER HOMES OF WASHINGTON, INC.
SHLR OF WASHINGTON, INC.
MELODY HOMES, INC.
MELODY MORTGAGE CO.
SCHULER REALTY/MAUI, INC.
SCHULER REALTY/OAHU, INC.
LOKELANI CONSTRUCTION CORPORATION
By:
-----------------------------------------------
Name: James K. Schuler
Title: President and Chief Executive Officer
(Signatures continued on following page)
S-1
<PAGE>
BANCAMERICA ROBERTSON STEPHENS
By:
---------------------------------
Name:
Title:
JEFFERIES & COMPANY, INC.
By:
---------------------------------
Name:
Title:
NATIONSBANC MONTGOMERY SECURITIES LLC
By:
---------------------------------
Name:
Title:
SBC WARBURG DILLON READ INC.
By:
---------------------------------
Name:
Title:
By:
---------------------------------
Name:
Title:
S-2
<PAGE>
SCHEDULE A
GUARANTORS
SCHULER HOMES OF CALIFORNIA, INC.
SCHULER HOMES OF OREGON, INC.
SCHULER HOMES OF WASHINGTON, INC.
SHLR OF WASHINGTON, INC.
MELODY HOMES, INC.
MELODY MORTGAGE CO.
SCHULER REALTY/MAUI, INC.
SCHULER REALTY/OAHU, INC.
LOKELANI CONSTRUCTION CORPORATION
<PAGE>
ANNEX A
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must agree that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Act. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Senior Notes where such Senior Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date (as defined herein), it will make this Prospectus available
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
<PAGE>
ANNEX B
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
<PAGE>
ANNEX C
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must agree that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Senior Notes
where such Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Act and any profit of any such resale of
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send a reasonable number of additional copies of this Prospectus and
any amendment or supplement to this Prospectus to any broker-dealer that
requests such documents. The Company has agreed to pay all expenses incident to
the Exchange Offer (which shall not include any expenses of any holder in
connection with resale of Exchange Notes) and will indemnify the holders of the
Senior Notes participating in the Exchange Offer (including any broker-dealers)
against certain liabilities, including liabilities under the Act
<PAGE>
[LETTERHEAD]
June 25, 1998
EXHIBIT 5.1
Schuler Homes, Inc.
828 First Street Mall, 4th Floor
Honolulu, Hawaii 96813
Re: Schuler Homes, Inc. - Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel for Schuler Homes, Inc., a Delaware
corporation (the "Company"), in connection with the registration by the Company
of its 9% Senior Notes Due 2008 (the "Notes") pursuant to a Registration
Statement on Form S-4 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Act"). The Company proposes to offer the Notes in
exchange for its outstanding 9% Senior Notes Due 2008 (the "Old Notes"), sold to
BancAmerica Robertson Stephens, Jefferies & Company, Inc., NationsBanc
Montgomery Securities LLC, and SBC Warburg Dillon Read Inc. (collectively, the
"Initial Purchasers") for resale pursuant to Rule 144A and Regulation S under
the Act.
On the basis of such investigation as we have deemed necessary, we are
of the opinion that (i) the Notes have been duly authorized and (ii) when issued
and exchanged pursuant to the Registration Statement and exhibits thereto, will
constitute validly issued and binding obligations of the Company, enforceable in
accordance with their terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization or
similar laws affecting creditors' rights and remedies generally and by general
principles of equity (whether such enforceability is considered in a proceeding
in equity or at law).
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" contained in the prospectus that forms a part of the
Registration Statement.
Very truly yours,
/s/ Brobeck, Phleger & Harrison, LLP
BROBECK, PHLEGER & HARRISON, LLP
<PAGE>
EXHIBIT 12
RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIOS)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated pretax income
(loss) from continuing
operations $3,257 $1,256 $9,520 $(18,675) $12,065 $50,085 $49,027
Amortization of capitalized
interest 1,694 1,466 6,666 3,247 3,429 3,884 2,329
Interest expensed (not
capitalized) 826 592 2,985 270 -- -- --
Amortization of loan fees 190 276 924 392 381 432 259
Other amortization and
depreciation 731 549 2,883 814 715 748 487
FASB Statement No. 121
charges -- -- -- 23,910 9,405 -- --
Interest portion of rental
expense -- -- -- -- -- -- --
Less: Income from
unconsolidated joint
ventures in excess of
distributions (327) (7) 136 (28) -- (3,076) --
------ ------ ------- ------ ------ ------ ------
Earnings $6,371 $4,132 $23,114 $9,930 $25,995 $52,073 $52,102
------ ------ ------- ------ ------ ------ ------
------ ------ ------- ------ ------ ------ ------
Interest $2,942 $2,836 $11,845 $7,865 $5,833 $6,621 $5,165
Interest portion of rental
expense -- -- -- -- -- -- --
Amortization of loan fees 225 296 907 844 528 500 590
--- --- --- --- --- --- ---
Fixed Charges $3,167 $3,132 $12,752 $8,709 $6,361 $7,121 $5,755
------ ------ ------- ------ ------ ------ ------
------ ------ ------- ------ ------ ------ ------
Ratio of earnings to fixed
charges 2.0 1.3 1.8 1.1 4.1 7.3 9.1
------ ------ ------- ------ ------ ------ ------
------ ------ ------- ------ ------ ------ ------
</TABLE>
<PAGE>
EXHIBIT 15
ACKNOWLEDGMENT OF INDEPENDENT ACCOUNTANTS
We are aware of the incorporation by reference in the Registration Statement
(Form S-4 No. 333-________) of Schuler Homes, Inc. for the registration of
$100,000,000 of the Company's 9% Senior Notes due 2008 of our report dated May
11, 1998 relating to the unaudited consolidated interim financial statements of
Schuler Homes, Inc. that are included in its Form 10-Q for the quarter ended
March 31, 1998.
ERNST & YOUNG LLP
Honolulu, Hawaii
June 25, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated March 5, 1998 in the Registration Statement
(Form S-4 No. 333- ) and related Prospectus of Schuler Homes, Inc. for
the registration of $100,000,000 of the Company's 9% Senior Notes due 2008.
ERNST & YOUNG LLP
Honolulu, Hawaii
June 25, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(B)(2)
-------------------------
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
(Exact name of trustee as specified in its charter)
95-4311476
(I.R.S. employer
Identification No.)
515 South Flower Street, Suite 2700
Los Angeles, CA 90071
(Address of principal (Zip Code)
executive offices)
DWIGHT LIU
515 South Flower Street, Suite 2700
Los Angeles, California 90071
(213) 861-5000
(Name, address, including zip code and telephone number of agent for service)
-------------------------
Schuler Homes, Inc.
(Exact name of obligor as specified in its charter)
DELAWARE 99-0293125
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
<PAGE>
828 Fort Street Mall, 4th Floor
Honolulu, Hawaii 96813
(Address of principal chief executive offices)
Schuler Homes, Inc.
Schuler Homes of California, Inc.
Schuler Homes of Oregon, Inc.
Schuler Homes of Washington, Inc.
SHLR of Washington, Inc.
Melody Homes, Inc.
Melody Mortgage Co.
Schuler Realty/Maui, Inc.
Schuler Realty/Oahu, Inc.
Lokelani Construction Corporation
(Exact name of guarantors as specified in their charters)
<TABLE>
<CAPTION>
FEDERAL TAX STATE OF
CORPORATION IDENTIFICATION NUMBER INCORPORATION
- ----------- --------------------- -------------
<S> <C> <C>
Schuler Homes, Inc. 99-0293125 Delaware
Schuler Homes of California, Inc. 99-0328127 California
Schuler Homes of Oregon, Inc. 99-0330791 Oregon
Schuler Homes of Washington, Inc. 99-0329483 Washington
SHLR of Washington, Inc. 99-0334375 Washington
Melody Homes, Inc. 88-0309544 Delaware
Melody Mortgage Co. 84-1261600 Colorado
Schuler Realty/Maui, Inc. 99-0290557 Hawaii
Schuler Realty/Oahu, Inc. 99-0290556 Hawaii
Lokelani Construction Corporation 22-3216488 Delaware
</TABLE>
Senior Notes due 2008
(Title of indenture securities)
<PAGE>
GENERAL
1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
490 L'Enfant Plaza East, S.W.
Washington, DC 20219
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Federal Reserve Bank (12th District)
San Francisco, California
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15.
The obligor currently is not in default under any of its outstanding
securities for which U.S. Trust Company of California, N.A. is Trustee.
Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15
of Form T-1 are not required under General Instruction B.
<PAGE>
16. LIST OF EXHIBITS
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
California, N.A. currently in effect; incorporated herein by reference to
Exhibit T-1.1 filed with Form T-1 Statement, Registration No. 33-33031.
T-1.2 - Included in Exhibit T-1.1
T-1.3 - Included in Exhibit T-1.1
T-1.4 - A copy of the By-Laws of U.S. Trust Company of California, N.A.,
as amended to date; incorporated by reference to Exhibit T-1.4 filed with Form
T-1 Statement, Registration No. 33-54136.
T-1.6 - The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939; incorporated herein by reference to Exhibit T-1.6
filed with Form T-1 Statement, Registration No. 33-33031.
T-1.7 - A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining authority
NOTE
As of May 22, 1998, the Trustee had 20,000 shares of Capital Stock outstanding,
all of which are owned by U.S. Trust Corporation
The responses to Items 2, 5, 6, 7, 8, 9, 10, 11 and 14 set forth the information
requested as though U. S. Trust Company of California, N.A. and U.S. Trust
Corporation were the "trustee."
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
<PAGE>
-----------------------------
Pursuant to the requirements of the Trust Indenture of Act of 1939, the trustee,
U.S. Trust Company of California, N.A., a corporation organized and existing
under the laws of the State of California, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Los Angeles, and State of
California, on the 22nd day of May, 1998.
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
Trustee
By: /s/ Josephine Libunao for
------------------------------------------
Sandra H. Leess
Authorized Signatory
<PAGE>
<TABLE>
<CAPTION>
U.S. TRUST COMPANY OF CALIFORNIA, N.A. Call Date: 13/31/98 ST-BK: 06-0784 FFIEC 033
515 SOUTH FLOWER STREET, SUITE 2700 Vendor ID: D Cert #: 33332 Page RC-1
LOS ANGELES, CA 90071 Transit #: 12204024
9
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR MARCH 31, 1998
All schedules are to be reported in thousands of dollars. Unless otherwise indicated,
report the amount outstanding as of the last business day of the quarter.
SCHEDULE RC - BALANCE SHEET
C200 < -
DOLLAR AMOUNTS IN THOUSANDS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A) RCON
---- ----------
a. Noninterest-bearing balances and currency and coin (1)_______________ ______ _______ 0081 7,317 1.a
----------
b. Interest bearing balances (2)________________________________________ ______ _______ 0071 141 1.b
----------
2. Securities:
----------
a. Held-to-maturity securities (from Schedule RC-B, column A)___________ ______ _______ 1754 0 2.a
----------
b. Available-for-sale securities (from Schedule RC-B, column D)_________ ______ _______ 1773 176,441 2.b
----------
3. Federal funds sold and securities purchased under agreements to resell___ ______ _______ 1350 62,000 3.
----------
4. Loans and lease financing receivables: RCON
---- ----------
a. Loans and leases, net of unearned income (from Schedule RC-C)________ 2122 56,321 4.a
----------
b. LESS: Allowance for loan and lease losses___________________________ 3123 979 4.b
----------
c. LESS: Allocated transfer risk reserve_______________________________ 3128 0 4.c
---------- ----------
d. Loans and leases, net of unearned income, allowance, and reserve RCON 55,432
----
(item 4.a minus 4.b and 4.c)________________________________________ ______ _______ 2125 4.d
----------
5. Trading assets___________________________________________________________ ______ _______ 3545 0 5.
----------
6. Premises and fixed assets (including capitalized leases)_________________ ______ _______ 2145 8,213 6.
----------
7. Other real estate owned (from Schedule RC-M)_____________________________ ______ _______ 2150 0 7.
----------
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M)_____________________________________________________ ______ _______ 2130 0 8.
----------
9. Customers' liability to this bank on acceptances outstanding_____________ ______ _______ 2155 0 9.
----------
10. Intangible assets (from Schedule RC-M)___________________________________ ______ _______ 2143 2,331 10.
----------
11. Other assets (from Schedule RC-F)________________________________________ ______ _______ 2160 5,418 11.
----------
12. Total assets (sum of items 1 through 11)_________________________________ ______ _______ 2170 317,203 12.
----------
</TABLE>
- ----------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE>
<TABLE>
<CAPTION>
U.S. TRUST COMPANY OF CALIFORNIA, N.A. Call Date: 3/31/98 ST-BK: 06-0784 FFIEC 033
515 SOUTH FLOWER STREET, SUITE 2700 Vendor ID: D Cert #: 33332 Page RC-2
LOS ANGELES, CA 90071 Transit #: 12204024
10
SCHEDULE RC - CONTINUED
DOLLAR AMOUNTS IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES
<S> <S> <C> <C> <C> <C> <C>
13. Deposits:
a. In domestic offices (sum of totals of RCON
---- -----------
columns A and C from Schedule RC-E)__________________________________ 2200 277,776 13.a
-----------
RCON -----------
----
(1) Noninterest-bearing (1)_________________________________________ 6631 32,591 13.a.1
-----------
(2) Interest-bearing _______________________________________________ 6636 245,185
-----------
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(1) Noninterest-bearing____________________________________________
(2) Interest-bearing_______________________________________________ -----------
14. Federal funds purchased(2) and securities sold under agreements to RCON 0 14
----
repurchase: 2800 -----------
15. a. Demand notes issued to the U.S. Treasury______________________________ ______ _______ 2840 0 15.a
-----------
b. Trading liabilities___________________________________________________ ______ _______ 3548 0 15.b
-----------
16. Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases): -----------
A. WITH A REMAINING MATURITY OF ONE YEAR OR LESS_________________________ ______ _______ 2332 0 16.a
-----------
B. WITH A REMAINING MATURITY OF MORE THAN ONE YEAR THROUGH THREE YEARS___ 0
______ _______ A547 16.b
-----------
C. WITH A REMAINING MATURITY OF MORE THAN THREE YEARS____________________ ______ _______ A548 0 16.c
-----------
17. Not applicable
-----------
18. Bank's liability on acceptances executed and outstanding__________________ ______ _______ 2920 0 18.
-----------
19. Subordinated notes and debentures_________________________________________ ______ _______ 3200 0 19.
-----------
20. Other liabilities (from Schedule RC-G)____________________________________ ______ _______ 2930 7,486 20.
-----------
21. Total liabilities (sum of items 13 through 20)____________________________ ______ _______ 2948 285,262 21.
-----------
22. Not applicable
EQUITY CAPITAL -----------
23. Perpetual preferred stock and related surplus_____________________________ ______ ______ 3838 5,000 23.
-----------
24. Common stock______________________________________________________________ ______ ______ 3230 2,000 24.
-----------
25. Surplus (exclude all surplus related to preferred stock)__________________ ______ ______ 3839 12,745 25.
-----------
26. a. Undivided profits and capital reserves________________________________ ______ ______ 3632 11,096 26.a
-----------
b. Net unrealized holding gains (losses) on available-for-sale ______ ______ 8434 1,100 26.b
securities_______ -----------
27. Cumulative foreign currency translation adjustments_______________________ -----------
28. a. Total equity capital (sum of items 23 through 27)_____________________ ______ ______ 3210 31,941 28.
-----------
29. Total liabilities and equity capital (sum of items 21and 28)______________ ______ ______ 3300 317,203 29.
-----------
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION. -----------
1. Indicate in the box at the right the number of the statement below that best describes the RCON
most comprehensive level of auditing work performed for the bank by independent external ----
auditors as of any date during 1997____________________________________________________________ 6724 1 M.1
-----------
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other
with generally accepted auditing standards by certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by
submits a report on the consolidated holding company (but external auditors
not on the bank separately) 7 = Other audit procedures (excluding tax preparation
3 = Directors' examination of the bank conducted in accordance work)
with generally accepted auditing standards by a certified 8 = No external audit work
public accounting firm (may be required by state chartering
authority)
</TABLE>
- ---------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited life preferred stock and related surplus.
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
OFFER FOR ALL OUTSTANDING
9% SENIOR NOTES DUE 2008
IN EXCHANGE FOR
9% SENIOR NOTES DUE 2008
OF
SCHULER HOMES, INC.
- --------------------------------------------------------------------------------
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON _________, 1998, UNLESS EXTENDED
The Exchange Agent is U.S. Trust Company of California, N.A., whose mailing
address, facsimile number and telephone number are as follows:
- --------------------------------------------------------------------------------
By Hand up to 4:30 P.M. By Overnight Courier and by Hand after
U.S. Trust Company of California, N.A. 4:30 P.M.
c/o United States Trust U.S. Trust Company of California, N.A.
Company of New York c/o United States Trust
111 Broadway Company of New York
Lower Level 770 Broadway, 13th Floor
New York, New York 10006 New York, New York 10003
Attn: Corporate Trust and Agency Attn: Corporate Trust and Agency
Services Services
- --------------------------------------------------------------------------------
--------------------------------------------
By Facsimile:
U.S. Trust Company of California, N.A.
Fax: (212) 420-6155
Confirm by Telephone: (800) 225-2398
--------------------------------------------
Delivery of this Letter of Transmittal to an address other than as set
forth above or transmission of this Letter of Transmittal via facsimile to a
number other than as set forth above does not constitute a valid delivery.
This Letter of Transmittal is to be completed by holders of 9% Senior Notes
due 2008 (the "Old Notes") either if Old Notes are to be forwarded herewith or
if tenders of Old Notes are to be made by book-entry transfer to an account
maintained by U.S. Trust Company of California, N.A. (the "Exchange Agent") at
The Depository Trust Company (the "DTC") pursuant to the procedures set forth in
"THE EXCHANGE OFFER--Procedures for Tendering" in the Prospectus (as defined
herein).
Holders of Old Notes whose certificates (the "Certificates") for such Old
Notes are not immediately available or who cannot deliver their Certificates and
all other required documents to the Exchange Agent on or prior to the Expiration
Date (as defined in the Prospectus) or who cannot complete the procedures for
book-entry transfer on a timely basis, must tender their Old Notes according to
the guaranteed delivery procedures set forth in "THE EXCHANGE OFFER--Procedures
for Tendering" in the Prospectus.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer
for any reason, or if Certificates are submitted for more Old Notes than are
tendered or accepted for exchange, Certificates for such non-exchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered by
book-entry transfer, such Old Notes will be credited to an account maintained at
DTC), without expenses to the tendering holder promptly following the Expiration
Date (as defined in the Prospectus).
DELIVERY OF DOCUMENTS TO THE DTC DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
- --------------------------------------------------------------------------------
DESCRIPTION OF SECURITIES TENDERED
- --------------------------------------------------------------------------------
NAME AND ADDRESS OF REGISTERED CERTIFICATE NUMBER(s) PRINCIPAL AMOUNT
HOLDER AS IT APPEARS ON THE OF OLD NOTES OF OLD NOTES
PRIVATELY PLACED 9% SENIOR NOTES TRANSMITTED TRANSMITTED
DUE 2008 ("OLD NOTES")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DTC AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution
-------------------------------------------------
Account Number
----------------------------------------------------------------
Transaction Code Number
-------------------------------------------------------
/ / CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)
--------------------------------------------------
Window Ticket Number (if any)
-------------------------------------------------
Date of Execution of Notice Guaranteed Delivery
-------------------------------
Name of Institution which Guaranteed Delivery
---------------------------------
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution
-------------------------------------------------
Account Number
----------------------------------------------------------------
Transaction Code Number
-------------------------------------------------------
/ / CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND ANY NON-EXCHANGED OLD
NOTES ARE TO BE RETURNED BY CREDITING DTC ACCOUNT NUMBER SET FORTH ABOVE.
Ladies and Gentlemen:
1. The undersigned hereby agrees to exchange the aggregate principal
amount of privately placed 9% Senior Notes Due 2008 (the "Old Notes") for a like
principal amount of 9% Senior Notes Due 2008 (the "Notes") of Schuler Homes,
Inc., a Delaware corporation (the "Company"), upon the terms and subject to the
conditions contained in the Registration Statement on Form S-4 filed by the
Company with the Securities and Exchange Commission (the "Registration
Statement") and the accompanying Prospectus dated ___________, 1998 included
therein (the "Prospectus"), receipt of which is hereby acknowledged.
2. The undersigned hereby acknowledges and agrees that the Notes
will bear interest from the most recent date to which interest has been paid on
the Old Notes or, if no interest has been paid on the Old Notes, from May 6,
1998. Accordingly, the undersigned will forgo accrued but unpaid interest on
his, her or its Old Notes that are exchanged for Notes, but will receive such
interest under the Notes.
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3. The undersigned hereby represents and warrants that he, she or it
has full authority to tender the Old Notes described above. The undersigned
will, upon request, execute and deliver any additional documents deemed by the
Company to be necessary or desirable to complete the exchange of the Old Notes.
4. The undersigned understands that the tender of the Old Notes
pursuant to all of the procedures set forth in the Prospectus will constitute an
agreement between the undersigned and the Company as to the terms and conditions
set forth in the Prospectus.
5. The undersigned hereby represents and warrants that the
undersigned (i) is not an affiliate of the Company within the meaning of Rule
405 of the Securities Act of 1933, as amended (the "Securities Act") and (ii) is
acquiring the Notes in the ordinary course of the business of the undersigned
and, if the undersigned is not a broker-dealer, that the undersigned is not
engaged in, and does not intend to engage in, a distribution of the Notes.
6. If the undersigned is a broker-dealer, (i) it hereby represents
and warrants that it acquired the Old Notes for its own account as a result of
market-making activities or other trading activities and (ii) it hereby
acknowledges that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of the Notes received hereby.
Neither the acknowledgment contained in the foregoing sentence nor the delivery
of such a prospectus shall be deemed an admission that the undersigned is an
"underwriter" within the meaning of the Securities Act.
7. Any obligation of the undersigned hereunder, shall be binding
upon the successors, assigns, executors, administrators, trustees in bankruptcy
and legal and personal representatives of the undersigned.
SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 1)
To be completed ONLY IF the Notes are to be issued in the name of someone
other than the undersigned or are to be sent to someone other than the
undersigned or to the undersigned at an address other than that provided above:
Name
--------------------------------------------------------------------------
(PLEASE PRINT)
Address
-----------------------------------------------------------------------
(INCLUDE ZIP CODE)
Telephone No:
-----------------------------------------------------------------
(INCLUDE AREA CODE)
Mail to:
Name
--------------------------------------------------------------------------
(PLEASE PRINT)
Address
-----------------------------------------------------------------------
(INCLUDE ZIP CODE)
Telephone No.:
----------------------------------------------------------------
(INCLUDE AREA CODE)
SIGNATURE
- ------------------------------------------------------------------------------
(NAME OF REGISTERED HOLDER)
By:
---------------------------------------------------------------------------
Name:
-------------------------------------------------------------------------
Title:
------------------------------------------------------------------------
Must be signed by registered holder exactly as name appears on Certificates
for Old Notes or on the register of holders of Old Notes maintained by U.S.
Trust Company of California, N.A., as trustee for the Old Notes (the "Trustee"),
or any person(s) authorized to become the registered holder(s) of the Old Notes
by endorsements
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<PAGE>
and documents transmitted herewith (including such opinions of counsel,
certifications and other information as may be required by the Trustee to comply
with the restrictions on transfer applicable to the Old Notes). If signature is
by trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
please set forth full title. See Instruction 3.)
Address:
----------------------------------------------------------------------
Telephone No.
-----------------------------------------------------------------
(INCLUDE AREA CODE)
Taxpayer Identification No.:
--------------------------------------------------
Signature Guaranteed By:
------------------------------------------------------
(SEE INSTRUCTION 1)
Title:
------------------------------------------------------------------------
Name of Institution:
----------------------------------------------------------
Address
-----------------------------------------------------------------------
Telephone No.:
----------------------------------------------------------------
(INCLUDE AREA CODE)
Date:
-------------------------------------------------------------------------
PLEASE READ THE INSTRUCTIONS BELOW, WHICH
FORM A PART OF THIS LETTER OF TRANSMITTAL.
INSTRUCTIONS
1. GUARANTEE OF SIGNATURES. Signatures on this Letter of Transmittal
must be guaranteed by a firm that is a member of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc. or by a commercial bank or trust company having an office in the United
States which is a member of a recognized Medallion Signature Program approved by
the Securities Transfer Association, Inc. (an "Eligible Institution") unless (i)
the "Special Issuance and Delivery Instructions" above have not been completed
or (ii) the Old Notes described above are tendered for the account of an
Eligible Institution.
2. DELIVERY OF LETTER OF TRANSMITTAL AND OLD NOTES. This Letter of
Transmittal is to be completed either if (a) Certificates are to be forwarded
herewith or (b) tenders are to be made pursuant to the procedures for tender by
book-entry transfer set forth in "THE EXCHANGE OFFER--Procedures for Tendering"
in the Prospectus. Certificates, or timely confirmation of a book-entry
transfer of such Old Notes into the Exchange Agent's account at the DTC, as well
as this Letter of Transmittal (or facsimile thereof), properly completed and
duly executed, with any required signature guarantees, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein on or prior to the Expiration Date. Old Notes
may be tendered in whole or in part in the principal amount of integral
multiples of $1,000.
THE METHOD OF DELIVERY OF OLD NOTES AND OTHER DOCUMENTS IS AT THE ELECTION
AND RISK OF THE RESPECTIVE HOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL
(WITH RETURN RECEIPT), PROPERLY INSURED, IS SUGGESTED.
3. GUARANTEED DELIVERY PROCEDURES. Registered holders who wish to tender
their Old Notes and (i) whose Old Notes are not immediately available, or (ii)
who cannot deliver their Old Notes, the Letter of Transmittal or any other
required documents to the Exchange Agent on or prior to the Expiration Date, or
(iii) who cannot complete the procedures for delivery by book-entry transfer on
a timely basis may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
substantially in the form made available by the Company; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the Certificate(s) (or a Book-Entry Confirmation
(as defined in the Prospectus)) representing all tendered
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<PAGE>
Old Notes in proper form for transfer and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within five New York
Stock Exchange trading days after the Expiration Date. Upon request of the
Exchange Agent, a Notice of Guaranteed Delivery will be sent to registered
holders who wish to tender their Old Notes according to the guaranteed delivery
procedures set forth above.
4. SIGNATURES ON LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by a person other than a registered holder
of any Old Notes, such Old Notes must be endorsed or accompanied by appropriate
bond powers, in either case signed exactly as the name or names of the
registered holder or holders appear on the Old Notes.
If this Letter of Transmittal or any Old Notes or bond power is signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
5. EXCHANGE OF OLD NOTES ONLY. Only the above-described Old Notes may be
exchanged for Notes pursuant to the Exchange Offer.
6. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Old Notes will be
accepted only in the principal amount of integral multiples of $1,000.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. In order for a withdrawal to be
effective on or prior to that time, a written, telegraphic, telex or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth above or in the Prospectus on
or prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if Certificates for Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Certificate for the Old Notes, if different from that of the
person who tendered such Old Notes. If Certificates for the Old Notes have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such Certificates for the Old Notes, the tendering holder
must submit the serial numbers shown on the particular Certificates for the Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in the Prospectus
under "THE EXCHANGE OFFER--Procedures for Tendering," the notice of withdrawal
must specify the name and number of the account at the DTC to be credited with
the withdrawal of Old Notes, in which case a notice of withdrawal will be
effective if delivered to the Exchange Agent by written, telegraphic, telex or
facsimile transmission. Withdrawals of tenders of Old Notes may not be
rescinded. Old Notes properly withdrawn will not be deemed validly tendered for
purposes of the Exchange Offer, but may be retendered at any subsequent time on
or prior to the Expiration Date by following any of the procedures described in
the Prospectus under "THE EXCHANGE OFFER--Procedures for Tendering."
7. MISCELLANEOUS. All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of tendered Old Notes
will be resolved by the Company, whose determination will be final and binding.
The Company reserves the absolute right to reject any or all tenders that are
not in proper form or the acceptance of which would, in the opinion of counsel
for the Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in this Letter of Transmittal) will be final and binding. Unless
waived, any irregularities in connection with tenders or consents must be cured
within such time as the Company shall determine. Neither the Company nor the
Exchange Agent shall be under any duty to give notification of defects in such
tenders or shall incur liabilities for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the irregularities
have not been cured or waived will be returned by the Exchange Agent to the
tendering holder thereof.
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<PAGE>
IMPORTANT TAX INFORMATION
Under current Federal income tax law, an Old Noteholder whose tendered Old
Notes are accepted for payment generally is required to provide the Exchange
Agent (as agent for the payer) with his or her correct taxpayer identification
number ("TIN") on Substitute Form W-9 below. If such Old Noteholder is an
individual, the TIN is his or her social security number. If the Exchange Agent
is not provided with the correct TIN, the Old Noteholder may be subject to a $50
penalty imposed by the Internal Revenue Service. In addition, payments that are
made to such Old Noteholders with respect to Notes exchanged pursuant to the
Offer may be subject to backup withholding.
Certain Old Noteholders (including, among others, all corporations and
certain foreign individuals) may not be subject to these backup withholding and
reporting requirements. Exempt Old Noteholders should indicate their exempt
status on Substitute Form W-9. In order for a foreign individual to qualify as
an exempt recipient, that Old Noteholder must submit a properly completed
Internal Revenue Service Form W-8, signed under penalties of perjury, attesting
to his or her exempt status. Such statements can be obtained from the Exchange
Agent. See the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 for additional instructions.
If backup withholding applies, the Exchange Agent is required to withhold
31 percent of any such payments made to the Old Noteholder. Backup withholding
is not an additional tax. Rather, the federal income tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to an Old
Noteholder with respect to Old Notes exchanged pursuant to the Offer, each Old
Noteholder is required to notify the Exchange Agent of his, her or its correct
TIN by completing the Substitute Form W-9 below certifying the TIN provided on
such form is correct (or that such Old Noteholder is awaiting a TIN) and that
(1) the Old Noteholder has not been notified by the Internal Revenue Service
that he, she or it is subject to backup withholding as a result of a failure to
report all interest or dividends or (2) the Internal Revenue Service has
notified the Old Noteholder that he, she or it is no longer subject to backup
withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Old Noteholder is required to give the Exchange Agent the social
security number or employer identification number of the record owner of the Old
Notes. If the Old Notes are in more than one name or are not in the name of the
actual owner, consult the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 for additional guidelines on which
number to report.
<PAGE>
<TABLE>
<CAPTION>
PART 1--PLEASE PROVIDE YOUR TIN IN
THE BOX AT THE RIGHT AND CERTIFY BY -------------------------
SIGNING AND DATING BELOW Social Security Number or
-------------------------
Employer Identification Number
<S> <C>
SUBSTITUTE PART 2--Certificate Under penalties of perjury, I certify that:
Form W-9 (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting
for a number to be issued to me) and
Department of the Treasury (2) I am not subject to backup withholding because: (a) I am exempt from backup
withholding, (b) I have not been notified by the Internal Revenue Service (the "IRS") that I
Internal Revenue Service am subject to backup withholding as a result of a failure to report all interest or dividends
or (c) the IRS has notified me that I am no longer subject to backup withholding.
PAYER'S REQUEST FOR
TAXPAYER IDENTIFICATION Certification Instructions--You must cross out Item (2) above if you have been notified by
NUMBER (TIN) the IRS that you are currently subject to backup withholding because of under-reporting
interest or dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from the IRS
that you are no longer subject to backup withholding, do not cross out such Item (2).
Part 3 Awaiting TIN [__]
---------------------------------------
Signature
---------------------------------------
Date
</TABLE>
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31
PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE
ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE
FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART THREE OF SUBSTITUTE
FORM W-9
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand
that if I do not provide a taxpayer identification number within sixty (60)
days, 31 percent of all reportable payments made to me thereafter will be
withheld until I provide a number.
- ---------------------------------
Signature
Date
--------------------
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
9% SENIOR NOTES DUE 2008
OF
SCHULER HOMES, INC.
This notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used to accept the Exchange Offer (as defined below) if
(i) certificates for the Company's (as defined below) 9% Senior Notes due 2008
(the "Existing Notes") are not immediately available, (ii) the Existing Notes,
the Letter of Transmittal and all other required documents cannot be delivered
to U.S. Trust Company of California, N.A. (the "Exchange Agent") on or prior to
the Expiration Date (as defined in the Prospectus referred to below) or
(iii) the procedures for delivery by book-entry transfer cannot be completed on
a timely basis. This Notice of Guaranteed Delivery may be delivered by hand,
overnight courier or mail, or transmitted by facsimile transmission, to the
Exchange Agent. See "The Exchange Offer Procedures for Tendering Existing
Notes" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
U.S. Trust Company of California, N.A.
BY OVERNIGHT DELIVERY OR HAND:
U.S. Trust Company of California, N.A.
c/o United States Trust Company of New York
770 Broadway, 13th Floor
New York, NY 10003
Attn: Corporate Trust and Agency Services
(Schuler Homes, Inc., 9% Senior Notes due 2008)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(800) 225-2398
FACSIMILE TRANSMISSIONS:
(212) 420-6155
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
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<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Schuler Homes, Inc., a Delaware
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the Prospectus dated [_____________], 1998 (as the same may be amended
or supplemented from time to time, the "Prospectus") and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Existing Notes set
forth below pursuant to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer--Procedures for Tendering
Existing Notes."
Description of Existing Notes Tendered
Name(s), Address(es) and Area Code(s) and Telephone
Number(s) of Registered Holder(s): Certificate Number(s) (if available):
Aggregate Principal Amount Tendered: $
Signature(s):
If Existing Notes will be tendered by book-entry transfer, please provide the
following information:
Name of Tendering Institution:
DTC Account Number:
Date:
Transaction Code Number:
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein) (i) a bank; (ii) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) a savings
association, that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program (each of the foregoing being referred to as an
"Eligible Institution"), hereby guarantees to deliver to the Exchange Agent, at
its address set forth above, either the Existing Notes tendered hereby in proper
form for transfer, or confirmation of the book-entry transfer of such Existing
Notes to the Exchange Agent's account at The Depository Trust Company ("DTC"),
pursuant to the procedures for book-entry transfer set forth in the Prospectus,
in either case together with one or more properly completed and duly executed
Letter(s) of Transmittal (or facsimile thereof) and any other required documents
within three New York Stock Exchange trading days after the date of execution of
this Notice of Guaranteed Delivery.
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The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Existing Notes tendered hereby to the Exchange Agent within
the time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
Name of Firm: Authorized Signature:
Address: Name (Please Print):
Capacity or Title:
Area Code and Telephone Number: Date:
NOTE: DO NOT SEND EXISTING NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY.
ACTUAL SURRENDER OF EXISTING NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED
BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
the Prospectus, and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange of Existing Notes for Exchange
Notes made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any time subsequent to
its date. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities to
which it relates. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy such securities in any circumstances in which
such offer or solicitation is unlawful.
-------------------------
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