<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-----------------------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19891
SCHULER HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware 99-0293125
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
828 Fort Street Mall, Suite 400
Honolulu, Hawaii 96813-4321
(Address of principal executive offices) (Zip code)
(808-521-5661)
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1999
--------------------- --------------
$.01 par value 20,053,028
<PAGE>
SCHULER HOMES, INC.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report. . . . . . . . . . . 3
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998. . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Income - Three months
ended March 31, 1999 and 1998. . . . . . . . . . . . . .5
Consolidated Statements of Cash Flows - Three
months ended March 31, 1999 and 1998 . . . . . . . . . .6
Notes to Consolidated Financial Statements . . . . . . . . .7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . .11
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . .19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Schuler Homes, Inc.
We have reviewed the accompanying interim consolidated balance sheet of
Schuler Homes, Inc. as of March 31, 1999, and the related consolidated
statements of income and cash flows for the three-month periods ended March
31, 1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying interim consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles. See Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Schuler Homes, Inc. as of
December 31, 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated March 15, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1998, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
Honolulu, Hawaii
May 13, 1999
3
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,1999 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents (restricted-Note 1)............. $ 7,506,000 $ 4,915,000
Real estate inventories (Note 2).......................... 397,557,000 325,166,000
Investments in unconsolidated joint ventures (Note 3)..... 8,490,000 23,998,000
Deferred income taxes..................................... 3,468,000 3,957,000
Intangibles, net.......................................... 13,916,000 13,879,000
Other assets (Note 3)..................................... 14,671,000 13,628,000
------------ ------------
Total assets.............................................. $445,608,000 $385,543,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.......................................... $ 23,713,000 $ 15,954,000
Accrued expenses.......................................... 20,005,000 16,703,000
Notes payable to banks (Note 4)........................... 60,371,000 17,365,000
Notes payable to others................................... 3,585,000 3,954,000
9% senior notes due 2008.................................. 98,551,000 98,512,000
6-1/2% convertible subordinated debentures due 2003....... 57,500,000 57,500,000
------------ ------------
Total liabilities......................................... 263,725,000 209,988,000
Commitments and contingencies (Notes 4 and 5)
Minority interest in consolidated subsidiary (Note 3)..... 1,343,000 ---
Stockholders' equity (Note 6):
Common stock, $.01 par value; 30,000,000 shares
authorized;20,922,028 and 20,892,465 shares issued at
March 31, 1999 and December 31, 1998, respectively.... 209,000 209,000
Additional paid-in capital.............................. 93,396,000 93,201,000
Retained earnings....................................... 92,552,000 87,762,000
Treasury stock, at cost; 869,000 shares at March 31,
1999 and December 31, 1998............................ (5,617,000) (5,617,000)
------------ ------------
Total stockholders' equity................................ 180,540,000 175,555,000
------------ ------------
Total liabilities and stockholders' equity................ $445,608,000 $385,543,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
4
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Residential real estate sales................................... $ 95,893,000 $ 55,512,000
Costs and expenses:
Residential real estate sales............................... 75,214,000 43,887,000
Selling and commissions..................................... 6,149,000 3,920,000
General and administrative.................................. 5,407,000 3,770,000
------------ ------------
Total costs and expenses................................ 86,770,000 51,577,000
------------ ------------
Operating income............................................ 9,123,000 3,935,000
Income from unconsolidated joint ventures....................... 73,000 358,000
Minority interest in pretax income of consolidated
subsidiary (Note 3)........................................... (93,000) ---
Other income (expense) (Note 4)................................. (1,361,000) (1,036,000)
------------ ------------
Income before provision for income taxes..................... 7,742,000 3,257,000
Provision for income taxes (Note 7)............................. 2,952,000 1,256,000
------------ ------------
Net income................................................... $ 4,790,000 $ 2,001,000
------------ ------------
------------ ------------
Net income per share (Note 8):
Basic and diluted............................................ $ 0.24 $ 0.10
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
5
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------
1999 1998
----------- ----------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................................... $ 4,790,000 $ 2,001,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization expense....................................... 872,000 731,000
Income from unconsolidated joint ventures................................... (73,000) (268,000)
Principal payments of notes receivable...................................... 581,000 94,000
Minority interest........................................................... 93,000 ---
Changes in assets and liabilities, net of effects of purchase of
additional 40 % interest in Stafford:
(Increase) decrease in real estate inventories............................... (20,054,000) (256,000)
(Increase) decrease in other assets.......................................... 453,000 (671,000)
Increase (decrease) in accounts payable..................................... 2,883,000 (7,548,000)
Increase (decrease) in accrued expenses..................................... 5,252,000 (1,091,000)
Change in deferred income taxes............................................. 489,000 (498,000)
----------- -----------
Net cash provided by (used in) operating activities....................... (4,714,000) (7,506,000)
INVESTING ACTIVITIES:
Purchase of additional 40% interest in Stafford, net of cash acquired............ (4,227,000) ---
Acquisition of certain assets of Keys Homes...................................... (1,000,000) ---
Advances to unconsolidated joint ventures........................................ --- (53,000)
Repayments of advances to unconsolidated joint ventures.......................... 71,000 42,000
Capital distributions from unconsolidated joint ventures......................... 443,000 1,750,000
Purchase of furniture, fixtures, and equipment................................... (468,000) (93,000)
----------- -----------
Net cash provided by (used in) investing activities....................... (5,181,000) 1,646,000
FINANCING ACTIVITIES:
Proceeds from bank borrowings.................................................... 75,990,000 38,844,000
Principal payments on bank borrowings............................................ (32,984,000) (31,521,000)
Principal payments on notes payables to others................................... (376,000) ---
Refinancing of Stafford s debt................................................... (29,378,000) ---
Advance to officer (Note 3)...................................................... (1,000,000) ---
Net decrease in discount on issuance of senior notes............................. 39,000 ---
Proceeds from issuance of common stock from exercise of stock options............ 30,000 ---
Proceeds from issuance of common stock under Employee Stock Purchase Plan........ 165,000 ---
----------- -----------
Net cash provided by (used in) financing activities...................... 12,486,000 7,323,000
----------- -----------
Increase (decrease) in cash...................................................... 2,591,000 1,463,000
Cash and cash equivalents (restricted) at beginning of period.................... 4,915,000 3,842,000
----------- -----------
Cash and cash equivalents (restricted) at end of period.......................... $ 7,506,000 $ 5,305,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
6
<PAGE>
SCHULER HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
These financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements for the year ended December 31, 1998
contained in the Company's 1998 annual report on Form 10-K.
The Company has experienced, and expects to continue to experience,
significant variability in quarterly sales and net income. The results of
any interim period are not necessarily indicative of the results that can
be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain amounts in the Consolidated Financial Statements relating to 1998
have been reclassified to conform to the 1999 presentation.
In March 1999, the Company sold second mortgage notes of approximately
$491,000, resulting in the recognition of sales and gross profit of
approximately $1,989,000 and $166,000 (net of discount and collection
allowance relating to the sale), respectively (excludes two sales which
closed during the first quarter of 1999). The collection allowance results
in an increase in the Company's restricted cash of approximately $120,000,
resulting in a cumulative balance of $626,000 at March 31, 1999.
2. Real Estate Inventories
Inventories which are substantially completed are carried at the lower of
cost or fair value less cost to sell. Fair value is determined by applying
a risk adjusted discount rate to estimates of future cash flows. In
addition, land held for future development or inventories under current
development are adjusted to fair value, only if an impairment to their
value is indicated.
The estimates of future cash flows require significant judgment relating to
the level of sales prices, rate of new home sales, amount of marketing
costs and price discounts needed in order to stimulate sales, rate of
increase in the cost of building materials and labor, introduction of
building code modifications, and 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.
7
<PAGE>
<TABLE>
<S> <C>
Real estate inventories at March 31, 1999 consist of the following:
Unimproved land held for future development...................... $ 36,653,000
Development projects in progress................................. 316,949,000
Completed inventory (including lots held for sale)............... 43,955,000
-------------
$397,557,000
-------------
-------------
</TABLE>
Completed inventory includes residential units which are substantially
ready for occupancy.
3. Related Party Transactions
In January 1999, the Company exercised its option to purchase an
additional 40% ownership interest in Stafford Homes (Stafford),
increasing its total ownership to 89%. As a result, the financial
statements of Stafford for the quarter ended March 31, 1999 are
consolidated with those of the Company. In connection with this
transaction, the Company refinanced Stafford's existing debt, which
included certain notes payable to the selling shareholder (Stafford's
President).
Stafford leases its main office building from an affiliate of its
President. The Company also leases its main office in Oregon from a
family member of the Division President of the Oregon Division. During
the quarter ended March 31, 1999, the Company incurred total rental
expense in connection with such leases of approximately $24,000.
In connection with the acquisition of certain assets of Keys Homes, Inc.
(Keys) in October 1998, the Division President of the Company's Oregon
Division (formerly the president of Keys) earns a percentage of the profits
of the Oregon Division. In addition, included in Other Assets at March 31,
1999 is a note receivable of $1,000,000 from the Oregon Division President,
which was issued on January 4, 1999, is due on December 31, 2005, bears
interest at 7%, and requires minimum annual payments of $200,000 plus
accrued but unpaid interest. Accrued interest receivable relating to the
note was approximately $17,000 at March 31, 1999.
From time to time, the Company engages the law firms in which directors of
the Company are partners. During the quarterly period ended March 31,
1999, legal fees of approximately $27,000 to such firms were incurred by
the Company.
4. Notes Payable to Banks
Notes Payable to Banks is comprised of a $90,000,000 Revolving Credit
Facility with a consortium of banks. The Company has a one-time option,
subject to the approval of the Banks, to increase the amount of the
facility to $120,000,000. In March 1999, the Company requested the Banks'
approval to increase the facility to $120,000,000. The Banks' are currently
reviewing the Company's request. In addition, the Company has a one-time
option to reduce the amount of the facility by $30,000,000 on an
irrevocable basis, provided the facility has been increased to $120,000,000
for at least six months. The facility expires on July 1, 2001 and includes
an option for the lenders to extend the term for an additional year as of
July 1 of each 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 its line of credit is dependent upon meeting certain financial
ratios and covenants. As of March 31, 1999, the Company met such financial
ratios and covenants.
The Company has an interest rate swap to pay LIBOR (currently fixed at
5.75%) 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 7%, 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 interest rate swap terminates on August 1, 2003.
8
<PAGE>
Notes Payable to Banks at March 31, 1999 consist of borrowings under its
credit facilities. At March 31, 1999, the Company's bank borrowings were
at interest rates of prime (7.75%) and LIBOR plus 1.5% (6.5% to 6.69%).
At March 31, 1999, $29,629,000 of the Company's line of credit is
unused, of which $6,249,000 is restricted for outstanding but unused
letters of credit.
In April 1999, the Company entered into a separate 90-day $10,000,000
line of credit with one of the banks included in the $90,000,000
Revolving Credit Facility.
The interest amounts in this paragraph relate to Notes Payable to Banks,
Notes Payable to Others, Senior Notes and the Convertible Subordinated
Debentures. The Company paid interest of approximately $2,901,000 during
the quarter ended March 31, 1999. Interest incurred during the quarter
ended March 31, 1999 was approximately $4,367,000. All of such interest
was capitalized to real estate inventories except for $941,000, which
was expensed (included in Other Income (Expense)) and not capitalized,
as such interest 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 the quarter ended March 31, 1999
totaled $2,960,000.
5. Commitments and Contingencies
At March 31, 1999, the Company had under contract to purchase for
approximately $4,000,000, land for residential development.
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.
Following the Courts' denial of a class certification request, a second
action involving other homeowners at Fairway Village advancing the same
claims was initiated. While the Company believed the claims to be largely
without merit, during April 1999, a settlement agreement was entered into
by the Company, third party defendants, insurance carriers and all of the
plaintiffs in both lawsuits, except for the owners of three units. The
settlement amount incurred by the Company will be charged against the
warranty accruals previously established by the Company. Although the cost
of remediation for certain units called for under the settlement agreement
is not determinable until the work is completed, the Company believes that
the cost of such work will not exceed its warranty accruals. A new trial
date in December 1999 has been set for the initial suit, which has two
remaining plaintiffs. No trial date has been set in the second action,
which includes one remaining plaintiff. 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.
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.
6. Stockholders' Equity
During the quarter ended March 31, 1999, options to purchase 110,400 shares
of common stock were granted. During the quarter ended March 31, 1999,
options were exercised, resulting in the issuance of 5,375 shares of common
stock. In addition, 24,188 shares were issued on February 26, 1999
pursuant to the Company's Employee Stock Purchase Plan.
7. Income Taxes
During the three months ended March 31, 1999, the Company made income tax
payments of $600,000.
9
<PAGE>
8. Net Income Per Share
Basic net income per share for the quarters ended March 31, 1999 and 1998
were computed using the weighted average number of common shares
outstanding during the quarters of 20,034,801 and 20,100,927, respectively.
The computation of diluted net income per share for the quarters ended
March 31, 1999 and 1998 resulted in amounts greater than the basic net
income per share. Accordingly, the basic net income per share is also
presented as the diluted net income per share.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, matters discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain "forward-looking statements" within the meaning of the
Private Securities Litigation Act of 1995 that involve risks and uncertainties.
The Company's actual results may differ materially from the results discussed in
the forward-looking statements. Forward-looking statements are based on various
factors and assumptions that include risks and uncertainties, including, but not
limited to the costs and achievability of Year 2000 compliance, the closing and
profitability of sales in backlog reported, the market for homes generally and
in areas where the Company operates, the availability and cost of land, changes
in economic conditions and interest rates, increases in raw material and labor
costs, consumer confidence, government regulation, weather conditions and
general competitive factors, all or each of which may cause actual results to
differ materially. In addition, other factors that might cause such a
difference include other risks detailed in the Company's Annual Report on Form
10-K and other documents filed by the Company with the Securities and Exchange
Commission from time to time.
OVERVIEW
Schuler Homes, Inc. 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.
For the quarter ended March 31, 1999, sales of residential real estate
(revenue) were $95.9 million and operating income was $9.1 million, compared to
revenues of $55.5 million and operating income of $3.9 million during the first
quarter last year. Net income was $4.8 million ($0.24 per share) for the
quarter ended March 31, 1999, compared to net income of $2.0 million ($0.10 per
share) during the 1998 first quarter. From the first quarter of 1998 to the
first quarter of 1999, revenues grew 72.7%, net income grew 139.4%, the number
of units closed increased from 390 to 508 and operating profit margins improved
from 7.1% to 9.6%.
In January 1999, the Company exercised its option to purchase an additional
40% ownership interest in Stafford Homes (Stafford), increasing its total
ownership to 89%.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of the
Company's revenues represented by each income statement line item presented.
<TABLE>
<CAPTION>
Three months ended % Change in Dollar Amounts
March 31, from
1999 1998 1998 to 1999
------ ------ --------------
<S> <C> <C> <C>
Residential real estate sales 100% 100.0% 72.7%
Costs and expenses:
Residential real estate sales 78.4 79.1 71.4
Selling and commissions 6.4 7.0 56.9
General and administrative 5.6 6.8 43.4
---- ----
Total costs and expenses 90.4 92.9 68.2
---- ----
Operating income 9.6 7.1 131.8
Income from unconsolidated joint ventures 0.1 0.7 (79.6)
Minority interest in pretax income of
consolidated subsidiary (0.1) --- N/A
Other income (expense) (1.5) (1.9) 31.4
---- ----
Income before provision for income taxes 8.1 5.9 137.7
Provision for income taxes 3.1 2.3 135.0
---- ----
Net income 5.0% 3.6% 139.4
---- ----
---- ----
</TABLE>
RESIDENTIAL REAL ESTATE SALES
The Company's Residential Real Estate Sales (revenues) for the quarter
ended March 31, 1999 were approximately $95.9 million as compared to
approximately $55.5 million during the quarter ended March 31, 1998. This
represents an increase of approximately $40.4 million or 72.7%. The increase
in revenues reflects a larger number of unit sales closed at higher average
sales prices in the first quarter of 1999 relative to the first quarter of
1998. The Company's average sales price per unit increased to $187,000 during
the 1999 first quarter (including 11 sales that closed prior to January 1,
1999 under the Company's "zero-down" sales program, for which the second
mortgages were sold during the 1999 first quarter), an increase from an
average sales price per unit during the 1998 first quarter of $170,000.
As a result of the increase in the Company's ownership of Stafford to
89% in early 1999, the operating results of Stafford are consolidated with
those of the Company during the quarter ended March 31, 1999, contributing to
the Company's higher 1999 first quarter revenues and average sales prices as
compared to the first quarter of 1998. Stafford's average sales price of home
sales closed was $245,000 during the quarter ended March 31, 1999.
During the first quarter of 1999, the Company recognized $2.0 million of
deferred revenue related to 11 sales that closed prior to 1999 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 were deferred until the
requirements for revenue and profit recognition were satisfied, which
occurred during the first quarter of 1999 when the second mortgages were sold.
12
<PAGE>
The following table sets forth the number of sales closed during the quarters
ended March 31, 1999 and 1998, which includes 100% of the sales closed at
projects developed by the Company's joint ventures.
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
---- ----
<S> <C> <C>
Consolidated:
Colorado 296 242
Hawaii (1) 65 59
Northern California 23 15
Oregon 60 10
Washington (3) 57 --
----- -----
Total Consolidated 501 326
Unconsolidated Joint Ventures:
Hawaii (2) 7 3
Washington (3) -- 61
Colorado (4) -- --
----- -----
Total 508 390
----- -----
----- -----
</TABLE>
(1) Excludes 11 sales that closed prior to January 1, 1999 under the Company's
"zero-down" sales program, for which the second mortgage notes were sold
during the 1999 first quarter.
(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 Homes, in which
the Company acquired a 49% interest in July 1997. In January 1999, the
Company increased its ownership interest in Stafford Homes to 89%.
(4) Reflects 100% of the information with respect to the Company's 50%-owned
joint venture in Colorado, The Ranch-Southpointe II LLC, which was entered
into in July 1998.
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 primarily include land acquisition costs, sitework and
construction payments to contractors, engineering and architectural costs,
loan fees, interest and other indirect costs attributable to development and
project management activities and miscellaneous construction costs.
Cost of Residential Real Estate Sales increased from approximately $43.9
million during the quarter ended March 31, 1998 to approximately $75.2
million during the same period in 1999, representing an increase of
approximately $31.3 million or 71.4%. This increase reflects a higher level
of unit and dollar sales closed during the first quarter of 1999 relative to the
first quarter of 1998 and the consolidation of Stafford's operating results
with those of the Company during the quarter ended March 31, 1999. As a
percentage of revenues, Cost of Residential Real Estate Sales decreased from
79.1% to 78.4%. This decrease is largely attributable to higher average
selling prices in the Company's Colorado division.
Total interest incurred during the quarters ended March 31, 1999 and
1998 was approximately $4.4 million and $2.9 million, respectively. Of the
amounts incurred, approximately $941,000 and $826,000 was expensed currently
(included in Other Income (Expense)), in the first quarters of 1999 and 1998,
respectively, and the remaining interest incurred was capitalized to
development projects. Interest capitalized to projects is expensed through
Cost of Residential Real Estate Sales as sales are closed and revenue is
recognized in the particular project. The amount of previously capitalized
interest, which was expensed through Cost of Residential Real Estate Sales,
totaled $3.0 million and $1.7 million during the quarters ended March 31,
1999 and 1998, respectively.
13
<PAGE>
Average debt outstanding was approximately $229.0 million and $163.1
million during the first quarters of 1999 and 1998, respectively. The
Company's average interest rate on its debt for the quarters ended March 31,
1999 and 1998 was approximately 7.7% and 7.3%, respectively. The increase
from 7.3% to 7.7% is due primarily to the issuance of the Senior Notes at a
9% interest rate in May 1998. The Company's Notes Payable to Banks bear
interest based on prime or LIBOR. Changes in the prime or LIBOR rates will
affect the amount of interest being capitalized to inventory and subsequently
expensed through Cost of Residential Real Estate Sales as sales are closed
and revenue is recognized.
COST AND EXPENSES - SELLING AND COMMISSIONS
Sales and marketing costs represented approximately 6.4% and 7.0% of
revenues during the quarters ended March 31, 1999 and 1998, respectively.
The reduction in selling and commission costs as a percentage of revenues is
a result of selling and commission costs increasing at a lower rate than
revenues.
COSTS AND EXPENSES - GENERAL AND ADMINISTRATIVE
General and Administrative Expenses include salaries, office and other
administrative costs. Indirect costs attributable to specific projects are
capitalized and deducted as part of cost of residential real estate sales.
General and Administrative Expenses increased by $1.6 million during the
first quarter of 1999 as compared to the same period in 1998 primarily due to
expansion at the Company's U.S. mainland divisions and the consolidation of
Stafford's operating results with those of the Company during the quarter
ended March 31, 1999. As a percentage of sales, General and Administrative
Expenses decreased from 6.8% during the quarter ended March 31, 1998 to 5.6%
during the quarter ended March 31, 1999. This decrease is a result of
General and Administrative Expenses increasing at a lower rate than revenues.
INCOME FROM UNCONSOLIDATED JOINT VENTURES
During the first quarter of 1999, Income from Unconsolidated Joint
Ventures represents the Company's 50% interest in the operations of two joint
ventures in Hawaii. During the quarter ended March 31, 1998, Income from
Unconsolidated Joint Ventures represented the Company's 49% interest in the
operations of Stafford in addition to its 50% interest in the operations of
two joint ventures in Hawaii. The decrease in this income from the first
three months of 1998 to the same period in 1999 is primarily the result of
Stafford being accounted for as a consolidated subsidiary for the quarter
ended March 31, 1999, rather than an unconsolidated joint venture, due to the
increase of the Company's ownership interest to 89% in January 1999.
MINORITY INTEREST IN PRETAX INCOME OF CONSOLIDATED SUBSIDIARY
Minority Interest in Pretax Income of Consolidated Subsidiary represents
the income relating to the 11% of Stafford not owned by the Company.
OTHER INCOME (EXPENSE)
Other Income (Expense) consists primarily of (i) interest incurred less
interest capitalized to inventory (interest expense), (ii) amortization of
financing fees, net of amounts capitalized to inventory, and (iii)
amortization of goodwill and covenants-not-to-compete; less interest income.
The increase in Other Income (Expense) of $325,000 from the first three
months of 1998 to the comparable period in 1999 is primarily due to an
increase in interest expense resulting from the consolidation of Stafford.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate for the first quarters of 1999
and 1998 was approximately 38.1% and 38.6%, respectively.
14
<PAGE>
VARIABILITY OF RESULTS; OTHER FACTORS
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, geographic area
to geographic area, and from fiscal quarter to fiscal quarter.
Certain of the Company's currently planned projects as well as future
projects, particularly in Hawaii, are anticipated to be longer term in nature
than those developed in the past by the Company. The increased length of
such projects further exposes the Company to the risks inherent in the
homebuilding industry, including reductions in the value of land inventory.
The Company's recent expansion to markets on the mainland United States
further exposes the Company to risks inherent in those markets. For example,
the Company will encounter construction issues and risks such as expansive
soils and extreme seasonal weather conditions in Colorado (dissimilar to
those encountered in Hawaii).
The Company will continue to consider its expansion into additional
selected residential housing markets in the United States mainland and into
certain foreign countries and into other related industries. The Company has
and would consider the acquisition of or joint venture with an existing
company, as well as its own acquisition and development of homebuilding
projects in certain areas, in order to facilitate its expansion. No
assurances can be given that the Company will be able to successfully
establish operations outside of its existing Hawaiian markets or that such
expansion will not adversely affect its results of operations.
In addition, the Company believes that the market price of its common stock
may at times be adversely affected due to the Company's relatively small size
when compared to certain other publicly traded national homebuilding firms.
The Company further believes that the price of its common stock may be
adversely affected due to the relatively low trading volume for its shares.
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.
15
<PAGE>
The following table sets forth the Company's backlog for both homes and
residential lots at March 31, 1999 and 1998, 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 unconsolidated joint
ventures.
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
Aggregate Aggregate
Number Sales Value Number Sales Value
------ ------------ ------ -----------
<S> <C> <C> <C> <C>
Consolidated:
Colorado 523 $ 91,798,000 340 $53,084,000
Hawaii 88 24,294,000 85 24,970,000
Northern California 70 14,702,000 21 2,995,000
Oregon 111 19,961,000 22 4,319,000
Washington 62 15,109,000 --- ---
---- ------------ ---- ------------
Total Consolidated 854 165,864,000 468 85,368,000
Unconsolidated Joint Ventures:
Hawaii 3 390,000 5 585,000
Washington --- --- 80 19,564,000
Colorado 42 6,623,000 --- ---
---- ------------ ---- ------------
Total 899 $172,877,000 553 $105,517,000
---- ------------ ---- ------------
---- ------------ ---- ------------
</TABLE>
The average sales prices of the homes and lots comprising backlog for
consolidated projects at March 31, 1999 and 1998 were $194,000 and $182,000,
respectively. Due to the ability of buyers to cancel their sales contracts,
no assurances can be given that homes or residential lots in backlog will
result in actual closings.
YEAR 2000 COMPLIANCE
The Company has developed and is currently executing a plan designed to
make its computer systems Year 2000 compliant. The plan covers four stages
including (i) inventory, (ii) assessment, (iii) remediation, and (iv)
testing. The Company has substantially completed the inventory, assessment
and remediation stages for its systems and applications. The Company has
started its testing of these systems and applications, and expects to
complete a majority of such testing by mid-1999.
The Company currently estimates that approximately $110,000 will be
incurred to address Year 2000 issues. As of March 31, 1999, approximately
$70,000 has been incurred and expensed. The Company anticipates that its
Year 2000 costs will be funded from operations, and does not expect to defer
any other information technology projects as a result of its Year 2000
efforts. The Company does not anticipate the Year 2000 issue will have
material adverse effects on the business operations or financial performance
of the Company. However, the failure of any internal system to achieve Year
2000 readiness could result in material disruption to the Company's
operations.
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. Although the Company believes that alternative sources of labor and
materials will be available, there can be no assurance that the inability of
the Company's key subcontractors and suppliers to attain Year 2000 compliance
will not have a material adverse effect on the business operations and
financial performance of the Company. Even where assurances are received
from third parties, there remains a risk that failure of systems and products
of other companies on which the Company relies could have a material adverse
effect on the Company.
In addition, the Company is materially reliant on third parties with
respect to its ability to collect sales proceeds and pay its vendors and
employees. Such third parties include governmental agencies in various
jurisdictions that record the conveyance of property, title and escrow
companies, banks and payroll processing firms. The Company intends to
16
<PAGE>
create a contingency plan once responses from such third parties to
questionnaires have been received and evaluated.
The costs of Year 2000 compliance and the foregoing statements are based
upon management's best estimates at the present time, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, the nature and
amount of programming required to upgrade or replace each of the affected
programs, the rate and magnitude of related labor and consulting costs and
the success of the Company's external customers and suppliers in addressing
the Year 2000 issue. The Company's evaluation is on-going and it expects
that new and different information will become available to it as that
evaluation continues. Consequently, there is no guarantee that all material
elements will be Year 2000 ready in time.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses it 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.
In January 1999, the Company increased its ownership interest in
Stafford to 89% and refinanced Stafford's existing debt. The Company
anticipates that it will acquire the remaining 11% interest in Stafford in
January 2001.
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 existing credit
agreements. The Company believes that it can meet its long-term capital needs
(including, among other 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 and in the Company's
Annual Report on Form 10-K, in particular, increases in interest rates.
NOTES PAYABLE
On May 6, 1998, the Company consummated its offering of $100.0 million
aggregate principal amount of 9% Senior Notes, which are due April 15, 2008.
The Company received net proceeds from the offering of approximately $97.2
million (net of discounts and estimated offering costs of approximately $2.8
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. In April 1998, the
Company amended certain provisions of its Revolving Credit Facility to
provide for the issuance of the Senior Notes.
The Company's Notes Payable to Banks is comprised of a $90.0 million
Revolving Credit Facility with a consortium of banks. The Company has a
one-time option, subject to the approval of the Banks, to increase the amount
of the facility to $120.0 million. In March 1999, the Company requested the
Banks' approval to increase the facility to $120.0 million. Although no
assurances can be given that the Banks will approve this request, the Company
believes this increase to the facility will be consummated by mid-1999. In
addition, the Company has a one-time option to reduce the amount of the
facility by $30 million on an irrevocable basis, provided the facility has
been increased to $120.0
17
<PAGE>
million for at least six months. The Revolving Credit Facility expires on
July 1, 2001 and includes an option for the lenders to extend the term for an
additional year as of July 1 of each 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
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. In April 1999, the Company entered
into a separate 90-day $10.0 million line of credit with one of the banks
included in the $90.0 million Revolving Credit Facility. At April 30, 1999,
and March 31, 1999, the Company had bank notes payable of approximately $69.0
million and $60.4 million, respectively.
COMMITMENTS
At April 30, 1999, the Company has commitments to purchase parcels of land
for approximately $4 million. The Company expects to utilize a combination of
cash flow from operations and bank financing to purchase these land parcels.
The Company intends to consummate the purchases of these land parcels
between 1999 and 2000. However, no assurances can be given that these
purchases will be completed.
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 1999. However, there can be no assurance that the Company will
not require additional financing within this time frame. The Company may
need to raise additional funds in order to support more rapid expansion,
respond to competitive pressures, acquire complementary businesses or respond
to unanticipated requirements. The Company may seek to raise additional
funds through private or public sales of debt or equity securities, bank
debt, or otherwise. There can be no assurance that such additional funding,
if needed, will be available on terms attractive to the Company, or at all.
18
<PAGE>
SCHULER HOMES, INC.
PART II. OTHER INFORMATION
Item 1. 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.
Following the Courts' denial of a class certification request, a second
action involving other homeowners at Fairway Village advancing the same
claims was initiated. While the Company believed the claims to be largely
without merit, during April 1999, a settlement agreement was entered into
by the Company, third party defendants, insurance carriers and all of the
plaintiffs in both lawsuits, except for the owners of three units. The
settlement amount incurred by the Company will be charged against the
warranty accruals previously established by the Company. Although the cost
of remediation for certain units called for under the settlement agreement
is not determinable until the work is completed, the Company believes that
the cost of such work will not exceed its warranty accruals. A new trial
date in December 1999 has been set for the initial suit, which has two
remaining plaintiffs. No trial date has been set in the second action,
which includes one remaining plaintiff. 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.
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.
Items 2 through 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------ --------------------
<S> <C>
10.1 Promissory Note between the Company and
First Hawaiian Bank, dated April 12, 1999.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. There were no reports on Form 8-K for the
quarter ended March 31, 1999.
19
<PAGE>
SCHULER HOMES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SCHULER HOMES, INC.
Date: May 14, 1999 By: /s/ James K. Schuler
-------------------------------------
James K. Schuler
Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: May 14, 1999 By: /s/ Pamela S. Jones
-------------------------------------
Pamela S. Jones
Senior Vice President of Finance,
Chief Financial Officer and
Director (principal financial officer)
Date: May 14, 1999 By: /s/ Douglas M. Tonokawa
-------------------------------------
Douglas M. Tonokawa
Vice President of Finance,
Chief Accounting Officer
(principal accounting officer)
20
<PAGE>
<PAGE>
PROMISSORY NOTE
Honolulu, Hawaii
$10,000,000.00 APR 12, 1999
FOR VALUE RECEIVED, SCHULER HOMES, INC., a Delaware corporation (the
"Maker"), promises to pay to the order of FIRST HAWAIIAN BANK, a Hawaii
corporation, at its office at 999 Bishop Street, Honolulu, Hawaii, or at such
other place as the holder of this Note (the "Holder") may from time to time
designate, the principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00),
or so much thereof as is from time to time advanced.
Interest shall accrue and be payable in the same manner as set forth in
that certain Second Amended and Restated Credit Agreement dated September 30,
1998, as amended (the "Credit Agreement") executed by and among the Maker,
First Hawaiian Bank, as administrative and co-syndication agent, Bank of
America NT&SA, as documentation and co-syndication agent, and First Hawaiian
Bank, Bank of America NT&SA, Bank Boston, NA, Bank One, Arizona, NA and Bank
of Hawaii, as "Banks", which is incorporated herein by reference. All
unpaid principal, all accrued but unpaid interest, and all unpaid fees and
charges hereunder shall be due and payable on July 12, 1999, unless due
sooner following the occurrence of an "Event of Default", as defined in the
Credit Agreement.
If any payment of principal or interest shall not have been paid within ten
(10) days after the same becomes due and payable, the Holder, in addition to its
other remedies, may collect, and the Maker shall pay on demand, a late charge
equal to five percent (5%) of the amount overdue.
During the existence of an "Event of Default", as defined in the Credit
Agreement, the Maker shall pay interest in the same manner as set forth in the
Credit Agreement.
Principal and interest shall be payable in lawful money of the United
States of America, in immediately available funds.
The Maker shall pay to the Holder a commitment fee in the amount of
$5,000.00 due at closing and a funding fee in the amount of $5,000.00 upon
initial funding of the loan.
The Maker promises to pay such attorneys' fees and expenses as are incurred
by the Holder to induce or compel the payment of this Note or any portion of the
indebtedness evidenced hereby, whether suit is brought hereon or not.
Except as otherwise provided herein, the Maker and all others who may
become liable for any part of this obligation severally waive presentment,
protest, demand and notice of protest, demand, dishonor and nonpayment of this
Note and consent to any number of renewals or extensions of the time of payment
hereof and to any release of parties obligated hereunder or forbearance in the
enforcement hereof.
No provision in this Note may be waived, modified or cancelled orally, but
only by an agreement in writing and signed by the party against whom enforcement
of any waiver, modification, discharge or cancellation is sought.
<PAGE>
The Maker represents and warrants that the execution, delivery, performance
of and compliance with each and all of the terms of this Note will not result in
any violation of or be in conflict with or constitute a default under any term
or provision of the Credit Agreement.
This Note shall be governed by and construed according to the laws of the
State of Hawaii.
IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed.
SCHULER HOMES, INC.
By /s/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
<PAGE>
STATE OF HAWAII )
) SS:
CITY AND COUNTY OF HONOLULU )
On this ________ day of April 8, 1999, personally appeared
Douglas M. Tonokawa, to me personally known, who, being by me
duly sworn or affirmed did say that such person(s) executed the foregoing
instrument as the free act and deed of such person(s), and if applicable, in
the capacity shown, having been duly authorized to execute such instrument in
such capacity.
/s/ Lorraine Takara
---------------------------------------
Lorraine Takara
Notary Public, State of Hawaii
My commission expires: JUN 20, 2001
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO IN THE COMPANY'S
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,506,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 397,557,000
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 445,608,000
<CURRENT-LIABILITIES> 0
<BONDS> 156,051,000
0
0
<COMMON> 209,000
<OTHER-SE> 180,331,000
<TOTAL-LIABILITY-AND-EQUITY> 445,608,000
<SALES> 95,893,000
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 86,770,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,742,000
<INCOME-TAX> 2,952,000
<INCOME-CONTINUING> 4,790,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,790,000
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
