<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1999
--------------------- ---------------
$.01 par value 20,049,572
<PAGE>
- -------------------------------------------------------------------------------
SCHULER HOMES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report ......................... 3
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 ........................................ 4
Consolidated Statements of Income - Three and six months
ended June 30, 1999 and 1998 ............................. 5
Consolidated Statements of Cash Flows - Six
months ended June 30, 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 .............................................. 20
SIGNATURES ............................................................... 22
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Schuler Homes, Inc.
We have reviewed the accompanying interim consolidated balance sheet of
Schuler Homes, Inc. as of June 30, 1999, and the related consolidated
statements of income for the three-month and six-month periods ended June 30,
1999 and 1998, and the consolidated statements of cash flows for the
six-month periods ended June 30, 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
August 9, 1999
3
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,1999 DECEMBER 31, 1998
------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents (restricted-Note 1) ............................ $ 5,414,000 $ 4,915,000
Real estate inventories (Note 2) ......................................... 402,602,000 325,166,000
Investments in unconsolidated joint ventures (Note 3) .................... 7,748,000 23,998,000
Deferred income taxes .................................................... 3,555,000 3,957,000
Intangibles, net ......................................................... 13,684,000 13,879,000
Other assets (Note 3) .................................................... 15,697,000 13,628,000
------------- -------------
Total assets ............................................................. $ 448,700,000 $ 385,543,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ......................................................... $ 26,394,000 $ 15,954,000
Accrued expenses ......................................................... 17,961,000 16,703,000
Notes payable to banks (Note 4) .......................................... 60,000,000 17,365,000
Notes payable to others .................................................. 2,550,000 3,954,000
9% senior notes due 2008 ................................................. 98,591,000 98,512,000
6-1/2% convertible subordinated debentures due 2003 ...................... 57,500,000 57,500,000
------------- -------------
Total liabilities ........................................................ 262,996,000 209,988,000
Commitments and contingencies (Notes 4 and 5)
Minority interest in consolidated subsidiary (Note 3) .................... 1,423,000 ---
Stockholders' equity (Note 6):
Common stock, $.01 par value; 30,000,000 shares authorized;
20,928,158 and 20,892,465 shares issued at June 30, 1999
and December 31, 1998, respectively ............................... 209,000 209,000
Additional paid-in capital ........................................... 93,430,000 93,201,000
Retained earnings .................................................... 99,228,000 87,762,000
Treasury stock, at cost; 1,278,400 and 869,000 shares
at June 30, 1999 and December 31, 1998, respectively .............. (8,586,000) (5,617,000)
------------- -------------
Total stockholders' equity ............................................... 184,281,000 175,555,000
------------- -------------
Total liabilities and stockholders' equity ............................... $ 448,700,000 $ 385,543,000
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Residential real estate sales .................................. $ 131,623,000 $ 67,433,000 $ 227,516,000 $ 122,945,000
Costs and expenses:
Residential real estate sales .............................. 104,580,000 53,971,000 179,794,000 97,858,000
Selling and commissions .................................... 8,373,000 4,672,000 14,522,000 8,592,000
General and administrative ................................. 6,488,000 3,750,000 11,895,000 7,520,000
------------- ------------- ------------- -------------
Total costs and expenses ............................... 119,441,000 62,393,000 206,211,000 113,970,000
------------- ------------- ------------- -------------
Operating income ........................................... 12,182,000 5,040,000 21,305,000 8,975,000
Income from unconsolidated joint ventures ...................... 264,000 438,000 337,000 796,000
Minority interest in pretax income of consolidated
subsidiary (Note 3) .......................................... (80,000) -- (173,000) --
Other income (expense) (Note 4) ................................ (1,506,000) (838,000) (2,867,000) (1,874,000)
------------- ------------- ------------- -------------
Income before provision for income taxes .................... 10,860,000 4,640,000 18,602,000 7,897,000
Provision for income taxes (Note 7) ............................ 4,184,000 1,788,000 7,136,000 3,044,000
------------- ------------- ------------- -------------
Net income .................................................. $ 6,676,000 $ 2,852,000 $ 11,466,000 $ 4,853,000
============= ============= ============= =============
Net income per share (Note 8):
Basic and diluted ........................................... $ 0.34 $ 0.14 $ 0.57 $ 0.24
============= ============= ============= =============
</TABLE>
See accompanying notes.
5
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .............................................................................. $ 11,466,000 $ 4,853,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization expense .............................................. 2,061,000 1,545,000
(Income) loss from unconsolidated joint ventures ................................... (239,000) (707,000)
Principal payments of notes receivable ............................................. 658,000 121,000
Minority interest .................................................................. 173,000 ---
Changes in assets and liabilities, net of effects of purchase of additional 40%
interest in Stafford:
(Increase) decrease in real estate inventories ..................................... (25,867,000) (21,737,000)
(Increase) decrease in other assets ................................................ (534,000) (1,786,000)
Increase (decrease) in accounts payable ............................................ 5,564,000 1,658,000
Increase (decrease) in accrued expenses ............................................ 3,208,000 1,200,000
Change in deferred income taxes .................................................... 402,000 (104,000)
------------- -------------
Net cash provided by (used in) operating activities .............................. (3,108,000) (14,957,000)
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 ............................................... (123,000) (5,109,000)
Repayments of advances to unconsolidated joint ventures ................................. 885,000 59,000
Capital distributions from unconsolidated joint ventures ................................ 659,000 2,470,000
Purchase of furniture, fixtures, and equipment .......................................... (771,000) (155,000)
------------- -------------
Net cash provided by (used in) investing activities .............................. (4,577,000) (2,735,000)
FINANCING ACTIVITIES:
Proceeds from bank borrowings ........................................................... 138,291,000 93,289,000
Principal payments on bank borrowings ................................................... (95,656,000) (171,016,000)
Principal payments on notes payables to others .......................................... (1,412,000) (1,709,000)
Proceeds from issuance of senior notes, net of discount ................................. --- 98,408,000
Refinancing of Stafford's debt .......................................................... (29,378,000) ---
Advance to affiliate (Note 3) ........................................................... (1,000,000) ---
Net decrease in discount on issuance of senior notes .................................... 79,000 24,000
Proceeds from issuance of common stock from exercise of stock options ................... 64,000 36,000
Proceeds from issuance of common stock under Employee Stock Purchase Plan ............... 165,000 ---
Reacquisition of the Company's common stock ............................................. (2,969,000) ---
------------- -------------
Net cash provided by (used in) financing activities ............................. 8,184,000 19,032,000
------------- -------------
Increase (decrease) in cash ............................................................. 499,000 1,340,000
Cash and cash equivalents (restricted) at beginning of period ........................... 4,915,000 3,842,000
------------- -------------
Cash and cash equivalents (restricted) at end of period ................................. $ 5,414,000 $ 5,182,000
============= =============
</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.
Included in Cash and Cash Equivalents at June 30, 1999 is a restricted
amount of $718,000, which primarily represents a collection allowance
resulting from the sale of second mortgage notes.
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>
Real estate inventories at June 30, 1999 consist of the following:
Unimproved land held for future development ............ $40,478,000
Development projects in progress ....................... 323,567,000
Completed inventory (including lots held for sale) ..... 38,557,000
-----------
$402,602,000
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
three-month and six-month periods ended June 30, 1999 are consolidated with
those of the Company. In connection with this transaction, the Company
refinanced Stafford's existing debt, which included $1,251,000 in certain
notes payable to affiliates of Stafford.
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 June 30, 1999, the Company incurred total rental expense in
connection with such leases of approximately $29,000.
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 June 30,
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 $35,000 at June 30, 1999.
From time to time, the Company engages the law firms in which directors of
the Company are partners. During the quarterly period ended June 30, 1999,
legal fees of approximately $20,000 to such firms were incurred by the
Company.
4. Notes Payable to Banks
In July 1999, the Company increased its Revolving Credit Facility with a
consortium of banks from $90,000,000 to $120,000,000. 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, 2002 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 June 30, 1999, the Company met such financial
ratios and covenants.
The Company has an interest rate swap to pay a fixed rate of 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. This interest rate swap terminates on August 1, 2003.
Effective August 9, 1999 through August 9, 2002, the Company entered into an
interest rate swap to pay interest at a floating one-month LIBOR (5.21% on
initial effective date) on $30,000,000, while receiving in return an
interest payment at a fixed rate of 6.31%. The interest rate differential
on these swaps to be received or paid is recognized during the period as an
adjustment to interest incurred.
8
<PAGE>
Notes Payable to Banks at June 30, 1999 consist of borrowings under its
credit facilities. At June 30, 1999, the Company's bank borrowings were at
interest rates of prime (7.75%) and LIBOR plus 1.5% (6.4% to 6.5%). At June
30, 1999, $30,000,000 of the Company's line of credit is unused, of which
$6,466,000 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 $120,000,000 Revolving
Credit Facility. In July 1999, the Company extended this line of credit for
an additional 90 days.
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 $5,665,000 during
the quarter ended June 30, 1999. Interest incurred during the quarter ended
June 30, 1999 was approximately $4,471,000. All of such interest was
capitalized to real estate inventories except for $657,000, which was
expensed (included in Other Income (Expense)) and not capitalized, as such
interest did not meet the requirements for capitalization. Interest,
previously capitalized to real estate inventories, expensed as a component
of Cost of Residential Real Estate Sales during the quarter ended
June 30, 1999 totaled $4,400,000.
5. Commitments and Contingencies
At June 30, 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 June 30, 1999, options were exercised, resulting
in the issuance of 6,130 shares of common stock.
In November 1998, the Company adopted a stock repurchase program to
reacquire up to an aggregate of $10,000,000 of its outstanding common stock
through August 30, 1999. During the quarter ended June 30, 1999, the
Company repurchased 409,400 shares at a cost of $2,968,150, resulting in
504,400 total shares purchased under
9
<PAGE>
the program at a total cost of $3,585,650.
7. Income Taxes
During the three months ended June 30, 1999, the Company made income tax
payments of $5,616,000.
8. Net Income Per Share
Basic net income per share for the quarter and six months ended June 30,
1999 were computed using the weighted average number of common shares
outstanding during the periods of 19,899,338 and 19,967,070, respectively.
Basic net income per share for the quarter and six months ended June 30,
1998 were computed using the weighted average number of common shares
outstanding during the periods of 20,104,653 and 20,102,800, respectively.
The computation of diluted net income per share for the three-month and
six-month periods ended June 30, 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.
9. Subsequent Events
In July 1999, the Company acquired certain assets of a homebuilder that
operates in Southern California and Arizona, thereby establishing two
new divisions of the Company. The owners of the seller will retain an
interest in the profits of the two new divisions, until the sooner of the
occurrence of certain agreed upon events or December 31, 2004, which may be
extended to December 31, 2006. In connection with the acquisition, the
Company issued 400,000 shares of its common stock and provided a loan to
the seller in the amount of $4,810,000. The loan is due on December 31,
2004 and bears interest at 7%.
In July 1999, the Company entered into an interest rate swap agreement.
Refer to Note 4.
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 June 30, 1999, sales of residential real estate
(revenue) were $131.6 million and operating income was $12.2 million,
compared to revenues of $67.4 million and operating income of $5.0 million
during the second quarter last year. Net income was $6.7 million ($0.34 per
share) for the quarter ended June 30, 1999, compared to net income of $2.9
million ($0.14 per share) during the 1998 second quarter. From the second
quarter of 1998 to the second quarter of 1999, revenues grew 95.2%, net
income grew 134.1%, the number of units closed increased from 433 to 706 and
operating profit margins improved from 7.5% to 9.3%.
In July 1999, the Company acquired certain assets of Rielly Homes, Inc.,
a homebuilder in Southern California and Phoenix, Arizona. Rielly Homes, Inc.
("Rielly"), founded by Tom Rielly in 1986, has delivered over 3,000 homes,
focusing primarily on the entry-level, and first and second move-up markets.
In 1998, Rielly closed the sales of approximately 165 homes, generating
revenues of approximately $50.6 million.
11
<PAGE>
RESULTS OF OPERATIONS
The following tables set 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
JUNE 30, AMOUNTS FROM
1999 1998 1998 TO 1999
---- ---- ------------
<S> <C> <C> <C>
Residential real estate sales ........................................ 100.0% 100.0% 95.2%
Costs and expenses:
Residential real estate sales .................................... 79.4 80.0 93.8
Selling and commissions .......................................... 6.4 6.9 79.2
General and administrative ....................................... 4.9 5.6 73.0
----- -----
Total costs and expenses ............................... 90.7 92.5 91.4
----- -----
Operating income ..................................................... 9.3 7.5 141.7
Income from unconsolidated joint ventures ............................ 0.2 0.6 (39.7)
Minority interest in pretax income of consolidated subsidiary ........ (0.1) --- ---
Other income (expense) ............................................... (1.1) (1.2) 79.7
----- -----
Income before provision for income taxes ............................. 8.3 6.9 134.1
Provision for income taxes ........................................... 3.2 2.7 134.0
----- -----
Net income ....................................................... 5.1% 4.2% 134.1
===== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED % CHANGE IN DOLLAR
JUNE 30, AMOUNTS FROM
1999 1998 1998 to 1999
---- ---- ------------
<S> <C> <C> <C>
Residential real estate sales ........................................ 100.0% 100.0% 85.1%
Costs and expenses:
Residential real estate sales .................................... 79.0 79.6 83.7
Selling and commissions .......................................... 6.4 7.0 69.0
General and administrative ....................................... 5.2 6.1 58.2
----- -----
Total costs and expenses ............................... 90.6 92.7 80.9
----- -----
Operating income ..................................................... 9.4 7.3 137.4
Income from unconsolidated joint ventures ............................ 0.2 0.6 (57.7)
Minority interest in pretax income of consolidated subsidiary ........ (0.1) --- ---
Other income (expense) ............................................... (1.3) (1.5) 53.0
----- -----
Income before provision for income taxes ............................. 8.2 6.4 135.6
Provision for income taxes ........................................... 3.2 2.5 134.4
----- -----
Net income ....................................................... 5.0% 3.9% 136.3
===== =====
</TABLE>
RESIDENTIAL REAL ESTATE SALES
The Company's Residential Real Estate Sales (revenues) for the quarter
ended June 30, 1999 were approximately
12
<PAGE>
$131.6 million as compared to approximately $67.4 million during the quarter
ended June 30, 1998. This represents an increase of approximately $64.2
million or 95.2%. The increase in revenues reflects a larger number of unit
sales closed at higher average sales prices in the second quarter of 1999
relative to the second quarter of 1998. The Company's average sales price per
unit increased to $193,000 during the 1999 second quarter, an increase from
an average sales price per unit during the 1998 second quarter of $182,000.
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 and six months ended June 30, 1999,
contributing to the Company's higher 1999 revenues and average sales prices
as compared to 1998. Stafford's average sales price of home sales closed was
$229,000 during the quarter ended June 30, 1999.
The Company's sales of residential real estate (revenues) were
approximately $227.5 million for the six months ended June 30, 1999, compared
to $122.9 million during the same period in 1998, an increase of 85.1%. The
increase is attributable to the increase in the number and average sales
price of unit sales closed during the first six months of 1999 compared to
the first six months of 1998. The average sales price per unit closed was
$191,000 during the six months ended June 30, 1999, compared to $177,000
during the six months ended June 30, 1998.
The following table sets forth the number of sales closed during the
three-month and six-month periods ended June 30, 1999 and 1998, which
includes 100% of the sales closed at projects developed by the Company's
joint ventures.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consolidated:
Colorado 360 243 656 485
Hawaii (1) 93 94 158 153
Northern California 60 20 83 35
Oregon 98 14 158 24
Washington (3) 71 --- 128 ---
-- --- --- ---
Total Consolidated 682 371 1,183 697
Unconsolidated Joint Ventures:
Hawaii (2) 4 7 11 10
Washington (3) -- 55 -- 116
Colorado (4) 20 --- 20 ---
-- --- -- ---
Total 706 433 1,214 823
=== === ===== ===
</TABLE>
(1) The amount for the six months ended June 30, 1999 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
13
<PAGE>
development and project management activities and miscellaneous construction
costs.
Cost of Residential Real Estate Sales increased from approximately $54.0
million during the quarter ended June 30, 1998 to approximately $104.6
million during the same period in 1999, representing an increase of
approximately $50.6 million or 93.8%. This increase reflects a higher level
of unit and dollar sales closed during the second quarter of 1999 relative to
the second quarter of 1998 and the consolidation of Stafford's operating
results with those of the Company during the quarter ended June 30, 1999. As
a percentage of revenues, Cost of Residential Real Estate Sales decreased
from 80.0% to 79.4%. This decrease is largely attributable to higher average
selling prices in the Company's Colorado division.
The cost of residential real estate sold increased from approximately
$97.9 million during the six months ended June 30, 1998 to approximately
$179.8 million during the same period in 1999, representing an increase of
approxi-mately $81.9 million or 83.7%, primarily reflecting a higher level of
unit and dollar sales closed during the first six months of 1999 relative to
the same period in 1998.
The cost of residential real estate sold as a percentage of sales
decreased from 79.6% for the six months ended June 30, 1998 to 79.0% for the
six months ended June 30, 1999. The decrease in the cost of residential real
estate sold as a percentage of sales reflects higher margins realized by the
Colorado division.
Total interest incurred during the quarters ended June 30, 1999 and 1998
was approximately $4.5 million and $3.4 million, respectively. The increase
in interest incurred reflects the higher level of average debt outstanding.
Of the amounts incurred, approximately $657,000 and $614,000 was expensed
currently (included in Other Income (Expense)), in the second 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 $4.4 million and $2.3 million during the quarters ended
June 30, 1999 and 1998, respectively.
Average debt outstanding was approximately $231.3 million and $172.0
million during the second quarters of 1999 and 1998, respectively, reflecting
the increase in debt outstanding associated with the increase in the
Company's ownership in Stafford and simultaneous refinancing of Stafford's
debt, as well as the higher volume of inventories in the Company's U.S.
mainland divisions. The Company's average interest rate on its debt for the
quarters ended June 30, 1999 and 1998 was approximately 7.8% and 7.9%,
respectively. 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
Selling costs and commissions represented approximately 6.4% and 6.9% of
sales of residential real estate during the quarters ended June 30, 1999 and
1998, respectively. Selling costs and commissions represented approximately
6.4% and 7.0% of sales of residential real estate during the six months ended
June 30, 1999 and 1998, respectively. These decreases are a result of the
selling costs and commissions 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 $2.7 million during the
second 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
and six months ended June 30, 1999. As a percentage of sales, General and
Administrative Expenses decreased from 5.6% during the quarter ended June 30,
1998 to 4.9% during the quarter ended June 30,
14
<PAGE>
1999. This decrease is a result of General and Administrative Expenses
increasing at a lower rate than revenues.
General and Administrative Expenses increased by $4.4 million or 58.2%
during the first half of 1999 as compared to the same period in 1998. As a
percentage of sales, General and Administrative Expense decreased from 6.1%
during the first half of 1998 to 5.2% during the first half of 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 two quarters of 1999, Income from Unconsolidated Joint
Ventures represents the Company's 50% interest in the operations of two joint
ventures in Hawaii, and during the second quarter of 1999, the Company's 50%
interest in its joint venture in Colorado. During the comparable periods in
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 and six 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 and six months ended June 30, 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 $668,000 and $993,000 from the
first three and six months of 1998 to the comparable periods in 1999,
respectively, 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 second quarters of 1999
and 1998 was approximately 38.5%.
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
15
<PAGE>
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.
The following table sets forth the Company's backlog for both homes and
residential lots at June 30, 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>
June 30, 1999 June 30, 1998
------------- -------------
Aggregate Aggregate
Number Sales Value Number Sales Value
<S> <C> <C> <C> <C>
Consolidated:
Colorado 566 $101,660,000 436 $ 70,674,000
Hawaii 87 23,890,000 76 22,715,000
Northern California 94 22,818,000 26 3,954,000
Oregon 100 16,285,000 41 8,076,000
Washington 74 20,698,000 --- ---
-- ---------- --- ---
Total Consolidated 921 185,351,000 579 105,419,000
Unconsolidated Joint Ventures:
Hawaii 4 432,000 6 758,000
Washington -- --- 88 22,320,000
Colorado 54 9,372,000 --- ---
-- --------- --- ----------
Total 979 $ 195,155,000 673 $128,497,000
=== ============= === ============
</TABLE>
The average sales prices of the homes and lots comprising backlog for
consolidated projects at June 30, 1999 and 1998 were $201,000 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.
16
<PAGE>
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
completed a majority of its testing of these systems and applications, and
expects to complete the remainder of such testing prior to the end of 1999.
The Company currently estimates that approximately $110,000 will be
incurred to address Year 2000 issues. As of June 30, 1999, approximately
$74,000 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 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
17
<PAGE>
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.
In July 1999, the Company increased its Revolving Credit Facility with a
consortium of banks from $90.0 million to $120.0 million. The Company has a
one-time option to reduce the amount of the facility by $30.0 million on an
irrevocable basis, provided the facility has been increased to $120.0 million
for at least six months. The facility expires on July 1, 2002 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 under the credit agreement, 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 $120.0 million Revolving Credit Facility (extended for an additional
90 days in July 1999). At July 31, 1999, and June 30, 1999, the Company had
bank notes payable of approximately $79.5 million and $60.0 million,
respectively.
COMMITMENTS
At July 31, 1999, the Company has commitments to purchase parcels of
land for approximately $4.0 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.
In November 1998, the Company adopted a stock repurchase program to
reacquire up to an aggregate of $10 million of its outstanding common stock
through August 30, 1999. During the quarter ended June 30, 1999, the Company
repurchased 409,400 shares at a cost of $3.0 million, resulting in 504,400
total shares purchased under the program at a total cost of $3.6 million.
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
18
<PAGE>
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.
19
<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
manage-ment, have a material adverse effect on the financial condition of
the Company.
Items 2 and 3. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held an Annual Meeting of Stockholders on May 17, 1999.
(b) At the Annual Meeting of Stockholders, the following directors were
elected:
Bert T. Kobayashi, Jr.
Thomas A. Bevilacqua
(c) At the Annual Meeting of Stockholders, the following matters were voted
upon:
(1) A proposal to ratify the selection of Ernst & Young LLP as independent
auditors for fiscal year 1999.
Affirmative votes: 18,674,926
Negative votes: 66,700
Abstain: 805
(2) A proposal to elect Bert T. Kobayashi, Jr. to the Board of Directors.
Affirmative votes: 18,260,631
Withhold authority: 481,800
(3) A proposal to elect Thomas A. Bevilacqua to the Board of
Directors.
Affirmative votes: 18,737,131
20
<PAGE>
Withhold authority: 5,300
(4) A proposal to approve the amend the 1992 Stock Option Plan.
Affirmative votes: 13,659,882
Negative votes: 5,079,124
Abstain: 3,425
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a)Exhibits.
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.1 Second Amendment to Second Amended and Restated
Credit Agreement between the Company, certain
Banks, First Hawaiian Bank and Bank of America
NT & SA, dated July 2, 1999.
10.2 Third Amendment to Second Amended and Restated
Credit Agreement between the Company, certain
Banks, First Hawaiian Bank and Bank of America
NT & SA, dated July 22, 1999.
10.3 Guaranty by wholly-owned subsidiaries of the
Company to certain Banks, First Hawaiian Bank
and Bank of America NT & SA, dated July 22,
1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K for the quarter
ended June 30, 1999.
21
<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: August 9, 1999 By: /s/ JAMES K. SCHULER
-------------------------------------
James K. Schuler
Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: August 9, 1999 By: /s/ PAMELA S. JONES
--------------------------------------
Pamela S. Jones
Senior Vice President of Finance,
Chief Financial Officer and
Director (principal financial officer)
Date: August 9, 1999 By: /s/ DOUGLAS M. TONOKAWA
--------------------------------------
Douglas M. Tonokawa
Vice President of Finance,
Chief Accounting Officer
(principal accounting officer)
22
<PAGE>
SECOND AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDMENT ("Amendment"), dated July 2, 1999, and effective as of
July 2, 1999, is made by and among (i) SCHULER HOMES, INC., a Delaware
corporation (the "Company"); (ii) SCHULER HOMES OF CALIFORNIA, INC., a
California corporation, SCHULER HOMES OF OREGON, INC., an Oregon corporation,
SCHULER HOMES OF WASHINGTON, INC., a Washington corporation, MELODY HOMES,
INC., a Delaware corporation, SCHULER REALTY/MAUI, INC., a Hawaii
corporation, SCHULER REALTY/OAHU, INC., a Hawaii corporation, LOKELANI
CONSTRUCTION CORPORATION, a Delaware corporation, MELODY MORTGAGE CO., a
Colorado corporation, and SHLR OF WASHINGTON, INC., a Washington corporation
("SHLR/Washington"), SHLR OF UTAH, INC., a Utah corporation, SHLR OF
COLORADO, INC., a Colorado corporation, and SSHI LLC, a Delaware limited
liability company ("SSHI") (collectively referred to as the "Guarantors"),
(iii) the banks from time to time party to this Agreement (collectively
referred to as the "Banks", and individually referred to as a "Bank"), (iv)
FIRST HAWAIIAN BANK, a Hawaii corporation, as administrative and
co-syndication agent for the Banks (the "Administrative Agent"), and (v) BANK
OF AMERICA NT&SA, a national banking association, as documentation and
co-syndication agent for the Banks (the "Documentation Agent", the
Administrative Agent and the Documentation Agent are collectively referred to
as the "Agents").
W I T N E S S E T H T H A T:
WHEREAS, the Company, the Banks and the Administrative Agent entered
into that certain Credit Agreement dated as of March 29, 1996 (the "Original
Credit Agreement"), relating to the establishment of a revolving credit
facility (the "Credit Facility") in the principal amount of US$110,000,000.00
(the "Original Commitment") made available to the Company by the Banks; and
WHEREAS, in connection therewith, the Company, the Banks and the
Administrative Agent executed certain Loan Documents (as defined in the
Original Credit Agreement); and
WHEREAS, the Company, the Banks and the Administrative Agent entered
into that certain Supplement No. 1 to Credit Agreement effective as of
January 8, 1997 (the "Supplement"), relating to the use of certain proceeds
of Advances (as defined in the Original Credit Agreement) during the Waiver
Period (as defined in the Supplement); and
WHEREAS, the Company, the Guarantors, the Banks and the Agents entered
into that certain Amended and Restated Credit Agreement dated March 27, 1997
(the "Amended Credit Agreement"), which amended the terms of the Original
Credit Agreement by, among other things, increasing the Original Commitment
to US $137,600,000.00; and
WHEREAS, the Company, the Guarantors, the Banks and the Agents entered
into that certain Second Amendment to Loan Documents dated April 29, 1998,
which among other things, provided for the consent to the Company's issuance
of "Senior Notes", as defined therein, which
<PAGE>
would be PARI PASSU with the Credit Facility and changed the status of the
Guarantors from that of "co-borrowers" to "guarantors" of the Credit
Facility; and
WHEREAS, the Company, the Banks and the Agents entered into that certain
Second Amended and Restated Credit Agreement dated September 30, 1998 (the
"Second Amended Credit Agreement"), which further amended the terms of the
Original Credit Agreement by, among other things, decreasing the Aggregate
Commitment to $90,000,000.00 and extending the Termination Date to July 1,
2001; and
WHEREAS, the Company, the Banks and the Agents entered into that certain
First Amendment to Second Amended and Restated Credit Agreement dated January
21, 1999, which permitted the Company, through SHLR/Washington, to acquire
the majority interest in SSHI LLC; and
WHEREAS, the Company has requested that the Banks and the Agents further
amend the terms of the Second Amended Credit Agreement by (i) increasing the
Aggregate Commitment to $120,000,000.00, (ii) extending the Termination Date
to July 1, 2002, (iii) increasing the sublimit for the issuance of Letters of
Credit from $10,000,000 to $15,000,000, and (iv) permitting the issuance of
"Senior Debt", and "Subordinated Debt", as such terms are defined herein; and
WHEREAS, the Banks and the Agents are willing to comply with such
request, upon and subject to the terms and conditions hereinafter set forth;
and
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties hereto hereby agree as follows:
1. DEFINITIONS. All capitalized terms used herein, unless otherwise
defined herein, shall have the same meanings as those ascribed to them in the
Second Amended Credit Agreement.
2. REPRESENTATIONS AND WARRANTIES. As an essential inducement to the
Banks and the Agents to execute this Amendment, the Company hereby repeats,
reaffirms and incorporates herein by reference all of the representations and
warranties contained in Section 5 of the Second Amended Credit Agreement.
3. AMENDMENT OF LOAN DOCUMENTS. The Loan Documents are hereby amended as
follows:
(a) As used in the Loan Documents, the term "Aggregate Commitment"
shall mean the combined Revolving Commitments of the Banks, in the amount of
U.S. ONE HUNDRED TWENTY MILLION AND NO/100 DOLLARS (U.S. $120,000,000.00);
provided, however, that the aggregate amount of all Letters of Credit issued
and outstanding at any one time may not exceed Fifteen Million Dollars
($15,000,000.00) and the aggregate amount of all
<PAGE>
Swing-Line Advances outstanding at any one time may not exceed Five Million
Dollars ($5,000,000.00).
(b) The Schedule "1" attached to the Second Amended Credit
Agreement shall be replaced with the Schedule "1" attached hereto.
(c) As used in the Loan Documents, the term "Termination Date"
shall mean July 1, 2002, unless extended by the Banks pursuant to Section
2.09.
(d) As used in the Loan Documents, the term "Senior Debt" shall
mean all monetary obligations, evidenced by bonds, debentures, notes or
similar instruments which are or are intended to be issued pursuant to a
registration statement under the Securities Act of 1933 or an exemption from
the registration requirements thereunder, of the Borrower or its
Subsidiaries, including principal and interest thereon, unless such
obligation, by its terms or by the terms of any agreement or instrument
pursuant to which such obligation is issued, is subordinated in right of
payment to the Obligations of the Borrower hereunder. The term "Senior Debt"
shall include the "Senior Notes".
(e) As used in the Loan Documents, the term "Permitted
Indebtedness" shall mean:
(i) the Country Club Village Subordinate Mortgage;
(ii) the existing Indebtedness and obligations of the
Borrower as a joint venture partner in Iao Partners (including any
Indebtedness of Iao Partners for which there is recourse to the
Borrower); PROVIDED, HOWEVER, that the Borrower shall be
permitted, after March 31, 1997, (A) to incur additional
Indebtedness as a joint venture partner of Iao Partners, (B) to
make additional net investments in Iao Partners, and (C) to make
additional net advances to Iao Partners, in amounts which shall
not exceed $5,000,000.00, in the aggregate, for all such
indebtedness, investments and advances described in (A), (B) and
(C) above;
(iii) Subordinated Debt of the Borrower (including the
Borrower's existing subordinated convertible debentures);
(iv) Indebtedness, not to exceed $10,000,000 in the
aggregate, created or arising under a conditional sale or other
title retention agreement, or incurred as purchase money
financing, with respect to property acquired by the Borrower or
any of its Subsidiaries; provided that the rights and remedies of
the seller under such agreement in the event of default are
limited to repossession or sale of such property;
(v) Indebtedness to the extent incurred upon the
indorsement of an instrument in order to negotiate the same, and
<PAGE>
for taxes, assessments, governmental charges, or levies to the
extent that payment thereof shall not at the time be required to
be made;
(vi) in addition to matters permitted in item (ii) above,
Indebtedness and Guaranty Obligations (except for indemnification
of sureties issuing bonds in connection with the Borrower's or any
of its Subsidiaries' real estate development businesses), not to
exceed $10,000,000 in the aggregate, incurred in the ordinary
course of the Borrower's and its Subsidiaries' real estate
development businesses;
(vii) Premium Payments;
(viii) Guaranty Obligations (a) incurred in respect of
indemnification of sureties for the issuance of bonds in
connection with the Borrower's or any of its Subsidiaries' real
estate development businesses and (b) associated with the
acquisition of Melody Homes, Inc. and Melody Mortgage Co. by the
Borrower;
(ix) Senior Debt and any guaranties thereof by any
Guarantor;
(x) the Guaranty; and
(xi) Indebtedness in respect of the Aggregate Commitment
hereunder.
(f) As used in the Loan Documents, the term "Real Estate
Indebtedness"shall mean: the total outstanding amount under: (1) the
Aggregate Commitment; (2) Subordinated Debt of the Borrower (including the
Borrower's existing subordinated convertible debentures); (3) Senior Debt;
and (4) other indebtedness, as may be permitted by the Banks, in connection
with the development of any Real Estate Development Assets.
(g) Section 2.02 of the Second Amended Credit Agreement is
hereby revised to read in its entirety as follows:
"2.02 DETERMINATION OF BORROWING BASE; RESTRICTION ON
ADVANCES, SWING-LINE ADVANCES AND LETTERS OF CREDIT. The
Administrative Agent will determine the initial Borrowing Base at
the Closing Date, calculated as of August 31, 1998, and evidenced
by a Borrowing Base Certificate delivered by the Borrower, to the
Administrative Agent no later than September 30, 1998. Such
determination shall be effective for the first month following the
Closing Date. Thereafter, the Borrowing Base for each succeeding
month will be determined by the Administrative Agent, calculated
as of the end of the preceding month,
<PAGE>
evidenced by the Borrowing Base Certificate provided to the
Administrative Agent by the Borrower, pursuant to Section 6.02(c)
of this Agreement, and verified by the Administrative Agent to its
satisfaction. The Administrative Agent shall promptly notify the
Borrower and each Bank of each determination by the Administrative
Agent of the Borrowing Base. Any determination of the Borrowing
Base by the Administrative Agent shall be conclusively deemed to
be correct unless objected to by the Borrower or the Majority
Banks within five (5) Business Days of the receipt of such
determination. The aggregate amount of all Advances and Swing-Line
Advances outstanding hereunder, and all Letters of Credit issued
and outstanding hereunder, shall not exceed the Borrowing Base, as
determined by the Administrative Agent for any succeeding month,
less (i) the outstanding principal amount of Senior Debt, and (ii)
50% of the outstanding principal amount of new Subordinated Debt
(i.e., Subordinated Debt incurred after the effective date of this
Amendment), and shall in no event exceed the amount of the
Aggregate Commitment. In the event the Borrowing Base, for any
month, as determined by the Administrative Agent hereunder, less
(i) the principal amount of Senior Debt, and (ii) 50% of the
principal amount of new Subordinated Debt, is less than the
aggregate amount of all outstanding Advances and Swing-Line
Advances and all issued and outstanding Letters of Credit at the
date of such determination, the Borrower shall, within fifteen
(15) Business Days of the receipt of notification by the
Administrative Agent, repay Advances or Swing-Line Advances and/or
repay or cash collateralize issued and outstanding Letters of
Credit, in such amounts as may be necessary to reduce the
aggregate amount of all outstanding Advances and Swing-Line
Advances and all issued and outstanding Letters of Credit, to the
amount of the newly-determined Borrowing Base, less (i) the
principal amount of Senior Debt, and (ii) 50% of the principal
amount of new Subordinated Debt."
4. DELIVERY OF RELATED DOCUMENTS. If requested by the Lender, the
Company shall deliver to the Administrative Agent on or before July 2, 1999
the following documents, all of which shall be in form and substance
satisfactory to the Banks and the Agents:
(a) Properly certified resolutions of the respective Boards of
Directors or other governing body, as applicable, of the Borrower and the
Guarantors duly authorizing the execution and delivery of this Amendment by
such applicable party.
(b) An opinion from counsel to the Borrower stating that after the
execution and delivery of this Amendment by the Borrower, the Loan Documents
will continue to be enforceable in accordance with their terms and will
continue to constitute the valid and legally binding obligations of the
Borrower.
5. FEES.
(a) ACTIVATION FEE. The Borrower shall pay to the Administrative
Agent on or before July 2, 1999, for the account of each Bank, an activation
fee in the amount of
<PAGE>
$75,000.00, which sum is equal to one-fourth of one percent (0.25%) of the
amount of the increase in the Aggregate Commitment ($30,000,000.00).
(b) EXTENSION FEE. The Borrower shall pay to the Administrative
Agent on or before July 2, 1999, for the account of each Bank, an extension
fee in the amount equal of $180,000.00, which sum is equal to fifteen
hundredths of one percent (0.15%) of the Aggregate Commitment.
(c) AGENCY FEES. The Borrower shall pay to the Administrative
Agent for the Administrative Agent's own account an agency fee in the amount
and at the times set forth in the letter agreements between the Borrower and
the Administrative Agent dated September 30, 1998, and July 2, 1999.
(d) OTHER FEES. The Borrower will continue to pay all other fees
as required by Section 2.11 of the Second Amended Credit Agreement.
6. VOLUNTARY REDUCTION IN COMMITMENTS. The Company and the Banks
acknowledge that, in connection with the increase in the Aggregate Commitment
to $120,000,000, as provided in paragraph 3(a) above, the Company shall have
the right and option, as provided in Section 2.07(b) of the Second Amended
Credit Agreement, after the Aggregate Commitment has remained at $120,000,000
for six (6) months, to permanently reduce the Aggregate Commitment by up to
$30,000,000, upon the terms and conditions set forth in said Section 2.07(b).
7. BANKS' RIGHT AND OPTION TO EXTEND TERMINATION DATE. The Company and
the Banks acknowledge that, in connection with the extension of the
Termination Date to July 1, 2002, as provided in paragraph 3(c) above, the
Banks shall have the right and option, as provided in Section 2.09 of the
Second Amended Credit Agreement, to further extend the Termination Date for a
period of one (1) year, to July 1, 2003, upon the terms and conditions set
forth in said Section 2.09.
8. CONFORMANCE. The Loan Documents are hereby amended to conform with
this Amendment, but in all other respects such provisions are to be and
continue in full force and effect.
9. CONTINUANCE OF SECURITY. The performance of the obligations of the
Company under the Loan Documents, as herein amended, shall be fully secured
by and entitled to the benefits of the Guaranty and the other Loan Documents,
and any modifications, extensions, renewals or replacements thereof.
10. CONTINUING GUARANTY. The Guarantors hereby consent to the foregoing
amendments, reaffirm their obligations under that certain Guaranty dated
January 21, 1999 (the
<PAGE>
"Guaranty") and covenant that the execution and delivery of this Amendment
shall not in any way affect, impair or diminish their obligations under the
Guaranty.
11. NO OFFSETS. As of the date hereof, the Company has no claims,
defenses or offsets against the Banks or the Agents, or against the Company's
obligations under the "Loan Documents", as herein amended, whether in
connection with the negotiations for or closing of the Credit Facility, of
any prior amendments, of this Amendment, or otherwise, and if any such
claims, defenses or offsets exist, they are hereby irrevocably waived and
released. As of the date hereof, the Guarantors have no claims, defenses or
offsets against the Banks or the Agents, or against the Guarantors'
obligations under the Guaranty, whether in connection with the negotiations
for or closing of the Credit Facility, of any prior amendments, of this
Amendment, or otherwise, and if any such claims, defenses or offsets exist,
they are hereby irrevocably waived and released.
12. NO WAIVER. This Amendment is made on the express condition that
nothing herein contained shall in any way be construed as affecting,
impairing or waiving any rights of the Banks or the Agents under any of the
Loan Documents, as herein amended.
13. ENTIRE AGREEMENT. This Amendment incorporates all of the agreements
between the parties relating to the amendment of the Loan Documents and
supersedes all other prior or concurrent oral or written letters, agreements
or understandings relating to such amendment.
14. HEADINGS. The headings of paragraphs and subparagraphs herein are
inserted only for convenience and reference, and shall in no way define,
limit or describe the scope or intent of any provisions of this Amendment.
15. GOVERNING LAW; SEVERABILITY. This Amendment is executed and
delivered, and shall be construed and enforced, in accordance with and
governed by the laws of the State of Hawaii. If any provision of this
Amendment is held to be invalid or unenforceable, the validity or
enforceability of the other provisions of this Amendment shall remain
unaffected.
16. SUBMISSION TO JURISDICTION. The Company and the Guarantors hereby
irrevocably and unconditionally submit, but only for the purposes of any
action or proceeding which the Banks and/or the Agents may bring to enforce
any of the Loan Documents, as amended herein, to the jurisdiction of the
courts of the State of Hawaii and the United States District Court for the
District of Hawaii. Such submission to such jurisdiction shall not prevent
the Banks and the Agents from commencing any such action or proceeding in any
other court having jurisdiction.
17. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the
<PAGE>
same instrument, and in making proof of this Amendment, it shall not be
necessary to produce or account for more than one such counterpart.
18. EXPENSES. The Company shall pay all reasonable expenses incurred by
the Administrative Agent in negotiations for and documentation of this
Amendment and the satisfaction of the conditions thereof, including, but not
limited to, fees and expenses of legal counsel for the Administrative Agent,
and any other costs incurred by the Administrative Agent in connection with
any of the matters described in this Amendment.
19. BINDING EFFECT. This Amendment shall bind and inure to the benefit
of the parties hereto and their respective successors and assigns; provided,
however, that the Company shall not assign this Amendment or any of the
rights, duties or obligations of the Company hereunder without the prior
written consent of the Banks and the Agents.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment the
day and year first above written.
SCHULER HOMES, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
"Borrower"
SCHULER HOMES OF CALIFORNIA, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER HOMES OF OREGON, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER HOMES OF WASHINGTON, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
MELODY HOMES, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER REALTY/MAUI, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
<PAGE>
SCHULER REALTY/OAHU, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
LOKELANI CONSTRUCTION CORPORATION
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
MELODY MORTGAGE CO.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SHLR OF WASHINGTON, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SHLR OF UTAH, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SHLR OF COLORADO, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
<PAGE>
SSHI LLC
By SHLR of Washington, Inc.
Its Managing Member
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
"Guarantors"
FIRST HAWAIIAN BANK,
as Administrative Agent and
Co-Syndication Agent
By /s/ Russell A. Loo
-------------------------------
Name: Russell A. Loo
Title: Assistant Vice President
"Administrative Agent"
BANK OF AMERICA NT&SA,
as Documentation Agent and
Co-Syndication Agent
By /s/ Cynthia Hamilton
-------------------------------
Name: Cynthia Hamilton
Title: Vice President
"Documentation Agent"
FIRST HAWAIIAN BANK, as a Bank
By /s/ Russell A. Loo
-------------------------------
Name: Russell A. Loo
Title: Assistant Vice President
BANK OF AMERICA NT&SA, as a Bank
By /s/ Cynthia Hamilton
-------------------------------
Name: Cynthia Hamilton
Title: Vice President
<PAGE>
BANK ONE, ARIZONA, NA
By /s/ R. Williams
-------------------------------
Name: Rhonda R. Williams
Title: Vice President
BANK BOSTON, NA
By /s/ Nicholas Whiting
-------------------------------
Name: Nicholas Whiting
Title: Vice President
BANK OF HAWAII
By /s/ Joyce Y. Sakai
-------------------------------
Name: Joyce Y. Sakai
Title: Vice President
"Banks"
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Bank Revolving Commitment
- ---- Commitment Percentage
-----------------------------------------
<S> <C> <C>
First Hawaiian Bank $ 33,300,000.00 27.750000000%
Bank of America NT & SA $ 26,700,000.00 22.250000000%
Bank One, Arizona, NA $ 20,000,000.00 16.666666667%
Bank Boston, NA $ 20,000,000.00 16.666666667%
Bank of Hawaii $ 20,000,000.00 16.666666667%
-------------- ---------------
$120,000,000.00 100.000000000%
</TABLE>
<PAGE>
THIRD AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDMENT ("Amendment"), dated July 22, 1999, and effective as of
July 22, 1999, is made by and among (i) SCHULER HOMES, INC., a Delaware
corporation (the "Company"); (ii) SCHULER HOMES OF CALIFORNIA, INC., a
California corporation ("Schuler/California"), SCHULER HOMES OF OREGON, INC.,
an Oregon corporation, SCHULER HOMES OF WASHINGTON, INC., a Washington
corporation, MELODY HOMES, INC., a Delaware corporation, SCHULER REALTY/MAUI,
INC., a Hawaii corporation, SCHULER REALTY/OAHU, INC., a Hawaii corporation,
LOKELANI CONSTRUCTION CORPORATION, a Delaware corporation, MELODY MORTGAGE
CO., a Colorado corporation, and SHLR OF WASHINGTON, INC., a Washington
corporation ("SHLR/Washington"), SHLR OF UTAH, INC., a Utah corporation, SHLR
OF COLORADO, INC., a Colorado corporation, and SSHI LLC, a Delaware limited
liability company ("SSHI") (collectively referred to as the "Original
Guarantors"), (iii) SHLR OF NEVADA, INC., a Nevada corporation
("SHLR/Nevada") and SRHI LLC, a Delaware limited liability company ("SRHI"),
(iv) the banks from time to time party to this Agreement (collectively
referred to as the "Banks", and individually referred to as a "Bank"), (v)
FIRST HAWAIIAN BANK, a Hawaii corporation, as administrative and
co-syndication agent for the Banks (the "Administrative Agent"), and (vi)
BANK OF AMERICA NT&SA, a national banking association, as documentation and
co-syndication agent for the Banks (the "Documentation Agent", the
Administrative Agent and the Documentation Agent are collectively referred to
as the "Agents").
W I T N E S S E T H T H A T:
WHEREAS, the Company, the Banks and the Administrative Agent entered
into that certain Credit Agreement dated as of March 29, 1996 (the "Original
Credit Agreement"), relating to the establishment of a revolving credit facility
(the "Credit Facility") in the principal amount of US$110,000,000.00 (the
"Original Commitment") made available to the Company by the Banks; and
WHEREAS, in connection therewith, the Company, the Banks and the
Administrative Agent executed certain Loan Documents (as defined in the Original
Credit Agreement); and
WHEREAS, the Company, the Banks and the Administrative Agent entered
into that certain Supplement No. 1 to Credit Agreement effective as of January
8, 1997 (the "Supplement"), relating to the use of certain proceeds of Advances
(as defined in the Original Credit Agreement) during the Waiver Period (as
defined in the Supplement); and
WHEREAS, the Company, the Guarantors, the Banks and the Agents
entered into that certain Amended and Restated Credit Agreement dated March
27, 1997 (the "Amended Credit Agreement"), which amended the terms of the
Original Credit Agreement by, among other things, increasing the Original
Commitment to US $137,600,000.00; and
WHEREAS, the Company, the Guarantors, the Banks and the Agents entered
into that certain Second Amendment to Loan Documents dated April 29, 1998, which
among other things, provided for the consent to the Company's issuance of
"Senior Notes", as defined therein, which would be PARI PASSU with the Credit
Facility and changed the status of the Guarantors from that of "co-borrowers" to
"guarantors" of the Credit Facility; and
- 1 -
<PAGE>
WHEREAS, the Company, the Banks and the Agents entered into that
certain Second Amended and Restated Credit Agreement dated September 30, 1998
(the "Second Amended Credit Agreement"), which further amended the terms of the
Original Credit Agreement by, among other things, decreasing the Aggregate
Commitment to $90,000,000.00 and extending the Termination Date to July 1, 2001;
and
WHEREAS, the Company, the Banks and the Agents entered into that
certain First Amendment to Second Amended and Restated Credit Agreement dated
January 21, 1999, which permitted the Company, through SHLR/Washington, to
acquire the majority interest in SSHI LLC; and
WHEREAS, the Company, the Banks and the Agents entered into that
certain Second Amendment to Second Amended and Restated Credit Agreement
dated July 2, 1999, which (i) increased the Aggregate Commitment to
$120,000,000.00, (ii) extended the Termination Date to July 1, 2002, (iii)
increased the sublimit for the issuance of Letters of Credit from $10,000,000
to $15,000,000, and (iv) permitted the issuance of "Senior Debt", and
"Subordinated Debt", as such terms are defined therein; and
WHEREAS, the Company has requested that the Banks and the Agents
further amend the terms of the Second Amended Credit Agreement by permitting the
Company, through Schuler/California, SHLR/Nevada and SRHI, to acquire interests
in Rielly Homes Madison, LLC, Rielly Carlsbad, LLC, Venturanza Del Verde, LLC,
Fairway Farms, LLC and PH-Rielly Orange Groves, LLC, and to consent to the
Company's expansion of business into Arizona; and
WHEREAS, the Banks and the Agents are willing to comply with such
request, upon and subject to the terms and conditions hereinafter set forth; and
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties hereto hereby agree as follows:
1. DEFINITIONS. All capitalized terms used herein, unless otherwise
defined herein, shall have the same meanings as those ascribed to them in the
Second Amended Credit Agreement.
2. REPRESENTATIONS AND WARRANTIES. As an essential inducement to the
Banks and the Agents to execute this Amendment, the Company hereby repeats,
reaffirms and incorporates herein by reference all of the representations and
warranties contained in Section 5 of the Second Amended Credit Agreement.
3. AMENDMENT OF LOAN DOCUMENTS. The Loan Documents are hereby amended
as follows:
(a) All references in the Loan Documents to "Guarantor" or
"Guarantors" shall include SHLR/Nevada and SRHI.
(b) All references in the Loan Documents to "Guaranty" shall
include all agreements in form and substance satisfactory to the Banks and
the Agents, duly executed by the
- 2 -
<PAGE>
Guarantors, including SHLR/Nevada and SRHI, jointly and severally
guaranteeing the due and punctual payment of the Note, and the observance and
performance of the Borrower's obligations under the Loan Documents.
(c) The definition of "Authorized States" in the Amended
Credit Agreement shall include the state of Arizona.
(d) Section 1.01 "Permitted Investment" is amended to replace
subsection (f) and to include a new subsection (g) as follows:
(f) the investment (including advances and
guaranties) in unconsolidated Subsidiaries of
the Borrower or joint ventures (in which the
Borrower is a joint venture partner) whichare
involved in home building in the principal
markets of the Borrower or its Subsidiaries,
provided such investment shall not exceed
$10,000,000 in the aggregate subsequent to
December 31, 1997, which shall include the
acquisition of a 49% interest in Reilly Homes
Madison, LLC, a Delaware limited liability
company, a 49% interest in Reilly Carlsbad,
LLC, a Delaware limited liability company, a
24.5% interest in Venturanza Del Verde, LLC,
a Delaware limited liability company, a 50%
interest in Fairway Farms, LLC, a Delaware
limited liability company and a 50% interest
in PH-Reilly Orange Groves, LLC, a
Delaware limited liability company.
(g) Loan receivable from Rielly Homes, Inc.
Thomas Rielly or Bruce Rielly in amounts not
to exceed $8.0 million.
(e) Section 7.07(a) ("Additional Investments and Acquisitions")
is amended to replace the existing table with the following new table:
<TABLE>
<CAPTION>
STATE PEAK NET INVESTMENT TOTAL PROJECT INVESTMENT
----- ------------------- ------------------------
<S> <C> <C>
Hawaii............ $50,000,000 $75,000,000
Colorado.......... $30,000,000 $75,000,000
California........ $30,000,000 $75,000,000
Washington........ $20,000,000 $50,000,000
Oregon............ $20,000,000 $50,000,000
Utah.............. $20,000,000 $50,000,000
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
STATE PEAK NET INVESTMENT TOTAL PROJECT INVESTMENT
----- ------------------- ------------------------
<S> <C> <C>
Arizona........... $30,000,000 $75,000,000
</TABLE>
(f) The definition of "Indebtedness" in Section 1.01 is
amended in its entirety as follows:
"INDEBTEDNESS" of any Person means, without duplication,
(a) all indebtedness for borrowed money (including
Subordinated Debt); (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services
(other than accounts payable and accrued expenses as set forth
in the consolidated financial statements of the Borrower and
its Subsidiaries entered into in the ordinary course of
business pursuant to ordinary terms); (c) all non-contingent
reimbursement or payment obligations with respect to Surety
Instruments; (d) all obligations evidenced by notes, bonds,
debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of
property, assets or businesses; (e) all indebtedness created
or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with
respect to property acquired by such Person (even though the
rights and remedies of the seller under such agreement in the
event of default are limited to repossession or sale of such
property); (f) all capital lease obligations; (g) all net
obligations with respect to Rate Contracts; (h) any
indebtedness which is guaranteed, directly or indirectly, by
such Person; and (i) all indebtedness referred to in clauses
(a) through (h) above secured by (or for which the holder of
such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any lien upon or in property
(including accounts and contracts rights) owned by such
Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness, but does not
include any indebtedness referred to in clauses (a) through
(g) above incurred by a Person as a joint venture partner of
any Joint Venture unless such indebtedness is guaranteed,
directly or indirectly (including general partner liability),
by such Person as a joint venture partner, or such
indebtedness owed by one member of the Borrower's consolidated
group to another member of such consolidated group.
4. DELIVERY OF RELATED DOCUMENTS. If requested by the Lender, the
Company shall deliver to the Administrative Agent on or before July 22, 1999
the following documents, all of which shall be in form and substance
satisfactory to the Banks and the Agents:
(a) The Guaranty executed by the Guarantors, SHLR/Nevada and
SRHI;
(b) Properly certified resolutions of the respective Boards of
Directors or other governing body, as applicable, of the Company, the
Guarantors, SHLR/Nevada and SRHI, duly
- 4 -
<PAGE>
authorizing the execution and delivery of this Amendment and the Guaranty by
such applicable party.
(c) A certificate of good standing of SHLR/Nevada and SRHI
issued by the applicable state agency, a copy of the Articles of
Incorporation, Articles of Organization or Certificate of Formation, as
applicable, of SHLR/Nevada and SRHI, certified as true and exact by the
applicable state agency, a copy of the Bylaws or Operating Agreement, as
applicable, of SHLR/Nevada and SRHI, and such authenticated copies of such
other corporate documents as the Administrative Agent may reasonably request.
(d) An opinion from counsel to the Company stating that after
the execution and delivery of this Amendment by the Company, the Loan
Documents will continue to be enforceable in accordance with their terms and
will continue to constitute the valid and legally binding obligations of the
Company.
(e) An opinion from counsel to the Guarantors, SHLR/Nevada and
SRHI stating that after the execution and delivery of this Amendment and the
Guaranty by the Guarantors, including SHLR/Nevada and SRHI, the Loan
Documents, including the Guaranty, will continue to be enforceable in
accordance with their terms and the Guaranty will constitute the valid and
legally binding obligations of the Guarantors, including SHLR/Nevada and SRHI.
5. CONFORMANCE. The Loan Documents are hereby amended to conform
with this Amendment, but in all other respects such provisions are to be and
continue in full force and effect.
6. CONTINUANCE OF SECURITY. The performance of the obligations of
the Company under the Loan Documents, as herein amended, shall be fully
secured by and entitled to the benefits of the Guaranty and the other Loan
Documents, and any modifications, extensions, renewals or replacements
thereof.
7. NO OFFSETS. As of the date hereof, the Company has no claims,
defenses or offsets against the Banks or the Agents, or against the Company's
obligations under the "Loan Documents", as herein amended, whether in connection
with the negotiations for or closing of the Credit Facility, of any prior
amendments, of this Amendment, or otherwise, and if any such claims, defenses or
offsets exist, they are hereby irrevocably waived and released. As of the date
hereof, the Guarantors, including SHLR/Nevada and SRHI, have no claims, defenses
or offsets against the Banks or the Agents, or against the Guarantors'
(including SHLR/Nevada and SRHI) obligations under the Guaranty, whether in
connection with the negotiations for or closing of the Credit Facility, of any
prior amendments, of this Amendment, or otherwise, and if any such claims,
defenses or offsets exist, they are hereby irrevocably waived and released.
8. NO WAIVER. This Amendment is made on the express condition that
nothing herein contained shall in any way be construed as affecting, impairing
or waiving any rights of the Banks or the Agents under any of the Loan
Documents, as herein amended.
- 5 -
<PAGE>
9. ENTIRE AGREEMENT. This Amendment incorporates all of the
agreements between the parties relating to the amendment of the Loan
Documents and supersedes all other prior or concurrent oral or written
letters, agreements or understandings relating to such amendment.
10. HEADINGS. The headings of paragraphs and subparagraphs herein
are inserted only for convenience and reference, and shall in no way define,
limit or describe the scope or intent of any provisions of this Amendment.
11. GOVERNING LAW; SEVERABILITY. This Amendment is executed and
delivered, and shall be construed and enforced, in accordance with and
governed by the laws of the State of Hawaii. If any provision of this
Amendment is held to be invalid or unenforceable, the validity or
enforceability of the other provisions of this Amendment shall remain
unaffected.
12. SUBMISSION TO JURISDICTION. The Company and the Guarantors
hereby irrevocably and unconditionally submit, but only for the purposes of
any action or proceeding which the Banks and/or the Agents may bring to
enforce any of the Loan Documents, as amended herein, to the jurisdiction of
the courts of the State of Hawaii and the United States District Court for
the District of Hawaii. Such submission to such jurisdiction shall not
prevent the Banks and the Agents from commencing any such action or
proceeding in any other court having jurisdiction.
13. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same instrument, and in making proof of
this Amendment, it shall not be necessary to produce or account for more than
one such counterpart.
14. EXPENSES. The Company shall pay all reasonable expenses incurred
by the Administrative Agent in negotiations for and documentation of this
Amendment and the satisfaction of the conditions thereof, including, but not
limited to, fees and expenses of legal counsel for the Administrative Agent,
and any other costs incurred by the Administrative Agent in connection with
any of the matters described in this Amendment.
15. BINDING EFFECT. This Amendment shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that the Company shall not assign this Amendment or any of
the rights, duties or obligations of the Company hereunder without the prior
written consent of the Banks and the Agents.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
the day and year first above written.
SCHULER HOMES, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
"Company"
SCHULER HOMES OF CALIFORNIA, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER HOMES OF OREGON, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER HOMES OF WASHINGTON, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
MELODY HOMES, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
- 7 -
<PAGE>
SCHULER REALTY/MAUI, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER REALTY/OAHU, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
LOKELANI CONSTRUCTION CORPORATION
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
MELODY MORTGAGE CO.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SHLR OF WASHINGTON, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SHLR OF UTAH, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
- 8 -
<PAGE>
SHLR OF COLORADO, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SSHI LLC
By SHLR of Washington, Inc.
Its Member
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
"Guarantors"
SHLR OF NEVADA, INC.
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
"SHLR/NEVADA"
SRHI LLC
By SHLR of Nevada, Inc.
--------------------------------
Its Managing Member
By /S/ Douglas M. Tonokawa
--------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
"SRHI"
- 9 -
<PAGE>
FIRST HAWAIIAN BANK, as Administrative
Agent and Co-Syndication Agent
By /S/ Russell A. Loo
--------------------------------
Name: Russell A. Loo
Title: Assistant Vice President
"Administrative Agent"
BANK OF AMERICA NT&SA, as Documentation
Agent and Co-Syndication Agent
By /S/ Cynthia K. Hamilton
--------------------------------
Name: Cynthia K. Hamilton
Title: Vice President
"Documentation Agent"
FIRST HAWAIIAN BANK, as a Bank
By /S/ Russell A. Loo
--------------------------------
Name: /S/ Russell A. Loo
Title: Assistant Vice President
BANK OF AMERICA NT&SA, as a Bank
By /S/ Cynthia K. Hamilton
--------------------------------
Name: Cynthia K. Hamilton
Title: Vice President
BANK ONE, ARIZONA, NA
By /S/ Scott Stovall
--------------------------------
Name: Scott Stovall
Title: Corporate Officer
- 10 -
<PAGE>
BANK BOSTON, NA
By /S/ Nicholas Whiting
--------------------------------
Name: Nicholas Whiting
Title: Vice President
BANK OF HAWAII
By /S/ Joyce Y. Sakai
--------------------------------
Name: Joyce Y. Sakai
Title: Vice President
"Banks"
- 11 -
<PAGE>
GUARANTY
This Guaranty is made by SCHULER HOMES OF CALIFORNIA, INC., a California
corporation, SCHULER HOMES OF OREGON, INC., an Oregon corporation, SCHULER
HOMES OF WASHINGTON, INC., a Washington corporation, MELODY HOMES, INC., a
Delaware corporation, SCHULER REALTY/MAUI, INC., a Hawaii corporation,
SCHULER REALTY/OAHU, INC., a Hawaii corporation, LOKELANI CONSTRUCTION
CORPORATION, a Delaware corporation, MELODY MORTGAGE CO., a Colorado
corporation, SHLR OF WASHINGTON, INC., a Washington corporation, SHLR OF
COLORADO, INC., a Colorado corporation, SHLR OF UTAH, INC., a Utah
corporation, SSHI LLC, a Delaware limited liability company, SHLR OF NEVADA,
INC., a Nevada corporation ("SHLR/Nevada") and SRHI LLC, a Delaware limited
liability company ("SRHI"), (collectively referred to as the "Guarantors",
and individually referred to as a "Guarantor").
WHEREAS, (i) Schuler Homes, Inc., a Delaware corporation (the "Borrower"),
(ii) the banks from time to time party to the Credit Agreement, as herein
defined (collectively referred to as the "Banks", and individually referred to
as a "Bank"), (iii) FIRST HAWAIIAN BANK, a Hawaii corporation, as administrative
and co-syndication agent for the Banks (the "Administrative Agent"), and (iv)
BANK OF AMERICA NT&SA, a national banking association, as documentation and co-
syndication agent for the Banks (the "Documentation Agent", the Administrative
Agent and the Documentation Agent are collectively referred to as the "Agents"),
entered into that certain Second Amended and Restated Credit Agreement dated
September 30, 1998, as amended (collectively, the "Credit Agreement"), relating
to a revolving credit facility (the "Credit Facility") in the principal amount
of $120,000,000.00 made available to the Borrower by the Banks; and
WHEREAS, the Guarantors are subsidiaries of the Borrower and deem it to
be to the Guarantors' financial benefit that the Banks make the Credit Facility
available to the Borrower; and
NOW, THEREFORE, as an essential inducement to the Banks and the Agents
to make the Credit Facility available to the Borrower pursuant to the terms of
the Credit Agreement, and as a consideration for so doing, the Guarantors hereby
agree with the Banks and the Agents, and with each holder of the Note evidencing
the Credit Facility and each holder of any interest in the Note (each holder of
the Note and each holder of any interest therein being hereinafter collectively
and individually called the "Holder"), as follows:
1. DEFINITIONS As used herein, the following terms shall have the
following meanings:
(a) "INDEBTEDNESS" shall mean (i) all sums due and payable under the
Note, including, without limitation, principal, interest, fees and charges
thereunder; and (ii) any and all other indebtedness or liability of the Borrower
to the Banks and/or the Agents under or arising out of the Credit Facility or
the Loan Documents, including, as to (i) and (ii) above, any extension, renewal,
reduction, compromise, indulgence, variation or modification thereof.
(b) "OBLIGATIONS" shall mean each and every agreement, covenant and
condition to be observed or performed by the Borrower under the Loan Documents.
<PAGE>
(c) "EXPENSES" shall mean all costs and expenses, including, but not
limited to, attorneys' fees, incurred in connection with the enforcement by
the Banks and the Agents of its rights against the Borrower under the Loan
Documents and against the Guarantors hereunder, following any default in the
due and punctual payment of the Indebtedness, or observance and performance
of the Obligations, by the Borrower.
2. INDEBTEDNESS AND OBLIGATIONS GUARANTEED. The Guarantors hereby
jointly and severally, absolutely, irrevocably and unconditionally guarantee the
payment of the Indebtedness and the observance and performance of the
Obligations. In connection therewith, the Guarantors will pay to the Banks and
the Agents, on demand, all of the Expenses, and will indemnify and hold the
Banks and the Agents harmless from and against any loss, cost, liability or
expense which the Banks and/or the Agents may sustain or incur by reason of the
failure of the Borrower to pay all of the Indebtedness or to observe and perform
all of the Obligations.
3. UNCONDITIONAL AND ABSOLUTE PAYMENT GUARANTY. This is an
unconditional and absolute guaranty of payment and not merely a guaranty of
collection, and if for any reason, any Indebtedness shall not be paid when and
as due and payable, or any Obligation shall not be observed or performed when
the same is required to be observed or performed, the Guarantors undertake
promptly to pay all such Indebtedness, and to observe and perform, or to cause
the appropriate party to observe and perform, each of such Obligations,
regardless of any defense or setoff or counterclaim which the Borrower may have
or assert, and regardless of whether or not any Holder or anyone on behalf of
any Holder shall have instituted any suit, action or proceeding or exhausted its
remedies or taken any steps to enforce any rights against any of such parties or
any other person to collect all or part of any such amounts, or to compel any
such performance, either pursuant to the Loan Documents, or at law or in equity,
and regardless of any other condition or contingency.
4. WAIVER. The Guarantors hereby unconditionally waive any and all
statutory and common law suretyship defenses that now or hereafter may be
available to the Guarantors, including, without limitation (a) any requirement
that any Holder in the event of any default by the Borrower first make demand
upon, or seek to enforce remedies against, the Borrower or any other guarantor
or any security or collateral held by the Banks or the Agents at any time, or to
pursue any other remedy in its power, before being entitled to payment from the
Guarantors of the amounts payable by the Guarantors hereunder, or before
proceeding against the Guarantors; (b) the defense of the statute of limitations
in any action hereunder or for the collection of any Indebtedness or the
performance of any Obligation; (c) any defense that may arise by reason of (i)
the incapacity, lack of authority, death or disability of the Borrower, any
Guarantor or any other person or entity, (ii) the revocation or repudiation of
this Guaranty by the Guarantors, or the revocation or repudiation of any of the
Loan Documents by the Borrower or any other person or entity, (iii) the failure
of the Banks or the Agents to file or enforce a claim against the estate (either
in administration, bankruptcy or any other proceeding) of the Borrower or any
other person or entity, (iv) the unenforceability in whole or in part of the
Loan Documents or any other document, instrument, or agreement referred to
therein, or any limitation on the liability of the Borrower thereunder, or any
limitation on the method or terms of payment thereunder, which may now or
hereafter be caused or imposed in any manner whatsoever, (v) the election by the
Banks and the Agents, in any proceeding instituted under the federal Bankruptcy
Code, of the application of Section 1111(b)(2) of the federal Bankruptcy Code,
2
<PAGE>
or (vi) any borrowing or grant of a security interest under Section 364 of the
federal Bankruptcy Code; (d) diligence, presentment, demand for payment,
protest, notice of discharge, notice of acceptance of this Guaranty, and
indulgences and notices of any other kind whatsoever; (e) any defense based upon
an election of remedies (including, if available, an election to proceed by
non-judicial foreclosure) by the Banks and the Agents which destroys or
otherwise impairs any subrogation rights of the Guarantors or the right of the
Guarantors to proceed against the Borrower for reimbursement, or both; (f) any
defense based upon any taking, modification or release of any collateral or
guaranties for the Indebtedness of the Borrower to the Banks and the Agents, or
any failure to perfect any security interest in, or the taking of any other
action or the failure to take any other action with respect to any collateral
securing payment of the Indebtedness or performance of the Obligations; (g) any
rights or defenses based upon an offset by the Guarantors against any obligation
now or hereafter owed to the Guarantors by the Borrower; or (h) any right of
appraisement with regard to the value of any collateral which the Banks may
apply as a credit to the obligations of the Borrower, through foreclosure or
otherwise, and agrees that the determination by an independent appraiser
appointed by the Banks or the Agents of the value of such collateral shall be
binding upon the Guarantors for all purposes; it being the intention hereof that
the Guarantors shall remain fully liable, as principal, until the full payment
of the Indebtedness, full performance of all the Obligations, and termination of
the obligations of the Banks and the Agents under the Loan Documents,
notwithstanding any act, omission or thing which might otherwise operate as a
legal or equitable discharge of the Guarantors.
5. NO RELEASE OF GUARANTY. The obligations, covenants, agreements and
duties of the Guarantors under this Guaranty shall not be released, affected,
stayed or impaired, except upon the express written consent of the Banks and
the Agents, by (a) any assignment, indorsement or transfer, in whole or in
part, of the Note, although made without notice to or the consent of the
Guarantors; or (b) any alteration, compromise, modification, acceleration,
extension or change to or of the time or manner of payment of any of the
Indebtedness, or the performance or observance of any of the Obligations; or
(c) any increase or reduction in the rate of interest or amount of principal
payable on the Note, or any other Indebtedness; or (d) the voluntary or
involuntary liquidation, sale or other disposition of all or substantially
all of the assets of the Borrower or the Guarantors; or (e) any receivership,
insolvency, bankruptcy, reorganization, dissolution or other similar
proceedings, affecting the Borrower or the Guarantors or any of their assets;
or (f) any release of any property from the lien and security interest
created by any of the Loan Documents, the subordination of any such lien or
security interest, or the acceptance of additional or substitute property as
security under the Loan Documents; or (g) the release or discharge of the
Borrower from the observance or performance of any agreement, covenant, term
or condition contained in the Loan Documents; or (h) the foreclosure of any
lien or security interest on any property securing repayment of the
Indebtedness, or the acceptance of a deed or assignment of any such property
in lieu of foreclosure; or (i) any action which the Holder may take or omit
to take by virtue of the Loan Documents or through any course of dealing with
the Borrower; or (j) the release of any existing guarantor or the addition of
a new guarantor; or (k) the operation of law or any other cause, whether
similar or dissimilar to the foregoing.
6. WAIVER OF SUBROGATION. The Guarantors hereby waive, release and
discharge any claim or right the Guarantors may have to be subrogated to the
rights of the Holder following payment of
3
<PAGE>
the Indebtedness and performance of the Obligations. This waiver, release and
discharge shall continue even after the Indebtedness has been paid in full,
the Obligations performed, and the obligations of the Banks and the Agents
under the Loan Documents terminated.
7. SUBORDINATION OF INDEBTEDNESS. Any indebtedness of the Borrower now
or hereafter held by any Guarantor is hereby subordinated to the Indebtedness
of the Borrower to the Holder; and, upon the request of the Holder, such
indebtedness of the Borrower to the Guarantors shall be collected, enforced
and received by the Guarantors as trustee for the Holder and shall be paid
over to the Holder on account of the Indebtedness of the Borrower to the
Holder without reducing or affecting in any manner the liability of the
Guarantors under the other provisions of this Guaranty.
8. CLAIMS IN BANKRUPTCY. The Guarantors will file all claims against the
Borrower in any bankruptcy or other proceeding in which the filing of claims
is required or permitted by law upon any indebtedness of the Borrower to any
Guarantor or claim against the Borrower by any Guarantor, and the Guarantors
hereby assign to the Banks and the Agents all rights of the Guarantors
thereunder. If the Guarantor does not file any such claim, the Banks and the
Agents, as attorney-in-fact for such Guarantor, is hereby authorized to do so
in the name of the Guarantor or, in the discretion of the Banks and the
Agents, to assign the claim and to cause proof of claim to be filed in the
name of the nominee of the Banks and the Agents. The Banks, the Agents or
their nominee shall have the sole right to accept or reject any plan proposed
in such proceeding and to take any other action which a party filing a claim
is entitled to take. In all such cases, whether in administration, bankruptcy
or otherwise, the person or persons authorized to pay such claim shall pay to
the Banks and the Agents the full amount payable on such claim up to the
amounts due under this Guaranty, and, to the full extent necessary for that
purpose, the Guarantors hereby assign to the Banks and the Agents all of the
Guarantors' rights to any such payments or distributions to which the
Guarantors would otherwise be entitled; provided, however, that the
Guarantors' obligations hereunder shall not be satisfied except to the extent
that the Banks and the Agents receive cash by reason of any such payment or
distribution. If the Banks and the Agents receive anything hereunder other
than cash, the same shall be held as collateral for the payment of all
amounts due under this Guaranty.
9. FINANCIAL CAPACITY.
(a) The Guarantors hereby agree, as a material inducement to the Banks
and the Agents to enter into the Third Amendment, to furnish to the Banks and
the Agents such financial statements, reports and information as required by
Sections 6.01 and 6.02 of the Credit Agreement. The Banks and the Agents
agree to keep confidential all of the financial information which it receives
in connection herewith, except that such information may be provided to any
assignee as provided in Section 17 hereof.
(b) The Guarantors will promptly notify each Bank through the
Administrative Agent of the commencement of, or any material development in,
any litigation or proceeding affecting any Guarantor which, if adversely
determined, would reasonably be expected to have a Material Adverse Effect
(as defined in the Credit Agreement); or in which the relief sought is an
injunction or other stay of the performance of this Guaranty. Such notice
shall be accompanied by a written statement
4
<PAGE>
by the chief executive officer, the president or the chief financial officer
of such Guarantor, or any other officer having substantially the same
authority and responsibility, setting forth details of the occurrence
referred to therein, and stating what action the Guarantors propose to take
with respect thereto and at what time.
10. CONDITION OF BORROWER. The Guarantors are fully aware of the
financial condition of the Borrower and are executing and delivering this
Guaranty based solely upon the Guarantors' own independent investigation of
all matters pertinent hereto, and are not relying in any manner upon any
representation or statement of the Banks or the Agents. The Guarantors
represent and warrant that the Guarantors are in a position to obtain and the
Guarantors hereby assume full responsibility for obtaining, any additional
information concerning the Borrower's financial condition and any other
matter pertinent hereto as the Guarantors may desire, and the Guarantors are
not relying upon or expecting the Banks or the Agents to furnish to the
Guarantors any information now or hereafter in the possession of the Banks or
the Agents concerning the same or any other matter. By executing this
Guaranty, the Guarantors knowingly acknowledge and accept the full range of
risks encompassed within a contract of this type. The Guarantors shall have
no right to require the Banks or the Agents to obtain or disclose any
information with respect to the Indebtedness or the Obligations, the
financial condition or character of the Borrower, the Borrower's ability to
pay the Indebtedness or perform the Obligations, the existence of any
collateral or security for any or all of the Indebtedness or the Obligations,
the existence or non-existence of any other guaranties of all or any part of
the Indebtedness or the Obligations, or any action or non-action on the part
of the Banks, the Agents, the Borrower, or any other person, or any other
matter, fact or occurrence whatsoever.
11. REPRESENTATIONS AND WARRANTIES. Each of the Guarantors represents and
warrants to the Banks and the Agents that:
(a) TAX RETURNS AND PAYMENTS. All material tax returns and reports of
each Guarantor required by law to be filed have been duly filed, and all taxes,
assessments, contributions, fees and other governmental charges the liability
for which could exceed $100,000 (other than those currently payable without
penalty or interest and those currently being contested in good faith) upon any
Guarantor or upon any Guarantor's properties, assets or income which are due and
payable have been paid.
(b) LITIGATION. There is, to the knowledge of the Guarantors, no
action, suit, proceeding or investigation pending at law or in equity or before
any Governmental Authority (as defined in the Credit Agreement), or threatened
against or affecting any Guarantor, an adverse ruling in which would or might
materially impair the ability of the Guarantors to observe and perform the
Guarantors' obligations under this Guaranty or have a material adverse effect
upon the legality, validity, binding effect or enforceability of this Guaranty.
(c) COMPLIANCE WITH OTHER INSTRUMENTS; NONE BURDENSOME. To the best of
their knowledge, no Guarantor is in violation of or in default with respect to
any provision of any mortgage, indenture, contract, agreement or instrument
applicable to such Guarantor, or by which such Guarantor is bound, and there is
no provision of any mortgage, indenture, contract, agreement or instrument
applicable to any Guarantor or by which any Guarantor is bound which materially
adversely affects,
5
<PAGE>
or in the future (so far as the Guarantors can now foresee) will materially
adversely affect, the business or prospects or condition (financial or other) of
any Guarantor or of any Guarantor's properties or assets.
(d) FINANCIAL STATEMENTS. Any financial statements heretofore delivered
to the Banks and the Agents by the Guarantors are true and correct in all
respects, and fairly represent the respective financial conditions of the
subjects thereof as of the respective dates thereof; and no materially adverse
change has occurred in the financial conditions reflected therein since the
respective dates thereof.
12. BANKRUPTCY. Until all Indebtedness has been paid to the Banks and
the Agents, all Obligations have been performed, and the obligations of the
Banks and the Agents under the Loan Documents have been terminated, the
Guarantors shall not, without the prior written consent of the Banks and the
Agents, commence or join with any other person in commencing any bankruptcy,
reorganization or insolvency proceedings of or against the Borrower. The
obligations of the Guarantors under this Guaranty shall not be altered, limited
or affected by any proceeding, voluntary or involuntary, involving the
bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement
of the Borrower or by any defense which the Borrower may have by reason of the
order, decree or decision of any court or administrative body resulting from any
such proceeding. The Guarantors acknowledge and agree that any interest on the
Indebtedness which accrues after the commencement of any such proceeding (or, if
interest on any portion of the Indebtedness ceases to accrue by operation of law
by reason of the commencement of said proceeding, such interest as would have
accrued on any such portion of the Indebtedness if said proceeding had not been
commenced) shall be included in the Indebtedness, since it is the intention of
the parties that the amount of the Indebtedness which is guaranteed by the
Guarantors pursuant to this Guaranty should be determined without regard to any
rule of law or order which may relieve the Borrower of any portion of such
Indebtedness. The Guarantors will permit any trustee in bankruptcy, receiver,
debtor in possession, assignee for the benefit of creditors or similar person to
pay the Banks and the Agents, or allow the claim of the Banks and the Agents in
respect of, any such interest accruing after the date on which such proceeding
is commenced. In the event that all or any portion of the Indebtedness is paid
or all or any part of the Obligations are performed by the Borrower, the
obligations of the Guarantors hereunder shall continue and remain in full force
and effect in the event that all or any part of such payment or performance is
avoided or recovered directly or indirectly from the Banks or the Agents as a
preference, fraudulent transfer or otherwise in such proceeding.
13. REMEDIES CUMULATIVE. The liability of the Guarantors, and all
rights, powers and remedies of the Banks and the Agents hereunder and under any
other agreement now or at any time hereafter in force between the Banks, the
Agents and the Guarantors relating to the Indebtedness or the Obligations, shall
be cumulative and not exclusive or alternative, and such rights, powers and
remedies shall be in addition to all other rights, powers and remedies given to
the Banks and the Agents by law.
14. AMENDMENTS; CONTINUING LIABILITY. The terms of this Guaranty may
not be modified or amended except by a written agreement executed by the
Guarantors with the consent in writing of the Holder. The obligations of the
Guarantors under this Guaranty shall be continuing obligations
6
<PAGE>
and a separate cause of action shall be deemed to arise in respect of each
default hereunder. The Guarantors will from time to time deliver, upon
request of the Holder, satisfactory acknowledgments of the Guarantors'
continued liability hereunder.
15. MERGER OR CONSOLIDATION OF GUARANTORS. No Guarantor will
consolidate or merge with or into another corporation, person or entity, whether
or not affiliated with such Guarantor without the written consent of the Holder
(which consent shall not be unreasonably withheld). No consolidation or merger
(with or without the consent of the Holder) shall release, affect or impair the
continuing liability and obligation of the Guarantors under this Guaranty.
16. NOTICES. Any notice or demand to be given or served hereunder shall
be in writing and personally delivered, or sent by registered or certified mail
addressed as follows:
To the Banks and
the Agents at: 999 Bishop Street
Honolulu, Hawaii 96813
Attention: Commercial Real Estate Division
To Guarantors at: 828 Fort Street Mall, 4th Floor
Honolulu, Hawaii 96813
Any such address may be changed from time to time by the addressee by serving
notice to the other party as above provided. Service of such notice or demand
shall be deemed complete on the date of actual delivery or at the expiration of
the second day after the date of mailing if mailed in
Hawaii, whichever is earlier.
The Guarantors hereby irrevocably authorize the Agents to accept
facsimile ("FAX") transmissions of such notices, requests, demands and
documents, provided such transmission is signed by an officer of any Guarantor.
The Guarantors shall and do hereby hold the Agents harmless from, and indemnify
the Agents against, any loss, cost, expense, claim or demand which may be
incurred by or asserted against the Agents by virtue of the Agents acting upon
any such notices, requests, demands or documents transmitted in accordance with
the above provisions. Any such FAX transmission shall, at the Agents' request,
be separately confirmed by telephone conference between the Agents and the
authorized officer described above, and shall be followed by transmission of the
actual "hard copy" of the notice, request, demand or document in question.
17. PARTIES IN INTEREST. All covenants, agreements, terms and
conditions contained in this Guaranty shall be binding on the Guarantors and the
Guarantors' respective successors, successors in trust and assigns, and shall
bind, inure to the benefit of and be enforceable by the Holder from time to
time. This Guaranty is assignable by the Banks and the Agents with respect to
all or any portion of the Indebtedness or the Obligations without notice to or
consent of the Guarantor, and when so assigned, the Guarantors shall be liable
to the assignee as to any such portion, without in any manner affecting the
liability of the Guarantors with respect to any of the Indebtedness or
Obligations retained by the Banks or the Agents.
7
<PAGE>
18. GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS. This Guaranty
shall be construed and interpreted in accordance with and shall be governed by
the laws of the State of Hawaii. The Banks and the Agents may bring any action
or proceeding to enforce this Guaranty, or any action or proceeding arising out
of this Guaranty, in any court or courts of the State of Hawaii or the United
States District Court for the District of Hawaii. If the Banks and the Agents
commence such an action in a court located in the State of Hawaii, or the United
States District Court for the District of Hawaii, the Guarantors hereby agree
that the Guarantors will submit and does hereby irrevocably submit to the
personal jurisdiction of such courts; if served by mail will acknowledge receipt
of a copy of the summons and complaint within the statutory time limit and in
the manner set forth on the notice and summons; and will not attempt to have
such action dismissed, abated, or transferred on the ground of FORUM NON
CONVENIENS or similar grounds; provided, however, that nothing contained herein
shall prohibit the Guarantors from seeking, by appropriate motion, to remove an
action brought in a Hawaii state court to the United States District Court for
the District of Hawaii. If such action is so removed, however, the Guarantors
shall not seek to transfer such action to any other district nor shall the
Guarantors seek to transfer to any other district any action which the Banks and
the Agents originally commenced in the United States District Court for the
District of Hawaii. Any action or proceeding brought by the Guarantors arising
out of this Guaranty shall be brought solely in a court of competent
jurisdiction located in the State of Hawaii or in the United States District
Court for the District of Hawaii.
19. PARAGRAPH HEADINGS. The headings of paragraphs herein are inserted
only for convenience and shall in no way define, describe or limit the scope or
intent of any provision of the Guaranty.
20. LIABILITY JOINT AND SEVERAL. The obligations of each Guarantor
hereunder shall be joint and several.
21. COUNTERPARTS. This Guaranty may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument, and in making proof of this Guaranty, it
shall not be necessary to produce or account for more than one
such counterpart.
IN WITNESS WHEREOF, the Guarantors have executed this instrument as of
July 22, 1999.
SCHULER HOMES OF CALIFORNIA, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER HOMES OF OREGON, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
8
<PAGE>
SCHULER HOMES OF WASHINGTON, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
MELODY HOMES, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER REALTY/MAUI, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SCHULER REALTY/OAHU, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
LOKELANI CONSTRUCTION CORPORATION
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
MELODY MORTGAGE CO.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SHLR OF WASHINGTON, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
9
<PAGE>
SHLR OF COLORADO, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SHLR OF UTAH, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SSHI LLC
By SHLR of Washington, Inc.
Its Member
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
SHLR OF NEVADA, INC.
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
"SHLR/NEVADA"
SRHI LLC
By SHLR of Nevada, Inc.
-------------------------------
Its Managing Member
By /s/ Douglas M. Tonokawa
-------------------------------
Name: Douglas M. Tonokawa
Title: Vice President of Finance
"SRHI"
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THE
COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,414,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 402,602,000
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 448,700,000
<CURRENT-LIABILITIES> 0
<BONDS> 57,500,000
0
0
<COMMON> 209,000
<OTHER-SE> 93,430,000
<TOTAL-LIABILITY-AND-EQUITY> 448,700,000
<SALES> 227,516,000
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 206,211,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,602,000
<INCOME-TAX> 7,136,000
<INCOME-CONTINUING> 11,466,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,466,000
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
</TABLE>
