<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-19891
SCHULER HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware 99-0293125
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
828 Fort Street Mall, Suite 400
Honolulu, Hawaii 96813-4321
(Address of principal executive offices) (Zip code)
(808-521-5661)
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 2000
--------------------- --------------
$.01 par value 20,100,946
<PAGE>
SCHULER HOMES, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Independent Accountants' Review Report............................ 3
Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999.............................................. 4
Consolidated Statements of Income - Three months
ended March 31, 2000 and 1999.................................. 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 2000 and 1999.................................. 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................................................. 18
SIGNATURES................................................................... 19
</TABLE>
2
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Schuler Homes, Inc.
We have reviewed the accompanying interim consolidated balance sheet of Schuler
Homes, Inc. as of March 31, 2000, and the related consolidated statements of
income and cash flows for the three-month periods ended March 31, 2000 and 1999.
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, 1999, 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 14, 2000, 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, 1999, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
ERNST & YOUNG LLP
Honolulu, Hawaii
May 8, 2000
3
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,2000 December 31, 1999
------------- -----------------
(unaudited)
ASSETS
------------- -------------
<S> <C> <C>
Cash and cash equivalents (restricted-Note 1) ................. $ 4,737,000 $ 6,673,000
Real estate inventories (Note 2) .............................. 442,925,000 436,305,000
Investments in unconsolidated joint ventures (Note 3) ......... 10,120,000 8,346,000
Deferred income taxes ......................................... 2,819,000 2,362,000
Intangibles, net .............................................. 15,149,000 15,506,000
Other assets (Note 3) ......................................... 21,135,000 21,274,000
------------- -------------
Total assets .................................................. $ 496,885,000 $ 490,466,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .............................................. $ 33,964,000 $ 31,819,000
Accrued expenses .............................................. 25,447,000 19,041,000
Notes payable to banks (Note 4) ............................... 60,974,000 78,183,000
Notes payable to others ....................................... 7,587,000 2,409,000
9% senior notes due 2008 ...................................... 98,711,000 98,671,000
6-1/2% convertible subordinated debentures due 2003 ........... 57,500,000 57,500,000
------------- -------------
Total liabilities ............................................. 284,183,000 287,623,000
Commitments and contingencies (Notes 4 and 5)
Minority interest in consolidated subsidiary .................. 1,845,000 1,695,000
Stockholders' equity (Note 6):
Common stock, $.01 par value; 30,000,000 shares authorized;
21,400,646 and 21,371,825 shares issued at March 31, 2000 and
December 31, 1999, respectively .......................... 214,000 214,000
Additional paid-in capital .................................. 96,186,000 96,038,000
Retained earnings ........................................... 123,174,000 113,482,000
Treasury stock, at cost; 1,299,700 and 1,278,400 shares at
March 31, 2000 and December 31, 1999, respectively ........ (8,717,000) (8,586,000)
------------- -------------
Total stockholders' equity .................................... 210,857,000 201,148,000
------------- -------------
Total liabilities and stockholders' equity .................... $ 496,885,000 $ 490,466,000
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Revenues:
Home and lot sales ............................. $ 154,532,000 $ 95,893,000
Land sales ..................................... 6,204,000 --
------------- -------------
Total revenues ........................... 160,736,000 95,893,000
Costs and expenses:
Home and lot sales ........................... 122,664,000 75,214,000
Land sales ................................... 4,155,000 --
Selling and commissions ...................... 8,902,000 6,149,000
General and administrative ................... 8,384,000 5,407,000
------------- -------------
Total costs and expenses ................. 144,105,000 86,770,000
------------- -------------
Operating income ............................. 16,631,000 9,123,000
Income from unconsolidated joint ventures ........ 753,000 73,000
Minority interest in pretax income of consolidated
subsidiary ..................................... (150,000) (93,000)
Other income (expense) (Note 4) .................. (1,381,000) (1,361,000)
------------- -------------
Income before provision for income taxes ......... 15,853,000 7,742,000
Provision for income taxes (Note 7) .............. 6,161,000 2,952,000
------------- -------------
Net income ..................................... $ 9,692,000 $ 4,790,000
============= =============
Net income per share (Note 8):
Basic ............................................ $ 0.48 $ 0.24
============= =============
Diluted .......................................... $ 0.46 $ 0.24
============= =============
</TABLE>
See accompanying notes.
5
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
------------ ------------
(unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income .................................................................... $ 9,692,000 $ 4,790,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization expense .................................... 1,413,000 872,000
Income from unconsolidated joint ventures ................................ (224,000) (73,000)
Principal payments of notes receivable ................................... 49,000 581,000
Minority interest ........................................................ 150,000 93,000
Changes in assets and liabilities, net of effects of purchase of additional 40%
interest in Stafford:
(Increase) decrease in real estate inventories ........................... (2,228,000) (20,054,000)
(Increase) decrease in other assets ...................................... (128,000) 453,000
Increase (decrease) in accounts payable .................................. 2,145,000 2,883,000
Increase (decrease) in accrued expenses .................................. 6,521,000 5,252,000
Change in deferred income taxes .......................................... (457,000) 489,000
------------ ------------
Net cash provided by (used in) operating activities .................... 16,933,000 (4,714,000)
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 ..................................... (747,000) --
Repayments of advances to unconsolidated joint ventures ....................... 112,000 71,000
Investment in unconsolidated joint ventures ................................... (915,000) --
Capital distributions from unconsolidated joint ventures ...................... -- 443,000
Purchase of furniture, fixtures, and equipment ................................ (278,000) (468,000)
------------ ------------
Net cash provided by (used in) investing activities ....................... (1,828,000) (5,181,000)
FINANCING ACTIVITIES:
Proceeds from bank borrowings ................................................. 55,370,000 75,990,000
Principal payments on bank borrowings ......................................... (72,579,000) (32,984,000)
Principal payments on notes payables to others ................................ (160,000) (376,000)
Refinancing of Stafford's debt ................................................ -- (29,378,000)
Advances to affiliates (Note 3) ............................................... -- (1,000,000)
Repayment of advances to affiliates (Note 3) .................................. 270,000 --
Net decrease in discount on issuance of senior notes .......................... 40,000 39,000
Proceeds from issuance of common stock from exercise of stock options ......... -- 30,000
Proceeds from issuance of common stock under Employee Stock Purchase Plan
(Note 6) ...................................................................... 149,000 165,000
Reacquisition of the Company's common stock (Note 6) .......................... (131,000) --
------------ ------------
Net cash provided by (used in) financing activities ....................... (17,041,000) 12,486,000
------------ ------------
Increase (decrease) in cash ................................................... (1,936,000) 2,591,000
Cash and cash equivalents (restricted) at beginning of period ................. 6,673,000 4,915,000
------------ ------------
Cash and cash equivalents (restricted) at end of period ....................... $ 4,737,000 $ 7,506,000
============ ============
</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, 1999
contained in the Company's 1999 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.
Included in Cash and Cash Equivalents at March 31,2000 is a restricted
amount of $1,204,000, which primarily represents a collection allowance
resulting from the sale of second mortgages and accounts restricted for
certain development costs.
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.
Real estate inventories at March 31, 2000 consist of the following:
<TABLE>
<S> <C>
Unimproved land held for future development .................. $ 48,375,000
Development projects in progress ............................. 352,476,000
Completed inventory (including lots held for sale) ........... 42,074,000
------------
$442,925,000
============
</TABLE>
Completed inventory includes residential units, which are substantially
ready for occupancy.
During the quarter ended March 31, 2000, the purchase price for certain of
the land parcels purchased by the Company included notes payable to land
sellers in the aggregate amount of $5,338,000.
7
<PAGE>
3. Related Party Transactions
The Company leases its main office in Oregon from a family member of the
Division President of the Oregon Division. During the quarter ended March
31, 2000, the Company incurred total rental expense in connection with such
lease of approximately $13,000.
In connection with the acquisition of certain assets of Keys Homes, Inc.
(Keys) in October 1998, the Division President of the Company's Oregon
Division (formerly the president of Keys) earns a percentage of the profits
of the Oregon Division. In addition, included in Other Assets at March 31,
2000 is a note receivable of $800,000 from the Oregon Division President,
which is due on December 31, 2005, bears interest at 7%, and requires
minimum annual payments of $200,000 plus accrued but unpaid interest. In
March 2000, the Company received a payment of $200,000, plus accrued
interest of $70,000. Accrued interest receivable relating to the note was
approximately $17,000 at March 31, 2000.
In connection with the acquisition of certain assets of a homebuilder in
July 1999 that established the new divisions in Southern California and
Arizona, the owners of the seller, who became officers of the new divisions,
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. In
addition, the Company provided a loan to the seller in the amount of
$4,810,000, which balance at March 31, 2000 was $4,406,000 and is included
in Other Assets. The loan is due on December 31, 2004 and bears interest at
7%. Accrued interest receivable relating to the loan was approximately
$103,000 at March 31, 2000.
From time to time, the Company engages the law firm in which a director of
the Company is a partner. During the quarterly period ended March 31, 2000,
no legal fees to such firm were incurred by the Company.
4. Notes Payable to Banks
On October 1, 1999, the Company increased its Revolving Credit Facility with
a consortium of banks from $120,000,000 to $170,000,000. The Company has a
one-time option to reduce the amount of the facility by up to $30,000,000 on
an irrevocable basis, provided the facility has remained at $170,000,000 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 and interest coverage ratios, as defined, the interest
rate may vary from LIBOR plus 1.5% to LIBOR plus 2%, or from prime plus 0%
to prime plus 0.25%. The Company's ability to draw upon its line of credit
is dependent upon meeting certain financial ratios and covenants. As of
March 31, 2000, the Company met such financial ratios and covenants.
The Company entered into two interest rate swaps. One swap requires the
Company 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. The second swap, which became effective on
August 9, 1999 and terminates on August 9, 2002, requires the Company to pay
interest at a floating one month LIBOR 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.
Notes Payable to Banks at March 31, 2000 consist of borrowings under its
credit facilities. At March 31, 2000, the Company's bank borrowings were at
interest rates of prime (9%) and LIBOR plus 1.5% (7.6%). At March 31, 2000,
$109,026,000 of the Company's line of credit is unused, of which $4,819,000
is restricted for outstanding but unused letters of credit.
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 $3,486,000 during the
8
<PAGE>
quarter ended March 31, 2000. Interest incurred during the quarter ended
March 31, 2000 was approximately $4,908,000. All of such interest was
capitalized to real estate inventories except for $1,086,000, 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 sales during the quarter ended March 31, 2000 totaled $4,045,000.
5. Commitments and Contingencies
At March 31, 2000, 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 owners of two of the
three units subsequently settled in late 1999, bringing an end to the
initial suit. The one remaining plaintiff in the second action settled in
April 2000. The settlement amounts incurred by the Company are not material
to its financial condition. Although the cost of remediation for certain
units called for under the settlement agreements are not determinable until
the work is completed, the Company believes that the cost of such work will
not be material to its financial condition.
The Company is also from time to time involved in routine litigation or
threatened litigation arising in the ordinary course of its business. Such
matters, if decided adversely to the Company, would not, in the opinion of
management, have a material adverse effect on the financial condition of the
Company.
6. Stockholders' Equity
During the quarter ended March 31, 2000, options to purchase 10,000 shares
of common stock were granted. During April 2000, options to purchase 61,000
shares of common stock were granted. In addition, 28,821 shares were issued
on February 29, 2000 pursuant to the Company's Employee Stock Purchase Plan.
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 (subsequently extended through December 31, 2000).
As of March 31, 2000, the Company has repurchased 525,700 shares under the
program at a total cost of $3,718,000.
7. Income Taxes
During the three months ended March 31, 2000, the Company made income tax
payments of $2,751,000.
8. Net Income Per Share
Basic net income per share for the quarters ended March 31, 2000 and 1999
were computed using the weighted average number of common shares outstanding
during the quarters of 20,097,608 and 20,034,801, respectively.
Diluted net income per share for the three month period ended March 31, 2000
was computed by adding to net income the interest expense of $653,000 (net
of related income taxes) which is applicable to convertible
9
<PAGE>
subordinated debentures, and dividing by 22,731,598, which represents the
weighted average number of shares assuming conversion of all convertible
subordinated debentures. The computation of diluted net income per share for
the quarter ended March 31, 1999 resulted in amounts greater than the basic
net income per share. Accordingly, the basic net income per share is also
presented as the diluted net income per share.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, matters discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain "forward-looking statements" within the meaning of the
Private Securities Litigation Act of 1995 that involve risks and uncertainties.
The Company's actual results may differ materially from the results discussed in
the forward-looking statements. Forward-looking statements are based on various
factors and assumptions that include risks and uncertainties, including, but not
limited to the 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 seven geographic markets: Arizona,
Colorado, Hawaii, Northern California, Oregon, Southern California and
Washington.
For the quarter ended March 31, 2000, revenues were $160.7 million and
operating income was $16.6 million, compared to revenues of $95.9 million and
operating income of $9.1 million during the first quarter last year. Net income
was $9.7 million ($0.46 per share) for the quarter ended March 31, 2000,
compared to net income of $4.8 million ($0.24 per share) during the 1999 first
quarter. The Company's 2000 first quarter operating income includes the sale of
a land parcel during the first quarter which contributed $6.2 million and $2.0
million to the Company's revenues and operating income, respectively. Operating
margins were 10.3% of revenues in the first quarter of 2000 compared to 9.5% of
revenues in the first quarter of 1999. For the first quarter of 1999 compared to
the first quarter of 2000, revenues grew 67.6%, net income grew 102.3%, and the
number of units closed increased by 53.7% from 508 to 781.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of the
Company's revenues represented by each income statement line item presented.
<TABLE>
<CAPTION>
Three months ended % Change in Dollar Amounts
March 31, from
2000 1999 1999 to 2000
---- ---- ------------
Home and lot sales
<S> <C> <C> <C>
Revenues 100.0% 100.0% 61.2%
Costs 79.4 78.4 63.1
Selling and commissions expense 5.8 6.4 44.8
Land sales
Revenues 100.0% -- N/A
Costs 67.0 -- N/A
- ---------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 67.6
General and administrative expense 5.2 5.7 55.1
----- -----
Total costs and expenses 89.7 90.5 66.1
----- -----
Operating income 10.3 9.5 82.3
Income from unconsolidated joint ventures 0.5 0.1 931.5
Minority interest in pretax income of consolidated subsidiary (0.1) (0.1) 61.3
Other income (expense) (0.9) (1.4) 1.5
----- -----
Income before provision for income taxes 9.8 8.1 104.8
Provision for income taxes 3.8 3.1 108.7
----- -----
Net income 6.0% 5.0% 102.3
===== =====
</TABLE>
REVENUES - HOME AND LOT SALES
The Company's Revenues - Home and Lot Sales for the quarter ended March 31,
2000 were approximately $154.5 million as compared to approximately $95.9
million during the quarter ended March 31, 1999. This represents an increase of
approximately $58.6 million or 61.2%. The increase in revenues reflects a larger
number of unit sales closed at higher average sales prices in the first quarter
of 2000 relative to the first quarter of 1999. The Company's average sales price
per unit increased to $214,000 during the 2000 first quarter, an increase from
an average sales price per unit during the 1999 first quarter of $187,000
(including 11 sales that closed prior to January 1, 1999 under the Company's
"zero-down" sales program, for which the second mortgages were sold during the
1999 first quarter).
12
<PAGE>
The following table sets forth the number of sales closed during the
quarters ended March 31, 2000 and 1999, which includes 100% of the sales closed
at projects developed by the Company's joint ventures.
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
---- ----
Consolidated:
<S> <C> <C>
Colorado 423 296
Hawaii (1) 88 65
Northern California 78 23
Oregon 79 60
Washington (2) 55 57
--- ---
Total Consolidated 723 501
Unconsolidated Joint Ventures:
Colorado (3) 25 --
Hawaii (4) 6 7
Southern California (5) 27 --
--- ---
Total 781 508
=== ===
</TABLE>
(1) Excludes 11 sales that closed prior to January 1, 1999 under the Company's
"zero-down" sales program, for which the second mortgage notes were sold
during the 1999 first quarter.
(2) Reflects 100% of the information with respect to 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%.
(3) Reflects 100% of the information with respect to the Company's 50%-owned
joint venture in Colorado.
(4) Reflects 100% of the information with respect to the Company's two 50% owned
joint ventures in Hawaii.
(5) Reflects 100% of the information with respect to the Company's 24.5% to
49%-owned joint ventures in Southern California.
REVENUES - LAND SALES
Revenues - Land Sales were $6.2 million during the first quarter of 2000,
resulting from the sale of a land parcel in Northern California. Generally, land
sale revenues will fluctuate with decisions to maintain or decrease the
Company's land ownership position in certain markets based upon the volume of
its holdings, the strength and number of competing developers entering
particular markets at given points in time, the availability of land markets
served by the Company and prevailing market conditions.
COSTS AND EXPENSES - HOME AND LOT SALES
Costs and Expenses - Home and Lot Sales represents the acquisition,
development and construction costs attributable to home sales closed.
Acquisition, development and construction costs include primarily land
acquisition costs, site work and land development costs, construction material
and labor costs, engineering and architectural costs, loan fees, interest, and
other direct and indirect costs attributable to development, project management
and construction activities.
Costs and Expenses - Home and Lot Sales increased from approximately $75.2
million during the quarter ended March 31, 1999 to approximately $122.7 million
during the same period in 2000, representing an increase of approximately $47.5
million or 63.1%. This increase reflects a larger number of units closed and
related increased revenue during the first quarter of 2000 relative to the first
quarter of 1999. As a percentage of revenues, Costs and Expenses - Home and Lot
Sales increased from 78.4% to 79.4%. This increase is primarily attributable to
the different mix of development projects in which closings occurred and the
decrease in the average sales price of homes closed in
13
<PAGE>
the Oregon Division, resulting from the softening experienced in its market due
to slowing job growth.
Total interest incurred during the quarters ended March 31, 2000 and 1999
was approximately $4.9 million and $4.4 million, respectively. Of the amounts
incurred, approximately $1.1 million and $941,000 was expensed currently
(included in Other Income (Expense)), in the first quarters of 2000 and 1999,
respectively, and the remaining interest incurred was capitalized to development
projects. Interest capitalized to projects is expensed through Costs and
Expenses - Home and Lot Sales as sales are closed and revenue is recognized in
the particular project. The amount of previously capitalized interest, which was
expensed through Costs and Expenses - Home and Lot Sales, totaled $4.0 million
and $3.0 million during the quarters ended March 31, 2000 and 1999,
respectively.
Average debt outstanding was approximately $250.7 million and $229.0
million during the first quarters of 2000 and 1999, respectively. The Company's
average interest rate on its debt for the quarters ended March 31, 2000 and 1999
was approximately 7.9% and 7.7%, 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.
COSTS AND EXPENSES - LAND SALES
Costs and Expenses - Land Sales represents the acquisition and, if any,
development costs attributable to the land parcel sold.
COST AND EXPENSES - SELLING AND COMMISSIONS
Selling and commissions expense represents the selling and marketing
costs associated with the sale of homes. Such costs include commissions, sales
incentives offered to buyers, advertising costs, model and sales office costs
and other general sales and marketing costs.
Selling costs and commissions represented approximately 5.8% and 6.4% of
revenues from home and lot sales during the quarters ended March 31, 2000 and
1999, respectively. The reduction in selling and commission costs as a
percentage of revenues is a result of selling costs and commissions increasing
at a lesser 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 Costs and Expenses - Home and Lot Sales.
General and Administrative Expenses increased by $3.0 million during the
first quarter of 2000 as compared to the same period in 1999, primarily due to
expansion at the Company's U. S. mainland divisions. As a percentage of sales,
General and Administrative Expenses decreased from 5.7% during the quarter ended
March 31, 1999 to 5.2% during the quarter ended March 31, 2000. This decrease is
a result of General and Administrative Expenses increasing at a lesser rate than
revenues.
INCOME FROM UNCONSOLIDATED JOINT VENTURES
Income from Unconsolidated Joint Ventures represents (i) the Company's 50%
interest in the operations of two joint ventures in Hawaii, (ii) beginning in
the second quarter of 1999, the Company's 50% interest in its joint venture in
Colorado and (iii) beginning in the third quarter of 1999, the Company's 24.5%
to 49% interest in joint ventures in Southern California.
MINORITY INTEREST IN PRETAX INCOME OF CONSOLIDATED SUBSIDIARY
Minority Interest in Pretax Income of Consolidated Subsidiary represents
the income relating to the 11% of
14
<PAGE>
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 decrease in
Other Income (Expense) from the first quarter of 1999 to the first quarter of
2000, is primarily due to a lower ratio of debt to inventory under development.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate for the first quarters of 2000 and
1999 was approximately 38.9% and 38.1%, respectively.
VARIABILITY OF RESULTS; OTHER FACTORS
The Company has experienced, and expects to continue to experience,
significant variability in sales and net income. Factors that contribute to
variability of the Company's results include: the timing of home closings, a
substantial portion of which historically have occurred in the last month of
each quarter; the Company's ability to continue to acquire additional land on
favorable terms for future developments; the condition of the real estate
markets and economies in which the Company operates; the cyclical nature of the
homebuilding industry and changes in prevailing interest rates; costs of
material and labor; and delays in construction schedules caused by timing of
inspections and approval by regulatory agencies, including zoning approvals and
receipt of entitlements, the timing of completion of necessary public
infrastructure, the timing of utility hookups and adverse weather conditions.
The Company's historical financial performance is not necessarily a meaningful
indicator of future results and, in general, the Company's financial results
will vary from development to development, geographic area to geographic area,
and from fiscal quarter to fiscal quarter.
Certain of the Company's currently planned projects as well as future
projects, particularly in Hawaii, are anticipated to be longer term in nature
than those developed in the past by the Company. The increased length of such
projects further exposes the Company to the risks inherent in the homebuilding
industry, including reductions in the value of land inventory.
The Company's recent expansion to markets on the mainland United States
further exposes the Company to risks inherent in those markets. For example, the
Company will encounter construction issues and risks such as expansive soils and
extreme seasonal weather conditions in Colorado (dissimilar to those encountered
in Hawaii).
The Company will continue to consider its expansion into additional
selected residential housing markets in the United States mainland and into
certain foreign countries and into other related industries. The Company has and
would consider the acquisition of or joint venture with an existing company, as
well as its own acquisition and development of homebuilding projects in certain
areas, in order to facilitate its expansion. No assurances can be given that the
Company will be able to successfully establish operations outside of its
existing Hawaiian markets or that such expansion will not adversely affect its
results of operations.
In addition, the Company believes that the market price of its common stock
may at times be adversely affected due to the Company's relatively small size
when compared to certain other publicly traded national homebuilding firms. The
Company further believes that the price of its common stock may be adversely
affected due to the relatively low trading volume for its shares.
Virtually all purchasers of the Company's homes finance their purchases
with mortgage financing from lenders. In general, housing demand is adversely
affected by increases in interest rates, unavailability of mortgage financing,
increasing housing costs and unemployment. The recent increase in mortgage
interest rates and any further increases in
15
<PAGE>
mortgage interest rates may adversely affect the ability of prospective buyers
to finance home purchases and may adversely impact the Company's revenues, gross
profit margins and net income. The Company's homebuilding activities are also
dependent upon the availability and cost of mortgage financing for buyers of
homes owned by potential customers so those customers ("move-up buyers") can
sell their homes and purchase a home from the Company.
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 March 31, 2000 and 1999, which includes homes and lots sold
pursuant to the Company's "zero-down" sales program and 100% of the backlog
related to projects developed by the Company's unconsolidated joint ventures.
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
Aggregate Aggregate
Number Sales Value Number Sales Value
------ ----------- ------ -----------
Consolidated:
<S> <C> <C> <C> <C>
Colorado 635 $125,713,000 523 $ 91,798,000
Hawaii 71 20,007,000 88 24,294,000
Northern California 117 36,634,000 70 14,702,000
Oregon 45 7,703,000 111 19,961,000
Washington 137 41,958,000 62 15,109,000
----- ------------ --- ------------
Total Consolidated 1,005 232,015,000 854 165,864,000
Unconsolidated Joint Ventures:
Colorado 11 2,110,000 42 6,623,000
Hawaii 16 1,572,000 3 390,000
Southern California 37 13,229,000 -- --
----- ------------ --- ------------
Total 1,069 $248,926,000 899 $172,877,000
===== ============ === ============
</TABLE>
The average sales prices of the homes and lots comprising backlog for
consolidated projects at March 31, 2000 and 1999 were $231,000 and $194,000,
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its liquidity and capital resources to, among other
things, (i) support its operations including its inventories of land, home sites
and homes; (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 and principal payments on outstanding debt.
16
<PAGE>
CAPITAL RESOURCES
The Company anticipates continuing to acquire land for use in its future
homebuilding operations. 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 risks
and improves liquidity. Because of increased demand for undeveloped, 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.
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,
particularly increases in interest rates, described elsewhere herein and in the
Company's Annual Report on Form 10-K.
LINES OF CREDIT AND NOTES PAYABLE
On October 1, 1999, the Company increased its Revolving Credit Facility
with a consortium of banks from $120.0 million to $170.0 million. The Company
has a one-time option to reduce the amount of the facility by up to $30.0
million on an irrevocable basis, provided the facility has remained at $170.0
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 and interest coverage ratios, as defined under the credit
agreement, the interest rate may vary from LIBOR plus 1.5% to LIBOR plus 2%, or
from prime plus 0% to prime plus 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. At
April 30, 2000, and March 31, 2000, the Company had bank notes payable of
approximately $75.5 million and $61.0 million, respectively.
COMMITMENTS
At April 30, 2000, 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 during 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 (subsequently extended through December 31, 2000). As of
March 31, 2000, the Company has repurchased 525,700 shares under the program at
a total cost of $3.7 million.
In connection with the acquisition of certain assets of a homebuilder in
October 1998, the owner of the seller, who became the Division President of the
Company's Oregon Division, earns a percentage of the profits of the Oregon
Division. In connection with the acquisition of certain assets of a homebuilder
in July 1999 that established the new divisions in Southern California and
Arizona, the owners of the seller, who became officers of the new divisions,
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.
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 2000.
However, there can be no assurance that the Company will not require additional
financing within this time frame. The Company may need to raise additional funds
in order to support more rapid expansion, respond to competitive pressures,
acquire complementary businesses or respond to unanticipated requirements. The
Company may seek to raise additional funds through private or public sales of
debt or equity securities, bank debt, or otherwise. There can be no assurance
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all.
17
<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
owners of two of the three units subsequently settled in late 1999,
bringing an end to the initial suit. The one remaining plaintiff in the
second action settled in April 2000. The settlement amounts incurred by the
Company are not material to its financial condition. Although the cost of
remediation for certain units called for under the settlement agreements
are not determinable until the work is completed, the Company believes that
the cost of such work will not be material to its financial condition.
The Company is also from time to time involved in routine litigation or
threatened litigation arising in the ordinary course of its business. Such
matters, if decided adversely to the Company, would not, in the opinion of
management, have a material adverse effect on the financial condition of
the Company.
Items 2 through 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Document Description
------ --------------------
27 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K for the quarter
ended March 31, 2000.
18
<PAGE>
SCHULER HOMES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
SCHULER HOMES, INC.
Date: May 9, 2000 By: /s/ James K. Schuler
--------------------------
James K. Schuler
Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: May 9, 12000 By: /s/ Pamela S. Jones
--------------------------
Pamela S. Jones
Senior Vice President of Finance,
Chief Financial Officer and
Director (principal financial officer)
Date: May 9, 2000 By: /s/ Douglas M. Tonokawa
--------------------------
Douglas M. Tonokawa
Vice President of Finance,
Chief Accounting Officer
(principal accounting officer)
19
<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 MARCH 31, 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,737,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 442,925,000
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 496,885,000
<CURRENT-LIABILITIES> 0
<BONDS> 156,211,000
0
0
<COMMON> 214,000
<OTHER-SE> 210,643,000
<TOTAL-LIABILITY-AND-EQUITY> 496,885,000
<SALES> 160,736,000
<TOTAL-REVENUES> 160,736,000
<CGS> 0
<TOTAL-COSTS> 144,105,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,853,000
<INCOME-TAX> 6,161,000
<INCOME-CONTINUING> 9,692,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,692,000
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.46
</TABLE>
