<PAGE>
UNITED STATES
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 September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
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 OCTOBER 31, 2000
--------------------- ------------------
Common Stock, $.01 par value 20,123,909
--------------------------------------------------------------------------------
<PAGE>
SCHULER HOMES, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report.................................................................3
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999.................................4
Consolidated Statements of Operations - Three and nine months ended September
30, 2000 and 1999................................................................................5
Consolidated Statements of Cash Flows - Nine months ended September 30,
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................................20
Item 6. Exhibits and Reports on Form 8-K......................................................................20
SIGNATURES....................................................................................................................21
EXHIBIT INDEX.................................................................................................................22
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
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 September 30, 2000, and the related consolidated statements of
operations for the three-month and nine-month periods ended September 30, 2000
and 1999, and the consolidated statements of cash flows for the nine-month
periods ended September 30, 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
November 13, 2000
3
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents (restricted-Note 1) ............................................. $ 3,206,000 $ 6,673,000
Real estate inventories (Note 2) .......................................................... 458,998,000 436,305,000
Investments in unconsolidated joint ventures .............................................. 11,250,000 8,346,000
Deferred income taxes ..................................................................... 15,963,000 2,362,000
Intangibles, net (Note3)................................................................... 13,810,000 15,506,000
Other assets (Note3) ...................................................................... 24,731,000 21,274,000
------------- -------------
Total assets .............................................................................. $ 527,958,000 $ 490,466,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.......................................................................... $ 38,025,000 $ 31,819,000
Accrued expenses........................................................................... 22,879,000 19,041,000
Notes payable to banks (Note 4) ........................................................... 86,575,000 78,183,000
Notes payable to others (Note 2) .......................................................... 10,603,000 2,409,000
9% senior notes due 2008 ................................................................. 98,791,000 98,671,000
6-1/2% convertible subordinated debentures due 2003 ....................................... 57,500,000 57,500,000
------------- -------------
Total liabilities ........................................................................ 314,373,000 287,623,000
Commitments and contingencies (Notes 4 and 5)
Minority interest in consolidated subsidiary .............................................. 2,472,000 1,695,000
Stockholders' equity (Note 6):
Common stock, $.01 par value; 30,000,000 shares authorized;
21,423,609 and 21,371,825 shares issued at September 30, 2000 and December 31,
1999, respectively .................................................................... 214,000 214,000
Additional paid-in capital .............................................................. 96,304,000 96,038,000
Retained earnings........................................................................ 123,312,000 113,482,000
Treasury stock, at cost; 1,299,700 and 1,278,400 shares at September
30, 2000 and December 31, 1999, respectively ......................................... (8,717,000) (8,586,000)
------------- -------------
Total stockholders' equity ............................................................... 211,113,000 201,148,000
------------- -------------
Total liabilities and stockholders' equity ............................................... $ 527,958,000 $ 490,466,000
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Home and lot sales .................................. $ 160,363,000 $ 128,335,000 $ 488,079,000 $ 355,851,000
Land sales .......................................... --- --- 6,204,000 ---
------------- ------------- ------------- -------------
Total revenues ................................... 160,363,000 128,335,000 494,283,000 355,851,000
Costs and expenses:
Home and lot sales .................................. 120,621,000 102,642,000 376,604,000 282,436,000
Land sales .......................................... --- --- 4,155,000 ---
Selling and commissions ............................. 10,205,000 8,101,000 29,265,000 22,623,000
General and administrative .......................... 8,959,000 6,505,000 26,291,000 18,400,000
------------- ------------- ------------- -------------
Total costs and expenses ......................... 139,785,000 117,248,000 436,315,000 323,459,000
Non-cash charge for impairment of long- .................
lived assets (Note2) ............................. 36,398,000 --- 36,398,000 ---
------------- ------------- ------------- -------------
Operating income (loss) ................................. (15,820,000) 11,087,000 21,570,000 32,392,000
Income (loss) from unconsolidated joint
ventures ....................................... (14,000) 556,000 1,069,000 893,000
Minority interest in pretax income of
consolidated subsidiary ........................... (261,000) (99,000) (777,000) (272,000)
Other income (expense) (Notes 3 and 4) .................. (1,701,000) (625,000) (6,151,000) (3,492,000)
------------- ------------- ------------- -------------
Income (loss) before provision (credit) for
taxes income........................................ (17,796,000) 10,919,000 15,711,000 29,521,000
Provision (credit) for income taxes (Note 7) ............ (7,034,000) 4,224,000 5,881,000 11,360,000
------------- ------------- ------------- -------------
Net income (loss) ....................................... $ (10,762,000) $ 6,695,000 $ 9,830,000 $ 18,161,000
============= ============= ============= =============
Net income (loss) per share (Note 8):
Basic ................................................... $ (0.54) $ 0.34 $ 0.49 $ 0.91
============= ============= ============= =============
Diluted ................................................. $ (0.54) $ 0.33 $ 0.49 $ 0.91
============= ============= ============= =============
</TABLE>
See accompanying notes.
5
<PAGE>
SCHULER HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
(unaudited)
-----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................................ $ 9,830,000 $ 18,161,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization expense ............................................ 5,529,000 3,366,000
Income distribution received from unconsolidated joint ventures in excess of
income recognized (income from unconsolidated joint ventures recognized
in excess of income distribution received)..................................... 986,000 (424,000)
Change in principal balance of notes receivable .................................. 720,000 735,000
Forgiveness of note receivable ................................................... 480,000 ---
Minority interests ............................................................... 777,000 272,000
Non-cash charge for impairment of long-lived assets............................... 36,398,000 ---
Changes in assets and liabilities, net of effects of purchase of additional 40%
interest in Stafford Homes:
(Increase) decrease in real estate inventories ..................................... (52,745,000) (56,093,000)
(Increase) decrease in other assets ................................................ (4,192,000) (2,327,000)
Increase (decrease) in accounts payable ............................................ 6,206,000 9,257,000
Increase (decrease) in accrued expenses ............................................ 3,953,000 4,078,000
Change in deferred income taxes .................................................... (13,601,000) 1,144,000
------------- -------------
Net cash provided by (used in) operating activities ............................ (5,659,000) (21,831,000)
INVESTING ACTIVITIES:
Purchase of additional 40% interest in Stafford Homes, net of cash acquired ........... --- (4,227,000)
Acquisition of certain assets of Keys Homes ........................................... --- (1,000,000)
Investment in unconsolidated joint ventures ........................................... (3,769,000) (2,185,000)
Advances to unconsolidated joint ventures ............................................. (1,813,000) (517,000)
Repayment of advances to unconsolidated joint ventures ................................ 1,211,000 975,000
Capital distributions from unconsolidated joint ventures .............................. 481,000 1,713,000
Purchase of furniture, fixtures, and equipment ........................................ (1,791,000) (1,004,000)
------------- -------------
Net cash provided by (used in) investing activities ............................ (5,681,000) (6,245,000)
FINANCING ACTIVITIES:
Proceeds from bank borrowings ......................................................... 213,214,000 240,373,000
Principal payments on bank borrowings ................................................. (204,822,000) (172,462,000)
Principal payments on notes payables to others ........................................ (1,395,000) (729,000)
Refinancing of Stafford Homes' debt ................................................... --- (29,378,000)
Advance to affiliate (Note 3) ......................................................... --- (5,810,000)
Repayment of advances to affiliates (Note 3) .......................................... 621,000 255,000
Net decrease in discount on issuance of senior notes .................................. 120,000 119,000
Proceeds from issuance of common stock from exercise of stock options ................. --- 64,000
Proceeds from issuance of common stock under Employee Stock Purchase Plan ............. 266,000 348,000
Reacquisition of the Company's common stock ........................................... (131,000) (2,969,000)
------------- -------------
Net cash provided by (used in) financing activities ........................... 7,873,000 29,811,000
------------- -------------
Increase (decrease) in cash ........................................................... (3,467,000) 1,735,000
Cash and cash equivalents (restricted) at beginning of period ......................... 6,673,000 4,915,000
------------- -------------
Cash and cash equivalents (restricted) at end of period ............................... $ 3,206,000 $ 6,650,000
============= =============
</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 September 30, 2000 is a restricted
amount of $1,059,000, which primarily represents a collection allowance
resulting from the sale of second mortgage notes 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. In contemplation of the pending transaction to combine
the business of the group of privately-held partnerships and limited
liability companies known as Western Pacific Housing (WPH) with the
Company's business, the Company plans to increase its product offerings in
Hawaii by adding projects in various areas on the islands of Oahu, Maui,
Kauai and Hawaii, while reducing its investment in longer term land parcels
in areas where it has a concentration of land. The change in strategy
resulted in the recognition of a non-cash charge for impairment of
long-lived assets, pursuant to Financial Accounting Standards Board
Statement No. 121, of approximately $36,398,000 ($22,198,000 after-tax)
during the quarter ended September 30, 2000, which resulted in reported
operating and net losses for the quarter. See Note 9.
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 September 30, 2000 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Unimproved land held for future development.................. $ 38,419,000
Development projects in progress............................. 392,002,000
Completed inventory (including lots held for sale)........... 28,577,000
-------------
$ 458,998,000
=============
</TABLE>
Completed inventory includes residential units which are substantially
ready for occupancy.
During the nine months ended September 30, 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 $9,590,000.
3. Related Party Transactions
During the prior quarter ended June 30, 2000, $1,443,000 of Other Income
(Expense) represented (i) the amortization of the unamortized balance of
intangibles associated with the Company's acquisition of certain assets of
Keys Homes in October 1998 and (ii) the forgiveness by the Company of a
portion of the note receivable from the former owner of Keys Homes and
former Oregon Division President, who has relinquished his right to a
percentage of profits of the Oregon division. During the quarter ended
September 30, 2000, the remaining note receivable balance of approximately
$351,000 was repaid to the Company.
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 Company issued 400,000 shares of its common stock to the
owners of the seller, who became officers of the new divisions. In
addition, the Company provided a loan to the seller in the amount of
$4,810,000, which balance at September 30, 2000 was $4,406,000 and is
included in Other Assets. The loan is due on December 31, 2004 and bears
interest at 7% per annum. Accrued interest receivable relating to the loan
was approximately $258,000 at September 30, 2000.
As a part of the Company's July 1999 asset acquisition, officers in the
new divisions who formerly owned the acquired assets received membership
interests in SRHI, LLC, which provide them with an interest in the
profits of the 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. SRHI, LLC is an affiliate of the Company. Upon
consummation of the pending transaction with WPH, the Company will
purchase the SRHI, LLC membership interests from the former owners of
the acquired assets for $9,000,000, payable as follows: $2,500,000 upon
the later of the consummation of the pending transaction or January 1,
2001, $2,000,000 on the one-year anniversary of the consummation of the
pending transaction, and a note for $4,500,000 that matures four years
after the consummation of the pending transaction and that bears
interest at 7% per annum. See Note 9.
4. Notes Payable to Banks
The Company has a Revolving Credit Facility with a consortium of banks in
the amount of $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. 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 September 30,
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. The second swap, which
became effective on August 9, 1999, requires the Company to pay interest at
8
<PAGE>
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. In October 2000, both swaps were canceled
at a cost of approximately $18,000.
Notes Payable to Banks at September 30, 2000 consist of borrowings under
its credit facilities. At September 30, 2000, the Company's bank borrowings
were at interest rates of prime (9.5%) and LIBOR plus 1.5% (8.1%). At
September 30, 2000, $83,425,000 of the Company's line of credit is unused,
of which $7,555,000 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 $3,632,000 during
the quarter ended September 30, 2000. Interest incurred during the quarter
ended September 30, 2000 was approximately $5,086,000. All of such interest
was capitalized to real estate inventories except for $1,378,000, 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 September 30, 2000 totaled
$4,026,000.
5. Commitments and Contingencies
At September 30, 2000, the Company had under contract to purchase for
approximately $1,600,000, land for residential development.
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
On August 31, 2000, 22,963 shares of common stock were issued 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. As of September 30, 2000, the Company had repurchased 525,700 shares
under the program at a total cost of $3,718,000. The program, which the
Company intended to continue until December 31, 2000, has been suspended
due to the pending transaction with WPH. See Note 9.
7. Income Taxes
During the three months ended September 30, 2000, the Company made income
tax payments, net of refunds, of $5,934,000.
8. Net Income Per Share
Basic net income per share for the quarter and nine months ended September
30, 2000 were computed using the weighted average number of common shares
outstanding during the periods of 20,108,434 and 20,102,329, respectively.
Basic net income per share for the quarter and nine months ended September
30, 1999 were computed using the weighted average number of common shares
outstanding during the periods of 19,968,925 and 19,967,688, respectively.
Diluted net income per share for the three-month period ended September 30,
1999 was computed by adding to net income the interest expense of $842,000
(net of related income taxes), which is applicable to convertible
9
<PAGE>
subordinated debentures, and dividing by 22,602,915, 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 and nine months ended September 30, 2000 and the nine
months ended September 30, 1999, resulted in amounts greater than the basic
net income per share. Accordingly, the basic net income per share for these
periods is also presented as the diluted net income per share.
9. Transaction with Western Pacific Housing
On September 12, 2000, the Company and the owners of the group of
privately-held partnerships and limited liability companies collectively
known as Western Pacific Housing (WPH) signed an agreement providing for a
reorganization in which the businesses and operations of the Company and
WPH will be combined. Following a series of transactions provided for in
this agreement, a new company to be named "Schuler Homes, Inc." will
acquire all of the common stock of the Company and the ownership interests
in WPH as well as their businesses and operations. Existing stockholders of
the Company will exchange their shares of the Company's stock for Class A
common stock of this new company on a 1-for-1 basis. The owners of WPH will
exchange their interests in WPH for (and a lender of WPH will receive)
shares of Class B common stock of this new company equal in an aggregate
amount to the shares of Class A common stock issued to the Company's
stockholders in the reorganization.
The holders of the Class A common stock initially will be entitled to elect
five of the nine directors of the new company. The holders of the Class B
common stock will be entitled to elect the remaining directors. In
addition, the holders of each of these classes of common stock will vote
separately as a class to approve some extraordinary transactions and some
amendments of the new company's certificate of incorporation. On most other
matters, holders of Class A common stock will have one vote per share and
holders of Class B common stock will have one-half vote per share. The
Class B common stock will automatically convert into Class A common stock
(on a 1-for-1 basis) if, among other things, it is transferred to anyone
other than a beneficial owner of the Class B common stock as of the date
the reorganization is completed.
The reorganization is structured to be tax-free to the Company's existing
stockholders and is expected to close in early 2001 following the receipt
of required stockholder approval and satisfaction of customary closing
conditions. For accounting purposes, the Company expects to treat the
reorganization as a purchase of WPH. Under this method, the WPH assets
acquired and liabilities assumed will be recorded at their fair market
value when the reorganization is completed.
10
<PAGE>
Item 2. 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 September 30, 2000, revenues were $160.4 million
compared to revenues of $128.3 million during the third quarter last year.
Operating income and net income during the third quarter of 2000, before the
non-cash charge for impairment of long-lived assets discussed below, were $20.6
million and $11.4 million ($0.53 per share-diluted), respectively, representing
increases of 85.6% and 70.8%, respectively, over operating income of $11.1
million and net income of $6.7 million during the third quarter of last year.
These results reflect the 2000 third quarter operating margin of 12.8%, a
significant improvement over last year's third quarter operating margin of 8.6%.
The expansion of the Company's operating margin is primarily due to sales price
increases in the Company's Colorado and Northern California divisions, as well
as higher gross margins in the Company's Hawaii and Washington divisions. After
giving effect to the non-cash charge for impairment of long-lived assets
discussed below, the Company had operating and net losses of $15.8 million and
$10.8 million for the quarter ended September 30, 2000.
For the nine months ended September 30, 2000, revenues were $494.3
million compared to revenues of $355.9 million during the same period last
year. Operating income and net income during the nine months ended September
30, 2000, before the non-cash charge for impairment of long-lived assets
discussed below, were $58.0 million and $32.0 million, respectively,
representing increases of 79.0% and 76.4%, respectively, over operating
income of $32.4 million and net income of $18.2 million during the first nine
months of 1999. After giving effect to the non-cash charge for impairment of
long-lived assets discussed below, the Company had operating and net income
of $21.6 million and $9.8 million, respectively, for the nine months ended
September 30, 2000.
On September 12, 2000, the Company signed an agreement with the owners
of the group of privately-held partnerships and limited liability companies
collectively known as Western Pacific Housing (WPH) to combine the business
of WPH with the Company, effectively doubling the size of the Company. WPH is
the sixth largest homebuilder in California and has a strong market presence
in major population centers of Northern and Southern California. The Company
believes the transaction with WPH will create a well-diversified homebuilder
focused on the Western United States that will rank among the top 15
homebuilders in the United States and among the leaders in several markets -
6th in the robust California market, and in the top 3 in Colorado, Hawaii,
Washington and Oregon, with a growing presence in Arizona. See Note 9 to the
unaudited interim financial statements of the Company set forth under Item 1
above.
In contemplation of the transaction with WPH, the Company plans to increase
its product offerings in Hawaii by adding projects in various areas on the
islands of Oahu, Maui, Kauai and Hawaii, while reducing its investment in longer
term land parcels in areas where it has a concentration of land. The change in
strategy resulted in the recognition of a non-cash charge for impairment of
long-lived assets, pursuant to Financial Accounting Standards Board Statement
No. 121, of approximately $36.4 million ($22.2 million after-tax) during the
quarter ended September 30, 2000, which resulted in reported operating and net
losses for the quarter.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of the Company's revenues represented by selected financial data.
<TABLE>
<CAPTION>
Three months ended
September 30,
2000 1999
----- ----
<S> <C> <C>
Total revenues 100.0 % 100.0 %
Costs and expenses:
Home, lot and land sales 75.2 80.0
Selling and commissions expense 6.4 6.3
General and administrative expense 5.6 5.1
---- ----
Total costs and expenses 87.2 91.4
---- ----
Operating income before non-cash charge for impairment
of long-lived assets(1) 12.8 % 8.6 %
==== ====
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
----- ----
<S> <C> <C>
Total revenues 100.0 % 100.0 %
Costs and expenses:
Home, lot and land sales 77.0 79.4
Selling and commissions expense 5.9 6.3
General and administrative expense 5.3 5.2
---- ----
Total costs and expenses 88.3 90.9
---- ----
Operating income before non-cash charge for impairment
of long-lived assets(1) 11.7 % 9.1 %
==== ====
</TABLE>
(1) Represents operating income before the non-cash charge for impairment of
long-lived assets as a percentage of revenues. During the quarter ended
September 30, 2000, the Company recognized a non-cash charge for impairment
of long-lived assets of approximately $36.4 million ($22.2 million after
tax), resulting in reported operating and net losses for the quarter of $15.8
million and $10.8 million, respectively. Operating income, exclusive of the
non-cash charge, was $20.6 million and $58.0 million for the three months and
nine months ended September 30, 2000, respectively.
TOTAL REVENUES
The Company's Total Revenues for the quarter ended September 30, 2000 were
approximately $160.4 million as compared to approximately $128.3 million during
the quarter ended September 30, 1999. This represents an increase of
approximately $32.0 million or 25.0%. The increase in revenues reflects a larger
number of unit sales closed at higher average sales prices in the third quarter
of 2000 relative to the third quarter of 1999. The Company's average sales price
per unit increased to $226,000 during the 2000 third quarter from an average
sales price per unit during the third quarter of 1999 of $202,000.
The Company's Total Revenues for the nine months ended September 30, 2000
were approximately $494.3 million as compared to approximately $355.9 million
during the nine months ended September 30, 1999. This represents an increase of
approximately $138.4 million or 38.9%. The increase in revenues reflects a
larger number of unit sales closed at higher average sales prices in the first
nine months of 2000 relative to the first nine months of 1999. The Company's
average sales price per unit increased to $224,000 during the first nine months
of 2000 from an average sales price per unit during the first nine months of
1999 of $194,000.
12
<PAGE>
The following table sets forth the number of sales closed during the
three-month and nine-month periods ended September 30, 2000 and 1999, which
includes 100% of the sales closed at projects developed by the Company's joint
ventures.
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consolidated:
Colorado 388 339 1,241 995
Hawaii 68 71 232(1) 229(1)
Northern California 88 76 239 159
Oregon 71 85 220 243
Southern California 2 --- 2 ---
Washington (2) 92 71 247 199
--- --- ----- -----
Total Consolidated 709 642 2,181 1,825
Unconsolidated Joint Ventures:
Colorado (3) --- 36 36 56
Hawaii (4) 9 5 32 16
Southern California (5) 14 9 76 9
--- --- ----- -----
Total 732 692 2,325 1,906
=== === ===== =====
</TABLE>
(1) Excludes 12 and 11 sales that closed prior to April 1, 2000 and January 1,
1999, respectively, under the Company's "zero-down" sales program, for
which the second mortgage notes were sold during the 2000 second quarter
and 1999 first quarter, respectively.
(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 from land sales were $6.2 million during the first quarter of
2000, resulting from the sale of a land parcel in Northern California. There
were no land sales during the second or third quarter of 2000. 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, LOT AND LAND SALES
Costs and Expenses - Home, Lot and Land Sales represents the acquisition,
development and construction costs attributable to home, lot and land 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, Lot and Land Sales increased from approximately
$102.6 million during the quarter ended September 30, 1999 to approximately
$120.6 million during the same period in 2000, representing an increase of
approximately $18.0 million or 17.5%. This increase reflects a larger number of
units closed and related increased
13
<PAGE>
revenue during the third quarter of 2000 relative to the third quarter of 1999.
As a percentage of related revenues, Costs and Expenses - Home, Lot and Land
Sales decreased from 80.0% in the third quarter of 1999 to 75.2% in the 2000
third quarter. This decrease is primarily attributable to higher margins
realized in Northern California, Colorado, Hawaii and Washington. Sales price
increases in the Company's Colorado and Northern California markets were the
main contributors to this margin expansion. Average sales prices of homes closed
in Colorado increased from approximately $181,000 during the third quarter of
1999 to $208,000 during the third quarter of 2000. In Northern California, the
average sales price increased from $255,000 to $327,000 during the same periods.
While some of the sales price increases are the result of a different mix of
homes closed, much of it is due to market strength.
Costs and Expenses - Home, Lot and Land Sales increased from approximately
$282.4 million during the nine months ended September 30, 1999 to approximately
$380.8 million during the same period in 2000, representing an increase of
approximately $98.3 million or 34.8%. This increase reflects a larger number of
units closed and related increased revenue during the first nine months of 2000
relative to the first nine months of 1999. As a percentage of revenues, Costs
and Expenses - Home, Lot and Land Sales decreased from 79.4% to 77.0%. Increased
sales prices in many of the Company's mainland markets, coupled with the
closings of home sales in projects in which land costs were lower than the cost
at which land can be purchased today, positively impacted the Company's profit
margins during the third quarter and first nine months of 2000. The Company
believes that since there can be no assurance that it will be able to raise
sales prices in the future at the same rate as increases in land and
construction costs, profit margins in the future will likely be lower than those
achieved in the third quarter of 2000.
Total interest incurred during the quarters ended September 30, 2000 and
1999 was approximately $5.1 million and $4.8 million, respectively. Of the
amounts incurred, approximately $1.4 million and $372,000 was expensed currently
(included in Other Expense), in the third 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 $4.5 million during the quarters ended September 30, 2000 and 1999,
respectively.
Total interest incurred during the nine months ended September 30,
2000 and 1999 was approximately $14.8 million and $13.6 million,
respectively. Of the amounts incurred, approximately $3.9 million and $2.0
million was expensed currently (included in Other Expense), in the nine
months ended September 30, 2000 and 1999, respectively, and the remaining
interest incurred was capitalized to development projects. The amount of
previously capitalized interest, which was expensed through Costs and
Expenses - Home and Lot Sales, totaled $12.3 million and $11.9 million during
the nine months ended September 30, 2000 and 1999, respectively.
Average debt outstanding was approximately $254.9 million and $244.7
million during the third quarters of 2000 and 1999, respectively. The
Company's average interest rate on its debt for the quarters ended September
30, 2000 and 1999 was approximately 7.9% and 7.8%, respectively. Average debt
outstanding was approximately $247.9 million and $235.1 million during the
nine months ended September 30, 2000 and 1999, respectively. The Company's
average interest rate on its debt for the nine months ended September 30,
2000 and 1999 was approximately 7.9% and 7.8%, 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 Costs and Expenses - Home and Lot
Sales as sales are closed and revenue is recognized.
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.
14
<PAGE>
Selling costs and commissions represented approximately 6.4% and 6.3% of
revenues from home and lot sales during the quarters ended September 30, 2000
and 1999, respectively. Selling costs and commissions represented
approximately 5.9% and 6.3% of Total Revenues during the nine months ended
September 30, 2000 and 1999, respectively.
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 $2.5 million or 37.7%
during the third 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 increased from 5.1%
during the quarter ended September 30, 1999 to 5.6% during the quarter ended
September 30, 2000. This increase is a result of General and Administrative
Expenses incurred at the new Southern California and Arizona divisions, where
only two home sales had closed as of September 30, 2000. In addition, the
increase includes the accrual of incentive bonuses, which reward employees for
higher profit margins and higher returns on investment.
General and Administrative Expenses increased by $7.9 million or 42.9%
during the first nine months of 2000 as compared to the same period in 1999. As
a percentage of sales, General and Administrative Expense was 5.3% and 5.2%
during the first nine months of 2000 and the first nine months of 1999,
respectively.
NON-CASH CHARGE FOR IMPAIRMENT OF LONG-LIVED ASSETS
In contemplation of the pending transaction with WPH, the Company plans to
increase its product offerings in Hawaii by adding projects in various areas on
the islands of Oahu, Maui, Kauai and Hawaii, while reducing its investment in
longer term land parcels in areas where it has a concentration of land. The
change in strategy resulted in the recognition of a non-cash charge for
impairment of long-lived assets, pursuant to Financial Accounting Standards
Board Statement No. 121, of approximately $36.4 million ($22.2 million
after-tax) during the quarter ended September 30, 2000, which resulted in
reported operating and net losses for the quarter.
INCOME (LOSS) FROM UNCONSOLIDATED JOINT VENTURES
Income (Loss) 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. During the quarter ended September 30, 2000, 23 home sales closed
at less profitable Hawaii and Southern California joint venture projects. In
addition, the more profitable Colorado joint venture project had completely
sold and closed all of its homes prior to the beginning of the 2000 third
quarter. The income from the Company's joint venture projects was
insufficient to cover the amortization of certain prepaid costs recorded on
the Company's books. As a result, income from unconsolidated joint ventures
declined from income of $556,000 in the third quarter of 1999 to a loss of
$14,000 in the third quarter of 2000.
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; reduced by (iv) interest income. In
addition, the increase in Other Expense from the third quarter and first nine
months of 1999 to the third quarter and first nine months of 2000 is due to a
higher amount of
15
<PAGE>
interest expensed rather than capitalized at the Oregon division, resulting from
a decrease in the amount of inventory under construction due to the current
softness in the Oregon real estate market conditions and also due to the
following, which occurred during the quarter ended June 30, 2000: (i) the
amortization of the unamortized balance of intangibles associated with the
Company's acquisition of certain assets of Keys Homes in October, 1998 and (ii)
the forgiveness by the Company of a portion of the note receivable from the
former owner of Keys Homes and former Oregon Division President, who has
relinquished his right to a percentage of profits of the Oregon division.
PROVISION (CREDIT) FOR INCOME TAXES
The Company's effective income tax rate for the third quarters of 2000 and
1999 was approximately 39.5% and 38.7%, respectively. The Company's effective
income tax rate for the nine months ended September 30, 2000 and 1999 was
approximately 37.4% and 38.5%, respectively.
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 September 30, 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>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
Aggregate Aggregate
Number Sales Value Number Sales Value
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Consolidated:
Colorado 474 $ 99,586,000 621 $ 114,218,000
Hawaii 88 26,491,000 97 26,955,000
Northern California 164 47,592,000 114 30,280,000
Oregon 54 10,008,000 66 12,763,000
Southern California 56 14,535,000 -- --
Washington 104 34,985,000 77 21,662,000
--- ------------- -- -------------
Total Consolidated 940 233,197,000 975 205,878,000
Unconsolidated Joint Ventures:
Colorado -- -- 41 7,156,000
Hawaii 21 2,595,000 6 820,000
Southern California 15 5,962,000 10 3,063,000
--- ------------- -- -------------
Total 976 $ 241,754,000 1,032 $ 216,917,000
=== ============= ===== =============
</TABLE>
The average sales prices of the homes and lots comprising backlog for
consolidated projects at September 30, 2000 and 1999 were $248,000 and $211,000,
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. The higher average sales price at September 30, 2000 compared
to September 30, 1999 is primarily attributable to increased sales prices in the
Company's mainland U.S. divisions due to strong mainland U.S. housing markets
and a different mix of homes sold.
At September 30, 2000, the Company's Colorado division's backlog was 474
units, as compared to 621 units at September 30, 1999. In Colorado, the Company
completely sold out of a number of its projects in the first half of 2000 as a
result of the strong rate of orders experienced earlier in the year. As of
September 30, 2000, the Colorado division was offering homes for sale from 9
active communities as compared to 13 a year ago. The Company has raised its
sales
16
<PAGE>
prices in Colorado to slow orders to match its construction pace and is
developing a number of new sites to increase the number of active communities
over the next year in this division from 9 to approximately 15 a year from now.
At September 30, 2000, the Company's Colorado division had approximately 6,450
lots that it either owned or controlled under option contracts.
VARIABILITY OF RESULTS; OTHER FACTORS
The Company has experienced, and expects to continue to experience,
significant variability in sales and net income. There are a number of
factors which could cause the Company's operating results to vary from
quarter to quarter. They include the following:
- timing of home closings
- the timing of, and profit from, land sales
- when the Company receives regulatory approvals to begin development of
land or building homes in particular communities
- the timing and completion of necessary public infrastructure
- the timing of utility hookups
- promotional pricing by competitors
- when the Company opens new residential communities for sales
- oversupply of homes
The Company's historical financial performance is not necessarily a
meaningful indicator of future results and, in general, the Company's
financial results will vary from development to development, and from fiscal
quarter to fiscal quarter.
As a homebuilder, the Company is subject to numerous risks, many of which
are beyond its control, including:
- Adverse weather conditions, such as droughts, floods, earthquakes,
wildfires or other natural disasters, which could damage the Company's
projects, cause delays in completion of its projects or reduce consumer
demand for its projects
- Shortages in labor or materials that could delay completion of the
Company's projects and increase the prices it pays for
labor or materials, thereby affecting its sales and profitability
- An oversupply of alternatives to new homes, such as rental properties
and used homes, could occur and could depress prices and reduce margins for
the sale of new homes.
- Landslides, soil subsidence, earthquakes and other geologic events could
occur that could damage the Company's projects, cause delays in the
completion of its projects or reduce consumer demand for its projects. Many
of the Company's projects are located in California, which has experienced
significant earthquake activity, including the 1994 earthquake in Northridge,
California. Losses associated with these events may not be insurable,
insurable at a reasonable cost or subject to effective indemnification
arrangements. In addition to direct damage to the Company's projects,
earthquakes or other geologic events could damage roads and highways
providing access to those projects, thereby adversely affecting the Company's
ability to market homes in those areas and possibly increasing the costs of
completion
- Construction defects, soil subsidence, inadequate sales disclosure
notices and other building related claims may be asserted against the
Company
Weather may significantly influence demand in some of the Company's
markets. Weekend weather is a particularly strong factor since that is when
the majority of home sales are initiated. In addition, adverse weather
conditions may delay site improvements and foundation work, among other
construction processes. There can be no assurance that weather patterns which
result in unseasonably cool temperatures, rain or snow, water shortages or
floods, or any of the other factors described above will not materially
adversely affect the Company's financial condition or results of operations.
The residential homebuilding industry is cyclical and highly sensitive
to changes in general economic and business conditions, both local and
national, such as levels of employment, consumer confidence and income,
availability of financing for acquisitions, construction and permanent
mortgages, interest rate levels and demand for housing. Sales of new homes
are also affected by the condition of the resale market for used homes,
including foreclosed homes.
General economic and business conditions, both local and national, may
be less favorable in the future. For example, California underwent a
significant recession in the early 1990s. Since the Company has many projects
in California, a decline in the economic and business conditions in
California could significantly affect the demand for its homes. Increases in
the rate of inflation could adversely affect the Company's margins by
increasing its costs and expenses. In times of high inflation, demand for
housing may decline and the Company may be unable to recover its increased
costs through higher sales prices.
Inflation can increase the cost of homebuilding materials, labor and
other construction related costs. Conversely, deflation can reduce the value
of homebuilders' inventories and cause the Company to reduce its sales
prices, resulting in decreased profits.
The homebuilding industry is subject to significant variability and
fluctuations in real estate values. As a result, the Company may be required
to write-down the book value of their real estate assets in accordance with
generally accepted accounting principles, and some of those write-downs could
be material. In addition, certain of the Company's currently planned projects
as well as future projects may 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. For example, in
contemplation of the pending transaction with WPH, the Company plans to
increase its product offerings in Hawaii by adding projects in various areas
on the islands of Oahu, Maui, Kauai and Hawaii, while reducing its investment
in longer term land parcels in areas where it has a concentration of land.
The change in strategy resulted in the recognition of a non-cash charge for
impairment of long-lived assets, pursuant to Financial Accounting Standards
Board Statement No. 121, of approximately $36.4 million ($22.2 million
after-tax) during the quarter ended September 30, 2000, which resulted in
reported operating and net losses for the quarter.
Since 1996, the Company has significantly expanded its operations by
moving into the Colorado, northern California, Oregon, southern California,
Washington and Arizona markets. New markets may be less stable and may
involve delays, problems and expenses, including construction issues and
risks not typically found in the markets with which the Company is most
familiar. There can be no assurance that the Company will successfully
establish operations outside of its existing markets or that its expansion
will not adversely affect its results of operations or financial condition.
The Company recently experienced substantial growth. While the Company
has recently expanded their management, particularly with respect to
administrative personnel in the land acquisition, construction management,
financial and administrative areas, there can be no assurance that the
Company will be able to hire the necessary personnel or develop the
infrastructure necessary to meet anticipated future growth.
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 increases in mortgage interest
rates over the past year and any further increases in 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.
In developing a project, the Company must obtain the approval of numerous
governmental authorities regulating such matters as permitted land uses and
levels of density and the installation of utility services such as electricity,
water and waste disposal. The Company is also subject to local, state and
federal statutes and rules regulating environmental matters, protection and
preservation of archeological finds, worker safety, advertising, consumer
credit, zoning, building moratoriums, building design and density requirements
which limit the number of homes that can be built within a particular project,
and fees imposed to defray the cost of providing certain governmental services
to developing areas. These laws may result in delays, cause the Company to incur
substantial compliance costs and prohibit or severely restrict development in
certain regions or areas.
To varying degrees, certain permits and approvals are required to complete
the residential developments in progress or currently being planned by the
Company. The ability of the Company to obtain necessary approvals and permits
for these projects is often beyond the Company's control and could restrict or
prevent the development of otherwise desirable property.
17
<PAGE>
In addition, the continued effectiveness of permits already granted is
subject to factors such as changes in policies, rules and regulations and
their interpretation and application.
The Company may also be subject to additional costs, delays or may be
precluded entirely from developing its projects because of government
regulations that could be imposed due to growth control initiatives or
unforeseen health, safety, welfare, archeological or environmental concerns.
The homebuilding industry is highly competitive. Homebuilders compete
for, among other things, desirable properties, financing, raw materials and
skilled labor. The Company competes both with large homebuilding companies,
some of which have greater financial resources than it does, and with smaller
local builders. The Company also competes for sales with individual resales
of existing homes and with available rental housing. If the Company cannot
compete successfully for the raw materials and resources to construct its
homes or with respect to sales of its homes, it could have a material adverse
effect on its financial condition and results of operations.
The Company generally provides limited warranties of at least one to two
years for workmanship and materials and for longer periods with respect to
structural components. Because the Company contracts its homebuilding work
to contractors or subcontractors who provide the Company with an indemnity
and a lien release prior to receiving payment from the Company for their
work, claims relating to workmanship and materials are generally the primary
responsibility of the Company's contractors or subcontractors. However, to
the extent that the Company's contractors or subcontractors do not cover
warranty claims, the Company has established reserves to cover warranty
expenses. The Company's historical experience is that warranty expenses
generally fall within the reserves established, although there can be no
assurance that the Company will continue to have this same experience in the
future. From time to time, the Company purchases structural warranty coverage
from third party insurers, and it expects to continue to do so as it deems
necessary.
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.
The Company anticipates continuing to acquire land for use in its future
homebuilding operations, including raw land, finished lots and partially
developed land. The Company currently intends to acquire a portion of the land
inventories required in future periods through takedowns of lots subject to
option contracts entered into in prior periods and under new option contracts.
The use of option contracts lessens the Company's land-related 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 has a Revolving Credit Facility with a consortium of banks in the
amount of $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. 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 October 31, 2000, and September 30, 2000, the Company
had bank notes payable of approximately $85.0 million and $86.6 million,
respectively. The Company intends to maintain its existing revolving credit
facility following the pending transaction with WPH and is currently in the
process of increasing the amount of its revolving credit facility to $200.0
million, although there can be no assurance that the increase will be
consummated.
The Company previously entered into two interest rate swaps. One swap
required the Company to pay a fixed rate of 5.75% on $30.0 million, while
receiving an interest payment at a floating one-month LIBOR. However, if the
one-month LIBOR reset at or above 7.0%, the swap reversed for that payment
period and no interest payments were exchanged. The second swap, which became
effective on August 9, 1999, required the Company to pay interest at a floating
one-month LIBOR on $30.0 million, while receiving an interest payment at a fixed
rate of 6.31%. The interest rate differential on these swaps to be received or
paid was recognized during the period as an adjustment to interest incurred.
Both swaps were cancelled on October 12, 2000 at a cost of approximately
$18,000.
At October 31, 2000, the Company had commitments to purchase parcels of
land for approximately $1.6 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 and 2001. 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 $10.0 million of its outstanding common
stock. As of September 30, 2000, the Company had repurchased 525,700 shares
under the program at a total cost of $3.7 million. The program, which the
Company intended to continue until December 31, 2000, has been suspended due
to the pending transaction with WPH.
18
<PAGE>
In connection with its 1997 purchase of a 49.0% interest in Stafford Homes,
the Company had an option to purchase the remaining 51.0% interest in Stafford
Homes based on a pre-determined formula, subject to specified contingencies. In
January 1999, the Company increased its ownership interest in Stafford Homes to
89.0% and refinanced Stafford Homes' existing debt. The Company anticipates that
it will acquire the remaining 11.0% interest in Stafford Homes in January 2001.
As a part of the Company's July 1999 asset acquisition that established
new divisions in Southern California and Arizona, officers in the new
divisions who formerly owned acquired assets received membership interests in
SRHI, LLC, which provide them with an interest in the profits of the 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. SRHI, LLC
is an affiliate of the Company. Upon consummation of the pending transaction
with WPH, the Company will purchase the SRHI, LLC membership interests from
the former owners of the acquired assets for $9.0 million, payable as
follows: $2.5 million upon the later of the consummation of the pending
transaction with WPH or January 1, 2001, $2.0 million on the one-year
anniversary of the consummation of the pending transaction, and a note for $4.5
million that matures four years after the consummation of the pending
transaction and that bears interest at 7.0% per annum.
The Company has no material commitments or off-balance sheet financing
arrangements that would tend to affect future liquidity. The Company anticipates
that it can 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 it can meet its long-term capital needs,
including meeting debt payments and refinancing or paying off other long-term
debt, from operations and external financing sources, assuming that no
significant adverse changes in the Company's business or general economic
conditions occur. However, there can be no assurance that the Company will not
require additional financing. The Company may need to raise additional funds to
support more rapid expansion, respond to competitive pressures, acquire
companies in the homebuilding industry and other related industries, or respond
to unanticipated requirements. For example, the Company is evaluating financing
opportunities and alternatives in connection with the pending transaction with
Western Pacific. 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 additional funding will be available on attractive terms,
or at all.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company limited its market risk on $30.0 million of its revolving
credit facility by entering into an interest rate swap agreement, which
converted floating rate debt to a fixed rate basis. This derivative financial
instrument was used for hedging purposes rather than speculation. The Company
does not enter into financial instruments for trading purposes.
As an example, based upon the Company's average bank borrowings of $81.0
million during 1999, if the interest rate indexes on which the Company's bank
borrowing rates are based increased 100 basis points in the year ending December
31, 2000, interest incurred would increase and cash flow would decrease for the
year ending December 31, 2000 by $510,000. The decreased cash flow derives from
increased interest on the portion of the bank borrowings in excess of the $30.0
million under the interest rate swap agreement. The Company would expense a
portion of the increased interest as a period cost for the year ending December
31, 2000. The balance of the increased interest would be capitalized to real
estate inventories and expensed as part of the cost of residential real estate
sales in the year ending December 31, 2000 and in future years. In addition, the
Company entered into a second swap, which converted fixed rate financing into a
floating rate basis on $30.0 million. On October 12, 2000 both swaps were
cancelled at a cost of approximately $18,000.
19
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 for a discussion of the termination of the Fairway Village
litigation matter.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
2.1 Agreement and Plan of Reorganization, dated as of September
12, 2000, among the registrant, Apollo Real Estate
Investment Fund, L.P., a Delaware limited partnership
("Apollo"), Blackacre WPH, LLC, a Delaware limited liability
company ("Blackacre"), Highridge Pacific Housing Investors,
L.P., a California limited partnership ("Highridge"), AP WP
Partners, L.P., a Delaware limited partnership, AP Western
GP Corporation, a Delaware corporation, AP LHI, Inc., a
California corporation, and Lamco Housing, Inc., a
California corporation (incorporated herein by reference to
Exhibit 2.1 of the registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on
September 18, 2000 (the "Form 8-K")) (the exhibits and
schedules to such agreement were not filed therewith (other
than those set forth as Exhibits 2.3, 2.4 and 2.5 to the
Form 8-K) and are listed on the table of contents of such
Exhibit 2.1. The registrant hereby undertakes to furnish
supplementally a copy of any omitted exhibit or schedule to
the Securities and Exchange Commission upon request).
2.2 Voting Agreement, dated as of September 12, 2000, among
Apollo, Blackacre, Highridge, The James and Patricia Schuler
Foundation, a Hawaii non-profit corporation, and James K.
Schuler, as sole trustee for the James and Patricia
Revocable Living Trust and the James K. Schuler 1998
Qualified Annuity Trust (incorporated herein by reference to
Exhibit 2.2 to the Form 8-K).
2.3 Form of Stockholders Agreement among Newco, the LLC, Apollo,
Blackacre, Highridge, The James and Patricia Schuler
Foundation, a Hawaii non-profit corporation, and James K.
Schuler, as sole trustee for the James and Patricia
Revocable Living Trust and the James K. Schuler 1998
Qualified Annuity Trust (incorporated herein by reference to
Exhibit 2.3 to the Form 8-K).
2.4 Form of Registration Rights Agreement among Newco, the LLC,
Apollo, Blackacre, Highridge, The James and Patricia Schuler
Foundation, a Hawaii non-profit corporation, and James K.
Schuler, as sole trustee for the James and Patricia
Revocable Living Trust and the James K. Schuler 1998
Qualified Annuity Trust (incorporated herein by reference to
Exhibit 2.4 to the Form 8-K).
2.5 Form of Schuler Holdings, Inc. Certificate of Incorporation
(incorporated herein by reference to Exhibit 2.5 to the
Form 8-K).
27 Financial Data Schedule
(b) Reports on Form 8-K. A Current Report on Form 8-K was filed on
September 18, 2000 reporting the signing of an agreement and plan
of reorganization between the Company and the group of privately-held
partnerships and limited liability companies collectively known as
Western Pacific Housing. This event was reported under Item 5 of
such Form 8-K.
20
<PAGE>
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: November 14, 2000 By: /s/ JAMES K. SCHULER
--------------------------------
James K. Schuler
Chairman of the Board,
President and Chief Executive Officer
Date: November 14, 2000 By: /S/ DOUGLAS M. TONOKAWA
--------------------------------
Douglas M. Tonokawa
Vice President of Finance,
Chief Accounting Officer
(principal accounting officer)
21
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Reorganization, dated as of September 12,
2000, among the registrant, Apollo Real Estate Investment Fund,
L.P., a Delaware limited partnership ("Apollo"), Blackacre WPH,
LLC, a Delaware limited liability company ("Blackacre"),
Highridge Pacific Housing Investors, L.P., a California limited
partnership ("Highridge"), AP WP Partners, L.P., a Delaware
limited partnership, AP Western GP Corporation, a Delaware
corporation, AP LHI, Inc., a California corporation, and Lamco
Housing, Inc., a California corporation (incorporated herein by
reference to Exhibit 2.1 of the registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 18, 2000 (the "Form 8-K")) (the exhibits and schedules
to such agreement were not filed therewith (other than those set
forth as Exhibits 2.3, 2.4 and 2.5 to the Form 8-K) and are
listed on the table of contents of such Exhibit 2.1. The
registrant hereby undertakes to furnish supplementally a copy of
any omitted exhibit or schedule to the Securities and Exchange
Commission upon request).
2.2 Voting Agreement, dated as of September 12, 2000, among Apollo,
Blackacre, Highridge, The James and Patricia Schuler Foundation,
a Hawaii non-profit corporation, and James K. Schuler, as sole
trustee for the James and Patricia Revocable Living Trust and the
James K. Schuler 1998 Qualified Annuity Trust (incorporated
herein by reference to Exhibit 2.2 to the Form 8-K).
2.3 Form of Stockholders Agreement among Newco, the LLC, Apollo,
Blackacre, Highridge, The James and Patricia Schuler Foundation,
a Hawaii non-profit corporation, and James K. Schuler, as sole
trustee for the James and Patricia Revocable Living Trust and the
James K. Schuler 1998 Qualified Annuity Trust (incorporated
herein by reference to Exhibit 2.3 to the Form 8-K).
2.4 Form of Registration Rights Agreement among Newco, the LLC,
Apollo, Blackacre, Highridge, The James and Patricia Schuler
Foundation, a Hawaii non-profit corporation, and James K.
Schuler, as sole trustee for the James and Patricia Revocable
Living Trust and the James K. Schuler 1998 Qualified Annuity
Trust (incorporated herein by reference to Exhibit 2.4 to the
Form 8-K).
2.5 Form of Schuler Holdings, Inc. Certificate of Incorporation
(incorporated herein by reference to Exhibit 2.5 to the Form
8-K).
27.1 Financial Data Schedule
22
