SCHULER HOMES INC, 10-K405, 2000-03-30

SCHULER HOMES INC
10-K405, 2000-03-30
OPERATIVE BUILDERS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER: 0-19891
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SCHULER HOMES, INC.

(Exact name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 99-0293125
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
828 FORT STREET MALL, 4TH FLOOR 96813
HONOLULU, HAWAII (Zip Code)
(Address of Principal Executive
Offices)
</TABLE>

(808) 521-5661
(Registrant's Telephone Number, Including Area Code)
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Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.01 Per Share

Convertible Subordinated Debentures Due 2003

Senior Notes Due 2008
------------------------

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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The aggregate market value of the Common Stock held by non-affiliates of the
Registrant on February 25, 2000, based on the closing price of the Common Stock
as reported by the NASDAQ National Market on such date, was approximately
$58,628,316. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of February 25, 2000, the Registrant had outstanding 20,093,425 shares of
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement relating to the Company's 2000

Annual Meeting to be filed hereafter (incorporated into Part III hereof).

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SCHULER HOMES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Consolidated Financial Data........................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 27
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 28

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 28
Item 13. Certain Relationships and Related Transactions.............. 28

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 28
</TABLE>

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PART I

ITEM 1. BUSINESS.

Except for historical information contained herein, the matters discussed in
this report 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
this Form 10-K and other documents filed by the Company with the Securities and
Exchange Commission from time to time.

GENERAL

Schuler Homes designs, constructs, markets and sells single-family
residences, townhomes and condominiums primarily to entry-level and first-time
move-up buyers. The Company operates in seven geographic markets: Arizona,
Colorado, Hawaii, Northern California, Oregon, Southern California and
Washington. Arizona and Southern California represent new geographic markets for
the Company, as a result of the July 1999 acquisition of certain assets of
Rielly Homes, Inc. The Company offers a variety of homes generally at sizes
ranging from 750 to 4,500 square feet and prices ranging from approximately
$77,000 to over $600,000, with an average sales price of $200,000 for units
closed in 1999. For the year ended December 31, 1999, the Company reported
revenues and unit closings of $506.8 million and 2,643 units, respectively.

As part of the Company's diversification strategy, the Company has entered
new housing markets through acquisition of existing homebuilders, as well as the
start-up of new homebuilding divisions, growing revenues from $93.6 million in
1996 to $506.8 million in 1999. The economic and real estate market conditions
of the geographic markets in which the Company operates vary from market to
market. For example, the Company believes that in 1999 its Colorado, Northern
California and Washington divisions benefited from continued strength in their
respective markets. The Company believes the Hawaii real estate market showed
signs of stabilizing and the Portland, Oregon/Vancouver, Washington market
appeared to experience a softening due to the slowing of job growth.

In addition, the current stage of a division's growth cycle will vary from
division to division as will the level of the Company's investment in, or
dependence upon the financial results of, a particular division. For example, at
December 31, 1999, approximately 36.9% of the Company's inventories were in
Hawaii, while approximately 48.2% of the Company's 1999 revenues and a
significant portion of the Company's operating income were derived from the
Company's Colorado division.

Schuler Homes is one of the two largest builders of single-family
residences, townhomes and condominiums in Hawaii. Since inception in March 1988
through December 31, 1999, the Company has closed the sales of 5,842 homes and
lots in Hawaii, of which 340 home and lot sales were closed during 1999. As of
December 31, 1999, the Company owned or controlled land zoned and entitled for
2,612 homes in Hawaii.

Schuler Homes entered the Denver, Colorado homebuilding market in
January 1997 through the purchase of Melody Homes, Inc. ("Melody"), one of the
largest builders in the Denver market, and Melody Mortgage Co. ("Melody
Mortgage"), a mortgage brokerage firm for Melody homebuyers. The Company
believes it is well-positioned to benefit from potential future growth in the
Denver housing

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market as a result of its strong land position (approximately 6,606 lots owned
or controlled as of December 31, 1999) and its local market knowledge. Since its
inception in 1953, Melody Homes has closed the sales of 17,548 homes and lots.
During 1999 as compared to 1998, Melody's home sales closed increased by 25.5%
to 1,368 homes and its revenues increased by 42.0% to $244.2 million. At
December 31, 1999, Melody's backlog was 624 units, or $119.1 million, compared
to 457 units, or $78.1 million at December 31, 1998. In addition, the Company
owns a 50% interest in a joint venture, The Ranch-Southpointe II LLC, for the
development of 116 townhomes in Lafayette, Colorado, of which 80 sales had
closed as of December 31, 1999.

The Company established new homebuilding operations in Northern California
and Oregon, in late 1996 and, in October 1998, acquired certain assets
(principally options to purchase land) of Keys Homes, Inc. ("Keys"), a Portland,
Oregon homebuilder. In 1999, the Company closed the sales of 256 new homes in
Northern California, generating revenues of $63.0 million, as compared to 83
homes closed and revenues of $12.8 million in 1998. In 1999, the Oregon division
(which includes Vancouver, Washington) closed the sales of 308 homes, generating
revenues of $50.2 million, as compared to 63 homes closed and revenues of
$12.5 million in 1998. As of December 31, 1999, the Company's Northern
California and Oregon divisions owned or controlled 2,839 and 978 lots,
respectively.

The Company entered the Puget Sound, Washington market in July 1997 by
acquiring a 49% interest in Stafford Homes ("Stafford"), a homebuilder for over
30 years in the greater Puget Sound area of Washington. In January 1999, Schuler
Homes exercised its option to purchase an additional 40% ownership interest in
Stafford, increasing Schuler Homes' total ownership to 89%. The Company expects
to purchase the remaining 11% ownership interest in January 2001. In 1999,
Stafford closed the sales of 273 homes with revenues of $67.0 million, as
compared to 251 homes closed in 1998 as an unconsolidated joint venture. At
December 31, 1999, Stafford owned or controlled 1,192 lots.

In July 1999, the Company acquired certain assets (primarily joint venture
interests and options to purchase land) of Rielly Homes, Inc. ("Rielly"), a
homebuilder in Southern California and Phoenix, Arizona. Founded by Tom Rielly
in 1986, Rielly has built over 3,000 homes, focusing primarily on the
entry-level and first and second move-up markets Since the Company's purchase in
July 1999, the Company has closed the sales of approximately 18 homes in
Southern California, all in unconsolidated joint venture projects. At
December 31, 1999, the Company owned or controlled 738 lots in Southern
California and 1,531 lots in Arizona.

HOMEBUILDING INDUSTRY

The homebuilding industry is cyclical and affected by changes in general and
local economic and other conditions, which may vary from one housing market to
another, including employment levels, demographic considerations, availability
of financing, interest rate levels, consumer confidence and housing demand. For
example, the Company believes that in 1999, its Colorado, Northern California
and Washington divisions benefited from continued strength in their respective
markets, the Hawaii real estate market showed signs of stabilizing, and the
Portland, Oregon/Vancouver, Washington market appeared to experience a softening
due to slowing job growth. The risks inherent to homebuilders in purchasing and
developing land increase as consumer demand for housing decreases. Because of
the long-term financial commitment involved in purchasing a home, general
economic uncertainties tend to result in more caution on the part of home
buyers, which, in turn, tends to result in fewer home purchases. In addition,
homebuilders are subject to various risks, many of them outside the control of
the homebuilder, including competitive overbuilding, availability and cost of
building lots, availability and cost of materials and labor, adverse weather
conditions which can cause delays in construction schedules, cost overruns,
changes in government regulations, increases in real estate taxes and other
local government fees, and the level of interest rates.

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The recent increase in mortgage interest rates 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 residential
real estate sales, 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.

The development, construction and sale of homes are subject to various risks
including, among others, the continued availability of suitable undeveloped land
at reasonable prices. The homebuilding industry is also subject to the potential
for significant variability and fluctuations in real estate values. Although the
Company believes that its projects are currently reflected on the Company's
balance sheet at or below the fair value, no assurances can be given that, in
the future, write-downs will not be material in amount.

MARKETS

The Company operates in seven geographic markets: Arizona, Colorado, Hawaii,
Northern California, Oregon, Southern California and Washington, several of
which are among the strongest housing markets in the United States.

<TABLE>
<CAPTION>
YEAR
GEOGRAPHIC AREA (MARKET) MARKETS ENTERED
- ------------------------ --------------------------------- --------
<S> <C> <C>
Arizona(1)....................... Greater Phoenix Area 1999
Colorado(2)...................... Denver 1997
Fort Collins 1997
Colorado Springs 1998
Hawaii........................... Maui 1988
Oahu 1990
Kauai 1992
Northern California.............. East Bay Area 1996
Oregon(3)........................ Portland, Oregon 1996
Vancouver, Washington 1996
Southern California(1)........... Los Angeles County 1999
Orange County 1999
San Diego County 1999
Riverside County 1999
Washington(4).................... Greater Puget Sound 1997
</TABLE>

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(1) Entrance into the Arizona and Southern California markets was a result of
the acquisition of certain assets of Rielly in July 1999.

(2) Entrance into the Colorado markets was a result of the acquisition of Melody
Homes in January 1997.

(3) In October 1998, the Company expanded its presence in the Oregon market
through the acquisition of certain assets of Keys.

(4) Entrance into the Washington market was a result of the acquisition of a 49%
interest in Stafford in July 1997. In January 1999, the Company increased
its ownership interest in Stafford Homes to 89%.

The Company's operations are situated in Arizona, Colorado, Hawaii, Northern
California, Oregon, Southern California and Washington. Adverse general economic
conditions in the markets in which the Company operates could have a material
adverse impact on the operations of the Company. In 1999, approximately 48.2% of
the Company's revenues and a significant portion of the Company's operating

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income were derived from operations in its Colorado market. In addition, at
December 31, 1999, approximately 36.9% and 24.4% of the Company's total
inventories were located in Hawaii and Colorado, respectively. The Company's
performance could be significantly affected by changes in the Colorado and
Hawaii markets.

Since 1996, the Company has significantly expanded its operations, moving
into the Arizona, Colorado, Northern California, Oregon, Southern California and
Washington markets, thus exposing the Company to risks inherent in those
markets. New markets may prove to be less stable and may involve delays,
problems and expenses, including construction issues and risks such as expansive
soils and extreme seasonal weather conditions, not typically found by the
Company in the Hawaii market, with which it is most familiar. No assurances can
be given that the Company will be able to successfully establish operations
outside of its existing markets or that such expansion will not adversely affect
its results of operations.

Since inception, the Company has experienced substantial sales growth. While
the Company has recently expanded its management and administrative personnel in
the land acquisition, construction management, financial and administrative
areas, the Company anticipates hiring additional personnel and enhancing its
management information systems to meet anticipated future growth. There can be
no assurance that such expansion or enhancement can be accomplished on a timely
and cost-effective basis without disrupting the Company's operations. Further,
there can be no assurance that such growth will continue.

The climates and geology of many of the states in which the Company operates
present special risks of natural disasters. To the extent that hurricanes,
unusually heavy rain or snow storms, earthquakes, droughts, floods, wildfires or
other natural disasters or similar events occur, the homebuilding industry in
general, and the Company's business in particular, in such states may be
adversely affected.

Demand in certain of the Company's markets is significantly influenced by
weather, particularly weekend weather, which is when the majority of the
Company's sales are initiated. In addition, adverse weather conditions may delay
the timing of site improvements and foundation work, among other construction
processes. The Company's results of operations could be materially adversely
affected by weather patterns which result in unseasonably cool temperatures,
rain or snow, water shortages or floods.

PROJECT AND PRODUCT DESCRIPTIONS

The Company has focused, and intends to continue to focus, its business
primarily on entry-level and first-time move-up housing in the form of
single-family residences, and, to a lesser extent, townhomes and condominiums in
addition to second-time move-up single-family homes. The Company attempts to
maximize efficiency by using standardized design plans whenever possible and
sharing design plans among markets. However, the Company maintains the
flexibility to alter its product mix within a given market depending on market
conditions and, in determining its product mix, considers demographic trends,
demand for a particular type of product, margins, timing and the economic
strength of the market. As a result of the Company's expansion into new markets,
the number and location of its active projects increased and its home designs
and product mix expanded and changed.

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The following table presents information relating to the Company's home and
lot closings and land position as of and for the year ended December 31, 1999:

<TABLE>
<CAPTION>
YEAR ENDED AS OF DECEMBER 31, 1999
DECEMBER 31, 1999 ----------------------------------------------------------------------------------
----------------------- TOTAL NUMBER
AVERAGE OF PROJECTS FOR NUMBER OF BUILDING SITES
NUMBER OF SALES DEVELOPMENT PROJECTS IN OWNED OR HOMES UNDER
MARKET SALES CLOSED PRICE (1) SALES STAGE(2) CONTROLLED(3)(4) CONSTRUCTION(5) BACKLOG(6)
- ------ ------------ -------- --------------- -------------- ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated:
Arizona............... -- $ -- 1 -- 756 -- --
Colorado.............. 1,368 179,000 23 13 6,606 445 624
Hawaii (7)............ 319 252,000 13 9 2,498 138 65
Northern California... 256 246,000 17 5 2,839 146 98
Oregon................ 308 163,000 17 13 978 120 59
Southern California... -- -- 3 -- 477 -- --
Washington (8)........ 273 246,000 18 9 1,192 144 69
----- --- -------- ------ ----- ---
Total Consolidated.... 2,524 200,000 92 49 15,346 993 915
Unconsolidated Joint
Ventures:
Arizona............. -- -- 2 -- 775 -- --
Colorado (9)........ 80 175,000 1 1 36 34 28
Hawaii (10)......... 21 126,000 2 2 114 7 8
Southern California
(11).............. 18 393,000 3 2 261 67 23
----- --- -------- ------ ----- ---
Total................. 2,643 200,000 100 54 16,532 1,101 974
===== === ======== ====== ===== ===
</TABLE>

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(1) Reflects the total number of projects owned or under option or similar
contract and includes projects with homes in the sales stage, under
construction and projects in various stages of planning.

(2) Represents the number of active projects in which home or lot sales closed
or standard sales contracts were entered into with homebuyers.

(3) Represents the estimated number of homes/lots relating to land owned (9,415
lots) or under option (7,117 lots) or similar contracts. The amounts are
based on current management estimates, which are subject to change.
Although the Company currently intends to consummate the purchase of the
parcels under purchase options or similar contracts, no assurances can be
given that the purchase will be completed or that the land under purchase
option will be acquired. In addition, this category includes Homes Under
Construction and Backlog.

(4) For consolidated projects, includes 92 model homes and 66 completed and
unsold homes in markets other than Hawaii, and 32 model homes and 96
completed and unsold homes in the Hawaii market, including approximately 34
homes rented and 40 homes held for sale in the Company's high-rise
condominium project in Oahu. For unconsolidated joint ventures, includes 8
model homes and 23 completed and unsold homes and in Hawaii, and 12 model
homes and no completed and unsold homes in Colorado and Southern
California.

(5) Includes certain homes reflected in Backlog.

(6) Represents homes/lots subject to pending sales contracts that have not yet
closed. As such contracts are subject to certain conditions being satisfied
and may be canceled by the buyer at any time, no assurances can be given
that homes/lots subject to pending sales contracts will result in closings.

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(7) Includes homes and lots sold pursuant to the Company's "zero-down" sales
program in Hawaii. Approximately $0.2 million of revenue associated with 1
zero-down closing was deferred in 1999 until the related notes receivables
are paid in full.

(8) Reflects 100% of the information with respect to Stafford Homes in which
the Company acquired a 49% interest in July 1997, and an additional 40%
interest in January 1999.

(9) Reflects 100% of the information with respect to the Company's 50%-owned
joint venture in Colorado, which was entered into in July 1998.

(10) Reflects 100% of the information with respect to the Company's two
50%-owned joint ventures in Hawaii.

(11) Reflects 100% of the information with respect to the Company's 24.5% to
49%-owned joint ventures in Southern California, which were acquired in
July 1999.

LAND ACQUISITION AND DEVELOPMENT

GENERAL. The Company selects its land for development based upon a variety
of factors, including: (i) internal and external demographic and marketing
studies; (ii) financial and legal reviews as to the feasibility of the proposed
project; (iii) the ability to secure necessary financing and required government
approvals and entitlements; (iv) environmental due diligence; (v) management's
judgment as to the real estate market economic trends; and (vi) the Company's
experience in a particular market. As part of the Company's ongoing land
acquisition policy, it actively seeks to purchase land that is already zoned for
residential development.

The Company generally utilizes options or land purchase agreements to obtain
control of desired parcels of land. The Company's purchase and option agreements
are typically subject to numerous conditions, including, but not limited to, the
Company's ability to obtain any necessary governmental approvals. During the
contingency period, the Company also confirms the availability of utilities,
completes its marketing feasibility studies, verifies site and construction
costs, reviews and approves soil and environmental reports and arranges for
project financing, if necessary. The use of options or purchase agreements may
increase the price of land that the Company eventually acquires, but
significantly reduces the risk. The Company has the ability to extend many of
these options for varying periods of time, in some cases by the payment of an
additional deposit and in some cases without an additional payment. Often, the
down payment on the agreement will be returned to the Company if all approvals
are not obtained, although pre-development costs may not be recoverable.

Due to the improvement in the economy and the increased availability of
capital during the past several years, the Company has experienced an increase
in competition for available land in certain of its market areas. The Company's
ability to continue its development activities over the long-term will be
dependent upon its continued ability to locate and enter into options or
agreements to purchase land, obtain governmental approvals for suitable parcels
of land, and consummate the acquisition and complete the development of such
land.

There can be no assurance that the Company will be successful in securing
necessary development approvals for the land currently under its control or for
land which the Company may acquire control of in the future or that, upon
obtaining such development approvals, the Company will elect to complete its
purchases under such options. The Company has generally been successful in the
past in obtaining governmental approvals, has substantial land currently owned
or under its control for which it has obtained or is seeking such approvals (as
set forth in the table above), and devotes significant resources to locating
suitable land for future development and to obtaining the required approvals on
land under its control. Failure to locate sufficient suitable land or to obtain
necessary governmental approvals, however, may impair the ability of the Company
over the long-term to maintain current levels of development activities.

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The Company also enters into partnerships or joint ventures to purchase land
and develop its communities where such arrangements are necessary to acquire the
land or appear to be otherwise economically advantageous to the Company. The
Company generally has not used partnerships or joint venture arrangements as a
method of raising capital for the development of projects, although such
arrangements may be used for purposes of expansion into other geographic areas
or other related businesses.

Although the Company's principal focus is the construction and sale of
single-family, townhome and condominium residential housing, from time to time
the Company offers residential lots for sale where it perceives an attractive
market opportunity. The Company does not anticipate that residential lot sales
will constitute a significant amount of revenues in the future.

MAINLAND U.S. The Company's homebuilding projects in the mainland United
States have typically taken one to four years to develop, depending on the
project's size, the Company's strategy with respect to the particular project,
regulatory approvals, economic conditions, and geological conditions at the
site. Larger projects are divided into phases, with each phase generally taking
six months to one year to complete. The Company has typically acquired interests
in tracts of land that require site improvements prior to construction and are
suitable for a subdivision comprised of between 50 and 500 buildable units.
However, from time to time, the Company has acquired finished lots from land
developers, and anticipates that it will periodically acquire finished lots from
land developers in the future.

HAWAII. The Company's strategy in Hawaii is to develop projects of a
similar size and of the same general profile as in the mainland U.S. However,
certain of the Company's currently planned projects in Hawaii are anticipated to
be longer term in nature and to include a larger number of buildable units than
those in the mainland United States. These larger projects generally will have
offsite and infrastructure requirements to be fulfilled prior to the
construction of homes, which increase the amount of cash expended at the
beginning of the project. The increased length and size of such projects further
exposes the Company to risks inherent in the homebuilding industry, including
reductions in the value of land inventory. In addition, certain of the Company's
land purchase agreements in Hawaii require the Company to make additional
payments to the seller if the average sales price or the final number of all
homes exceeds an amount stated in such agreements. The Company also has
occasionally granted a profit participation interest in certain of its projects
to individuals involved in locating, structuring and assisting in the management
of the particular project.

Financial Accounting Standards Board ("FASB") Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," requires that inventories which are substantially completed are carried at
the lower of cost or fair value less selling cost, determined by applying a risk
adjusted discount rate to 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 the level
of consumer confidence, among other items. No assurances can be given that
changes in estimates, which would cause a material FASB 121 charge, will not
occur in subsequent periods.

CONSTRUCTION

The Company primarily acts as its own general contractor with its
supervisory employees coordinating all work on its projects. From time to time
the Company will hire independent general contractors on its projects in Hawaii,
particularly for its townhome and condominium projects. The general contractors
are responsible for the general management of the construction process,
coordinating the activities of all subcontractors, suppliers and building
inspectors and following design plans generally prepared by consulting
architects and engineers who are retained by the Company and whose designs are
geared to the

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local market. Company employees monitor the construction of each project,
participate in all material design and building decisions, subject the
contractors' and subcontractors' work to quality and cost controls and monitor
compliance with zoning and building codes. In addition, the Company works
closely with contractors and subcontractors on engineering, site preparation,
environmental impact analysis, purchasing, architectural design, site planning,
coordinating governmental approvals, contract management and closings. The
Company will sometimes require its general contractors and/or subcontractors to
post lien-free completion and performance construction bonds. The Company
believes that its relations with its contractors are good.

The Company's homes include single-family residences, townhomes and
condominiums, which have ranged in size from approximately 750 to 4,500 square
feet. The Company typically completes the construction of a home within two to
four months from commencement of building construction. Construction time for
the Company's homes depends on the time of year, availability of labor,
materials and supplies and other factors. The Company seeks to utilize
standardized home designs and pre-fabricated components wherever feasible. This
standardization facilitates efficiencies in the on-site construction of homes
and helps permit on-site mass production and bulk purchasing of materials by the
contractors and subcontractors engaged by the Company, thus reducing costs and
expensive change orders. However, from time to time the Company develops new
designs to replace or augment existing ones as part of its continuing efforts to
assure that its homes are responsive to current consumer preferences. For new
designs, the Company engages a number of unaffiliated architectural firms in
addition to its in-house architect. Where it is believed to be cost-effective
and efficient, the Company uses steel building components in certain of its
projects, which represents a departure from the traditional wood-frame method of
construction.

The residential construction industry has, from time to time, experienced
serious material and labor shortages, including shortages in insulation,
drywall, certain carpentry work and cement supply. Delays in construction of
homes and higher costs due to these shortages and fluctuating lumber prices
could have an adverse effect upon the Company's operations. The Company is also
susceptible to delays caused by strikes affecting shipping and transportation of
building materials necessary for the Company's business, particularly in Hawaii
because of its remote location. In addition, many of the Company's contractors
in Hawaii are represented by labor unions or collective bargaining agreements.
No assurances can be given that the renegotiation of such agreements would not
lead to a disruption of the Company's operations and an increase in its
construction costs.

SALES AND MARKETING

The Company sells its homes primarily through commissioned employees who
typically work from a sales office located at each project, as well as through
cooperating independent brokers. In all instances, Company personnel are
available to assist prospective buyers by providing them with floor plans,
pricing information, financing options, tours of model homes and the selection
of options and upgrades. The Company generally does not permit changes in home
design, but home buyers are afforded the opportunity to select, at additional
cost, various optional amenities such as prewiring options, upgraded carpet
quality, varied interior and exterior color schemes and finishes and
occasionally expanded rooms and varied room configurations. The Company focuses
on increasing customer satisfaction through the use of its own design centers in
the majority of its markets to help customers select features and options on
their homes. Sales personnel are also trained by the Company and attend periodic
meetings to be updated on the availability of financing, construction schedules,
marketing and advertising plans, which the Company believes results in a sales
force with extensive knowledge of the Company's operating policies and housing
products. The Company also makes extensive use of advertising to market its
homes, including print, radio and television, in addition to other promotional
activities such as direct mail, its web sites on the Internet and the placement
of strategically located sign boards in the immediate areas of its developments.

10
<PAGE>
The Company's objective is to price its homes very competitively and to
market its homes in advance of construction, in an effort to minimize levels of
unsold inventory upon completion of a project. The Company accomplishes
pre-sales by entering into pre-construction sales contracts with its customers.
The sales contracts generally provide for requisite mortgage approval within a
specified period, and the Company attempts to minimize cancellations by
requiring a cash deposit of approximately $500 to $13,500 and by training its
sales force to assess the qualifications of potential homebuyers.

The Company, from time to time, uses sales incentives in order to attract
homebuyers. The use of sales incentives (such as interest rate buy-downs,
landscaping and certain interior home options and upgrades) has been used
primarily in Hawaii, and may, from time to time, be used in certain other
markets, depending largely on prevailing economic and competitive market
conditions.

The Company normally builds, decorates, furnishes and landscapes between one
to five model homes for each project and maintains on-site sales offices. At
December 31, 1999, the Company owned and maintained approximately 144 model
homes. The Company believes that model homes play a particularly important role
in the Company's marketing efforts. Consequently, the Company expends a
significant effort to create an attractive atmosphere at its model homes. The
Company also uses a cross-referral program that encourages sales personnel to
direct customers to other Company projects based on the customer's needs.

In addition, the Company maintains a customer service department which is
responsible for pre-closing and post-closing customer needs. Prior to closing, a
Company employee accompanies the buyer on a home orientation and inspection
tour. Post-closing, a Company employee follows up with the customer to ensure
satisfaction, to answer questions and to help resolve any problems, including
responding to warranty requests.

CUSTOMER FINANCING

The Company assists its home buyers in obtaining financing from mortgage
lenders offering qualified home buyers a variety of financing options, including
a wide variety of conventional and Federal Housing Administration ("FHA")
financing programs. The Company also provides customer financing in the Colorado
market through Melody Mortgage. Melody Mortgage provides mortgage originations
only, and does not retain or service the mortgages that it originates. The
mortgages are funded by one of a number of mortgage lenders arranged by Melody
Mortgage. All of Melody Mortgage's revenues are derived from mortgages on homes
built by the Company and no third party loans are arranged for homes not built
by the Company.

In certain limited circumstances, the Company may attempt to minimize
potential risks relating to the availability of customer financing by purchasing
mortgage financing commitments that lock in the availability of funds and
interest rates at specified levels for a certain period of time. Also, the
Company has occasionally provided financing pursuant to agreements of sale and
second mortgages to purchasers of its homes and residential lots. The Company
had notes receivable of $0.9 million in Hawaii at December 31, 1999, primarily
comprised of second mortgages provided by the Company to homebuyers who
purchased homes as part of the Company's "zero-down" sales incentive program in
Hawaii. To the extent the Company provides financing to its customers, it
becomes subject to the risks inherent with such practices, including possible
defaults by the purchasers. The Company believes that it has established
adequate reserves to cover these risks and the Company does not record the
related revenue and profit until the second mortgage is fully paid.

11
<PAGE>
estate sales, 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
addition, the Company believes that the availability of FHA mortgage financing
is an important factor in marketing many of its homes. Any limitations or
restrictions on the availability of such financing could adversely affect the
Company's residential real estate sales. Furthermore, changes in Federal income
tax laws may affect demand for new homes. Enactment of such proposals may have
an adverse effect on the homebuilding industry in general, and demand for the
Company's products in particular. No prediction can be made whether any such
proposals will be enacted and, if enacted, the particular form such laws would
take.

WARRANTY PROGRAM

The Company generally provides limited warranties of at least one to two
years for workmanship and materials and for longer periods with respect to
structural components. Because the Company contracts its homebuilding work to
qualified contractors or subcontractors who provide the Company with an
indemnity and a lien release prior to receiving payment from the Company for
their work, claims relating to workmanship and materials are generally the
primary responsibility of the Company's contractors or subcontractors. However,
to the extent that warranty claims are not covered by the Company's contractors
or subcontractors, the Company has established a reserve to cover warranty
expenses. The Company's historical experience is that such warranty expenses
generally fall within the reserve established although no assurances can be
given that this will be the experience in the future. From time to time, where
deemed appropriate, the Company purchases structural warranty coverage from
third party insurers.

ACQUISITIONS AND JOINT VENTURES

Prior to 1997, the Company operated solely in the Hawaii market, one of the
country's strongest residential housing markets in the late 1980's and early
1990's. Due to a decline in the Hawaiian economy which negatively impacted the
Hawaiian residential housing market in the mid-1990's, the Company adopted a
strategic expansion plan late in 1996 and early 1997 designed to geographically
diversify the Company's operations outside of the Hawaii market in order to
improve the Company's overall return on invested capital. The expansion plan
provided for the redeployment of capital generated by the Hawaii division to
housing markets in the Western United States that have experienced significant
population and employment growth in recent years. As a result of its
diversification efforts, which have been achieved through the acquisition of
existing homebuilders as well as the start-up of new homebuilding operations,
the Company reported improved financial results in 1997, 1998 and 1999 with
revenues of $229.6 million, $282.9 million, and $506.8 million, respectively, as
compared to $93.6 million in 1996. Since 1996 the Company (i) reduced its
completed and unsold housing inventory in Hawaii by 81%, (ii) generated
approximately $32 million, $28.5 million and $27.9 million in cash flow in
Hawaii, in 1997, 1998 and 1999, respectively, and (iii) derived approximately
63%, 70% and 84% of its revenues from sales in markets outside of Hawaii in
1997, 1998 and 1999, respectively.

In January 1997, the Company acquired Melody, one of the largest
homebuilders in Denver, Colorado for over 40 years, and Melody Mortgage, a
mortgage brokerage firm for Melody homebuyers.

On July 31, 1997, the Company acquired a 49% interest in Stafford Homes, a
30-year-old homebuilder in the greater Seattle/Puget Sound area of Washington
State. The Company increased its interest to 89% in January 1999, and expects to
acquire the remaining 11% interest in January 2001. The Company believes that
the joint venture arrangement provided an opportunity for the Company to
strategically expand into the Seattle/Puget Sound area, an attractive housing
market, through a company with a good reputation, a strong management team and a
significant land base.

12
<PAGE>
In July 1998, the Company acquired a 50% interest in a joint venture, The
Ranch-Southpointe II LLC, to build 116 townhomes in Lafayette, Colorado.

In October 1998, the Company expanded its presence in the Oregon market with
its acquisition of certain assets (principally options to purchase land) and the
employment of the former management team of Keys, a Portland, Oregon
homebuilder. Keys was engaged in the construction and sale of high quality
single-family, duplex and cottage homes targeted for the entry-level market. In
connection with the acquisition of certain assets of 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 July 1999, the Company acquired certain assets of Rielly Homes, Inc.
("Rielly"), a homebuilder in Southern California and Phoenix, Arizona. Founded
by Tom Rielly in 1986, Rielly has built over 3,000 homes, focusing primarily on
the entry-level and first and second move-up markets. In connection with the
acquisition 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 addition, the Company has a 50% interest in Waiakoa Estates Subdivision
Joint Venture, an unincorporated joint venture which is engaged in the
development and sale of residential lots on the island of Maui and has a 50%
interest in Iao Partners, a general partnership which is engaged in the
development and sale of an "affordable" townhome residential project on the
island of Maui.

As part of its strategy to further diversify geographically and facilitate
its expansion within its current markets and into new markets, the Company
expects to continue to evaluate potential acquisitions of companies in the
homebuilding industry and other related industries, strategic investments and
joint ventures. However, there can be no assurance that it will consummate any
further transactions in the future.

COMPETITION AND OTHER FACTORS

The development and sale of residential properties is highly competitive and
fragmented. The Company competes for residential sales on the basis of a number
of interrelated factors, including location, reputation, amenities, design,
quality and price, with numerous national, regional and local builders,
including some builders with greater financial resources. Builders of new homes
compete not only for homebuyers, but also for desirable properties, raw
materials and skilled subcontractors. The Company also competes for residential
sales with individual resales of existing homes and available rental housing.
The Company believes that it compares favorably to other builders in the markets
in which it operates, due primarily to (i) its experience within its geographic
markets, (ii) its responsiveness to market conditions, and (iii) its reputation
for quality design, construction and service. Competition is particularly
intense when the Company enters or starts operations in a new market area until
its reputation becomes firmly established in that area.

The housing industry is cyclical and generally affected by consumer
confidence levels, prevailing economic conditions and long-term and short-term
interest rate levels. A variety of other factors affect the housing industry and
demand for new homes, including the availability of labor and materials and
increases in the costs thereof, changes in costs associated with home ownership
such as increases in property taxes and energy costs, changes in consumer
preferences, demographic trends and the availability of and changes in mortgage
financing programs.

GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

GENERAL. In developing a project, the Company must obtain the approval of
numerous governmental authorities regulating such matters as permitted land uses
and levels of density and the installation of

13
<PAGE>
utility services such as electricity, water and waste disposal. Several
governmental authorities have imposed fees as a means of defraying the cost of
providing certain governmental services to developing areas. The Company has
historically, for the most part, purchased land which is fully entitled and
zoned for residential development. Because the Company historically has
generally purchased land that has already been zoned for residential
development, restrictive zoning issues have not had a material adverse effect on
the Company's development activities. The Company is also subject to local,
state and federal statutes and rules regulating environmental matters,
protection and preservation of archeological finds, 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.

The Company may be subject to additional costs, delays or may be precluded
entirely from developing its projects because of government regulations that
could be imposed in the future due to unforeseen health, safety, welfare,
archeological or environmental concerns. Environmental regulations can also have
an adverse impact on the availability and price of certain raw materials such as
lumber. Hawaii, in particular, has some of the strictest land use, environmental
and agricultural laws in the United States, and the rezoning of land for urban
development is a difficult and time-consuming process.

To varying degrees, certain permits and approvals will be required to
complete the residential developments in progress or currently being planned by
the Company. The ability of the Company to obtain necessary approvals and
permits for these projects is often beyond the Company's control and could
restrict or prevent the development of otherwise desirable property. The length
of time necessary to obtain permits and approvals increases the carrying costs
of unimproved property acquired for the purpose of development and construction
and could delay the timing of the closing of its sales. In addition, the
continued effectiveness of permits already granted is subject to factors such as
changes in policies, rules and regulations and their interpretation and
application.

HAWAII'S AFFORDABLE HOUSING REQUIREMENTS. To promote affordable housing,
governmental agencies in Hawaii have implemented various formal and informal
policies at both the state and county level. As a condition to rezoning land for
urban development, it is the current practice of certain County governments to
negotiate agreements with residential land developers for the provision of
affordable housing. Generally, these conditions require developers of
residential projects to offer for sale to eligible buyers a portion, typically
30%, of the total number of units in the project, each at an affordable price
usually determined as a price at which a purchaser earning 80% to 120% of the
local median income is able to satisfy specified mortgage criteria. For purposes
of determining whether a home is affordable, the Counties generally assume a 33%
income-to-loan ratio, a monthly amount for common area expenses and taxes, a
30-year loan with an interest rate reflecting then current market conditions and
various other factors. To ensure that homes sold pursuant to a governmentally
imposed affordable housing requirement in Hawaii remain affordable to other
eligible buyers and to prevent speculation, Counties typically impose transfer
restrictions on purchasers of the Company's affordable homes. Agreements entered
into between developers and County agencies may also provide for a shared
appreciation arrangement whereby the County shares with the owner in the
appreciation of the affordable home. Based upon this affordability criterion,
specific price limitations are generally imposed on the homes that may satisfy a
developer's affordable housing requirement. Increases in mortgage interest rates
may decrease the sales price at which affordable homes may be sold thereby
potentially reducing the profitability of affordable housing projects.

Because a portion of the Company's focus is on Hawaii's affordable housing
market, any material changes in the current policies of the Hawaii Land Use
Commission and the various county authorities with regard to affordable housing
conditions or related policies could adversely affect the Company's operations
and financial results.

14
<PAGE>
EMPLOYEES

At December 31, 1999, the Company employed 451 persons, of whom 242 were
executive, project management and administrative personnel, 155 were sales and
marketing, escrow, and customer service/ warranty personnel and 54 were
construction workers, who assist with punchlist clearing and other miscellaneous
tasks. Although none of the Company's employees are covered by collective
bargaining agreements, certain of the employees of contractors which the Company
engages are represented by labor unions or are subject to collective bargaining
arrangements. The Company believes that it has good relationships with its
employees and contractors.

The Company's success is highly dependent upon the continuing services of
its President and Chief Executive Officer, James K. Schuler. The loss of the
services of James K. Schuler would have a material adverse effect on the
Company. There is intense competition to attract and retain management and key
employees in the markets where our operations are conducted. The Company's
business could be adversely affected in the event of its inability to recruit or
retain key personnel in one or more of the markets in which it conducts its
operations.

At December 31, 1999, James K. Schuler owned approximately 52% of the
Company's Common Stock. Due to this ownership position, Mr. Schuler has the
ability to control the affairs and policies of the Company and has the ability
to elect a sufficient number of directors to control the Board and to approve or
disapprove any matter submitted to a vote of stockholders. Furthermore,
Mr. Schuler may have conflicts of interest with other stockholders with respect
to the affairs and policies of the Company. Mr. Schuler's ownership position,
together with the anti-takeover effects of certain provisions contained in the
Company's Certificate of Incorporation, Bylaws and Senior Note Indenture, and
the repurchase option of the holders of the Company's Convertible Subordinated
Debentures due 2003 (the "Debentures"), may have the effect of delaying,
deferring or preventing a change in control of the Company.

EXECUTIVE OFFICERS OF THE REGISTRANT

In addition to executive officers who are also directors of the Company, the
following executive officers are not directors and are elected by and serve at
the discretion of the Board of Directors:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Harvey L Goth............................. 67 Senior Vice President of Acquisition and
Development

David L. Oyler............................ 50 Vice President/Division President--Melody
Homes, Inc.

Douglas M. Tonokawa....................... 41 Vice President of Finance and Chief
Accounting Officer
</TABLE>

HARVEY L. GOTH. Mr. Goth has been the Company's Senior Vice President of
Acquisition and Development since May 1992. Prior to joining the Company,
Mr. Goth was President of Malama Pacific Corporation from October 1991 to
May 1992 and Executive Vice President of Blackfield Hawaii Corporation from
April 1983 to May 1988. Mr. Goth was a development consultant from May 1988 to
October 1991 in Hawaii and Nevada. Malama Pacific Corporation is a real estate
development company and subsidiary of Hawaiian Electric Industries. Blackfield
Hawaii Corporation, also a real estate developer, was a subsidiary of Pacific
Enterprises.

DAVID L. OYLER. Mr. Oyler has served as the Vice President/Division
President of Melody Homes, Inc. since 1994. He joined Melody Homes, Inc. in
August, 1974 and has held the positions of Assistant Manager of Land
Development, Vice President of Land Development, Company Safety Officer and
Executive Vice President.

15
<PAGE>
DOUGLAS M. TONOKAWA. Mr. Tonokawa joined the Company as Vice President of
Finance in September 1992 and has also served as Chief Accounting Officer since
1996. From 1982 to September 1992, Mr. Tonokawa was employed at Ernst & Young
LLP, a national accounting firm, where he reached the level of Senior Manager.
Mr. Tonokawa is a member of the Hawaii Society of Certified Public Accountants
and the American Institute of Certified Public Accountants.

ITEM 2. PROPERTIES.

The Company owns an 11,225 square foot building in Colorado where Melody
operates and has its corporate headquarters. In addition, the Company leases
1,938 square feet under a lease expiring in 2000 for its design center in
Colorado. Melody Mortgage also leases 2,470 square feet of office space for its
mortgage operations, under a lease which expires in 2000. The Company also
leases approximately 1,800 square feet of space for another office in Colorado
under a lease expiring in 2001. Melody is currently building a 15,000 square
foot addition to its corporate headquarters building, which it expects to
complete in approximately mid-2000. At that time, the design center and Melody
Mortgage will move into the newly expanded space.

The Company also leases approximately 30,000 square feet of space for its
corporate headquarters in Hawaii and other divisions under leases expiring in
2000 to 2006. The Company currently anticipates that as certain divisions
expand, additional office space will be required. The Company believes that,
when needed, adequate space will be readily available.

ITEM 3. 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 Court's 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 settlement amount incurred by the Company is not
material to its financial condition. Although the cost of remediation for
certain units called for under the settlement agreement is not determinable
until the work is completed, the Company believes that the cost of such work
will not be material to its financial condition. A trial date in April 2000 has
been set in the second action, which includes one remaining plaintiff. If
decided adversely to the Company, it would not, in the opinion of management,
have a material adverse effect on the financial condition of the Company.

The Company is also from time to time involved in routine litigation or
threatened litigation arising in the ordinary course of its business. Such
matters, if decided adversely to the Company, would not, in the opinion of
management, have a material adverse effect on the financial condition of the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.

No matters were submitted during the fourth quarter of 1999 to a vote of
security-holders, through the solicitation of proxies or otherwise.

16
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been quoted on the NASDAQ National Market
under the symbol "SHLR" since March 20, 1992. The following table shows the high
and low closing sales prices for the Common Stock of the Company for the periods
indicated, as reported by the NASDAQ National Market. These prices do not
include retail markups, markdowns or commissions.

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
Quarter ended March 31, 1998.............................. $ 9.000 $6.281
Quarter ended June 30, 1998............................... 10.063 7.250
Quarter ended September 30, 1998.......................... 9.125 6.875
Quarter ended December 31, 1998........................... 7.875 6.375
1999
Quarter ended March 31, 1999.............................. 8.938 6.000
Quarter ended June 30, 1999............................... 7.750 5.938
Quarter ended September 30, 1999.......................... 7.375 6.125
Quarter ended December 31, 1999........................... 7.250 6.250
2000
Quarter ended March 31, 2000 (through February 25,
2000)................................................... 6.813 6.000
</TABLE>

The closing sale price of the Company's Common Stock as reported on the
NASDAQ National Market on February 25, 2000 was $6.125 per share. As of
February 25, 2000, there were 211 holders of record of the Company's Common
Stock. The Company estimates that as of February 25, 2000, there were
approximately 1,400 beneficial holders of the Company's Common Stock.

DIVIDENDS

The Company anticipates that all future earnings will be retained to finance
the continuing development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, the success of the
Company's development activities, capital requirements, the general financial
condition of the Company and general business conditions. Payment of dividends
is also restricted by the Company's credit facility.

17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the
consolidated financial statements, related notes thereto and other financial
data included elsewhere herein. These historical results are not necessarily
indicative of the results to be expected in the future.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Residential real estate sales
(1).............................. $ 506,778 $ 282,902 $ 229,624 $ 93,645 $ 132,897
Cost and expenses:
Residential real estate sales.... 403,684 225,370 184,843 76,612 101,356
Inventory impairment loss (2).... -- -- -- 23,910 9,405
Selling and commissions.......... 31,747 19,124 17,268 7,767 7,333
General and administrative....... 25,481 16,008 13,596 4,179 4,167
---------- ---------- ---------- ---------- ----------
Total costs and expenses....... 460,912 260,502 215,707 112,468 122,261
---------- ---------- ---------- ---------- ----------
Operating income (loss).......... 45,866 22,400 13,917 (18,823) 10,636
Income (loss) from unconsolidated
joint ventures................... 1,322 2,435 (136) 157 967
Minority interest in pretax income
of consolidated subsidiary....... (444) -- -- -- --
Other income (expense)............. (4,851) (4,243) (4,261) (9) 462
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes..................... 41,893 20,592 9,520 (18,675) 12,065
Provision (credit) for income
taxes............................ 16,173 7,876 3,634 (7,289) 4,703
---------- ---------- ---------- ---------- ----------
Net income (loss).................. $ 25,720 $ 12,716 $ 5,886 $ (11,386) $ 7,362
========== ========== ========== ========== ==========
Net income (loss) per share
(basic).......................... $ 1.29 $ 0.63 $ 0.29 $ (0.55) $ 0.35
========== ========== ========== ========== ==========
Weighted average shares outstanding
(basic).......................... 19,997,759 20,102,922 20,100,267 20,583,860 20,874,177
Net income (loss) per share
(diluted) (3).................... $ 1.28 $ 0.63 $ 0.29 $ (0.55) $ 0.35
========== ========== ========== ========== ==========
Weighted average shares outstanding
(diluted)........................ 22,631,749 N/A N/A N/A N/A
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................................... $ 6,673 $ 4,915 $ 3,842 $ 1,619 $ 6,147
Inventories................................... 436,305 325,166 291,081 238,358 247,506
Total assets.................................. 490,466 385,543 340,571 268,947 273,370
Revolving Credit Facility..................... 78,183 17,365 91,077 44,690 36,781
9% Senior Notes due 2008...................... 98,671 98,512 -- -- --
6.50% Convertible Subordinated Debentures due
2003........................................ 57,500 57,500 57,500 57,500 57,500
Other indebtedness............................ 2,409 3,954 2,627 -- --
Total debt.................................... 236,763 177,331 151,204 102,190 94,281
Total stockholders' equity.................... 201,148 175,555 163,355 157,465 173,851
</TABLE>

18
<PAGE>
- ------------------------

(1) Revenue from a sale is recognized upon the closing of the sale and when the
down payment requirement has been met. See Note 1 of Notes to Consolidated
Financial Statements.

(2) Represents a non-cash charge pursuant to Financial Accounting Standards
Board Statement No. 121. See Note 1 of Notes to Consolidated Financial
Statements.

(3) Net income (loss) per share (diluted) is computed by adding interest charged
to cost of residential real estate sold which is applicable to the
Convertible Subordinated Debentures (net of related income taxes) to net
income and dividing by the weighted average number of shares outstanding,
assuming conversion of all Convertible Subordinated Debentures. The
computation of diluted earnings per share for 1998, 1997, 1996 and 1995
excludes the impact of the Convertible Subordinated Debentures, since the
effect would be antidilutive.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

Schuler Homes designs, constructs, markets and sells single-family
residences, townhomes and condominiums primarily to entry level and first-time
move-up buyers. The Company operates in seven geographic markets: Arizona,
Colorado, Hawaii, Northern California, Oregon, Southern California and
Washington.

Schuler Homes' 1999 financial results reflected higher operating margins
than in 1998, coupled with increased unit closings and sales volumes. From 1998
to 1999 revenues grew 79.1% from $282.9 million to $506.8 million, and the
number of units closed increased from 1,827 to 2,643. Net income increased
102.3% from $12.7 million in 1998 to $25.7 million in 1999.

In January 1999, the Company exercised its option to purchase an additional
40% ownership interest in Stafford Homes, a homebuilder in Washington,
increasing its total ownership to 89%.

19
<PAGE>
RESULTS OF OPERATIONS

SELECTED FINANCIAL INFORMATION

The table below shows certain items in the Company's statements of
operations data expressed as a percentage of total residential real estate
sales.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Residential real estate sales......................... 100.0% 100.0% 100.0%
Costs and expenses:
Residential real estate sales....................... 79.6 79.7 80.5
Selling and commissions............................. 6.3 6.8 7.5
General and administrative.......................... 5.0 5.6 5.9
----- ----- -----
Total costs and expenses.............................. 90.9 92.1 93.9
----- ----- -----
Operating income.................................... 9.1% 7.9% 6.1%
===== ===== =====
</TABLE>

20
<PAGE>
OPERATING DATA

The operating data shown below shows certain data regarding units closed,
average sales prices of units closed, and backlog.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
SELECTED OPERATING DATA:
Unit closings
Colorado.......................................... 1,368 1,090 950
Hawaii(1)......................................... 319 320 343
Northern California............................... 256 83 15
Oregon............................................ 308 63 9
Washington(2)..................................... 273 -- --
------------ ------------ -----------
Total Consolidated.............................. 2,524 1,556 1,317
Unconsolidated Joint Ventures:
Colorado(3)..................................... 80 -- --
Hawaii(4)....................................... 21 20 28
Southern California(5).......................... 18 -- --
Washington(2)................................... -- 251 82
------------ ------------ -----------
Total............................................. 2,643 1,827 1,427
============ ============ ===========
Average sales price
Colorado........................................ $ 179,000 $ 158,000 $ 149,000
Hawaii(1)....................................... 252,000 268,000 228,000
Northern California............................. 246,000 154,000 141,000
Oregon.......................................... 163,000 198,000 179,000
Washington(2)................................... 246,000 -- --
Total Consolidated............................ 200,000 182,000 169,000
Unconsolidated Joint Ventures:
Colorado(3)..................................... 175,000 -- --
Hawaii(4)....................................... 126,000 121,000 130,000
Southern California(5).......................... 393,000 -- --
Washington(2)................................... -- 240,000 223,000
Total............................................. $ 200,000 $ 189,000 $ 172,000
Backlog at period end, units(6)..................... 974 681 408
Backlog at period end, aggregate sales value(6)..... $208,727,000 $123,886,000 $76,125,000
</TABLE>

- ------------------------

(1) Includes homes and lots sold pursuant to the Company's "zero-down" sales
program in Hawaii. Approximately $0.2 million, $0.3 million and
$3.4 million of revenues associated with 1, 2 and 18 zero-down closings were
deferred in 1999, 1998 and 1997, respectively, until the related notes
receivables are paid in full.

(2) Reflects 100% of the information with respect to Stafford Homes in which the
Company acquired a 49% interest in July, 1997, which it increased to 89% in
January 1999. The number of sales closed for the year ended December 31,
1997 would have been 160 had the Company had an ownership interest in
Stafford Homes for the entire year.

(3) Reflects 100% of the information with respect to the Company's 50%-owned
joint venture in Colorado, which was entered into in July, 1998.

(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, which were acquired in
July 1999.

21
<PAGE>
(6) Represents homes/lots subject to pending sales contracts that have not yet
closed. As such contracts are subject to certain conditions being satisfied
and may be canceled by the buyer at any time, no assurances can be given
that homes/lots subject to pending sales contracts will result in closings.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

RESIDENTIAL REAL ESTATE SALES

The Company's Residential Real Estate Sales (revenues) in 1999 were
$506.8 million, an increase of 79.1% as compared to 1998 revenues of
$282.9 million. The increase in revenues reflects a larger number of and higher
average sales price of unit sales closed in 1999 relative to 1998. The Company's
average sales price per unit increased in 1999 to $200,000 for units closed and
included in the Company's consolidated revenues, a 5.8% increase from an average
sales price per unit of $182,000 in 1998. As a result of the increase in the
Company's ownership of Stafford to 89% in early 1999, the operating results of
Stafford are consolidated with those of the Company during 1999, contributing to
the Company's higher 1999 revenues and average sales prices as compared to 1998.
Stafford's average sales price of home sales closed was $246,000 during 1999.
The increase in the average sales price per unit was also attributable to
increased sales prices in the Company's other mainland markets resulting from
strong market conditions, in combination with a different mix of homes delivered
in 1999 as compared to 1998. The strong market conditions in certain areas where
the Company does business, in combination with the maturing of the start-up
operations at the Company's Northern California and Oregon divisions, resulted
in a larger number of homes sales closed in 1999 as compared to 1998.

The Company's revenues in 1998 were $282.9 million, an increase of 23.2% as
compared to 1997 revenues of $229.6 million. The increase in revenues reflects a
larger number of and higher average sales price of unit sales closed in 1998
relative to 1997. During 1997, the Company recognized $10.1 million of deferred
revenue related to 53 of the 70 sales that closed in 1996 pursuant to the
Company's zero-down sales program, in which the Company provided new home buyers
with second mortgages of up to 20% of the purchase price. Revenue and profit
recognition on these zero-down sales was deferred until the requirements for
revenue and profit recognition were satisfied, which occurred during the first
quarter of 1997 when the second mortgages were sold.

COSTS AND EXPENSES--RESIDENTIAL REAL ESTATE SALES

Costs and Expenses--Residential Real Estate 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--Residential Real Estate Sales in 1999 were
$403.7 million, an increase of 79.1% as compared to Costs and
Expenses--Residential Real Estate Sales in 1998 of $225.4 million. This increase
reflects a larger number of units closed and related increased revenue in 1999
relative to 1998. As a percentage of revenues, Costs and Expenses--Residential
Real Estate Sales were 79.6% in 1999 and 79.7% in 1998.

Costs and Expenses--Residential Real Estate Sales in 1998 were
$225.4 million, an increase of 21.9% as compared to Costs and
Expenses--Residential Real Estate Sales in 1997 of $184.8 million. This increase
reflects a larger number of units closed and related increased revenue in 1998
relative to 1997. As a percentage of revenues, Costs and Expenses--Residential
Real Estate Sales decreased in 1998 to 79.7% from 80.5% in 1997. This decrease
reflects higher profit margins realized by the Colorado division in 1998,
primarily due to an increase in average sales prices, and higher profit margins
in the Company's Hawaii operation in 1998, primarily as a result of the negative
impact to profit margins in 1997 of the recognition of costs related to the
sales of second mortgages associated with zero-down sales deferred in 1996.

22
<PAGE>
COSTS AND EXPENSES--SELLING AND COMMISSIONS

Selling and commissions expense represents the selling and marketing costs
associated with the sale of homes. Such costs include commissions, sales
incentives offered to buyers, advertising costs, model and sales office costs
and other general sales and marketing costs.

Selling and commissions expense in 1999 was $31.7 million, an increase of
66.0% as compared to selling and commissions expense in 1998 of $19.1 million.
The increase in selling and commissions expense reflects a higher level of unit
sales closed in 1999 than in 1998. As a percentage of revenues, selling and
commissions expense decreased to 6.3% in 1999 from 6.8% in 1998. This decrease
is a result of the selling and commissions costs increasing at a lesser rate
than revenues.

Selling and commissions expense in 1998 was $19.1 million, an increase of
10.7% as compared to selling and commissions expense in 1997 of $17.3 million.
As a percentage of revenues, selling and commissions decreased to 6.8% in 1998
from 7.5% in 1997. This decrease is a result of the selling costs and
commissions increasing at a lesser rate than revenues.

COSTS AND EXPENSES--GENERAL AND ADMINISTRATIVE

General and administrative expense includes salaries, office and other
administrative costs. Indirect costs attributable to specific projects are
capitalized and deducted as part of the cost of residential real estate sales.

General and administrative expenses in 1999 were $25.5 million, an increase
of 59.2% as compared to general and administrative expenses in 1998 of
$16.0 million, which represented an increase of 17.7% as compared to general and
administrative expenses of $13.6 million in 1997. As a percentage of revenues,
general and administrative expenses decreased to 5.0% in 1999 from 5.6% in 1998
and 5.9% in 1997. This decrease is a result of general and administrative
expenses increasing at a lesser rate than revenues.

INCOME FROM UNCONSOLIDATED JOINT VENTURES

During 1999, 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% interests in joint ventures in Southern California.
During 1998, Income from Unconsolidated Joint Ventures represented the Company's
49% interest in the operations of Stafford, in addition to its 50% interest in
the operations of two joint ventures in Hawaii. The decrease in this income from
1998 to 1999 is primarily the result of Stafford being accounted for as a
consolidated subsidiary for 1999, rather than an unconsolidated joint venture,
due to the increase of the Company's ownership interest to 89% in January 1999.
The increase in Income from Unconsolidated Joint Ventures from 1997 to 1998 is
primarily the result of the growth in income from the Company's 49% interest in
Stafford of $1.9 million.

The Company's loss from unconsolidated joint ventures in 1997 is primarily
the result of the Company's share of a loss recognized by one of its Hawaii
joint ventures in 1997, Iao Partners, of $397,000, which was offset in part by
the Company's share of the income of Stafford since the date of acquisition
(July 1997) of $329,000.

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.

23
<PAGE>
OTHER INCOME (EXPENSE)

Other income (expense) primarily represents (i) interest incurred less
interest capitalized to inventory (interest expense), (ii) amortization of
financing fees, net of amounts capitalized to inventory, and (iii) amortization
of goodwill and covenants-not-to-compete; less interest income. The increase in
Other Income (Expense) of $608,000 from 1998 to 1999, is primarily due to
additional interest expense resulting from the consolidation of Stafford offset
by a lower ratio of debt to inventory under development at certain divisions
other than Stafford. The increase from 1997 to 1998 is primarily the result of
an increase in the amount of interest and financing fees expensed.

PROVISION (CREDIT) FOR INCOME TAXES

The effective combined tax rates were approximately 38.6%, 38.2% and 38.2%
in 1999, 1998 and 1997, 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 December 31, 1999, 1998, and 1997, which includes homes and
lots sold pursuant to the Company's zero-down sales program and 100% of the
backlog related to projects developed by the Company's joint ventures.

<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- ----------------------- ----------------------
AGGREGATE AGGREGATE AGGREGATE
NUMBER SALES VALUE NUMBER SALES VALUE NUMBER SALES VALUE
-------- ------------ -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated:
Colorado(1)....................... 624 $119,127,000 457 $ 78,075,000 267 $41,284,000
Hawaii............................ 65 17,117,000 47 11,903,000 67 19,774,000
Northern California............... 98 28,142,000 35 6,508,000 14 1,905,000
Oregon............................ 59 10,069,000 76 13,397,000 14 2,676,000
Washington........................ 69 21,937,000 -- -- -- --
--- ------------ --- ------------ --- -----------
Total Consolidated.................. 915 196,392,000 615 109,883,000 362 65,639,000
Unconsolidated Joint Ventures:
Colorado(2)....................... 28 5,117,000 20 3,111,000 -- --
Hawaii............................ 8 1,134,000 5 620,000 3 398,000
Southern California(3)............ 23 6,084,000 -- -- -- --
Washington(4)..................... -- -- 41 10,272,000 43 10,088,000
--- ------------ --- ------------ --- -----------
Total............................... 974 $208,727,000 681 $123,886,000 408 $76,125,000
=== ============ === ============ === ===========
</TABLE>

- ------------------------

(1) The Colorado market was added in 1997 as a result of the acquisition of
Melody in January 1997.

(2) Reflects the backlog of the Company's 50%-owned joint venture in Colorado,
which was entered into in July 1998.

(3) Reflects the backlog of the Company's 24.5% to 49%-owned joint ventures in
Southern California, which were acquired in July 1999.

24
<PAGE>
(4) The Washington market was added in 1997 as a result of the Company's
acquisition of a 49% interest in Stafford in July 1997, which increased to
89% in January 1999.

The average sales prices of the homes and lots comprising backlog for
consolidated projects at December 31, 1999, 1998 and 1997 were $215,000,
$179,000, and $181,000, respectively. The higher average sales price in 1999
relative to 1998 and 1997 primarily reflects an increase in sales prices in the
Company's mainland U.S. divisions as a result of the strength of the housing
markets in those areas, in combination with a different mix of homes sold.

Due to the ability of buyers to cancel their sales contracts, no assurance
can be given that homes in backlog will result in actual closings.

VARIABILITY OF RESULTS; 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,
building permits and receipt of entitlements, the timing of completion of
necessary public infrastructure, the timing of utility hookups and adverse
weather conditions. The Company's historical financial performance is not
necessarily a meaningful indicator of future results and, in general, the
Company's financial results will vary from development to development, and from
fiscal quarter to fiscal quarter.

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 mortgage interest rates may
adversely affect the ability of prospective buyers to finance home purchases and
may adversely impact the Company's residential real estate sales, 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.

IMPACT OF YEAR 2000

In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred and expensed approximately $78,000 as of December 31, 1999 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its internal
systems or the products and services of third parties. The Company will continue
to monitor its computer applications throughout the Year 2000 in order to
promptly address latent Year 2000 matters that may arise.

25
<PAGE>
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.

CAPITAL RESOURCES

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 risk and improves
liquidity. Because of increased demand for land and partially developed and
finished lots in certain of the markets where the Company builds homes, the
Company's ability to acquire lots using option contracts has been reduced or has
become more expensive.

In connection with the purchase of its 49% interest in Stafford in 1997, the
Company had an option to purchase the remaining 51% interest in Stafford based
on a pre-determined formula, subject to certain contingencies. In January 1999,
the Company increased its ownership interest in Stafford to 89% and refinanced
Stafford's existing debt. The Company anticipates that it will acquire the
remaining 11% interest in Stafford in January 2001.

At December 31, 1999, the Company had commitments to purchase parcels of
land for approximately $7.3 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
December 31, 1999, the Company has repurchased 504,400 shares under the program
at a total cost of $3.6 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 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.

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

26
<PAGE>
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 2% or prime plus 0% to 0.25%. The Revolving Credit Facility
contains covenants, including certain financial covenants, and also contains
provisions, which may, in certain circumstances, limit the amount the Company
may borrow. In April 1999, the Company entered into a separate 90-day
$10.0 million line of credit with one of the banks included in the
$120.0 million Revolving Credit Facility (extended for an additional 90 days in
July 1999 and cancelled on October 1, 1999). At December 31, 1999,
$91.8 million of the Company's line of credit was unused, of which $6.0 million
is restricted to withdrawal for specific project costs and letters of credit.

The Company entered into two interest rate swaps. One swap requires the
Company to pay a fixed rate of 5.75% on $30 million, 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 (5.21% on initial effective date) on $30 million 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.

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 companies in the homebuilding industry and other related industries 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The Company has limited its market risk on $30 million of its Revolving
Credit Facility by entering into an interest rate swap agreement, which converts
floating rate debt to a fixed rate basis. This derivative financial instrument
is 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 were to increase 100 basis points in 2000,
interest incurred would increase and cash flows would decrease in 2000 by
$510,000, which amount reflects the effect on interest on the portion of the
bank borrowings in excess of the $30 million under the interest rate swap
agreement. A portion of the increased interest would be expensed as a period
cost in 2000, while the balance would be capitalized to real estate inventories
and be expensed as a component of the cost of residential real estate sales in
2000 and future years.

In addition, the Company entered into a second swap, which converts fixed
rate financing to a floating rate basis on $30 million.

27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors.............................. 33
Consolidated Balance Sheets, December 31, 1999 and 1998..... 34
Consolidated Statements of Operations for years ended
December 31, 1999, 1998 and 1997.......................... 35
Consolidated Statements of Stockholders' Equity for years
ended December 31, 1999, 1998 and 1997.................... 36
Consolidated Statements of Cash Flows for years ended
December 31, 1999, 1998 and 1997.......................... 37
Notes to Consolidated Financial Statements.................. 38
</TABLE>

SCHEDULES

All schedules have been omitted as the required information is inapplicable
or the information is presented in the financial statements or related notes.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

The Company's Proxy Statement for its 2000 Annual Meeting of Stockholders,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, will be incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K, provides the information
required under Part III (Items 10, 11, 12 and 13), except for the information
with respect to the Company's executive officers who are not directors, which is
included in "Item 1. Business--Executive Officers of the Registrant."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

See "Item 8. Financial Statements and Supplementary Data."

(B) REPORTS ON FORM 8-K.

None.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of the Company. (Incorporated
by reference to Exhibit 3.1 of the Company's registration
statement under the Securities Act on Form S-1, Registration
Statement No. 33-45485.)
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit
3.2 of the Company's registration statement under the
Securities Act on Form S-1, Registration Statement No.
33-55858.)
4.1 Indenture between the Company and Bishop Trust Company,
Limited, as Trustee, dated as of January 15, 1993.
(Incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K dated January 21, 1993;
Commission file number 0-19891.)
4.2 Form of Debenture (included in Exhibit 4.1).
4.3 Specimen of Common Stock certificate. (Incorporated by
reference to Exhibit 4.1 of the Company' registration
statement under the Securities Act on Form S-1, Registration
No. 33-45485.)
4.4 Indenture between the Company and U.S. Trust Company of
California, N.A., as Trustee, dated May 6, 1998.
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q dated March 31, 1998; Commission file number
0-19891.)
4.5 Form of Senior Notes (included in Exhibit 4.4).
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q dated March 31, 1998; Commission file number
0-19891.)
4.6 Registration Rights Agreement dated as of April 30, 1998
between the Company and the Initial Purchasers.
(Incorporated by reference to Exhibit 4.5 of the Company's
Registration Statement under Securities Act on Form S-4,
Registration No. 333-57723.)
10.1 Form of Indemnification Agreement between the Company and
its directors and certain officers. (Incorporated by
reference to Exhibit 10.1 of the Company's registration
statement under the Securities Act on Form S-1, Registration
No. 33-45485.)
+10.2 1992 Stock Option Plan, as amended. (Incorporated by
reference to Exhibit 10.2 of the Company's 1992 Annual
Report on Form 10-K; Commission file number 0-19891.)
+10.3 Form of Stock Option Agreement. (Incorporated by reference
to Exhibit 28.2 of the Company's registration statement
under the Securities Act on Form S-8, Registration No.
33-53044.)
+10.4 Form of Non-Employee Director Automatic Option Grant
Agreement. (Incorporated by reference to Exhibit 28.3 of the
Company's registration statement under the Securities Act on
Form S-8, Registration No. 33-53044.)
+10.5 Employment Agreement dated as of January 31, 1992 between
the Company and James K. Schuler. (Incorporated by reference
to Exhibit 10.10 of the Company's registration statement
under the Securities Act on Form S-1, Registration No.
33-45485.)
10.6 Joint Venture Agreement between the Company and United
Realty, Inc. dated as of August 26, 1989. (Incorporated by
reference to Exhibit 10.54 of the Company's registration
statement under the Securities Act on Form S-1, Registration
No. 33-45485.)
10.7 Partnership Agreement between the Company and C. Brewer
Properties, Inc. dated as of October 15, 1992. (Incorporated
by reference to Exhibit 10.75 of the Company's registration
statement under the Securities Act on Form S-1, Registration
No. 33-55858.)
10.8 Purchase Agreement between the Company and Itoman Hawaii,
Inc. dated October 13, 1992. (Incorporated by reference to
Exhibit 10.78 of the Company's registration statement under
the Securities Act on Form S-1, Registration No. 33-55858.)
10.9 Agreement among the Company, Palailai Holdings, Inc. and
Malama Mohala Corp. dated November 4, 1992. (Incorporated by
reference to Exhibit 10.79 of the Company's registration
statement under the Securities Act on Form S-1, Registration
No. 33-55858.)
10.10 Purchase Agreement (Parcel 15) between the Company and AMFAC
Property Development Corp. dated July 14, 1992.
(Incorporated by reference to Exhibit 10.82 of the Company's
registration statement under the Securities Act on Form S-1,
Registration No. 33-55858.)
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.11 Lease between the Company and AALL Hawaii Holdings dated
May 14, 1993 (i.e., lease of premises located at 828 Fort
Street Mall, 4th Floor, Honolulu, Hawaii). (Incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report
on Form 10-Q dated June 30, 1993; Commission file number
0-19891.)
10.12 Amendment dated April 9, 1993 to Purchase Agreement (Parcel
15) between the Company and AMFAC Property Development
Corp., a Hawaii Corporation. (Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K
dated April 30, 1993; Commission file number 0-19891.)
10.13 Purchase Agreement (Parcel 9) dated July 30, 1993 between
the Company and AMFAC Property Development Corp., a Hawaii
Corporation. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-Q dated
September 30, 1993; Commission file number 0-19891.)
+10.14 Schuler Homes, Inc. 401(k) Retirement Savings Plan (005)
dated July 20, 1993, which amends in full the Schuler Homes,
Inc. Profit Sharing Plan (005), originally effective
November 1, 1989. (Incorporated by reference to Exhibit
10.6 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1993; Commission file number 0-19891.)
+10.15 Amendment to the Schuler Homes, Inc. 401(k) Retirement
Savings Plan (005) (Sections 2.1 and 2.2) effective
September 1, 1993. (Incorporated by reference to Exhibit
10.7 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1993; Commission file number 0-19891.)
10.16 Letter Agreement between the Company and Lokelani Ma'ili
Kai, Ltd. and P.H. Property Development Company, dated
January 24, 1994. (Incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K dated March 2,
1994; Commission file number 0-19891.)
10.17 Addendum to Letter Agreement dated January 24, 1994 between
the Company and Lokelani Ma'ili Kai, Ltd. and P.H. Property
Development Company, dated February 18, 1994. (Incorporated
by reference to Exhibit 10.2 of the Company's Current Report
on Form 8-K dated March 2, 1994; Commission file number
0-19891.)
+10.18 Amendment to the Schuler Homes, Inc. 401(k) Retirement
Savings Plan (005) (Sections 1.5(a) and 1.11, effective
January 1, 1994; and Sections 2.1 and 2.2, effective
September 16, 1994). (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1994; Commission file number 0-19891.)
10.19 Agreement for Increased Density on Parcels 10, 15, 16 and 20
between the Company and AMFAC Property Development Corp.
dated December 12, 1994. (Incorporated by reference to
Exhibit 10.82 of the Company's 1994 Annual Report on Form
10-K; Commission file number 0-19891.)
10.20 Agreement (Kapolei Knolls) between the Company and Finance
Realty, Ltd. dated September 11, 1995. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q
dated September 30, 1995; Commission file number 0-19891.)
10.21 Agreement between Waiakoa Estates Subdivision Joint Venture
and Betsill Brothers Construction, Inc. dated September 16,
1995. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q dated September 30, 1995; Commission
file number 0-19891.)
10.22 Amended and Restated Purchase and Sale Agreement between the
Company and Gentry Development Company and Gentry Homes,
Ltd., dated November 20, 1995. (Incorporated by reference to
the Company's 1995 Annual Report on Form 10-K; Commission
file number 0-19891.)
10.23 Contract for Purchase and Sale of Real Property between the
Company and Investek Properties Company, LLC, dated
June 19, 1996. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q dated June 30, 1996;
Commission file number 0-19891.)
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.24 Real Estate Purchase Agreement between Schuler Homes of
California, Inc. and Frank J. Andrews, Jr., dated
August 20, 1996. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q dated September 30, 1996;
Commission file number 0-19891.)
10.25 Option Agreement between Schuler Homes of California, Inc.
and Frank J. Andrews, Jr., dated August 20, 1996.
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q dated September 30, 1996; Commission file
number 0-19891.)
10.26 Real Estate Purchase and Sale Agreement between the Company
and Coop Family Limited Partnership, dated September 20,
1996. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q dated September 30, 1996; Commission
file number 0-19891.)
10.27 Second Amendment to Loan Documents between the Company,
certain Banks, First Hawaiian Bank and Bank of America NT &
SA, dated April 29, 1998. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q dated March 31,
1998; Commission file number 0-19891.)
10.28 Guaranty between the Company, certain Banks, First Hawaiian
Bank and Bank of America NT & SA, dated April 29, 1998.
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q dated March 31, 1998; Commission file number
0-19891.)
10.29 Release of Negative Pledge Agreement between the Company,
certain Banks and First Hawaiian Bank, dated April 29, 1998.
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q dated March 31, 1998; Commission file number
0-19891.)
+10.30 Schuler Homes, Inc. 1998 Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 99.1 of the Company's
registration statement under the Securities Act on Form S-8,
Registration No. 333-60305.)
10.31 Second Amended and Restated Credit Agreement between the
Company, certain Banks, First Hawaiian Bank and Bank of
America NT & SA, dated September 30, 1998. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q
dated September 30, 1998; Commission file number 0-19891.)
10.32 Guaranty by wholly-owned subsidiaries of the Company, dated
September 30, 1998, relating to Second Amended and Restated
Credit Agreement dated September 30, 1998. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q
dated September 30, 1998; Commission file number 0-19891.)
+10.33 Restated Schuler Homes, Inc. 401(k) Retirement Savings Plan,
effective April 1, 1998. (Incorporated by reference to the
Company's 1998 Annual Report on Form 10-K; Commission file
number 0-19891.)
10.34 First Amendment to Second Amended and Restated Credit
Agreement between the Company, certain Banks, First Hawaiian
Bank and Bank of America NT & SA, dated January 21, 1999.
(Incorporated by reference to the Company's 1998 Annual
Report on Form 10-K; Commission file number 0-19891.)
10.35 Guaranty by wholly-owned subsidiaries of the Company to
certain Banks, First Hawaiian Bank and Bank of America NT &
SA, dated January 21, 1999. (Incorporated by reference to
the Company's 1998 Annual Report on Form 10-K; Commission
file number 0-19891.)
10.36 Promissory Note between the Company and First Hawaiian Bank,
dated April 12, 1999. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q dated March 31,
1999; Commission file number 0-19891.)
10.37 Second Amendment to Second Amended and Restated Credit
Agreement between the Company, certain Banks, First Hawaiian
Bank and Bank of America NT & SA, dated July 2, 1999.
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q dated June 30, 1999; Commission file number
0-19891.)
</TABLE>

31
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.38 Third Amendment to Second Amended and Restated Credit
Agreement between the Company, certain Banks, First Hawaiian
Bank and Bank of America NT & SA, dated July 22, 1999.
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q dated June 30, 1999; Commission file number
0-19891.)
10.39 Guaranty by wholly-owned subsidiaries of the Company to
certain Banks, First Hawaiian Bank and Bank of America NT &
SA, dated July 22, 1999. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q dated June 30, 1999;
Commission file number 0-19891.)
10.40 Schuler Homes, Inc. 1992 Stock Option Plan (amended).
(Incorporated by reference to Exhibit 99.1 of the Company's
registration statement under the Securities Act on Form S-8,
Registration No. 333-84957.)
10.41 Third Amended and Restated Credit Agreement between the
Company, certain Banks, First Hawaiian Bank and Bank of
America, N.A., dated as of September 30, 1999. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q
dated September 30, 1999; Commission file number 0-19891.)
10.42 Guaranty by wholly-owned subsidiaries of the Company to
certain Banks, First Hawaiian Bank and Bank of America,
N.A., dated as of September 30, 1999. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q
dated September 30, 1999; Commission file number 0-19891.)
*21 Subsidiaries of the Registrant.
*23.1 Consent of Independent Auditors.
*27 Financial Data Schedule.
</TABLE>

- ------------------------

* Filed herewith

+ Management contract, compensatory plan or arrangement

(D) SEE ITEM 14(1C).

32
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Schuler Homes, Inc.

We have audited the accompanying consolidated balance sheets of Schuler
Homes, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Schuler
Homes, Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

ERNST & YOUNG LLP

Honolulu, Hawaii

March 14, 2000

33
<PAGE>
SCHULER HOMES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS

Cash and cash equivalents (restricted--Note 1).............. $ 6,673,000 $ 4,915,000
Real estate inventories (Note 2)............................ 436,305,000 325,166,000
Investments in unconsolidated joint ventures (Note 3)....... 8,346,000 23,998,000
Deferred income taxes (Note 4).............................. 2,362,000 3,418,000
Intangibles, net (Note 1)................................... 15,506,000 13,879,000
Other assets (Note 11)...................................... 21,274,000 14,167,000
------------ ------------
Total assets................................................ $490,466,000 $385,543,000
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable............................................ $ 31,819,000 $ 15,954,000
Accrued expenses............................................ 19,041,000 16,703,000
Notes payable to bank (Note 5).............................. 78,183,000 17,365,000
Notes payable to others (Note 2)............................ 2,409,000 3,954,000
Senior notes (Note 6)....................................... 98,671,000 98,512,000
Convertible subordinated debentures (Note 7)................ 57,500,000 57,500,000
------------ ------------
Total liabilities........................................... 287,623,000 209,988,000

Commitments and contingencies (Notes 5 and 8)

Minority interest in consolidated subsidiary (Note 3)....... 1,695,000 --

Stockholders' equity (Notes 1, 7, 9 and 11):
Common stock, $.01 par value; 30,000,000 shares
authorized; 21,371,825 and 20,892,465 shares issued at
December 31, 1999 and 1998, respectively................ 214,000 209,000
Additional paid-in capital................................ 96,038,000 93,201,000
Retained earnings......................................... 113,482,000 87,762,000
Treasury stock, at cost; 1,278,400 and 869,000 shares at
December 31, 1999 and 1998, respectively................ (8,586,000) (5,617,000)
------------ ------------
Total stockholders' equity.................................. 201,148,000 175,555,000
------------ ------------
Total liabilities and stockholders' equity.................. $490,466,000 $385,543,000
============ ============
</TABLE>

See accompanying notes.

34
<PAGE>
SCHULER HOMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Residential real estate sales (Note 11)............ $506,778,000 $282,902,000 $229,624,000
Costs and expenses:
Residential real estate sales.................... 403,684,000 225,370,000 184,843,000
Selling and commissions.......................... 31,747,000 19,124,000 17,268,000
General and administrative (Note 11)............. 25,481,000 16,008,000 13,596,000
------------ ------------ ------------
Total costs and expenses........................... 460,912,000 260,502,000 215,707,000
------------ ------------ ------------
Operating income................................... 45,866,000 22,400,000 13,917,000
Income (loss) from unconsolidated joint ventures
(Note 3)......................................... 1,322,000 2,435,000 (136,000)
Minority interest in pretax income of consolidated
subsidiary....................................... (444,000) -- --
Other income (expense)............................. (4,851,000) (4,243,000) (4,261,000)
------------ ------------ ------------
Income before provision for income taxes........... 41,893,000 20,592,000 9,520,000
Provision for income taxes (Note 4)................ 16,173,000 7,876,000 3,634,000
------------ ------------ ------------
Net income......................................... $ 25,720,000 $ 12,716,000 $ 5,886,000
============ ============ ============
Net income per share (Note 12):
Basic............................................ $ 1.29 $ 0.63 $ 0.29
============ ============ ============
Diluted.......................................... $ 1.28 $ 0.63 $ 0.29
============ ============ ============
</TABLE>

See accompanying notes.

35
<PAGE>
SCHULER HOMES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
---------- -------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 20,100,177 $209,000 $93,096,000 $ 69,160,000 $(5,000,000) $157,465,000
Issuance of common stock from
exercise of stock options (Note
9)................................ 750 -- 4,000 -- -- 4,000
Net income.......................... -- -- -- 5,886,000 -- 5,886,000
---------- -------- ----------- ------------ ----------- ------------
Balance at December 31, 1997........ 20,100,927 209,000 93,100,000 75,046,000 (5,000,000) 163,355,000
Issuance of common stock from
exercise of stock options (Note
9)................................ 17,538 -- 101,000 -- -- 101,000
Reacquisition of the Company's
common stock...................... (95,000) -- -- -- (617,000) (617,000)
Net income.......................... -- -- -- 12,716,000 -- 12,716,000
---------- -------- ----------- ------------ ----------- ------------
Balance at December 31, 1998........ 20,023,465 209,000 93,201,000 87,762,000 (5,617,000) 175,555,000
Issuance of common stock from
exercise of stock options (Note
9)................................ 23,730 -- 134,000 -- -- 134,000
Issuance of common stock under
Employee Stock Purchase Plan (Note
9)................................ 55,630 1,000 348,000 -- -- 349,000
Reacquisition of the Company's
common stock...................... (409,400) -- -- -- (2,969,000) (2,969,000)
Issuance of common stock in
connection with acquisition (Note
11)............................... 400,000 4,000 2,355,000 -- -- 2,359,000
Net income.......................... -- -- -- 25,720,000 -- 25,720,000
---------- -------- ----------- ------------ ----------- ------------
Balance at December 31, 1999........ 20,093,425 $214,000 $96,038,000 $113,482,000 $(8,586,000) $201,148,000
========== ======== =========== ============ =========== ============
</TABLE>

See accompanying notes.

36
<PAGE>
SCHULER HOMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 25,720,000 $ 12,716,000 $ 5,886,000
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization expense..................... 5,371,000 3,162,000 2,883,000
Income distribution received from unconsolidated joint
ventures in excess of income recognized (income from
unconsolidated joint ventures recognized in excess of
income distribution received)........................... 700,000 (2,360,000) 143,000
Change in principal balance of notes receivable........... 817,000 207,000 2,303,000
Increase in allowance for doubtful accounts............... -- 96,000 --
Minority interest......................................... 444,000 -- --
Changes in assets and liabilities:
(Increase) decrease in real estate inventories............ (61,756,000) (34,375,000) (12,775,000)
(Increase) decrease in other assets....................... (1,036,000) (1,622,000) (698,000)
Increase (decrease) in accounts payable................... 10,989,000 3,149,000 7,438,000
Increase (decrease) in accrued expenses................... 3,907,000 2,473,000 3,696,000
Change in deferred income taxes........................... 1,056,000 584,000 3,354,000
------------- ------------- -------------
Net cash provided by (used in) operating activities....... (13,788,000) (15,970,000) 12,230,000
INVESTING ACTIVITIES:
Payment for purchase of Melody Homes and Mortgage, net of
cash acquired............................................. -- -- (29,508,000)
Purchase of additional 40% interest in Stafford, net of cash
acquired.................................................. (4,227,000) -- --
Acquisition of certain assets of Keys Homes................. (1,000,000) -- --
Investments in unconsolidated joint ventures................ (1,823,000) (1,000,000) (2,980,000)
Advances to unconsolidated joint ventures................... (1,574,000) (8,431,000) (1,724,000)
Repayments of advances to unconsolidated joint ventures..... 1,103,000 263,000 145,000
Capital distributions from unconsolidated joint venture..... 2,178,000 3,557,000 --
Purchase of furniture, fixtures and equipment............... (1,265,000) (432,000) (664,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities....... (6,608,000) (6,043,000) (34,731,000)
FINANCING ACTIVITIES:
Proceeds from bank borrowings............................... 312,936,000 169,670,000 131,827,000
Principal payments on bank borrowings....................... (252,118,000) (243,382,000) (107,107,000)
Principal payments on notes payable to others............... (1,553,000) --
Proceeds from issuance of senior notes, net of discount and
offering costs............................................ -- 97,210,000 --
Refinancing of Stafford's debt.............................. (29,378,000) -- --
Advances to affiliates (Note 11)............................ (5,810,000) -- --
Repayment of advances to affiliates......................... 404,000 -- --
Net decrease in discount on issuance of senior notes........ 160,000 104,000 --
Proceeds from issuance of common stock from exercise of
stock options............................................. 134,000 101,000 4,000
Proceeds from issuance of common stock under Employee Stock
Purchase Plan............................................. 348,000 -- --
Reacquisition of the Company's common stock................. (2,969,000) (617,000) --
------------- ------------- -------------
Net cash provided by (used in) financing activities....... 22,154,000 23,086,000 24,724,000
------------- ------------- -------------
Increase (decrease) in cash................................. 1,758,000 1,073,000 2,223,000
Cash and cash equivalents (restricted) at beginning of
period.................................................... 4,915,000 3,842,000 1,619,000
------------- ------------- -------------
Cash and cash equivalents (restricted) at end of period..... $ 6,673,000 $ 4,915,000 $ 3,842,000
============= ============= =============
</TABLE>

See accompanying notes.

37
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

Schuler Homes, Inc. (the Company) was incorporated in Hawaii in March 1988
and, during January 1992, was reincorporated in Delaware. The Company is engaged
in the development and sale of residential real estate in the following
geographic markets: Arizona, Colorado, Hawaii, Northern California, Oregon,
Southern California and Washington.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments and other
short-term investments (less than 3 months) to be cash equivalents. Included in
Cash and Cash Equivalents at December 31, 1999 and 1998 are restricted amounts
of $1,169,000 and $506,000, respectively, which primarily represent a collection
allowance resulting from the sale of second mortgage notes and accounts
restricted for certain development costs.

REAL ESTATE INVENTORIES

Real estate inventories consist of raw land, lots under development, houses
under construction and completed homes. Pursuant to FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," inventories which are substantially completed are carried at
the lower of cost or fair value less cost to sell. Fair value is determined by
applying a risk adjusted discount rate to estimates of future cash flows,
resulting in a lower value than under the net realizable value method previously
required. In addition, land held for future development or inventories under
current development are adjusted to fair value, only if an impairment to their
value is indicated.

The estimates of future cash flows require significant judgment relating to
level of sales prices, rate of new home sales, amount of marketing costs and
price discounts needed in order to stimulate sales, rate of increase in the cost
of building materials and labor, introduction of building code modifications,
and economic and real estate market conditions in general. Accordingly, there
exists at any date, a reasonable possibility that changes in estimates will
occur in subsequent periods.

All direct and indirect land costs, all development and construction costs,
and applicable carrying charges (primarily interest) are capitalized to real
estate projects during the development period. The capitalized costs are
assigned to individual components of projects based on specific identification,
if practicable, or allotted based on relative sales value (in accordance with
FASB Statement No. 67, "Accounting for Costs and Initial Rental Operations of
Real Estate Projects"). Selling expenses and other marketing costs are expensed
in the period incurred and are included in cost of residential real estate sold
in the accompanying consolidated statements of operations.

38
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNCONSOLIDATED JOINT VENTURES

Investments in unconsolidated joint ventures consist of the Company's
interest in real estate ventures in Arizona, Colorado, Hawaii and Southern
California, and are accounted for using the equity method.

INTANGIBLES

Intangibles consist of goodwill and covenants not-to-compete, which resulted
from the Company's past acquisitions. The intangibles are being amortized on a
straight-line basis over periods ranging from 15 to 20 years. Accumulated
amortization at December 31, 1999 and 1998 is approximately $2,343,000 and
$1,461,000, respectively.

SALES AND PROFIT RECOGNITION

A sale is generally recorded and profit recognized when closings have
occurred and a buyer has met down payment and continuing investment criteria
required by generally accepted accounting principles.

INTEREST RATE SWAP

The Company entered into interest-rate swap agreements to modify the
interest characteristics of its outstanding debt. These agreements involve the
exchange of amounts based on a fixed interest rate for amounts based on variable
interest rates and vice versa over the life of the agreements without an
exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest incurred related to the debt (the
accrual accounting method). The fair value of the swap agreements are not
recognized in the financial statements. In the event of the termination of an
interest-rate swap agreement, gains and losses would be deferred as an
adjustment to the carrying amount of the outstanding debt and amortized as an
adjustment to interest incurred related to the debt over the remaining term of
the original contract life of the terminated swap agreement. In the event of the
early extinguishment of a designated debt obligation, any realized or unrealized
gain or loss from a swap would be recognized in income coincident with the
extinguishment.

In June 1999, the Financial Accounting Standards Board issued Statement
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL
OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which is required to be adopted
in years beginning after June 15, 2000. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.

RECLASSIFICATIONS

Certain amounts in the Consolidated Financial Statements relating to 1998
and 1997 have been reclassified to conform to the 1999 presentation.

39
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. REAL ESTATE INVENTORIES

Real estate inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Unimproved land held for future development...... $ 41,596,000 $ 34,472,000
Development projects in progress................. 349,270,000 251,821,000
Completed inventory (including lots held for
sale).......................................... 45,439,000 38,873,000
------------ ------------
$436,305,000 $325,166,000
============ ============
</TABLE>

Completed inventory includes residential units which are substantially ready
for occupancy.

The Company has notes payable to land sellers with a principal balance of
$2,409,000 and $3,954,000 at December 31, 1999 and 1998, respectively, which
relate to land purchased for future residential development. The notes are
secured by mortgages on the purchased land.

3. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

Condensed combined financial information as of December 31, 1999, 1998 and
1997 and for the years then ended are as follows:

<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Assets (primarily real estate
inventories)........................ $53,244,000 $71,910,000 $53,298,000
Liabilities........................... 38,071,000 46,953,000 30,452,000
----------- ----------- -----------
Equity................................ $15,173,000 $24,957,000 $22,846,000
=========== =========== ===========
Revenues.............................. $23,959,000 $63,933,000 $22,011,000
Expenses.............................. 20,970,000 59,090,000 22,071,000
----------- ----------- -----------
Net income (loss)..................... $ 2,989,000 $ 4,843,000 $ (60,000)
=========== =========== ===========
</TABLE>

On July 31, 1997, the Company (through a wholly-owned subsidiary, SHLR of
Washington, Inc., incorporated in the state of Washington) acquired a 49%
interest in SSHI LLC (dba Stafford Homes), with an option to purchase the
remaining 51% interest, subject to certain contingencies. The Company accounted
for this investment as an unconsolidated joint venture under the equity method
of accounting in 1997 and 1998. In January 1999, the Company increased its
interest in Stafford to 89% and refinanced Stafford's debt with the Company's
line of credit facility. As a result, Stafford Homes is accounted for as a
consolidated subsidiary in 1999, rather than an unconsolidated joint venture.

The Company's loss from unconsolidated joint ventures in 1997 is primarily
the result of the Company's share of the loss recognized by Iao Partners
(50%-owned by the Company) of $397,000, offset in part by the Company's share of
the income of Stafford of $329,000. As of December 31, 1999 and 1998, the
Company's cumulative share of the undistributed profits of its joint ventures is
$5,759,000 and $9,117,000, respectively.

Included in the investments in unconsolidated joint ventures of the Company,
and in the liabilities of the joint ventures are advances from the Company to
its unconsolidated joint ventures of $876,000, $9,611,000, and $1,521,000, at
December 31, 1999, 1998 and 1997, respectively.

40
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INCOME TAXES

The following summarizes the provision for income taxes:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
Federal............................... $12,978,000 $6,857,000 $ 343,000
State................................. 2,139,000 974,000 (61,000)
----------- ---------- ----------
15,117,000 7,831,000 282,000
Deferred:
Federal............................... 893,000 28,000 2,843,000
State................................. 163,000 17,000 509,000
----------- ---------- ----------
1,056,000 45,000 3,352,000
----------- ---------- ----------
Provision for income taxes.............. $16,173,000 $7,876,000 $3,634,000
=========== ========== ==========
</TABLE>

The provision for income taxes on adjusted historical income differs from
the amounts computed by applying the applicable Federal statutory rates due to
the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Provision for federal income taxes at
the statutory rate.................... $14,663,000 $7,207,000 $3,343,000
Provision for state income taxes, net of
federal income tax benefits........... 1,510,000 669,000 290,000
Other................................... -- -- 1,000
----------- ---------- ----------
Provision for income taxes.............. $16,173,000 $7,876,000 $3,634,000
=========== ========== ==========
</TABLE>

Deferred income taxes are the result of provisions of the tax laws that
either require or permit certain items of income or expense to be reported for
tax purposes in different periods than they are reported for financial reporting
purposes. The primary components of the Company's deferred income taxes relate
to capitalized interest and inventory impairment losses (Note 3). At
December 31, 1999, the total deferred tax liabilities (primarily resulting from
capitalized interest) and total deferred tax assets (primarily resulting from
inventory impairment losses) are $2,632,000 and $4,994,000, respectively.

Income tax payments of $13,565,000, $7,118,000 and $455,000, were made
during 1999, 1998 and 1997, respectively.

5. NOTES PAYABLE TO BANK

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 2% or prime plus 0% to 0.25%. The Company's ability to draw upon its
line of credit is dependent upon meeting certain

41
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. NOTES PAYABLE TO BANK (CONTINUED)
financial ratios and covenants. As of December 31, 1999, 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 (5.21% on initial effective date) on $30,000,000, while
receiving in return an interest payment at a fixed rate of 6.31%. The interest
rate differential on these swaps to be received or paid is recognized during the
period as an adjustment to interest incurred.

The Company's notes payable at December 31, 1999 consist of borrowings under
its credit facilities. At December 31, 1999, the Company's bank borrowings were
at interest rates of prime (8.5%) and LIBOR plus 1.5% (8.0%). At December 31,
1999, $91,817,000 of the Company's line of credit is unused, of which $5,966,000
is restricted for outstanding but unused letters of credit.

In April 1999, the Company entered into a separate 90-day $10,000,000 line
of credit with one of the banks included in the $120,000,000 Revolving Credit
Facility. In July 1999, the Company extended this line of credit for an
additional 90 days. This separate line of credit was canceled on October 1,
1999.

The interest amounts in this paragraph relate to notes payable to bank and
others, senior notes and the convertible subordinated debentures. The Company
paid interest of approximately $18,407,000, $11,818,000, and $11,644,000 during
the years ended December 31, 1999, 1998 and 1997, respectively. Interest
incurred during 1999, 1998 and 1997 was approximately $18,652,000, $13,789,000
and $11,845,000, respectively. All of such interest was capitalized to real
estate inventories except for $3,077,000, $3,096,000 and $2,985,000 in 1999,
1998 and 1997, respectively, which was expensed and not capitalized, as such
interest related to assets which did not meet the requirements for
capitalization. Interest, previously capitalized to real estate inventories,
expensed as a component of cost of residential real estate sales during 1999,
1998 and 1997 totaled $16,327,000, $9,554,000 and $6,666,000, respectively.

The following information relates to notes payable to bank at December 31,
1999 and 1998 and interest thereon during the years then ended:

<TABLE>
<CAPTION>
MAXIMUM AVERAGE DAILY
WEIGHTED AVERAGE AMOUNT AMOUNT WEIGHTED AVERAGE
INTEREST RATE AT OUTSTANDING OUTSTANDING INTEREST RATE
END OF THE YEAR DURING THE YEAR DURING THE YEAR DURING THE YEAR*
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
1999................. 8.1% $111,513,000 $80,968,000 7.0%
=== ============ =========== ===
1998................. 7.2% $112,157,000 $49,199,000 7.8%
=== ============ =========== ===
</TABLE>

* Computed by dividing related interest charged by the average daily amount
outstanding during the year.

6. SENIOR NOTES

On May 6, 1998, the Company consummated its offering of $100,000,000
aggregate principal amount of 9% Senior Notes, which are due April 15, 2008. The
Company received net proceeds from the offering of approximately $97,200,000
(net of discounts and offering costs of approximately $2,800,000). The Company
used such proceeds to repay a portion of the Company's borrowings under its line
of credit. The offering costs are amortized over the term of the notes using the
interest method. The Company offered to

42
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. SENIOR NOTES (CONTINUED)
exchange its Senior Notes for new notes evidencing the same debt as the Senior
Notes, which were registered pursuant to a Form S-4 Registration Statement filed
with the U.S. Securities and Exchange Commission on July 6, 1998. Pursuant to
such exchange offer, all of the Senior Notes were exchanged for new notes.

7. CONVERTIBLE SUBORDINATED DEBENTURES

On January 28, 1993, the Company issued $50,000,000 principal amount of
6 1/2% Convertible Subordinated Debentures, which are due January 15, 2003. On
February 25, 1993, the related over-allotment option for an additional
$7,500,000 was exercised in full. The Debentures are convertible at any time
prior to maturity into shares of the Company's common stock at a conversion
price of $21.83 per share, subject to adjustment under certain conditions. The
Company received net proceeds from the offering of approximately $55,200,000
(net of offering costs of approximately $2,300,000). The Company used a portion
of such proceeds to purchase $51,500,000 of additional land inventory for
residential development, using the balance of $3,700,000 to repay a portion of
the Company's borrowings under its line of credit. The offering costs are being
amortized over the term of the debentures using the interest method.

8. COMMITMENTS AND CONTINGENCIES

At December 31, 1999, the Company had under contracts to purchase for
approximately $7,317,000, land parcels for future residential development.

Certain of the Company's land purchase agreements require the Company to
make additional payments to the seller if the average sales price or number of
homes built on such land exceeds an amount stated in such purchase agreements.
Amounts paid pursuant to these agreements have not been significant.

One of the agreements for land purchased during early 1993 includes a
provision for the Company to pay the previous owner of the land additional
amounts if the number of units developed exceeds 580. The Company may develop up
to 832 units for sale. The Company is obligated to pay an additional $20,000 for
each residential unit in excess of 580 residences. Accordingly, the Company may
be obligated to pay the previous owner of the land an additional $5,040,000. The
additional payments are earned by the previous owners upon the issuance of a
certificate of occupancy for each excess unit. Such payments are payable at the
closing of the sale of each excess unit. The payments are secured by a
subordinated mortgage on a portion of the purchased land. As of December 31,
1999, the Company has paid $1,700,000 and accrued $160,000, for a total of
$1,860,000 related to the construction of 93 units in excess of 580.

43
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
of such work will not be material to its financial condition. A trial date in
April 2000 has been set in the second action, which includes one remaining
plaintiff. If decided adversely to the Company, it would not, in the opinion of
management, have a material adverse effect on the financial condition of the
Company.

9. EMPLOYEE BENEFIT AND STOCK OPTION PLANS

The Company sponsors a 401(k) defined contribution retirement savings plan
that covers substantially all employees of the Company after completion of one
year of service. Company contributions to this plan, which include amounts based
on a percentage of employee contributions as well as discretionary
contributions, were $220,000, $130,000 and $89,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.

In January 1992, the Company adopted a stock option plan (the "Plan"). Under
the Plan, options to purchase an aggregate of not more than 1,000,000 (increased
to 1,500,000 pursuant to the filing of a Form S-8 Registration Statement with
the U.S. Securities and Exchange Commission in August 1999) shares of common
stock may be granted from time to time to employees, officers and directors of
the Company. The options vest 25% one year after being granted. Thereafter,
vesting occurs pro rata each month until 100% vesting is attained four years
after the grant date. The maximum term of the options granted is 10 years.

The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of
6.0%, 5.6% and 6.4%; dividend yields of 0%, 0% and 0%; volatility factors of the
expected market price of the Company's common stock of 0.37, 0.37 and 0.32; and
a weighted-average expected life of the option of 4.5, 4 and 3.25 years.

The Black-Scholes option valuation model used was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

44
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
applying FASB Statement No. 123 on pro forma net income for 1999, 1998 and 1997
are not likely to be representative of the effects for future years, since the
1999, 1998 and 1997 pro forma net income amounts each reflect expense for only
one year of vesting. The Company's pro forma information follows:

<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Pro forma net income................... $25,221,000 $11,806,000 $5,122,000
Pro forma net income per share:
Basic................................ $ 1.26 $ 0.59 $ 0.25
Diluted.............................. 1.26 0.59 0.25
</TABLE>

A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:

<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of
year....................... 771,658 $ 6 611,085 $ 6 369,885 $12
Granted...................... 262,200 6 198,850 7 523,501 6
Exercised.................... (23,730) 6 (17,538) 6 (750) 6
Forfeited.................... (18,509) 7 (20,739) 7 (281,551) 13
------- --- ------- --- -------- ---
Outstanding-end of year...... 991,619 $ 6 771,658 $ 6 611,085 $ 6
======= === ======= === ======== ===
Exercisable at end of year... 562,607 $ 6 277,446 $ 7 39,889 $10
Weighted-average fair value
of options granted during
the year................... $ 2.40 $ 2.59 $ 1.80
</TABLE>

Exercise prices for options outstanding as of December 31, 1999 ranged from
$6 to $26.

In 1997, option holders were permitted to receive new options in exchange
for certain of their existing outstanding options (covering up to an aggregate
of approximately 271,000 shares of Common Stock). Options for 256,000 shares
were exchanged in 1997 at a new exercise price of $5.625. The new options became
subject to a new vesting schedule and the existing options were canceled.

On July 31, 1998, the Company filed a Form S-8 Registration Statement with
the U.S. Securities and Exchange Commission to register 500,000 shares of the
Company's common stock for issuance under the Company's Employee Stock Purchase
Plan. As of December 31, 1999, 55,630 shares of the Company's common stock were
issued on a cumulative basis since the inception of the Plan.

10. STOCKHOLDERS' EQUITY

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
December 31, 1999, the Company has repurchased 504,400 shares under the program
at a total cost of $3,586,000.

45
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. RELATED PARTY TRANSACTIONS

James K. Schuler, the Company's chief executive officer, owns a majority of
the common shares outstanding as of December 31, 1999 and 1998.

In connection with the purchase of an additional 40% interest in Stafford,
the Company refinanced Stafford's existing debt, which included $1,251,000 in
certain notes payable to affiliates of Stafford.

The Company leases its main office in Oregon from a family member of the
Division President of the Oregon Division. During 1999, the Company incurred
total rental expense in connection with the lease of approximately $103,000. The
terms for the lease are no less favorable to the Company than could be obtained
from unaffiliated third parties.

In connection with the acquisition of certain assets of a homebuilder in
October 1998, the Division President of the Company's Oregon Division (formerly
the president of the acquired homebuilder) earns a percentage of the profits of
the Oregon Division. In addition, included in Other Assets at December 31, 1999,
is a note receivable of $1,000,000 from the Oregon Division President, which was
issued on January 4, 1999, is due on December 31, 2005, bears interest at 7%,
and requires minimum annual payments of $200,000 plus accrued but unpaid
interest. Accrued interest receivable relating to the note was approximately
$70,000 at December 31, 1999. During 1999, the Company sold 27 of its homes for
an aggregate sales price of $2,449,000 to a limited liability company of which
the Division President of the Company's Oregon Division is a member.

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 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 $26,000 at
December 31, 1999.

From time to time, the Company engages the law firms in which directors of
the Company are partners. During 1999, 1998 and 1997, legal fees of
approximately $36,000, $322,000 and $322,000, respectively, to such firms were
incurred by the Company.

12. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share for the years ended December 31, 1999,
1998 and 1997 were computed using the weighted average number of common shares
outstanding during the period of 19,997,759, 20,102,922 and 20,100,267,
respectively.

Diluted net income per share for the year ended December 31, 1999 was
computed by adding to net income the interest expense of $3,342,000 (net of
related income taxes) which is applicable to convertible subordinated
debentures, and dividing by 22,631,749, 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 years ended
December 31, 1998 and 1997, 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 for the years ended December 31, 1998 and
1997.

46
<PAGE>
SCHULER HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.

Notes receivable (included in Other Assets): The carrying amount of the
Company's notes receivable approximate their fair value, since the interest rate
currently being offered on new notes is similar to the interest rates on
existing notes.

Accrued interest payable (included in Accrued Expenses) and notes payable to
bank: The carrying amounts of the Company's accrued interest payable and notes
payable to bank approximate their fair value.

Convertible subordinated debentures: The fair value of $46,862,500 for the
Company's convertible subordinated debentures is based on the quoted market
price of $81.50 at December 31, 1999.

Interest rate swaps: The estimated fair value at December 31, 1999 is a
liability of approximately $271,000 and is based on a bank quote. Credit loss
from counterparty nonperformance is not anticipated.

Senior notes: The fair value of $93,500,000 for the Company's senior notes
is based on the quoted market price of $93.50 at December 31, 1999.

14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information for the years ended December 31, 1999 and
1998 are presented in the following summary:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Sales............................ $95,893 $131,623 $128,335 $150,927
Operating income................. 9,123 12,182 11,087 13,474
Pre-tax income................... 7,742 10,860 10,919 12,372
Net income....................... 4,790 6,676 6,695 7,559
Earnings per share (diluted)..... 0.24 0.34 0.33 0.37
1998
Sales............................ $55,512 $ 67,433 $ 79,186 $ 80,771
Operating income................. 3,935 5,040 6,635 6,790
Pre-tax income................... 3,257 4,640 5,767 6,928
Net income....................... 2,001 2,852 3,583 4,280
Earnings per share (diluted)..... 0.10 0.14 0.18 0.21
</TABLE>

Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.

47
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S> <C> <C>
SCHULER HOMES, INC.

By: /s/ JAMES K. SCHULER
-----------------------------------------
James K. Schuler
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Dated: March 24, 2000
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board,
/s/ JAMES K. SCHULER President and Chief
------------------------------------------- Executive Officer (principal March 24, 2000
James K. Schuler executive officer)

/s/ MICHAEL T. JONES
------------------------------------------- Executive Vice President of March 24, 2000
Michael T. Jones Operations and Director

Senior Vice President of
/s/ PAMELA S. JONES Finance, Chief Financial
------------------------------------------- Officer and Director March 24, 2000
Pamela S. Jones (principal financial
officer)

Vice President of Finance,
/s/ DOUGLAS M. TONOKAWA Chief Accounting Officer
------------------------------------------- (principal accounting March 24, 2000
Douglas M. Tonokawa officer)

/s/ MARTIN T. HART
------------------------------------------- Director March 24, 2000
Martin T. Hart

/s/ BERT T. KOBAYASHI, JR.
------------------------------------------- Director March 24, 2000
Bert T. Kobayashi, Jr.

/s/ THOMAS A. BEVILACQUA
------------------------------------------- Director March 24, 2000
Thomas A. Bevilacqua
</TABLE>

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
Melody Homes, Inc. Delaware
Melody Mortgage Co. Colorado
Schuler Homes of California, Inc. California
Schuler Homes of Washington, Inc. (1) Washington
Schuler Homes of Oregon, Inc. (1) Oregon
SHLR of Washington, Inc. (2) Washington
SHLR of Colorado, Inc. Colorado
SHLR of Nevada, Inc. (3) Nevada
Schuler Realty/Maui, Inc. Hawaii
Schuler Realty/Oahu, Inc. Hawaii
Lokelani Construction Corporation Delaware
SHLR of Utah, Inc. Utah
</TABLE>

(1) Also does business as Keys and Schuler Homes for certain residential
development projects.
(2) Owns an 89% interest in SSHI LLC, which does business as Stafford Homes.
(3) Owns a 100% capital interest in SRHI LLC, which does business as Rielly
Homes and as Schuler Homes of Arizona in California and Arizona,
respectively.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Registration Statements (Form
S-8 Nos. 33-53044, 333-60305 and 333-84957) of Schuler Homes, Inc., of our
report dated March 14, 2000, with respect to the consolidated financial
statements of Schuler Homes, Inc. included in this Form 10-K for the year ended
December 31, 1999.

Ernst & Young LLP

Honolulu, Hawaii
March 25, 2000

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THE COMPANY'S
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,673,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 436,305,000
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 490,466,000
<CURRENT-LIABILITIES> 0
<BONDS> 156,171,000
0
0
<COMMON> 214,000
<OTHER-SE> 96,038,000
<TOTAL-LIABILITY-AND-EQUITY> 201,148,000
<SALES> 506,778,000
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 460,912,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 41,893,000
<INCOME-TAX> 16,173,000
<INCOME-CONTINUING> 25,720,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,720,000
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.28

</TABLE>