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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000
COMMISSION FILE NUMBER: 0-15925
CAPITAL PACIFIC HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
4100 MACARTHUR BLVD., SUITE 200
NEWPORT BEACH, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
95-2956559
(IRS EMPLOYER IDENTIFICATION NUMBER)
92660
(ZIP CODE)
(949) 622-8400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK $.10 PAR VALUE
(TITLE OF EACH CLASS)
THE AMERICAN STOCK EXCHANGE
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At May 1, 2000, the aggregate market value of the voting stock held by
persons other than the directors, executive officers and principal shareholders
filing Schedules 13D of the Registrant was $6,397,993 as determined by the
closing price on the American Stock Exchange. The basis of this calculation does
not constitute a determination by the Registrant that all of its principal
shareholders, directors and executive officers are affiliates as defined in Rule
405 under the Securities Act of 1933.
At May 1, 2000, there were 13,791,211 shares of Common Stock outstanding.
Part III incorporates certain information by reference to the Registrant's
definitive proxy statement to be filed with the Commission no later than June
28, 2000.
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PART 1
ITEM 1. BUSINESS
GENERAL
Capital Pacific Holdings, Inc., together with its subsidiaries (the
"Company"), is a regional builder and developer with operations throughout
selected metropolitan areas of Southern California, Nevada, Texas, Arizona and
Colorado. The Company's principal business activities are to build and sell
single-family homes and to develop and build commercial and mixed-use projects.
The Company's single-family homes are targeted to entry-level, move-up and
luxury buyers. The acquisition and development of commercial and mixed-use
projects, as well as ownership of existing commercial properties, is
accomplished primarily through non-majority investments in limited liability
companies. Since 1975, the Company has built and sold over 22,000 homes in the
markets it serves. During the fiscal year ended February 29, 2000, the Company
(including unconsolidated joint ventures) closed 2,006 home and lot sales,
including 1,296 homes, at an average home sales price of $233,000. The Company
currently conducts its operations under various names, including the name
Capital Pacific Homes in California, Nevada, Arizona and Colorado and Clark
Wilson Homes, Inc. ("Clark Wilson") in Texas.
In fiscal year 1998, the Company consummated an equity and restructuring
transaction whereby the Company and certain of its subsidiaries transferred to
Capital Pacific Holdings, LLC ("CPH LLC") substantially all of their respective
assets and CPH LLC assumed all the liabilities of the Company and its
subsidiaries. At the current time, the Company, together with its subsidiaries,
has a 67.93% interest in CPH LLC. An unaffiliated investment company, California
Housing Finance, L.P. ("CHF") holds a 32.07% minority interest in CPH LLC as a
result of a cash investment in CPH LLC. Subject to adjustment and exceptions
under certain circumstances, CHF has the same interest in all future business of
the Company, all of which will be conducted either within CPH LLC or through
project-specific entities. Assets under management, including assets owned by
unconsolidated joint ventures, totaled $703 million at February 29, 2000 in 62
residential and commercial properties. At February 29, 2000, CPH LLC had $281
million in assets and a net worth of $100 million. In addition, the Company has
interests in unconsolidated joint ventures which have total assets of $345
million and a combined net worth of $282 million at February 29, 2000. The
Company is the sole managing member of CPH LLC. The Company maintains certain
licenses and other assets as is necessary to fulfill its obligations as managing
member. The Company and its subsidiaries perform their respective management
functions for CPH LLC as well as other project-specific entities of which the
Company is the managing member pursuant to management agreements, which include
provisions for the reimbursement of Company and subsidiary costs, a management
fee and indemnification by CPH LLC and the project-specific entities.
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC and the project-specific entities. At the current time,
all material financing transactions and arrangements are incurred either by CPH
LLC or by the project-specific entities.
STRATEGY
The Company's long-term strategy includes the following key elements:
(1) Maintaining diversity in its geographic markets. The Company
believes that geographic market diversification is a key element in
achieving long-term stability and growth. While the Company has no specific
plans to expand outside the Nevada, Texas, Arizona, Colorado and Southern
California markets, it may consider expansion to other markets in the
future.
(2) Diversifying its product. The Company builds homes targeted for
all price segments, from entry level buyers to the semi-custom luxury
market move-up buyers, so that it is able to deliver well-priced homes to a
broad segment of its potential customer base. Within Texas, Nevada, Arizona
and Colorado, the Company serves the entry level as well as move-up
markets. Within Southern California, the Company has products targeted
toward second and third time move-up buyers, as well as the million
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dollar luxury market. This product diversification enables the Company to
better adapt to changing market conditions.
(3) Enhancing the Company's capital base and sources of financial
liquidity. In addition to the equity and restructuring transaction
described above, the Company has diversified sources of financing and will
continue to pursue new financing alternatives in the future. In fiscal year
1995, the Company accessed the public debt capital markets through the sale
of $100 million of 12 3/4% Senior Notes ("Senior Notes") including 790,000
warrants to purchase common stock (the "Offering"). The Senior Notes are
due May 1, 2002. The proceeds from the offering were used to repay certain
debt of the Company, acquire certain properties and for general working
capital purposes. Effective upon the completion of the October 1, 1997
equity and restructuring transaction, the obligations under the Senior
Notes were transferred to CPH LLC. Credit facilities in place at February
29, 2000 totaled $225 million, of which $126 million was outstanding. The
Company intends to maintain, through CPH LLC, its traditional lending
relationships as a source of liquidity to the extent permitted by the
indenture (the "Indenture") to which the Notes are subject. The Company
believes this financing strategy allows orderly growth and greater
flexibility to react quickly to changing market conditions. The Company
also utilizes joint ventures within its operations as a source of financing
and risk management. At February 29, 2000, the Company had 12 active joint
ventures. The Company has successfully completed several projects and
closed many homes utilizing this strategy in the past.
(4) Controlling costs and maintaining operational efficiency. The
Company has job cost, warranty tracking and construction scheduling systems
and other quality controls to control costs and to reduce the effect of
certain risks inherent in the home-building industry. These systems and
controls enable the Company to monitor and improve its efficiencies.
(5) Minimizing inventory risk. The Company tries to carefully manage
its land and inventory risk in a variety of ways. The Company monitors its
supply of owned, optioned and controlled land to maintain an adequate
pipeline of building lots in each of its markets while avoiding excess land
holdings. For its homebuilding projects, the Company generally prefers to
purchase entitled land, typically in parcels of only 50 to 250 lots, and
makes use of options, seller financing and joint ventures, when available,
to reduce its capital commitment and exposure to risks. "Entitled" land is
generally defined as land that has received all necessary land use
approvals for residential development from the appropriate state, county
and local governments, including any required tract maps and subdivision
approvals. The Company generally tries to limit its speculative building by
commencing construction only after some sales have been made and tries to
limit each construction phase to between 10 and 15 units. The Company
generally purchases and holds land in amounts sufficient to support home
production and sales over a 24 to 48 month period in California, and in
amounts sufficient to support home production and sales over an 18 to 36
month period in Nevada, Texas, Arizona and Colorado. In Nevada, the
Company's decision on maintenance of inventory will depend upon its future
judgments regarding market conditions.
(6) Land Development. In certain project-specific joint ventures, the
Company has purchased unentitled land, with the intention of obtaining the
required entitlements and then either selling the unimproved land,
developing lots and selling them to other builders or building homes
itself. Due in part to a declining inventory of entitled land in certain of
the Company's markets and its increasing commercial and mixed use
activities, the Company's land development activities have increased.
(7) Commercial and mixed-use development. The Company's operating
strategy also encompasses the development of commercial and mixed-use
projects, as well as ownership of existing commercial properties, primarily
through non-majority investments in limited liability companies. These
projects are typically structured as joint ventures with the majority of
the capital provided by financial partners. This strategy enables the
Company to take advantage of unique opportunities in selected infill
projects and also provides a measure of diversification within the real
estate development arena. The Company's commercial and mixed-use portfolio
currently includes by a 400 room, five-star hotel which is midway through
construction and an operating oceanfront golf course, both in Monarch
Beach, California. In addition, the Company is pursuing entitlements on a
31 acre mixed-use coastal parcel in
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Huntington Beach, California, as well as certain other residential and golf
course parcels throughout California. The Company also operates three
office buildings located in Orange County California totaling 164,400
square feet. In addition, the Company owns two office facilities, totaling
63,600 square feet, from which it conducts its California and Nevada
operations and within which it leases available space to third parties.
HOMEBUILDING GEOGRAPHIC MARKETS
At February 29, 2000, the Company, either directly or through joint
ventures, owned lots in various stages of development with respect to
approximately 56 residential projects, including 12 projects located in the
Orange, Los Angeles and Riverside Counties of Southern California, 9 projects
located in Las Vegas, Nevada, 16 projects located in Austin, Texas, 12 projects
located in Phoenix, Arizona and 7 projects in the Denver metropolitan and
Colorado Springs areas of Colorado. The Company is currently selling homes in 41
of these projects. The Company's homes for sale currently range in size from
3,000 to 8,000 square feet in Southern California, from 1,100 to 3,600 square
feet in Nevada, from 930 to 4,500 square feet in Texas, from 930 to 3,700 square
feet in Arizona and from 1,100 to 2,200 square feet in Colorado. The Company's
homes are currently priced from $460,000 to $3,500,000 in Southern California,
from $110,000 to $337,000 in Nevada, from $81,000 to $452,000 in Texas, from
$82,000 to $350,000 in Arizona, and from $110,0000 to $229,000 in Colorado.
The following table sets forth the estimated number of homes under
construction and lots owned, under option and controlled as of February 29,
2000:
ESTIMATED NUMBER OF HOUSING UNITS THAT COULD BE
CONSTRUCTED ON LAND CONTROLLED AS OF FEBRUARY 29, 2000(a)
LOTS
HOMES UNDER LOTS UNDER LOTS
REGION CONSTRUCTION(B) OWNED OPTION(C) CONTROLLED(D) TOTAL
- ------ --------------- ----- --------- ------------- -----
Southern California.................. 115 703 -- 240 1,058
Nevada............................... 113 252 196 -- 561
Texas................................ 266 897 394 -- 1,557
Arizona.............................. 110 438 -- 332 880
Colorado............................. 118 329 259 474 1,180
--- ----- --- ----- -----
Total...................... 722 2,619 849 1,046 5,236
=== ===== === ===== =====
- ---------------
(a) Based upon current management estimates, which are subject to change.
(b) Including completed model homes.
(c) Lots under option represent lots under rolling option contracts within
existing projects. There can be no assurance that the Company will actually
acquire any lots under option.
(d) Controlled home sites include those properties for which the Company has
entered into a variety of contractual relationships including non-binding
letters of intent, binding purchase agreements with customary conditions
precedent and similar arrangements. There can be no assurance that the
Company will actually acquire any such properties.
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The table below summarizes the residential developments currently in
process in the Company's geographic markets:
UNITS
NUMBER OF NUMBER OF TOTAL UNITS REMAINING
PROJECTS HELD FOR PROJECTS IN UNITS CLOSED IN AT
REGION DEVELOPMENT(A) SALES STAGE(B) PLANNED(C) FY 2000 2/29/00(C)
- ------ ----------------- --------------- ---------- --------- ----------
Southern California......... 12 7 1,028 131 818
Nevada...................... 9 8 1,750 791 561
Texas....................... 16 12 3,296 568 1,557
Arizona..................... 12 9 959 358 548
Colorado.................... 7 5 864 158 706
-- -- ----- ----- -----
Total............. 56 41 7,897 2,006 4,190
== == ===== ===== =====
- ---------------
(a) The number of projects held for development includes owned projects with
houses in the planning, development, construction and sales stages.
(b) The number of projects in the sales stage includes projects where the sales
office has opened, reservations are being taken or sales contracts are being
executed.
(c) Includes units under construction, in backlog and lots under option in owned
projects.
JOINT VENTURES
The Company conducts its operations as either wholly owned projects or
through joint ventures in which the joint venture partner typically provides
more than a majority of the capital and/or financing required for the project.
The Company has utilized joint ventures in order to increase access to sources
of capital, financing and quality sites. The Company expects to continue to
utilize joint ventures in the future on a selective basis, taking into account
other available sources of financing, project risk and the potential return to
the Company.
Since the financial restructuring in fiscal year 1998, the Company,
together with its financial partners, has invested over $390 million in 11 new
joint ventures. The Company typically is required to fund a small percentage of
the capital requirements of each joint venture, which amount is included in
investments in and advances to unconsolidated joint ventures in the Company's
consolidated balance sheets.
Residential Joint Ventures
At February 29, 2000, the Company's residential joint ventures were as
follows:
UNITS
REMAINING
TOTAL UNITS UNITS CLOSED AT
JOINT VENTURE PLANNED IN FY 2000 2/29/00
- ------------- ----------- ------------ ---------
Grand Coto Estates, LP -- Orange County.......... 93 11 --
M.P.E. Partners, LP -- Los Angeles County........ 51 10 --
RPV Associates, LLC -- Los Angeles County........ 79 0 79
CPH Dana Point, LLC -- Orange County............. 44 0 44
CPH Monarch Beach, LLC -- Orange County.......... 65 6 59
CPH Resorts I, LLC -- Orange County(a)........... 238 0 238
CPH Newport Coast, LLC -- Orange County(b)....... 97 1 96
CPH Vista Palisades, LLC -- San Diego County..... 55 0 55
CPH Yucaipa I, LLC -- Riverside County(b)........ 100 -- 671
--- -- ---
822 28 571
=== == ===
- ---------------
(a) Residential portion of joint venture.
(b) Consolidated joint venture.
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Mixed-Use and Commercial Joint Ventures
At February 29, 2000, the Company's mixed-use and commercial joint ventures
were as follows:
JOINT VENTURE DESCRIPTION
- ------------- -----------
Atlanta Huntington Beach, LLC........... Mixed-use
CPH Resorts I, LLC(a)................... Hotel, Residential and Golf Operations
CPH Dos Pueblos Associates, LLC......... Golf Course Development
CPH Airport Office Building, LLC........ Commercial Office Building
CPH Redhill Office Building, LLC........ Commercial Office Buildings
CPH Jurupa/Milliken, LLC(b)............. Industrial Buildings
- ---------------
(a) Commercial portion of joint venture.
(b) Consolidated joint venture.
LAND ACQUISITION
For typical residential developments, the Company tries to purchase and
hold land in California in amounts sufficient to support home production and
sales over a 24 to 48 month period. The Company also tries to maintain an
additional 18-month supply of entitled land through options and other means. The
Company typically purchases or options entitled land in Texas, Arizona and
Colorado in amounts sufficient to support home production and sales over an 18
month to 36 month period. In Nevada, the Company's decision on maintenance of
inventory will depend upon its future judgments regarding market conditions. The
Company typically does not acquire and hold land for speculative investment.
The Company typically considers numerous factors when analyzing the
suitability of land for acquisition and development including, but not limited
to, proximity to existing developed areas; population growth patterns;
availability of existing community services (i.e., utilities, schools and
transportation); employment growth rates; anticipated absorption rates for new
housing; and the estimated cost of development.
The Company tries to avoid speculative building by constraining project
phase sizes, and entitlement risks by acquiring entitled land when practicable
and acquiring lots through the use of options, development agreements and joint
ventures with lot owners, when appropriate. Additionally, by forming strategic
alliances with partners, the Company has been able to obtain access to
additional capital and construction financing to spread project risk, which
allows the Company to minimize the risk of holding property and to preserve its
capital. To date, the Company's alliances have been conducted through joint
ventures.
During fiscal years 1999 and 2000, the Company expanded its land
development presence in the Southern California market. Specifically, four
projects, all structured as joint ventures, currently consist of land in various
stages of entitlement. Due in part to a declining inventory of entitled land in
certain of the Company's markets and its increasing commercial and mixed-use
activities, the Company's land development activities have increased.
PRODUCT DESIGN
The Company has received numerous industry design awards for its homes and
developments. The Company's homes are noted for their innovative design,
attention to detail and quality construction. By emphasizing the right product
designs, the Company has also been able to build brand loyalty while attempting
to reduce warranty costs. In many markets, resales of the Company's homes
include the Company's name as a sign of quality construction and design.
The Company contracts with a number of outside architects, designers,
engineers, consultants and subcontractors. While some of the Company's employees
are involved in various stages of the design process, the Company believes that
the use of third parties for the production of the final design, engineering and
construction reduces its costs, increases design innovation and quality, and
reduces the risks of liability associated with the design and construction
process. The Company monitors the work of outside architects,
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designers and engineers through consultants and employees of the Company. The
Company believes it is critical to coordinate the design process with the
construction and sales and marketing efforts of the Company to ensure an
appropriate balance between market responsiveness, design innovation,
construction effectiveness and quality.
The Company creates architectural variety within its projects by offering
numerous models, floor plans, and exterior styles in an effort to enhance home
values by creating diversified neighborhood looks within its projects.
Generally, the Company selects the exterior finishes of its homes. The Company
offers homebuyers the opportunity to engage interior design consultants to
personalize the interior of their homes. Such services are offered at an
additional cost to buyers in California through the Company's wholly owned
subsidiary, Newport Design Center ("Newport Design"), or the services may be
provided through the homebuyer's own consultants.
DEVELOPMENT AND CONSTRUCTION
The Company acts as the general contractor for the construction of its
projects, except in certain commercial projects. Virtually all construction work
for the Company is performed by subcontractors. The Company's consultants and
employees coordinate the construction of each project and the activities of
subcontractors and suppliers, and subject their work to quality and cost
controls and compliance with zoning and building codes. Subcontractors typically
are retained on a phase-by-phase basis to complete construction at a fixed
price. Agreements with the Company's subcontractors are generally entered into
after competitive bidding on a project by project basis. The Company has
established relationships with a large number of subcontractors and is not
dependent to any material degree upon the services of any one subcontractor and
believes that, if necessary, it can generally retain sufficient qualified
subcontractors for each aspect of construction. The Company believes that
conducting its operations in this manner enables it not only to readily and
efficiently adapt to changes in housing demand, but also to avoid fixed costs
associated with retaining construction personnel.
The Company typically develops its residential projects in several phases
generally averaging approximately 10 to 15 homes per phase. From market studies,
the Company determines the number of homes to be built in the first phase, the
appropriate price range for the market and other factors. The first phase of
home construction is typically small to reduce risk while the Company measures
consumer demand. Construction generally does not begin until some sales have
occurred, except for construction of model homes. Subsequent phases are
generally not started until 50% to 75% of the homes in the previous phase have
been sold. Sales prices in the second phase are then adjusted to reflect market
demand as evidenced by sales experience in the first phase. With each subsequent
phase, the Company continues to accumulate market data which, along with
information such as time of year, the local labor situation and the availability
of materials and supplies, enables the Company to determine the pricing, timing
and size of subsequent phases. Although the time required to complete a phase
varies from development to development depending on the above factors, the
Company typically completes construction of a phase within one of its California
developments in approximately six to ten months for larger homes and four to
five months for smaller homes and within its Nevada, Texas, Arizona and Colorado
developments within three to four months.
SALES AND MARKETING
The Company typically builds, furnishes and landscapes model homes for each
residential project and maintains on-site sales offices, which are usually open
seven days a week. Management believes that model homes play a particularly
important role in the Company's marketing efforts. Consequently, the Company
expends a significant effort in creating an attractive atmosphere at its model
homes. Interior decorations vary among the Company's models and are carefully
selected based upon the lifestyles of targeted buyers. Structural changes in
design from the model homes generally are not permitted, but homebuyers may
select various optional construction and design amenities.
The Company normally sells all of its homes through Company sales
representatives who typically work from the sales offices located either at the
model homes or at sales centers used in each subdivision. When
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appropriate, the Company also uses cooperative brokers to sell its homes.
Company sales representatives are available to assist prospective buyers by
providing them with floor plans, price information and tours of model homes, and
to assist them with the selection of options and upgrades. Sales representatives
attend periodic meetings at which they are provided with information regarding
other products in the area, the variety of financing programs available,
construction schedules and marketing and advertising plans.
The Company generally opens an on-site sales office before the construction
of the model homes is completed. This on-site sales office is utilized as a
temporary sales center to commence the sales process to potential customers.
Potential homebuyers may reserve a home by submitting a refundable deposit (a
reservation deposit) usually ranging from $500 to $20,000 and executing a
reservation document. The Company then conducts preliminary research concerning
the credit status of the potential homebuyer in order to "pre-qualify" the
homebuyer. Once the prospective homebuyer has been "pre-qualified" and there is
a strong indication that the homebuyer will qualify for a mortgage (although
final loan approval is still pending), the homebuyer must then convert the
reservation deposit to an "earnest money deposit" and complete a purchase
contract for the purchase of their home. The Company attempts to keep its
contract cancellation rate low by attempting to pre-qualify prospective
homebuyers and by allowing homebuyers to customize their homes at an early point
in the purchase process. When home purchase contracts are canceled, damages are
usually limited to a percentage of the purchase price of the home and may be
less pursuant to applicable law or to the terms of the purchase contract. The
Company generally determines whether to seek to obtain such damages on a
case-by-case basis. When home purchase contracts are canceled, the Company is
usually able to identify alternate homebuyers.
The Company makes extensive use of advertising and promotional resources,
including newspaper and magazine advertisements, brochures, direct mail and the
placement of strategically located signboards in the immediate areas of its
projects, and occasionally places radio and television advertisements. Because
the Company usually offers multiple projects within a market area, it is able to
utilize regional advertising that highlights all of the Company's projects
within that same market area. The Company's wholly-owned subsidiary, Creative
Design & Media, designs most advertising materials and brochures for the
Company's California operations.
The Company has established a highly sophisticated website on the Internet,
www.cph-inc.com. The Company utilizes the Internet through its website address
to augment its advertising and promotional activities. In addition, Clark Wilson
Homes recently won several awards in Texas for its website which can be found at
www.clarkwilsonhomes.com.
The Company provides flooring and other amenities and upgrades to its
homebuyers in California through Newport Design and through its design center in
Texas.
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OPERATING DATA
The following table shows new home and lot deliveries, net new orders and
average sales prices for each of the last three fiscal years for each of the
Company's residential operations, including unconsolidated joint ventures:
YEAR END
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1999 2000
------------ ------------ ------------
New homes delivered:
California............................................ 246 119 58
Texas................................................. 343 438 471
Nevada................................................ 208 217 339
Arizona............................................... 76 70 358
Colorado.............................................. -- -- 42
-------- -------- --------
Subtotal........................................... 873 844 1,268
Unconsolidated Joint Ventures (California)............ 36 88 28
-------- -------- --------
Total homes delivered.............................. 909 932 1,296
-------- -------- --------
Lots delivered........................................ 60 50 710
-------- -------- --------
Total homes and lots delivered................ 969 982 2,006
======== ======== ========
Net new orders........................................ 919 1,053 1,397
======== ======== ========
Average sales price for homes delivered:
California (excluding unconsolidated joint
ventures).......................................... $370,000 $566,000 $898,000
California (including unconsolidated joint
ventures).......................................... 404,000 698,000 935,000
Texas................................................. 157,000 164,000 189,000
Nevada................................................ 161,000 190,000 206,000
Arizona............................................... 142,000 148,000 144,000
Colorado.............................................. -- -- 193,000
Combined (excluding unconsolidated joint ventures).... 217,000 224,000 216,000
Combined (including unconsolidated joint ventures).... 233,000 287,000 233,000
BACKLOG AND INVENTORY
The Company typically pre-sells homes prior to and during construction
through home purchase contracts requiring earnest money deposits or through
reservation documents requiring reservation deposits. Generally, reservation
deposits are refundable, but home purchase contracts are not cancelable unless
the customer is unable to sell their existing home, qualify for financing or
under certain other circumstances. A home sale is placed in backlog status upon
execution of such a contract or reservation and receipt of an earnest money
deposit or reservation deposit and is removed when such contracts or
reservations are canceled as described above or the home purchase escrow is
closed.
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The following table shows backlog in units and dollars at the end of each
of the last three fiscal years for each of the Company's residential operations,
including unconsolidated joint ventures:
ENDING BACKLOG
-----------------------------------------------------------
FEBRUARY 28, 1998 FEBRUARY 28, 1999 FEBRUARY 29, 2000
----------------- ----------------- -----------------
UNITS ($000S) UNITS ($000S) UNITS ($000S)
----- -------- ----- -------- ----- --------
California.................. 122 $ 75,000 51 $ 45,700 52 $ 62,000
Texas....................... 200 30,700 252 47,600 272 54,700
Nevada...................... 41 7,100 57 12,200 97 20,200
Arizona..................... 13 2,200 137 18,500 71 11,100
Colorado.................... -- -- -- -- 106 18,400
--- -------- --- -------- --- --------
Total............. 376 $115,000 497 $124,000 598 $166,400
=== ======== === ======== === ========
The following table shows net new orders (sales made less cancellations and
credit rejections), homes closed and ending backlog relating to sales of the
Company's homes and homes under contract or reservation for each quarter since
the beginning of fiscal year 1999, including unconsolidated joint ventures. The
Company's backlog at any given time is a good indicator of the number of units
that will be closed in the four to six months following such date:
ENDING BACKLOG
NET NEW HOMES -----------------
ORDERS CLOSED UNITS ($000S)
------- ------ ----- --------
Fiscal Year 1999
1st Quarter................................... 196 152 420 $124,500
2nd Quarter................................... 261 235 446 120,800
3rd Quarter................................... 249 205 490 145,300
4th Quarter................................... 347 340 497 124,000
----- -----
Total Fiscal Year 1999................ 1,053 932
===== =====
Fiscal Year 2000
1st Quarter................................... 349 303 543 $124,900
2nd Quarter................................... 364 308 599 138,000
3rd Quarter................................... 380 291 688 176,800
4th Quarter................................... 304 394 598 166,400
----- -----
Total Fiscal Year 2000................ 1,397 1,296
===== =====
MORTGAGE COMPANY
The Company established mortgage operations in California through its
wholly owned subsidiary Capital Pacific Mortgage, Inc. during fiscal year 1996.
The Company offers mortgage broker services to certain of its homebuyers through
Capital Pacific Mortgage, Inc. The Company also offers mortgage broker services
to certain of its Texas homebuyers through its subsidiary, Fairway Financial
Company (Fairway), established in fiscal year 1995. In addition, the Company has
established certain relationships with local mortgage broker operations in other
operating regions.
HOMEOWNER WARRANTY
The Company provides homeowners with a limited warranty on the terms of
which the Company will correct, for a limited period, deficiencies listed in the
homeowner warranty manual. The warranty does not, however, include items that
are covered by manufacturer's warranties (such as appliances and air
conditioning) or items that are not installed by employees or contractors of the
Company (such as flooring installed by an outside contractor employed by the
homeowner). The Company also provides certain homebuyers with policies issued by
third-parties that extend protection beyond the Company's warranty period.
Statutory
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requirements in the states in which the Company does business may grant to
homebuyers rights in addition to those provided by the Company.
COMPETITION
The homebuilding industry is highly competitive. In each of the markets in
which it operates, the Company competes in terms of location, design, quality
and price with numerous other residential builders, including large national and
regional firms, some of which have greater financial resources than the Company.
As the Company enters and until it develops a reputation in a new market area,
the Company can expect to face even more significant competitive pressures. In
certain markets, the Company may from time to time engage in redesigns of
product and/or make changes in existing model homes to make the Company's
product more competitive. Such redesigns and/or changes may cause the Company to
incur additional expenses and/or to write-off previous investments in such
design or model homes.
REGULATION
The housing and land development industries are subject to increasing
environmental, building, zoning and real estate sales regulations by various
federal, state and local authorities. Such regulations affect home building by
specifying, among other things, the type and quality of building materials that
must be used, certain aspects of land use and building design, as well as the
manner in which the Company conducts sales activities and otherwise deals with
customers. Such regulations affect development activities by directly affecting
the viability and timing of projects.
The Company must increasingly obtain the approval of numerous government
authorities which regulate such matters as land use and level of density, the
installation of utility services, such as water and waste disposal, and the
dedication of acreage for open space, parks, schools and other community
purposes. If such authorities determine that existing utility services will not
adequately support proposed development, building moratoriums may be imposed. As
a result, the Company devotes an increasing amount of time to evaluating the
impact of governmental restrictions imposed upon a new residential development.
Furthermore, as local circumstances or applicable laws change, the Company may
be required to obtain additional approvals or modifications of approvals
previously obtained. Such increasing regulation has resulted in a significant
increase in time between the Company's initial acquisition of land and the
commencement and completion of its developments, particularly in California. In
addition, due to the Company's increasing participation in land development
activities through certain of its joint ventures, the Company is subject to
greater exposure to regulatory risks.
EMPLOYEES
As of April 30, 2000, the Company employed 335 persons full-time, compared
to 258 persons at April 30, 1999. Of these, 31 were in executive positions, 61
were engaged in sales activities, 118 in project management activities and 125
in administrative and clerical activities. In addition, one of the Company's
unconsolidated joint ventures utilizes approximately 98 employees in golf and
food service operations. None of the Company's employees is represented by a
union and the Company considers its employee relationships to be good.
RAW MATERIALS
All of the raw materials and most of the components used in the Company's
business are readily available in the United States. Most are standard items
carried by major suppliers. However, a rapid increase in the number of homes
started could cause shortages in the availability of such materials, thereby
leading to delays in the delivery of homes under construction. In addition,
increases in the price of lumber and other materials have a negative impact on
margins. In order to maintain its quality standards while providing a product at
good value, the Company has used and will under appropriate market circumstances
consider the further use of alternative materials, such as metal studs and
framing in some of its projects.
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ITEM 2. PROPERTIES
The Company owns two office facilities and leases other facilities in
California, Nevada, Texas, Arizona and Colorado. The Company owns its principal
offices, which are located at 4100 MacArthur Blvd., Newport Beach, California,
where the Company occupies approximately 20,000 out of a total 43,800 square
feet of space available. The majority of the remaining office space is leased to
third parties.
The Company also owns a 19,800 square foot office building in Las Vegas,
Nevada. Approximately 10,000 square feet are used as the principal offices of
the Company in Nevada. The majority of the remaining office space is leased to
third parties.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine claims and litigation arising in the
ordinary course of its business. The legal responsibility and financial impact
with respect to pending litigation cannot be presently ascertained.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange (AMEX)
under the Symbol "CPH." The following table sets forth the quarterly high and
low sales prices for the Common Stock for the periods indicated.
HIGH LOW
----- -----
FISCAL 1999
Fourth Quarter............................................ $3.38 $2.50
Third Quarter............................................. 3.75 2.63
Second Quarter............................................ 5.00 2.50
First Quarter............................................. 5.06 3.13
FISCAL 2000
Fourth Quarter............................................ $2.88 $2.44
Third Quarter............................................. 2.69 1.88
Second Quarter............................................ 3.88 2.88
First Quarter............................................. 3.50 2.44
Payment of dividends is within the discretion of the Company's Board of
Directors and holders of shares of Common Stock are entitled to receive
dividends when and if declared by the Board of Directors out of funds legally
available therefore. The Company has no present intention to pay dividends, but
rather intends to retain any earnings. The covenants in the Indenture have
restrictions on permissible dividend payments to the Company from Capital
Pacific Holdings, LLC. There can be no assurance that such limit may not become
more restrictive as the result of any future losses of Capital Pacific Holdings,
LLC. During the last three years, no dividends have been paid.
On May 1, 2000, the Company had approximately 1,000 beneficial holders of
its Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information of the Company is
presented for the fiscal years ended February 29, 2000, February 28, 1999,
February 28, 1998, February 28, 1997 and February 29, 1996. The selected
financial information and other data should be read in conjunction with the
Company's audited Consolidated Financial Statements and the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, both of which are included elsewhere in this report. Certain
reclassifications have been made to the prior years' balances to conform to the
current year presentation.
LAST DAY OF FEBRUARY
-----------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
INCOME STATEMENT DATA:
Sales of homes and land............. $168,679 $216,549 $191,098 $192,422 $290,791
Cost of sales....................... 133,706 164,814 148,702 156,493 231,273
Impairment loss on real estate
assets............................ -- -- 8,000 -- --
-------- -------- -------- -------- --------
Gross margin........................ 34,973 51,735 34,396 35,929 59,518
Income from unconsolidated joint
ventures.......................... 1,560 259 764 7,949 1,730
Selling, general and administrative
expenses.......................... (22,895) (30,282) (24,744) (21,186) (30,813)
Interest expense(1)................. (10,373) (18,743) (14,264) (17,842) (22,141)
Interest and other income, net...... 920 900 1,391 1,381 1,513
-------- -------- -------- -------- --------
Income (loss) from operations....... 4,185 3,869 (2,457) 6,231 9,807
Minority interest(2)................ (1,080) 192 (469) (1,850) (2,835)
-------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item............ 3,105 4,061 (2,926) 4,381 6,972
Income tax expense (benefit)........ 503 539 (735) 1,095 1,745
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item.............................. 2,602 3,522 (2,191) 3,286 5,227
Extraordinary gain on debt retired
at less than face value, net of
minority interest and taxes....... -- -- -- -- 955
-------- -------- -------- -------- --------
Net income (loss)................... $ 2,602 $ 3,522 $ (2,191) $ 3,286 $ 6,182
======== ======== ======== ======== ========
Net income (loss) per common
share:(3)
Before extraordinary item........... $ .17 $ .23 $ (.15) $ .23 $ .37
Extraordinary item.................. -- -- -- -- .07
-------- -------- -------- -------- --------
Net income (loss) per share -- basic
and diluted....................... $ .17 $ .23 $ (.15) $ .23 $ .44
======== ======== ======== ======== ========
Weighted average shares -- basic.... 14,995 14,995 14,795 14,237 13,923
======== ======== ======== ======== ========
Weighted average
shares -- diluted(5).............. 14,995 14,995 14,795 14,271 14,014
======== ======== ======== ======== ========
Proforma revenues (including
unconsolidated joint ventures).... $213,374 $227,750 $214,093 $271,372 $319,064
======== ======== ======== ======== ========
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1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Real estate projects................ $227,194 $233,562 $192,347 $261,333 $282,497
Total assets........................ 266,508 271,918 251,655 324,763 358,281
Notes payable....................... 63,929 73,474 36,714 91,489 125,809
Senior Unsecured Notes Payable...... 100,000 100,000 100,000(4) 100,000(4) 88,392(4)
Minority interest................... 2,894 360 30,061(4) 30,032(4) 33,594(4)
Stockholders' equity................ 63,346 66,868 63,050(4) 65,354(4) 70,886(4)
OPERATING DATA (IN UNITS):
Homes closed........................ 1,174 1,113 909 932 1,296
Total units closed.................. 1,182 1,140 969 982 2,006
Homes contracted for................ 1,182 1,039 919 1,053 1,397
Homes in backlog.................... 440 366 376 497 598
- ---------------
(1) Represents interest costs initially capitalized which are recognized as
homes and land are sold.
(2) Includes the minority interest share of earnings of CPH LLC since the
financial restructuring in fiscal year 1998.
(3) Reflects per share amounts on both a basic and diluted basis. See Note 1 to
the Consolidated Financial Statements.
(4) At February 28, 1998 and 1999 and February 29, 2000, respectively, minority
interest includes $29.8 million, $29.9 million and $32.6 million of capital
in CPH LLC attributable to CHF. At February 28, 1998 and 1999 and February
29, 2000, respectively, CPH LLC had total capital accounts of $91.4 million,
$92.5 million and $100.1 million and was the sole obligor for the balance of
the Senior Unsecured Notes Payable.
(5) Reflects dilution due to outstanding warrants and stock options. See Note 1
to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements in the financial discussion and analysis by management
contain "forward-looking" information (as defined in the Private Securities
Litigation Reform Act of 1995 and within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended) that involves risk and uncertainty, including projections and
assumptions regarding the business environment in which the Company operates.
Actual future results and trends may differ materially depending on a variety of
factors, including the Company's successful execution of internal performance
strategies; changes in general national and regional economic conditions, such
as levels of employment, consumer confidence and income, availability to
homebuilders of financing for acquisitions, development and construction,
availability to homebuyers of permanent mortgages, interest rate levels and the
demand for housing and office space and commercial lease rates; supply levels of
land, labor and materials; difficulties in obtaining permits or approvals from
governmental authorities; difficulties in marketing homes; regulatory changes
and weather and other environmental uncertainties; competitive influences; and
the outcome of pending and future legal claims and proceedings.
RESULTS OF OPERATIONS -- GENERAL
The following table illustrates the actual and pro forma results of the
Company's operations for the past three fiscal years. The pro forma results have
been adjusted to reflect the inclusion of the operating results of the Company's
unconsolidated joint ventures, including the portion attributable to the
Company's joint
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venture partners, and are used throughout this discussion for comparative
purposes wherever the phrase "pro forma" is utilized.
RESULTS OF OPERATIONS
YEAR ENDED
--------------------------------------------------------------------------------------
FEBRUARY 28, 1998 FEBRUARY 28, 1999 FEBRUARY 29, 2000
-------------------------- ---------------------------- --------------------------
PRO FORMA PRO FORMA PRO FORMA
(INCLUDING (INCLUDING (INCLUDING
ACTUAL JOINT VENTURES) ACTUAL JOINT VENTURES) ACTUAL JOINT VENTURES)
-------- --------------- ---------- --------------- -------- ---------------
(AMOUNTS IN THOUSANDS)
Sales of homes and land... $191,098 $214,093 $192,422 $271,372 $290,791 $319,064
Cost of sales............. 156,702 174,431 156,493 217,059 231,273 254,666
-------- -------- -------- -------- -------- --------
Gross margin............ $ 34,396 $ 39,662 $ 35,929 $ 54,313 $ 59,518 $ 64,398
======== ======== ======== ======== ======== ========
As is noted in footnote 1 to the financial statements presented herein, the
Company is reporting its results on a consolidated basis with the results of CPH
LLC. References to the Company in this Item 7 are, unless the context indicates
otherwise, also references to CPH LLC. At the current time, all material
financing transactions and arrangements are incurred either by CPH LLC or by
project-specific entities.
The Company has migrated to structuring most California projects through
joint ventures, most of which are not consolidated. Non-California operations
are conducted through wholly-owned, consolidated subsidiaries. The Company has
increased its activities in Arizona and Colorado, markets which have not
provided significant revenues in prior years. Activity has also increased in
Texas.
The unconsolidated California projects from which significant equity in
earnings was derived through early fiscal 2000 are substantially completed. The
Company does not expect to derive substantial equity in earnings from its
current unconsolidated joint ventures until future years due to (1) the stage of
development of the majority of these projects, and/or (2) the preferred returns
to be initially paid to capital partners, as discussed in Note 4 to the
consolidated financial statements.
Fiscal 2000 (Year Ended February 29, 2000) Compared to Fiscal 1999 (Year Ended
February 28, 1999):
The Company reported income from operations of $9.8 million in fiscal 2000,
as compared to income from operations of $6.2 million in fiscal 1999. The
Company reported net income of $6.2 million, or $0.44 per share, in fiscal 2000,
as compared to net income of $3.3 million, or $0.23 per share, in fiscal 1999.
Net income for fiscal 2000 included an extraordinary gain of $1.0 million, or
$0.07 per share, as a result of the retirement of debt at less than face value.
Sales of homes and land including unconsolidated joint ventures were $319.1
million for fiscal 2000 compared to $271.4 million for fiscal 1999. The increase
was due to an increase in total home closings from 932 in fiscal 1999 to 1,296
in fiscal 2000, including 88 and 28 homes, respectively, closed in
unconsolidated joint ventures, offset by a decrease in average sales price from
$287,000 in fiscal 1999 to $233,000 in fiscal 2000. Total unit closings
increased from 982 in fiscal 1999 to 2,006 in fiscal 2000, reflecting an
increase in lot sales.
The increase in closings was due primarily to stronger demand in the
Company's Nevada and Texas markets and the addition of several projects in
Arizona and Colorado, offset by reduction in closings attributable to the
buildout of certain California projects. The decrease in average sales price is
due to the shift in relative unit closings from the higher-priced California
market to the Company's other markets. The Company's actual gross margin
increased from 18.7% in fiscal 1999 to 20.5% in fiscal 2000, due to the close
out of certain lower-margin projects in fiscal 1999 and a gradual shift to
certain higher-margin projects. The pro forma gross margin increased marginally
from 20.0% in fiscal 1999 to 20.2% in fiscal 2000.
Selling, general and administrative expense of $30.8 million for fiscal
2000 increased $9.6 million or 45.4% as compared to fiscal 1999 due to a higher
level of activity. As a percentage of revenue, selling, general and
administrative expense decreased from 11.0% in fiscal 1999 to 10.6% in fiscal
2000.
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16
Income from unconsolidated joint ventures decreased from $7.9 million
fiscal 1999 to $1.7 million in fiscal 2000, due to lower unit closings in the
existing joint ventures, principally Grand Coto Estates, L.P. and M.P.E.
Partners, L.P. (MPE).
Interest and other income increased slightly from $1.4 million in fiscal
1999 to $1.5 million in fiscal 2000 and consists primarily of the results of
operations of the Company's mortgage broker operations, as well as certain
financing and other transactions.
Minority interest of $1.9 million in fiscal 1999 and $2.8 million in fiscal
2000 primarily represents the share of CPH LLC's income attributable to CHF.
Interest incurred was $24.5 million in fiscal 2000, as compared to $22.3
million in fiscal 1999, while interest expensed was $22.1 million in fiscal 2000
as compared to $17.8 million in fiscal 1999. Substantially all interest costs
are initially capitalized and are recognized as homes and land are sold. As
presented in the consolidated statements of operations, income from
unconsolidated joint ventures for fiscal 2000 and 1999 excludes the recognition
of approximately $519,000 and $2.1 million, respectively, in interest previously
capitalized to the lots contributed to MPE. Such interest costs are included in
interest expense.
The Company recorded a provision for income taxes of $1.7 million in fiscal
2000, as compared to $1.1 million in fiscal 1999. The effective tax rate in both
years was reduced from the statutory rate by the use of available loss
carryforwards.
Fiscal 1999 (Year Ended February 28, 1999) Compared to Fiscal 1998 (Year Ended
February 28, 1998):
The Company reported income from operations of $6.2 million in fiscal 1999,
as compared to a loss from operations of $2.5 million in fiscal 1998. The
Company reported net income of $3.3 million, or $0.23 per share, in fiscal 1999,
as compared to a net loss of $2.2 million, or $0.15 per share, in fiscal 1998.
The results for fiscal 1998 included an $8 million non-cash charge primarily for
the impairment of certain real estate projects.
Sales of homes and land including unconsolidated joint ventures were $271.4
million for fiscal 1999 compared to $214.1 million for fiscal 1998. The increase
was due to an increase in total home closings from 909 in fiscal 1998 to 932 in
fiscal 1999, including 36 and 88 homes, respectively, closed in unconsolidated
joint ventures, as well as an increase in average sales price from $233,000 in
fiscal 1998 to $287,000 in fiscal 1999.
The increase in closings and average sales price was due primarily to
stronger demand in all of the Company's markets, and, to a lesser extent, due to
a recovery from the negative effect of El Nino weather conditions on fiscal 1998
closings. The Company's actual gross margin improved from 18.0% in fiscal 1998
to 18.7% in fiscal 1999, and the pro forma gross margin improved from 18.5% in
fiscal 1998 to 20.0% in fiscal 1999, due to a larger volume of closings in the
higher margin joint ventures during fiscal 1999.
Selling, general and administrative expense of $21.2 million for fiscal
1999 decreased $3.6 million or 14.4% as compared to fiscal 1998. As a percentage
of revenue, selling, general and administrative expense decreased from 12.9% in
fiscal 1998 to 11.0% in fiscal 1999.
Income from unconsolidated joint ventures increased from $764,000 in fiscal
1998 to $7.9 million in fiscal 1999, due to higher unit closings and higher
margins in the ongoing joint ventures, principally Grand Coto Estates, L.P. and
M.P.E. Partners, L.P. (MPE).
Interest and other income remained steady at $1.4 million between years and
consists primarily of the results of operations of the Company's mortgage broker
operations.
Minority interest of $469,000 in fiscal 1998 and $1.9 million in fiscal
1999 primarily represents the share of CPH LLC's income attributable to CHF
since October 1, 1997.
Interest incurred was $22.3 million in fiscal 1999, as compared to $20.4
million in fiscal 1998, while interest expensed was $17.8 million in fiscal 1999
as compared to $14.3 million in fiscal 1998. Substantially all interest costs
are initially capitalized and are recognized as homes and land are sold. As
presented in the consolidated statements of operations, income from
unconsolidated joint ventures for fiscal 1999 excludes the recognition of
approximately $2.1 million in interest previously capitalized to the lots
contributed to MPE. Such interest costs are included in interest expense.
15
17
The Company recorded a provision for income taxes of $1.1 million in fiscal
1999, as compared to a benefit of $735,000 in fiscal 1998. The effective tax
rate in fiscal 1999 was reduced from the statutory rate by the use of available
loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements are for the acquisition,
development, construction, marketing and overhead of its projects. The need to
stage the acquisition and use of raw materials such as land and finished lots
and the need, on certain projects, to construct community facilities ahead of
the start of home construction requires homebuilders such as the Company to
commit working capital for longer periods than many traditional manufacturing
companies. When building inventory, the Company uses substantial amounts of cash
that are generally obtained from borrowings, available cash flow from operations
and partners' contributions to joint ventures.
At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain project specific entities. As of
February 29, 2000, the Company has in place several credit facilities with
contingent availabilities totaling $225 million (the "Facilities") with various
bank lenders (the "Banks"), of which $126 million was outstanding. The
Facilities are secured by liens on various completed or under construction homes
and lots held by CPH LLC and CPH Newport Coast, LLC, a consolidated joint
venture. Pursuant to the Facilities, CPH LLC is subject to certain covenants,
which require, among other things, the maintenance of a consolidated liabilities
to net worth ratio, minimum liquidity, minimum net worth and loss limitations,
all as defined in the documents that evidence the Facilities. At February 29,
2000, CPH LLC was in compliance with these covenants. The Facilities also define
certain events that constitute events of default. As of February 29, 2000, no
such event had occurred. Commitment fees are payable annually on some of the
Facilities.
Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors, including CHF, the investor in CPH LLC. In addition,
development work undertaken in certain of the Company's joint ventures is
financed through various non-recourse lending arrangements. The Company
anticipates that it will continue to utilize both third party financing and
joint ventures to cover financing needs in excess of internally generated cash
flow.
In May, 1994 the Company completed the sale of $100 million of 12 -3/4%
Senior Notes including 790,000 warrants to purchase common stock. The proceeds
from the offering were used to repay certain debt of the Company, acquire
certain properties and for general working capital and construction purposes.
The obligations associated with the Senior Notes have been transferred from the
Company to CPH LLC. The Senior Notes are due May 1, 2002. During fiscal 2000,
the Company repurchased $11.6 million of the Senior Notes.
The Indenture to which the Senior Notes are subject contains restrictions
on CPH LLC on the incurring of indebtedness, which affect the availability of
the Facilities based on various measures of the financial performance of CPH
LLC. Subject to such restrictions, the Facilities are available to augment cash
flow from operations and joint venture financing to fund the CPH LLC's
operations.
Management expects that cash flow generated from operations and from
additional financing permitted by the terms of the Indenture will be sufficient
to cover the debt service and to fund CPH LLC's current development and
homebuilding activities for the reasonably foreseeable future, and expects that
capital commitments from its joint venture partners and other bank facilities
will provide sufficient financing for the operation of its joint ventures.
INTEREST RATES AND INFLATION
The long-term impact of inflation on the Company is manifested in increased
land prices, land development, construction and overhead costs balanced by
increased sales prices.
The Company generally contracts for land significantly before development
and sales efforts begin and, accordingly, to the extent land acquisition costs
are fixed, increases or decreases in the sales prices of homes,
16
18
land and other real estate properties may affect the Company's profits. Since
the sales prices of homes are fixed at the time of sale and the Company
generally sells its homes prior to commencement of construction, any inflation
of construction costs in excess of those anticipated may result in lower gross
margins. The Company generally attempts to minimize that effect by entering into
fixed-price contracts with its subcontractors and material suppliers for
specified periods of time, which generally do not exceed one year.
Housing demand, in general, is adversely affected by increases in interest
costs, as well as materials and other costs. Interest rates, the length of time
that land remains in inventory and the proportion of inventory that is financed
affect the Company's interest costs. If the Company is unable to duplicate its
past ability to raise sales prices enough to compensate for higher costs, or if
mortgage interest rates increase significantly, affecting prospective buyers'
ability to adequately finance a home purchase, the Company's homebuilding
revenues, gross margins and net income would be adversely affected. Increases in
sales prices, whether the result of inflation or demand, may affect the ability
of prospective buyers to afford a new home.
ASSET IMPAIRMENT CHARGE
During fiscal 1998, in connection with the restructuring and
recapitalization of the Company discussed above, management completed a process
of reevaluating and revising the Company's business plan, including its plans
for the development of its various projects. As a result of this analysis, it
was determined that certain of the Company's projects would require an
impairment charge when evaluated in accordance with SFAS No. 121. In addition,
management determined that certain warranty-related reserves should be adjusted.
Therefore, during the third quarter of fiscal 1998, the Company recorded a
non-cash charge of $8 million.
YEAR 2000 COMPLIANCE
The Company incurred approximately $1.0 million in connection with Y2K
readiness, including hardware, software, consulting fees, and other expenses.
The Company does not expect to incur significant additional expenditures in the
course of completing its Y2K compliance program.
As of May 26, 2000, the Company is not aware of any significant Y2K issues
which have impacted its operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). Under the provisions of SFAS 133, companies
are required to recognize all derivatives as either assets or liabilities in the
statements of financial position and measure those instruments at fair value.
The Company is required to adopt SFAS 133 effective March 1, 2001. Currently,
the Company does not have any instruments that would qualify as derivatives
under SFAS 133. Accordingly, the Company does not believe SFAS 133 would have a
material impact on the Company's financial position, results of operations, or
liquidity at the current time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in interest
rates on its debt. Currently, the Company does not utilize interest rate swaps,
forward or option contracts on foreign currencies or commodities, or other types
of derivative financial instruments. The purpose of the following analysis is to
provide a framework to understand the Company's sensitivity to hypothetical
changes in interest rates as of February 29, 2000. Many of the statements
contained in this section are forward looking and should be read in conjunction
with the Company's disclosures under the heading "Forward-Looking Statements."
The Company uses debt financing primarily for the purpose of acquiring and
developing land and constructing and selling homes. Historically, the Company
has made short-term borrowings under its revolving credit facilities to fund
these expenditures. In addition, the Company has previously issued $100 million
in fixed rate debt to provide longer-term financing. At February 29, 2000, $88.4
million of the Senior Notes remain outstanding.
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For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt instrument, but not the Company's earnings or cash
flows. Conversely, for variable rate debt, changes in interest rates generally
do not impact fair market value of the debt instrument, but do affect the
Company's future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a result,
interest rate risk and changes in fair market value should not have a
significant impact on such debt until the Company would be required to refinance
such debt. Based on the amount of variable rate debt outstanding at February 29,
2000, and holding the variable rate debt balance constant, each one-percentage
point increase in interest rates would result in an increase in interest
incurred for the coming year of approximately $1.0 million.
The table below details the principal amount and the average interest rates
for debt for each category based upon the expected maturity dates. The carrying
value of the Company's variable rate debt approximates fair value due to the
frequency of repricing of this debt. The Company's fixed rate debt consists of
the Senior Notes payable. The Senior Notes payable are publicly traded debt
instruments and their fair values are based on their quoted market prices as of
February 29, 2000.
EXPECTED MATURITY DATE
-------------------------------------------------------
YEAR ENDING FEBRUARY 28,
------------------------------------------- FAIR
2001 2002 2003 THEREAFTER TOTAL VALUE
------- ------- ------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
LIABILITIES:
Fixed rate debt............. $ -- $ -- $88,392 $-- $ 88,392 $ 74,028
Average interest rate..... -- -- 12.75% -- 12.75%
Variable rate debt.......... $58,922 $66,887 $ -- $-- $125,809 $125,809
Average interest rate..... 8.89% 10.47% -- -- 9.70%
The Company does not believe that the future market rate risks related to
the above securities will have a material adverse impact on the Company's
financial position, results of operations or liquidity.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
CAPITAL PACIFIC HOLDINGS, INC.
Report of Independent Public Accountants.................... 20
Consolidated Balance Sheets as of February 28, 1999 and
February 29, 2000......................................... 21
Consolidated Statements of Operations for the years ended
February 28, 1998 and 1999 and February 29, 2000.......... 22
Consolidated Statements of Stockholders' Equity for the
years ended February 28, 1998 and 1999 and February 29,
2000...................................................... 23
Consolidated Statements of Cash Flows for the years ended
February 28, 1998 and 1999 and February 29, 2000.......... 24
Notes to Consolidated Financial Statements.................. 25
GRAND COTO ESTATES, L.P.
Report of Independent Auditors.............................. 38
Balance Sheets as of December 31, 1999 and 1998............. 39
Statements of Operations for the years ended December 31,
1999, 1998 and 1997....................................... 40
Statements of Partners' Capital (Deficit) for the years
ended December 31, 1999, 1998 and 1997.................... 41
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997....................................... 42
Notes to Financial Statements............................... 43
M.P.E. PARTNERS, L.P.
Reports of Independent Auditors............................. 46
Balance Sheets as of December 31, 1999 and 1998............. 47
Statements of Operations for the years ended December 31,
1999 and 1998 and for the period March 14, 1997
(Inception) through December 31, 1997..................... 48
Statements of Partners' Capital (Deficit) for the years
ended December 31, 1999 and 1998 and for the period March
14, 1997 (Inception) through December 31, 1997............ 49
Statements of Cash Flows for the years ended December 31,
1999 and 1998 and for the period March 14, 1997
(Inception) through December 31, 1997..................... 50
Notes to Financial Statements............................... 51
19
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Capital Pacific Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Capital
Pacific Holdings, Inc. (a Delaware corporation) and subsidiaries as of February
28, 1999 and February 29, 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended February 29, 2000. 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 did not audit the
financial statements of certain Joint Ventures (Notes 1 and 4), the investments
in which are reflected in the accompanying financial statements using the equity
method of accounting. The investments in these Joint Ventures represent 1.7 and
less than one percent of the Company's total assets at February 28, 1999 and
February 29, 2000, respectively, and the equity in the net income of these Joint
Ventures was $834,000, $5,819,000 and $1,197,000 for the years ended February
28, 1998 and 1999 and February 29, 2000, respectively. Those statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to the amounts included for those entities, is
based on the reports of the other auditors.
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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Capital Pacific Holdings, Inc. and subsidiaries as of
February 28, 1999 and February 29, 2000, and the results of their operations and
their cash flows for each of the three years in the period ended February 29,
2000, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Orange County, California
May 24, 2000
20
22
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28, FEBRUARY 29,
1999 2000
------------ ------------
ASSETS
Cash and cash equivalents................................... $ 5,782 $ 19,389
Restricted cash............................................. 1,029 1,373
Accounts and notes receivable............................... 12,533 22,862
Real estate projects........................................ 261,333 282,497
Property, plant and equipment............................... 9,014 8,536
Investment in and advances to unconsolidated joint
ventures.................................................. 23,301 15,379
Prepaid expenses and other assets........................... 11,771 8,245
--------- ---------
Total assets...................................... $ 324,763 $ 358,281
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 37,888 $ 39,600
Notes payable............................................... 91,489 125,809
Senior unsecured notes payable.............................. 100,000 88,392
--------- ---------
Total liabilities................................. 229,377 253,801
--------- ---------
Minority interest........................................... 30,032 33,594
--------- ---------
Stockholders' equity:
Common stock, par value $.10 per share; 30,000,000 shares
authorized; 14,027,911 and 13,815,911 shares issued and
outstanding, respectively.............................. 1,500 1,500
Additional paid-in capital................................ 211,888 211,888
Accumulated deficit....................................... (145,425) (139,243)
Treasury stock............................................ (2,609) (3,259)
--------- ---------
Total stockholders' equity........................ 65,354 70,886
--------- ---------
Total liabilities and stockholders' equity........ $ 324,763 $ 358,281
========= =========
See accompanying notes to financial statements.
21
23
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1999 2000
------------ ------------ ------------
Sales of homes and land................................. $191,098 $192,422 $290,791
Cost of sales........................................... 148,702 156,493 231,273
Impairment loss on real estate assets................... 8,000 -- --
-------- -------- --------
Gross margin.......................................... 34,396 35,929 59,518
Income from unconsolidated joint ventures............... 764 7,949 1,730
Selling, general and administrative expenses............ (24,744) (21,186) (30,813)
Interest expense........................................ (14,264) (17,842) (22,141)
Interest and other income, net.......................... 1,391 1,381 1,513
-------- -------- --------
Income (loss) from operations......................... (2,457) 6,231 9,807
Minority interest....................................... (469) (1,850) (2,835)
-------- -------- --------
Income (loss) before income taxes..................... (2,926) 4,381 6,972
Provision (benefit) for income taxes.................... (735) 1,095 1,745
-------- -------- --------
Income (loss) before extraordinary item............... (2,191) 3,286 5,227
Extraordinary gain on debt retired at less than face
value, net of minority interest and taxes............. -- -- 955
-------- -------- --------
Net income (loss)..................................... $ (2,191) $ 3,286 $ 6,182
======== ======== ========
Net income (loss) per share -- basic and diluted:
Income (loss) per share before extraordinary item..... $ (0.15) $ 0.23 $ 0.37
Extraordinary gain on debt retired at less than face
value, net of minority interest and taxes.......... -- -- 0.07
-------- -------- --------
Net income (loss) per common share.................... $ (0.15) $ 0.23 $ 0.44
======== ======== ========
Weighted average number of common shares -- basic..... 14,795 14,237 13,923
======== ======== ========
Weighted average number of common shares -- diluted... 14,795 14,271 14,014
======== ======== ========
See accompanying notes to financial statements.
22
24
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED FEBRUARY 29, 2000
(IN THOUSANDS, EXCEPT SHARES)
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
---------- ------ ---------- ----------- -------- -------
BALANCE, February 28, 1997..... 14,995,000 $1,500 $211,888 $(146,520) $ -- $66,868
Repurchase of common stock... (689,489) -- -- -- (1,627) (1,627)
Net loss..................... -- -- -- (2,191) -- (2,191)
---------- ------ -------- --------- ------- -------
BALANCE, February 28, 1998..... 14,305,511 1,500 211,888 (148,711) (1,627) 63,050
Repurchase of common stock... (277,600) -- -- -- (982) (982)
Net income................... -- -- -- 3,286 -- 3,286
---------- ------ -------- --------- ------- -------
BALANCE, February 28, 1999..... 14,027,911 1,500 211,888 (145,425) (2,609) 65,354
Repurchase of common stock... (212,000) -- -- -- (650) (650)
Net income................... -- -- -- 6,182 -- 6,182
---------- ------ -------- --------- ------- -------
BALANCE, February 29, 2000..... 13,815,911 $1,500 $211,888 $(139,243) $(3,259) $70,886
========== ====== ======== ========= ======= =======
See accompanying notes to financial statements.
23
25
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1999 2000
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss)..................................... $ (2,191) $ 3,286 $ 6,182
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on retirement of senior unsecured notes
payable....................................... -- -- (955)
Depreciation and amortization.................... 1,685 1,768 1,897
Changes in Assets and Liabilities:
(Increase) decrease in accounts and notes
receivable.................................. (21,390) 13,658 (10,329)
(Increase) decrease in real estate projects... 41,215 (68,986) (21,164)
(Increase) decrease in prepaid expenses and
other assets................................ (1,383) 610 2,020
Increase (decrease) in accounts payable and
accrued liabilities......................... (9,386) 16,058 1,394
Equity in earnings of unconsolidated joint ventures,
including interest expense......................... (764) (5,822) (1,211)
Minority interest..................................... 469 1,850 3,424
--------- --------- --------
Net cash provided by (used in) operating
activities.................................. 8,255 (37,578) (18,742)
--------- --------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment................... (1,796) (2,164) (1,039)
Decrease (increase) in investments in and advances to
unconsolidated joint ventures...................... (4,410) (10,718) 9,133
--------- --------- --------
Net cash provided by (used in) investing
activities.................................. (6,206) (12,882) 8,094
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable........................... 129,169 208,383 306,169
Principal payments of notes payable................... (165,929) (153,608) (271,849)
Capital contributions (distributions) to minority
interest, net...................................... 29,232 (1,879) 106
Retirement of senior unsecured notes payable.......... -- -- (9,521)
Repurchase of common stock............................ (1,627) (982) (650)
--------- --------- --------
Net cash provided by (used in) financing
activities.................................. (9,155) 51,914 24,255
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (7,106) 1,454 13,607
CASH AND CASH EQUIVALENTS, beginning of period.......... 11,434 4,328 5,782
--------- --------- --------
CASH AND CASH EQUIVALENTS, end of period................ $ 4,328 $ 5,782 $ 19,389
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH AND NON-CASH ACTIVITIES:
Cash paid during the year for interest, all
capitalized to real estate projects................ $ 19,800 $ 22,289 $ 25,450
Cash paid during the year for income taxes............ -- -- --
See accompanying notes to financial statements.
24
26
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Company Organization and Operations
Capital Pacific Holdings, Inc., together with its subsidiaries, (the
"Company") conducts business under various names, including the name Capital
Pacific Homes in California, Nevada, Arizona and Colorado and Clark Wilson Homes
in Texas.
In fiscal year 1998, the Company consummated an equity and restructuring
transaction whereby the Company and certain of its subsidiaries transferred to
Capital Pacific Holdings, LLC ("CPH LLC") substantially all of their respective
assets and CPH LLC assumed all the liabilities of the Company and its
subsidiaries. At the current time, the Company, together with its subsidiaries,
has a 67.93% interest in CPH LLC. An unaffiliated investment company, California
Housing Finance, L.P. ("CHF") holds a 32.07% minority interest in CPH LLC as a
result of a cash investment in CPH LLC. Subject to adjustment and exceptions
under certain circumstances, CHF has the same interest in all future business of
the Company, all of which will be conducted either within CPH LLC or through
project-specific entities. Assets under management, including assets owned by
unconsolidated joint ventures, totaled $703 million at February 29, 2000 in 62
residential and commercial properties. At February 29, 2000, CPH LLC had $281
million in assets and a net worth of $100 million. In addition, the Company has
interests in unconsolidated joint ventures which have total assets of $345
million and a combined net worth of $282 million at February 29, 2000. The
Company is the sole managing member of CPH LLC. The Company maintains certain
licenses and other assets as is necessary to fulfill its obligations as managing
member. The Company and its subsidiaries perform their respective management
functions for CPH LLC as well as other project-specific entities of which the
Company is the managing member pursuant to management agreements, which include
provisions for the reimbursement of Company and subsidiary costs, a management
fee and indemnification by CPH LLC and the project-specific entities.
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC and the project-specific entities. At the current time,
all material financing transactions and arrangements are incurred either by CPH
LLC or by the project-specific entities.
The Company is a regional builder and developer with operations throughout
selected metropolitan areas of Southern California, Nevada, Texas, Arizona and
Colorado. The Company's principal business activities are to build and sell
single-family homes and to develop and build commercial and mixed-use projects.
The Company's single-family homes are targeted to entry-level, move-up and
luxury buyers. The acquisition and development of commercial and mixed-use
projects, as well as ownership of existing commercial properties is accomplished
primarily through non-majority investments in limited liability companies.
Approximately 27, 25, 29, 16 and 3 percent of the Company's total revenues
(including the unconsolidated joint ventures) were in California, Nevada, Texas,
Arizona and Colorado, respectively, for the year ended February 29, 2000.
The Company's business, and the markets which it serves in California,
Nevada, Texas, Arizona and Colorado are affected by local, national and world
economic conditions and events, in particular by the level of mortgage interest
rates, consumer confidence and real estate prices. The Company cannot predict
whether mortgage interest rates will be at levels attractive to prospective
homebuyers. If interest rates increase, in particular mortgage interest rates,
the Company's operating results could be adversely impacted.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingencies at the date of the financial
statements and the reported
25
27
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts of revenues and expenses during the reported period. Significant
estimates include projected revenues and costs of projects, which impact the
allocation of costs to homes sold. Actual results could differ from estimated
amounts.
Principles of Consolidation and Minority Interest in Joint Ventures
The consolidated financial statements include the accounts of the Company
and wholly owned subsidiaries and certain majority-owned joint ventures, as well
as the accounts of CPH LLC, including the capital accounts of CPH LLC totaling
$100 million at February 29, 2000, $33 million of which is required to be
presented as minority interest in the accompanying consolidated balance sheets.
All other investments (See Note 4) are accounted for under the equity method.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Long-Lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identified intangibles to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable based on the estimated future cash flows
(undiscounted and without interest charges). SFAS No. 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less costs to sell.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives of three to thirty years using the straight-line method.
Total property and equipment was $9,014,000 and $8,536,000 (net of accumulated
depreciation of $4,923,000 and $6,608,000, respectively) as of February 28, 1999
and February 29, 2000, respectively.
Real Estate Projects
All direct and indirect land costs, offsite and onsite improvements and
applicable interest and carrying charges are capitalized to real estate projects
under development. Capitalized costs are expensed as real estate is sold; direct
marketing costs are expensed in the period incurred. Land and land development
costs are accumulated by project and are allocated to individual phases using
the relative sales value method.
Prior to February 29, 1996, each real estate project was carried at the
lower of its cost or its estimated net realizable value. SFAS No. 121 changed
the method of valuing long-lived assets, including real estate projects, whereby
long-lived assets that are expected to be held and used in operations are to be
carried at the lower of cost or, if impaired, the fair value of the asset,
rather than the net realizable value. Long-lived assets to be disposed of should
be reported at the lower of carrying amount or fair value less cost to sell. For
purposes of applying SFAS No. 121, real estate under development is considered
to be held for use whereas finished units are considered assets to be disposed
of. In evaluating long-lived assets held for use, a review for impairment loss
is triggered if the sum of the expected future cash flows (undiscounted and
without interest charge) is less than the carrying amount of the asset. Various
assumptions and estimates are used to determine fair value in determining the
amount of any impairment loss including, among others, estimated costs of
construction, development and direct marketing, sales absorption rates,
anticipated sales prices and carrying costs. The calculation of the impairment
loss is based on estimated future cash flows which are calculated to include an
appropriate return and interest. The estimates used to determine the impairment
adjustment can change in the near term as the economy in the Company's key areas
changes.
26
28
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the restructuring and recapitalization of the Company
discussed above, management completed a process of reevaluating and revising the
Company's business plan, including its plans for the development of its various
projects. As a result of this analysis, it was determined that certain of the
Company's projects would require an impairment charge when evaluated in
accordance with SFAS No. 121. In addition, management determined that certain
warranty-related reserves should be adjusted. Therefore, during the third
quarter of fiscal 1998, the Company recorded a non-cash charge of $8 million.
Revenue Recognition
The Company's accounting policies follow the provisions of SFAS No. 66
"Accounting for Sales of Real Estate," which specify minimum down payment
requirements, financing terms and certain other requirements for sales of real
estate.
Income from sales is recognized when title has passed, the buyer has met
minimum down payment requirements and the terms of any notes received by the
Company satisfy continuing investment requirements. At the time of sale,
accumulated costs are relieved from real estate projects and charged to cost of
sales on a relative sales value basis.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
which requires the liability method of accounting for income taxes.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, short-term
investments which have a maturity of 90 days or less from the date of purchase
are considered cash equivalents.
Stock Options
The Company accounts for equity-based compensation under SFAS No. 123
"Accounting for Stock-Based Compensation." Under SFAS No. 123, companies have
the option to implement a fair value-based accounting method or continue to
account for employee stock options and stock purchase plans using the intrinsic
value based method of accounting as prescribed by Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities
electing to remain under APB Opinion No. 25 must make pro forma disclosures of
net income or loss and earnings per share as if the fair value based method of
accounting defined in SFAS No. 123 had been applied. The Company has adopted the
disclosure requirements of SFAS No. 123 and will continue accounting for stock
options under APB Opinion No. 25.
Net Income Per Common Share
Effective February 28, 1998, the Company adopted SFAS No. 128. This
statement requires the presentation of both basic and diluted net income per
share for financial statement purposes. Basic net income per share is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding. Diluted net income per share includes the
effect of the potential shares outstanding, including dilutive securities using
the treasury stock method. The table below reconciles the
27
29
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
components of the basic net income (loss) per share calculation to diluted net
income (loss) per share (in thousands, except per share data):
YEAR ENDED FEBRUARY 28, YEAR ENDED FEBRUARY 29,
--------------------------------------------------- ------------------------
1998 1999 2000
------------------------- ----------------------- ------------------------
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
------- ------ ------ ------ ------ ----- ------ ------- -----
Basic Net Income (loss) Per Share:
Income (loss) available to
common stockholders before
extraordinary item............ $(2,191) 14,795 $(0.15) $3,286 14,237 $0.23 $5,227 13,923 $0.37
Effect of Dilutive Securities:
Warrants........................ -- -- -- -- 32 -- -- -- --
Stock options................... -- -- -- -- 2 -- -- 91 --
------- ------ ------ ------ ------ ----- ------ ------- -----
Diluted Net Income (Loss) Per
Share before extraordinary
item............................ $(2,191) 14,795 $(0.15) $3,286 14,271 $0.23 $5,227 14,014 $0.37
======= ====== ====== ====== ====== ===== ====== ======= =====
Comprehensive Income
During the year ended February 28, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. For each of the three years ended February 29, 2000
comprehensive income equaled net income; therefore, a separate statement of
comprehensive income is not included in the accompanying financial statements.
Segment Reporting
Effective February 28, 1999, the Company adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." Under the provisions
of SFAS No. 131, the Company's operations are conducted primarily under one
segment, homebuilding, at this time.
Reclassifications
Certain reclassifications have been made to certain prior year balances in
order to conform with the current year presentation.
2. RESTRICTED CASH
The Company has restricted cash totaling $1,029,000 and $1,373,000 as of
February 28, 1999 and February 29, 2000, respectively. Included in these amounts
for both fiscal 1999 and fiscal 2000 is $416,000 which was held as collateral
for the Company's bonding obligations which it incurs on behalf of CPH LLC and
certain joint ventures. The balance of restricted cash consists of deposits to
various municipalities, banks, and utilities to guarantee future performance of
development obligations.
28
30
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. REAL ESTATE PROJECTS
Real estate projects consist of the following at February 28, 1999 and
February 29, 2000 (in thousands):
1999 2000
-------- --------
Land and improvements under construction............... $232,340 $254,206
Completed residential homes............................ 11,935 11,592
Completed model homes.................................. 17,058 16,699
-------- --------
$261,333 $282,497
======== ========
Total interest costs incurred during the years ended February 28, 1998,
February 28, 1999 and February 29, 2000 were $20,411,000, $22,346,000 and
$24,465,000 respectively, all of which was initially capitalized.
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company is a general partner or member and has a 50 percent or less
ownership in 13 unconsolidated entities at February 29, 2000. The Company's net
investments in and advances to unconsolidated entities are as follows at
February 28, 1999 and February 29, 2000 (in thousands):
1999 2000
------- -------
JMP Canyon Estates, L.P. ................................ $ 207 $ 159
JMP Harbor View, L.P. ................................... 677 621
Grand Coto Estates, L.P. ................................ 3,753 (633)
M.P.E. Partners, L.P. ................................... 2,370 1,710
RPV Associates, LLC...................................... 1,644 2,759
CPH Dana Point, LLC...................................... 793 266
CPH Monarch Beach, LLC................................... 1,205 445
CPH Resorts I, LLC....................................... 4,268 4,700
CPH Vista Palisades, LLC................................. 637 435
Atlanta Huntington Beach, LLC............................ 5,195 1,259
CPH Dos Pueblos, LLC..................................... 2,086 3,595
CPH Airport Office Building, LLC......................... 55 7
CPH Redhill Office Building, LLC......................... 411 56
------- -------
$23,301 $15,379
======= =======
The Company's ownership interests in the above entities vary. Generally,
the Company receives between 44 and 70 percent of earnings although a preferred
return on invested capital is provided. Typically, the majority of capital is
provided by capital partners. The Company is typically a general partner or
managing member in each of the above entities and is the managing entity
pursuant to terms in each venture's agreement. The Company's carrying amount in
each of the entities equals the underlying equity, and there are generally no
significant amounts of undistributed earnings. The Company provides for income
taxes currently on its share of distributed and undistributed earnings and
losses from the investments.
The Company uses the equity method of accounting for its investments in
these unconsolidated 50 or less percent-owned entities. The accounting policies
of the entities are substantially the same as those of the Company.
29
31
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is summarized, combined financial information for the
unconsolidated entities at February 28, 1999 and February 29, 2000 (in
thousands):
1999 2000
-------- --------
ASSETS
Cash................................................... $ 4,373 $ 11,225
Real estate projects................................... 215,620 281,402
Commercial buildings................................... 21,094 21,071
Other assets........................................... 57,998 31,281
-------- --------
$299,085 $344,979
======== ========
1999 2000
-------- --------
LIABILITIES AND EQUITY
Accounts payable and other liabilities................. $ 22,663 $ 15,136
Due to the Company..................................... 14,450 10,588
Notes payable.......................................... 12,100 37,722
-------- --------
49,213 63,446
-------- --------
Equity
The Company.......................................... 8,851 4,791
Others............................................... 241,021 276,742
-------- --------
249,872 281,533
-------- --------
$299,085 $344,979
======== ========
1998 1999 2000
------- ------- -------
INCOME STATEMENT
Sales of homes and land....................... $23,667 $78,950 $28,274
Interest and other income, net................ 351 7,151 16,296
------- ------- -------
24,018 86,101 44,570
Costs and expenses............................ 20,293 72,416 33,428
------- ------- -------
Net income.................................... $ 3,725 $13,685 $11,142
======= ======= =======
The fiscal years of Grand Coto Estates, L.P. (Grand Coto) and M.P.E.
Partners, L.P. (MPE) end on December 31, pursuant to which the last year audited
by other auditors was the year ended December 31, 1999.
Equity in earnings (losses) from unconsolidated joint ventures consisted of
the following for the years ended February 28, 1998 and 1999 and February 29,
2000.
1998 1999 2000
---- ------ ------
MPE................................................ $ 45 $3,994 $ 932
Grand Coto......................................... 730 3,939 785
Others............................................. (11) 16 13
---- ------ ------
$764 $7,949 $1,730
==== ====== ======
30
32
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As presented in the consolidated statements of operations, income from
unconsolidated joint ventures for fiscal 1999 and fiscal 2000 excludes the
recognition of approximately $2.1 million and $519,000, respectively, of
interest previously capitalized to the lots contributed to MPE. Such interest
costs are included in interest expense.
As of February 29, 2000, there were no remaining homes to be sold by MPE or
Grand Coto. The Company has recently commenced sales activity at several new
projects that are owned by unconsolidated joint ventures.
5. NOTES PAYABLE
Notes payable consist of the following at February 28, 1999 and February
29, 2000 (in thousands):
1999 2000
------- --------
Notes payable to banks, including interest varying from
LIBOR plus two to prime plus two percent maturing
between June 15, 2000 and February 1, 2002 secured by
certain real estate projects on a non-recourse
basis................................................. $72,602 $105,951
Notes payable to bank, including interest at prime with
the term of the commitment reducing commencing August
2, 2001 secured by certain real estate projects on a
recourse basis........................................ 17,386 19,281
Other................................................... 1,501 577
------- --------
$91,489 $125,809
======= ========
At February 28, 1999 and February 29, 2000, the aggregate carrying value of
assets collateralizing the above notes was $215,275,000 and $249,581,000,
respectively.
At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain project specific entities. As of
February 29, 2000, CPH LLC has in place several credit facilities with
contingent availabilities totaling $225 million (the "Facilities") with various
bank lenders (the "Banks"), of which $114 million was outstanding. The
Facilities are secured by liens on various completed or under construction homes
and lots held by CPH LLC and CPH Newport Coast, LLC, a consolidated joint
venture. Pursuant to the Facilities, CPH LLC is subject to certain covenants,
which require, among other things, the maintenance of a consolidated liabilities
to net worth ratio, minimum liquidity, minimum net worth and loss limitations,
all as defined in the documents that evidence the Facilities. At February 29,
2000, CPH LLC was in compliance with these covenants. The Facilities also define
certain events that constitute events of default. As of February 29, 2000, no
such event had occurred. Commitment fees are payable annually on some of the
Facilities.
Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors, including CHF, the investor in CPH LLC. In addition,
development work undertaken in certain of the Company's joint ventures is
financed through various non-recourse lending arrangements. The Company
anticipates that it will continue to utilize both third party financing and
joint ventures to cover financing needs in excess of internally generated cash
flow.
During the years ended February 28, 1998, February 28, 1999 and February
29, 2000, the highest month-end balance on notes payable was $73,305,000,
$101,943,000 and $125,809,000, respectively, and the weighted average
outstanding balance was $54,310,000, $70,073,000 and $110,830,000, respectively.
The weighted average interest rates on notes payable during the years ended
February 28, 1998, February 28, 1999 and February 29, 2000, were 8.9 percent,
8.7 percent and 9.0 percent, respectively. The weighted average interest rates
on notes payable at February 28, 1998, February 28, 1999 and February 29, 2000,
were 8.9 percent, 8.6 percent and 9.7 percent, respectively.
31
33
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate scheduled principal maturities of notes payable are as
follows (in thousands):
AS OF
FEBRUARY 29,
2000
------------
FISCAL YEARS ENDING:
- --------------------
2001..................................................... $ 58,922
2002..................................................... 66,887
--------
Total.......................................... $125,809
========
6. SENIOR UNSECURED NOTES PAYABLE; WARRANTS
In May, 1994, the Company issued $100 million principal amount of its
12 3/4 percent Senior Notes due May 1, 2002 (the "Notes"). In connection with
the issuance of the Notes, the Company issued 790,000 warrants to purchase the
Company's common stock at a price of $3.30 per share, all of which are fully
exercisable until 2002. Interest is due and payable on May 1 and November 1 of
each year. Effective May 1, 1999, the Notes became redeemable at the option of
CPH LLC at 106.375% of their principal amount, declining ratably on an annual
basis to par on and after May 1, 2001, plus accrued interest. As of May 1, 2000,
the Notes are redeemable at 103.1875% of their principal amount.
The obligations associated with the Notes have been transferred to CPH LLC.
CPH LLC will be obligated to make an offer to purchase 10% of the outstanding
principal balance of the Notes at a purchase price equal to 100% of the
principal amount, plus accrued interest, in the event there are two consecutive
fiscal quarters that the CPH LLC's Consolidated Tangible Net Worth (as defined)
is less than $37 million. The Notes also contain certain restrictive covenants,
which, among other things, limit the incurrence of additional indebtedness, the
payment of dividends, the ability to create liens, make restricted payments (as
defined) and the ability to enter into certain transactions with affiliates. As
of February 29, 2000 CPH LLC was in compliance with these covenants and was not
required to make any such offer.
During fiscal 2000, the Company repurchased $11.6 million of the Notes,
resulting in an extraordinary gain of $955,000.
At February 29, 2000, unamortized bond issuance cost was $1.6 million, net
of accumulated amortization of $4.2 million, which is being amortized over the
term of the Notes utilizing the effective interest rate method. Unamortized bond
issuance cost is included in prepaid expenses and other assets in the
accompanying consolidated balance sheets.
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended February 28, 1998, February 28, 1999 and February 29, 2000 (in
thousands):
1998 1999 2000
------- ------ ------
Current
Federal............................................... $ 150 $ 75 $ 745
State................................................. 215 220 700
------- ------ ------
365 295 1,445
------- ------ ------
Deferred................................................ (1,100) 800 300
------- ------ ------
Provision (benefit) for income taxes.................... $ (735) $1,095 $1,745
======= ====== ======
32
34
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred income tax benefit (provision) at February 28, 1998, February
28, 1999 and February 29, 2000 results from the following temporary differences
between financial and tax reporting (in thousands):
1998 1999 2000
------- ------- ------
Accrued expenses....................................... $ 104 $ (524) $ (22)
Construction period expenses........................... 923 (46) (197)
Depreciation........................................... (53) 30 40
Built-in losses........................................ (2,542) (1,213) (722)
Net operating loss carryforward........................ 257 (664) 823
Decrease in valuation allowance........................ 2,411 1,617 (222)
------- ------- ------
$ 1,100 $ (800) $ (300)
======= ======= ======
The components of the Company's deferred income tax asset (liability) as of
February 28, 1999 and February 29, 2000 are as follows:
1999 2000
------- --------
Accrued expenses........................................ $ 71 $ 49
Construction period expenses............................ 1,726 1,529
Depreciation............................................ (80) (40)
Built-in losses......................................... 2,926 2,204
Net operating loss carryforward......................... 324 1,147
Valuation allowance..................................... (4,667) (4,889)
------- --------
$ 300 $ --
======= ========
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The deferred
income tax asset is included in prepaid expenses and other assets in the
accompanying balance sheets.
A reconciliation of the income tax provision (benefit) computed at the
federal statutory rate and the income tax benefit for financial reporting
purposes for the years ended February 28, 1998, February 28, 1999 and February
29, 2000, are as follows:
1998 1999 2000
---- ---- ----
Income taxes at statutory rate.............................. 34% 34% 34%
State income taxes, net of federal tax benefit.............. 3 3 3
Alternative minimum tax..................................... (5) -- --
Franchise tax liability..................................... (7) 2 --
Utilization of loss carryforwards........................... -- (14) (12)
-- --- ---
25% 25% 25%
== === ===
8. REPURCHASE OF COMMON STOCK
During the third quarter of fiscal 1998, the CPH LLC repurchased 1,015,000
shares of the Company's common stock which were issued to Roger Nix, the
previous owner of Durable Homes, Inc. ("Durable"), a wholly owned subsidiary of
the Company operating in Nevada, in connection with the Company's acquisition of
Durable in 1993, and distributed such shares to the Company and CHF in
proportion to their respective ownership percentages in the CPH LLC.
Accordingly, 689,489 shares were distributed to the Company and are being held
as treasury stock. As a result, the number of outstanding shares of the Company
was reduced
33
35
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from 14,995,000 to 14,305,511. The foregoing distribution is subject to
adjustment based on contractual arrangements between the Company and CHF.
In addition, in fiscal 1998, the Company announced a stock repurchase
program whereby up to 1,000,000 additional shares of the Company's outstanding
common stock may be repurchased by CPH LLC. As of February 29, 2000, 487,100
shares had been repurchased and held by CPH LLC under this program.
9. STOCK OPTION PLAN
Effective February 28, 1995, the Board of the Corporation approved the 1995
Stock Incentive Plan (the "1995 Plan"). The 1995 Plan permits a committee
designated by the Board of the Corporation to make awards to key employees and
directors of the Company and its subsidiaries. Subject to various restrictions,
awards could be in the form of stock options, restricted or unrestricted stock,
stock appreciation rights or a combination of the above. The maximum number of
shares or share equivalents that may be awarded under the 1995 Plan is
1,500,000.
Options are typically granted to purchase shares at prices equal to the
fair market value of the shares at the date of grant. The options are typically
intended to vest over a one to five year period and are generally intended to be
exercisable at various dates over one to 10 year periods. When the options are
exercised, the proceeds will be credited to equity along with the related income
tax benefits, if any.
The following is a summary of the transactions relating to the Company's
stock option plan for the years ended February 28, 1999 and February 29, 2000:
FISCAL 1999 FISCAL 2000
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
Options outstanding, beginning of year... -- $ -- 256,000 $2.75
Granted.................................. 256,000 2.75 250,000 1.88
Exercised................................ -- -- -- --
Canceled................................. -- -- (43,000) 2.75
--------- ----- --------- -----
Options outstanding, end of year......... 256,000 $2.75 463,000 $2.28
========= ===== ========= =====
Options exercisable at end of year....... -- 71,000
========= =========
Options available for future grant....... 1,244,000 1,037,000
========= =========
The following information is provided pursuant to the requirements of SFAS
No. 123. The fair value of each option granted during the years ended February
28, 1999 and February 29, 2000 is estimated using the Black-Scholes
option-pricing model on the date of grant using the following weighted average
assumptions:
FISCAL 1999 FISCAL 2000
----------- -----------
Dividend yield........................................ 0% 0%
Expected volatility................................... 35.5% 56.5%
Risk-free interest rate............................... 4.67% 6.12%
Expected life......................................... 5 years 5 years
The 213,000 and 250,000 options granted in fiscal 1999 and fiscal 2000,
respectively, which remain outstanding as of February 29, 2000 have exercise
prices of $2.75 and $1.875, respectively, and a remaining contractual life of
8.92 and 9.58 years, respectively. As of February 29, 2000, 71,000 of these
options are
34
36
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercisable. The per share fair value of all options granted during fiscal 1999
and fiscal 2000 was $1.07 and $1.03, respectively.
During the years ended February 28, 1999 and February 29, 2000, no
compensation expense was recognized related to the stock options granted,
however, had compensation expense been determined consistent with SFAS No. 123
for the Company's stock option grants for its stock-based compensation plan, the
Company's net income and diluted net income per share for the years ended
February 28, 1999 and February 29, 2000 would approximate the pro forma amounts
below (Dollars in thousands, except per share amounts):
FISCAL 1999 FISCAL 2000
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
Income before extraordinary item...... $3,286 $3,281 $5,227 $5,144
Diluted income per common share before
extraordinary item.................. $ 0.23 $ 0.23 $ 0.37 $ 0.37
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
10. RELATED PARTY TRANSACTIONS
Commitment fees totaling $534,000 were paid to joint venture partners and
capitalized to the real estate being developed during fiscal 1998. These
capitalized fees are included in cost of sales as the units are sold.
In fiscal 1998, the Company contributed an aggregate of $2,925,000,
including $215,000 of cash, to unconsolidated joint ventures. In fiscal 1999,
the Company contributed cash totaling $3,176,000 to unconsolidated joint
ventures. In fiscal 2000, the Company contributed cash totaling $3,278,000 to
unconsolidated joint ventures.
The Company has made reimbursable advances to unconsolidated joint ventures
for construction and other expenditures. The balance of advances at February 28,
1999 and February 29, 2000 was $14,450,000 and $10,588,000, respectively. These
amounts are included in investment in and advances to unconsolidated joint
ventures in the accompanying consolidated balance sheets. During fiscal 1999 and
fiscal 2000, the Company charged interest totaling $371,000 and $1,422,000,
respectively, to the joint ventures based on these advances.
During fiscal 1998, 1999 and 2000, the Company recognized $3,135,000,
$10,452,000 and $13,106,000, respectively, in construction overhead
reimbursements from joint ventures. Amounts are received pursuant to terms of
the joint venture agreements, which generally specify a fixed payment per month
over the anticipated period of development. Such amounts are included in
selling, general and administrative expenses in the accompanying statements of
operations.
The Company entered into a cost sharing arrangement whereby the Company is
reimbursed by MPE for certain costs related to advertising and the operation and
maintenance of the models and sales office. Total shared costs charged to MPE
during the years ended February 28, 1998 and 1999 and February 29, 2000 were
$639,000, $1,354,000 and zero, respectively.
During fiscal 1999, the Company acquired four parcels of land for total
consideration of approximately $3,283,000 from a partnership in which an officer
of one of the Company's subsidiaries holds an ownership interest. The terms of
this transaction had been agreed upon prior to the time that this officer became
an employee of the Company. This officer is no longer an employee.
Included in accounts receivable at February 28, 1999 and February 29, 2000
is $1,353,000 and $1,633,000, respectively, of amounts owed from the Company's
various unconsolidated joint ventures to the Company's wholly-owned subsidiary,
Newport Design Center, Inc. for goods and services rendered.
35
37
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1999 and fiscal 2000, approximately $207,000 and $193,000,
respectively, was paid to a company owned by a relative of the Chairman of the
Board for services rendered in connection with website design and maintenance
and the development of virtual reality home tour models. In addition, this
company paid approximately $15,000 in rent for office space leased from the
Company during fiscal 1999.
An officer of the Company purchased a home from one of the Company's joint
ventures in fiscal 1999 for $780,000.
11. COMMITMENTS AND CONTINGENCIES
General
Approximately $31,228,000 and $38,480,000 of performance bonds which have
been issued on behalf of both CPH LLC and certain joint ventures, and for which
the Company has been indemnified, were outstanding at February 28, 1999 and
February 29, 2000, respectively. The estimated cost to complete the development
work related to the performance bonds are $14,980,000 and $24,026,000 at
February 28, 1999 and February 29, 2000, respectively. The beneficiaries of
these bonds are certain municipalities. CPH LLC has an outstanding letter of
credit of $416,000 as of February 29, 2000 to ensure performance on certain
agreements. CPH LLC has pledged a certificate of deposit in a like amount as
collateral for the obligation under the letter of credit which is included in
restricted cash.
CPH LLC has entered into agreements to lease certain office equipment and
facilities under operating leases which expire at various dates through fiscal
year 2004. The facility leases generally provide that CPH LLC shall pay property
taxes, insurance and other items. Minimum payments under noncancelable leases at
February 29, 2000, are as follows (in thousands):
AS OF
FEBRUARY 29,
FISCAL YEARS ENDING: 2000
-------------------- ------------
2001..................................................... $ 836
2002..................................................... 593
2003..................................................... 330
2004..................................................... 100
--------
Total.......................................... $ 1,859
========
Total rent expense was $338,000 and $442,000 and $769,000 for the years
ended February 28, 1998, February 28, 1999 and February 29, 2000, respectively.
As discussed in Notes 1 and 4, CPH LLC is a general partner in certain
joint venture partnerships. As a general partner, CPH LLC is liable for all
debts of the partnerships without limitation to the respective partnership
interest.
Dividends
No dividends were declared or paid for the years ended February 28, 1998,
February 28, 1999 and February 29, 2000.
Legal Proceedings
The Company is involved in routine claims and litigation arising in the
ordinary course of its business. Although the legal responsibility and financial
impact with respect to pending claims and litigation cannot be presently
ascertained, the Company does not believe that these matters will result in the
payment by the Company, giving consideration to any applicable insurance
proceeds or contributions by other parties, that, in the aggregate, would be
material in relation to the financial position of the Company. It is reasonably
possible
36
38
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that the estimate of reserves provided for by the Company with respect to such
claims and litigation could change in the near term and such change could be
material.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate:
Cash and Equivalents -- The carrying amount is a reasonable estimate
of fair value. These assets primarily consist of short-term investments and
demand deposits.
Notes Payable to Banks -- These notes payable mature in two to three
years. The rates of interest paid on the notes approximate the current
rates available for secured real estate financing with similar terms and
maturities.
Senior Unsecured Notes Payable Due 2002 -- This issue is not publicly
traded on a major exchange. Consequently, the fair value of this issue is
based on a trade closest to the year ended February 29, 2000.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
AT FEBRUARY 28, 1999 AT FEBRUARY 29, 2000
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- --------- --------
Financial Assets:
Cash and equivalents..................... $ 5,782 $ 5,782 $19,389 $19,389
Financial Liabilities:
Notes payable............................ 91,489 91,489 125,809 125,809
Senior unsecured notes payable........... 100,000 90,000 88,392 74,028
13. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the years ended February 28, 1999
and February 29, 2000 is as follows (in thousands except for per share data):
QUARTER
----------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------
1999:
Sales of homes and land....... $28,292 $47,411 $47,717 $69,002 $192,422
Gross margin.................. 5,526 7,727 9,560 13,116 35,929
Net income.................... $ 340 $ 575 $ 485 $ 1,886 $ 3,286
======= ======= ======= ======= ========
Net income per common share... $ 0.02 $ 0.04 $ 0.03 $ 0.13 $ 0.23
======= ======= ======= ======= ========
2000:
Sales of homes and land....... $61,974 $67,383 $63,430 $98,004 $290,791
Gross margin.................. 11,304 12,493 14,137 21,584 59,518
Net income.................... $ 820 $ 1,100 $ 812 $ 3,450 $ 6,182
======= ======= ======= ======= ========
Net income per common share... $ 0.06 $ 0.08 $ 0.06 $ 0.24 $ 0.44
======= ======= ======= ======= ========
37
39
REPORT OF INDEPENDENT AUDITORS
To the Partners
Grand Coto Estates, L.P.
We have audited the accompanying balance sheets of Grand Coto Estates,
L.P., a California limited partnership (the "Partnership"), as of December 31,
1999 and 1998, and the related statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Partnership'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 financial position of Grand Coto Estates, L.P. at
December 31, 1999 and 1998, and the 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
January 28, 2000
38
40
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
ASSETS
Cash........................................................ $ 236,795 $ 459,741
Real estate inventories (Notes 2, 3 and 4).................. -- 20,164,994
Due from general partner (Note 4)........................... -- 56,467
Other assets................................................ 106,880 73,494
----------- -----------
$ 343,675 $20,754,696
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities (Note 2)........... $ 1,297,177 $ 3,948,578
Due to general partner (Note 4)............................. 176,493 --
----------- -----------
1,473,670 3,948,578
Commitments and contingencies (Note 5)
Partners' capital (deficit)................................. (1,129,995) 16,806,118
----------- -----------
$ 343,675 $20,754,696
=========== ===========
See accompanying notes to financial statements.
39
41
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- ----------
SALES................................................ $37,557,500 $23,172,946 $5,057,989
COST OF SALES........................................ 28,116,357 16,659,863 3,778,997
----------- ----------- ----------
GROSS PROFIT......................................... 9,441,143 6,513,083 1,278,992
OTHER EXPENSES (INCOME)
Selling and marketing................................ 2,650,480 1,572,850 372,859
Other income......................................... (18,032) (35,473) (13,739)
----------- ----------- ----------
NET INCOME........................................... $ 6,808,695 $ 4,975,706 $ 919,872
=========== =========== ==========
See accompanying notes to financial statements.
40
42
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
IHP
INVESTMENT CAPITAL PACIFIC
FUND I, L.P. HOLDINGS, LLC TOTAL
------------ --------------- ------------
BALANCE -- December 31, 1996..................... $ 1,978,868 $ 760,922 $ 2,739,790
Contributions from partner....................... 16,766,839 -- 16,766,839
Distributions to partners........................ (4,675,763) (175,500) (4,851,263)
Net income....................................... 690,330 229,542 919,872
------------ ----------- ------------
BALANCE -- December 31, 1997..................... 14,760,274 814,964 15,575,238
Contributions from partner....................... 18,395,326 -- 18,395,326
Distributions to partners........................ (20,832,471) (1,307,681) (22,140,152)
Net income....................................... 3,027,853 1,947,853 4,975,706
------------ ----------- ------------
BALANCE -- December 31, 1998..................... 15,350,982 1,455,136 16,806,118
Contributions from partners...................... 7,688,262 2,801,787 10,490,049
Distributions to partners........................ (27,318,352) (7,916,505) (35,234,857)
Net income....................................... 3,686,647 3,122,048 6,808,695
------------ ----------- ------------
BALANCE -- December 31, 1999..................... $ (592,461) $ (537,534) $ (1,129,995)
============ =========== ============
See accompanying notes to financial statements.
41
43
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 6,808,695 $ 4,975,706 $ 919,872
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Cost of sales.................................. 28,116,357 16,659,863 3,778,997
Changes in operating assets and liabilities
Additions to real estate inventories........ (7,951,363) (19,413,753) (13,559,319)
Due from general partner.................... 56,467 (56,467) --
Other assets................................ (33,386) 42,504 (26,330)
Accounts payable and accrued liabilities.... (2,651,401) 2,759,099 1,189,479
Due to general partner...................... 176,493 (214,166) (90,207)
------------ ------------ ------------
Net cash provided by (used in) operating
activities..................................... 24,521,862 4,752,786 (7,787,508)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable.............. -- (575,206) (4,101,081)
Capital contributions from partner............... 10,490,049 18,395,326 16,766,839
Capital distributions to partners................ (35,234,857) (22,140,152) (4,851,263)
------------ ------------ ------------
Net cash (used in) provided by financing
activities..................................... (24,744,808) (4,320,032) 7,814,495
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH.................. (222,946) 432,754 26,987
CASH -- beginning of year........................ 459,741 26,987 --
------------ ------------ ------------
CASH -- end of year.............................. $ 236,795 $ 459,741 $ 26,987
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest during the year........... $ -- $ 28,875 $ 346,949
============ ============ ============
See accompanying notes to financial statements.
42
44
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Grand Coto Estates, L.P., a California limited partnership (the
"Partnership"), was formed on October 30, 1996 in accordance with the provisions
of the laws of the State of California for the purpose of developing and selling
93 single-family homes in Coto de Caza, California (the "Project"). The general
partner, Peters Ranchland Company, Inc. ("Peters"), and the limited partner, IHP
Investment Fund I, L.P. ("IHP"), each owned a 50% interest in the Partnership at
inception. On October 1, 1997, Peters transferred its interest in the
Partnership to Capital Pacific Holdings, LLC ("CPH").
The Partnership Agreement provides that cash flows, as defined, are
distributed to the partners first, in the amount of the adjusted GAAP profit
component (as defined) from the sale of each home, in accordance with their
percentage interests; second, in satisfaction of unpaid preferred returns;
third, for payment of partners' capital contributions; fourth, in accordance
with their percentage interests.
Net income is allocated to the partners in the following order of priority:
first, to recover any net losses allocated previously; second, to the extent of
and in proportion to the amount by which cash flow distributed in satisfaction
of preferred returns and the adjusted GAAP profit component (as defined in the
partnership agreement) exceeds previously allocated net income; thereafter, in
accordance with their percentage interests. Net losses are allocated first, to
the general partner up to $2,076,921 plus all previously allocated net income;
second, to the limited partner until the limited partner's capital account is
reduced to zero; any remaining losses are allocated to the general partner.
Certain distributions reflected in the statement of partners' capital were
not in accordance with the provisions of the partnership agreement and it is
management's and the partners' intent to cumulatively adjust future
contributions and distributions of the Partnership to reflect the provisions of
the partnership agreement.
The partnership agreement provides, among other things, that the partners
shall be entitled to receive a preferred return on contributed capital computed
using an interest rate equal to prime plus 2%. As of December 31, 1999 and 1998,
the Partnership has unpaid preferred returns of $0 and $394,827, respectively,
on IHP's capital contributions, and $0 and $8,178, respectively, on CPH's
capital contributions.
Use of Estimates
The preparation of the Partnership's 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 as of December 31, 1999 and 1998, and revenues and expenses for each
of the years in the period ended December 31, 1999. Actual results could
materially differ from those estimates in the near term.
Real Estate Inventories
Real estate inventories include direct and indirect land costs, offsite
costs and onsite improvement costs, project commitment fees and builder overhead
fees which are capitalized to the real estate project. Selling and marketing
costs are expensed as incurred.
The Partnership complies with the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"). SFAS No. 121
requires the Partnership to review the Project whenever events or changes in
circumstances indicate that the cost basis of such assets may not be
recoverable. If the cost basis of the Project is greater than the projected
future net cash flows from the Project, an impairment loss is recognized.
Impairment losses are calculated as the difference between the Project's cost
basis and its estimated fair value,
43
45
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
net of disposal costs on completed units, if any. No impairment losses were
recorded in December 31, 1998 and 1997, Accordingly, the Project was carried at
its historical cost basis. The Partnership sold all of its remaining homes in
1999, therefore, there is no inventory balance as of December 31, 1999.
Sales and Profit Recognition
Sales are recorded and profit is recognized when title has passed to a
buyer who has met down payment and continuing investment criteria and
substantially all of the risks and rewards of ownership have been transferred to
the buyer. At the time of sale, accumulated costs are relieved from real estate
inventories by a method that approximates relative sales value and are charged
to cost of sales.
Income Taxes
The Partnership is not a taxable entity and the results of its operations
are included in the tax returns of the partners. Accordingly, no provision for
income taxes is reflected in the accompanying financial statements.
2. REAL ESTATE INVENTORIES
During 1999, the Project's remaining 45 homes were sold. At December 31,
1999, included in accounts payable and accrued liabilities is $1,155,219 of
estimated costs to complete the development of the Project and $141,958 of
warranty cost reserves.
3. NOTE PAYABLE
The Partnership had a noninterest-bearing note payable issued to the seller
in connection with the acquisition of the land on which the Project is being
developed. The note payable was secured by real estate inventories and was paid
off in May 1998. The unamortized discount based on an imputed interest rate of
10% was $28,875 as of December 31, 1997. Imputed interest of $19,252 and
$266,473 was capitalized to real estate inventories during the years ended
December 31, 1998 and 1997, respectively.
4. RELATED PARTY TRANSACTIONS
The partnership agreement provides that a total of $1,579,199 be paid to
the general partner in monthly installments for builder overhead fees. If, after
all of the homes in the Project are sold, actual sales prices (as defined) are
less than budgeted sales prices, the general partner shall be liable to the
Partnership for all overhead fees received in excess of 3% of actual gross sales
prices (as defined). If actual sales prices are greater than budgeted sales
prices, the general partner shall be entitled to receive from the Partnership an
amount equal to 3% of actual gross sales prices less overhead fees already
received. An additional $394,154 of builder overhead fees was incurred by the
Partnership as actual sale prices were greater than budget.
The following fees were paid to the partners and capitalized to the Project
during the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
-------- -------- --------
Commitment fees paid to IHP........................ $ -- $131,600 $263,200
Builder overhead fees paid to CPH.................. 218,920 717,540 642,733
-------- -------- --------
$218,920 $849,140 $905,933
======== ======== ========
44
46
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
The Partnership's commitments and contingencies include the usual
obligations incurred by real estate developers in the normal course of business.
In the opinion of management, these matters will not have a material effect on
the Partnership's financial position.
In the jurisdiction in which the Partnership develops and constructs the
Project, community facilities district bonds are issued by government
instrumentalities to finance major infrastructure and other improvements. As a
land owner benefited by these improvements, the Partnership is responsible for
the assessments on its land until the property is sold to buyers. When homes
within the Project are sold, the buyers assume the responsibility for the
related assessment.
45
47
REPORT OF INDEPENDENT AUDITORS
To the Partners
M.P.E. Partners, L.P.
We have audited the accompanying balance sheets of M.P.E. Partners, L.P., a
California limited partnership (the "Partnership"), as of December 31, 1999 and
1998, and the related statements of operations, partners' capital (deficit) and
cash flows for the years ended December 31, 1999 and 1998 and for the period
March 14, 1997 (inception) through December 31, 1997. These financial statements
are the responsibility of the Partnership'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 financial position of M.P.E. Partners, L.P. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years ended December 31, 1999 and 1998 and for the period March 14, 1997
(inception) through December 31, 1997 in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
January 28, 2000
46
48
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
---------- -----------
ASSETS
Cash........................................................ $ 529,158 $ 420,515
Receivables and other assets................................ 2,846 278,544
Real estate inventories (Notes 2 and 3)..................... -- 16,102,348
---------- -----------
$ 532,004 $16,801,407
========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities.................... $ 823,388 $ 2,866,241
Due to partners (Note 3).................................... 455,935 109,138
---------- -----------
1,279,323 2,975,379
Commitments and contingencies (Note 4)
Partners' capital (deficit)................................. (747,319) 13,826,028
---------- -----------
$ 532,004 $16,801,407
========== ===========
See accompanying notes to financial statements.
47
49
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND FOR THE
PERIOD MARCH 14, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
1999 1998 1997
----------- ----------- ----------
SALES................................................ $24,345,000 $32,056,400 $1,944,600
COST OF SALES........................................ 19,039,542 25,739,557 1,505,103
----------- ----------- ----------
GROSS PROFIT......................................... 5,305,458 6,316,843 439,497
OTHER EXPENSES (INCOME)
Selling and marketing (Note 3)....................... 2,701,810 2,100,750 644,567
Other expense (income)............................... 17,045 6,170 (1,624)
----------- ----------- ----------
NET INCOME (LOSS).................................... $ 2,586,603 $ 4,209,923 $ (203,446)
=========== =========== ==========
See accompanying notes to financial statements.
48
50
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND FOR THE
PERIOD MARCH 14, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
IHP
INVESTMENT CAPITAL PACIFIC
FUND I, L.P. HOLDINGS, LLC TOTAL
------------ --------------- ------------
BALANCE -- March 14, 1997 (Inception)............ $ -- $ -- $ --
Contributions from partners...................... 20,405,433 2,710,000 23,115,433
Net loss......................................... -- (203,446) (203,446)
------------ ----------- ------------
BALANCE -- December 31, 1997..................... 20,405,433 2,506,554 22,911,987
Contributions from partners...................... 18,799,859 -- 18,799,859
Distribution to partners......................... (29,918,842) (2,176,899) (32,095,741)
Net income....................................... 2,621,826 1,588,097 4,209,923
------------ ----------- ------------
BALANCE -- December 31, 1998..................... 11,908,276 1,917,752 13,826,028
Contributions from partners...................... 6,149,660 -- 6,149,660
Distribution to partners......................... (21,609,165) (1,700,445) (23,309,610)
Net income....................................... 1,677,956 908,647 2,586,603
------------ ----------- ------------
BALANCE -- December 31, 1999..................... $ (1,873,273) $ 1,125,954 $ (747,319)
============ =========== ============
See accompanying notes to financial statements.
49
51
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND FOR THE
PERIOD MARCH 14, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................ $ 2,586,603 $ 4,209,923 $ (203,446)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Cost of sales.................................. 19,039,542 25,739,557 1,505,103
Changes in operating assets and liabilities
Receivables and other assets................ 275,698 1,604,686 (1,883,230)
Additions to real estate inventories........ (2,937,194) (19,091,151) (21,545,857)
Accounts payable and accrued liabilities.... (2,042,853) 2,349,522 516,719
Due to partners............................. 346,797 (1,118,257) 1,227,395
------------ ------------ ------------
Net cash provided by (used in) operating
activities..................................... 17,268,593 13,694,280 (20,383,316)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from partners.............. 6,149,660 18,799,859 20,405,433
Capital distributions to partners................ (23,309,610) (32,095,741) --
------------ ------------ ------------
Net cash (used in) provided by financing
activities..................................... (17,159,950) (13,295,882) 20,405,433
------------ ------------ ------------
NET INCREASE IN CASH............................. 108,643 398,398 22,117
CASH -- beginning of period...................... 420,515 22,117 --
------------ ------------ ------------
CASH -- end of period............................ $ 529,158 $ 420,515 $ 22,117
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash transaction
Capital contribution for model-related costs..... $ -- $ -- $ 2,710,000
============ ============ ============
See accompanying notes to financial statements.
50
52
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
M.P.E. Partners, L.P., a California limited partnership (the
"Partnership"), was formed on March 14, 1997 (inception) in accordance with the
provisions of the laws of the State of California for the purpose of developing
and selling 51 single-family homes in Tarzana, California (the "Project"). The
general partner, Peters Ranchland Company, Inc. ("Peters"), and the limited
partner, IHP Investment Fund I, L.P. ("IHP"), each owned a 50% interest in the
Partnership at inception. On October 1, 1997, Peters transferred its interest in
the Partnership to Capital Pacific Holdings, LLC ("CPH").
The partnership agreement provides that cash flows, as defined, are
distributed to the partners first, in the amount of the adjusted GAAP profit
component (as defined) from the sale of each home, in accordance with their
percentage interests; second, in satisfaction of unpaid preferred returns;
third, for payment of partners' capital contributions in accordance with their
percentage interests; any remaining cash flows are distributed to the partners
in accordance with their percentage interests.
Net income is allocated to the partners in the following order of priority:
first, to recover any net losses allocated previously; second, to the extent of
and in proportion to the amount by which cash flow distributed in satisfaction
of preferred returns and the adjusted GAAP profit component (as defined in the
partnership agreement) distributed from the sale of each home exceeds previously
allocated profits; third, to the extent other cash flows distributed, as
defined, exceed previously allocated net income; thereafter, in accordance with
their percentage interests. Net losses are allocated first, to the general
partner up to $4,063,045 plus all previously allocated net income; second, to
the limited partner until the limited partner's capital account is reduced to
zero; any remaining losses are allocated to the general partner.
Certain distributions reflected in the statement of partners' capital were
not in accordance with the provisions of the partnership agreement and it is
management's and the partners' intent to cumulatively adjust future
contributions and distributions of the Partnership to reflect the provisions of
the partnership agreement.
The partnership agreement provides, among other things, that the partners
shall be entitled to receive a preferred return on contributed capital computed
at the rate of prime plus 1%. As of December 31, 1999 and 1998, the Partnership
has unpaid preferred returns of $0 and $6,391, respectively, on IHP's capital
contributions, and $307,434 and $245,829, respectively, on CPH's capital
contributions.
Use of Estimates
The preparation of the Partnership's 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 as of December 31, 1999 and 1998, and revenues and expenses for the
years ended December 31, 1999 and 1998 and the period March 14, 1997 (inception)
through December 31, 1997. Actual results could materially differ from those
estimates in the near term.
Real Estate Inventories
Real estate inventories include direct and indirect land costs, offsite
costs and onsite improvement costs, project commitment fees and builder overhead
fees which are capitalized to the Project. Selling and marketing costs are
expensed as incurred.
The Partnership complies with the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"). SFAS No. 121
requires the Partnership to review the Project whenever events or changes in
51
53
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
circumstances indicate that the cost basis of the Project may not be
recoverable. If the cost basis of the Project is greater than the projected
future net cash flows from the Project, an impairment loss is recognized.
Impairment losses are calculated as the difference between the Project's cost
basis and its estimated fair value, net of disposal costs on completed units, if
any. No impairment losses were recorded in 1998 and 1997. Accordingly, the
Project was carried at its historical cost basis. The Partnership sold all of
its remaining homes in 1999, therefore, there is no inventory balance at
December 31, 1999.
Sales and Profit Recognition
Sales are recorded and profit is recognized when title has passed to a
buyer who has met down payment and continuing investment criteria, and
substantially all of the risks and rewards of ownership have been transferred to
the buyer. At the time of sale, accumulated costs are relieved from real estate
inventories by a method that approximates relative sales value and are charged
to cost of sales.
Income Taxes
The Partnership is not a taxable entity and the results of its operations
are included in the tax returns of the partners. Accordingly, no provision for
income taxes is reflected in the accompanying financial statements.
2. REAL ESTATE INVENTORIES
During 1999, the Project's remaining 20 homes were sold. At December 31,
1999, included in accounts payable and accrued liabilities is $552,475 of
estimated costs to complete the development of the Project and $270,913 of
warranty cost reserves.
3. RELATED PARTY TRANSACTIONS
The Partnership acquired the Project on April 11, 1997 from a related
party, Capital Pacific Holdings, Inc. and two other affiliates (collectively,
"CPH, Inc."), for $12,392,547, utilizing IHP's initial cash contribution.
CPH, Inc. incurred certain costs in connection with the development of the
Partnership's models and sales office. In accordance with the Partnership
Agreement, $2,710,000 was credited to CPH's capital account relating to these
development costs.
The Partnership entered into a cost sharing agreement with CPH, Inc. which
requires the Partnership to reimburse CPH, Inc. for certain costs related to
advertising and the operation and maintenance of the models and sales office.
Total shared costs allocated to the Partnership during the years ended December
31, 1999 and 1998 and the period ended December 31, 1997 were $0, $1,520,811 and
$471,646, respectively, and are included in selling and marketing costs in the
Partnership's statements of operations.
The partnership agreement provides that a total of $1,623,655 be paid to
the general partner in monthly installments for builder overhead fees. If, after
all of the homes in the Project are sold, actual sales prices (as defined) are
less than budgeted sales prices, the general partner shall be liable to the
Partnership for all overhead fees received in excess of 3% of actual gross sales
prices (as defined). If actual sales prices are greater than budgeted sales
prices, the general partner shall be entitled to receive from the Partnership an
amount equal to 3% of actual gross sales prices less overhead fees already
received. An additional $126,725 of builder overhead fees was incurred by the
Partnership as actual sale prices were greater than budget.
52
54
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following fees were paid to the partners and capitalized to the Project
during the year ended December 31, 1998 and the period March 14, 1997
(inception) through December 31, 1997:
1999 1998 1997
-------- ---------- --------
Commitment fees paid to IHP....................... $ -- $ 270,609 $270,609
Builder overhead fees paid to CPH................. 267,913 847,128 635,346
-------- ---------- --------
$267,913 $1,117,737 $905,955
======== ========== ========
The amounts due to the partners as of December 31, 1999 and 1998 consist of
amounts due to CPH for the payment of builder overhead fees and development
fees.
4. COMMITMENTS AND CONTINGENCIES
The Partnership's commitments and contingencies include the usual
obligations incurred by real estate developers in the normal course of business.
In the opinion of management, these matters will not have a material effect on
the Partnership's financial position.
53
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the
Company's definitive proxy statement to be filed with the Commission no later
than June 28, 2000 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Company's definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Company's definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Company's definitive Proxy Statement.
54
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. FINANCIAL STATEMENTS. The following Financial Statements, together with the
Notes thereto and Independent Auditors' Reports thereon, are included in Part
II, Item 8 of this report.
CAPITAL PACIFIC HOLDINGS, INC.
Report of Independent Public Accountants
Consolidated Balance Sheets as of February 28, 1999 and February 29,
2000
Consolidated Statements of Operations for the years ended February 28,
1998 and 1999 and February 29, 2000
Consolidated Statements of Stockholders' Equity for the years ended
February 28, 1998 and 1999 and February 29, 2000
Consolidated Statements of Cash Flows for the years ended February 28,
1998 and 1999 and February 29, 2000
Notes to Consolidated Financial Statements
GRAND COTO ESTATES, L.P.
Report of Independent Auditors
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the years ended December 31, 1999, 1998 and
1997
Statements of Partners' Capital (Deficit) for the years ended December
31, 1999, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1999, 1998 and
1997
Notes to Financial Statements
M.P.E. PARTNERS, L.P.
Reports of Independent Auditors
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the years ended December 31, 1999, and 1998
and the period March 14, 1997 (Inception) through December 31, 1997
Statements of Partners' Capital (Deficit) for the years ended December
31, 1999 and 1998 and the period March 14, 1997 (Inception) through
December 31, 1997
Statements of Cash Flows for the years ended December 31, 1999 and 1998
and the period March 14, 1997 (Inception) through December 31, 1997
Notes to Financial Statements
55
57
2. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Second Restated Certificate of Incorporation of the
Registrant, as Amended. (Incorporated by reference to
Exhibit 3.3 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998).
3.2 Second Amended and Restated Bylaws of the Registrant.
(Incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
4.1 See the Articles of Incorporation and Bylaws of the
Registrant (Exhibits 3.1 - 3.2) and the Indenture and
related agreements (Exhibits 10.1 - 10.6).
10.1 Indenture agreement by and between Capital Pacific Holdings,
Inc., as Issuer; Durable Homes, Inc., J.M. Peters Nevada,
Inc., and Peters Ranchland, Inc., as Guarantors, and United
States Trust Company of New York, as Trustee, dated as of
May 13, 1994. (Incorporated by reference to Exhibit 10.1 of
the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 28, 1994 filed on May 27, 1994, SEC File
No. 001-09911).
10.2 Warrant Agreement by and between Capital Pacific Holdings,
Inc., and United States Trust Company of New York, Warrant
Agent, dated as of May 13, 1994. (Incorporated by reference
to Exhibit 10.2 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1994 filed on
May 27, 1994, SEC File No. 001-09911).
10.3 Warrant Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911).
10.4 Notes Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911).
10.5 Second Supplemental Indenture dated as of September 10, 1997
to the Indenture agreement dated as of May 13, 1998.
(Incorporated by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
10.6 Third Supplemental Indenture, dated as of October 1, 1997 to
the Indenture agreement dated as of May 13, 1994, as
amended. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
10.7 Capital Pacific Holdings, Inc. Stock Incentive Agreement
(Non-Qualified). Incorporated by reference to Exhibit 10.7
of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1999.
21.1 Subsidiaries of the Registrant. (Incorporated by reference
to Exhibit 21.1 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1999.)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99.1 Amended and Restated Limited Liability Company agreement
(Incorporated by reference to Exhibit 99.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1997).
99.2 Investment and Stockholder agreement (Incorporated by
reference to Exhibit 99.2 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1997).
99.3 Registration Rights agreement (Incorporated by reference to
Exhibit 99.3 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year ended
February 29, 2000.
56
58
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, in the City of Newport
Beach, State of California, on May 26, 2000.
CAPITAL PACIFIC HOLDINGS, INC.
By /s/ HADI MAKARECHIAN
------------------------------------
Hadi Makarechian
Chairman of the Board,
Chief Executive Officer and
President
Date: May 30, 2000
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Hadi Makarechian and Steven O. Spelman, Jr., and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for each person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments to
this report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully and to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue of the powers herein granted.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HADI MAKARECHIAN Chairman of the Board, Chief May 30, 2000
- --------------------------------------------------- Executive Officer and President
Hadi Makarechian
/s/ STEVEN O. SPELMAN, JR. Senior Vice President, Chief May 30, 2000
- --------------------------------------------------- Financial Officer and Corporate
Steven O. Spelman, Jr. Secretary
/s/ WILLIAM A. FUNK Director, Senior Vice President, May 30, 2000
- --------------------------------------------------- Commercial Development
William A. Funk
/s/ KARLHEINZ M. KAISER Director May 30, 2000
- ---------------------------------------------------
Karlheinz M. Kaiser
/s/ ALLAN L. ACREE Director May 30, 2000
- ---------------------------------------------------
Allan L. Acree
57
59
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------
3.1 Second Restated Certificate of Incorporation of the
Registrant, as Amended. (Incorporated by reference to
Exhibit 3.3 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998). ..............
3.2 Second Amended and Restated Bylaws of the Registrant.
(Incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998). ..................................
4.1 See the Articles of Incorporation and Bylaws of the
Registrant (Exhibits 3.1-3.2) and the Indenture and related
agreements (Exhibits 10.1-10.6). ...........................
10.1 Indenture agreement by and between Capital Pacific Holdings,
Inc., as Issuer; Durable Homes, Inc., J.M. Peters Nevada,
Inc., and Peters Ranchland, Inc., as Guarantors, and United
States Trust Company of New York, as Trustee, dated as of
May 13, 1994. (Incorporated by reference to Exhibit 10.1 of
the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 28, 1994 filed on May 27, 1994, SEC File
No. 001-09911). ............................................
10.2 Warrant Agreement by and between Capital Pacific Holdings,
Inc., and United States Trust Company of New York, Warrant
Agent, dated as of May 13, 1994. (Incorporated by reference
to Exhibit 10.2 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1994 filed on
May 27, 1994, SEC File No. 001-09911). .....................
10.3 Warrant Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911). ............
10.4 Notes Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911). ............
10.5 Second Supplemental Indenture dated as of September 10, 1997
to the Indenture agreement dated as of May 13, 1998.
(Incorporated by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998). ..................................
10.6 Third Supplemental Indenture, dated as of October 1, 1997 to
the Indenture agreement dated as of May 13, 1994, as
amended. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998). ..................................
10.7 Capital Pacific Holdings, Inc. Stock Incentive Agreement
(Non-Qualified). Incorporated by reference to Exhibit 10.7
of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1999. .......................
21.1 Subsidiaries of the Registrant. (Incorporated by reference
to Exhibit 21.1 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1999.) .........
23.1 Consent of Ernst & Young LLP. ..............................
23.2 Consent of Arthur Andersen LLP. ............................
60
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------
27 Financial Data Schedule. ...................................
99.1 Amended and Restated Limited Liability Company agreement
(Incorporated by reference to Exhibit 99.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1997). ....................................
99.2 Investment and Stockholder agreement (Incorporated by
reference to Exhibit 99.2 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended August 31,
1997). .....................................................
99.3 Registration Rights agreement (Incorporated by reference to
Exhibit 99.3 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997). ...............