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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 28, 1997 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)
(714) 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 27, 1997, 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 $5,548,463 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 27, 1997, there were 14,995,000 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 25, 1997.
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PART 1
ITEM 1. BUSINESS
GENERAL
Capital Pacific Holdings, Inc., together with its subsidiaries, (the
"Company") known until August, 1995 as J.M. Peters Company, Inc., is one of the
leading single-family homebuilders in Southern California; Las Vegas, Nevada;
Austin, Texas; and Phoenix, Arizona where it builds and sells homes targeted to
entry level and move-up buyers. Since 1975, the Company has built and sold in
excess of 10,000 homes in California, principally in Orange County, but also in
the adjacent counties of Los Angeles, San Diego and Riverside. Since 1969,
Durable Homes, Inc. ("Durable"), a wholly owned subsidiary that was acquired by
the Company in 1993 (the "Durable Acquisition"), has built and sold in excess of
8,000 homes, principally in Las Vegas, but also in Laughlin, Nevada. Since 1992,
Clark Wilson Homes, Inc. ("Clark Wilson"), a wholly owned subsidiary that was
acquired by the Company in 1994 (the "Clark Wilson Acquisition"), has built and
sold nearly 1,000 homes, principally in Austin, Texas. During the fiscal year
ended February 28, 1997, the Company, (including unconsolidated joint ventures)
closed 1,140 home and lot sales at an average home sales price of $192,655
(including 297 homes closed in California at an average sales price of $324,286,
299 homes closed in Nevada at an average sales price of $143,372, 346 homes
closed in Texas at an average sales price of $162,732 and 171 homes in Arizona
at an average sale price of $110,752).
In August 1992, Capital Pacific Homes, Inc., a Delaware corporation,
acquired control of the Company in a $47.25 million purchase (the "Acquisition")
from the Resolution Trust Corporation ("RTC"). Capital Pacific Homes, Inc. was
merged with and into the Company effective December 30, 1994.
In August, 1995, the Company changed its name to Capital Pacific
Holdings, Inc. and changed its stock ticker symbol on the American Stock
Exchange ("AMEX") from "JMP" to "CPH." The Company continues to use the J.M.
Peters Company, Inc. name in its marketing materials.
STRATEGY
The Company's long-term strategy includes the following key elements:
(1) Diversifying its geographic markets. The Company believes
that geographic market diversification is a key element in achieving
long-term stability and growth. By acquiring Durable and Clark Wilson
and establishing a metropolitan Phoenix, Arizona operation, the Company
has expanded its geographic reach beyond its Southern California
markets. During the fiscal year ended February 28, 1997, over 50% of the
Company's revenues were generated outside of the Company's Southern
California operations. While the Company has no specific plans to expand
outside the Nevada, Texas, Arizona and Southern California markets, it
may consider expansion to other markets in the future.
(2) Diversifying its product. The Company builds homes targeted
for entry level buyers as well as move-up buyers so that it is able to
deliver cost-effective homes to a broad segment of its potential
customer base. Within Austin, Texas, Clark Wilson serves the entry level
as well as move-up markets. The Phoenix, Arizona operations also serve
the entry level and move-up markets. Within Nevada, Durable focuses on
entry level and first time move-up markets. Through its J.M. Peters
Nevada, Inc. ("JMPN") subsidiary, the Company offers higher-end products
in Nevada. Within Southern California, the Company has products targeted
toward first, second and third time move-up buyers, as well as the
million dollar luxury market.
(3) Enhancing the Company's capital base and sources of financial
liquidity. The Company has diversified sources of financing and will
continue to pursue new financing alternatives in the future. In May,
1994, the Company accessed the public debt capital markets through the
sale of $100,000,000 of 12 3/4% Senior Notes ("Notes") including 790,000
warrants to purchase common stock (the "Offering"). The proceeds from
the offering were used to repay certain debt of the Company, acquire
certain properties and for general working capital purposes. The Company
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also currently has a $40 million recourse and two $25 million
non-recourse secured lines of credit with a bank to provide additional
flexibility. Durable and Clark Wilson have established non-recourse
construction lines of credit totaling $15.0 and $37.6 million,
respectively. Subsequent to the end of fiscal year 1997, the Company's
Arizona operation secured a $10.0 million non-recourse line of credit
and Durable secured a $30.0 million non-recourse line of credit to
replace the existing $15.0 million non-recourse line. The Company
intends to maintain 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. The
Company currently has two new joint ventures with IHP Investment Fund I,
(an advisor to the State of California Public Employees Retirement
System ("CalPERS")) and one with an institutional investor. 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 improve and monitor its
efficiencies.
(5) Minimizing land and inventory risk. The Company carefully
manages 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. The Company 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
prefers to limit each construction phase to 10-15 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 and Arizona.
GEOGRAPHIC MARKETS
At February 28, 1997, the Company owned lots in various stages of
development with respect to approximately 45 projects, including 17 projects
located in the Orange, Los Angeles and Riverside Counties of Southern
California, 9 projects located in Las Vegas, Nevada, 15 projects located in
Austin, Texas and 4 projects located in Phoenix, Arizona. The Company is
currently selling homes in 44 of these projects. The Company's homes currently
range in size from 1,284 to 6,287 square feet in Southern California, from 1,110
to 3,342 square feet in Nevada, from 830 to 4,500 square feet in Texas and from
930 to 3,579 square feet in Arizona. The Company's homes are currently priced
from $148,000 to $1,364,000 in Southern California, from $99,000 to $286,000 in
Nevada, from $66,000 to $320,000 in Texas and from $72,000 to $300,000 in
Arizona. At February 28, 1997, the Company, including unconsolidated joint
ventures, owned 2,087 building sites, including sites with finished homes or
homes under construction (702 in California, 784 in Nevada, 454 in Texas and
147 in Arizona) and controlled an additional 1,240 building sites (158 in
California, 419 in Nevada and 663 in Texas) through options and purchase
contracts.
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DEVELOPMENTS IN PROCESS--CALIFORNIA
The following table sets forth certain information regarding projects
under development in California during fiscal year 1997.
HOMES AVAILABLE FOR
UNITS UNDER CONSTRUCTION FUTURE
NAME AND TOTAL REMAINING AT 2/28/97 CONSTRUCTION UNITS AVG.
LOCATION OF UNITS AT ---------- ------------ CLOSED IN PRICE OF START OF
PROJECT PLANNED 2/28/97 SOLD MODEL SPEC(a) SOLD UNSOLD FY 1997 HOMES(b) CONSTRUCTION
------- ------- ------- ---- ----- ------- ---- ------ ------- -------- ------------
WHOLLY-OWNED:
The Courts
Palmia/Mission Viejo
Orange County 180 56 10 4 23 -- 19 53 $164,000 FY95
Fullerton
Fullerton
Orange County 143 94 4 4 14 -- 72 35 449,000 FY96
Newport Coast
Irvine
Orange County 37 37 -- -- -- -- 37 -- N/A(c) FY97
The Villas
Palmia/Mission Viejo
Orange County 171 64 23 5 18 -- 18 57 214,000 FY96
Rancho Serrano
Temecula
Riverside County 120 16 1 -- 4 -- 11 17 228,500 FY94
Cozumel
La Quinta
Riverside County 86 64 2 5 11 -- 46 5 446,000 FY94
Cayman
La Quinta
Riverside County 40 18 3 1 8 -- 6 3 335,000 FY94
Antigua Custom Lots
La Quinta
Riverside County 73 45 -- -- -- -- 45 4 165,000 N/A
Mulholland Park
Tarzana
Los Angeles County 162(d) 133 22 6 9 -- 96 29 1,032,000 FY96
Mulholland Park
Custom Lots
Tarzana
Los Angeles County 11 3 -- -- -- -- 3 4 400,000 N/A
Lake Hills
Corona
Riverside County 56 8 2 -- 6 -- -- 32 236,000 FY96
Vista Collection
Corona
Riverside County 53(e) 50 -- 2 2 -- 46 3 147,500 FY97
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Harbor Ridge
San Clemente
Orange County 124(f) 80 1 4 7 4 64 32 319,000 FY96
Walnut Estates
Walnut
Los Angeles County 16 16 -- -- -- -- 16 -- 617,000 FY97
Calabasas - Carrera
Calabasas
Los Angeles County 66 3 -- -- -- -- 3 -- N/A(g) N/A
-- - -- -- -- -- -- --
SUBTOTAL
WHOLLY-OWNED 1,338 687 68 31 102 4 482 274
----- ----- -- -- --- -- --- ---
JOINT VENTURES (h):
Harbor View
San Clemente
Orange County 92 1 1 -- -- -- -- 24 329,000 FY95
Canyon Estates
Coto de Caza
Orange County 58 -- -- -- -- -- -- 7 457,000 FY95
Grand Coto Estates
Coto de Caza
Orange County 93 93 -- 3 -- -- 90 -- 625,000 FY98
----- ----- -- -- --- --- --- ----
SUBTOTAL JOINT
VENTURES 243 94 1 3 -- -- 90 31
----- ----- -- -- --- -- --- ----
TOTALS 1,581 781 69 34 102 4 572 305
===== ===== == == === == === ====
(a) Speculative units are unsold homes under construction.
(b) Represents average price of homes closed for projects with units for
sale on February 28, 1997, and estimated average price for other
projects.
(c) The design development process for this project is not sufficiently
advanced to identify a specific average.
(d) Includes 51 lots which were transferred in fiscal year 1998 to a joint
venture with an advisor to CalPERS.
(e) Includes 41 lots the Company had the right to acquire under an option
contract with the seller. The rights under the option contract were sold
by the Company to a third party in May 1997.
(f) Includes 38 lots the Company had the right to acquire under an option
contract with the seller which lots were purchased in May, 1997.
(g) As of February 28, 1997, the Company has not finalized its plans for the
remaining lots. As such, the average selling prices have not been
established.
(h) In fiscal year 1998, the Company entered into a joint venture which
purchased and plans to develop 79 homes on 132 acres of coastal bluff
property in the city of Rancho Palos Verdes. The Company currently plans
to start construction in fiscal year 1998.
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DEVELOPMENTS IN PROCESS--NEVADA
The following table sets forth certain information regarding projects
under development in Nevada during fiscal year 1997.
UNITS HOMES AVAILABLE FOR
NAME AND TOTAL REMAINING UNDER CONSTRUCTION FUTURE UNITS AVG.
LOCATION OF UNITS AT AT 2/28/97 CONSTRUCTION CLOSED IN PRICE OF START OF
PROJECT PLANNED 2/28/97 SOLD MODEL SPEC(a) SOLD UNSOLD FY 1997 HOMES(b) CONSTRUCTION
------- ------- ------- ---- ----- ------- ---- ------ ------- -------- ------------
WHOLLY-OWNED:
White Cliffs
Las Vegas
Clark County 172 -- -- -- -- -- -- 18 $107,000 FY94
The Falls at
Hidden Canyon
North Las Vegas
Clark County 241 27 5 6 16 -- -- 91 111,000 FY95
Spinnaker Bay
Laughlin
Clark County 108 -- -- -- -- -- -- 2 120,000 FY93
Country Meadows
Las Vegas
Clark County 99 37 2 3 6 11 15 43 125,000 FY96
Arbor Grove
Las Vegas
Clark County 165 165 11 4 5 -- 145 -- 120,000 FY98
Talon Pointe
Las Vegas
Clark County 111 111 -- -- -- -- 111 -- N/A (g) FY98
Kew Gardens
Las Vegas
Clark County 70(c) 70 9 3 3 2 53 -- 255,000 FY97
Altezza
Las Vegas
Clark County 128(d) 115 1 3 8 -- 103 13 263,000 FY96
Courtney Ranch
Las Vegas
Clark County 168 146 8 3 13 2 120 22 132,000 FY96
Palatine Hills
Las Vegas
Clark County 135(e) 116 12 4 14 -- 86 19 220,000 FY96
Country Lane
Las Vegas
Clark County 228 152 12 3 4 1 132 45 126,000 FY95
Sequoia
Las Vegas
Clark County 181 -- -- -- -- -- -- 29 122,000 FY95
----- --- --- --- --- --- --- ----
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SUBTOTAL
WHOLLY-OWNED 1,806 939 60 29 69 16 765 282
----- ----- --- -- -- -- --- ---
JOINT VENTURES:
Taos Estates(f)
Las Vegas
Clark County 91 -- -- -- -- -- -- 17 276,000 FY94
----- ---- ---- ---- ---- ---- ---- ---
SUBTOTAL JOINT
VENTURES 91 -- -- -- -- -- -- 17
----- --- --- -- -- --- --- ---
TOTALS 1,897 939 60 29 69 16 765 299
===== === === == == === === ===
(a) Speculative units are unsold homes under construction.
(b) Represents average price of homes closed for projects with units for
sale on February 28, 1997, and estimated average price for other
projects.
(c) Durable owns 35 lots in the Kew Gardens project, and holds options on 35
lots for the remainder of the project. There can be no assurance that
the Company will actually acquire such lots within the option term.
(d) Durable purchased 69 lots in the Altezza project, and holds options on
59 lots for the remainder of the project. There can be no assurance that
the Company will actually acquire such lots within the option term.
(e) Durable purchased 74 lots in the Palatine Hills project, and holds
options on 61 lots for the remainder of the project. Durable purchased 6
of the optioned lots in March 1997. There can be no assurance that the
Company will actually acquire such remaining lots within the option
term.
(f) JMPN and Durable are the general partners.
(g) The design development process for this project is not sufficiently
advanced to identify a specific average.
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DEVELOPMENTS IN PROCESS--TEXAS
The following table sets forth certain information about projects under
development in Texas as of February 28, 1997.
UNITS HOMES AVAILABLE FOR
NAME AND TOTAL REMAINING UNDER CONSTRUCTION FUTURE UNITS AVG.
LOCATION OF UNITS AT AT 2/28/97 CONSTRUCTION(a),(b) CLOSED IN PRICE OF START OF
---------- -------------------
PROJECT PLANNED 2/28/97 SOLD MODEL SPEC(c) SOLD UNSOLD FY 1997 HOMES(d) CONSTRUCTION
- ------- ------- ------- ---- ----- ------- ---- ------ ------- -------- ------------
WHOLLY-OWNED
Cat Hollow
Round Rock
Williamson County 226 97 9 1 2 13 72 52 $155,000 FY94
Circle C Ranch
Austin
Travis County 150 46 6 1 1 6 32 24 155,000 FY93
Cypress Creek
Cedar Park
Williamson County 70 16 3 -- 2 4 7 25 145,000 FY94
North Park
Pflugerville
Travis County 86 -- -- -- -- -- -- 2 125,000 FY93
Ranch at Cypress
Cedar Park
Williamson County 102 34 7 1 2 3 21 26 145,000 FY94
Springbrook
Round Rock
Travis County 389 166 11 2 4 9 140 73 145,000 FY96
Lake Pointe North
Austin
Travis County 46 24 3 1 -- 1 19 19 210,000 FY96
The Settlement
Round Rock
Williamson County 35 1 -- -- 1 -- -- 12 116,000 FY94
Travis Country
Austin
Travis County 286 213 10 1 6 10 186 67 175,000 FY96
Onion Creek
Austin
Travis County 54 43 3 1 3 4 32 11 250,000 FY96
Lake Point South
Austin
Travis County 34 7 2 -- 3 -- 2 19 185,000 FY96
Wildflower
Austin
Travis County 167 167 -- -- -- 22 145 -- 80,000 FY97
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Lake Point 50
Austin
Travis County 169 169 5 2 -- 9 153 -- 160,000 FY96
Lake Point 60
Austin
Travis County 18 17 -- -- -- 3 14 1 185,000 FY96
Lake Point 70
Austin
Travis County 40 40 -- -- -- 7 33 -- 210,000 FY96
Lake Point 80
Austin
Travis County 20 20 1 -- -- -- 19 -- 250,000 FY96
Meadows of Brushy Creek
Round Rock
Williamson County 68 54 3 -- 3 4 44 14 180,000 FY96
Other Projects 4 3 -- -- 1 -- 2 1 N/A(e) N/A
- - -- -- - -- - - --- ---
TOTALS 1,964 1,117 63 10 28 95 921 346
===== ===== == == == == === ===
(a) All projects listed include lot option contracts executed by Clark
Wilson for future lot takedowns.
(b) The total Available for Future Construction includes lots under the
control of Clark Wilson and lots actually owned by Clark Wilson.
(c) Speculative units are unsold homes under construction.
(d) Represents average price of homes closed for projects with units for
sale on February 28, 1997, and estimated average price for other
projects.
(e) As of February 28, 1997, the Company has not finalized its plans for the
remaining lots. As such, average selling prices have not been
established.
DEVELOPMENTS IN PROCESS--ARIZONA
The following table sets forth certain information about projects under
development in Arizona during fiscal year 1997.
UNITS HOMES AVAILABLE FOR
NAME AND TOTAL REMAINING UNDER CONSTRUCTION FUTURE UNITS AVG.
LOCATION OF UNITS AT AT 2/28/97 CONSTRUCTION CLOSED IN PRICE OF START OF
PROJECT PLANNED 2/28/97 SOLD MODEL SPEC(a) SOLD UNSOLD FY 1997 HOMES(b) CONSTRUCTION
------- ------- ------- ---- ----- ------- ---- ------ ------- -------- ------------
WHOLLY-OWNED:
Wildflower
Chandler
Maricopa County 132 4 1 -- 3 -- -- 95 $117,500 FY96
San Marcos
Chandler
Maricopa County 79 77 12 3 25 -- 37 2 147,000 FY97
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Ambrosia at Amberlea
Phoenix
Maricopa County 101 30 2 3 13 -- 12 61 81,000 FY96
Scottsdale Vista Estates
Scottsdale
Maricopa County 54 36 5 -- -- -- 31 13 290,000 FY96
--- --- -- -- -- -- --- --
TOTALS 366 147 20 6 41 -- 80 171
=== === == == == == === ===
(a) Speculative units are unsold homes under construction.
(b) Represents average price of homes closed for projects with units for
sale on February 28 1997, and estimated average price for other
projects.
JOINT VENTURES
The Company conducts its home-building 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.
At February 28, 1997, the Company's joint ventures were as follows:
GENERAL PARTNER/PROJECT NAME UNITS
- ---------------------------- TOTAL UNITS UNITS CLOSED REMAINING
PLANNED IN FY97 AT 2/28/97
------- ------- ----------
CAPITAL PACIFIC HOLDINGS, INC.
JMP Harbor View--Orange County 92 24 1
JMP Canyon Estates--Orange County 58 7 0
--- --- ---
Sub-total 150 31 1
PETERS RANCHLAND COMPANY, INC.
Grand Coto Estates--Orange County (a) 93 0 93
--- --- ---
J.M. PETERS NEVADA, INC./DURABLE HOMES, INC.(b)
Taos Estates--Las Vegas 91 17 0
--- -- --
TOTALS 334 48 94
=== === ===
(a) The Company entered into one new joint venture, with a CalPERS advisor,
for the development of 93 homes in Coto de Caza, California in fiscal
year 1997.
(b) JMPN and Durable are co-general partners in Taos Estates, L.P.
In fiscal year 1998, the Company entered into a new joint venture which
purchased and plans to develop 79 homes on 132 acres of coastal bluff property
in the city of Rancho Palos Verdes, California. The Company currently plans to
start construction in fiscal year 1998. In fiscal year 1998, the Company
established a joint venture with an advisor to CalPERS to develop 51 lots in the
Company's Mulholland Park Project, previously owned solely by the Company.
LAND ACQUISITION
The Company typically purchases and holds entitled 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
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purchases or options entitled land in Nevada, Texas and Arizona in amounts
sufficient to support home production and sales over an 18 month to 36 month
period. The Company does not acquire and hold land for speculative investment.
The following table sets forth the estimated number of lots owned, under
option and controlled as of February 28, 1997:
ESTIMATED NUMBER OF HOUSING UNITS THAT COULD BE
CONSTRUCTED ON LAND CONTROLLED AS OF FEBRUARY 28, 1997(a)
---------------------------------------------------------
UNDER
REGION OWNED OPTION(b) CONTROLLED(c) TOTAL
------ ----- --------- ------------- -----
Southern California 497 79 79 655
Nevada 626 155 264 1,045
Texas 353 663 -- 1,016
Arizona 80 -- -- 80
----- --- --- ----
TOTAL 1,556 897 343 2,796
===== === === =====
(a) Based upon current management estimates, which are subject to change.
(b) There can be no assurance that the Company will actually acquire any
lots under option.
(c) 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.
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 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.
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. Most recently, three of the
Company's Mulholland Park homes won three out of 25 awards for national design,
as chosen by the American Institute of Architects. 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, 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
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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, floorplans, 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 through the Company's wholly owned subsidiary, Newport
Design Center ("Newport Design") or through the homebuyer's own consultants.
DEVELOPMENT AND CONSTRUCTION
The Company acts as the general contractor for the construction of its
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 projects in several phases generally
averaging approximately 10-15 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 eight months for larger homes and four to
five months for smaller homes and within its Nevada, Texas and Arizona
developments within three to four months.
SALES AND MARKETING
The Company typically builds, furnishes and landscapes model homes for
each 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 appropriate, the
Company also uses community, regional and cooperative brokers to sell its homes.
Company 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
12
13
information regarding other products in the area, the variety of financing
programs available, construction schedules and marketing and advertising plans.
The Company generally opens on-site sales offices before the
construction of the model homes are completed. These on-site sales offices are
utilized as temporary sales centers to commence the sales process to potential
customers. Potential homebuyers may reserve a home by submitting a refundable
deposit (a reservation fee) 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 fee 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, radio, television and magazine advertisements,
brochures, direct mail and the placement of strategically located sign boards in
the immediate areas of its projects. 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. All
advertising materials and brochures are designed in-house through the Company's
advertising department.
The Company has established a highly sophisticated website on the
Internet. The website address is http://www.cph-inc.com. The Company utilizes
the Internet through its website address to augment its advertising and
promotional activities. The website receives an average of 40,000 "hits" per
month. To the Company's knowledge, it is the only homebuilder with virtual
reality houses on its website.
The Company provides flooring and other amenities and upgrades to its
homebuyers in California through its wholly-owned subsidiary, Newport Design,
and through its other design centers in Nevada and Texas.
BACKLOG AND INVENTORY
The Company typically pre-sells homes prior to and during construction
through purchase contracts requiring earnest money deposits or reservations
requiring reservation fees. Generally reservation fees are refundable, but
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 fee and is
removed when such contracts or reservations are canceled as described above or
the home purchase escrow is closed. At February 28, 1997, the Company had a
backlog in California of 98 homes with an aggregate sales value of $51.9
million, compared to a backlog of 140 homes with an aggregate sales value of
$43.2 million at February 29, 1996. At February 28, 1997, the Company had a
total backlog in Nevada of 78 homes with an aggregate sales value of $12.6
million, compared to a backlog of 64 homes with an aggregate sales value of $8.9
million at February 29, 1996. At February 28, 1997, the Company had a total
backlog in Texas of 159 homes with an aggregate sales value of $24.4 million,
compared to a backlog of 165 homes with an aggregate sales value of $26.2
million at February 29, 1996. At February 28, 1997, the Company had a backlog in
Arizona of 31 units with an aggregate sales value of $4.4 million, compared to a
backlog of 71 units with an aggregate sales value of $8.6 million at February
29, 1996.
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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 1996. Management believes that the Company's
backlog at any given time is a good indicator of the number of units that will
be closed in the four months following such date:
ENDING BACKLOG
NET NEW HOMES --------------
ORDERS CLOSED UNITS ($000s)
------ ------ ----- -------
Fiscal Year 1997
1st Quarter 376 252 564 $119,963
2nd Quarter 240 332 472 93,694
3rd Quarter 225 279 418 88,628
4th Quarter 198 250 366 93,246
--- ---
Total Fiscal Year 1997 1,039 1,113
===== =====
Fiscal Year 1996
1st Quarter 324 245 511 $130,586
2nd Quarter 234 224 521 130,266
3rd Quarter 264 236 549 123,782
4th Quarter 360 469 438 86,899
--- ---
Total Fiscal Year 1996 1,182 1,174
===== =====
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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 Fairway Financial Company,
established in fiscal year 1995.
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 Nevada and Texas homebuyers with
policies issued by third-parties that extend protection beyond the Company's
warranty period. Statutory 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 home-building 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 industry is 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.
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.
EMPLOYEES
As of April 30, 1997, the Company employed 217 persons full-time,
compared to 288 persons at April 30, 1996. Of these, 18 were in executive
positions, 51 were engaged in sales activities, 111 in project management
activities and 37 in administrative and clerical activities. None of the
Company's employees is represented by a union and the Company considers its
employee relationships to be good.
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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
houses 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. The Company has established steel
framing operations in Las Vegas, Nevada to explore new production methods.
POTENTIAL TRANSACTIONS; SUBSEQUENT EVENTS
During September 1996 through January 1997, the Company engaged in
negotiations with a potential institutional investor over possible equity
contributions and joint venture financing for the Company. These negotiations
were terminated in January 1997. As a result of these negotiations, the Company
incurred increased general and administrative expenses which adversely affected
profitability. The negotiations and the expectations of the Company that a
transaction would be concluded prior to the fiscal year 1997 year-end delayed
plans for additional joint venture or other alternate financing and resulted in
use of the Company's bank lines to approximately the limits imposed by the
Indenture. The cumulative effect strained Company cash flows, slowed production
and caused delays in paying subcontractors. This resulted in fewer closings to
offset increased interest costs and increased general and administrative costs.
With the termination of the negotiations, the Company has addressed these issues
by entering into two new joint ventures (see "Joint Ventures" above),
negotiating a new line of credit for its Arizona and Nevada operations (see
"Liquidity and Capital Resources" below) and decreasing its accounts payable
from $21.4 million at year end to approximately $4 million as of May 27, 1997.
On May 5, 1997, the Company announced that it had retained Morgan
Stanley & Co., Inc. to advise the Company on ways to enhance shareholder value.
Morgan Stanley will provide advice and assistance in connection with a possible
sale, business combination or acquisition transactions involving some or all of
the assets or equity of the Company. There can be no assurance that Morgan
Stanley's retention will lead to a transaction, or that any such transaction
will in fact enhance shareholder value.
ITEM 2. PROPERTIES
The Company owns two office facilities and leases other facilities in
California, Nevada, Texas and Arizona. The Company owns its principal offices,
which are located at 4100 MacArthur Blvd., Suite 200, Newport Beach, California
92660, where the Company occupies approximately 20,000 out of a total 45,000
square feet of space available. The majority of the remaining office space is
leased to third parties.
Durable owns a 19,800 square foot office building in Las Vegas, Nevada.
Approximately 10,000 square feet are used as the principal offices of Durable
and JMPN. 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 such litigation cannot be presently ascertained.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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.
FISCAL 1997 HIGH LOW
- ----------- ---- ---
Fourth Quarter 3.25 2.63
Third Quarter 2.88 2.13
Second Quarter 3.88 2.44
First Quarter 3.94 3.19
FISCAL 1996
- -----------
Fourth Quarter 4.38 2.13
Third Quarter 3.25 2.25
Second Quarter 3.44 2.00
First Quarter 2.81 2.00
Subject to Indenture and loan agreement covenants, 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 by the Company. There can be no assurance that such limit may
not become more restrictive as the result of any future losses of the Company.
During the last three years, no dividends have been paid.
On April 30, 1997, the Company had approximately 1,000 beneficial
holders of its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information of the Company
is presented for the fiscal years ended February 28, 1997, February 29, 1996,
February 28, 1995, February 28, 1994 and February 28, 1993. 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.
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(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
LAST DAY OF FEBRUARY
--------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Total revenues(1) $ 75,702 $91,066 $143,089 $169,018 $212,415
-------- ------- -------- -------- --------
Cost and expenses:
Cost of homes and land 68,257 73,348 112,152 138,707 174,142
Adjustments to carrying value
of real estate projects and
investments in partnerships 75,476 -- -- --
Interest expense 8,538 418 -- --
Provision for litigation
judgment -- -- 1,950 --
Selling, general and
administrative 9,764 12,322 22,314 26,126 34,404
-------- ------- -------- -------- ------
Total costs and expenses 162,035 86,088 136,416 164,833 3,869
-------- ------- -------- -------- ------
Minority interest -- 4,332 5,883 1,080 (192)
-------- ------- -------- -------- ------
Income (loss) before income taxes
and extraordinary items (86,333) 646 790 3,105 4,061
Income tax (benefit) expense (1,792) -- 216 503 539
-------- ------- -------- -------- ------
Income (loss) before extraordinary
items (84,541) 646 574 2,602 3,522
Extraordinary items:
Extraordinary gain for debt
retired at less than face
value, net of taxes -- 4,268 3,075 -- --
-------- ------- -------- ---------- ------
Net income (loss) $(84,541) $ 4,914 $ 3,649 $ 2,602 $3,522
======== ======= ======== ========== ======
Net income (loss) per common share:
Before extraordinary items $ (6.05) $ .04 $ .04 $ .17 $ .23
Extraordinary items -- .30 .20 -- --
-------- ------- -------- ---------- ------
Net income (loss) per share(2) $ (6.05) $ .34 $ .24 $ .17 $ .23
======== ======= ======== ========== ======
AT THE LAST DAY OF FEBRUARY
---------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Real estate projects $99,636 $105,696 $167,807 $227,194 $233,562
Total assets 115,551 121,954 215,175 266,508 271,918
Notes payable 38,433 34,709 29,391 63,929 73,474
Senior Unsecured Notes Payable -- -- 100,000 100,000 100,000
Due to parent 1,702 -- -- -- --
Stockholders' equity 48,015 55,594 60,744 63,346 66,868
OPERATING DATA (in units):
Homes closed 115 404 824(3) 1,174 1,113
Homes contracted for 126 478 835(4) 1,182 1,039
Homes in backlog 92 305 432 438 366
- -----------------
(1) Total revenues excluding unconsolidated joint ventures.
(2) The weighted average number of shares outstanding is 14,995,000 for the
years ended February 28, 1997, February 29, 1996 and February 28, 1995,
14,488,000 for the year ended February 28, 1994 and 13,980,000 for the
year ended February 28, 1993.
(3) Excludes homes closed by Clark Wilson for the six month period prior
to the Clark Wilson Acquisition.
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19
(4) Excludes 116 homes in Clark Wilson's backlog at August 31, 1994 (prior
to the Clark Wilson acquisition).
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20
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) 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 for permanent
mortgages, interest rate levels and the demand for housing; supply levels of
land, labor and materials; difficulties in obtaining permits or approvals from
governmental authorities; difficulties in marketing homes; regulatory and
weather and other environmental uncertainties; competitive influences; and the
outcome of pending and future legal claims and proceedings.
RESULTS OF OPERATIONS--GENERAL
FISCAL YEAR 1997 (YEAR ENDED FEBRUARY 28, 1997) COMPARED TO FISCAL YEAR 1996
(YEAR ENDED FEBRUARY 29, 1996)
Net Income. The Company recorded net income of $0.9 million in fiscal
year 1997 or $0.23 per share, compared to net income of $2.6 million, or $0.17
per share, for fiscal year 1996. These results were due to the factors described
below.
Revenues from Sales of Homes. Total revenues including unconsolidated
joint ventures were $218.7 million for fiscal 1997 compared to $208.4 million
for fiscal 1996. Revenues from housing sales for fiscal year 1997 increased by
26.9% to $207.9 million from $163.8 million in fiscal year 1996; the revenues
figures for housing sales for fiscal year 1997 and fiscal year 1996 do not
include closings from the unconsolidated joint ventures. This revenue increase
was due to an increase in the average sales price during the fiscal year. Home
closings for fiscal year 1997 were 1,113 (which includes 31 homes closed in
unconsolidated joint ventures) compared to 1,174 homes (which includes 115 homes
closed in unconsolidated joint ventures) for fiscal year 1996, a decrease of 61
homes which, nevertheless, resulted in an increase in total revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal year 1997 of $33 million increased $6.9
million over fiscal year 1996. This increase was primarily due to the increased
number of projects being marketed in California and Texas.
Minority Interest. Minority interest expense for fiscal 1997 of $198
thousand decreased $902 thousand from fiscal 1996. This decrease was due to a
reduced number of consolidated joint venture home closings in fiscal year 1997.
For fiscal 1997, consolidated joint venture closings totaled 17 units versus the
75 units closed in fiscal 1996.
Backlog. During the fiscal year ended February 28, 1997, the Company
recorded 1,039 net orders (home sales contracted for less cancellations), which
was 143 homes lower than fiscal year 1996. The Company had $93.2 million in its
backlog (homes under contract but not closed) at February 28, 1997, which was an
increase of $6.3 million over the Company's backlog at February 29, 1996. The
Company had 366 homes in its backlog at February 28, 1997, which was a decrease
of 74 homes over the Company's backlog at February 29, 1996. As of April 30,
1997, the Company had $106.3 million consisting of 438 homes in its backlog.
FISCAL YEAR 1996 (YEAR ENDED FEBRUARY 29, 1996) COMPARED TO FISCAL YEAR 1995
(YEAR ENDED FEBRUARY 28, 1995)
General. The results of operations of the Company for the fiscal year
ended February 28, 1995, do not include the full year of Clark Wilson's results
of operations due to the fact that the Clark Wilson Acquisition did not occur
until the start of the third quarter of fiscal year 1995.
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21
Net Income. The Company recorded net income of $2.6 million in fiscal
year 1996, or $0.17 per share, compared to a net income after extraordinary
items of $3.6 million, or $0.24 per share, for fiscal year 1995. Fiscal year
1995 net income of $3.6 million includes $3.1 million (net of tax), or $0.20 per
share, extraordinary gain due to the resolution of project financing at less
than the face amount of the debt. There was no extraordinary gain in fiscal year
1996. These results were due to the factors discussed below.
Revenues from Sales of Homes. Revenues from housing sales for fiscal
year 1996 of $163.8 million increased $24.7 million, or 17.7%, from fiscal year
1995. This increase was due to a greater number of home closings during the
fiscal year. Home closings for fiscal year 1996 were 1,174 (which includes 115
homes closed in unconsolidated joint ventures) compared to 824 homes (which
includes 3 homes closed in unconsolidated joint ventures) for fiscal year 1995,
an increase of 350 homes. This increased activity was primarily due to increased
closings in California, and a full year of Clark Wilson activity compared to six
months of Clark Wilson activity in the prior fiscal year. The revenues figures
for fiscal year 1996 and fiscal year 1995 do not include closings from the
unconsolidated joint ventures. Total revenues from unconsolidated joint ventures
were $44.6 million for fiscal 1996 compared to $900 thousand for fiscal 1995.
Had these closings been included in the fiscal year 1996 and fiscal year 1995
revenue figures, fiscal year 1996 revenues from home closings would be $208.4
million, reflecting an increase of $68.4 million in revenues, or an increase of
48.8%, from fiscal year 1995 revenues of $140 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal year 1996 of $26.1 million increased $3.8
million over fiscal year 1995. This increase was due to the increased closings
and number of projects being marketed in California and a full year of Clark
Wilson activity (compared to a half year in fiscal 1995).
Minority Interest. Minority interest expense for fiscal year 1996 of
$1.1 million decreased $4.8 million from fiscal year 1995. This decrease was
due to a reduced number of joint venture home closings in fiscal year 1996. For
fiscal year 1996, joint venture closings totaled 75 units versus the 264 units
closed in fiscal year 1995.
Backlog. During the fiscal year ended February 29, 1996, the Company
recorded 1,182 net orders (home sales contracted for less cancellations), which
was 347 homes higher than fiscal year 1995. The Company had 438 homes in its
backlog (homes under contract but not closed) at February 29, 1996, which was an
increase of 6 homes over the Company's backlog at February 28, 1995.
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.
The Company has principally used secured recourse and non-recourse bank
financing, bond financing and financing provided by an advisor to CalPERS and
other joint venture partners for overhead, acquisition, development and
construction financing for individual projects or phases of projects.
In May, 1994 the Company completed the sale of $100,000,000 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 proceeds are projected to provide sufficient available liquidity, when
combined with additional financing permitted under the Indenture, joint ventures
and cash flow from operations, to fund the Company's current and projected
acquisition, development and construction activities.
21
22
As of February 28, 1997, the Company had a $40 million recourse and two
$25 million non-recourse secured lines of credit with a bank. The terms of the
various credit facilities expire on dates ranging from October 1, 1997, through
March 31, 1999. The Company is currently negotiating extensions to all
facilities due within one year. The facilities are secured by liens on various
completed or under construction homes and/or lots held by the Company. The
credit agreements contain certain covenants, including covenants that require
the Company to comply with certain operating and reporting requirements and
maintain certain financial levels and ratios. The credit agreements also define
certain events that constitute events of default. The bank is entitled to
payments out of the proceeds of its collateral prior to any holders of unsecured
indebtedness, including the Notes.
Durable and Clark Wilson also have non-recourse lines of credit to
facilitate construction activity. Durable has (subsequent to the end of fiscal
year 1997) secured a $30.0 million non-recourse line of credit to replace its
existing $15.0 million non-recourse line. Borrowings under this facility bear
interest at prime plus one and one-quarter percent. Clark Wilson has secured
several non-recourse lines of credit in the aggregate amount of $37.5 million.
The term of the commitments under these facilities will expire from May 31, 1997
through July 19, 1998. Borrowings under these facilities bear interest from
prime plus one-half percent to prime plus one percent. Clark Wilson is currently
negotiating extensions on all facilities due within one year. Subsequent to
February 28, 1997, the Company's Arizona operation secured a $10.0 million
non-recourse line of credit.
The Indenture contains restrictions on the incurring of indebtedness
which affect the availability of these bank facilities based on various measures
of the financial performance of the Company. Subject to such restrictions, the
bank facilities will be available to augment cash flow from operations, joint
venture funds and the proceeds of the Offering to fund the Company's operations.
COMPANY CREDIT FACILITIES
($ Millions)
Amount Amount
Borrower As of February 28, 1997 As of May 28, 1997
- -------- ----------------------- ------------------
Company $ 40.0 recourse $ 40.0 recourse
Company 25.0 non-recourse 25.0 non-recourse
Company 25.0 non-recourse 25.0 non-recourse
Clark Wilson 37.5 non-recourse 37.5 non-recourse
Durable 15.0 non-recourse 30.0 non-recourse
Arizona -- 10.0 non-recourse
------ ------
TOTAL $142.5 $167.5
====== ======
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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
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
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 CHARGES
Operating results during fiscal year 1997 were adversely affected by
asset impairment charges totaling $2,272, related to the write-off of
operational start up costs for the Company's operations in Arizona, the
write-off of certain redesign and materials costs previously capitalized to
certain low margin projects in Nevada and certain other costs.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted by the
Company on February 28, 1998. At that time, the Company will be required to
change the method used to compute earnings per share and to restate all prior
periods presented. Under the new requirements primary earnings per share will
be replaced with basic earnings per share. Basic earnings per share excludes
the dilutive effect of common stock equivalents, including stock options. Had
earnings per share been calculated under the provisions of the new standard,
both basic and diluted earnings per share would be the same as net income per
share as reflected in the accompanying consolidated statements of income for
each of the three years in the period ended February 28, 1997.
23
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CAPITAL PACIFIC HOLDINGS, INC.
Reports of Independent Public Accountants
Consolidated Balance Sheets as of February 29, 1996 and February 28,
1997
Consolidated Statements of Operations for the years ended February 28,
1995, February 29, 1996 and February 28, 1997.
Consolidated Statements of Stockholders' Equity for the years ended
February 28, 1995, February 29, 1996 and February 28, 1997.
Consolidated Statements of Cash Flows for the years ended February 28,
1995, February 29, 1996 and February 28, 1997.
Notes to Consolidated Financial Statements
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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
29, 1996 and February 28, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended February 28, 1997. 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 (Note 1), which statements
reflect total assets and total revenues of 4 and 38 percent at February 28,
1995, 1 and 1 percent at February 29, 1996, and 1 and 1 percent at February 28,
1997, respectively, of the consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to the amounts included for those entities, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 29, 1996 and February 28, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended February 28, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Orange County, California
May 29, 1997
25
26
INDEPENDENT AUDITORS' REPORT
To the Partners
JMP Canyon Estates, L.P.
We have audited the balance sheets of JMP Canyon Estates, L.P., a California
limited partnership (the "Partnership"), as of December 31, 1996 and 1995, and
the related statements of operations, partners' capital and cash flows for the
years ended December 31, 1996 and 1995 and the period July 27, 1994 (inception)
through December 31, 1994 (not presented separately herein). 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audit provides 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 JMP Canyon Estates, L.P. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995 and the period July 27, 1994
(inception) through December 31, 1994, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
February 28, 1997
26
27
INDEPENDENT AUDITORS' REPORT
To the Partners
JMP Harbor View, L.P.
We have audited the balance sheets of JMP Harbor View, L.P., a California
limited partnership (the "Partnership"), as of December 31, 1996 and 1995, and
the related statements of partners' capital and cash flows for the years ended
December 31, 1996 and 1995 and the period December 13, 1994 (inception) through
December 31, 1994 (not presented separately herein). 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audit provides 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 JMP Harbor View, L.P. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995 and the period December 13, 1994
(inception) through December 31, 1994, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
February 28, 1997
27
28
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
FEBRUARY 29, FEBRUARY 28,
1996 1997
--------- --------
CASH AND CASH EQUIVALENTS $ 13,850 $ 11,434
RESTRICTED CASH 1,429 1,417
ACCOUNTS AND NOTES RECEIVABLE 4,421 4,801
REAL ESTATE PROJECTS 227,194 233,562
PROPERTY, PLANT AND EQUIPMENT 6,685 7,746
PREPAID EXPENSES AND OTHER ASSETS 12,929 12,958
--------- ---------
Total Assets $ 266,508 $ 271,918
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 36,339 31,216
NOTES PAYABLE 63,929 73,474
SENIOR UNSECURED NOTES PAYABLE 100,000 100,000
--------- --------
Total liabilities 200,268 204,690
--------- --------
MINORITY INTEREST 2,894 360
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 per share;
30,000,000 shares authorized;
14,995,000 issued and outstanding 1,500 1,500
Additional paid-in capital 211,888 211,888
Accumulated deficit (150,042) (146,520)
---------- ----------
Total stockholders' equity 63,346 66,868
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 266,508 $ 271,918
========= =========
See accompanying notes to consolidated financial statements.
28
29
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED
-----------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
REVENUES:
Sales of homes and land $139,123 $163,768 $207,869
Income (loss) from unconsolidated joint ventures (7) 1,560 259
Interest and other income, net 3,973 3,690 4148
-------- -------- --------
143,089 169,018 212,415
-------- -------- --------
COSTS AND EXPENSES:
Cost of homes and land 112,152 138,707 174,142
Selling, general and administrative 22,314 26,126 34,404
Provision for litigation judgment 1,950 -- --
Minority interest 5,883 1,080 (192)
Interest -- -- --
-------- -------- --------
142,299 165,913 208,354
-------- -------- --------
Income before provision for income
taxes and extraordinary gain 790 3,105 4,061
Provision for income taxes 216 503 539
-------- -------- --------
Income before extraordinary gain 574 2,602 3,522
Extraordinary gain for debt retired at less than
face value, net of taxes 3,075 -- --
-------- -------- --------
Net income $ 3,649 $ 2,602 $ 3,522
======== ======== ========
NET INCOME PER COMMON SHARE:
Before extraordinary gain $ .04 $ .17 $ .23
Extraordinary gain .20 -- --
-------- -------- --------
Net income $ .24 $ .17 $ .23
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES 14,995 14,995 14,995
====== ====== ========
See accompanying notes to financial statements.
29
30
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED FEBRUARY 28, 1997
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
----- ------- -------- -----
BALANCE, February 28, 1994 $1,500 $210,387 $(156,293) $ 55,954
Issuance of warrants in connection with
offering of senior unsecured notes payable -- 1,501 -- 1,501
Net income -- -- 3,649 3,649
------ -------- --------- --------
BALANCE, February 28, 1995 1,500 211,888 (152,644) 60,744
Net income -- -- 2,602 2,602
------ -------- --------- --------
BALANCE, February 29, 1996 1,500 211,888 (150,042) 63,346
Net income -- -- 3,522 3,522
------ -------- --------- --------
BALANCE, February 28, 1997 $1,500 $211,888 $(146,520) $ 66,868
====== ======== ========= ========
See accompanying notes to financial statements.
30
31
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997
-------- -------- --------
OPERATING ACTIVITIES:
Net income $ 3,649 $ 2,602 $ 3,522
Adjustments to reconcile net income to net
cash provided by (used in) operating activities--
Extraordinary gain, net (3,075) -- --
Provision for litigation judgment 1,950 -- --
Depreciation and amortization 794 1,390 1,876
Changes in Assets and Liabilities
Net of the Effects of the Purchase of Clark
Wilson, Inc. and Durable Homes, Inc.:
(Increase) decrease in accounts and
notes receivable (2,168) (603) (380)
Increase in real estate projects (60,547) (57,109) (6,368)
(Increase) decrease in prepaid expenses
and other assets (470) (2,013) (1,131)
Increase in accounts payable
and accrued liabilities 2,449 14,823 (5,123)
-------- -------- --------
Net cash provided by (used in)
operating activities (57,418) (40,910) (7,604)
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition of Clark Wilson Homes, Inc. (3,631) -- --
Purchases of property and equipment (5,982) (1,269) (2,937)
(Decrease) increase in investments in partnerships (1,949) 1,635 1,114
-------- -------- --------
Net cash provided by (used in) investing
activities (11,562) 366 (1,823)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from senior unsecured notes
payable, net 95,834 -- --
Proceeds from notes payable 59,406 131,572 143,596
Principal payments of notes payable (63,425) (98,949) (134,051)
Minority interest in joint ventures (10,435) (630) (2,534)
-------- -------- --------
Net cash provided by (used in)
financing activities 81,380 31,993 7,011
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 12,400 (8,551) (2,416)
CASH AND CASH EQUIVALENTS, beginning of
period 10,001 22,401 13,850
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 22,401 $ 13,850 $ 11,434
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH AND NONCASH ACTIVITIES:
Cash paid during the year for interest $ 6,556 $17,939 7,212
Cash paid during the year for income taxes 20 1,479 500
Residential inventory surrendered in exchange for
debt forgiveness 1,048 -- --
Note payable and accrued interest reduced by debt
forgiveness 4,713 -- --
Promissory note payable issued to seller in connection
with the acquisition of Clark Wilson Homes, Inc. 2,500 -- --
Issuance of warrants in connection with offering of
senior unsecured notes payable 1,501 -- --
31
32
Land acquisition financed by purchase money
trust deeds 2,249 -- --
Debt assumed by consolidated partnership for land
contributed -- 1,915 --
See accompanying notes to financial statements.
32
33
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
In August, 1992, Capital Pacific Homes, Inc., a Delaware corporation,
acquired from San Jacinto F.A. ("San Jacinto") (i) common stock of J.M. Peters
Company, Inc., known since August, 1995 as Capital Pacific Holdings, Inc.,
together with its subsidiaries, (the "Company") representing 85.8 percent of the
total outstanding shares of Common Stock of the Company and (ii) all debt of the
Company owed to San Jacinto (the "CPH acquisition"). Effective December 31,
1994, Capital Pacific Homes, Inc. merged with and into the Company (the
"Merger") pursuant to an Agreement and Plan of Merger, dated November 21, 1994
(the "Merger Agreement") with the Company surviving the Merger.
In August, 1995, the Company changed its name to Capital Pacific
Holdings, Inc. The Company continues to use the J.M. Peters Company, Inc. name
in its marketing materials and is qualified to do business in California as J.M.
Peters Company, Inc.
The Company is a regional builder of single-family homes with operations
throughout selected metropolitan areas of California, Nevada, Texas and
Arizona. Approximately 47, 18 ,26 and 9 percent of the Company's total revenues
(including the unconsolidated joint ventures) were in California, Nevada, Texas
and Arizona, respectively, for the year ended February 28, 1997. Economic growth
in Southern California during the early 1990's lagged behind that of Northern
California and behind that of the late 1980's. Conditions in the Southern
California areas of the Company's operations have recently improved. There can
be no assurances that such improvements will continue in the future.
The Company's business, and the markets which it serves in California,
Nevada, Texas and Arizona, are affected by local, national and world economic
conditions and events, in particular by the level of mortgage interest rates and
consumer confidence. 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.
On May 5, 1997, the Company announced that it had retained Morgan
Stanley & Co., Inc. to advise the Company on ways to enhance shareholder value.
Morgan Stanley will provide advice and assistance in connection with a possible
sale, business combination or acquisition transactions involving some or all of
the assets or equity of the Company. There can be no assurance that Morgan
Stanley's retention will lead to a transaction, or that any such transaction
will in fact enhance shareholder value.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from estimated amounts.
33
34
Acquisition of Clark Wilson Homes, Inc.
Effective September 1, 1994, the Company acquired all of the common
stock of Clark Wilson Homes, Inc. ("Clark Wilson") and Fairway Financial
Corporation ("Fairway") for a total purchase price, including direct costs of
the acquisition, of $6.1 million. The Company paid $3.5 million cash and issued
a $2.5 million contingent promissory note to the seller. The amount due under
such note is fully dependent upon the performance of Clark Wilson. As of
February 28, 1997, the Company has paid $0.6 million of the principal balance
of the promissory note. The transaction was accounted for as a purchase. The
results of the operations for Clark Wilson and Fairway have been included in the
consolidated financial statements of the Company from the effective date of the
acquisition. Clark Wilson builds single family homes in Texas. Fairway assists
Clark Wilson homebuyers with obtaining financing for new home purchases.
The allocation of purchase price at September 1, 1994, was as follows
(in thousands):
Cash and cash equivalents $ 95
Real estate inventories 11,055
Other assets 1,362
Goodwill 3,803
Accounts payable and other liabilities (2,759)
Notes payable (7,425)
-------
Total $ 6,131
=======
Principles of Consolidation and Minority Interest in Joint Ventures
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries and investments for which it has
control. All other investments (See Note 4) are accounted for on the equity
method. All significant intercompany balances and transactions have been
eliminated in consolidation.
Effective upon the closing date of the purchase transaction with San
Jacinto, Peters Ranchland Company, Inc., a wholly owned subsidiary of the
Company, as general partner, entered into four limited partnership agreements
("Joint Ventures") with IHP Investment Fund I, L.P. ("IHP") (an advisor to the
State of California Public Employees Retirement System ("CalPERS")), the limited
partner to pursue the development of various real properties of the Company,
with such properties transferred to the Joint Ventures concurrently with the
closing. Peters Ranchland Company, Inc. and IHP each had a 50% interest in each
Joint Venture. The financial statements of the Joint Ventures have been
consolidated herein. As of February 28, 1997, home building operations of these
Joint Ventures have been completed and all homes sold.
Two additional partnerships with IHP (J.M.P. Canyon Estates, L.P. and
J.M.P. Harbor View L.P.), were entered into during fiscal 1995 and have been
constructing homes and had closings in fiscal years 1996 and 1997. These two
projects were completed in 1997. In fiscal year 1997, the Company entered
into a further additional partnership with IHP, Grand Coto Estates, L.P. These
partnerships are accounted for on the equity method of accounting and are not
consolidated.
Long-Lived Assets
Effective February 29, 1996, the Company adopted 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. For purposes of applying SFAS 121, real estate
under development is considered to be held for use whereas finished units are
considered assets to be disposed of. The effect of adoption was not material to
the Company's financial statements.
34
35
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 were $6,685,000 and $7,746,000 (net of
accumulated depreciation of $3,217,000 and $3,817,000, respectively) as of
February 29, 1996 and February 28, 1997, 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 included in cost and expenses 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 changes
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. 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
change.
Revenue Recognition
The Company's accounting policies follow specific provisions of the
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate," which specifies minimum down payment requirements, financing terms
and other certain 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
Effective March 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, which requires the liability
method of accounting for income taxes.
The Company was from the time of the CPH acquisition until the end of
calendar year 1994 part of the CPH consolidated tax group. Effective December
31, 1994, CPH merged with and into the Company. Beginning with the tax year
ended December 31, 1995, the Company has filed its own consolidated tax returns.
35
36
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.
Impact of Recently Issued Accounting Standards
In October 1995, the FASB issued 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. The Company has not issued any employee stock options
or shares under stock purchase plans which are currently outstanding.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted by the
Company on February 28, 1998. At that time, the Company will be required to
change the method used to compute earnings per share and to restate all prior
periods presented. Under the new requirements primary earnings per share will
be replaced with basic earnings per share. Basic earnings per share excludes
the dilutive effect of common stock equivalents, including stock options. Had
earnings per share been calculated under the provisions of the new standard,
both basic and diluted earnings per share would be the same as net income per
share as reflected in the accompanying consolidated statements of income for
each of the three years in the period ended February 28, 1997.
Reclassifications
Certain reclassifications have been made to certain prior year balances
in order to conform with the current year presentation.
Asset Impairment Charges
Operating results during fiscal year 1997 were adversely affected by
asset impairment charges totaling $2,272, related to the write-off of
operational start up costs for the Company's operations in Arizona, the
write-off of certain redesign and materials costs previously capitalized to
certain low margin projects in Nevada and certain other costs.
2. RESTRICTED CASH
The Company has restricted cash totaling $1,429,000 and $1,359,000 as of
February 29, 1996 and February 28, 1997, respectively. Included in these amounts
for fiscal 1996 and 1997 is $500,000, which is held as collateral for the
Company's bonding obligations. The balance of restricted cash are deposits to
various municipalities, banks, and utilities to guarantee future performance of
development obligations.
3. REAL ESTATE PROJECTS
Real estate projects consist of the following at February 29, 1996
and February 28, 1997 (in thousands):
1996 1997
---- ----
Land and improvements under construction $191,025 $186,172
Completed residential homes 18,374 30,038
Completed model homes 17,795 17,352
-------- --------
$227,194 $233,562
======== ========
Total interest costs incurred during the years ended February 28, 1995,
February 29, 1996 and February 28, 1997 were $11,810,000, $18,261,000 and
$22,640,000, respectively, of which $11,810,000, $18,261,000 and $22,640,000,
respectively, were capitalized.
36
37
4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company is a general partner and has a 50 percent ownership in four
unconsolidated entities at February 28, 1997. The Company's investments are as
follows at February 29, 1996 and February 28, 1997 (in thousands):
1996 1997
---- ----
Bay Hill Escrow $ 177 $ 183
JMP Canyon Estates L.P. 966 125
JMP Harbor View L.P. 1,336 43
Grand Coto Estates, L.P. 761
------ ------
$2,479 $1,112
====== ======
The Company uses the equity method of accounting for its investments in
these unconsolidated 50 percent-owned entities. The accounting policies of the
entities are substantially the same as those of the Company. Investments in
these entities are included in prepaid expenses and other assets in the
consolidated balance sheets.
Following is summarized, unaudited combined financial information for
the unconsolidated entities at February 29, 1996 and February 28, 1997 (in
thousands):
ASSETS
1996 1997
---- ----
Cash $ 1,370 $ 386
Real estate projects 5,647 9,337
Other assets 236 604
------- -------
$ 7,253 $10,327
======= =======
LIABILITIES AND EQUITY
1996 1997
---- ----
Accounts payable and other liabilities $ 3,560 $ 6,926
Equity
The Company 2,479 1,112
Others 1,214 2,289
------- -------
3,693 3,087
------- -------
$ 7,253 $10,327
======= =======
INCOME STATEMENT
1996 1997
---- ----
Sales of homes and land $44,695 $11,201
Interest and other income, net (71) 425
------- -------
44,624 11,626
------- -------
Costs and expenses 38,981 10,627
------- -------
Net income (loss) $ 5,643 $ 999
======= =======
37
38
5. NOTES PAYABLE
Notes payable consist of the following at February 29, 1996 and February
28, 1997 (in thousands):
1996 1997
---- ----
Promissory notes collateralized by deeds of trust, including
interest varying from 9.5 percent to prime plus one percent $ 3,661 $ 3,680
Notes payable to bank, at banks prime rate plus one percent,
maturing December 1996 241 --
Notes payable to bank, including interest at prime plus 2.5
percent, maturing June 7, 1997 1,915 --
Notes payable to banks, including interest varying from prime plus
one percent to prime plus two percent maturing between May 31, 1997
and March 31, 1999 secured by certain real estate inventories on a
non-recourse basis 30,158 32,233
Notes payable to bank, including interest at prime plus one percent
with the term of the commitment reducing commencing March 31, 1998
secured by certain real estate inventories on a recourse basis 25,454 35,656
Contingent promissory note payable to previous owner of Clark
Wilson secured by Stock Pledge Agreement on a non-recourse basis, under which
the amounts due, including interest at 8 percent,
are fully dependent upon the performance of the entity acquired 2,500 1,905
------- --------
$63,929 $ 73,474
======= ========
The Company is currently negotiating extensions of all bank notes
payable due within the next fiscal year.
At February 29, 1996 and February 28, 1997, the aggregate carrying value
of assets collateralizing the above notes was $122,498,000 and $179,941,002,
respectively.
As of February 28, 1997, the Company has in place three separate
facilities totalling $90 million (the "Facilities") with its principal bank
lender (the "Bank").
A commitment fee is payable annually on the Facilities. Availability of
funds under the Facilities is subject to, among other things, the Indenture,
specific loan-to-value factors, appraisal reports and the satisfactory
underwriting by the bank on a project basis. At February 28, 1997, the Company
had aggregate borrowings outstanding of $57.4 million under the Facilities.
The Facilities are secured by liens on various completed or under
construction homes and lots held by the Company. Pursuant to the Facilities, the
Company 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 28, 1997 the Company was in compliance with
these covenants. The Facilities also define certain events that constitute
events of default. As of February 28, 1997, no such event had occurred.
Durable and Clark Wilson also have secured non-recourse lines of credit
to facilitate construction activity. Clark Wilson has several non-recourse
secured lines of credit for a total of $37.5 million with maturity dates from
May 31, 1997 to July 19, 1998. Subsequent to the end of fiscal year 1997,
Durable secured a $30.0 million non-recourse line of credit to replace its
existing $15.0 million non-recourse line and the Company's Arizona operations
secured a $10.0 million non-recourse line of credit.
38
39
During the years ended February 28, 1995, February 29, 1996 and February
28, 1997, the highest month-end balance on notes payable was $34,364,000,
$70,171,000 and $83,152,000, respectively, and the weighted average outstanding
balance was $19,880,000, $48,162,000 and $78,041,000, respectively. The weighted
average interest rates on notes payable during the years ended February 28,
1995, February 29, 1996 and February 28, 1997, were 10.9 percent, 10.8 percent
and 9.3 percent, respectively. The weighted average interest rates on notes
payable at February 28, 1995, February 29, 1996 and February 28, 1997, were 9.8
percent, 9.3 percent and 9.4 percent, respectively.
The aggregate scheduled principal maturities of notes payable are as
follows (in thousands):
AS OF
FEBRUARY 28,
1997
-------------
Fiscal years ending:
1998 $14,279
1999 1,905
2000 57,290
2001 --
-------
TOTAL $73,474
=======
39
40
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 2004. Interest is due and payable on May 1 and November 1 of
each year. The Notes are fully and unconditionally guaranteed by certain of the
Company's subsidiaries (See Note 13). The Notes are not redeemable at the option
of the Company prior to May 1, 1999. Thereafter, the Notes will be redeemable at
106.375% of their principal amount, declining ratably to par on and after May 1,
2001, plus accrued interest.
The Company 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 Company's Consolidated Tangible Net Worth
(as defined) is less than $37 million. In addition, the Notes contain other
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 28, 1997 the Company was in
compliance with these covenants and was not required to make any such offer.
At February 28, 1997, the Company's unamortized bond issuance cost was
$4.1 million, net of accumulated amortization of $1.8 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.
40
41
7. INCOME TAXES
The expense (benefit) for income taxes consists of the following for the
years ended February 28, 1995, February 29, 1996 and February 28, 1997 (in
thousands):
1995 1996 1997
---- ---- ----
Current
Federal $1,026 $ 365 $ 351
State 230 138 188
------ ------ ------
1,256 503 539
------ ------ ------
Deferred
Federal (950) -- --
State (90) -- --
------ ------ ------
1,040 -- --
------ ------ ------
Provision for income taxes on income before
extraordinary gain $ 216 $ 503 $ 539
====== ====== ======
The deferred income tax benefit at February 29, 1996 and February 28,
1997 results from the following temporary differences between financial and tax
reporting (in thousands):
1996 1997
---- ----
Accrued expenses $ (120) $ 79
Construction period expenses 746 1,482
Decrease in valuation allowance (678) (1,660)
Depreciation 52 99
------ -------
$ -- $ --
====== =======
The components of the Company's deferred income tax asset (liability) as
of February 29, 1996 and February 28, 1997 are as follows:
1996 1997
---- ----
Depreciation $ 129 $ 30
Accrued expenses 1,257 1,178
Construction period expenses 2,331 849
Valuation allowance (3,717) (2,057)
------- -------
$ -- $ --
======= =======
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.
A reconciliation of income taxes (benefit) computed at the federal
statutory rate and the income tax benefit for financial reporting purposes for
the years ended February 28, 1995, February 29, 1996 and February 28, 1997, are
as follows:
1995 1996 1997
---- ---- ----
Income taxes at statutory rate 34% 34% 34%
State income taxes, net of federal tax benefit 3 3 3
Utilization of net operating loss carryforward (10) (21) (24)
--- --- ---
27% 16% 13%
=== === ===
41
42
8. NET INCOME (LOSS) PER COMMON SHARE
Net income per common share is based upon the weighted average number of
common shares outstanding of 14,995,000, 14,995,000 and 14,995,000 at February
28, 1995, February 29, 1996 and February 28, 1997, respectively. The effect of
stock options and warrants were not dilutive in all years presented, and has not
been included in the computation of net income per common share.
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 present and former
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. No awards have been made under the 1995 Plan.
42
43
10. RELATED PARTY TRANSACTIONS
During fiscal 1995, the Company reimbursed CHH II, Inc., a corporation
controlled by the chairman of the board of the Company, for $43,000 in expenses
incurred in connection with the acquisition by the Company of an aircraft.
Commitment fees totaling $667,000 and $132,000 were paid to joint
venture partners and capitalized to the real estate being developed during
fiscal 1995 and 1997, respectively. These capitalized fees are included in
cost of sales as the units are sold.
In fiscal 1995, the Company contributed land and improvements valued at
$9,351,000 to an unconsolidated joint venture with CalPERS and received a
distribution of cash in the amount of $8,226,000. In fiscal 1997, the Company
contributed cash of $761,000 to an unconsolidated joint venture with CalPERS.
The Company has made advances to unconsolidated joint ventures for
construction. The balance of advances at February 28, 1997 was $885,000. This
amount is included in accounts and notes receivable on the consolidated balance
sheet.
During fiscal 1996 and 1997, the Company recognized $1,254,000 and
$555,000 in construction overhead income on joint ventures.
11. COMMITMENTS AND CONTINGENCIES
General
Approximately $32,272,000 and $36,528,000 of performance bonds were
outstanding at February 29, 1996 and February 28, 1997, respectively. The
estimated cost to complete the development work related to the performance bonds
are $15,549,000 and $17,970,000 at February 29, 1996 and February 28, 1997,
respectively. The beneficiaries of these bonds are certain municipalities. The
Company has an outstanding letter of credit totaling $472,000 to ensure
performance on certain agreements as of February 29, 1996 and February 28, 1997.
The Company 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.
The Company has entered into agreements to lease certain office
equipment and facilities under operating leases which expire at various dates
through fiscal year 2001. The facility leases generally provide that the Company
shall pay property taxes, insurance and other items. Minimum payments under
noncancelable leases at February 28, 1997, are as follows:
YEARS ENDING FEBRUARY 28 OR FEBRUARY 29 (IN THOUSANDS):
- -------------------------------------------------------
1998 $ 405
1999 250
2000 99
2001 87
2002 73
------
$ 914
======
Total rent expense was $864,000, $415,000 and $493,000 for the years
ended February 28, 1995, February 29, 1996 and February 28, 1997, respectively.
As discussed in Notes 1 and 4, the Company is a general partner in
several joint venture partnerships. As a general partner, the Company is liable
for all debts of the partnerships without limitation to the respective
partnership interest.
Dividends
43
44
No dividends were declared or paid for the years ended February 28,
1995, February 29, 1996 and February 28, 1997.
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 such litigation cannot be presently ascertained. It is
reasonably possible 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.
Contingent Promissory Note Payable--This note is payable based
on performance of the entity acquired. The carrying amount is a
reasonable estimate of fair value.
Trust Deed Notes Payable--These notes are primarily for purchase
money deeds of trust on land acquired. These notes generally
have maturities ranging from one to two years. The rates of
interest paid on these 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 28, 1997.
44
45
The estimated fair values of the Company's financial instruments are as
follows:
AT FEBRUARY 29, 1996 AT FEBRUARY 28, 1997
-------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial Assets:
Cash and equivalents $ 13,850 $13,850 $ 11,434 $ 11,434
Financial Liabilities:
Notes payable to banks $ 59,806 $59,806 $ 67,889 $ 67,889
Trust deed notes payable 1,622 1,622 3,680 3,680
Senior unsecured notes payable 100,000 96,000 100,000 100,000
Promissory note payable 2,500 2,500 1,905 1,905
45
46
13. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the offering in fiscal 1995 of the Senior Unsecured
Notes (the "Offering"), the Company and certain of its wholly-owned subsidiaries
(Guarantors) jointly, severally, fully and unconditionally guaranteed such
notes. Supplemental condensed combined financial information of the Company,
Guarantors and non-guarantors is presented as follows. As discussed in Note 3 in
Notes To Supplemental Guarantor Information, these financial statements are
prepared using the equity method of accounting for the Company's and the
Guarantors' investments in subsidiaries and partnerships. This supplemental
financial information should be read in conjunction with the Consolidated
Financial Statements.
AS OF AND FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 1997
(IN THOUSANDS)
(UNAUDITED)
CAPITAL NON-
PACIFIC GUARANTORS GUARANTORS ELIMI- TOTAL
HOLDINGS, INC. (1) (2) NATIONS(4) CONSOLIDATED
-------------- --- --- ---------- ------------
BALANCE SHEET
Cash $ 7,759 $ 1,155 $ 2,520 $ 0 $ 11,434
Inventories 154,186 45,163 38,109 (3,898) 233,560
Investment in Partnerships and
subsidiaries(3) 27,749 1,044 -- (27,679) 1,114
Intercompany advances 37,295 (21,592) (14,453) 1,250
Other 15,187 3,863 5,509 24,559
-------- -------- -------- -------- --------
Total Assets $242,176 $ 29,633 $ 31,685 $(31,577) $271,917
======== ======== ======== ======== ========
Accounts payable and accrued
liabilities $ 16,977 $ 8,326 $ 5,912 $ 31,215
Intercompany advances 0
Notes payable 159,195 7,009 7,270 173,474
Minority interest 360 360
Shareholders' equity 66,004 14,298 18,503 (31,577) 66,868
-------- -------- -------- -------- --------
Total Liabilities and Equity $242,176 $ 29,633 $ 31,685 $(31,577) $271,917
======== ======== ======== ======== ========
STATEMENT OF OPERATIONS
Revenues:
Sales of homes and land $ 89,757 $ 38,374 $ 79,738 $207,869
Interest and other income, net 908 251 3,130 $ 4,289
Equity in income of partnerships
and subsidiaries(3) 316 (226) 0 168 258
-------- -------- -------- -------- --------
Total Revenues 90,981 38,399 82,868 168 212,416
-------- -------- -------- -------- --------
Cost of homes and land 72,293 35,399 66,450 174,142
Selling, general and administrative 15,926 5,848 12,630 34,404
Interest 0 0 0 0
Minority interest (192) (192)
-------- -------- -------- -------- --------
Income before provision for
income taxes 2,762 (2,848) 3,788 360 4,062
Provision (benefit) for income taxes 470 70 540
-------- -------- -------- -------- --------
Net Income (loss) $ 2,292 $ (2,848) $ 3,718 $ 360 $ 3,522
======== ======== ======== ======== ========
46
47
CAPITAL NON-
PACIFIC GUARANTORS GUARANTORS ELIMI- TOTAL
HOLDINGS, INC. (1) (2) NATIONS(4) CONSOLIDATED
-------------- ---------- ---------- ---------- ------------
STATEMENT OF CASH FLOWS
Net cash from (used in) operating
activities $(8,172) $(3,685) $ 1,719 $ 2,534 $(7,604)
Net cash from (used in) investing
activities 998 (2,174) (647) 0 (1,823)
Net cash from (used in) financing
activities 8,899 4,267 (3,621) (2,534) 7,011
------- ------- -------- ------- -------
Net increase (decrease) in cash 1,725 (1,592) (2,549) 0 (2,416)
Cash -- beginning of period 6,034 2,747 5,069 0 13,850
------- ------- -------- ------- -------
Cash -- end of period $ 7,759 $ 1,155 $ 2,520 $ 0 $11,434
======= ======= ======== ======= =======
47
48
AS OF AND FOR THE TWELVE MONTHS ENDED FEBRUARY 29, 1996
(IN THOUSANDS)
(UNAUDITED)
CAPITAL NON-
PACIFIC GUARANTORS GUARANTORS ELIMI- TOTAL
HOLDINGS, INC. (1) (2) NATIONS(4) CONSOLIDATED
-------------- --- --- ---------- ------------
BALANCE SHEET
Cash $ 6,034 $ 2,747 $ 5,069 $ -- $ 13,850
Inventories 156,679 26,650 43,740 125 227,194
Investment in Partnerships and
subsidiaries(3) 29,524 1,314 -- (28,242) 2,596
Intercompany advances 29,675 -- -- (29,675) --
Other 15,651 1,364 6,913 (1,060) 22,868
-------- -------- -------- -------- --------
Total Assets $237,563 $ 32,075 $ 55,722 $(58,852) $266,508
======== ======== ======== ======== ========
Accounts payable and accrued
liabilities $ 23,923 $ 6,735 $ 6,741 $ (1,060) $ 36,339
Intercompany advances -- 5,451 24,224 (29,675) --
Notes payable 150,294 2,743 10,892 -- 163,929
Minority interest -- -- -- 2,894 2,894
Shareholders' equity 63,346 17,146 13,865 (31,011) 63,346
-------- -------- -------- -------- --------
Total Liabilities and Equity $237,563 $ 32,075 $ 55,722 $(58,852) $266,508
======== ======== ======== ======== ========
STATEMENT OF OPERATIONS
Revenues:
Sales of homes and land $ 44,564 $ 53,284 $ 65,920 $ -- $163,768
Interest and other income, net 1,554 739 1,801 (404) 3,690
Equity in income of partnerships
and subsidiaries(3) 6,548 769 55 (5,812) 1,560
-------- -------- -------- -------- --------
Total Revenues 52,666 54,792 67,776 (6,216) 169,018
-------- -------- -------- -------- --------
Cost of homes and land 39,739 44,819 55,053 (904) 138,707
Selling, general and administrative 9,822 7,036 9,268 -- 26,126
Interest -- -- -- -- --
Minority interest -- -- -- 1,080 1,080
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes 3,105 2,937 3,455 (6,392) 3,105
Provision (benefit) for income taxes 503 934 251 (1,185) 503
-------- -------- -------- -------- --------
Net Income (loss) $ 2,602 $ 2,003 $ 3,204 $ (5,207) $ 2,602
======== ======== ======== ======== ========
48
49
CAPITAL NON-
PACIFIC GUARANTORS GUARANTORS ELIMI- TOTAL
HOLDINGS, INC. (1) (2) NATIONS(4) CONSOLIDATED
-------------- --- --- ---------- ------------
STATEMENT OF CASH FLOWS
Net cash from (used in) operating
activities $ 32,640 $ 741 $(9,641) $ 630 $(40,910)
-------- -------- -------- -------- --------
Net cash from (used in) investing
activities 1,061 (540) (155) -- 366
Net cash from (used in) financing
activities 32,501 (866) 988 (630) 31,993
Net increase (decrease) in cash 922 (655) (8,808) -- (8,551)
Cash -- beginning of period 5,112 3,412 13,877 -- 22,401
-------- -------- -------- -------- --------
Cash -- end of period $ 6,034 $ 2,747 $ 5,069 $ 0 $ 13,850
======== ======== ======== ======== ========
49
50
AS OF AND FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 1995 (IN THOUSANDS)
(UNAUDITED)
CAPITAL NON-
PACIFIC GUARANTORS GUARANTORS ELIMI- TOTAL
HOLDINGS, INC. (1) (2) NATIONS(4) CONSOLIDATED
-------------- --- --- ---------- ------------
BALANCE SHEET
Cash $ 5,112 $ 3,412 $ 13,877 $ -- $ 22,401
Inventories 119,283 26,084 22,440 167,807
Investment in Partnerships and
subsidiaries(3) 22,199 2,672 -- (22,922) 1,949
Intercompany advances 25,678 -- -- (25,678) --
Other 15,954 692 6,696 (324) 23,018
-------- -------- -------- -------- ------
Total Assets $188,226 $ 32,860 $ 43,013 $(48,924) $215,175
======== ======== ======== ======== ========
Accounts payable and accrued
liabilities $ 9,689 $ 7,619 $ 4,532 $ (324) $ 21,516
Intercompany advances -- 8,167 17,511 (25,678) --
Notes payable 117,793 3,609 7,989 -- 129,391
Minority interest -- -- -- 3,524 3,524
Shareholders' equity 60,744 13,465 12,981 (26,446) 60,744
-------- -------- -------- -------- --------
Total Liabilities and Equity $188,226 $ 32,860 $ 43,013 $(48,924) $215,175
======== ======== ======== ======== ========
STATEMENT OF OPERATIONS
Revenues:
Sales of homes and land $ 18,722 $ 35,375 $ 85,026 $ -- $139,123
Interest and other income, net 1,036 2,282 1,104 (449) 3,973
Equity in income of partnerships
and subsidiaries(3) 6,735 4,499 -- (11,241) (7)
-------- -------- -------- -------- --------
Total Revenues 26,493 42,156 86,130 (11,690) 143,089
-------- -------- -------- -------- --------
Cost of homes and land 15,474 29,628 67,050 112,152
Selling, general and administrative 8,279 6,050 8,434 (449) 22,314
Interest 1,950 -- -- -- 1,950
Minority interest -- -- -- 5,883 5,883
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes and
extraordinary gain 790 6,478 10,646 (17,124) 790
Provision (benefit) for income taxes 216 2,182 89 (2,271) 216
-------- -------- -------- -------- --------
Income (loss) before extraordinary gain 574 4,296 10,557 (14,853) 574
Extraordinary gain, Net 3,075 -- -- -- 3,075
-------- -------- -------- -------- --------
Net Income (loss) $ 3,649 $ 4,296 $ 10,557 $(14,853) $ 3,649
======== ======== ======== ======== ========
STATEMENT OF CASH FLOWS
Net cash from (used in) operating
activities $(81,810) $ 1,692 $ 12,265 $ 10,435 $(57,418)
Net cash from (used in) investing
activities (11,569) 7 -- -- (11,562)
Net cash from (used in) financing
activities
Net borrowings (payments) from
notes payable (2,623) (1,306) (90) -- (4,019)
Senior unsecured notes payable 95,834 -- -- -- 95,834
Minority interest in joint ventures -- -- -- (10,435) (10,435)
-------- -------- -------- -------- --------
Net cash from (used in)
financing activities 93,211 (1,306) (90) (10,435) 81,380
-------- -------- -------- -------- --------
Net increase (decrease) in cash (168) 393 12,175 -- 12,400
Cash -- beginning of period 5,280 3,019 1,702 -- 10,001
-------- -------- -------- -------- --------
Cash -- end of period $ 5,112 $ 3,412 $ 13,877 $ -- $ 22,401
======== ======== ======== ======== ========
50
51
NOTES TO SUPPLEMENTAL GUARANTOR INFORMATION.
(1) Guarantors include Durable Homes, Inc., J.M.Peters Nevada, Inc., and
Peters Ranchland Company, Inc., all wholly-owned subsidiaries of
Capital Pacific Holdings, Inc.
(2) The non-guarantors include:
(a) The limited partnerships in which Peters Ranchland Company,
Inc., is general partner:
Ranchland Alicante Development, L.P.
Ranchland Montilla Development, L.P.
Ranchland Fairway Estates Development, L.P.
Ranchland Portola Development, L.P.
Grand Coto Estates, L.P.
(b) The limited partnership in which Capital Pacific Holdings,
Inc., is a general partner:
Peters Walnut Estates
(c) The limited partnership in which J.M. Peters Nevada, Inc. and
Durable Homes, Inc., are general partners:
Taos Estates, L.P.
(d) The wholly owned subsidiaries of Capital Pacific Holdings,
Inc.:
Newport Design Center, Inc.
Capital Pacific Communities, Inc.
Capital Pacific Homes, Inc.
J.M. Peters, Arizona, Inc. (expected to
become a guarantor in fiscal year 1998)
J.M. Peters Homes of Arizona, Inc. (expected to
become a guarantor in fiscal year 1998)
Capital Pacific Mortgage, Inc. (expected to become
a guarantor in fiscal year 1998)
Clark Wilson Homes, Inc. (expected to become a
guarantor in fiscal year 1998)
Fairway Financial Corporation
Parkland Estates, Inc. (expected to become a
guarantor in fiscal year 1998)
J.M. Peters California, Inc. (expected to become a
guarantor in fiscal year 1998)
(e) Fifty percent owned entities of Capital Pacific Holdings,
Inc.:
Bay Hill Escrow, Inc.
J.M.P. Harbor View, L.P.
J.M.P. Canyon Estates, L.P.
(3) Investments in partnerships and subsidiaries are accounted for by the
Company and the Guarantors on the equity method for purposes of the
supplemental combining presentation.
(4) The elimination entries eliminate investments in subsidiaries,
partnerships and intercompany balances.
51
52
15. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the years ended February 29,
1996 and February 28, 1997 is as follows (in thousands except for per share
data):
QUARTER
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- ------- -------- --------
1997:
Total revenues $ 45,900 $ 64,392 $50,176 $ 51,947 $212,415
Gross profit on sales of homes and land 8,025 10,594 7,367 7,741 33,727
Net income (loss) $ 327 $ 2,066 $ 940 $ 189 $ 3,522
======== ======== ======= ======== ========
Net income (loss) per common share $ .02 $ .14 $ .06 $ .01 $ .23
======== ======== ======= ======== ========
1996:
Total revenues $ 33,140 $ 28,416 $33,558 $ 73,904 $169,018
Gross profit on sales of homes and land 5,426 4,633 4,817 10,185 25,061
Net income (loss) $ (273) $ (226) $ 550 $ 2,551 $ 2,602
======== ======== ======= ======== ========
Net income (loss) per common share $ (.02) $ (.01) $ .04 $ .16 $ .17
======== ======== ======= ======== ========
54
53
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 25, 1997 (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.
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 Consolidated
Financial Statements, together with the Notes thereto
and Independent Auditors' Report thereon, are
included in Part II, Item 8 of this report.
CAPITAL PACIFIC HOLDINGS, INC.
Reports of Independent Public Accountants
Consolidated Balance Sheets as of February 29, 1996
and February 28, 1997
Consolidated Statements of Operations for the years
ended February 28, 1995, February 29, 1996 and
February 28, 1997
Consolidated Statements of Stockholders' Equity for
the years ended February 28, 1995, February 29, 1996
and February 28, 1997
Consolidated Statements of Cash Flows for the years
ended February 28, 1995, February 29, 1996 and
February 28, 1997
Notes to Consolidated Financial Statements
2. Exhibits.
53
54
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Articles of Incorporation of the Registrant (Incorporated by reference
to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1996).
3.2 Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
February 28, 1996).
4.1 See the Articles of Incorporation and Bylaws of the Registrant
(Exhibits 3.1 and 3.2) and the Indenture and related agreements
(Exhibits 10.1-10.4).
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 10.15 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1994).
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 10.16 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
February 28, 1994).
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 10.17 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
February 28, 1994).
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 10.18 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
February 28, 1994).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the year
ended February 28, 1997.
54
55
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 29, 1997.
CAPITAL PACIFIC HOLDINGS, INC.
By /s/ HADI MAKARECHIAN
----------------------------
Hadi Makarechian
Chairman of the Board
Date: May 29, 1997
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Hadi Makarechian and Marquis L. Cummings, 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 May 29, 1997
- -----------------------------------
Hadi Makarechian
/s/ DALE DOWERS Director, President and May 29, 1997
- ----------------------------------- Chief Executive Officer
Dale Dowers
/s/ MARQUIS L. CUMMINGS Vice President and Chief May 29, 1997
- ----------------------------------- Financial Officer
Marquis L. Cummings
/s/ WILLIAM FUNK Director May 29, 1997
- -----------------------------------
William Funk
/s/ KARL KAISER Director May 29, 1997
- -----------------------------------
Karl Kaiser
/s/ ALLAN L. ACREE Director May 29, 1997
- -----------------------------------
Allan L. Acree
55
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EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
3.1 Articles of Incorporation of the Registrant (Incorporated by
reference to Exhibit 3.1 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended February 28, 1996)
3.2 Bylaws of the Registrant (Incorporated by reference to Exhibit
3.2 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1996)
4.1 See the Articles of Incorporation and Bylaws of the Registrant
(Exhibits 3.1 and 3.2) and the Indenture and related agreements
(Exhibits 10.1-10.4)
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 10.15 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1994)
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
10.16 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1994)
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
10.17 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1994)
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
10.18 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1994)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule.
56