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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, 1998
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 1, 1998, 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 $13,125,401 as determined by the
closing price on the American Stock Exchange. The basis of this calculation does
not constitute a determination by the Registrant that all of its principal
shareholders, directors and executive officers are affiliates as defined in Rule
405 under the Securities Act of 1933.
At May 1, 1998, there were 14,305,511 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
26, 1998.
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PART 1
ITEM 1. BUSINESS
GENERAL
Capital Pacific Holdings, Inc., together with its subsidiaries (the
"Company") is one of the leading builders 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. The Company has recently expanded
its operating strategy to encompass the development of commercial and mixed-use
projects, as well as ownership of existing commercial properties. Since 1975,
the Company has built and sold nearly 10,000 homes in California in Orange, Los
Angeles, San Diego and Riverside counties. Since 1969, Capital Pacific Homes,
Inc., a wholly owned subsidiary that was acquired by the Company in 1993 (known
at that time as Durable Homes, Inc.), 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 in
excess of 1,500 homes, principally in Austin, Texas. Since 1995, the Company has
built and sold nearly 300 homes in Phoenix, Arizona. During the fiscal year
ended February 28, 1998, the Company, (including unconsolidated joint ventures)
closed 969 home and lot sales at an average home sales price of $233,000
(including 282 homes closed in California at an average sales price of $404,000,
208 homes closed in Nevada at an average sales price of $161,000, 343 homes
closed in Texas at an average sales price of $157,000 and 76 homes closed in
Arizona at an average sale price of $142,000). The Company currently conducts
its operations under various names, including the name Capital Pacific Homes in
Nevada and Arizona and Clark Wilson Homes in Texas.
In August 1992, Capital Pacific Homes, Inc., a Delaware corporation,
acquired control of J.M. Peters Company, Inc. ("J.M. Peters") 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."
Effective as of October 1, 1997, the Company consummated an equity and
restructuring transaction whereby the Company and certain of its subsidiaries
transferred to a newly formed limited liability company known as Capital Pacific
Holdings, LLC ("CPH LLC") substantially all of their respective assets and CPH
LLC assumed all the liabilities of the Company and its subsidiaries. Immediately
thereafter, a newly formed unaffiliated investment company, California Housing
Finance, L.P. ("CHF"), contributed to the capital of CPH LLC the sum of $30
million in cash and acquired a 32.07% interest in CPH LLC. The Company, together
with its subsidiaries, has a 67.93% interest in CPH LLC. At February 28, 1998,
CPH LLC had total assets of $250 million and a net worth of $91 million. Subject
to adjustment and exceptions under certain circumstances, CHF has the same
interest in all future business of the Company, all of which will be conducted
either within CPH LLC or through newly formed project specific entities. The
Company is the sole managing member of CPH LLC and expects that it will be the
sole managing member of any newly formed project specific entity. The Company
maintains certain licenses and other assets as is necessary to fulfill its
obligations as managing member. The Company and its subsidiaries perform its
management functions for CPH LLC pursuant to management agreements which include
provisions for the reimbursement of Company and subsidiary costs, a management
fee and indemnification by CPH LLC.
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC. At the current time, all material financing transactions
and arrangements are incurred either by CPH LLC or by certain newly formed
project specific entities.
STRATEGY
The Company's long-term strategy includes the following key elements:
(1) Maintaining diversity in its geographic markets. The Company
believes that geographic market diversification is a key element in
achieving long-term stability and growth. While the Company has no
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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
all price segments, from entry level buyers to the semi-custom luxury
market move-up buyers, so that it is able to deliver well-priced homes to a
broad segment of its potential customer base. Within Texas, Nevada and
Arizona, the Company serves the entry level as well as move-up markets.
Within Southern California, the Company has products targeted toward second
and third time move-up buyers, as well as the million dollar luxury market.
This product diversification enables the Company to better adapt to
changing market conditions.
(3) Enhancing the Company's capital base and sources of financial
liquidity. In addition to the equity and restructuring transaction
described above, the Company has diversified sources of financing and will
continue to pursue new financing alternatives in the future. In May, 1994,
the Company accessed the public debt capital markets through the sale of
$100 million 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. Effective upon the completion of
the October 1, 1997 equity and restructuring transaction, the obligations
under the Notes were transferred to CPH LLC. The Company also currently has
a $45 million recourse and a $45 million non-recourse secured line of
credit with a bank to provide additional flexibility. The Company's Nevada,
Texas and Arizona operations have established non-recourse construction
lines of credit totaling $30, $37 and $10 million, respectively. Credit
facilities in place at February 28, 1998 totalled $167 million, of which
$37 million was outstanding. The Company intends to maintain, through CPH
LLC, its traditional lending relationships as a source of liquidity to the
extent permitted by the indenture (the "Indenture") to which the Notes are
subject. The Company believes this financing strategy allows orderly growth
and greater flexibility to react quickly to changing market conditions. The
Company also utilizes joint ventures within its operations as a source of
financing and risk management. At February 28, 1998, the Company had two
joint ventures with IHP Investment Fund I, (an advisor to the State of
California Public Employees Retirement System ("CalPERS") and two with
affiliates of CHF. The Company has successfully completed several projects
and closed many homes utilizing this strategy in the past.
(4) Controlling costs and maintaining operational efficiency. The
Company has job cost, warranty tracking and construction scheduling systems
and other quality controls to control costs and to reduce the effect of
certain risks inherent in the home-building industry. These systems and
controls enable the Company to monitor and improve its efficiencies.
(5) Minimizing inventory risk. The Company tries to carefully manage
its land and inventory risk in a variety of ways. The Company monitors its
supply of owned, optioned and controlled land to maintain an adequate
pipeline of building lots in each of its markets while avoiding excess land
holdings. 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.
(6) Commercial and mixed-use development. The Company has recently
expanded its operating strategy to encompass the development of commercial
and mixed-use projects, as well as investing in existing commercial
properties. In addition, the Company owns two office facilities from which
it conducts its California and Nevada operations and leases available space
to third parties. This strategy
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enables the Company to take advantage of unique opportunities in selected
infill projects and also provides a measure of diversification within the
real estate development arena.
GEOGRAPHIC MARKETS
At February 28, 1998, the Company owned lots in various stages of
development with respect to approximately 52 projects, including 18 projects
located in the Orange, Los Angeles and Riverside Counties of Southern
California, 11 projects located in Las Vegas, Nevada, 19 projects located in
Austin, Texas and 4 projects located in Phoenix, Arizona. The Company is
currently selling homes in 47 of these projects. The Company's homes currently
range in size from 1,284 to 6,287 square feet in Southern California, from 1,149
to 3,878 square feet in Nevada, from 810 to 4,500 square feet in Texas and from
1,248 to 3,679 square feet in Arizona. The Company's homes are currently priced
from $280,000 to $1,393,000, in Southern California, from $110,000 to $300,000
in Nevada, from $69,000 to $284,000 in Texas and from $102,000 to $313,000 in
Arizona.
The following table sets forth the estimated number of homes under
construction and lots owned, under option and controlled as of February 28,
1998:
ESTIMATED NUMBER OF HOUSING UNITS THAT COULD BE
CONSTRUCTED ON LAND CONTROLLED AS OF FEBRUARY 28, 1998(a)
HOMES UNDER LOTS LOTS UNDER LOTS
REGION CONSTRUCTION(B) OWNED OPTION(C) CONTROLLED(D) TOTAL
------ --------------- ----- ---------- ------------- -----
Southern California................. 129 450 -- 3,655 4,234
Nevada.............................. 96 561 75 265 997
Texas............................... 131 279 500 -- 910
Arizona............................. 13 199 -- 104 316
--- ----- --- ----- -----
TOTAL..................... 369 1,489 575 4,024 6,457
=== ===== === ===== =====
- ---------------
(a) Based upon current management estimates, which are subject to change.
(b) Including completed model homes.
(c) Lots under option represent lots under rolling option contracts within
existing projects. There can be no assurance that the Company will actually
acquire any lots under option.
(d) Controlled home sites include those properties for which the Company has
entered into a variety of contractual relationships including non-binding
letters of intent, binding purchase agreements with customary conditions
precedent and similar arrangements. There can be no assurance that the
Company will actually acquire any such properties.
DEVELOPMENTS IN PROCESS -- CALIFORNIA
The following table sets forth certain information regarding projects under
development in California during fiscal year 1998.
NAME AND TOTAL UNITS UNITS AVG.
LOCATION OF UNITS REMAINING CLOSED IN PRICE OF START OF
PROJECT PLANNED 2/28/98 FY 1998 HOMES(A) CONSTRUCTION
----------- ------- --------- --------- ---------- ------------
WHOLLY-OWNED:
The Courts
Palmia/Mission Viejo
Orange County 180 6 50 $ 180,000 FY95
Fullerton
Fullerton
Orange County 143 61 33 471,500 FY96
Newport Coast
Irvine
Orange County 37 37 -- N/A(b) FY99
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NAME AND TOTAL UNITS UNITS AVG.
LOCATION OF UNITS REMAINING CLOSED IN PRICE OF START OF
PROJECT PLANNED 2/28/98 FY 1998 HOMES(A) CONSTRUCTION
----------- ------- --------- --------- ---------- ------------
The Villas
Palmia/Mission Viejo
Orange County 171 3 60 239,000 FY96
Rancho Serrano
Temecula
Riverside County 120 1 15 225,000 FY94
Cozumel
La Quinta
Riverside County 86 56 8 427,500 FY94
Cayman
La Quinta
Riverside County 40 10 8 290,000 FY94
Antigua Custom Lots
La Quinta
Riverside County 73 45 -- 195,000 N/A
Mulholland Park
Tarzana
Los Angeles County 108 61 18 1,172,000 FY96
Mulholland Park
Custom Lots
Tarzana
Los Angeles County 14 5 1 471,500 N/A
Lake Hills
Corona
Riverside County 56 1 7 217,500 FY96
Vista Collection
Corona
Riverside County 12 -- 9 147,500 FY97
Harbor Ridge
San Clemente
Orange County 124 44 36 388,000 FY96
Walnut Estates
Walnut
Los Angeles County 16 9 7 593,000 FY97
Calabasas -- Carrera
Calabasas
Los Angeles County 66 3 -- N/A(c) N/A
----- --- ---
Subtotal Wholly-owned 1,246 342 252
----- --- ---
JOINT VENTURES:
Harbor View
San Clemente
Orange County 92 -- 1 329,000 FY95
Grand Coto Estates
Coto de Caza
Orange County 93 64 29 625,000 FY98
MPE Partners
Tarzana
Los Angeles County 51 45 6 1,172,000 FY98
Rancho Palos Verdes
Los Angeles County 79 79 -- N/A(b) FY99
Dana Point
Orange County 49(d) 49 -- N/A(b) FY99
----- --- ---
Subtotal Joint Ventures 364 237 36
----- --- ---
TOTALS 1,610 579 288
===== === ===
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(a) Represents average price of homes closed for projects with units for sale on
February 28, 1998, and estimated average price for other projects.
(b) The design development process for this project is not sufficiently advanced
to identify a specific average.
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(c) As of February 28, 1998, the Company has not finalized its plans for the
remaining lots. As such, the average selling prices have not been
established.
(d) The Company is in the process of entitling the property for development as
49 single family residences. There can be no assurances that such
entitlements will be obtained.
DEVELOPMENTS IN PROCESS -- NEVADA
The following table sets forth certain information regarding projects under
development in Nevada during fiscal year 1998.
NAME AND TOTAL UNITS UNITS AVG.
LOCATION OF UNITS REMAINING CLOSED IN PRICE OF START OF
PROJECT PLANNED 2/28/98 FY 1998 HOMES(A) CONSTRUCTION
----------- ------- --------- --------- -------- ------------
The Falls at
Hidden Canyon
North Las Vegas
Clark County 241 1 26 $119,000 FY95
Country Meadows
Las Vegas
Clark County 99 7 30 129,500 FY96
Arbor Grove
Las Vegas
Clark County 165 127 38 131,000 FY98
Talon Pointe
Las Vegas
Clark County 111 111 -- 325,000 FY98
Kew Gardens
Las Vegas
Clark County 70 48 22 303,000 FY97
Altezza
Las Vegas
Clark County 36 16 7 286,000 FY96
Courtney Ranch
Las Vegas
Clark County 56 6 28 139,000 FY96
Palatine Hills
Las Vegas
Clark County 135(b) 96 20 230,000 FY96
Country Lane
Las Vegas
Clark County 228 116 36 130,000 FY95
Crestmont
Las Vegas
Clark County 112 112 -- 163,000 FY99
Meritage
Las Vegas
Clark County 92(c) 92 -- 260,000 FY99
Other projects 1 -- 1 N/A N/A
----- --- ---
TOTALS 1,346 732 208
===== === ===
- ---------------
(a) Represents average price of homes closed for projects with units for sale on
February 28, 1998, and estimated average price for other projects.
(b) The Company has purchased 89 lots in the Palatine Hills project, and holds
options on 46 lots for the remainder of the project. There can be no
assurance that the Company will actually acquire such remaining lots within
the option term.
(c) The Company has purchased 63 lots in the Meritage project, and holds options
on 29 lots for the remainder of the project. There can be no assurance that
the Company will actually acquire such remaining lots within the option
term.
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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, 1998.
UNITS
NAME AND TOTAL REMAINING UNITS AVG.
LOCATION OF UNITS AT CLOSED IN PRICE OF START OF
PROJECT PLANNED DECEMBER 28, 1998 FY 1998 HOMES(A) CONSTRUCTION
----------- ------- ------------------- --------- -------- ------------
Cat Hollow
Round Rock
Williamson County 289 130 30 $155,000 FY94
Circle C Ranch
Austin
Travis County 152 19 29 158,000 FY93
Cypress Creek
Cedar Park
Williamson County 69 3 12 159,000 FY94
Ranch at Cypress
Cedar Park
Williamson County 102 17 17 146,000 FY94
Springbrook
Round Rock
Travis County 389 132 34 146,000 FY96
Lake Pointe North
Austin
Travis County 49 18 9 216,000 FY96
The Settlement
Round Rock
Williamson County 35 -- 1 116,000 FY94
Travis Country
Austin
Travis County 237 110 54 179,000 FY96
Onion Creek
Austin
Travis County 55 31 13 259,000 FY96
Lake Point South
Austin
Travis County 34 1 6 197,000 FY96
Wildflower
Austin
Travis County 167 101 66 83,000 FY97
Lake Point 50
Austin
Travis County 168 135 33 178,000 FY96
Lake Point 60
Austin
Travis County 18 5 12 197,000 FY96
Lake Point 70
Austin
Travis County 40 30 10 216,000 FY96
Lake Point 80
Austin
Travis County 19 15 4 257,000 FY96
Meadows of Brushy Creek
Round Rock
Williamson County 68 42 12 194,000 FY96
Forest Creek
Round Rock
Williamson County 36 36 -- 199,000 FY98
Steiner Ranch
Austin
Travis County 81 81 -- N/A(b) FY98
Other Projects 60 4 55(c) N/A(b) FY99
----- --- ---
TOTALS 2,068 910 397
===== === ===
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- ---------------
(a) Represents average price of homes closed for projects with units for sale on
February 28, 1998, and estimated average price for other projects.
(b) As of February 28, 1998, the Company has not finalized its plans for the
remaining lots. As such, average selling prices have not been established.
(c) Includes 54 lot closings in fiscal 1998.
DEVELOPMENTS IN PROCESS -- ARIZONA
The following table sets forth certain information about projects under
development in Arizona during fiscal year 1998.
NAME AND TOTAL UNITS UNITS AVG.
LOCATION OF UNITS REMAINING AT CLOSED IN PRICE OF START OF
PROJECT PLANNED FEBRUARY 28, 1998 FY 1998 HOMES(A) CONSTRUCTION
----------- ------- ------------------- --------- -------- ------------
Wildflower
Chandler
Maricopa County 132 -- 4 $121,000 FY96
San Marcos
Chandler
Maricopa County 79 40 37 159,000 FY97
Ambrosia at Amberlea
Phoenix
Maricopa County 101 4 26 82,000 FY96
Scottsdale Vista Estates
Scottsdale
Maricopa County 54 27 9 318,000 FY96
Fairview Crossings
Glendale
Maricopa County 141 141 -- 120,000 FY99
--- --- --
TOTALS 507 212 76
=== === ==
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(a) Represents average price of homes closed for projects with units for sale on
February 28, 1998, and estimated average price for other projects.
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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, 1998, the Company's joint ventures were as follows:
UNITS
REMAINING
TOTAL UNITS UNITS CLOSED AT
PLANNED IN FY98 2/28/98
----------- ------------ ---------
JMP Harbor View -- Orange County............. 92 1 0
Grand Coto Estates, LP -- Orange County...... 93 29 64
M.P.E. Partners, LP -- Los Angeles
County(a).................................. 51 6 45
RPV Associates, LLC -- Los Angeles
County(b).................................. 79 0 79
CPH Dana Point, LLC -- Orange County(c)...... 49 0 49
--- -- ---
364 36 237
=== == ===
Subsequent to February 28, 1998, the Company entered into four new joint
ventures in California effected through the formation of additional LLC's
similar in structure to the CPH LLC. These new joint ventures include a 31 acre
oceanfront mixed-use site in Huntington Beach, a 440 acre residential parcel in
Vista and two office buildings in Orange County with total square footage of
approximately 109,000. Each of these additional LLC's enables the Company to
preserve its existing capital, while mitigating project-level risk.
(a) 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.
(b) 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.
(c) In fiscal year 1998, the Company entered into a new joint venture which
purchased 25 acres of ocean view property in the city of Dana Point,
California and plans to entitle and develop 49 homes.
LAND ACQUISITION
The Company typically tries to purchase and hold land in California in
amounts sufficient to support home production and sales over a 24 to 48 month
period. The Company also tries to maintain an additional 18 month supply of
entitled land through options and other means. The Company typically purchases
or options entitled land in 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 Company typically considers numerous factors when analyzing the
suitability of land for acquisition and development including, but not limited
to: proximity to existing developed areas; population growth patterns;
availability of existing community services (i.e., utilities, schools and
transportation); employment growth rates; anticipated absorption rates for new
housing; and the estimated cost of development.
The Company tries to avoid speculative building by constraining project
phase sizes, and entitlement risks by acquiring entitled land when practicable
and acquiring lots through the use of options, development agreements and joint
ventures with lot owners, when appropriate. Additionally, by forming strategic
alliances with partners, the Company has been able to obtain access to
additional capital and construction financing to spread project risk, which
allows the Company to minimize the risk of holding property and to preserve its
capital. To date, the Company's alliances have been conducted through joint
ventures.
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Subsequent to February 28, 1998, the Company has completed the acquisition
of four separate projects as follows:
TOTAL
PROJECT UNITS
NAME LOCATION PLANNED
------- -------- -------
Bradfield Village Buda, Texas 208
Fox Crossing Chandler, Arizona 104
Mountain Creek Pflugerville, Texas 319(1)
Walnut Grove North Las Vegas, Nevada 265(2)
- ---------------
(1) Including 244 lots under option.
(2) Including 208 lots under option.
Construction is expected to begin on each of the above projects during
fiscal 1999.
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 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
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 the services may be provided through the
homebuyer's own consultants.
DEVELOPMENT AND CONSTRUCTION
The Company acts as the general contractor for the construction of its
projects. 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.
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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 cooperative brokers to sell its homes. Company sales
representatives are available to assist prospective buyers by providing them
with floor plans, price information and tours of model homes, and to assist them
with the selection of options and upgrades. Sales representatives attend
periodic meetings at which they are provided with information regarding other
products in the area, the variety of financing programs available, construction
schedules and marketing and advertising plans.
The Company generally opens an on-site sales office before the construction
of the model homes is completed. This on-site sales office is utilized as a
temporary sales centers to commence the sales process to potential customers.
Potential homebuyers may reserve a home by submitting a refundable deposit (a
reservation deposit) usually ranging from $500 to $20,000 and executing a
reservation document. The Company then conducts preliminary research concerning
the credit status of the potential homebuyer in order to "pre-qualify" the
homebuyer. Once the prospective homebuyer has been "pre-qualified" and there is
a strong indication that the homebuyer will qualify for a mortgage (although
final loan approval is still pending), the homebuyer must then convert the
reservation deposit to an "earnest money deposit" and complete a purchase
contract for the purchase of their home. The Company attempts to keep its
contract cancellation rate low by attempting to pre-qualify prospective
homebuyers and by allowing homebuyers to customize their homes at an early point
in the purchase process. When home purchase contracts are canceled, damages are
usually limited to a percentage of the purchase price of the home and may be
less pursuant to applicable law or to the terms of the purchase contract. The
Company generally determines whether to seek to obtain such damages on a
case-by-case basis. When home purchase contracts are canceled, the Company is
usually able to identify alternate homebuyers.
The Company makes extensive use of advertising and promotional resources,
including newspaper, 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 through the Company's
wholly-owned subsidiary, Creative Design & Media in California, Nevada and
Arizona and in-house in Texas.
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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. To the Company's knowledge, it is one of only a few homebuilders
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.
OPERATING DATA
The following table shows new home deliveries, net new orders and average
sales prices for each of the last three fiscal years for each of the Company's
operations, including unconsolidated joint ventures:
YEAR ENDED
--------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
New homes delivered:
California.................................... 192 266 246
Texas......................................... 272 346 343
Nevada........................................ 547 299 208
Arizona....................................... 48 171 76
-------- -------- --------
Subtotal................................... 1,059 1,082 873
Unconsolidated Joint Ventures (Calif.)........ 115 31 36
-------- -------- --------
Total................................. 1,174 1,113 909
======== ======== ========
Net new orders.................................. 1,182 1,039 919
======== ======== ========
Average sales price:
California (excluding joint ventures)......... $211,000 $310,000 $370,000
California (including joint ventures)......... 283,000 324,000 404,000
Texas......................................... 144,000 163,000 157,000
Nevada........................................ 135,000 143,000 161,000
Arizona....................................... 123,000 111,000 142,000
Combined (excluding joint ventures)........... 154,000 188,000 217,000
Combined (including joint ventures)........... 176,000 193,000 233,000
BACKLOG AND INVENTORY
The Company typically pre-sells homes prior to and during construction
through home purchase contracts requiring earnest money deposits or through
reservation documents requiring reservation deposits. Generally, reservation
deposits are refundable, but home purchase contracts are not cancelable unless
the customer is unable to sell their existing home, qualify for financing or
under certain other circumstances. A home sale is placed in backlog status upon
execution of such a contract or reservation and receipt of an earnest money
deposit or reservation deposit and is removed when such contracts or
reservations are canceled as described above or the home purchase escrow is
closed.
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The following table shows backlog in units and dollars at the end of each
of the last three fiscal years for each of the Company's operations, including
unconsolidated joint ventures:
ENDING BACKLOG
-------------------------------------------------------------
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
------------------ ------------------ -----------------
UNITS ($000S) UNITS ($000S) UNITS ($000S)
------ -------- ------ -------- ----- --------
California.................... 140 $43,200 98 $51,900 122 $ 75,000
Texas......................... 165 26,200 159 24,400 200 30,700
Nevada........................ 64 8,900 78 12,600 41 7,100
Arizona....................... 71 8,600 31 4,400 13 2,200
--- ------- --- ------- --- --------
Total.................... 440 $86,900 366 $93,300 376 $115,000
=== ======= === ======= === ========
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 1997. The Company's backlog at any given time is a
good indicator of the number of units that will be closed in the four to six
months following such date:
ENDING BACKLOG
NET NEW HOMES -----------------
ORDERS CLOSED UNITS ($000S)
------- ------ ----- --------
Fiscal Year 1998
1st Quarter........................... 238 154 450 113,500
2nd Quarter........................... 228 199 479 133,700
3rd Quarter........................... 201 229 451 139,200
4th Quarter........................... 252 327 376 115,000
----- -----
Total Fiscal Year 1998........ 919 909
===== =====
Fiscal Year 1997
1st Quarter........................... 376 252 564 $120,000
2nd Quarter........................... 240 332 472 93,800
3rd Quarter........................... 225 279 418 89,600
4th Quarter........................... 198 250 366 93,300
----- -----
Total Fiscal Year 1997........ 1,039 1,113
===== =====
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.
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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, 1998, the Company employed 229 persons full-time, compared
to 217 persons at April 30, 1997. Of these, 31 were in executive positions, 42
were engaged in sales activities, 75 in project management activities and 81 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.
RAW MATERIALS
All of the raw materials and most of the components used in the Company's
business are readily available in the United States. Most are standard items
carried by major suppliers. However, a rapid increase in the number of homes
started could cause shortages in the availability of such materials, thereby
leading to delays in the delivery of homes under construction. In addition,
increases in the price of lumber and other materials have a negative impact on
margins. In order to maintain its quality standards while providing a product at
good value, the Company has used and will under appropriate market circumstances
consider the further use of alternative materials, such as metal studs and
framing in some of its projects.
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.
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The Company also owns a 19,800 square foot office building in Las Vegas,
Nevada. Approximately 10,000 square feet are used as the principal offices of
the Company in Nevada. The majority of the remaining office space is leased to
third parties.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine claims and litigation arising in the
ordinary course of its business. The legal responsibility and financial impact
with respect to such litigation cannot be presently ascertained.
The Company is involved in a well publicized dispute with the owners of
several homes and homeowners' associations in the Orange County project known as
Niguel Summit and with adjacent homeowners. Prior to the Acquisition, J.M.
Peters constructed the homes in Niguel Summit in 1988. The Company has been
named as one of several defendants in a largely consolidated litigation
concerning damage to residences precipitated by excessive amounts of rainfall as
a result of recent El Nino conditions. The Company believes that it has adequate
insurance, good defenses to the claims and valid cross-complaints against the
original developer, subcontractors and consultants which, on a combined basis,
are projected to prevent any material adverse effect to the Company arising from
such litigation.
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.
HIGH LOW
----- -----
FISCAL 1998
Fourth Quarter.............................................. $4.00 $2.13
Third Quarter............................................... 3.94 2.69
Second Quarter.............................................. 3.81 2.63
First Quarter............................................... 2.94 1.88
FISCAL 1997
Fourth Quarter.............................................. 3.25 2.63
Third Quarter............................................... 2.88 2.13
Second Quarter.............................................. 3.88 2.44
First Quarter............................................... 3.94 3.19
Payment of dividends is within the discretion of the Company's Board of
Directors and holders of shares of Common Stock are entitled to receive
dividends when and if declared by the Board of Directors out of funds legally
available therefore. The Company has no present intention to pay dividends, but
rather intends to retain any earnings. The covenants in the Indenture have
restrictions on permissible dividend payments to the Company from Capital
Pacific Holdings, LLC. There can be no assurance that such limit may not become
more restrictive as the result of any future losses of Capital Pacific Holdings,
LLC. During the last three years, no dividends have been paid.
On May 1, 1998, the Company had approximately 1,000 beneficial holders of
its Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information of the Company is
presented for the fiscal years ended February 28, 1998, February 28, 1997,
February 29, 1996, February 28, 1995 and February 28, 1994. 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.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND
OPERATING DATA)
LAST DAY OF FEBRUARY
-------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Sales of homes and land..................................... $91,066 $143,089 $168,679 $216,549 $191,098
Cost of sales............................................... 73,348 112,152 144,079 183,557 162,966
Impairment loss on real estate assets....................... -- -- -- -- 8,000
------- -------- -------- -------- --------
Gross margin................................................ 17,718 30,937 24,600 32,992 20,132
Selling, general and administrative......................... 12,322 22,314 22,895 30,282 24,744
------- -------- -------- -------- --------
Income (loss) from operations............................. 5,396 8,623 1,705 2,710 (4,612)
------- -------- -------- -------- --------
Income from unconsolidated joint ventures................... -- -- 1,560 259 764
Interest and other income, net.............................. -- -- 920 900 1,391
Minority interest(1)........................................ (4,332) (5,883) (1,080) 192 (469)
Interest expense............................................ (418) -- -- -- --
Provision for litigation judgment........................... -- (1,950) -- -- --
------- -------- -------- -------- --------
Income (loss) before income taxes and extraordinary items... 646 790 3,105 4,061 (2,926)
Income tax expense (benefit)................................ -- 216 503 539 (735)
------- -------- -------- -------- --------
Income (loss) before extraordinary items.................... 646 574 2,602 3,522 (2,191)
Extraordinary items:
Extraordinary gain for debt retired at less than face
value, net of taxes..................................... 4,268 3,075 -- -- --
------- -------- -------- -------- --------
Net income (loss)........................................... $ 4,914 $ 3,649 $ 2,602 $ 3,522 $ (2,191)
======= ======== ======== ======== ========
Net income (loss) per common share:(2)
Before extraordinary items.................................. $ .04 $ .04 $ .17 $ .23 $ (.15)
Extraordinary items......................................... .30 .20 -- -- --
------- -------- -------- -------- --------
Net income (loss) per share................................. $ .34 $ .24 $ .17 $ .23 $ (.15)
======= ======== ======== ======== ========
Weighted average shares..................................... 14,488 14,995 14,995 14,995 14,795
======= ======== ======== ======== ========
AT THE LAST DAY OF FEBRUARY
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Real estate projects....................................... $105,696 $167,807 $227,194 $233,562 $192,347
Total assets............................................... 121,954 215,175 266,508 271,918 251,655
Notes payable.............................................. 34,709 29,391 63,929 73,474 36,714
Senior Unsecured Notes Payable............................. -- 100,000 100,000 100,000 100,000(3)
Minority interest.......................................... 13,959 3,524 2,894 360 30,061(3)
Stockholders' equity....................................... 55,594 60,744 63,346 66,868 63,050(3)
OPERATING DATA (IN UNITS):
Homes closed............................................... 404 824(4) 1,174 1,113 909
Homes contracted for....................................... 478 835(5) 1,182 1,039 919
Homes in backlog........................................... 305 432 440 366 376
- ---------------
(1) Includes the minority interest share of earnings of the CPH LLC from October
1, 1997 forward.
(2) Reflects per share amounts on both a basic and diluted basis. See Note 1 to
the Consolidated Financial Statements.
(3) At February 28, 1998, minority interest includes $29.8 million of capital in
CPH LLC attributable to CHF. At February 28, 1998, CPH LLC had total capital
accounts of $91.4 million and was the sole obligor for the balance of the
$100 million Senior Unsecured Notes Payable.
(4) Excludes homes closed by Clark Wilson for the six month period prior to the
Clark Wilson Acquisition.
(5) Excludes 116 homes in Clark Wilson's backlog at August 31, 1994 (prior to
the Clark Wilson acquisition).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements in the financial discussion and analysis by management
contain "forward-looking" information (as defined in the Private Securities
Litigation Reform Act of 1995 and within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended) that involves risk and uncertainty, including projections and
assumptions regarding the business environment in which the Company operates.
Actual future results and trends may differ materially depending on a variety of
factors, including the Company's successful execution of internal performance
strategies; changes in general national and regional economic conditions, such
as levels of employment, consumer confidence and income, availability to
homebuilders of financing for acquisitions, development and construction,
availability to homebuyers of permanent mortgages, interest rate levels and the
demand for housing; supply levels of land, labor and materials; difficulties in
obtaining permits or approvals from governmental authorities; difficulties in
marketing homes; regulatory changes and weather (including El Nino) and other
environmental uncertainties; competitive influences; and the outcome of pending
and future legal claims and proceedings.
RESULTS OF OPERATIONS -- GENERAL
The following table illustrates the actual and pro forma results of the
Company's operations for the past three fiscal years. The pro forma results have
been adjusted to reflect the inclusion of the operating results of the Company's
unconsolidated joint ventures, including the portion attributable to the
Company's joint venture partners, and the exclusion of the $8,000,000 non-cash
charge recorded in the third quarter of fiscal 1998, and are used throughout
this discussion for comparative purposes wherever the phrase "pro forma" is
utilized.
RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEAR ENDED
-----------------------------------------------------------------------
FEBRUARY 29, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1998
--------------------- --------------------- ---------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- --------- -------- ---------
Sales of homes and land........... $168,679 $213,374 $216,549 $227,750 $191,098 $214,093
Cost of sales..................... 144,079 183,507 183,557 194,296 170,966 181,614
-------- -------- -------- -------- -------- --------
Gross margin.................. $ 24,600 $ 29,867 $ 32,992 $ 33,454 $ 20,132 $ 32,479
======== ======== ======== ======== ======== ========
As is noted in footnote 1 to the financial statements presented herein, the
Company is reporting its results on a consolidated basis with the results of CPH
LLC. References to the Company in this Item 7 are, unless the context indicates
otherwise, also references to CPH LLC. At the current time, all material
financing transactions and arrangements are incurred either by CPH LLC or by
certain newly formed project specific entities.
FISCAL 1998 (YEAR ENDED FEBRUARY 28, 1998) COMPARED TO FISCAL 1997 (YEAR ENDED
FEBRUARY 28, 1997):
The Company reported a net loss of $2.2 million, or $0.15 per share, in
fiscal 1998, as compared to net income of $3.5 million, or $0.23 per share, in
fiscal 1997, due primarily to the $8 million non-cash charge discussed above.
Sales of homes and land including unconsolidated joint ventures were $214.1
million for fiscal 1998 compared to $227.8 million for fiscal 1997. This
decrease is due to a decrease in total home closings from 1,113 in fiscal 1997
to 909 in fiscal 1998, including 31 and 36 homes, respectively, closed in
unconsolidated joint ventures. As an offset to the decreased closing activity,
the Company's average sales price per unit has increased to $233,000 in fiscal
1998 from $193,000 in fiscal 1997, a 20.7% increase.
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The decrease in closings and the resultant decrease in sales was primarily
due to the effect, prior to the restructuring discussed above, of constraints in
both the bank lines and bond indenture which limited construction starts and
sale releases in the past several quarters. In addition, the level of closings
was negatively impacted by the unusually wet winter in California precipitated
by the El Nino weather phenomenon. Due primarily to the non-cash charge of $8
million, the Company's actual gross margin on home and lot closings decreased to
10.5% for fiscal 1998 as compared to 15.2% for fiscal 1997. However, the
Company's pro forma gross margin on home and lot closings improved to 15.2%
during fiscal 1998 as compared to 14.7% in fiscal 1997.
Selling, general and administrative expense of $24.7 million for fiscal
1998 decreased $5.5 million or 18.3% as compared to fiscal 1997. As a percentage
of revenue, selling, general and administrative expense decreased from 14.0% in
fiscal 1997 to 12.9% for 1998. This relationship is impacted positively by the
Company's ongoing cost containment efforts and adversely by the effect of lower
revenues during fiscal 1998.
Income from unconsolidated joint ventures increased from $259,000 in fiscal
1997 to $764,000 in fiscal 1998, due to both the higher unit closings and higher
margins experienced in the Company's current joint ventures.
Interest and other income increased from $900,000 to $1,391,000, primarily
as a result of increased activity in the Company's mortgage broker operations.
Minority interest of $469,000 for fiscal 1998 primarily represents the
share of the New LLC's income attributable to CHF since October 1, 1997.
Interest incurred was $20.4 million in fiscal 1998, as compared to $21.6
million in fiscal 1997, while interest included in cost of sales was $14.3
million during fiscal 1998, as compared to $18.7 million in fiscal 1997.
The Company has recorded a net income tax benefit of $735,000 for fiscal
1998 reflecting the generation of a deferred income tax benefit during the year
offset by current income taxes payable.
FISCAL 1997 (YEAR ENDED FEBRUARY 28, 1997) COMPARED TO FISCAL 1996 (YEAR ENDED
FEBRUARY 29, 1996)
The Company recorded net income of $3.5 million in fiscal 1997 or $0.23 per
share, compared to net income of $2.6 million, or $0.17 per share, for fiscal
1996. These results were due to the factors described below.
Sales of homes and land including unconsolidated joint ventures were $227.8
million for fiscal 1997 compared to $213.4 million for fiscal 1996. Revenues
from housing sales for fiscal 1997 increased by 28.4% to $216.5 million from
$168.7 million in fiscal year 1996; the revenues figures for housing sales for
fiscal 1997 and fiscal 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 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 1996, a decrease of 61 homes which, nevertheless, resulted in an
increase in total revenue.
Selling, general and administrative expenses for fiscal year 1997 of $30.3
million increased $7.4 million over fiscal 1996. This increase was primarily due
to the increased number of projects being marketed in California and Texas.
Minority interest for fiscal 1997 of $(192,000) decreased $1,272,000 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.
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
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finished lots and the need, on certain projects, to construct community
facilities ahead of the start of home construction requires homebuilders such as
the Company to commit working capital for longer periods than many traditional
manufacturing companies. When building inventory, the Company uses substantial
amounts of cash that are generally obtained from borrowings, available cash flow
from operations and partners' contributions to joint ventures.
At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain newly formed project specific
entities. As of February 28, 1998, CPH LLC has in place several credit
facilities totaling $167 million (the "Facilities") with various bank lenders
(the "Banks"), of which $37 million was outstanding. The Facilities are secured
by liens on various completed or under construction homes and lots held by CPH
LLC. Pursuant to the Facilities, CPH LLC is subject to certain covenants, which
require, among other things, the maintenance of a consolidated liabilities to
net worth ratio, minimum liquidity, minimum net worth and loss limitations, all
as defined in the documents that evidence the Facilities. At February 28, 1998,
CPH LLC was in compliance with these covenants. The Facilities also define
certain events that constitute events of default. As of February 28, 1998, no
such event had occurred. Commitment fees are payable annually on some of the
Facilities.
Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors, including CHF, the investor in CPH LLC. The Company
anticipates that it will continue to utilize both third party financing and
joint ventures to cover financing needs in excess of internally generated cash
flow.
In May, 1994 the Company completed the sale of $100 million of 12 3/4%
Senior Notes including 790,000 warrants to purchase common stock. The proceeds
from the offering were used to repay certain debt of the Company, acquire
certain properties and for general working capital and construction purposes.
The 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 CPH LLC's current and projected
acquisition, development and construction activities. The obligations associated
with the Senior Notes have been transferred from the Company to CPH LLC.
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 CPH LLC. Subject to such restrictions, the bank
facilities will be available to augment cash flow from operations and joint
venture financing to fund the CPH LLC's operations.
Management expects that cash flow generated from operations and from
additional financing permitted by the terms of the Indenture will be sufficient
to cover the debt service and to fund CPH LLC's current development and
homebuilding activities for the reasonably foreseeable future.
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
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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
In connection with the restructuring and recapitalization of the Company
discussed above, management completed a process of reevaluating and revising the
Company's business plan, including its plans for the development of its various
projects. As a result of this analysis, it was determined that certain of the
Company's projects would require an impairment charge when evaluated in
accordance with SFAS No. 121. In addition, management determined that certain
warranty-related reserves should be adjusted. Therefore, during the third
quarter of fiscal 1998, the Company recorded a non-cash charge of $8 million.
Operating results during fiscal year 1997 were adversely affected by asset
impairment charges totaling $2.3 million 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 the write-off of certain other costs.
YEAR 2000 COMPLIANCE
The Company has assessed the vulnerability of its computer systems to the
"Year 2000 issue" and the cost of addressing Year 2000 compliance. Modifications
and replacements of computer systems, primarily the replacement of computer
software, to attain Year 2000 compliance have begun, and the Company expects to
attain Year 2000 compliance and institute appropriate testing of its
modifications and replacements before the Year 2000 date change. Presently, the
Company does not believe that Year 2000 compliance will result in material
expenditures by the Company, nor does the Company anticipate the Year 2000 issue
will have direct material adverse effects on the business operations or
financial performance of the Company. There can be no assurance, however, that
the Year 2000 issue will not adversely affect the Company and its business,
including through an adverse effect on general economic conditions.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130 "Reporting Comprehensive Income" ("FAS 130") and Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). Both FAS 130 and 131 are required to be adopted by the Company for the
year ended February 28, 1999. The Company believes the adoption of these
statements will not have a material impact on its consolidated financial
statements.
21
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CAPITAL PACIFIC HOLDINGS, INC.
PAGE
----
Reports of Independent Public Accountants................. 23
Consolidated Balance Sheets as of February 28, 1997 and
February 28, 1998...................................... 28
Consolidated Statements of Operations for the years ended
February 29, 1996, February 28, 1997 and February 28,
1998................................................... 29
Consolidated Statements of Stockholders' Equity for the
years ended February 29, 1996, February 28, 1997 and
February 28, 1998...................................... 30
Consolidated Statements of Cash Flows for the years ended
February 29, 1996, February 28, 1997 and February 28,
1998................................................... 31
Notes to Consolidated Financial Statements................ 32
22
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Capital Pacific Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Capital Pacific
Holdings, Inc. (a Delaware corporation) and subsidiaries as of February 28, 1997
and February 28, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended February 28, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of certain Joint Ventures (Notes 1 and 4), which statements represent
total assets and total revenues of 1 and 1 percent at February 29, 1996, 1 and 1
percent at February 28, 1997, and 1 and 1 percent at February 28, 1998,
respectively, of the consolidated totals. Those statements were audited by other
auditors whose reports have been furnished to us and our opinion, insofar as it
relates to the amounts included for those entities, is based 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 28, 1997 and February 28, 1998, and the results of their operations and
their cash flows for each of the three years in the period ended February 28,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
May 13, 1998
23
24
REPORT OF INDEPENDENT AUDITORS
To the Partners
Grand Coto Estates, L.P.
We have audited the balance sheet of Grand Coto Estates, L.P., a California
limited partnership (the "Partnership"), as of December 31, 1997, and the
related statements of operations, partners' capital and cash flows for the year
then ended (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 audit 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 Grand Coto Estates, L.P. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
February 16, 1998
24
25
REPORT OF INDEPENDENT AUDITORS
To the Partners
M.P.E. Partners, L.P.
We have audited the balance sheet of M.P.E. Partners, L.P., a California
limited partnership (the "Partnership"), as of December 31, 1997, and the
related statements of operations, partners' capital and cash flows for the
period March 14, 1997 (inception) through December 31, 1997 (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 audit 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 M.P.E. Partners, L.P. as of
December 31, 1997, and the results of its operations and its cash flows for the
period March 14, 1997 (inception) through December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
February 13, 1998
25
26
REPORT OF INDEPENDENT AUDITORS
To the Partners
JMP Canyon Estates, L.P.
We have audited the balance sheet of JMP Canyon Estates, L.P., a California
limited partnership (the "Partnership"), as of December 31, 1996, and the
related statements of operations, partners' capital and cash flows for the years
ended December 31, 1996 and 1995 (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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JMP Canyon Estates, L.P. as
of December 31, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
February 28, 1997
26
27
REPORT OF INDEPENDENT AUDITORS
To the Partners
JMP Harbor View, L.P.
We have audited the balance sheet of JMP Harbor View, L.P., a California
limited partnership (the "Partnership"), as of December 31, 1996, and the
related statements of operations, partners' capital and cash flows for the years
ended December 31, 1996 and 1995 (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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JMP Harbor View, L.P. as of
December 31, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
February 28, 1997
27
28
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
FEBRUARY 28, FEBRUARY 28,
1997 1998
------------ ------------
Cash and cash equivalents................................... $ 11,434 $ 4,328
Restricted cash............................................. 1,417 1,361
Accounts and notes receivable............................... 4,801 26,191
Real estate projects........................................ 233,562 192,347
Property, plant and equipment............................... 7,746 7,857
Investment in and advances to unconsolidated joint
ventures.................................................. 1,588 6,762
Prepaid expenses and other assets........................... 11,370 12,809
-------- --------
Total assets...................................... $271,918 $251,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 31,216 $ 21,830
Notes payable............................................... 73,474 36,714
Senior unsecured notes payable.............................. 100,000 100,000
-------- --------
Total liabilities................................. 204,690 158,544
-------- --------
Minority interest........................................... 360 30,061
-------- --------
Stockholders' equity:
Common stock, par value $.10 per share; 30,000,000 shares
authorized; 14,995,000 and 14,305,511 issued and
outstanding, respectively.............................. 1,500 1,500
Additional paid-in capital................................ 211,888 211,888
Accumulated deficit....................................... (146,520) (148,711)
Treasury stock............................................ -- (1,627)
-------- --------
Total stockholders' equity........................ 66,868 63,050
-------- --------
Total liabilities and stockholders' equity........ $271,918 $251,655
======== ========
See accompanying notes to 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 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
Sales of homes and land................................. $168,679 $216,549 $191,098
Cost of sales........................................... 144,079 183,557 162,966
Impairment loss on real estate assets................... -- -- 8,000
-------- -------- --------
Gross margin.......................................... 24,600 32,992 20,132
Selling, general and administrative expenses............ 22,895 30,282 24,744
-------- -------- --------
Income (loss) from operations......................... 1,705 2,710 (4,612)
Income from unconsolidated joint ventures............... 1,560 259 764
Interest and other income, net.......................... 920 900 1,391
Minority interest....................................... (1,080) 192 (469)
-------- -------- --------
Income (loss) before income taxes..................... 3,105 4,061 (2,926)
Provision (benefit) for income taxes.................... 503 539 (735)
-------- -------- --------
Net income (loss)..................................... $ 2,602 $ 3,522 $ (2,191)
======== ======== ========
Net income (loss) per common share:................... $ 0.17 $ 0.23 $ (0.15)
======== ======== ========
Weighed average number of common shares............... 14,995 14,995 14,795
======== ======== ========
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, 1998
(IN THOUSANDS, EXCEPT SHARES)
COMMON
STOCK ADDITIONAL
-------------------- PAID-IN (ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT) STOCK TOTAL
---------- ------ ---------- ------------ -------- -------
BALANCE, February 28, 1995................... 14,995,000 $1,500 $211,888 $(152,644) $ -- $60,744
Net income................................. -- -- -- 2,602 -- 2,602
---------- ------ -------- --------- ------- -------
BALANCE, February 29, 1996................... 14,995,000 1,500 211,888 (150,042) -- 63,346
Net income................................. -- -- -- 3,522 -- 3,522
---------- ------ -------- --------- ------- -------
BALANCE, February 28, 1997................... 14,995,000 1,500 211,888 (146,520) -- 66,868
Repurchase of common stock................. (689,489) -- -- -- (1,627) (1,627)
Net loss................................... -- -- -- (2,191) -- (2,191)
---------- ------ -------- --------- ------- -------
BALANCE, February 28, 1998................... 14,305,511 $1,500 $211,888 $(148,711) $(1,627) $63,050
========== ====== ======== ========= ======= =======
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 29, FEBRUARY 28, FEBRUARY 28,
1996 1997 1998
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 2,602 $ 3,522 $ (2,191)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization.......................... 1,390 1,876 1,685
Changes in Assets and Liabilities:
(Increase) decrease in accounts and notes
receivable........................................ (603) (380) (21,390)
(Increase) decrease in real estate projects.......... (57,109) (6,368) 41,215
(Increase) decrease in prepaid expenses and other
assets............................................ (2,013) (1,131) (1,383)
Increase (decrease) in accounts payable and accrued
liabilities....................................... 14,823 (5,123) (9,386)
Equity in earnings of unconsolidated joint ventures.... (1,560) (259) (764)
Minority interest...................................... 1,080 (192) 469
-------- --------- --------
Net cash provided by (used in) operating
activities........................................ (41,390) (8,055) 8,255
-------- --------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,269) (2,937) (1,796)
Decrease (increase) in investments in and advances to
unconsolidated joint ventures.......................... 3,195 1,373 (4,410)
-------- --------- --------
Net cash provided by (used in) investing
activities........................................ 1,926 (1,564) (6,206)
-------- --------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable............................... 131,572 143,596 129,169
Principal payments of notes payable....................... (98,949) (134,051) (165,929)
Capital contributions (distributions) to minority
interest, net.......................................... (1,710) (2,342) 29,232
Repurchase of common stock................................ -- -- (1,627)
-------- --------- --------
Net cash provided by (used in) financing
activities........................................ 30,913 7,203 (9,155)
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (8,551) (2,416) (7,106)
CASH AND CASH EQUIVALENTS, beginning of period.............. 22,401 13,850 11,434
-------- --------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 13,850 $ 11,434 $ 4,328
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH AND NON-CASH ACTIVITIES:
Cash paid during the year for interest.................... $ 17,939 $ 22,640 $ 19,800
Cash paid during the year for income taxes................ 1,479 540 --
Debt assumed by consolidated partnership for land
contributed............................................ 1,915 -- --
See accompanying notes to financial statements.
31
32
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Company Organization and Operations
Capital Pacific Holdings, Inc., together with its subsidiaries, (the
"Company") conducts business under various names, including the name Capital
Pacific Homes in Nevada and Arizona and Clark Wilson Homes in Texas.
Effective as of October 1, 1997, the Company consummated an equity and
restructuring transaction whereby the Company and certain of its subsidiaries
transferred to a newly formed limited liability company known as Capital Pacific
Holdings, LLC ("CPH LLC") substantially all of their respective assets and CPH
LLC assumed all the liabilities of the Company and its subsidiaries. Immediately
thereafter, a newly formed unaffiliated investment company, California Housing
Finance, L.P. ("CHF"), contributed to the capital of CPH LLC the sum of $30
million in cash and acquired a 32.07% interest in CPH LLC. The Company, together
with its subsidiaries, has a 67.93% interest in CPH LLC. At February 28, 1998,
CPH LLC had $250 million in assets and a net worth of $91 million. Subject to
adjustment and exceptions under certain circumstances, CHF has the same interest
in all future business of the Company, all of which will be conducted either
within CPH LLC or through newly formed project specific entities. The Company is
the sole managing member of CPH LLC and expects that it will be the sole
managing member of any newly formed project specific entity. The Company
maintains certain licenses and other assets as is necessary to fulfill its
obligations as managing member. The Company and its subsidiaries perform its
management functions for CPH LLC pursuant to management agreements which include
provisions for the reimbursement of Company and subsidiary costs, a management
fee and indemnification by CPH LLC.
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC. At the current time, all material financing transactions
and arrangements are incurred either by CPH LLC or by certain newly formed
project specific entities.
The Company is a regional builder with operations throughout selected
metropolitan areas of Southern California, Nevada, Texas and Arizona.
Approximately 53, 16, 26 and 5 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, 1998. Economic
conditions in the Southern California areas of the Company's operations have
recently improved dramatically. There can be no assurances that such
improvements will continue in the future.
The Company has recently expanded its operating strategy to encompass the
development of commercial and mixed-use projects, as well as ownership of
existing commercial properties.
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.
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.
Significant estimates include projected revenues and costs of projects, which
impact the allocation of costs to homes sold. Actual results could differ from
estimated amounts.
32
33
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Principles of Consolidation and Minority Interest in Joint Ventures
The consolidated financial statements for fiscal 1998 include the accounts
of the Company, wholly owned subsidiaries and certain majority owned joint
ventures, as well as the accounts of CPH LLC, including the capital accounts of
CPH LLC totaling $91.4 million, $29.8 million of which is required to be
presented as minority interest in the accompanying consolidated balance sheets.
The consolidated financial statements for prior periods include only the
accounts of the Company, wholly owned subsidiaries and certain majority owned
joint ventures. 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")), as 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, 1998, 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, 1997 and 1998. These
two projects were completed in fiscal 1997 and fiscal 1998, respectively. In
fiscal year 1997, the Company entered into an additional partnership with IHP,
Grand Coto Estates, L.P. In fiscal 1998, the Company entered into another
partnership with IHP, M.P.E. Partners, L.P. and entered into two additional
joint ventures with an affiliate of CHF, RPV Associates, LLC and CPH Dana Point,
LLC. All of these partnerships and joint ventures 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. The effect of adoption was not material to the
Company's financial statements.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives of three to thirty years using the straight-line method.
Total property and equipment was $7,746,000 and $7,857,000 (net of accumulated
depreciation of $3,817,000 and $4,757,000, respectively) as of February 28, 1997
and February 28, 1998, 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
33
34
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
development costs are accumulated by project and are allocated to individual
phases using the relative sales value method.
Prior to February 29, 1996, each real estate project was carried at the
lower of its cost or its estimated net realizable value. SFAS No. 121 changed
the method of valuing long-lived assets, including real estate projects, whereby
long-lived assets that are expected to be held and used in operations are to be
carried at the lower of cost or, if impaired, the fair value of the asset,
rather than the net realizable value. Long-lived assets to be disposed of should
be reported at the lower of carrying amount or fair value less cost to sell. For
purposes of applying SFAS 121, real estate under development is considered to be
held for use whereas finished units are considered assets to be disposed of. In
evaluating long-lived assets held for use, a review for impairment loss is
triggered if the sum of the expected future cash flows (undiscounted and without
interest charge) is less than the carrying amount of the asset. Various
assumptions and estimates are used to determine fair value in determining the
amount of any impairment loss including, among others, estimated costs of
construction, development and direct marketing, sales absorption rates,
anticipated sales prices and carrying costs. The calculation of the impairment
loss is based on estimated future cash flows which are calculated to include an
appropriate return and interest. The estimates used to determine the impairment
adjustment can change in the near term as the economy in the Company's key areas
change.
In connection with the restructuring and recapitalization of the Company
discussed above, management completed a process of reevaluating and revising the
Company's business plan, including its plans for the development of its various
projects. As a result of this analysis, it was determined that certain of the
Company's projects would require an impairment charge when evaluated in
accordance with SFAS No. 121. In addition, management determined that certain
warranty-related reserves should be adjusted. Therefore, during the third
quarter of fiscal 1998, the Company recorded a non-cash charge of $8 million.
Operating results during fiscal year 1997 were adversely affected by asset
impairment charges totaling $2.3 million 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 the write-off of certain other costs.
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 certain other requirements for sales of real estate.
Income from sales is recognized when title has passed, the buyer has met
minimum down payment requirements and the terms of any notes received by the
Company satisfy continuing investment requirements. At the time of sale,
accumulated costs are relieved from real estate projects and charged to cost of
sales on a relative sales value basis.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, which requires the liability
method of accounting for income taxes.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, short-term
investments which have a maturity of 90 days or less from the date of purchase
are considered cash equivalents.
34
35
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Options
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.
Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which was adopted by the Company on February 28,
1998. Net income (loss) per common share is based upon the weighted average
number of common shares outstanding for the period. The effect of stock options
and warrants was not dilutive in all years presented, and thus basic and diluted
income (loss) per common share are the same.
Reclassifications
Certain reclassifications have been made to certain prior year balances in
order to conform with the current year presentation.
2. RESTRICTED CASH
The Company has restricted cash totaling $1,417,000 and $1,361,000 as of
February 28, 1997 and February 28, 1998, respectively. Included in these amounts
for fiscal 1997 and 1998 is $500,000, which is held as collateral for the
Company's bonding obligations. The balance of restricted cash consists of
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 28, 1997 and
February 28, 1998 (in thousands):
1997 1998
-------- --------
Land and improvements under construction............... $186,172 $168,216
Completed residential homes............................ 30,038 10,249
Completed model homes.................................. 17,352 13,882
-------- --------
$233,562 $192,347
======== ========
Total interest costs incurred during the years ended February 29, 1996,
February 28, 1997 and February 28, 1998 were $18,261,000, $22,640,000 and
$20,411,000, respectively, all of which was initially capitalized.
35
36
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company is a general partner and has a 50 percent or less ownership in
seven unconsolidated entities at February 28, 1998. The Company's investments in
and advances to unconsolidated entities are as follows at February 28, 1997 and
February 28, 1998 (in thousands):
1997 1998
------- -------
Bay Hill Escrow.......................................... $ 183 $ 20
JMP Canyon Estates, L.P.................................. 393 500
JMP Harbor View , L.P.................................... 49 628
Grand Coto Estates, L.P.................................. 963 982
M.P.E. Partners, L.P..................................... -- 3,500
RPV Associates, LLC...................................... -- 1,125
CPH Dana Point, LLC...................................... -- 7
------- -------
$ 1,588 $ 6,762
======= =======
The Company uses the equity method of accounting for its investments in
these unconsolidated 50 or less percent-owned entities. The accounting policies
of the entities are substantially the same as those of the Company.
Following is summarized, unaudited combined financial information for the
unconsolidated entities at February 28, 1997 and February 28, 1998 (in
thousands):
ASSETS
1997 1998
------- -------
Cash..................................................... $ 386 $ 452
Real estate projects..................................... 9,337 64,865
Other assets............................................. 604 2,113
------- -------
$10,327 $67,430
======= =======
LIABILITIES AND EQUITY
1997 1998
------- -------
Accounts payable and other liabilities................... $ 6,926 $ 8,974
Equity
The Company............................................ 1,112 3,213
Others................................................. 2,289 55,243
------- -------
3,401 58,456
------- -------
$10,327 $67,430
======= =======
INCOME STATEMENT
1996 1997 1998
------- ------- -------
Sales of homes and land....................... $44,695 $11,201 $23,667
Interest and other income, net................ (71) 425 351
------- ------- -------
44,624 11,626 24,018
------- ------- -------
Costs and expenses............................ 38,981 10,627 20,293
------- ------- -------
Net income.................................... $ 5,643 $ 999 $ 3,725
======= ======= =======
36
37
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE
Notes payable consist of the following at February 28, 1997 and February
28, 1998 (in thousands):
1997 1998
------- -------
Promissory notes collateralized by deeds of trust,
including interest varying from 9.5 percent to prime
plus one percent....................................... $ 3,680 $ --
Notes payable to banks, including interest varying from
prime to prime plus two percent maturing between May
31, 1998 and April 30, 1999 secured by certain real
estate inventories on a non-recourse basis............. 32,233 24,709
Notes payable to bank, including interest at prime with
the term of the commitment reducing commencing December
1, 1998 secured by certain real estate inventories on a
recourse basis......................................... 35,656 11,736
Contingent promissory note payable to previous owner of
Clark Wilson........................................... 1,905 --
Other.................................................... -- 269
------- -------
$73,474 $36,714
======= =======
At February 28, 1997 and February 28, 1998, the aggregate carrying value of
assets collateralizing the above notes was $179,941,000 and $148,520,000,
respectively.
At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain newly formed project specific
entities. As of February 28, 1998, CPH LLC has in place several credit
facilities with contingent availabilities totaling $167 million (the
"Facilities") with various bank lenders (the "Banks"), of which $37 million was
outstanding. The Facilities are secured by liens on various completed or under
construction homes and lots held by CPH LLC. Pursuant to the Facilities, CPH LLC
is subject to certain covenants, which require, among other things, the
maintenance of a consolidated liabilities to net worth ratio, minimum liquidity,
minimum net worth and loss limitations, all as defined in the documents that
evidence the Facilities. At February 28, 1998, CPH LLC was in compliance with
these covenants. The Facilities also define certain events that constitute
events of default. As of February 28, 1998, no such event had occurred.
Commitment fees are payable annually on some of the Facilities.
Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors, including CHF, the investor in the CPH LLC. The Company
anticipates that it will continue to utilize both third party financing and
joint ventures to cover financing needs in excess of internally generated cash
flow.
During the years ended February 29, 1996, February 28, 1997 and February
28, 1998, the highest month-end balance on notes payable was $70,171,000,
$83,152,000 and $73,305,000, respectively, and the weighted average outstanding
balance was $48,162,000, $78,041,000 and $54,310,000, respectively. The weighted
average interest rates on notes payable during the years ended February 29,
1996, February 28, 1997 and February 28, 1998, were 10.8 percent, 9.3 percent
and 8.9 percent, respectively. The weighted average interest rates on notes
payable at February 29, 1996, February 28, 1997 and February 28, 1998, were 9.3
percent, 9.4 percent and 8.9 percent, respectively.
37
38
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate scheduled principal maturities of notes payable are as
follows (in thousands):
AS OF
FEBRUARY 28,
1998
------------
Fiscal years ending:
1999................................................... $16,983
2000................................................... --
2001................................................... 6,231
2002................................................... 13,500
-------
TOTAL.................................................. $36,714
=======
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 not redeemable at the option of CPH LLC 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 obligations associated with the Notes have been transferred to CPH LLC.
CPH LLC will be obligated to make an offer to purchase 10% of the outstanding
principal balance of the Notes at a purchase price equal to 100% of the
principal amount, plus accrued interest, in the event there are two consecutive
fiscal quarters that the CPH LLC's Consolidated Tangible Net Worth (as defined)
is less than $37 million. The Notes also contain certain restrictive covenants,
which, among other things, limit the incurrence of additional indebtedness, the
payment of dividends, the ability to create liens, make restricted payments (as
defined) and the ability to enter into certain transactions with affiliates. As
of February 28, 1998 CPH LLC was in compliance with these covenants and was not
required to make any such offer.
At February 28, 1998, unamortized bond issuance cost was $3.5 million, net
of accumulated amortization of $2.3 million, which is being amortized over the
term of the Notes utilizing the effective interest rate method. Unamortized bond
issuance cost is included in prepaid expenses and other assets in the
accompanying consolidated balance sheets.
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended February 29, 1996, February 28, 1997 and February 28, 1998 (in
thousands):
1996 1997 1998
---- ---- -------
Current
Federal.......................................... $365 $351 $ 150
State............................................ 138 188 215
---- ---- -------
503 539 365
---- ---- -------
Deferred........................................... -- -- (1,100)
---- ---- -------
Provision (benefit) for income taxes............... $503 $539 $ (735)
==== ==== =======
38
39
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred income tax benefit at February 28, 1997 and February 28, 1998
results from the following temporary differences between financial and tax
reporting (in thousands):
1996 1997 1998
----- ------- -------
Accrued expenses................................ $ 120 $ (79) $ 104
Construction period expenses.................... (746) (1,482) 923
Depreciation.................................... (52) (99) (53)
Built-in losses................................. -- -- (2,542)
Net operating loss carryforward................. -- 190 257
Decrease in valuation allowance................. 678 1,470 2,411
----- ------- -------
$ -- $ -- $ 1,100
===== ======= =======
The components of the Company's deferred income tax asset (liability) as of
February 28, 1997 and February 28, 1998 are as follows:
1997 1998
------- -------
Accrued expenses......................................... $ 491 $ 595
Construction period expenses............................. 849 1,772
Depreciation............................................. (57) (110)
Built-in losses.......................................... 6,681 4,139
Net operating loss carryforward.......................... 731 988
Valuation allowance...................................... (8,695) (6,284)
------- -------
$ -- $ 1,100
======= =======
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 the income tax provision (benefit) computed at the
federal statutory rate and the income tax benefit for financial reporting
purposes for the years ended February 29, 1996, February 28, 1997 and February
28, 1998, are as follows:
1996 1997 1998
---- ---- ----
Income taxes at statutory rate.......................... 34% 34% 34%
State income taxes, net of federal tax benefit.......... 3 3 3
Alternative minimum tax................................. -- -- (5)
Franchise tax liability................................. -- -- (7)
Utilization of net operating loss carryforward.......... (21) (24) --
--- --- --
16% 13% 25%
=== === ==
8. REPURCHASE OF COMMON STOCK
During the third quarter of fiscal 1998, the New LLC repurchased 1,015,000
shares of the Company's common stock which were issued to Roger Nix, the
previous owner of Durable Homes, Inc. ("Durable"), a wholly owned subsidiary of
the Company operating in Nevada, in connection with the Company's acquisition of
Durable in 1993, and distributed such shares to the Company and CHF in
proportion to their respective ownership percentages in the New LLC.
Accordingly, 689,489 shares were distributed to the Company and are being held
as treasury stock. As a result, the number of outstanding shares of the Company
has been reduced from 14,995,000 to 14,305,511. The foregoing distribution is
subject to adjustment based on contractual arrangements between the Company and
CHF.
39
40
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, the Company has announced a stock repurchase program whereby
up to 500,000 additional shares of the Company's outstanding common stock may be
repurchased. As of February 28, 1998, an insignificant number of shares had been
repurchased under this program.
9. STOCK OPTION PLAN
Effective February 28, 1995, the Board of the Corporation approved the 1995
Stock Incentive Plan (the "1995 Plan"). The 1995 Plan permits a committee
designated by the Board of the Corporation to make awards to key employees and
directors of the Company and its subsidiaries. Subject to various restrictions,
awards could be in the form of stock options, restricted or unrestricted stock,
stock appreciation rights or a combination of the above. The maximum number of
shares or share equivalents that may be awarded under the 1995 Plan is
1,500,000. No awards have been made under the 1995 Plan.
10. RELATED PARTY TRANSACTIONS
Commitment fees totaling $132,000 and $534,000 were paid to joint venture
partners and capitalized to the real estate being developed during fiscal 1997
and 1998, respectively. These capitalized fees are included in cost of sales as
the units are sold.
In fiscal 1997, the Company contributed cash of $761,000 to an
unconsolidated joint venture with CalPERS. In fiscal 1998, the Company
contributed an aggregate of $2,925,000, including $215,000 of cash, to
unconsolidated joint ventures.
The Company has made advances to unconsolidated joint ventures for
construction. The balance of advances at February 28, 1997 and 1998 was $885,000
and $3,552,000, respectively. This amount is included in investment in and
advances to unconsolidated joint ventures on the consolidated balance sheet.
During fiscal 1996, 1997 and 1998, the Company recognized $1,254,000,
$555,000 and $3,135,000 in construction overhead income on joint ventures.
11. COMMITMENTS AND CONTINGENCIES
General
Approximately $36,528,000 and $28,447,000 of performance bonds were
outstanding at February 28, 1997 and February 28, 1998, respectively. The
estimated cost to complete the development work related to the performance bonds
are $17,970,000 and $14,989,000 at February 28, 1997 and February 28, 1998,
respectively. The beneficiaries of these bonds are certain municipalities. CPH
LLC has an outstanding letter of credit totaling $472,000 to ensure performance
on certain agreements as of February 28, 1997 and February 28, 1998. CPH LLC has
pledged a certificate of deposit in a like amount as collateral for the
obligation under the letter of credit which is included in restricted cash.
40
41
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CPH LLC has entered into agreements to lease certain office equipment and
facilities under operating leases which expire at various dates through fiscal
year 2003. The facility leases generally provide that CPH LLC shall pay property
taxes, insurance and other items. Minimum payments under noncancelable leases at
February 28, 1998, are as follows:
AS OF
FEBRUARY 28,
FISCAL YEARS ENDING: 1998
-------------------- ------------
1999................................................. $ 438
2000................................................. 237
2001................................................. 190
2002................................................. 170
2003................................................. 139
------
Total $1,174
======
Total rent expense was $415,000, $493,000 and $338,000 for the years ended
February 29, 1996, February 28, 1997 and February 28, 1998, respectively.
As discussed in Notes 1 and 4, CPH LLC is a general partner in several
joint venture partnerships. As a general partner, CPH LLC is liable for all
debts of the partnerships without limitation to the respective partnership
interest.
Dividends
No dividends were declared or paid for the years ended February 29, 1996,
February 28, 1997 and February 28, 1998.
Legal Proceedings
The Company is involved in routine claims and litigation arising in the
ordinary course of its business, including a well publicized dispute in Orange
County. Although the legal responsibility and financial impact with respect to
such claims and litigation cannot be presently ascertained, the Company does not
believe that these matters will result in the payment by the Company, giving
consideration to any applicable insurance proceeds or contributions by other
parties, that, in the aggregate, would be material in relation to the financial
position of the Company. It is reasonably possible 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.
41
42
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998.
The estimated fair values of the Company's financial instruments are as
follows:
AT FEBRUARY 28, 1997 AT FEBRUARY 28, 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial Assets:
Cash and equivalents.................. $ 11,434 $ 11,434 $ 4,328 $ 4,328
Financial Liabilities:
Notes payable......................... 67,889 67,889 36,714 36,714
Trust deed notes payable.............. 3,680 3,680 -- --
Senior unsecured notes payable........ 100,000 100,000 100,000 108,000
Promissory note payable............... 1,905 1,905 -- --
13. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the years ended February 28, 1997
and February 28, 1998 is as follows (in thousands except for per share data):
QUARTER
---------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------
1998:
Sales of homes and land......... $34,956 $46,114 $47,722 $62,306 $191,098
Gross margin.................... 6,735 8,190 (1,970)(a) 7,177 20,132
Net income (loss)............... $ 1,063 $ 1,424 $(5,173)(a) $ 495 $ (2,191)
======= ======= ======= ======= ========
Net income (loss) per common
share........................ $ 0.07 $ 0.09 $ (0.35) $ 0.03 $ (0.15)
======= ======= ======= ======= ========
1997:
Sales of homes and land......... $46,292 $64,251 $50,996 $55,010 $216,549
Gross margin.................... 7,170 8,966 8,365 8,491 32,992
Net income...................... $ 327 $ 2,066 $ 940 $ 189 $ 3,522
======= ======= ======= ======= ========
Net income per common share..... $ 0.02 $ 0.14 $ 0.06 $ 0.01 $ 0.23
======= ======= ======= ======= ========
- ---------------
(a) Includes $8,000 non-cash charge for impairment loss on real estate assets.
14. SUBSEQUENT EVENTS
Subsequent to February 28, 1998, the Company, together with its financial
partners, has invested approximately $41 million in four new joint ventures and
CPH LLC has invested approximately $5 million in four new residential
development projects.
42
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the
Company's definitive proxy statement to be filed with the Commission no later
than June 26, 1998 (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 28, 1997 and February 28, 1998
Consolidated Statements of Operations for the years ended February 29,
1996, February 28, 1997 and February 28, 1998
Consolidated Statements of Stockholders' Equity for the years ended
February 29, 1996, February 28, 1997 and February 28, 1998
Consolidated Statements of Cash Flows for the years ended February 29,
1996, February 28, 1997 and February 28, 1998
Notes to Consolidated Financial Statements
2. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Second Restated Certificate of Incorporation of the
Registrant.
3.2 Certificate of Amendment to the Second Restated Certificate
of Incorporation of the Registrant.
43
44
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.3 Second Restated Certificate of Incorporation of the
Registrant, as Amended.
3.4 Second Amended and Restated Bylaws of the Registrant.
4.1 See the Articles of Incorporation and Bylaws of the
Registrant (Exhibits 3.1-3.4) and the Indenture and related
agreements (Exhibits 10.1-10.6).
10.1 Indenture agreement by and between Capital Pacific Holdings,
Inc., as Issuer; Durable Homes, Inc., J.M. Peters Nevada,
Inc., and Peters Ranchland, Inc., as Guarantors, and United
States Trust Company of New York, as Trustee, dated as of
May 13, 1994 (Incorporated by reference to Exhibit 10.15 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).
10.5 Second Supplemental Indenture dated as of September 10, 1997
to the Indenture agreement dated as of May 13, 1998.
10.6 Third Supplemental Indenture, dated as of October 1, 1997 to
the Indenture agreement dated as of May 13, 1994, as
amended.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99.1 Amended and Restated Limited Liability Company agreement
(Incorporated by reference to Exhibit 99.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1997).
99.2 Investment and Stockholder agreement (Incorporated by
reference to Exhibit 99.2 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1997).
99.3 Registration Rights agreement (Incorporated by reference to
Exhibit 99.3 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997).
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the year ended
February 28, 1998.
44
45
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 28, 1998.
CAPITAL PACIFIC HOLDINGS, INC.
By /s/ HADI MAKARECHIAN
------------------------------------
Hadi Makarechian
Chairman of the Board
and Chief Executive Officer
Date: May 28, 1998
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Hadi Makarechian and Steven O. Spelman, Jr., and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for each person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments to
this report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully and to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue of the powers herein granted.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ------------
/s/ HADI MAKARECHIAN Chairman of the Board and Chief May 28, 1998
- -------------------------------------------------- Executive Officer
Hadi Makarechian
/s/ DALE DOWERS Director, President and Chief May 28, 1998
- -------------------------------------------------- Operating Officer
Dale Dowers
/s/ STEVEN O. SPELMAN, JR. Vice President and Chief May 28, 1998
- -------------------------------------------------- Financial Officer
Steven O. Spelman, Jr.
/s/ WILLIAM FUNK Director May 28, 1998
- --------------------------------------------------
William Funk
/s/ KARL KAISER Director May 28, 1998
- --------------------------------------------------
Karl Kaiser
/s/ ALLAN L. ACREE Director May 28, 1998
- --------------------------------------------------
Allan L. Acree
45
46
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------- ----------- ----------
3.1 Second Restated Certificate of Incorporation of the
Registrant.
3.2 Certificate of Amendment to the Second Restated Certificate
of Incorporation of the Registrant.
3.3 Second Restated Certificate of Incorporation of the
Registrant, as amended.
3.4 Second Amended and Restated Bylaws of the Registrant.
4.1 See the Articles of Incorporation and Bylaws of the
Registrant (Exhibits 3.1 -- 3.4) and the Indenture and
related agreements (Exhibits 10.1 -- 10.6).
10.1 Indenture agreement by and between Capital Pacific Holdings,
Inc., as Issuer; Durable Homes, Inc., J.M. Peters Nevada,
Inc., and Peters Ranchland, Inc., as Guarantors, and United
States Trust Company of New York, as Trustee, dated as of
May 13, 1994 (Incorporated by reference to Exhibit 10.15 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).
10.5 Second Supplemental Indenture dated as of September 10, 1997
to the Indenture agreement dated as of May 13, 1998.
10.6 Third Supplemental Indenture, dated as of October 1, 1997 to
the Indenture agreement dated as of May 13, 1994, as
amended.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
99.1 Amended and Restated Limited Liability Company agreement
(Incorporated by reference to Exhibit 99.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1997).
99.2 Investment and Stockholder agreement (Incorporated by
reference to Exhibit 99.2 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1997).
99.3 Registration Rights agreement (Incorporated by reference to
Exhibit 99.3 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997).