CAPITAL PACIFIC HOLDINGS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999

COMMISSION FILE NUMBER: 0-15925

CAPITAL PACIFIC HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)

4100 MACARTHUR BLVD., SUITE 200
NEWPORT BEACH, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

95-2956559
(IRS EMPLOYER IDENTIFICATION NUMBER)

92660
(ZIP CODE)

(949) 622-8400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

COMMON STOCK $.10 PAR VALUE
(TITLE OF EACH CLASS)

THE AMERICAN STOCK EXCHANGE
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

At May 1, 1999, 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 $7,902,989 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, 1999, there were 13,997,511 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
28, 1999.

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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, move-up and luxury buyers. The Company has recently
entered the Colorado residential market. The Company has also 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 over 20,000 homes in the markets it serves.
During the fiscal year ended February 28, 1999, the Company (including
unconsolidated joint ventures) closed 982 home and lot sales at an average home
sales price of $287,000. The Company currently conducts its operations under
various names, including the name Capital Pacific Homes in Nevada, Arizona and
Colorado and Clark Wilson Homes, Inc. ("Clark Wilson") in Texas.

In fiscal year 1998, the Company consummated an equity and restructuring
transaction whereby the Company and certain of its subsidiaries transferred to 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. Subject to adjustment and
exceptions under certain circumstances, CHF has the same interest in all future
business of the Company, all of which will be conducted either within CPH LLC or
through project-specific entities. At February 28, 1999, CPH LLC had total
assets of $275 million and a net worth of $92 million. In addition, the Company
has interests in unconsolidated joint ventures which have total assets of $299
million and a combined net worth of $250 million at February 28, 1999. The
Company is the sole managing member of CPH LLC. The Company maintains certain
licenses and other assets as is necessary to fulfill its obligations as managing
member. The Company and its subsidiaries perform 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. In addition, the Company is a managing member of
certain project-specific entities.

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 project-specific entities.

STRATEGY

The Company's long-term strategy includes the following key elements:

(1) Maintaining diversity in its geographic markets. The Company
believes that geographic market diversification is a key element in
achieving long-term stability and growth. While the Company has no specific
plans to expand outside the Nevada, Texas, Arizona, Colorado and Southern
California markets, it may consider expansion to other markets in the
future.

(2) Diversifying its product. The Company builds homes targeted for
all price segments, from entry level buyers to the semi-custom luxury
market move-up buyers, so that it is able to deliver well-priced homes to a
broad segment of its potential customer base. Within Texas, Nevada, Arizona
and Colorado, the Company serves the entry level as well as move-up
markets. Within Southern California, the Company has products targeted
toward second and third time move-up buyers, as well as the million dollar
luxury market. This product diversification enables the Company to better
adapt to changing market conditions.

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(3) Enhancing the Company's capital base and sources of financial
liquidity. In addition to the equity and restructuring transaction
described above, the Company has diversified sources of financing and will
continue to pursue new financing alternatives in the future. In fiscal year
1995, the Company accessed the public debt capital markets through the sale
of $100 million of 12 3/4% Senior Notes ("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. Credit facilities
in place at February 28, 1999 totaled $220 million, of which $90 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, 1999, the Company had two
joint ventures with IHP Investment Fund I, (an advisor to the State of
California Public Employees Retirement System ("CalPERS") and ten 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. For its homebuilding projects, 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 tries 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,
Arizona and Colorado.

(6) Land Development. In certain project-specific joint ventures, the
Company has purchased unentitled land, with the intention of obtaining the
required entitlements and then either selling the unimproved land,
developing lots and selling them to another builder or building homes
itself.

(7) 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. These projects are typically structured as joint ventures with
the majority of the capital provided by financial partners. This strategy
enables the Company to take advantage of unique opportunities in selected
infill projects and also provides a measure of diversification within the
real estate development arena. In addition, the Company owns two office
facilities from which it conducts its California and Nevada operations and
within which it leases available space to third parties.

GEOGRAPHIC MARKETS

At February 28, 1999, the Company, either directly or through joint
ventures, owned lots in various stages of development with respect to
approximately 54 projects, including 14 projects located in the Orange,

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Los Angeles and Riverside Counties of Southern California, 9 projects located in
Las Vegas, Nevada, 17 projects located in Austin, Texas, 10 projects located in
Phoenix, Arizona and 4 projects in the Denver metropolitan and Colorado Springs
areas of Colorado. The Company is currently selling homes in 38 of these
projects. The Company's homes for sale currently range in size from 2,500 to
8,000 square feet in Southern California, from 1,400 to 3,700 square feet in
Nevada, from 1,400 to 3,700 square feet in Texas, from 1,100 to 3,200 square
feet in Arizona and from 1,200 to 2,400 square feet in Colorado. The Company's
homes are currently priced from $330,000 to $3,500,000 in Southern California,
from $110,000 to $320,000 in Nevada, from $75,000 to $300,000 in Texas and from
$80,000 to $360,000 in Arizona, and are anticipated to sell from $110,000 to
$380,000 in Colorado.

The following table sets forth the estimated number of homes under
construction and lots owned, under option and controlled as of February 28,
1999:

ESTIMATED NUMBER OF HOUSING UNITS THAT COULD BE
CONSTRUCTED ON LAND CONTROLLED AS OF FEBRUARY 28, 1999(a)

LOTS
HOMES UNDER LOTS UNDER LOTS
REGION CONSTRUCTION(B) OWNED OPTION(C) CONTROLLED(D) TOTAL
------ --------------- ----- --------- ------------- -----

Southern California.................. 81 742 4 652 1,479
Nevada............................... 174 324 293 571 1,362
Texas................................ 215 926 935 -- 2,076
Arizona.............................. 183 426 87 -- 696
Colorado............................. 5 201 80 304 590
--- ----- ----- ----- -----
TOTAL........................... 658 2,619 1,399 1,527 6,203
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(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

The table below summarizes the residential developments currently in
process in the Company's geographic markets:

UNITS
NUMBER OF NUMBER OF TOTAL UNITS REMAINING
PROJECTS HELD FOR PROJECTS IN SALES UNITS CLOSED IN AT
REGION DEVELOPMENT(A) STAGE(B) PLANNED(C) FY 1999 2/28/99(c)
------ ----------------- ----------------- ---------- --------- -------------

Southern California......... 14 9 1,233 213 827
Nevada...................... 9 9 1,214 217 791
Texas....................... 17 13 3,417 482 2,076
Arizona..................... 10 7 820 70 696
Colorado.................... 4 -- 286 -- 286
-- -- ----- --- -----
54 38 6,970 982 4,676
== == ===== === =====

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(a) The number of projects held for development includes owned projects with
houses in the planning, development, construction and sales stages.

(b) The number of projects in the sales stage includes projects where the sales
office has opened, reservations are being taken or sales contracts are being
executed.

(c) Includes units under construction, in backlog and lots under option in owned
projects.
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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.

Since the financial restructuring in fiscal year 1998, the Company,
together with its financial partners, has invested over $220 million in nine new
joint ventures. The Company typically is required to fund a small percentage of
the capital requirements of each joint venture, which amount is included in
investments in and advances to unconsolidated joint ventures in the Company's
consolidated balance sheets.

At February 28, 1999, the Company's residential joint ventures were as
follows:

UNITS
REMAINING
TOTAL UNITS UNITS CLOSED AT
JOINT VENTURE PLANNED IN FY 1999 2/28/99
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Grand Coto Estates, LP -- Orange County.............. 93 53 11
M.P.E. Partners, LP -- Los Angeles County............ 51 35 10
RPV Associates, LLC -- Los Angeles County............ 79 0 79
CPH Dana Point, LLC -- Orange County................. 49 0 49
CPH Monarch Beach, LLC -- Orange County.............. 65 0 65
CPH Resorts I, LLC -- Orange County(a)............... 238 0 238
CPH Newport Coast, LLC -- Orange County.............. 97 0 97
CPH Vista Palisades, LLC -- San Diego County......... 55 0 55
--- --- ---
727 88 604
=== === ===

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(a) Residential portion of joint venture.

In addition, at February 28, 1999, the Company's mixed-use and commercial
joint ventures were as follows:

JOINT VENTURE DESCRIPTION
------------- -----------

Atlanta Huntington Beach, LLC Mixed-use
CPH Resorts I, LLC Hotel, Residential and Golf Operations
CPH Dos Pueblos Associates, LLC Golf Course Development
CPH Airport Office Building, LLC Commercial Office Building
CPH Redhill Office Building, LLC Commercial Office Buildings

LAND ACQUISITION

For typical residential developments, the Company tries to purchase and
hold land in California in amounts sufficient to support home production and
sales over a 24 to 48 month period. The Company also tries to maintain an
additional 18 month supply of entitled land through options and other means. The
Company typically purchases or options entitled land in Nevada, Texas, Arizona
and Colorado in amounts sufficient to support home production and sales over an
18 month to 36 month period. The Company typically does not acquire and hold
land for speculative investment.

The Company typically considers numerous factors when analyzing the
suitability of land for acquisition and development including, but not limited
to, proximity to existing developed areas; population growth patterns;
availability of existing community services (i.e., utilities, schools and
transportation); employment growth rates; anticipated absorption rates for new
housing; and the estimated cost of development.

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The Company tries to avoid speculative building by constraining project
phase sizes, and entitlement risks by acquiring entitled land when practicable
and acquiring lots through the use of options, development agreements and joint
ventures with lot owners, when appropriate. Additionally, by forming strategic
alliances with partners, the Company has been able to obtain access to
additional capital and construction financing to spread project risk, which
allows the Company to minimize the risk of holding property and to preserve its
capital. To date, the Company's alliances have been conducted through joint
ventures.

During fiscal 1999, the Company has expanded its land development presence
in the Southern California market. Specifically, four new projects, all
structured as joint ventures, currently consist of land in various stages of
entitlement.

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, floor plans, and exterior styles in an effort to enhance home
values by creating diversified neighborhood looks within its projects.
Generally, the Company selects the exterior finishes of its homes. The Company
offers homebuyers the opportunity to engage interior design consultants to
personalize the interior of their homes. Such services are offered at an
additional cost to buyers in California through the Company's wholly owned
subsidiary, Newport Design Center ("Newport Design"), or the services may be
provided through the homebuyer's own consultants.

DEVELOPMENT AND CONSTRUCTION

The Company acts as the general contractor for the construction of its
projects. Virtually all construction work for the Company is performed by
subcontractors. The Company's consultants and employees coordinate the
construction of each project and the activities of subcontractors and suppliers,
and subject their work to quality and cost controls and compliance with zoning
and building codes. Subcontractors typically are retained on a phase-by-phase
basis to complete construction at a fixed price. Agreements with the Company's
subcontractors are generally entered into after competitive bidding on a project
by project basis. The Company has established relationships with a large number
of subcontractors and is not dependent to any material degree upon the services
of any one subcontractor and believes that, if necessary, it can generally
retain sufficient qualified subcontractors for each aspect of construction. The
Company believes that conducting its operations in this manner enables it not
only to readily and efficiently adapt to changes in housing demand, but also to
avoid fixed costs associated with retaining construction personnel.

The Company typically develops its projects in several phases generally
averaging approximately 10 - 15 homes per phase. From market studies, the
Company determines the number of homes to be built in the first phase, the
appropriate price range for the market and other factors. The first phase of
home construction is typically small to reduce risk while the Company measures
consumer demand. Construction generally does
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not begin until some sales have occurred, except for construction of model
homes. Subsequent phases are generally not started until 50% to 75% of the homes
in the previous phase have been sold. Sales prices in the second phase are then
adjusted to reflect market demand as evidenced by sales experience in the first
phase. With each subsequent phase, the Company continues to accumulate market
data which, along with information such as time of year, the local labor
situation and the availability of materials and supplies, enables the Company to
determine the pricing, timing and size of subsequent phases. Although the time
required to complete a phase varies from development to development depending on
the above factors, the Company typically completes construction of a phase
within one of its California developments in approximately six to ten months for
larger homes and four to five months for smaller homes and within its Nevada,
Texas, Arizona and Colorado developments within three to four months.

Clark Wilson was recently nominated for a Smithsonian Award for innovative
and progressive use of technology in the construction industry.

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 and magazine advertisements, brochures, direct mail and the
placement of strategically located sign boards in the immediate areas of its
projects, and occasionally places radio and television advertisements. Because
the Company usually offers multiple projects within a market area, it is able to
utilize regional advertising that highlights all of the Company's projects
within that same market area. Most advertising materials and brochures are
designed through the Company's wholly-owned subsidiary, Creative Design & Media
in California, Nevada, Arizona and Colorado and in-house in Texas.

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The Company has established a highly sophisticated website on the Internet.
The website address is 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. In addition, Clark Wilson Homes
recently won several awards in Texas for its website which can be found at
www.clarkwilsonhomes.com.

The Company provides flooring and other amenities and upgrades to its
homebuyers in California through its wholly-owned subsidiary, Newport Design,
and through its other design centers in Nevada and Texas.

OPERATING DATA

The following table shows new home and lot deliveries, net new orders and
average sales prices for each of the last three fiscal years for each of the
Company's operations, including unconsolidated joint ventures:

YEAR END
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1998 1999
------------ ------------ ------------

New homes delivered:
California.................................... 266 246 119
Texas......................................... 346 343 438
Nevada........................................ 299 208 217
Arizona....................................... 171 76 70
-------- -------- --------
Subtotal................................... 1,082 873 844
Unconsolidated Joint Ventures (California).... 31 36 88
-------- -------- --------
Total homes delivered...................... 1,113 909 932
-------- -------- --------
Lots delivered................................ 27 60 50
-------- -------- --------
Total homes and lots delivered............. 1,140 969 982
======== ======== ========
Net new orders................................ 1,039 919 1,053
======== ======== ========
Average sales price for homes delivered:
California (excluding joint ventures)......... $310,000 $370,000 $566,000
California (including joint ventures)......... 324,000 404,000 698,000
Texas......................................... 163,000 157,000 164,000
Nevada........................................ 143,000 161,000 190,000
Arizona....................................... 111,000 142,000 148,000
Combined (excluding joint ventures)........... 188,000 217,000 224,000
Combined (including joint ventures)........... 193,000 233,000 287,000

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 28, 1997 FEBRUARY 28, 1998 FEBRUARY 28, 1999
------------------ ----------------- -----------------
UNITS ($000S) UNITS ($000S) UNITS ($000S)
------ -------- ----- -------- ----- --------

California................... 98 $51,900 122 $ 75,000 51 $ 45,700
Texas........................ 159 24,400 200 30,700 252 47,600
Nevada....................... 78 12,600 41 7,100 57 12,200
Arizona...................... 31 4,400 13 2,200 137 18,500
--- ------- --- -------- --- --------
Total.............. 366 $93,300 376 $115,000 497 $124,000
=== ======= === ======== === ========

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 1998, including unconsolidated joint ventures. The
Company's backlog at any given time is a good indicator of the number of units
that will be closed in the four to six months following such date:

ENDING BACKLOG
NET NEW HOMES -----------------
ORDERS CLOSED UNITS ($000S)
------- ------ ----- --------

Fiscal Year 1999
1st Quarter................................... 196 152 420 $124,500
2nd Quarter................................... 261 235 446 120,800
3rd Quarter................................... 249 205 490 145,300
4th Quarter................................... 347 340 497 124,000
----- ---
Total Fiscal Year 1999................ 1,053 932
===== ===
Fiscal Year 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
===== ===

MORTGAGE COMPANY

The Company established mortgage operations in California through its
wholly owned subsidiary Capital Pacific Mortgage, Inc. during fiscal year 1996.
The Company offers mortgage broker services to certain of its homebuyers through
Capital Pacific Mortgage, Inc. The Company also offers mortgage broker services
to certain of its Texas homebuyers through its subsidiary, Fairway Financial
Company (Fairway), established in fiscal year 1995.

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 Arizona, 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 homebuilding industry is highly competitive. In each of the markets in
which it operates, the Company competes in terms of location, design, quality
and price with numerous other residential builders, including large national and
regional firms, some of which have greater financial resources than the Company.
As the Company enters and until it develops a reputation in a new market area,
the Company can expect to face even more significant competitive pressures. In
certain markets, the Company may from time to time engage in redesigns of
product and/or make changes in existing model homes to make the Company's
product more competitive. Such redesigns and/or changes may cause the Company to
incur additional expenses and/or to write-off previous investments in such
design or model homes.

REGULATION

The housing 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, particularly in California. In
addition, due to the Company's increasing participation in land development
activities though certain of its joint ventures, the Company is subject to
greater exposure to regulatory risks.

EMPLOYEES

As of April 30, 1999, the Company employed 258 persons full-time, compared
to 229 persons at April 30, 1998. Of these, 24 were in executive positions, 51
were engaged in sales activities, 80 in project management activities and 103 in
administrative and clerical activities. In addition, one of the Company's
unconsolidated joint ventures employs 95 employees in golf and food service
operations. None of the Company's employees is represented by a union and the
Company considers its employee relationships to be good.

RAW MATERIALS

All of the raw materials and most of the components used in the Company's
business are readily available in the United States. Most are standard items
carried by major suppliers. However, a rapid increase in the number of homes
started could cause shortages in the availability of such materials, thereby
leading to delays in the delivery of homes under construction. In addition,
increases in the price of lumber and other materials have a negative impact on
margins. In order to maintain its quality standards while providing a product at
good value, the Company has used and will under appropriate market circumstances
consider the further use of alternative materials, such as metal studs and
framing in some of its projects.

ITEM 2. PROPERTIES

The Company owns two office facilities and leases other facilities in
California, Nevada, Texas, Arizona and Colorado. The Company owns its principal
offices, which are located at 4100 MacArthur Blvd., Newport Beach, California,
where the Company occupies approximately 20,400 out of a total 43,800 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, including a well publicized dispute in Orange
County which was resolved during fiscal 1999. The legal responsibility and
financial impact with respect to pending litigation cannot be presently
ascertained.

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

None.

PART II

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

The Company's Common Stock is traded on the American Stock Exchange (AMEX)
under the Symbol "CPH." The following table sets forth the quarterly high and
low sales prices for the Common Stock for the periods indicated.

HIGH LOW
----- -----

FISCAL 1999
Fourth Quarter............................................ $3.38 $2.50
Third Quarter............................................. 3.75 2.63
Second Quarter............................................ 5.00 2.50
First Quarter............................................. 5.06 3.13
FISCAL 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

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, 1999, 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, 1999, February 28, 1998,
February 28, 1997, February 29, 1996 and February 28. 1995. 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
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------

INCOME STATEMENT DATA:
Sales of homes and land.................................... $143,089 $168,679 $216,549 $191,098 $192,422
Cost of sales.............................................. 105,430 133,706 164,814 148,702 156,493
Impairment loss on real estate assets...................... -- -- -- 8,000 --
-------- -------- -------- -------- --------
Gross margin............................................... 37,659 34,973 51,735 34,396 35,929
Income from unconsolidated joint ventures.................. -- 1,560 259 764 7,949
Selling, general and administrative expenses............... (22,314) (22,895) (30,282) (24,744) (21,186)
Interest expense(1)........................................ (6,722) (10,373) (18,743) (14,264) (17,842)
-------- -------- -------- -------- --------
Income (loss) from operations.............................. 8,623 3,265 2,969 (3,848) 4,850
Interest and other income, net............................. -- 920 900 1,391 1,381
Minority interest(2)....................................... (5,883) (1,080) 192 (469) (1,850)
Provision for litigation judgment.......................... (1,950) -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes and extraordinary
items.................................................... 790 3,105 4,061 (2,926) 4,381
Income tax expense (benefit)............................... 216 503 539 (735) 1,095
-------- -------- -------- -------- --------
Income (loss) before extraordinary items................... 574 2,602 3,522 (2,191) 3,286
Extraordinary gain for debt retired at less than face
value, net of taxes...................................... 3,075 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss).......................................... $ 3,649 $ 2,602 $ 3,522 $ (2,191) $ 3,286
======== ======== ======== ======== ========
Net income (loss) per common share:(3)
Before extraordinary items................................. $ .04 $ .17 $ .23 $ (.15) $ .23
Extraordinary items........................................ .20 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) per share -- basic and diluted........... $ .24 $ .17 $ .23 $ (.15) $ .23
======== ======== ======== ======== ========
Weighted average shares -- basic........................... 14,995 14,995 14,995 14,795 14,237
======== ======== ======== ======== ========
Weighted average shares -- diluted(7)...................... 14,995 14,995 14,995 14,795 14,271
======== ======== ======== ======== ========

1995 1996 1997 1998 1999
-------- -------- -------- -------- --------

BALANCE SHEET DATA:
Real estate projects....................................... $167,807 $227,194 $233,562 $192,347 $261,333
Total assets............................................... 215,175 266,508 271,918 251,655 324,763
Notes payable.............................................. 29,391 63,929 73,474 36,714 91,489
Senior Unsecured Notes Payable............................. 100,000 100,000 100,000 100,000(4) 100,000(4)
Minority interest.......................................... 3,524 2,894 360 30,061(4) 30,032(4)
Stockholders' equity....................................... 60,744 63,346 66,868 63,050(4) 65,354(4)
OPERATING DATA (IN UNITS):
Homes closed............................................... 824(5) 1,174 1,113 909 932
Homes contracted for....................................... 835(6) 1,182 1,039 919 1,053
Homes in backlog........................................... 432 440 366 376 497

- ---------------
(1) Represents interest costs initially capitalized which are recognized as
homes and land are sold.

(2) Includes the minority interest share of earnings of CPH LLC since the
financial restructuring in fiscal year 1998.

(3) Reflects per share amounts on both a basic and diluted basis. See Note 1 to
the Consolidated Financial Statements.

(4) At February 28, 1999 and 1998, respectively, minority interest includes
$29.9 million and $29.8 million of capital in CPH LLC attributable to CHF.
At February 28, 1999 and 1998, respectively, CPH LLC had total capital
accounts of $92.5 million and $91.4 million and was the sole obligor for the
balance of the $100 million Senior Unsecured Notes Payable.

(5) Excludes homes closed by Clark Wilson for the six month period prior to the
acquisition of Clark Wilson.

(6) Excludes 116 homes in Clark Wilson's backlog at August 31, 1994 (prior to
the Clark Wilson acquisition).

(7) Reflects dilution due to outstanding warrants and stock options. See Note 1
to the Consolidated Financial Statements.

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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 are used throughout this discussion for
comparative purposes wherever the phrase "pro forma" is utilized.

RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)

YEAR ENDED
------------------------------------------------------------------------------------
FEBRUARY 28, 1997 FEBRUARY 28, 1998 FEBRUARY 28, 1999
-------------------------- -------------------------- --------------------------
PRO FORMA PRO FORMA PRO FORMA
(INCLUDING (INCLUDING (INCLUDING
ACTUAL JOINT VENTURES) ACTUAL JOINT VENTURES) ACTUAL JOINT VENTURES)
-------- --------------- -------- --------------- -------- ---------------

Sales of homes and land.... $216,549 $227,750 $191,098 $214,093 $192,422 $271,372
Cost of sales.............. 164,814 175,105 156,702 174,431 156,493 217,059
-------- -------- -------- -------- -------- --------
Gross margin............. $ 51,735 $ 52,645 $ 34,396 $ 39,662 $ 35,929 $ 54,313
======== ======== ======== ======== ======== ========

As is noted in footnote 1 to the financial statements presented herein, the
Company is reporting its results on a consolidated basis with the results of CPH
LLC. References to the Company in this Item 7 are, unless the context indicates
otherwise, also references to CPH LLC. At the current time, all material
financing transactions and arrangements are incurred either by CPH LLC or by
project-specific entities.

FISCAL 1999 (YEAR ENDED FEBRUARY 28, 1999) COMPARED TO FISCAL 1998 (YEAR ENDED
FEBRUARY 28, 1998):

The Company reported income from operations of $4.9 million in fiscal 1999,
as compared to a net loss from operations of $3.8 million in fiscal 1998. The
Company reported net income of $3.3 million, or $0.23 per share, in fiscal 1999,
as compared to a net loss of $2.2 million, or $0.15 per share, in fiscal 1998.
The results for fiscal 1998 included an $8 million non-cash charge primarily for
the impairment of certain real estate projects.

Sales of homes and land including unconsolidated joint ventures were $271.4
million for fiscal 1999 compared to $214.1 million for fiscal 1998. The increase
was due to an increase in total home closings from 909 in fiscal 1998 to 932 in
fiscal 1999, including 36 and 88 homes, respectively, closed in unconsolidated
joint ventures, as well as an increase in average sales price from $233,000 in
fiscal 1998 to $287,000 in fiscal 1999.

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14

The increase in closings and average sales price was due primarily to
stronger demand in all of the Company's markets, and, to a lesser extent, due to
a recovery from the negative effect of El Nino weather conditions on fiscal 1998
closings. The Company's actual gross margin improved from 18.0% in fiscal 1998
to 18.7% in fiscal 1999, and the pro forma gross margin improved from 18.5% in
fiscal 1998 to 20.0% in fiscal 1999, due to a larger volume of closings in the
higher margin joint ventures during fiscal 1999.

Selling, general and administrative expense of $21.2 million for fiscal
1999 decreased $3.6 million or 14.4% as compared to fiscal 1998. As a percentage
of revenue, selling, general and administrative expense decreased from 12.9% in
fiscal 1998 to 11.0% in fiscal 1999.

Income from unconsolidated joint ventures increased from $764,000 in fiscal
1998 to $7.9 million in fiscal 1999, due to higher unit closings and higher
margins in the ongoing joint ventures, principally Grand Coto Estates, L.P. and
M.P.E. Partners, L.P. (MPE).

Interest and other income remained steady at $1.4 million between years and
consists primarily of the results of operations of the Company's mortgage broker
operations.

Minority interest of $469,000 in fiscal 1998 and $1.9 million in fiscal
1999 primarily represents the share of CPH LLC's income attributable to CHF
since October 1, 1997.

Interest incurred was $22.3 million in fiscal 1999, as compared to $20.4
million in fiscal 1998, while interest expensed was $17.8 million in fiscal 1999
as compared to $14.3 million in fiscal 1998. Substantially all interest costs
are initially capitalized and are recognized as homes and land are sold. As
presented in the consolidated statements of operations, income from
unconsolidated joint ventures for fiscal 1999 excludes the recognition of
approximately $2.1 million in interest previously capitalized to the lots
contributed to MPE. Such interest costs are included in interest expense.

The Company recorded a provision for income taxes of $1.1 million in fiscal
1999, as compared to a benefit of $735,000 in fiscal 1998. The effective tax
rate in both years was reduced from the statutory rate by the availability and
use of net operating loss carryforwards.

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, due primarily to the $8 million non-cash charge discussed above as
compared to net income of $3.5 million, or $0.23 per share, in fiscal 1997.

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.

The decrease in closings and the resultant decrease in sales were 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
18.0% for fiscal 1998 as compared to 23.9% for fiscal 1997. The Company's pro
forma gross margin on home and lot closings decreased by a smaller percentage to
18.5% during fiscal 1998 as compared to 23.1% in fiscal 1997 due to the impact
of a higher volume of closings in the higher margin joint ventures in fiscal
1998.

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.

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15

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 CPH 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 expensed 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.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal cash requirements are for the acquisition,
development, construction, marketing and overhead of its projects. The need to
stage the acquisition and use of raw materials such as land and finished lots
and the need, on certain projects, to construct community facilities ahead of
the start of home construction requires homebuilders such as the Company to
commit working capital for longer periods than many traditional manufacturing
companies. When building inventory, the Company uses substantial amounts of cash
that are generally obtained from borrowings, available cash flow from operations
and partners' contributions to joint ventures.

At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain project specific entities. As of
February 28, 1999, the Company has in place several credit facilities with
contingent availabilities totaling $220 million (the "Facilities") with various
bank lenders (the "Banks"), of which $90 million was outstanding. The Facilities
are secured by liens on various completed or under construction homes and lots
held by CPH LLC and CPH Newport Coast, LLC, a consolidated joint venture.
Pursuant to the Facilities, CPH LLC is subject to certain covenants, which
require, among other things, the maintenance of a consolidated liabilities to
net worth ratio, minimum liquidity, minimum net worth and loss limitations, all
as defined in the documents that evidence the Facilities. At February 28, 1999,
CPH LLC was in compliance with these covenants. The Facilities also define
certain events that constitute events of default. As of February 28, 1999, no
such event had occurred. Commitment fees are payable annually on some of the
Facilities.

Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors, including CHF, the investor in CPH LLC. In addition,
development work undertaken in certain of the Company's joint ventures is
financed through various non-recourse lending arrangements. The Company
anticipates that it will continue to utilize both third party financing and
joint ventures to cover financing needs in excess of internally generated cash
flow.

In May, 1994 the Company completed the sale of $100 million of 12 3/4%
Senior Notes including 790,000 warrants to purchase common stock. The proceeds
from the offering were used to repay certain debt of the Company, acquire
certain properties and for general working capital and construction purposes.
The obligations associated with the Senior Notes have been transferred from the
Company to CPH LLC.

The Indenture to which the Senior Notes are subject contains restrictions
on CPH LLC on the incurring of indebtedness, which affect the availability of
the Facilities based on various measures of the financial performance of CPH
LLC. Subject to such restrictions, the Facilities are available to augment cash
flow from operations and joint venture financing to fund the CPH LLC's
operations.

Management expects that cash flow generated from operations and from
additional financing permitted by the terms of the Indenture will be sufficient
to cover the debt service and to fund CPH LLC's current development and
homebuilding activities for the reasonably foreseeable future, and expects that
capital commitments from its joint venture partners and other bank facilities
will provide sufficient financing for the operation of its joint ventures.

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INTEREST RATES AND INFLATION

The long-term impact of inflation on the Company is manifested in increased
land prices, land development, construction and overhead costs balanced by
increased sales prices.

The Company generally contracts for land significantly before development
and sales efforts begin and, accordingly, to the extent land acquisition costs
are fixed, increases or decreases in the sales prices of homes, land and other
real estate properties may affect the Company's profits. Since the sales prices
of homes are fixed at the time of sale and the Company generally sells its homes
prior to commencement of construction, any inflation of construction costs in
excess of those anticipated may result in lower gross margins. The Company
generally attempts to minimize that effect by entering into fixed-price
contracts with its subcontractors and material suppliers for specified periods
of time, which generally do not exceed one year.

Housing demand, in general, is adversely affected by increases in interest
costs, as well as materials and other costs. Interest rates, the length of time
that land remains in inventory and the proportion of inventory that is financed
affect the Company's interest costs. If the Company is unable to duplicate its
past ability to raise sales prices enough to compensate for higher costs, or if
mortgage interest rates increase significantly, affecting prospective buyers'
ability to adequately finance a home purchase, the Company's homebuilding
revenues, gross margins and net income would be adversely affected. Increases in
sales prices, whether the result of inflation or demand, may affect the ability
of prospective buyers to afford a new home.

ASSET IMPAIRMENT CHARGES

During fiscal 1998, in connection with the restructuring and
recapitalization of the Company discussed above, management completed a process
of reevaluating and revising the Company's business plan, including its plans
for the development of its various projects. As a result of this analysis, it
was determined that certain of the Company's projects would require an
impairment charge when evaluated in accordance with SFAS No. 121. In addition,
management determined that certain warranty-related reserves should be adjusted.
Therefore, during the third quarter of fiscal 1998, the Company recorded a
non-cash charge of $8 million.

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 began assessing its Year 2000 ("Y2K") compliance issues during
fiscal 1998 and at that time determined that its primary internal computer
hardware and computer software were not Y2K compliant. Subsequently, the Company
determined that it would be more cost efficient to install a new Y2K compliant
software package than to modify the existing software package. In late 1998, the
Company contracted to purchase a new software package and upgraded its existing
primary computer hardware system to support the new computer software package,
as well as more fully integrate the Company's operations. The Company's goal is
full implementation of the new software package by August 31, 1999.

As part of a program of continuous technology updates, for the past several
years, the Company has upgraded personal computers in its locations and this
process will continue. As this occurs during 1999, personal computers at each
company location will be tested for Y2K compliance. These personal computer
upgrades are considered to be ongoing and are not considered to be specifically
Y2K related. The Company expects to incur some costs to replace or repair such
equipment, but has not presently determined the amount of these costs, which are
not expected to be material.

The Company also is investigating the Y2K compliance status of its vendors,
subcontractors and suppliers through the Company's own vendor compliance
program. For example, the Company has determined that its voicemail and security
systems at its Newport Beach headquarters are not Y2K compliant, and upgrades to
both systems were required. The Company's goal is to complete this investigation
and any corrective efforts by June 30, 1999. Since the Company does not rely on
any individual vendor, subcontractor or supplier for a
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17

significant portion of its operations, the potential impact of Y2K noncompliance
risks arising from such entities is not expected to have any material effect on
the Company. The Company does not believe that it is reasonably likely that Y2K
non-compliance will result in disruptions to its business that will have a
material adverse effect on the Company.

To date, the Company has incurred approximately $900,000 in connection with
Y2K readiness, including hardware, software, consulting fees, and other
expenses. The Company expects to incur additional expenditures of less than
$100,000 in fiscal 2000 in the course of becoming Y2K compliant. These consist
primarily of costs of hardware and software which would otherwise be incurred by
the Company in the normal course of its business. The additional costs incurred
by the Company may vary from these estimates but are not expected to be
material.

The Company's estimates of costs and completion dates for its Y2K readiness
program represent management's best estimates. These estimates are based upon
many assumptions, including the availability of external resources to assist
with systems remediation and replacement efforts, and key third party suppliers,
vendors and customers being Y2K compliant. If any of the assumptions ultimately
prove to have been incorrect, the cost estimates and completion dates set forth
above could be substantially and adversely affected.

While the Company believes it is taking all appropriate steps to achieve
internal Y2K compliance, any potential future business interruptions, costs,
damages or losses related thereto, also are dependent upon the Y2K compliance of
third parties. In the event that the Company or any of the Company's vendors,
subcontractors or suppliers experience disruptions due to the Y2K issue, the
Company's operations could be adversely affected. The Y2K issue is universal and
complex, as virtually every computer operation will be affected in some way.
Consequently, no assurance can be given that complete Y2K compliance can be
achieved without significant additional costs. Also, the Company could be
materially impacted by widespread economic or financial market disruptions or by
Y2K computer system failures at financial institutions or government agencies on
which the Company is dependent for financing, utilities, zoning, building
permits and related matters. There can be no assurance that Y2K will not
adversely affect the Company and its operations.

A formal Y2K internal contingency plan has not been prepared because the
Company does not anticipate a material disruption to its business and because
the Company is able to rely on a variety of systems, vendors, subcontractors and
suppliers in the event of Y2K disruptions that are likely to occur.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). Under the provisions of SFAS 133, companies
are required to recognize all derivatives as either assets or liabilities in the
statements of financial position and measure those instruments at fair value.
The Company is required to adopt SFAS 133 effective March 1, 2001. Currently,
the Company does not have any instruments that would qualify as derivatives
under SFAS 133. Accordingly, the Company does not believe SFAS 133 would have a
material impact on the Company's financial position, results of operations, or
liquidity at the current time.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risks related to fluctuations in interest
rates on its debt. Currently, the Company does not utilize interest rate swaps,
forward or option contracts on foreign currencies or commodities, or other types
of derivative financial instruments. The purpose of the following analysis is to
provide a framework to understand the Company's sensitivity to hypothetical
changes in interest rates as of February 28, 1999. Many of the statements
contained in this section are forward looking and should be read in conjunction
with the Company's disclosures under the heading "Forward-Looking Statements."

The Company utilizes debt financing primarily for the purpose of acquiring
and developing land and constructing and selling homes. Historically, the
Company has made short-term borrowings under its

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18

revolving credit facilities to fund these expenditures. In addition, the Company
has previously issued $100 million in fixed rate debt to provide longer-term
financing.

For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt instrument, but not the Company's earnings or cash
flows. Conversely, for variable rate debt, changes in interest rates generally
do not impact fair market value of the debt instrument, but do affect the
Company's future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a result,
interest rate risk and changes in fair market value should not have a
significant impact on the fixed rate debt until the Company would be required to
refinance such debt. Holding the variable rate debt balance constant, each
one-percentage point increase in interest rates would result in an increase in
variable rate interest incurred for the coming year of approximately $800,000.

The table below details the principal amount and the average interest rates
for debt for each category based upon the expected maturity dates. The carrying
value of the Company's variable rate debt approximates fair value due to the
frequency of repricing of this debt. The Company's fixed rate debt consists of
the senior notes payable. Senior notes payable are publicly traded debt
instruments and their fair values are based on their quoted market prices as of
February 28, 1999.

EXPECTED MATURITY DATE
---------------------------------------------------
FEBRUARY 28,
-------------------------------------- FAIR
2000 2001 2002 2003 THEREAFTER TOTAL VALUE
------- ------- ------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)

LIABILITIES:
Fixed rate debt.......... $ -- $ -- $ -- $100,000 $ -- $100,000 $90,000
Average interest
rate................ -- -- -- 12.75% -- 12.75% --
Variable rate debt....... $23,619 $23,901 $43,969 $ -- $ -- $ 91,489 $91,489
Average interest
rate................ 8.34% 8.25% 9.11% -- -- 8.69%

The Company does not believe that the future market rate risks related to
the above securities will have a material adverse impact on the Company's
financial position, results of operations or liquidity.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CAPITAL PACIFIC HOLDINGS, INC.

PAGE
----

Reports of Independent Public Accountants................... 20
Consolidated Balance Sheets as of February 28, 1998 and
1999...................................................... 23
Consolidated Statements of Operations for the years ended
February 28, 1997, 1998 and 1999.......................... 24
Consolidated Statements of Stockholders' Equity for the
years ended February 28, 1997, 1998 and 1999.............. 25
Consolidated Statements of Cash Flows for the years ended
February 28, 1997, 1998 and 1999.......................... 26
Notes to Consolidated Financial Statements.................. 27

GRAND COTO ESTATES, L.P.

Report of Independent Auditors.............................. 41
Balance Sheets as of December 31, 1998 and 1997............. 42
Statements of Operations for the years ended December 31,
1998 and 1997............................................. 43
Statements of Partners' Capital for the years ended December
31, 1998 and 1997......................................... 44
Statements of Cash Flows for the years ended December 31,
1998 and 1997............................................. 45
Notes to Financial Statements............................... 46

M.P.E. PARTNERS, L.P.

Reports of Independent Auditors............................. 49
Balance Sheets as of December 31, 1998 and 1997............. 50
Statements of Operations for the year ended December 31,
1998 and for the period March 14, 1997 (Inception) through
December 31, 1997......................................... 51
Statements of Partners' Capital for the year ended December
31, 1998 and for the period March 14, 1997 (Inception)
through December 31, 1997................................. 52
Statements of Cash Flows for the year ended December 31,
1998 and for the period March 14, 1997 (Inception) through
December 31, 1997......................................... 53
Notes to Financial Statements............................... 54

19
20

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, 1998 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended February 28, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of certain Joint Ventures (Notes 1 and 4), the investments in which
are reflected in the accompanying financial statements using the equity method
of accounting. The investments in these Joint Ventures represent 1.2 and 1.7
percent of the Company's total assets at February 28, 1998 and 1999,
respectively, and the equity in the net income (loss) of these Joint Ventures
was $(323,000), $834,000 and $5,819,000 for the years ended February 28, 1997,
1998 and 1999, respectively. Those statements were audited by other auditors
whose reports have been furnished to us and our opinion, insofar as it relates
to the amounts included for those entities, is based on the reports of the other
auditors.

We conducted our audits in accordance with 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, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended February 28, 1999, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Orange County, California
May 25, 1999

20
21

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 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 JMP Canyon Estates, L.P. as
of December 31, 1996, 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 28, 1997

21
22

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 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 JMP Harbor View, L.P. as of
December 31, 1996, 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 28, 1997

22
23

CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

FEBRUARY 28, FEBRUARY 28,
1998 1999
------------ ------------

Cash and cash equivalents................................... $ 4,328 $ 5,782
Restricted cash............................................. 1,361 1,029
Accounts and notes receivable............................... 26,191 12,533
Real estate projects........................................ 192,347 261,333
Property, plant and equipment............................... 7,857 9,014
Investment in and advances to unconsolidated joint
ventures.................................................. 6,762 23,301
Prepaid expenses and other assets........................... 12,809 11,771
--------- ---------
Total assets...................................... $ 251,655 $ 324,763
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 21,830 $ 37,888
Notes payable............................................... 36,714 91,489
Senior unsecured notes payable.............................. 100,000 100,000
--------- ---------
Total liabilities................................. 158,544 229,377
--------- ---------
Minority interest........................................... 30,061 30,032
--------- ---------
Stockholders' equity:
Common stock, par value $.10 per share; 30,000,000 shares
authorized; 14,305,511 and 14,027,911 shares issued and
outstanding, respectively.............................. 1,500 1,500
Additional paid-in capital................................ 211,888 211,888
Accumulated deficit....................................... (148,711) (145,425)
Treasury stock............................................ (1,627) (2,609)
--------- ---------
Total stockholders' equity........................ 63,050 65,354
--------- ---------
Total liabilities and stockholders' equity........ $ 251,655 $ 324,763
========= =========

See accompanying notes to financial statements.
\
23
24

CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)

FOR THE YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1998 1999
------------ ------------ ------------

Sales of homes and land................................. $216,549 $191,098 $192,422
Cost of sales........................................... 164,814 148,702 156,493
Impairment loss on real estate assets................... -- 8,000 --
-------- -------- --------
Gross margin.......................................... 51,735 34,396 35,929
Income from unconsolidated joint ventures............... 259 764 7,949
Selling, general and administrative expenses............ (30,282) (24,744) (21,186)
Interest expense........................................ (18,743) (14,264) (17,842)
-------- -------- --------
Income (loss) from operations......................... 2,969 (3,848) 4,850
Interest and other income, net.......................... 900 1,391 1,381
Minority interest....................................... 192 (469) (1,850)
-------- -------- --------
Income (loss) before income taxes..................... 4,061 (2,926) 4,381
Provision (benefit) for income taxes.................... 539 (735) 1,095
-------- -------- --------
Net income (loss)..................................... $ 3,522 $ (2,191) $ 3,286
======== ======== ========
Net income (loss) per common share -- basic and
diluted............................................ $ 0.23 $ (0.15) $ 0.23
======== ======== ========
Weighted average number of common shares -- basic..... 14,995 14,795 14,237
======== ======== ========
Weighted average number of common shares -- diluted... 14,995 14,795 14,271
======== ======== ========

See accompanying notes to financial statements.
24
25

CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED FEBRUARY 28, 1999
(IN THOUSANDS, EXCEPT SHARES)

COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
---------- ------ ---------- ----------- -------- -------

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
Repurchase of common stock........ (277,600) -- -- -- (982) (982)
Net income........................ -- -- -- 3,286 -- 3,286
---------- ------ -------- --------- ------- -------
BALANCE, February 28, 1999.......... 14,027,911 $1,500 $211,888 $(145,425) $(2,609) $65,354
========== ====== ======== ========= ======= =======

See accompanying notes to financial statements.
25
26

CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

FOR THE YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1998 1999
------------ ------------ ------------

OPERATING ACTIVITIES:
Net income (loss)..................................... $ 3,522 $ (2,191) $ 3,286
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
--
Depreciation and amortization...................... 1,876 1,685 1,768
Changes in Assets and Liabilities:
(Increase) decrease in accounts and notes
receivable.................................... (380) (21,390) 13,658
(Increase) decrease in real estate projects...... (6,368) 41,215 (68,986)
(Increase) decrease in prepaid expenses and other
assets........................................ (1,131) (1,383) 610
Increase (decrease) in accounts payable and
accrued liabilities........................... (5,123) (9,386) 16,058
Equity in earnings of unconsolidated joint
ventures, including interest expense............. (259) (764) (5,822)
Minority interest.................................. (192) 469 1,850
--------- --------- ---------
Net cash provided by (used in) operating
activities.................................. (8,055) 8,255 (37,578)
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment................... (2,937) (1,796) (2,164)
Decrease (increase) in investments in and advances to
unconsolidated joint ventures...................... 1,373 (4,410) (10,718)
--------- --------- ---------
Net cash provided by (used in) investing
activities.................................. (1,564) (6,206) (12,882)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable........................... 143,596 129,169 208,383
Principal payments of notes payable................... (134,051) (165,929) (153,608)
Capital contributions (distributions) to minority
interest, net...................................... (2,342) 29,232 (1,879)
Repurchase of common stock............................ -- (1,627) (982)
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................. 7,203 (9,155) 51,914
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (2,416) (7,106) 1,454
CASH AND CASH EQUIVALENTS, beginning of period.......... 13,850 11,434 4,328
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period................ $ 11,434 $ 4,328 $ 5,782
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH AND NON-CASH ACTIVITIES:
Cash paid during the year for interest, all
capitalized to real estate projects................ $ 22,640 $ 19,800 $ 22,289
Cash paid during the year for income taxes............ 540 -- --

See accompanying notes to financial statements.
26
27

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, Arizona and Colorado 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. Subject to adjustment
and exceptions under certain circumstances, CHF has the same interest in all
future business of the Company, all of which will be conducted either within CPH
LLC or through project-specific entities. At February 28, 1999, CPH LLC had $275
million in assets and a net worth of $92 million. In addition, the Company has
interests in unconsolidated joint ventures which have total assets of $299
million and a combined net worth of $250 million at February 28, 1999. The
Company is the sole managing member of CPH LLC. The Company maintains certain
licenses and other assets as is necessary to fulfill its obligations as managing
member. The Company and its subsidiaries perform 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. In addition, the Company is a managing member of
certain project-specific entities.

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 project-specific entities.

The Company is a regional builder with operations throughout selected
metropolitan areas of Southern California, Nevada, Texas and Arizona. The
Company has recently purchased land and begun development in Colorado.
Approximately 54, 15, 27 and 4 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, 1999.

The Company has recently expanded its operating strategy to encompass the
development of unentitled land and commercial and mixed-use projects, as well as
ownership of existing commercial properties through various joint ventures.

The Company's business, and the markets which it serves in California,
Nevada, Texas, Arizona and Colorado are affected by local, national and world
economic conditions and events, in particular by the level of mortgage interest
rates, consumer confidence and real estate prices. The Company cannot predict
whether mortgage interest rates will be at levels attractive to prospective
homebuyers. If interest rates increase, in particular mortgage interest rates,
the Company's operating results could be adversely impacted.

Accounting Estimates

The preparation of financial statements in conformity with 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

27
28
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

revenues and expenses during the reported period. Significant estimates include
projected revenues and costs of projects, which impact the allocation of costs
to homes sold. Actual results could differ from estimated amounts.

Principles of Consolidation and Minority Interest in Joint Ventures

The consolidated financial statements for fiscal 1999 and 1998 include the
accounts of the Company and wholly owned subsidiaries, as well as the accounts
of CPH LLC, including the capital accounts of CPH LLC totaling $92 million at
February 28, 1999, $30 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.

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 $7,857,000 and $9,014,000 (net of accumulated
depreciation of $4,757,000 and $4,923,000, respectively) as of February 28, 1998
and February 28, 1999, respectively.

Real Estate Projects

All direct and indirect land costs, offsite and onsite improvements and
applicable interest and carrying charges are capitalized to real estate projects
under development. Capitalized costs are expensed as real estate is sold; direct
marketing costs are expensed in the period incurred. Land and land development
costs are accumulated by project and are allocated to individual phases using
the relative sales value method.

Prior to February 29, 1996, each real estate project was carried at the
lower of its cost or its estimated net realizable value. SFAS No. 121 changed
the method of valuing long-lived assets, including real estate projects, whereby
long-lived assets that are expected to be held and used in operations are to be
carried at the lower of cost or, if impaired, the fair value of the asset,
rather than the net realizable value. Long-lived assets to be disposed of should
be reported at the lower of carrying amount or fair value less cost to sell. For
purposes of applying SFAS 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

28
29
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

appropriate return and interest. The estimates used to determine the impairment
adjustment can change in the near term as the economy in the Company's key areas
changes.

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 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 the provisions of SFAS No. 66,
"Accounting for Sales of Real Estate," which specify minimum down payment
requirements, financing terms and certain other requirements for sales of real
estate.

Income from sales is recognized when title has passed, the buyer has met
minimum down payment requirements and the terms of any notes received by the
Company satisfy continuing investment requirements. At the time of sale,
accumulated costs are relieved from real estate projects and charged to cost of
sales on a relative sales value basis.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
which requires the liability method of accounting for income taxes.

Statements of Cash Flows

For purposes of the consolidated statements of cash flows, short-term
investments which have a maturity of 90 days or less from the date of purchase
are considered cash equivalents.

Stock Options

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.

29
30
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Net Income Per Common Share

Effective February 28, 1998, the Company adopted SFAS No. 128. This
statement requires the presentation of both basic and diluted net income per
share for financial statement purposes. Basic net income per share is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding. Diluted net income per share includes the
effect of the potential shares outstanding, including dilutive securities using
the treasury stock method. The table below reconciles the components of the
basic net income (loss) per share calculation to diluted net income (loss) per
share (in thousands, except per share data):

YEAR ENDED FEBRUARY 28,
-----------------------------------------------------------------------------
1997 1998 1999
----------------------- ------------------------- -----------------------
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------- ------ ------ ------ ------ -----

Basic Net Income (loss) Per Share:
Income (loss) available to common
stockholders................................ $3,522 14,995 $0.23 $(2,191) 14,795 $(0.15) $3,286 14,237 $0.23
Effect of Dilutive Securities:
Warrants...................................... -- -- -- -- -- -- -- 32 --
Stock options................................. -- -- -- -- -- -- -- 2 --
------ ------ ----- ------- ------ ------ ------ ------ -----
Diluted Net Income (Loss) Per Share:............ $3,522 14,995 $0.23 $(2,191) 14,795 $(0.15) $3,286 14,271 $0.23
====== ====== ===== ======= ====== ====== ====== ====== =====

Comprehensive Income

During the year ended February 28, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. For each of the three years ended February 28, 1999
comprehensive income equaled net income; therefore, a separate statement of
comprehensive income is not included in the accompanying financial statements.

Segment Reporting

Effective February 28, 1999, the Company adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." Under the provisions
of SFAS No. 131, the Company's operations are conducted primarily under one
segment, homebuilding, at this time.

Reclassifications

Certain reclassifications have been made to certain prior year balances in
order to conform with the current year presentation.

2. RESTRICTED CASH

The Company has restricted cash totaling $1,361,000 and $1,029,000 as of
February 28, 1998 and February 28, 1999, respectively. Included in these amounts
for fiscal 1998 and 1999 is $972,000 and $416,000, respectively, which was held
as collateral for the Company's bonding obligations which it incurs on behalf of
CPH LLC and certain joint ventures. The balance of restricted cash consists of
deposits to various municipalities, banks, and utilities to guarantee future
performance of development obligations.

30
31
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. REAL ESTATE PROJECTS

Real estate projects consist of the following at February 28, 1998 and
February 28, 1999 (in thousands):

1998 1999
-------- --------

Land and improvements under construction.................... $168,216 $232,340
Completed residential homes................................. 10,249 11,935
Completed model homes....................................... 13,882 17,058
-------- --------
$192,347 $261,333
======== ========

Total interest costs incurred during the years ended February 28, 1997,
February 28, 1998 and February 28, 1999 were $21,647,000, $20,411,000 and
$22,346,000, respectively, all of which was initially capitalized.

4. INVESTMENTS IN UNCONSOLIDATED ENTITIES

The Company is a general partner and has a 50 percent or less ownership in
14 unconsolidated entities at February 28, 1999. The Company's net investments
in and advances to unconsolidated entities are as follows at February 28, 1998
and February 28, 1999 (in thousands):

1998 1999
------ -------

Bay Hill Escrow............................................. $ 20 $ --
JMP Canyon Estates, L.P..................................... 500 207
JMP Harbor View, L.P........................................ 628 677
Grand Coto Estates, L.P..................................... 982 3,753
M.P.E. Partners, L.P........................................ 3,500 2,370
RPV Associates, LLC......................................... 1,125 1,644
CPH Dana Point, LLC......................................... 7 793
CPH Monarch Beach, LLC...................................... -- 1,205
CPH Resorts I, LLC.......................................... -- 4,268
CPH Vista Palisades, LLC.................................... -- 637
Atlanta Huntington Beach, LLC............................... -- 5,195
CPH Dos Pueblos, LLC........................................ -- 2,086
CPH Airport Office Building, LLC............................ -- 55
CPH Redhill Office Building, LLC............................ -- 411
------ -------
$6,762 $23,301
====== =======

The Company's ownership interests in the above entities vary. Generally,
the Company receives between 44 and 70 percent of earnings although a preferred
return on invested capital is provided. Typically, the majority of capital is
provided by capital partners. The Company is typically a general partner or
managing member in each of the above entities and is the managing entity
pursuant to terms in each venture's agreement. The Company's carrying amount in
each of the entities equals the underlying equity, and there are generally no
significant amounts of undistributed earnings that were not collected after year
end. The Company provides for income taxes currently on its share of distributed
and undistributed earnings and losses from the investments.

31
32
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, combined financial information for the
unconsolidated entities at February 28, 1998 and February 28, 1999 (in
thousands):

ASSETS

1998 1999
------- --------

Cash........................................................ $ 452 $ 4,373
Real estate projects........................................ 64,865 215,620
Commercial buildings........................................ -- 21,094
Other assets................................................ 2,113 57,998
------- --------
$67,430 $299,085
======= ========

LIABILITIES AND EQUITY

1998 1999
------- --------

Accounts payable and other liabilities...................... $ 8,974 $ 37,113
Notes payable............................................... -- 12,100
------- --------
8,974 49,213
------- --------
Equity
The Company............................................... 3,213 10,680
Others.................................................... 55,243 239,192
------- --------
58,456 249,872
------- --------
$67,430 $299,085
======= ========

INCOME STATEMENT

1997 1998 1999
------- ------- -------

Sales of homes and land............................... $11,201 $23,667 $78,950
Interest and other income, net........................ 425 351 7,151
------- ------- -------
11,626 24,018 86,101
Costs and expenses.................................... 10,627 20,293 72,416
------- ------- -------
Net income............................................ $ 999 $ 3,725 $13,685
======= ======= =======

The fiscal years of Grand Coto Estates, L.P. (Grand Coto) and M.P.E.
Partners, L.P. (MPE) end on December 31, pursuant to which the last year audited
by other auditors was the year ended December 31, 1998. The following separately
summarizes the activity of these investees, which are included in the
summarized, combined financial information above, for the Company's fiscal year
ended February 28, 1999 (amounts in thousands):

MPE GRAND COTO
------------------------------------- -------------------------------------
MARCH 1 - JANUARY 1 - MARCH 1 - JANUARY 1 -
DECEMBER 31, FEBRUARY 28, DECEMBER 31, FEBRUARY 28,
1998 1999 TOTAL 1998 1999 TOTAL
------------ ------------ ------- ------------ ------------ -------

Revenues................... $27,883 $12,248 $40,131 $11,307 $27,512 $38,819
Expenses................... 24,280 11,017 35,297 8,777 21,785 30,562
------- ------- ------- ------- ------- -------
Net income................. $ 3,603 $ 1,231 $ 4,834 $ 2,530 $ 5,727 $ 8,257
======= ======= ======= ======= ======= =======

32
33
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The condensed balance sheets for these joint ventures as of February 28,
1999, are as follows (amounts in thousands):

GRAND
MPE COTO
------- -------

ASSETS

Cash........................................................ $ 538 $ 477
Real estate projects........................................ 6,940 1,291
Other assets................................................ 5,148 1,013
------- -------
$12,626 $ 2,781
======= =======
LIABILITIES AND EQUITY
Accounts payable and other liabilities...................... $ 1,933 $ 2,472
------- -------
Equity
The Company............................................... 1,675 3,554
Others.................................................... 9,018 (3,245)
------- -------
10,693 309
------- -------
$12,626 $ 2,781
======= =======

As presented in the consolidated statements of operations, income from
unconsolidated joint ventures for fiscal 1999 excludes the recognition of
approximately $2.1 million in interest previously capitalized to the lots
contributed to MPE. Such interest costs are included in interest expense.

5. NOTES PAYABLE

Notes payable consist of the following at February 28, 1998 and February
28, 1999 (in thousands):

1998 1999
------- -------

Notes payable to banks, including interest varying from
prime to prime plus two percent maturing between July 31,
1999 and July 31, 2001 secured by certain real estate
projects on a non-recourse basis.......................... $24,709 $72,602
Notes payable to bank, including interest at prime with the
term of the commitment reducing commencing December 1,
1999 secured by certain real estate projects on a recourse
basis..................................................... 11,736 17,386
Other....................................................... 269 1,501
------- -------
$36,714 $91,489
======= =======

At February 28, 1998 and February 28, 1999, the aggregate carrying value of
assets collateralizing the above notes was $148,520,000 and $215,275,000,
respectively.

At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain project specific entities. As of
February 28, 1999, CPH LLC has in place several credit facilities with
contingent availabilities totaling $220 million (the "Facilities") with various
bank lenders (the "Banks"), of which $90 million was outstanding. The Facilities
are secured by liens on various completed or under construction homes and lots
held by CPH LLC and CPH Newport Coast, LLC, a consolidated joint venture.
Pursuant to the Facilities, CPH LLC is subject to certain covenants, which
require, among other things, the maintenance of a consolidated liabilities to
net worth ratio, minimum liquidity, minimum net worth and loss limitations, all
as defined in the documents that evidence the Facilities. At February 28, 1999,
CPH LLC was in compliance with these covenants. The Facilities also define
certain events that constitute events of default. As of February 28, 1999, no
such event had occurred. Commitment fees are payable annually on some of the
Facilities.

33
34
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors, including CHF, the investor in CPH LLC. In addition,
development work undertaken in certain of the Company's joint ventures is
financed through various non-recourse lending arrangements. The Company
anticipates that it will continue to utilize both third party financing and
joint ventures to cover financing needs in excess of internally generated cash
flow.

During the years ended February 28, 1997, February 28, 1998 and February
28, 1999, the highest month-end balance on notes payable was $83,152,000,
$73,305,000 and $101,943,000, respectively, and the weighted average outstanding
balance was $78,041,000, $54,310,000 and $70,073,000, respectively. The weighted
average interest rates on notes payable during the years ended February 28,
1997, February 28, 1998 and February 28, 1999, were 9.3 percent, 8.9 percent and
8.7 percent, respectively. The weighted average interest rates on notes payable
at February 28, 1997, February 28, 1998 and February 28, 1999, were 9.4 percent,
8.9 percent and 8.6 percent, respectively.

The aggregate scheduled principal maturities of notes payable are as
follows (in thousands):

AS OF
FEBRUARY 28,
1999
------------

Fiscal years ending:
2000........................................... $ 23,619
2001........................................... 23,901
2002........................................... 43,969
--------
TOTAL.................................. $ 91,489
========

6. SENIOR UNSECURED NOTES PAYABLE; WARRANTS

In May, 1994, the Company issued $100 million principal amount of its
12 3/4 percent Senior Notes due May 1, 2002 (the "Notes"). In connection with
the issuance of the Notes, the Company issued 790,000 warrants to purchase the
Company's common stock at a price of $3.30 per share, all of which are fully
exercisable until 2002. Interest is due and payable on May 1 and November 1 of
each year. Effective May 1, 1999, the Notes became redeemable at the option of
CPH LLC at 106.375% of their principal amount, declining ratably on an annual
basis to par on and after May 1, 2001, plus accrued interest.

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, 1999 CPH LLC was in compliance with these covenants and was not
required to make any such offer.

At February 28, 1999, unamortized bond issuance cost was $2.7 million, net
of accumulated amortization of $3.1 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.

34
35
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES

The provision (benefit) for income taxes consists of the following for the
years ended February 28, 1997, February 28, 1998 and February 28, 1999 (in
thousands):

1997 1998 1999
---- ------- ------

Current
Federal................................................. $351 $ 150 $ 75
State................................................... 188 215 220
---- ------- ------
539 365 295
---- ------- ------
Deferred.................................................. -- (1,100) 800
---- ------- ------
Provision (benefit) for income taxes...................... $539 $ (735) $1,095
==== ======= ======

The deferred income tax benefit (provision) at February 28, 1997, February
28, 1998 and February 28, 1999 results from the following temporary differences
between financial and tax reporting (in thousands):

1997 1998 1999
------- ------- -------

Accrued expenses...................................... $ (79) $ 104 $ (524)
Construction period expenses.......................... (1,482) 923 (46)
Depreciation.......................................... (99) (53) 30
Built-in losses....................................... -- (2,542) (1,213)
Net operating loss carryforward....................... 190 257 (664)
Decrease in valuation allowance....................... 1,470 2,411 1,617
------- ------- -------
$ -- $ 1,100 $ (800)
======= ======= =======

The components of the Company's deferred income tax asset (liability) as of
February 28, 1998 and February 28, 1999 are as follows:

1998 1999
------- -------

Accrued expenses............................................ $ 595 $ 71
Construction period expenses................................ 1,772 1,726
Depreciation................................................ (110) (80)
Built-in losses............................................. 4,139 2,926
Net operating loss carryforward............................. 988 324
Valuation allowance......................................... (6,284) (4,667)
------- -------
$ 1,100 $ 300
======= =======

A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The deferred
income tax asset is included in prepaid expenses and other assets in the
accompanying balance sheets.

35
36
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A reconciliation of the income tax provision (benefit) computed at the
federal statutory rate and the income tax benefit for financial reporting
purposes for the years ended February 28, 1997, February 28, 1998 and February
28, 1999, are as follows:

1997 1998 1999
---- ---- ----

Income taxes at statutory rate.............................. 34% 34% 34%
State income taxes, net of federal tax benefit.............. 3 3 3
Alternative minimum tax..................................... -- (5) 2
Franchise tax liability..................................... -- (7) 2
Utilization of net operating loss carryforward.............. (24) -- (16)
--- -- ---
13% 25% 25%
=== == ===

8. REPURCHASE OF COMMON STOCK

During the third quarter of fiscal 1998, the CPH LLC repurchased 1,015,000
shares of the Company's common stock which were issued to Roger Nix, the
previous owner of Durable Homes, Inc. ("Durable"), a wholly owned subsidiary of
the Company operating in Nevada, in connection with the Company's acquisition of
Durable in 1993, and distributed such shares to the Company and CHF in
proportion to their respective ownership percentages in the CPH LLC.
Accordingly, 689,489 shares were distributed to the Company and are being held
as treasury stock. As a result, the number of outstanding shares of the Company
was reduced from 14,995,000 to 14,305,511. The foregoing distribution is subject
to adjustment based on contractual arrangements between the Company and CHF.

In addition, in fiscal 1998, the Company announced a stock repurchase
program whereby up to 500,000 additional shares of the Company's outstanding
common stock may be repurchased by CPH LLC. As of February 28, 1999, 277,600
shares had been repurchased and held by CPH LLC under this program.

9. STOCK OPTION PLAN

Effective February 28, 1995, the Board of the Corporation approved the 1995
Stock Incentive Plan (the "1995 Plan"). The 1995 Plan permits a committee
designated by the Board of the Corporation to make awards to key employees and
directors of the Company and its subsidiaries. Subject to various restrictions,
awards could be in the form of stock options, restricted or unrestricted stock,
stock appreciation rights or a combination of the above. The maximum number of
shares or share equivalents that may be awarded under the 1995 Plan is
1,500,000.

Options are typically granted to purchase shares at prices equal to the
fair market value of the shares at the date of grant. The options are typically
intended to vest over a one to five year period and are generally intended to be
exercisable at various dates over one to 10 year periods. When the options are
exercised, the proceeds will be credited to equity along with the related income
tax benefits, if any.

36
37
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following is a summary of the transactions relating to the Company's
stock option plan for the year ended February 28, 1999:

WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- ----------------

Options outstanding, beginning of year................... -- $ --
Granted.................................................. 256,000 2.75
Exercised................................................ -- --
Canceled................................................. -- --
--------- -----
Options outstanding, end of year......................... 256,000 $2.75
========= =====
Options exercisable at end of year....................... --
=========
Options available for future grant....................... 1,244,000
=========

The following information is provided pursuant to the requirements of SFAS
No. 123. The fair value of each option granted during the year ended February
28, 1999 is estimated using the Black-Scholes option-pricing model on the date
of grant using the following weighted average assumptions:

Dividend yield.............................................. 0%
Expected volatility......................................... 35.5%
Risk-free interest rate..................................... 4.67%
Expected life............................................... 5 years

The 256,000 options outstanding as of February 28, 1999 all have exercise
prices of $2.75 and a remaining contractual life of 9.95 years. As of February
28, 1999, none of these options are exercisable. The per share fair value of all
options granted during fiscal 1999 was $1.07.

During the year ended February 28, 1999, no compensation expense was
recognized related to the stock options granted, however, had compensation
expense been determined consistent with SFAS No. 123 for the Company's stock
option grants for its stock-based compensation plan, the Company's net income
and diluted net income per share for the year ended February 28, 1999 would
approximate the pro forma amounts below (Dollars in thousands, except per share
amounts):

AS REPORTED PRO FORMA
----------- ---------

Net income.................................................. $3,286 $3,281
Diluted net income per common share......................... $ 0.23 $ 0.23

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.

10. RELATED PARTY TRANSACTIONS

Commitment fees totaling $534,000 were paid to joint venture partners and
capitalized to the real estate being developed during fiscal 1998. These
capitalized fees are included in cost of sales as the units are sold.

In fiscal 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. In fiscal 1999, the Company contributed cash
totaling $3,176,000 to unconsolidated joint ventures.

The Company has made reimbursable advances to unconsolidated joint ventures
for construction and other expenditures. The balance of advances at February 28,
1998 and 1999 was $3,552,000 and $14,450,000,

37
38
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

respectively. These amounts are included in investment in and advances to
unconsolidated joint ventures in the accompanying consolidated balance sheets.

During fiscal 1997, 1998 and 1999, the Company recognized $555,000,
$3,135,000 and $10,452,000 in construction overhead reimbursements from joint
ventures. Amounts are received pursuant to terms of the joint venture
agreements, which generally specify a fixed payment per month over the
anticipated period of development. Such amounts are included in selling, general
and administrative expenses in the accompanying statements of operations.

The Company entered into a cost sharing arrangement whereby the Company is
reimbursed by MPE for certain costs related to advertising and the operation and
maintenance of the models and sales office. Total shared costs charged to MPE
during the years ended February 28, 1998 and February 28, 1999 were $639,000 and
$1,354,000, respectively.

During fiscal 1999, the Company acquired four parcels of land for total
consideration of approximately $3,283,000 from a partnership in which an officer
of one of the Company's subsidiaries holds an ownership interest. The terms of
this transaction had been agreed upon prior to the time that this officer became
an employee of the Company.

Included in accounts receivable at February 28, 1998 and February 28, 1999
is $1,308,000 and $1,353,000, respectively, of amounts owed from the Company's
various unconsolidated joint ventures to the Company's wholly-owned subsidiary,
Newport Design Center, Inc. for goods and services rendered.

During fiscal 1999, approximately $207,000 was paid to a company owned by a
relative of the Chairman of the Board for services rendered in connection with
website design and maintenance and the development of virtual reality home tour
models. In addition, this company paid approximately $15,000 in rent for office
space leased from the Company during fiscal 1999.

An officer of the Company purchased a home from one of the Company's joint
ventures in fiscal 1999 for $780,000.

11. COMMITMENTS AND CONTINGENCIES

General

Approximately $28,447,000 and $31,228,000 of performance bonds which have
been issued on behalf of both CPH LLC and certain joint ventures, and for which
the Company has been indemnified, were outstanding at February 28, 1998 and
February 28, 1999, respectively. The estimated cost to complete the development
work related to the performance bonds are $14,989,000 and $14,980,000 at
February 28, 1998 and February 28, 1999, respectively. The beneficiaries of
these bonds are certain municipalities. CPH LLC has an outstanding letter of
credit of $416,000 as of February 28, 1999 to ensure performance on certain
agreements. CPH LLC has pledged a certificate of deposit in a like amount as
collateral for the obligation under the letter of credit which is included in
restricted cash.

38
39
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 2004. The facility leases generally provide that CPH LLC shall pay property
taxes, insurance and other items. Minimum payments under noncancelable leases at
February 28, 1999, are as follows (in thousands):

FISCAL YEARS ENDING:
--------------------

2000..................................................... $ 704
2001..................................................... 458
2002..................................................... 332
2003..................................................... 311
2004..................................................... 89
-------
Total.......................................... $ 1,894
=======

Total rent expense was $493,000, $338,000 and $442,000 for the years ended
February 28, 1997, February 28, 1998 and February 28, 1999, 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 28, 1997,
February 28, 1998 and February 28, 1999.

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 which was resolved during the year ended February 28, 1999. Although the
legal responsibility and financial impact with respect to pending claims and
litigation cannot be presently ascertained, the Company does not believe that
these matters will result in the payment by the Company, giving consideration to
any applicable insurance proceeds or contributions by other parties, that, in
the aggregate, would be material in relation to the financial position of the
Company. It is reasonably possible that the estimate of reserves provided for by
the Company with respect to such claims and litigation could change in the near
term and such change could be material.

12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate:

Cash and Equivalents -- The carrying amount is a reasonable estimate
of fair value. These assets primarily consist of short-term investments and
demand deposits.

Notes Payable to Banks -- These notes payable mature in two to three
years. The rates of interest paid on the notes approximate the current
rates available for secured real estate financing with similar terms and
maturities.

Senior Unsecured Notes Payable Due 2002 -- This issue is not publicly
traded on a major exchange. Consequently, the fair value of this issue is based
on a trade closest to the year ended February 28, 1999.

39
40
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The estimated fair values of the Company's financial instruments are as
follows (in thousands):

AT FEBRUARY 28, 1998 AT FEBRUARY 28, 1999
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- --------- -------

Financial Assets:
Cash and equivalents.................... $ 4,328 $ 4,328 $ 5,782 $5,782
Financial Liabilities:
Notes payable........................... 36,714 36,714 91,489 91,489
Senior unsecured notes payable.......... 100,000 108,000 100,000 90,000

13. UNAUDITED QUARTERLY FINANCIAL DATA

Summarized quarterly financial data for the years ended February 28, 1998
and February 28, 1999 is as follows (in thousands except for per share data):

QUARTER
---------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------

1999:
Sales of homes and land......... $28,292 $47,411 $47,717 $69,002 $192,422
Gross margin.................... 5,526 7,727 9,560 13,116 35,929
Net income...................... $ 340 $ 575 $ 485 $ 1,886 $ 3,286
======= ======= ======= ======= ========
Net income per common share..... $ 0.02 $ 0.04 $ 0.03 $ 0.13 $ 0.23
======= ======= ======= ======= ========
1998:
Sales of homes and land......... $34,956 $46,114 $47,722 $62,306 $191,098
Gross margin.................... 10,034 11,743 1,790(a) 10,829 34,396
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)
======= ======= ======= ======= ========

- ---------------
(a) Includes an $8,000 non-cash charge for impairment loss on real estate
assets.

40
41

REPORT OF INDEPENDENT AUDITORS

To the Partners
Grand Coto Estates, L.P.

We have audited the accompanying balance sheets of Grand Coto Estates,
L.P., a California limited partnership (the "Partnership"), as of December 31,
1998 and 1997, and the related statements of operations, partners' capital and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 Grand Coto Estates, L.P. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

February 10, 1999

41
42

GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

BALANCE SHEETS

DECEMBER 31, 1998 AND 1997

1998 1997
----------- -----------

ASSETS
Cash........................................................ $ 459,741 $ 26,987
Real estate inventories (Notes 2, 3 and 4).................. 20,164,994 17,411,104
Due from general partner (Note 3)........................... 56,467 --
Other assets................................................ 73,494 115,998
----------- -----------
$20,754,696 $17,554,089
=========== ===========

LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities.................... $ 3,948,578 $ 1,189,479
Due to general partner (Note 3)............................. -- 214,166
Note payable, net of unamortized discount of $28,875 at
December 31, 1997 (Note 4)................................ -- 575,206
----------- -----------
3,948,578 1,978,851
Commitments and contingencies (Note 5)
Partners' capital........................................... 16,806,118 15,575,238
----------- -----------
$20,754,696 $17,554,089
=========== ===========

See accompanying notes to financial statements.
42
43

GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

1998 1997
----------- ----------

SALES....................................................... $23,172,946 $5,057,989
COST OF SALES............................................... 16,659,863 3,778,997
----------- ----------
GROSS PROFIT................................................ 6,513,083 1,278,992
OTHER EXPENSES (INCOME)
Selling and marketing....................................... 1,572,850 372,859
Other income................................................ (35,473) (13,739)
----------- ----------
NET INCOME.................................................. $ 4,975,706 $ 919,872
=========== ==========

See accompanying notes to financial statements.
43
44

GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

IHP
INVESTMENT CAPITAL PACIFIC
FUND I, L.P. HOLDINGS, LLC TOTAL
------------ --------------- ------------

BALANCE -- December 31, 1996......................... $ 1,978,868 $ 760,922 $ 2,739,790
Contributions from partner........................... 16,766,839 -- 16,766,839
Distributions to partners............................ (4,675,763) (175,500) (4,851,263)
Net income........................................... 690,330 229,542 919,872
------------ ----------- ------------
BALANCE -- December 31, 1997......................... 14,760,274 814,964 15,575,238
Contributions from partner........................... 18,395,326 -- 18,395,326
Distributions to partners............................ (20,832,471) (1,307,681) (22,140,152)
Net income........................................... 3,027,853 1,947,853 4,975,706
------------ ----------- ------------
BALANCE -- December 31, 1998......................... $ 15,350,982 $ 1,455,136 $ 16,806,118
============ =========== ============

See accompanying notes to financial statements.
44
45

GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

1998 1997
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. 4,975,706 $ 919,872
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Cost of sales............................................. 16,659,863 3,778,997
Changes in operating assets and liabilities
Additions to real estate inventories................... (19,413,753) (13,559,319)
Due from general partner............................... (56,467) --
Other assets........................................... 42,504 (26,330)
Accounts payable and accrued liabilities............... 2,759,099 1,189,479
Due to general partner................................. (214,166) (90,207)
------------ ------------
Net cash provided by (used in) operating activities......... 4,752,786 (7,787,508)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable......................... (575,206) (4,101,081)
Capital contributions from partner.......................... 18,395,326 16,766,839
Capital distributions to partners........................... (22,140,152) (4,851,263)
------------ ------------
Net cash (used in) provided by financing activities......... (4,320,032) 7,814,495
------------ ------------
NET INCREASE IN CASH........................................ 432,754 26,987
CASH -- beginning of year................................... 26,987 --
------------ ------------
CASH -- end of year......................................... $ 459,741 $ 26,987
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest during the year...................... $ 28,875 $ 346,949
============ ============

See accompanying notes to financial statements.
45
46

GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998 AND 1997

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Grand Coto Estates, L.P., a California limited partnership (the
"Partnership"), was formed on October 30, 1996 in accordance with the provisions
of the laws of the State of California for the purpose of developing and selling
93 single-family homes in Coto de Caza, California (the "Project"). The general
partner, Peters Ranchland Company, Inc. ("Peters"), and the limited partner, IHP
Investment Fund I, L.P. ("IHP"), each owned a 50% interest in the Partnership at
inception. On October 1, 1997, Peters transferred its interest in the
Partnership to Capital Pacific Holdings, LLC ("CPH").

The Partnership Agreement provides that cash flows, as defined, are
distributed to the partners first, in the amount of the adjusted GAAP profit
component (as defined) from the sale of each home, in accordance with their
percentage interests; second, in satisfaction of unpaid preferred returns;
third, for payment of partners' capital contributions; fourth, in accordance
with their percentage interests.

Net income is allocated to the partners in the following order of priority:
first, to recover any net losses allocated previously; second, to the extent of
and in proportion to the amount by which cash flow distributed in satisfaction
of preferred returns and the adjusted GAAP profit component (as defined in the
partnership agreement) exceeds previously allocated net income; thereafter, in
accordance with their percentage interests. Net losses are allocated first, to
the general partner up to $2,076,921 plus all previously allocated net income;
second, to the limited partner until the limited partner's capital account is
reduced to zero; any remaining losses are allocated to the general partner.

The partnership agreement provides, among other things, that the partners
shall be entitled to receive a preferred return on contributed capital computed
using an interest rate equal to prime plus 2%. As of December 31, 1998 and 1997,
the Partnership has unpaid preferred returns of $394,827 and $624,550,
respectively, on IHP's capital contributions, and $8,178 and $92,494,
respectively, on CPH's capital contributions.

The preparation of the Partnership's financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of December 31, 1998 and 1997, and revenues and expenses for the
years then ended. Actual results could materially differ from those estimates in
the near term.

Real Estate Inventories

Real estate inventories include direct and indirect land costs, offsite
costs and onsite improvement costs, project commitment fees and builder overhead
fees which are capitalized to the real estate project. Selling and marketing
costs are expensed as incurred.

The Partnership complies with the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"). SFAS No. 121
requires the Partnership to review the Project whenever events or changes in
circumstances indicate that the cost basis of such assets may not be
recoverable. If the cost basis of the Project is greater than the projected
future net cash flows from the Project, an impairment loss is recognized.
Impairment losses are calculated as the difference between the Project's cost
basis and its estimated fair value, net of disposal costs on completed units, if
any. No impairment losses were recorded in December 31, 1998 and 1997,
accordingly, the Project is carried at its historical cost basis.

46
47
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Management estimates the projected future net cash flows of the Project
based on present development plans and intentions. The estimates assume that all
necessary Project entitlements are in place, development is completed and
disposition occurs in the normal course of business. Future economic, financial,
market and political conditions may affect management's development and
marketing plans. In addition, management's plans and the ultimate future net
cash flows of the Project may be affected by the availability of funding for
development and construction of single-family homes and the availability of
capital contributions from the partners.

Sales and Profit Recognition

Sales are recorded and profit is recognized when title has passed to a
buyer who has met down payment and continuing investment criteria and
substantially all of the risks and rewards of ownership have been transferred to
the buyer. At the time of sale, accumulated costs are relieved from real estate
inventories by a method that approximates relative sales value and are charged
to cost of sales.

Income Taxes

The Partnership is not a taxable entity and the results of its operations
are included in the tax returns of the partners. Accordingly, no provision for
income taxes is reflected in the accompanying financial statements.

2. REAL ESTATE INVENTORIES

During 1998, 39 homes were sold. As of December 31, 1998, three model units
were completed, 39 units were under construction and construction of three units
had not yet been started.

3. RELATED PARTY TRANSACTIONS

The partnership agreement provides that a total of $1,579,199 be paid to
the general partner in monthly installments for builder overhead fees. If, after
all of the homes in the Project are sold, actual sales prices (as defined) are
less than budgeted sales prices, the general partner shall be liable to the
Partnership for all overhead fees received in excess of 3% of actual gross sales
prices (as defined). If actual sales prices are greater than budgeted sales
prices, the general partner shall be entitled to receive from the Partnership an
amount equal to 3% of actual gross sales prices less overhead fees already
received.

The partnership agreement provides that $526,399 be paid to the limited
partner for commitment fees in four installments: $131,599 upon the formation of
Partnership and thereafter, three installments equal to $131,600 shall be paid
every six months during the next 18 months.

The following fees were paid to the partners and capitalized to the Project
during the years ended December 31, 1998 and 1997:

1998 1997
-------- --------

Commitment fees paid to IHP................................. $131,600 $263,200
Builder overhead fees paid to CPH........................... 717,540 642,733
-------- --------
$849,140 $905,933
======== ========

4. NOTE PAYABLE

The Partnership had a noninterest-bearing note payable issued to the seller
in connection with the acquisition of the land on which the Project is being
developed. The note payable was secured by real estate inventories and was paid
off in May 1998. The unamortized discount based on an imputed interest rate of
10%

47
48
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

was $28,875 as of December 31, 1997. Imputed interest of $19,252 and $266,473
was capitalized to real estate inventories during the years ended December 31,
1998 and 1997, respectively.

5. COMMITMENTS AND CONTINGENCIES

The Partnership's commitments and contingencies include the usual
obligations incurred by real estate developers in the normal course of business.
In the opinion of management, these matters will not have a material effect on
the Partnership's financial position.

In the jurisdiction in which the Partnership develops and constructs the
Project, community facilities district bonds are issued by government
instrumentalities to finance major infrastructure and other improvements. As a
land owner benefited by these improvements, the Partnership is responsible for
the assessments on its land until the property is sold to buyers. When homes
within the Project are sold, the buyers assume the responsibility for the
related assessment.

6. IMPACT OF YEAR 2000 (UNAUDITED)

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Partnership's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions or engage in normal business activities.

As the developer of the Project, CPH provides accounting services to the
Partnership. CPH began assessing its Year 2000 compliance issues during 1997 and
at that time determined that its primary internal computer hardware and computer
software were not Year 2000 compliant. CPH contracted to purchase a new software
package and upgraded its existing primary computer hardware system to support
the new computer software package. CPH estimates full implementation of the new
software package by August 31, 1999.

CPH is investigating the Year 2000 compliance status of its vendors,
subcontractors and suppliers and expects to complete this investigation and any
corrective efforts by June 30, 1999. Since CPH does not rely on any individual
vendor, subcontractor or supplier for a significant portion of its operations,
the potential impact of Year 2000 noncompliance risks arising from such entities
is not expected to have any material effect on CPH or the Partnership. CPH does
not believe that it is reasonably likely that Year 2000 non-compliance will
result in disruptions to its business that will have a material adverse effect
on the Partnership.

CPH's estimates of completion for its Year 2000 program represent
management's best estimates. These estimates are based upon many assumptions,
including the availability of external resources to assist with systems
remediation and replacement efforts, and key third-party suppliers, vendors and
customers being Year 2000 compliant. If any of the assumptions ultimately prove
to have been incorrect, the completion dates set forth above could be
substantially and adversely affected.

While CPH believes it is taking all appropriate steps to achieve internal
Year 2000 compliance, any potential future business interruptions, costs,
damages or losses related thereto are also dependent upon the Year 2000
compliance of third parties. In the event that CPH or any of its vendors,
subcontractors or suppliers experience disruptions due to the Year 2000 Issue,
the Partnership's operations could be adversely affected. Consequently, there
can be no assurance that the Year 2000 Issue will not adversely affect CPH or
the Partnership. Based on its assessment of the remaining risks associated with
the Year 2000 Issue, CPH does not believe the development of contingency plans
is warranted at this time.

48
49

REPORT OF INDEPENDENT AUDITORS

To the Partners
M.P.E. Partners, L.P.

We have audited the accompanying balance sheets of M.P.E. Partners, L.P., a
California limited partnership (the "Partnership"), as of December 31, 1998 and
1997, and the related statements of operations, partners' capital and cash flows
for the year ended December 31, 1998 and for the period March 14, 1997
(inception) through December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 M.P.E. Partners, L.P. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the year ended December 31, 1998 and for the period March 14, 1997
(inception) through December 31, 1997 in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP

February 10, 1999

49
50

M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

BALANCE SHEETS

DECEMBER 31, 1998 AND 1997

1998 1997
----------- -----------

ASSETS
Cash........................................................ $ 420,515 $ 22,117
Receivables and other assets................................ 278,094 1,883,230
Real estate inventories (Notes 2 and 3)..................... 16,102,348 22,750,754
Other assets................................................ 450 --
----------- -----------
$16,801,407 $24,656,101
=========== ===========

LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities.................... $ 2,866,241 $ 516,719
Due to partners (Note 3).................................... 109,138 1,227,395
----------- -----------
2,975,379 1,744,114
Commitments and contingencies (Note 4)
Partners' capital........................................... 13,826,028 22,911,987
----------- -----------
$16,801,407 $24,656,101
=========== ===========

See accompanying notes to financial statements.
50
51

M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD MARCH 14, 1997
(INCEPTION) THROUGH DECEMBER 31, 1997

1998 1997
----------- ----------

SALES....................................................... $32,056,400 $1,944,600
COST OF SALES............................................... 25,739,557 1,505,103
----------- ----------
GROSS PROFIT................................................ 6,316,843 439,497
OTHER EXPENSES (INCOME)
Selling and marketing (Note 3).............................. 2,100,750 644,567
Other expense (income)...................................... 6,170 (1,624)
----------- ----------
NET INCOME (LOSS)........................................... $ 4,209,923 $ (203,446)
=========== ==========

See accompanying notes to financial statements.
51
52

M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF PARTNERS' CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD MARCH 14, 1997
(INCEPTION) THROUGH DECEMBER 31, 1997

IHP
INVESTMENT CAPITAL PACIFIC
FUND I, L.P. HOLDINGS, LLC TOTAL
------------ --------------- ------------

BALANCE -- March 14, 1997 (Inception)................ $ -- $ -- $ --
Contributions from partners.......................... 20,405,433 2,710,000 23,115,433
Net loss............................................. -- (203,446) (203,446)
------------ ------------ ------------
BALANCE -- December 31, 1997......................... 20,405,433 2,506,554 22,911,987
Contributions from partners.......................... 18,799,859 -- 18,799,859
Distribution to partners............................. (29,918,842) (2,176,899) (32,095,741)
Net income........................................... 2,621,826 1,588,097 4,209,923
------------ ------------ ------------
BALANCE -- December 31, 1998......................... $ 11,908,276 $ 1,917,752 $ 13,826,028
============ ============ ============

See accompanying notes to financial statements.
52
53

M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD MARCH 14, 1997
(INCEPTION) THROUGH DECEMBER 31, 1997

1998 1997
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 4,209,923 $ (203,446)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Cost of sales............................................. 25,739,557 1,505,103
Changes in operating assets and liabilities
Receivables and other assets........................... 1,604,686 (1,883,230)
Additions to real estate inventories................... (19,091,151) (21,545,857)
Accounts payable and accrued liabilities............... 2,349,522 516,719
Due to partners........................................ (1,118,257) 1,227,395
------------ ------------
Net cash provided by (used in) operating activities......... 13,694,280 (20,383,316)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from partners......................... 18,799,859 20,405,433
Capital distributions to partners........................... (32,095,741) --
------------ ------------
Net cash (used in) provided by financing activities......... (13,295,882) 20,405,433
NET INCREASE IN CASH........................................ 398,398 22,117
CASH -- beginning of period................................. 22,117 --
------------ ------------
CASH -- end of period....................................... $ 420,515 $ 22,117
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash transaction
Capital contribution for model-related costs.............. $ -- $ 2,710,000
============ ============

See accompanying notes to financial statements.
53
54

M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

M.P.E. Partners, L.P., a California limited partnership (the
"Partnership"), was formed on March 14, 1997 (inception) in accordance with the
provisions of the laws of the State of California for the purpose of developing
and selling 51 single-family homes in Tarzana, California (the "Project"). The
general partner, Peters Ranchland Company, Inc. ("Peters"), and the limited
partner, IHP Investment Fund I, L.P. ("IHP"), each owned a 50% interest in the
Partnership at inception. On October 1, 1997, Peters transferred its interest in
the Partnership to Capital Pacific Holdings, LLC ("CPH").

The partnership agreement provides that cash flows, as defined, are
distributed to the partners first, in the amount of the adjusted GAAP profit
component (as defined) from the sale of each home, in accordance with their
percentage interests; second, in satisfaction of unpaid preferred returns;
third, for payment of partners' capital contributions in accordance with their
percentage interests; any remaining cash flows are distributed to the partners
in accordance with their percentage interests.

Net income is allocated to the partners in the following order of priority:
first, to recover any net losses allocated previously; second, to the extent of
and in proportion to the amount by which cash flow distributed in satisfaction
of preferred returns and the adjusted GAAP profit component (as defined in the
partnership agreement) distributed from the sale of each home exceeds previously
allocated profits; third, to the extent other cash flows distributed, as
defined, exceed previously allocated net income; thereafter, in accordance with
their percentage interests. Net losses are allocated first, to the general
partner up to $4,063,045 plus all previously allocated net income; second, to
the limited partner until the limited partner's capital account is reduced to
zero; any remaining losses are allocated to the general partner.

The partnership agreement provides, among other things, that the partners
shall be entitled to receive a preferred return on contributed capital computed
at the rate of prime plus 1%. As of December 31, 1998 and 1997, the Partnership
has unpaid preferred returns of $6,391 and $1,083,487, respectively, on IHP's
capital contributions, and $245,829 and $186,916, respectively, on CPH's capital
contributions.

Use of Estimates

The preparation of the Partnership's financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of December 31, 1998 and 1997, and revenues and expenses for the
year ended 1998 and the period March 14, 1997 (inception) through December 31,
1997. Actual results could materially differ from those estimates in the near
term.

Real Estate Inventories

Real estate inventories include direct and indirect land costs, offsite
costs and onsite improvement costs, project commitment fees and builder overhead
fees which are capitalized to the Project. Selling and marketing costs are
expensed as incurred.

The Partnership complies with the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"). SFAS No. 121
requires the Partnership to review the Project whenever events or changes in
circumstances indicate that the cost basis of the Project may not be
recoverable. If the cost basis of the Project is greater than the projected
future net cash flows from the Project, an impairment loss is recognized.
Impairment losses are calculated as the difference between the Project's cost
basis and its estimated fair value,

54
55
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

net of disposal costs on completed units, if any. No impairment losses were
recorded in 1998 and 1997. Accordingly, the Project is carried at its historical
cost basis.

Management estimates the projected future net cash flows of the Project
based on present development plans and intentions. The estimates assume that all
necessary Project entitlements are in place, development is completed and
disposition occurs in the normal course of business. Future economic, financial,
market and political conditions may affect management's development and
marketing plans. In addition, management's plans and the ultimate future net
cash flows of the Project may be affected by the availability of funding for
development and construction of single-family homes and the availability of
capital contributions from the partners.

Sales and Profit Recognition

Sales are recorded and profit is recognized when title has passed to a
buyer who has met down payment and continuing investment criteria, and
substantially all of the risks and rewards of ownership have been transferred to
the buyer. At the time of sale, accumulated costs are relieved from real estate
inventories by a method that approximates relative sales value and are charged
to cost of sales.

Income Taxes

The Partnership is not a taxable entity and the results of its operations
are included in the tax returns of the partners. Accordingly, no provision for
income taxes is reflected in the accompanying financial statements.

2. REAL ESTATE INVENTORIES

During 1998, 29 homes were sold. As of December 31, 1998, the remaining 20
units were under construction.

3. RELATED PARTY TRANSACTIONS

The Partnership acquired the Project on April 11, 1997 from a related
party, Capital Pacific Holdings, Inc. and two other affiliates (collectively,
"CPH, Inc."), for $12,392,547, utilizing IHP's initial cash contribution.

CPH, Inc. incurred certain costs in connection with the development of the
Partnership's models and sales office. In accordance with the Partnership
Agreement, $2,710,000 was credited to CPH's capital account relating to these
development costs.

The Partnership entered into a cost sharing agreement with CPH, Inc. which
requires the Partnership to reimburse CPH, Inc. for certain costs related to
advertising and the operation and maintenance of the models and sales office.
Total shared costs allocated to the Partnership during the year ended December
31, 1998 and the period ended December 31, 1997 were $1,520,811 and $471,646,
respectively, and are included in selling and marketing costs in the
Partnership's statements of operations.

The partnership agreement provides that a total of $1,623,655 be paid to
the general partner in monthly installments for builder overhead fees. If, after
all of the homes in the Project are sold, actual sales prices (as defined) are
less than budgeted sales prices, the general partner shall be liable to the
Partnership for all overhead fees received in excess of 3% of actual gross sales
prices (as defined). If actual sales prices are greater than budgeted sales
prices, the general partner shall be entitled to receive from the Partnership an
amount equal to 3% of actual gross sales prices less overhead fees already
received.

55
56
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The partnership agreement provides that $541,218 be paid to the limited
partner for commitment fees in two installments: $270,609 upon the formation of
the Partnership and $270,609 upon the close of escrow of the first home sold.

The following fees were paid to the partners and capitalized to the Project
during the year ended December 31, 1998 and the period March 14, 1997
(inception) through December 31, 1997:

1998 1997
---------- --------

Commitment fees paid to IHP................................. $ 270,609 $270,609
Builder overhead fees paid to CPH........................... 847,128 635,346
---------- --------
$1,117,737 $905,955
========== ========

The amounts due to the partners as of December 31, 1998 and 1997 consist of
amounts due to CPH for the payment of builder overhead fees and development
fees, and to IHP for the payment of commitment fees.

4. COMMITMENTS AND CONTINGENCIES

The Partnership's commitments and contingencies include the usual
obligations incurred by real estate developers in the normal course of business.
In the opinion of management, these matters will not have a material effect on
the Partnership's financial position.

5. IMPACT OF YEAR 2000 (UNAUDITED)

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Partnership's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions or engage in normal business activities.

As the developer of the Project, CPH provides accounting services of the
Partnership. CPH began assessing its Year 2000 compliance issues during 1997 and
at that time determined that its primary internal computer hardware and computer
software were not Year 2000 compliant. CPH contracted to purchase a new software
package and upgraded its existing primary computer hardware system to support
the new computer software package. CPH estimates full implementation of the new
software package by August 31, 1999.

CPH is investigating the Year 2000 compliance status of its vendors,
subcontractors and suppliers and expects to complete this investigation and any
corrective efforts by June 30, 1999. Since CPH does not rely on any individual
vendor, subcontractor or supplier for a significant portion of its operations,
the potential impact of Year 2000 noncompliance risks arising from such entities
is not expected to have any material effect on CPH or the Partnership. CPH does
not believe that it is reasonably likely that Year 2000 non-compliance will
result in disruptions to its business that will have a material adverse effect
on the Partnership.

CPH's estimates of completion for its Year 2000 program represent
management's best estimates. These estimates are based upon many assumptions,
including the availability of external resources to assist with systems
remediation and replacement efforts, and key third-party suppliers, vendors and
customers being Year 2000 compliant. If any of the assumptions ultimately prove
to have been incorrect, the completion dates set forth above could be
substantially and adversely affected.

While CPH believes it is taking all appropriate steps to achieve internal
Year 2000 compliance, any potential future business interruptions, costs,
damages or losses related thereto are also dependent upon the Year 2000
compliance of third parties. In the event that CPH or any of its vendors,
subcontractors or suppliers experience disruptions due to the Year 2000 Issue,
the Partnership's operations could be adversely affected.

56
57
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Consequently, there can be no assurance that the Year 2000 Issue will not
adversely affect CPH or the Partnership. Based on its assessment of the
remaining risks associated with the Year 2000 Issue, CPH does not believe the
development of contingency plans is warranted at this time.

57
58

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated by reference to the
Company's definitive proxy statement to be filed with the Commission no later
than June 28, 1999 (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, 1998 and 1999
Consolidated Statements of Operations for the years ended February 28,
1997, 1998 and 1999
Consolidated Statements of Stockholders' Equity for the years ended
February 28, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended February 28,
1997, 1998 and 1999
Notes to Consolidated Financial Statements

58
59

GRAND COTO ESTATES, L.P.

Report of Independent Auditors
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the years ended December 31, 1998 and 1997
Statements of Partners' Capital for the years ended December 31, 1998
and 1997
Statements of Cash Flows for the years ended December 31, 1998 and 1997
Notes to Financial Statements

M.P.E. PARTNERS, L.P.

Reports of Independent Auditors
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the year ended December 31, 1998 and for
the period March 14, 1997 (Inception) through December 31, 1997
Statements of Partners' Capital for the year ended December 31, 1998 and
for the period March 14, 1997 (Inception) through December 31, 1997
Statements of Cash Flows for the year ended December 31, 1998 and for
the period March 14, 1997 (Inception) through December 31, 1997
Notes to Financial Statements

2. EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

3.1 Second Restated Certificate of Incorporation of the
Registrant, as Amended. (Incorporated by reference to
Exhibit 3.3 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998)
3.2 Second Amended and Restated Bylaws of the Registrant.
(Incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998)
4.1 See the Articles of Incorporation and Bylaws of the
Registrant (Exhibits 3.1-3.2) and the Indenture and related
agreements (Exhibits 10.1-10.6).
10.1 Indenture agreement by and between Capital Pacific Holdings,
Inc., as Issuer; Durable Homes, Inc., J.M. Peters Nevada,
Inc., and Peters Ranchland, Inc., as Guarantors, and United
States Trust Company of New York, as Trustee, dated as of
May 13, 1994. (Incorporated by reference to Exhibit 10.1 of
the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 28, 1994 filed on May 27, 1994, SEC File
No. 001-09911)
10.2 Warrant Agreement by and between Capital Pacific Holdings,
Inc., and United States Trust Company of New York, Warrant
Agent, dated as of May 13, 1994. (Incorporated by reference
to Exhibit 10.2 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1994 filed on
May 27, 1994, SEC File No. 001-09911)
10.3 Warrant Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911)
10.4 Notes Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911)

59
60

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

10.5 Second Supplemental Indenture dated as of September 10, 1997
to the Indenture agreement dated as of May 13, 1998.
(Incorporated by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
10.6 Third Supplemental Indenture, dated as of October 1, 1997 to
the Indenture agreement dated as of May 13, 1994, as
amended. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
10.7 Capital Pacific Holdings, Inc. Stock Incentive Agreement
(Non-Qualified)
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, 1999.

60
61

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, 1999.

CAPITAL PACIFIC HOLDINGS, INC.

By /s/ HADI MAKARECHIAN
------------------------------------
Hadi Makarechian
Chairman of the Board,
Chief Executive Officer and
President

Date: May 28, 1999

KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Hadi Makarechian and Steven O. Spelman, Jr., and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for each person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments to
this report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully and to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue of the powers herein granted.

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

SIGNATURE TITLE DATE
--------- ----- ----

/s/ HADI MAKARECHIAN Chairman of the Board, Chief May 28, 1999
- ------------------------------------------------ Executive Officer and President
Hadi Makarechian

/s/ STEVEN O. SPELMAN, JR. Senior Vice President, Chief May 28, 1999
- ------------------------------------------------ Financial Officer and Corporate
Steven O. Spelman, Jr. Secretary

/s/ WILLIAM A. FUNK Director, Senior Vice President, May 28, 1999
- ------------------------------------------------ Commercial Development
William A. Funk

/s/ KARLHEINZ M. KAISER Director May 28, 1999
- ------------------------------------------------
Karlheinz M. Kaiser

/s/ ALLAN L. ACREE Director May 28, 1999
- ------------------------------------------------
Allan L. Acree

61
62

EXHIBIT INDEX

SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------

3.1 Second Restated Certificate of Incorporation of the
Registrant, as Amended. (Incorporated by reference to
Exhibit 3.3 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998)
3.2 Second Amended and Restated Bylaws of the Registrant.
(Incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998)
4.1 See the Articles of Incorporation and Bylaws of the
Registrant (Exhibits 3.1-3.2) and the Indenture and related
agreements (Exhibits 10.1-10.6).
10.1 Indenture agreement by and between Capital Pacific Holdings,
Inc., as Issuer; Durable Homes, Inc., J.M. Peters Nevada,
Inc., and Peters Ranchland, Inc., as Guarantors, and United
States Trust Company of New York, as Trustee, dated as of
May 13, 1994. (Incorporated by reference to Exhibit 10.1 of
the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 28, 1994 filed on May 27, 1994, SEC File
No. 001-09911)
10.2 Warrant Agreement by and between Capital Pacific Holdings,
Inc., and United States Trust Company of New York, Warrant
Agent, dated as of May 13, 1994. (Incorporated by reference
to Exhibit 10.2 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1994 filed on
May 27, 1994, SEC File No. 001-09911)
10.3 Warrant Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911)
10.4 Notes Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911)
10.5 Second Supplemental Indenture dated as of September 10, 1997
to the Indenture agreement dated as of May 13, 1998.
(Incorporated by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
10.6 Third Supplemental Indenture, dated as of October 1, 1997 to
the Indenture agreement dated as of May 13, 1994, as
amended. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
10.7 Capital Pacific Holdings, Inc. Stock Incentive Agreement
(Non-Qualified)
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).

63

SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------

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).