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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003 Commission File Number 1-6844
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CALPROP CORPORATION
Incorporated in California I.R.S. Employer Identification No.
13160 Mindanao Way, #180 95-4044835
Marina Del Rey, California 90292
(310) 306-4314
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K X .
---
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$463,339 at June 24, 2004
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
10,235,305 Shares Outstanding at June 24, 2004
Documents Incorporated by reference:
Portions of the registrant's definitive Proxy Statement for 2003 Annual Meeting
of Shareholders are incorporated by reference into Part III of this report.
PART I
ITEM 1. Business
General
Calprop Corporation ("Calprop") designs, constructs, and sells
single-family detached homes and townhomes as part of condominiums or planned
unit developments in California and Colorado. The Company selects and acquires
the site, secures construction financing and constructs and sells homes. The
Company also sells improved lots in California and Colorado. The Company selects
projects of varying types in several local markets in an effort to reduce the
risks inherent in the residential housing industry. To enable the Company to
adapt to the changing market conditions and to control its overhead expenses,
the Company performs its construction activities through independent
subcontractors under the direction of on-site construction supervisors employed
by the Company rather than employing a permanent construction work force. The
Company does not generally finance the purchase of its homes, but has done so in
the past to facilitate sales and may do so in the future to the extent it is
feasible, if market conditions require such financing. In addition to the
continuing emphasis on single-family construction, the Company also designs,
constructs, and leases apartments and townhomes in Southern and Northern
California.
During 2003, the Company was primarily engaged in the development of lots,
and the construction and marketing of single-family detached homes and
townhomes. As of December 31, 2003, the Company had three residential housing
projects in various stages of construction and development, consisting of 39
homes and townhomes under construction (including 8 homes in escrow and two
model homes), and 89 lots under development. The Company's products range from
homes for first-time buyers to custom homes. In addition to the construction and
sale of single-family and multifamily housing, the Company was engaged in the
development of apartments available for lease. During the year, management
approved a plan of action to sell the operating assets of the apartment
building. As a result, the rental property has been classified as held for sale
and depreciation has ceased as of the date the plan was approved. Operations of
the apartment building are classified as discontinued operations in the
consolidated statements of operations. The apartment project was sold on March
12, 2004 with a gross sales price of $9,000,000 (see Notes 4 and 11).
Residential Housing Industry
The residential housing industry includes several hundred developers and
home builders of various sizes and capabilities. The development process starts
with the acquisition of a raw parcel of land. The developer prepares preliminary
plans, environmental reports and obtains all necessary governmental approvals,
including zoning and conditional use permits before subdividing the land into
final tract maps and approved development plans. The subdivided parcel is then
graded and the infrastructure of roads, sewers, storm drains, and public
utilities are added to develop finished lots. Building permits are obtained and
housing is constructed, and then sold or rented. Residential housing is
constructed in a variety of types, including single-family detached homes
(ranging from the less expensive "first-time buyer" homes to the medium priced
"trade-up" homes to the more expensive "custom" homes), patio-homes (adjacent
homes with party walls), condominiums (owner-occupied multifamily housing), and
multifamily rental housing (apartments, retirement homes and other types of
nonowner occupied multifamily housing). Any of these types can be built as part
of a planned unit development with common areas such as green belts, swimming
pools and other recreational facilities for common use by occupants.
The Company's Strategy
The Company's strategy has been to acquire land in or near major urban
centers in California and Colorado and to construct single-family housing for
resale. The Company does not specialize in the construction of a specific
type or design of housing and does not limit its operation to any specific
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location. The Company usually acquires project sites which are zoned and
subdivided so that the Company can construct and sell single-family housing in a
relatively short period of time, usually two to three years. The Company will
also acquire raw land that is not zoned or subdivided for investment or for
development by processing it through the entitlement process to obtain zoning
and other permits necessary for development into single-family housing and other
urban uses.
Future Projects
Land Acquisition - During 2004, the Company completed the sale of its
contractual rights to purchase approximately 60 acres of undeveloped land in
Southern California for a gross sales price of $11,700,000. The Company has
entered into approximately $8,625,000 in contracts to acquire two properties and
has acquired one project for $600,000 in its current market in Riverside County
in Southern California. These three properties are zoned for residential
development and can be subdivided into approximately 213 single family detached
lots. The Company plans to start construction in the first quarter of 2005.
As the Company intends to continue specializing in the construction and
sale of single-family and multifamily housing, the Company is continually
considering potential projects for development. In addition to the construction
and sale of single-family and multifamily housing, the Company has entered the
market to construct and lease single-family and multifamily housing. This market
would provide consistent cash flow in the cyclical industry of real estate
development. The following discussion is the process which the Company follows
to acquire land, entitle, market and build residential housing projects.
Land Acquisition and Construction
In considering the purchase of land for the construction of housing, the
Company takes various factors into account, including, among others, population
growth patterns, availability of utilities and community services such as water,
gas, electricity, sewer, transportation and schools, the estimated absorption
rate for new housing, estimated costs of construction and success of the
Company's past projects in and familiarity with the area.
The Company's long-term strategy is to acquire or option project sites
which are properly zoned and subdivided so that the Company can construct and
sell single-family housing in a relatively short period of time, usually less
than three years, after acquiring the land. Larger projects are constructed in
phases, and the Company determines the number of homes in each phase based upon
the estimated costs of construction and estimated sales schedule. The division
of a project into phases may also be required by the project construction
lender. Although a construction and marketing schedule is established for all
phases at the commencement of a project, the precise timing of construction of
each phase depends on the rate of sales of homes in previous phases.
In certain instances, the Company purchases land which is not substantially
ready for construction. Depending on the stage of development of the parcel, the
Company might be required to obtain necessary entitlements to subdivide the
parcel of land; these entitlements include environmental clearances, zoning,
subdivision mapping, permits and other governmental approvals. After the
entitlement process the Company would then develop the land through grading lots
and streets, and building the infrastructure of water, sewer, storm drains,
utilities, curbs, streets, and possibly amenities, such as parks, pools and
recreational facilities.
The Company acts as its own general contractor, and its supervisory
employees coordinate all work on a project. The services of independent
architectural, design, engineering and other consulting firms are engaged to
assist in the pre-construction aspects of the project. The Company's
construction activities are conducted through independent subcontractors, under
fixed-price contracts, operating in conformity with plans, specifications and
detailed drawings furnished by the Company and under the direction of on-site
construction supervisors employed by the Company. Generally, the Company
solicits bids from several potential subcontractors and awards a contract for a
single phase of a project based on the subcontracting bid as well as the
Company's knowledge of the subcontractor's work and reputation.
3
Subcontracting enables the Company to retain the necessary flexibility to react
to changes in the demand for housing, and to utilize the management strengths,
specialization capabilities, equipment and facilities of its subcontractors
without large capital investments of its own.
The Company does not have long-term contractual commitments with any of its
subcontractors, consultants or suppliers of materials. The Company selects
subcontractors who it believes will perform the required work in a timely manner
and whose quality of workmanship meets the Company's standards. Although some
subcontractors employ unionized labor, the Company has not signed a master labor
agreement or experienced any significant delays in construction as a result of
strikes or stoppages; however, there can be no assurances that the Company will
not experience such delays in the future.
The Company secures raw materials, fixtures and furnishings directly or
through its subcontractors from customary trade sources. Although certain
products have been in short supply from time to time, such shortages have not
impaired the Company's ability to conduct its business in the past and are not
expected to do so in the foreseeable future.
Marketing
The Company's marketing department coordinates the design of the homes to
be built and the interior design of model units and the design and preparation
of advertising materials. The Company builds, landscapes and furnishes model
units for public display. After each project is sufficiently completed so as to
permit retail sales to begin, the Company selects a realtor or realty company to
market homes which are under construction or completed.
Warranties
The Company provides a one-year express warranty against defects in
workmanship and materials to purchasers of homes in its projects. In addition,
California and Colorado law provides the Company's customers certain implied
warranties, the scope and duration of which exceed the Company's express
warranties. The Company requires its subcontractors to indemnify the Company in
writing and requires the insurance of the subcontractor to provide that the
Company is a primary insured and an additional insured from its subcontractors
for liabilities arising from their work, except for liability arising through
the sole negligence or willful misconduct of the Company or from defects in
designs furnished by the Company. Nevertheless, the Company is primarily liable
to its customers for breach of warranty. The Company has builder's product
liability insurance coverage which it believes to be adequate in light of the
Company's claims history.
Schedule II to the financial statements sets forth the Company's warranty
reserves which the Company believes are adequate. Normal warranty costs are
accrued at the close of escrow and held on a project until two years after the
project is completed and all completion bonds posted with governmental agencies
are released.
Financing
Generally, the Company acquires a project site for a purchase price paid
with cash or a combination of cash and short-term acquisition financing secured
by the project site. The amount and terms of financing vary from project to
project.
After final working drawings from architects are prepared, the Company
obtains a construction loan, secured by the portion of the project site to which
the loan relates. The Company's construction loans are used to finance projected
construction costs. In order to obtain the construction loan, the Company must
repay all acquisition financing or obtain a reconveyance of that portion of the
project site which is used to secure the construction loan. The construction
loan is due and payable shortly after completion of the construction being
financed. The Company repays construction financing from the proceeds of project
unit sales. The construction financing provides for release of individual lots
for sale during the term of the financing upon partial repayment of principal in
a specified amount per lot. All cash sales
4
proceeds in excess of the specified release amount are retained by the Company.
If the Company experienced a delay in unit sales following construction and was
unable to extend the term of its construction financing, the Company would be
required to repay the construction financing or obtain other financing in order
to hold the unsold units until market conditions improved. Although the Company
does not arrange third-party financing for its customers, it has provided
secured purchase money financing from time to time to the extent required by
market conditions. In addition, the Company in the future may also subsidize
home purchasers, as an alternative to providing direct financing, by "buying
down" the interest rate on loans from lending institutions, the extent and
amount of which would depend upon prevailing market conditions and interest rate
levels at the time.
The Company usually receives the full sales price for its homes in cash at
the closing of purchase escrows. Most of the Company's home purchasers obtain
conventional financing from independent financial institutions. Depending upon
the price range of the homes in a particular project and the prevailing mortgage
market in the area, the financing obtained by the Company's qualifying home
purchasers may be insured either by the Federal Housing Administration ("FHA")
or guaranteed by the Veterans Administration ("VA"). As a result of government
regulations, FHA and VA financing of the purchase of homes from the Company is
limited because, among other things, the loan amount may not exceed certain
specified levels.
Competition
The home building industry is highly competitive, particularly in the large
urban areas of California. In each of the areas in which it operates, the
Company competes in terms of location, design, quality, price and available
mortgage financing with numerous other residential construction firms, including
large national and regional firms, many of which have greater financial
resources than the Company. The Company believes that no single competitor
dominates any single market area served by the Company.
Business Risks
The development, construction and sale of single-family homes generally are
subject to various risks, including, among others, possible changes in the
governmental structure of the project locality, possible shortages of suitable
undeveloped land at reasonable prices, unfavorable general and local economic
conditions such as employment conditions and income levels of the general
population, adverse local market conditions resulting from such unfavorable
economic conditions or competitive overbuilding, increases in prevailing
interest rates, increases in real estate taxes and the cost of materials and
labor, and the availability of construction financing and home mortgage
financing attractive to home purchasers. In addition, the demand for residential
housing depends in part on the tax consequences of home ownership to home
purchasers. There have been various tax legislation proposals before Congress
over the past few years which could reduce the tax advantages currently
associated with home ownership. There can be no assurances that any such
legislation, if enacted, would not adversely impact the residential housing
industry in general or the Company's business and results of operations.
The Company's business in particular depends upon the successful completion
of construction and sale of homes on established schedules. Construction and
sale schedules may be adversely affected by a variety of factors which are not
within the Company's control, including the factors described above, inclement
weather conditions, earthquakes, labor and material shortages and strikes.
Although the Company has not experienced any serious labor or material shortages
in recent years, the residential housing industry from time to time experiences
serious labor and material shortages.
Governmental Regulations
The residential housing industry is also subject to increasing
environmental, building, zoning and real estate sales regulation by various
federal, state and local governmental authorities. Such regulations affect home
building by specifying, among other things, the type and quality of building
material which must be used, certain aspects of land use and building design, as
well as the manner in which the Company conducts its sales, lending activities
and other dealings with its customers. For example, the
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Federal Consumer Credit Protection Act requires, among other things, certain
disclosures to purchasers about finance charges in credit transactions, such as
sales financed by the Company. California law requires that full information
concerning certain subdivisions be filed with the California Real Estate
Commissioner, and in such instances no sales may be made to the public until the
Commissioner has issued a public report which is delivered to purchasers.
Because the Company's competitors are also subject to the foregoing regulation,
the Company believes that it is not placed at a competitive disadvantage, except
to the extent that competitors with greater financial resources and greater
volume of development activity may more readily withstand longer delays and
increased costs in the development of projects.
Although the strategy of the Company is to build homes on land which is
already subdivided, zoned and improved with utilities, the Company occasionally
undertakes projects which entail the subdivision of partially improved land. In
such cases the Company is required to obtain the approval of numerous
governmental authorities regulating such matters as permitted land uses and
levels of population density, access to utility services such as water and waste
disposal, and the dedication of acreage for open space, parks, schools and other
community purposes. Furthermore, changes in prevailing local circumstances or
applicable law, including moratoria, zoning changes and other governmental
actions, can require additional approvals or modification of approvals
previously obtained. As a result of such regulation, the time between the
original acquisition and the commencement and completion of a project can
increase significantly. Furthermore, the commencement or completion of a project
could be precluded entirely, in which case the Company would sustain a
substantial loss on the project.
Employees
The Company has approximately eleven full-time employees, including four
executive officers, five persons in its finance, marketing and operations
departments, and two field superintendents and general laborers at June 10,
2004. The Company also employs temporary and part-time laborers from time to
time as necessary. None of the Company's employees are currently represented by
a collective bargaining unit. The Company compensates its employees with
salaries and fringe benefits that it believes are competitive with the building
industry and the local economy. The Company believes that relations with its
employees generally are excellent.
Licensing
The Company is licensed by the State of California as a general building
contractor, and this license is essential to its operations. This license must
be renewed every two years. The Company's current license expires in July 2006.
6
ITEM 2. Properties
Current projects
The table below sets forth certain information relating to the Company's
current projects as of December 31, 2003 and certain information relating to the
Company's development operations during the previous twelve months.
Units sold Remaining
Units sold Units under Units subject to units to
12 months construction completed construction construct
ended as of as of as of as of
Project 12/31/03 12/31/03 (1) 12/31/03 12/31/03 12/31/03
- ------- -------------------------------------------------------------------
Units Held For Sale
1. Parc Metropolitan 16 -- -- -- --
2. High Ridge Court 31 21 -- 7 12
3. Saddlerock 57 18 -- 1 --
4. Rohnert Park -- -- -- -- 77
5. Mission Gorge (accounted for under
the equity method) -- -- -- -- --
-------------------------------------------------------------------
Total 104 39 -- 8 89
===================================================================
Total inventory units as of 12/31/03 128
==============
(1) Units under construction includes 8 units sold subject to construction and 2
model units
Assets Held For Sale
6. Parcwest Apartments -- -- 68 -- --
-------------------------------------------------------------------
Total 68
===================================================================
Backlog- As noted in the above table, the total number of units sold subject to
construction ("backlog") at December 31, 2003, was 8 units, with gross revenues
of such backlog equal to $2,020,000. As of March 31, 2004, the backlog was 11
units, representing $2,877,000 compared to a backlog of 21 units representing
$6,620,000 as of March 28, 2003. See also "Management Discussion and Analysis of
Financial Condition and Results of Operations" for additional discussion of Real
Estate Sales for 2003 and 2002.
1. Parc Metropolitan (Milpitas, California)
The Parc Metropolitan project consists of three separate projects/products,
Product A, Product B, and Product C for a total of 382 units.
Product A consists of 130 townhomes. The project consists of two models
ranging from 1,404 to 1,764 square feet with base sales prices before lot
premiums or sales incentives of $405,900 to $513,000.
Product B consists of 108 townhomes. The project consists of six models
ranging from 1,012 to 1,369 square feet with base sales prices before lot
premiums or sales incentives of $354,900 to $423,900.
Product C consists of 144 townhomes. The project consists of two models
ranging from 1,353 to 1,534 square feet with base sales prices before lot
premiums or sales incentives of $395,900 to $458,900.
7
The Company closed escrow on all units as of December 31, 2003.
The project is located approximately 45 miles south of San Francisco along
highway 880 in the Silicon Valley area.
In 1998, the Company formed RGCCLPO Development Co., LLC, a California
limited liability company, ("RGCCLPO") with RGC. In September, 1998, 382 lots in
the Parc Metropolitan project were acquired by RGCCLPO. The profits and losses
of RGCCLPO were distributed between the members as follows: 50% to RGC and 50%
to the Company. During 1999, the Company acquired RGC's 50% partnership interest
in RGCCLPO to attain 100% ownership as of December 31, 1999.
The Company acquired the land through seller financing with Ford Motor
Company and Ford Motor Land Development Corporation on the entire 382 lots and
the land for the Parcwest Apartments project. The original note balance of
$12,850,000 bore interest at 9%. As of December 31, 2001, the loan had been paid
in its entirety. The Company has a profit participation agreement with Ford for
$6,200,000 to be paid on or before December 13, 2002. The amount was paid off on
December 6, 2002.
The Company's acquisition and development loan on the entire 382 lots of
the project was obtained in 1998 from Lowe Enterprises Residential Advisors,
("Lowe"). The loan permitted borrowing by the Company of $9,700,000 and bore
interest at the prime plus 2.0%. After repayment of principal and interest, Lowe
received, as participating interest, a 27% IRR calculated on an annual basis. In
December of 2001, the loan was refinanced and obtained with Curci for
$4,500,000. The loan bore interest at 20%. As of December 31, 2002, the loan was
paid in its entirety.
The Company's construction loan on the first phase of construction for
Product A was obtained from Comerica Bank in 1998. The loan permitted borrowing
by the Company of $13,773,142 on this project and bore interest at the bank's
reference rate plus 1.0%. As of December 31, 2001, the loan had been paid in its
entirety.
The Company's construction loan on the first phase of construction for
Product B was obtained from Comerica Bank in 1999. The loan permitted borrowing
by the Company of $10,604,352 on this project and bore interest at the bank's
reference rate plus 1.0%. As of December 31, 2001, the loan had been paid in its
entirety.
The Company's construction loan on the first phase of construction for
Product C was obtained from Comerica Bank in 1999. The loan permitted borrowing
by the Company of $12,342,388 on this project and bore interest at the bank's
reference rate plus 1.0%. As of December 31, 2001, the loan had been paid in its
entirety.
The Company's construction loan on the second phase of construction for
Product A was obtained from Comerica Bank in 2000. The loan permitted borrowing
by the Company of $13,612,993 on this project and bore interest at the bank's
reference rate plus 1.0%. As of December 31, 2002, the loan was paid in its
entirety.
The Company's construction loan on the second phase of construction for
Product B was obtained from Comerica Bank in 2000. The loan permitted borrowing
by the Company of $10,661,232 on this project and bore interest at the bank's
reference rate plus 1.0%. As of December 31, 2002, the loan was paid in its
entirety.
The Company's construction loan on the second phase of construction for
Product C was obtained from Comerica Bank in 2000. The loan permitted borrowing
by the Company of $12,897,860 on this project and bore interest at the bank's
reference rate plus 1.0%. As of December 31, 2002, the loan was paid in its
entirety.
The Company's construction loan on the third phase of construction for
Product A was obtained from Comerica Bank in 2001. The loan permitted borrowing
by the Company of $15,900,000 on this project
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and bore interest at the bank's reference rate plus 1.0%. As of December 31,
2002, the loan had been paid in its entirety.
The Company's construction loan on the third phase of construction for
Product C was obtained from Comerica Bank in 2001. The loan permitted borrowing
by the Company of $9,321,000 on this project and bore interest at the bank's
reference rate plus 1.0%. As of December 31, 2002, the loan had been paid in its
entirety.
The Company's construction loan on the build-out units in the third phase
of construction for Product A was obtained from Comerica Bank in 2002. The loan
permits borrowing by the Company of $7,520,000 on this project and bears
interest at the bank's reference rate plus 1.0%. As of December 31, 2003, the
loan had been paid in its entirety.
2. High Ridge Court (Thornton, Colorado)
The High Ridge Court project, consists of 170 units of single-family
detached housing. The project consists of two models ranging from 1,238 to 1,884
square feet with base sales prices before lot premiums or sales incentives of
$209,900 to $231,600. As of December 31, 2003, the Company had 12 lots under
development, 19 units under construction (7 were in escrow), and two models.
The project is located approximately 3 miles west of I-25 in the city of
Thornton.
The Company has an acquisition loan with Curci on the entire 170 lots of
the project. The loan permits borrowing by the Company of $4,250,000 on this
project and bears interest at 12%. The loan contains a profit sharing provision
in the amount of 50% of "net proceeds" as defined in the agreement. As of
December 31, 2003, $2,499,024 of the principal of this loan was outstanding.
The Company's acquisition and development loan for the remaining three
phases of the project was obtained in 1999 from First American Bank Texas. The
loan permitted borrowing by the Company of $2,041,000 and bore interest at the
prime rate plus 1.0%. As of December 31, 2002, the loan had been paid in its
entirety.
The Company's revolving construction loan on the entire 170 lots of the
project was obtained in 1998 from First American Bank Texas. The revolving loan
permitted the Company to have a maximum outstanding balance of $5,000,000 for
the construction of the High Ridge and Saddlerock projects. The loan bore
interest at the prime rate plus 1.0%. During 2001, the Company paid the
revolving construction loan in its entirety and obtained a construction loan on
the third and fourth phase with Imperial Capital Bank. The loan permitted
borrowing by the Company of $9,340,000 on this project and bore interest at the
bank's reference rate plus 1.0%. As of December 31, 2003, the loan had been paid
in its entirety.
The Company's construction loan on the fifth phase of construction was
obtained from Imperial Capital in 2003. The loan permits borrowing by the
Company of $8,500,000 on this project and bears interest at the bank's reference
rate plus 1.25%. As of December 31, 2003, the outstanding principal of this loan
was $32,204, and the Company had available $4,252,258. The Company believes
these funds are adequate to complete the construction of the final phase of
construction.
3. Saddlerock (Aurora, Colorado)
The Saddlerock project consists of 94 units of single-family detached
housing . The project consists of two models ranging from 1,899 to 2,900 square
feet with base sales prices before lot premiums or sales incentives of $335,653
to $372,769. As of December 31, 2003, the Company had 18 units under
construction with one in escrow. As of December 31, 2003, the two models were
sold.
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The project is located adjacent to highway E470 approximately 7 miles east
of I-25 in the city of Aurora.
The Company has an acquisition/construction loan with Curci on the entire
94 lots of the project. The loan permits borrowing by the Company of $3,000,000
on this project and bears interest at 12%. The loan contains a profit sharing
provision in the amount of 50% of "net proceeds" as defined in the agreement.
During 2003, the loan amount to be borrowed under this loan was increased to pay
of the projects construction loan for the first and second phase of the project.
As of December 31, 2003, $4,444,419 of the principal of this loan was
outstanding.
The Company's acquisition and development loan on the entire 94 lots of the
project was obtained in 1998 from First American Bank Texas. The loan permitted
borrowing by the Company of $2,606,800 and bore interest at the prime rate plus
1.0%. As of December 31, 2000, the loan had been paid in its entirety.
The Company's revolving construction loan on the entire 94 lots of the
project was obtained in 1998 from First American Bank Texas. The revolving loan
permitted the Company to have a maximum outstanding balance of $5,000,000 for
the construction of the Saddlerock and High Ridge projects. The loan bore
interest at the prime rate plus 1.0%. During 2000, the construction loan for the
remaining units was refinanced and obtained with Comerica Bank. The loan
permitted borrowing by the Company of $13,538,913 on this project and bears
interest at the bank's reference rate plus 1.0%. During 2003, the loan was
refinanced with Curci-Turner. The Company believes these funds are adequate to
complete the construction of the final phase of construction.
On May 6, 2004, the Company sold the Saddlerock project for a gross sales
price of $1,390,000. There was no gain or loss on this transaction.
4. Rohnert Park, (Sonoma County, California)
The Rohnert Park project consists of lots available to build 77 units of
single-family attached housing. As of December 31, 2003, the Company had 77 lots
under development.
The project is located approximately 48 miles north of San Francisco
along highway 101 in the Sonoma County area.
The Company acquired the land through financing with CC Santa Rosa 77, LLC,
on the entire 77 lots. The original notes balances of $2,210,000 and $390,000
bears interest at 10%. As of December 31, 2003, $2,210,000 and $390,000 of the
principal of these loans were outstanding.
5. Mission Gorge (San Diego, San Diego County, California)
In 1987, the Company purchased approximately 200 acres of land in San
Diego. The previous owners, as a part of a group of property owners, had entered
into an option agreement with another developer to acquire the group's property,
upon obtaining an Amended Community Plan for the community in which the property
is located. At the present time, the Amended Community Plan has not been
completed. The Company is actively pursuing alternative land development
opportunities.
The Company formed Mission Gorge, LLC, a California limited liability
company, with the Curci-Turner, LLC for the purposes of developing the 200 acres
of the Mission Gorge project. The net proceeds are to be divided equally, as
defined in the operating agreement, among the two members, Calprop and
Curci-Turner, LLC. In December 2000, the Curci-Turner, LLC made a distribution
of its 50% interest to the members of Curci-Turner, LLC in the following
proportions: The John L. Curci Trust as to a 25% interest and The Janet Curci
Living Trust No. Il as to a 25% interest.
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On February 24, 2004, the Company purchased the remaining 50% interest from
The John L. Curci Trust and The Janet Curci Living Trust No. II for a total
purchase price of $3,600,000. On May 21, 2004, the Company sold the Mission
Gorge property for a gross sales price of $6,849,679. As a result, the Company
will record a gain on the sale of land of $431,703 in the second quarter of
2004.
6. Parcwest (Milpitas, California)
The Parcwest project consists of a 68-unit affordable apartment project
adjacent to the Parc Metropolitan project. The 68 units were completed in 2002
and substantially leased as of December 31, 2003. During the year, management
approved a plan of action to sell the operating assets of the apartment
building. As a result, the rental property has been classified as held for sale
and depreciation has ceased as of the date the plan was approved. Operations of
the apartment building are classified as discontinued operations in the
consolidated statements of operations. The apartment project was sold on March
12, 2004 with a gross sales price of $9,000,000 (see Note 4 and 11).
The project is located approximately 45 miles south of San Francisco along
highway 880 in the Silicon Valley area.
In 1999, the Company formed PWA Associates, LLC, a California limited
liability company, ("PWA") with RGC Associates, LLC (RGC Associates). In
December, 1999, land for the 68-unit apartment in the Parcwest project was
acquired by PWA. The profits and losses of PWA were distributed between the
members as follows: 50% to RGC Associates and 50% to the Company. In May of
2001, the Company acquired RGC's 50% partnership interest in PWA to attain 100%
ownership as of December 31, 2003.
The Company had an acquisition loan with the City of Milpitas. The loan
permitted borrowing by the Company of $1,000,000 on this project and bore
interest at 6.35%. As of December 31, 2003, the loan was paid in its entirety.
The Company's construction loans were obtained from Comerica Bank in 2001.
The loans permitted borrowing by the Company of $6,816,000 and $1,061,670 on
this project and bore interest at the bank's reference rate plus 1.0% and 5.5%,
respectively. During 2003, the construction loans were refinanced and obtained a
permanent loan with UBS Warburg. As of December 31, 2003, $7,678,544 of the
principal of this loan was outstanding.
ITEM 3. Legal Proceedings
There are no pending legal proceedings to which the Company is a party or
to which any of its properties are subject other than routine litigation
incidental to the Company's business, none of which is considered by the Company
to be material to its business or operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Company's security holders during
the fourth quarter of 2003.
11
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Transactions in the Company's common stock, its only class of common equity
security, are quoted on the OTC Bulletin Board under the symbol CLPO.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2003 stock price
range-
High $ .85 $ .73 $ .56 $ .65
Low .73 .31 .35 .15
2002 stock price
range-
High $ 1.01 $ 1.02 $ .95 $ .93
Low .80 .60 .80 .75
As of June 24, 2004, there were 434 record holders of common stock.
Dividends: There have been no cash dividends declared in the past two years,
nor was there a stock dividend declared during 2003 or 2002. The
dividend policy, whether cash or stock, is reviewed by the Board
of Directors on an annual basis. During 2003, there were no
restrictions, as a result of a loan or other agreement, limiting
the Company's ability to issue a dividend.
12
ITEM 6. Selected Financial Data
The following data should be read in conjunction with the financial
statements of the Company and the related notes thereto which are included
elsewhere in this Form 10K and in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is also
included elsewhere in this Form 10K.
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 2003
------------------------------------------------
2003 2002 2001 2000 1999
SALES AND OPERATING REVENUE $ 19,892,939 $ 91,641,620 $ 90,614,622 $ 64,238,615 $ 52,598,849
NET (LOSS) INCOME (15,144,157) (7,890,557) 3,326,106 3,627,940 (752,582)
(LOSS) INCOME FROM CONTINUING
OPERATIONS PER SHARE:
BASIC $ (1.25) $ (0.71) $ 0.32 $ 0.35 $ (0.07)
DILUTED $ (1.25) $ (0.71) $ 0.32 $ 0.35 $ (0.07)
(LOSS) INCOME FROM DISCONTINUED
OPERATIONS PER SHARE:
BASIC $ (0.23) $ (0.06)
DILUTED $ (0.23) $ (0.06)
AS OF DECEMBER 31:
TOTAL ASSETS $ 23,523,872 $ 46,074,946 $ 98,967,700 $108,609,523 $ 87,817,643
LONG TERM OBLIGATIONS $ 5,243,182 $ 6,000,000 $ 7,979,090 $ 1,000,000 $ 17,201,168
13
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion relates to the consolidated financial statements
of the Company and should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report. Statements contained in
this "Management's Discussion and Analysis of Financial Condition and Results of
may be forward-looking statements. Such statements are subject to certain risks
and uncertainties, which could cause actual results to differ materially from
those projected. You are cautioned not to place undue reliance on these
forward-looking statements.
The Company began experiencing difficulties due to the downturn in the
California real estate market during the second quarter of 1990, and through
1996 the Company continued to be impacted by the general economic downturn. In
response to these conditions the Company began utilizing marketing programs
which included price reductions and incentives to potential buyers. During 1997
however, the California real estate market began to experience a recovery. In
general, the Company's products were well received. However, the number of units
sold subject to construction ("backlog") has decreased due to having fewer
completed homes available for sale at December 31, 2003, 2002 and 2000 of 8, 12
and 60 units, respectively compared to 87 and 128 units as of December 31, 1999
and 2000, respectively. As of December 31, 2003, the Company has entered into
contracts to purchase three new development projects to start construction in
2004. Additionally, the Company's real estate sales increased from $90,614,622
in 2001 to $91,641,620 in 2002, and decreased to $19,892,939 in 2003. The
increase in real estate sales in 2001 and 2002 is primarily attributable to an
increase in units available for sale resulting from an increase in production of
249 and 248, respectively from previous years. The decrease in real estate sales
between 2002 and 2003 is primarily attributable to a decrease in units available
for sale resulting from a decrease in production of 37 in 2003.
The Company had a loss of $823,053 from development operations before
recognition of impairment of real estate in 2003 as compared to a loss of
$757,490 in 2002. As a percentage of real estate sales, a loss from development
operations before recognition of impairment of real estate decreased by 3.31
percentage points to (4.14)% in 2003 compared to (0.83)% in 2002. The Company
had a loss from development operations before recognition of impairment of real
estate in 2002 of $757,490 from income from development operations before
recognition of impairment of real estate of $7,943,613 in 2001. As a percentage
of real estate sales, a loss from development operations before recognition of
impairment of real estate decreased by 9.6 percentage points to (0.83)% in 2002
compared to as a percentage of real estate, income from development operations
before recognition of impairment of real estate to 8.77% in 2001. The
significant decrease of income before recognition of impairment of real estate
as a percentage of gross revenues from 2003 to 2001 results from a slower
absorption rate, and increased production overhead costs. The increased sales
price was not sufficient to offset the increased direct construction cost,
marketing and sales incentives, production overhead and interest costs.
The 2003 impairment loss on real estate development includes the recording
of an impairment loss for two projects. The impairment loss on the Saddlerock
project is primarily a result of the lack of demand of the product lines
resulted in a slower absorption rate. The Company introduced three new product
lines and converted certain upgrades as standards to increase the absorption
rate. The project consisted of 94 homes with five product lines in Aurora,
Colorado. The introduction of the new product lines increased direct
construction cost, marketing, production overhead and interest costs and as a
result the Company recorded an impairment loss on real estate under development
of $4,614,756. As of December 31, 2003, the Company has no remaining units to
construct, 18 units under construction, one of which has been sold. On May 6,
2004, the Company sold the Saddlerock project for a gross sales price of
$1,390,000. There was no gain or loss on this transaction.
The impairment loss on the High Ridge Court project is primarily a result
of an absorption rate slower than anticipated. The decrease in absorption rate
increased marketing, production and interest costs and as a result the Company
recorded an impairment loss on real estate under development of $431,394. As of
December 31, 2003, the Company has 33 remaining units to construct, 21 units
under construction, seven of which have been sold.
14
In January 2003, the Company sold its 24.5% interest in RGC Carmel
Country, LLC, the ("Joint Venture") to related parties. The Joint Venture
consisted of 181 townhomes available for lease in San Diego. The Company's basis
in the Joint Venture was $0. The proceeds from the sale, in the amount of
$2,000,000, was received in 2002 and was recorded as a deposit at December 31,
2002. The Company recorded a gain of $2,000,000 on the sale of the joint venture
in 2003.
The Company developed and constructed a 68-unit affordable apartment, the
Parc West Apartment Homes located in Milpitas, California, adjacent to the Parc
Metropolitan project owned by RGCCLPO. Construction was completed in August 2002
and the 68 units were available for lease. As of December 31, 2003, the
apartment project was substantially leased. The apartment project was sold on
March 12, 2004 at a gross sales price of $9,000,000. In accordance with the SFAS
144 "Accounting for the Impairment or Disposal of Long-lived Assets," the net
loss of assets held for sale is reflected in the consolidated statement of
operations as discontinued operations for all periods presented. The loss from
discontinued operations during the year ended December 31, 2003 includes an
impairment loss of $2,268,948.
Results of operations
The Company had a loss from continuing operations before income taxes of
$6,269,560 in 2003, a loss from continuing operations before income taxes of
$7,263,252 in 2002, and income from continuing operations before income taxes of
$3,492,971 in 2001. The net loss suffered in 2003 and 2002 is primarily a result
of loss from development operations and a reflection of the recognition of asset
impairment of the High Ridge and Saddlerock projects in the amount of $5,046,150
and $4,471,693, respectively. The income in 2001 is primarily due to increase in
profit from operations as the Company began selling homes in its Parkland Farms,
Montserrat Estates and Parc Metropolitan projects.
Real estate sales decreased to $19,892,939 in 2003 from $90,641,620 in
2002, down 78.1%. Real estate sales were $90,614,622 in 2001. In 2003, the
Company sold 54 homes, with an average sales price of $322,160 and 50 lots, with
an average sales price of $49,925. In 2002, the Company sold 248 homes, with an
average sales price of $369,523. In 2001, the Company sold 249 homes, with an
average sales price of $363,914.
The overall gross profit percentage before recognition of impairment loss
of the Company was (4.1)%, (0.8)%, and 8.8% in 2003, 2002, and 2001,
respectively.
General and administrative expenses were $1,711,586 in 2003 and $2,379,007
in 2002, down 28.1%. General and administrative expenses were $2,924,795 in
2001. The decrease in 2003 from 2002 and 2001 is the result of a decrease in
payroll costs, and decreased accounting costs due to the efforts of management
to function more effectively. The decrease is also attributed to the decrease of
the number of projects currently in construction.
The provision for income taxes of $6,535,343 in 2003 represents the
increase in the deferred tax valuation allowance to fully offset the deferred
tax asset. During 2002, the Company increased the deferred tax valuation
allowance to offset current year's net income tax benefit of $3,152,732. The
provision for income taxes of $171,742 in 2001 includes the decrease of the
deferred income tax valuation to offset 2001 deferred income taxes of
$1,187,934.
Liquidity and capital resources
As of December 2003, the Company has construction loans outstanding to
financial institutions, secured by the development projects' trust deeds, with
rates ranging from prime plus 1.25% to 10% and maturing January 2005 through
June 2005. As of December 31, 2003, the outstanding balances owing on these
loans totaled $2,744,158. Additionally, the Company has an unsecured line of
credit with a financial institution available to borrow up to $1,500,000 at
prime and mature on August 1, 2004. As of December 31, 2003, $1,500,000 is
outstanding. The Company also have notes payable to financial institutions to
finance general liability policies for the Company's projects for $121,545. The
notes are
15
unsecured with interest rate at 6.25% and mature through May 31, 2004. The
balance of these loans as of December 31, 2003 is $4,365,703.
As of December 31, 2003, the Company had remaining construction loan
commitments from banks and financial institutions of approximately $4,252,000,
which may be drawn down by the Company upon the satisfaction of certain
conditions. The Company continues to seek joint venture partners and additional
financing to fund its operations.
Related-Party Notes:
Curci-The Company has the following notes payable to Curci at December 31,
2003 and 2002. A principal of Curci is a stockholder of the Company. Under the
terms of certain of the notes payable, Curci participates in "Net Proceeds" from
certain projects, as defined in the loan agreement, which is comparable to net
profit:
December 31, December 31,
Project Profit share 2003 2002
- --------------------- ----------------- ------------------ ----------------
Secured loans:
High Ridge Court 50% $ 2,499,024 $ 2,366,102
Saddlerock 50% 4,444,419 2,413,597
----------- -----------
6,943,443 4,779,699
Unsecured loans 5,356,254(1) 5,000,000(1)
----------- -----------
$12,299,697 $ 9,779,699
=========== ===========
(1) During 2001, the Company obtained a $5,000,000 unsecured working
capital loan from Curci which bear interest at 15% and matures on July 16, 2004.
Interest is payable monthly. Unpaid interest of $356,254 has been added to the
note principal.
Other Related Parties-During 1996, the Company converted its Preferred
Stock to Common Stock and the accrued Preferred Stock dividend due to an officer
of the Company and a related party of $581,542 and $472,545, respectively, was
exchanged for notes with interest payable at 10%. As of both December 31, 2003
and 2002, the outstanding principal due an officer of the Company and a related
party on these notes was $581,542 and $462,330, respectively.
Included in notes payable to related parties is a note payable to Mission
Gorge, LLC which bear interest at 12%. Outstanding balances as of December 31,
2003 and 2002 was $2,000,000.
Included in notes payable to related parties are notes payable to an
officer which bear interest at 12%. Outstanding balances as of December 31, 2003
and 2002 were $499,062 and $424,063, respectively.
The Company has other loans from related parties, which provide for
interest at 10% per annum. As of December 31, 2003 and 2002 these loans totaled
$640,000 and $740,000, respectively.
Included in accounts payable as of December 31, 2003 and 2002 is interest
payable on the notes discussed above of $503,798 and $259,913, respectively.
As of December 31, 2003, the Company had three remaining projects in
various stages of construction and development. During 2003, the Company had
four projects producing revenues from completed homes and apartments: Parc
Metropolitan, High Ridge Court, Saddlerock and Parcwest Apartments. As of
December 31, 2003, Parc Metropolitan was completed and all homes were sold. The
Company enters 2004 with 39 homes under construction, of which 8 are in escrow
for sale, and 2 model
16
units. The Company has an inventory of 89 lots under development. In addition,
the Company has a 68 unit apartment building that is substantially leased as of
December 31, 2003, and is being held for sale.
Based on its agreements with its lenders, the Company believes that it will
have sufficient liquidity to finance its construction projects in 2004 through
funds generated from operations, funds available under its existing bank
commitments, funds generated from new lending institutions, and, if necessary,
funds that could be obtained by using its internally financed real estate
development in process as collateral for additional loans.
Management's plan, with respect to managing cash flow includes the
following components: pay off debt that is coming due in 2004, minimize
operating expenses, and maintain control over costs. With regard to the debt
coming due in 2004, management expects to extend the maturity dates of various
loans and pay the remaining loans off through cashflow from operations, prior to
their maturity date. With regard to minimizing operating expenses, management
plans to achieve this by continuing to closely examine overhead items.
Management anticipates that the funds generated from operations, including
borrowings from existing loan commitments, will be adequate to allow the Company
to continue operations throughout 2004.
Contractual Obligations
Our significant contractual obligations as of December 31, 2003 follows:
Payments Due by Period
- ------------------------------------- --------------------------------------------------------------------------
2004 2005-2006 2007-2008 After 2008 Total
Debt related to assets held for sale $ 7,678,544 $ 7,678,544
Debt $15,605,152 $ 5,243,182 20,848,334
Operating leases 205,854 276,684 482,538
--------------------------------------------------------------------------
Total contractual obligations $15,811,006 $ 5,519,866 $ 7,678,544 $29,009,416
==========================================================================
At December 31, 2003 we had scheduled maturities on existing debt of $15,605,152
through December 31, 2004. Our ability to make scheduled payments of principal
or interest on or to refinance this indebtedness depends on our future
performance, which to a certain extent, is subject to general economic,
financial, competitive and other factors beyond our control. We believe our
borrowing availability under existing credit facilities, our operating cash
flow, and our ability to obtain new borrowings and/or raise new capital, should
provide the funds necessary to meet our working capital requirements, debt
service and maturities and short- and long-term needs based upon currently
anticipated levels of growth. However, limitations on access to financing
constrain our ability to take advantage of opportunities that might lead to more
significant growth.
Critical Accounting Policies
In the preparation of our financial statements, we select and apply accounting
principles generally accepted in the United States of America. The application
of some of these generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in our financial
statements and accompanying results. The accounting policies that include
significant estimates and assumptions are in the areas of valuing our real
estate under development and rental property and determining if any are
impaired.
We review our real estate under development and rental property for impairment
of value. This includes considering certain indications of impairment such as
significant declines in occupancy, other significant changes in property
operations, significant deterioration in the surrounding economy or
environmental
17
problems. If such indications are present, we estimate the total future cash
flows from the property and compare the total future cash flows to the carrying
value of the property. If the total future cash flows are less than the carrying
value, we adjust the carrying value down to its estimated fair value. Fair value
may be based on third-party appraisals or our estimate of the property's fair
value.
Recent Accounting Pronouncements
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of." SFAS 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion No. 30
(APB 30), Reporting Results of Operations Reporting the Effects of Disposal of a
Segment of a Business. SFAS 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. SFAS 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for the Company for all financial statements issued in
fiscal 2002. The adoption of SFAS 144 did not have a material impact on the
Company's financial position or results of operations.
In April 2002, FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
145"). The most significant provisions of this statement relate to the
rescission of Statement No. 4 "Reporting Gains and Losses from Extinguishment of
Debt." SFAS 145 also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. Under SFAS 145, any gain or loss on extinguishment of
debt that was classified as an extraordinary item in prior periods presented
that does not meet certain defined criteria must be reclassified. The provisions
of SFAS 145 are effective for fiscal years beginning after May 15, 2002.
Management does not expect that the adoption of this statement will have a
material effect on the Company's results of operations or financial condition.
In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit
or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity". SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of SFAS
146 are effective for exit or disposal activities that are initiated after
December 31, 2002. Management does not expect that the adoption of this
statement will have a material effect on the Company's results of operations or
financial condition.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes the current
practice in the accounting for, and disclosure of, guarantees. Guarantees and
indemnification agreements meeting the characteristics described in FIN 45 are
required to be initially recorded as a liability at fair value. FIN 45 also
requires a guarantor to make significant new disclosures for virtually all
guarantees even if the likelihood of the guarantor having to make payment under
the guarantee is remote. The disclosure requirements within FIN 45 are effective
for financial statements for annual or interim periods ending after December 15,
2002. The initial recognition and initial measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002.
Management does not expect the adoption of the initial recognition and
measurement provisions will have a material effect on the Company's results of
operations or financial condition.
In December 2002, the Financial Accounting Standards Board, ("FASB") issued SFAS
148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS
148"). SFAS 148 amends SFAS 123 "Accounting for Stock Based Compensation" ("SFAS
123") to provide alternative methods of transition for
18
an entity that voluntarily changes to the fair value recognition provision of
recording stock option expense. SFAS 148 also requires disclosure in the summary
of significant accounting policies of the effects of an entity's accounting
policy with respect to stock options on reported net income and earnings per
share in annual and interim financial statements. The Company voluntarily
adopted the fair value recognition provision prospectively, for all employee
awards granted or settled after January 1, 2002. Under this provision, total
compensation expense related to stock options is determined using the fair value
of the stock options on the date of grant and is recognized on a straight-line
basis over the option vesting period. Prior to 2002, the Company accounted for
stock options issued under this plan under the recognition and measurement
provision of APB Opinion 25 "Accounting for Stock Issued to Employees and
Related Interpretations".
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and
provides guidance on the identification of entities for which control is
achieved through means other than voting rights ("variable interest entities" or
"VIEs") and how to determine when and which business enterprise should
consolidate the VIE. This new model for consolidation applies to an entity in
which either: (1) the equity investors (if any) lack one or more characteristics
deemed essential to a controlling financial interest or (2) the equity
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. In
December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify
some of the provisions of the interpretation and defer the effective date of
implementation for certain entities. The provisions of FIN 46R are effective for
the first reporting period ending after December 15, 2003 for entities
considered to be special-purpose entities. The provisions for all other entities
subject to FIN 46R are effective for financial statements of the first reporting
period ending after March 15, 2004. On February 1, 2003, the Company adopted the
provisions of this interpretation, which did not have a material effect on the
Company's results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement In January
2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements" and provides
guidance on the identification of entities for which control is achieved through
means other than through voting rights ("variable interest entities" or "VIEs")
and how to determine when and which business enterprise should consolidate the
VIE. This new model for consolidation applies to an entity which either (1) the
equity investors (if any) do not have a controlling financial interest or (2)
the equity investment at risk is insufficient to finance that entity's
activities without receiving additional subordinated financial support from
other parties. The provisions of this interpretation are immediately effective
for VIEs formed after January 31, 2003. For VIEs formed prior to January 31,
2003, the provisions of this interpretation apply to the first fiscal year or
interim period beginning after June 15, 2003. Management does not expect that
the adoption of this standard will have a material effect on the Company's
results of operations or financial condition.
19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The table below represents the contractual balances of our financial
instruments at the expected maturity dates as well as their fair value at
December 31, 2003. The expected maturity categories take into consideration
actual amortization of principal and does not take into consideration
reinvestment of cash. The weighted average interest rate for various liabilities
presented are actual as of December 31, 2003.
Principal maturing in: Fair value
------------------------------------------------------------------------- December 31,
2004 2005 2006 2007 2008 Thereafter Total 2003
---------------------------------------------------------------------------------------------------
Interest rate sensitive liabilities
Variable rate borrowings $ 1,500,000 $ 144,158 $ 1,644,158 $ 1,644,158
Average interest rate 4.00% 5.25% 4.11%
Fixed rate borrowings 14,105,152 5,099,024 7,678,544 26,882,720 26,882,720
Average interest rate 12.85% 8.56% 6.08% 10.10%
---------------------------------------------------------------------------------------------------
$15,605,152 $5,243,182 $7,678,544 $28,526,878 $28,526,878
===================================================================================================
Weighted average interest rate 12.00% 8.47% 6.08% 9.76%
===================================================================================================
The table below represents the contractual balances of our financial
instruments at the expected maturity dates as well as their fair value at
December 31, 2002. The expected maturity categories take into consideration
actual amortization of principal and does not take into consideration
reinvestment of cash. The weighted average interest rate for various liabilities
presented are actual as of December 31, 2002.
Principal maturing in: Fair value
------------------------------------------------------------------------- December 31,
2003 2004 2005 2006 2007 Thereafter Total 2002
---------------------------------------------------------------------------------------------------
Interest rate sensitive liabilities
Variable rate borrowings $18,615,597 $ -- $ -- $18,615,597 $18,615,597
Average interest rate 6.48% 6.48%
Fixed rate borrowings 9,098,223 5,000,000 1,000,000 15,098,223 14,287,932
Average interest rate 11.54% 15.00% 6.35% 12.34%
---------------------------------------------------------------------------------------------------
$27,713,820 $5,000,000 $1,000,000 $33,713,820 $32,903,529
===================================================================================================
Weighted average interest rate 8.14% 15.00% 6.35% 9.10%
===================================================================================================
20
Effects of inflation
Real estate has long been considered a hedge against inflation, and
inflation has often contributed to dramatic growth in property values. During
normal markets, the Company has been able to pass increased costs of materials
and labor to its buyers by increasing its sales prices. However, growth in
property values slowed or reversed during 1996, 1997 then again in 2002 and 2003
in California, thus preventing the Company from increasing sales prices to cover
increased costs. In 1998, 1999, 2000, and 2001 due to the strength and stability
of the economy, the real estate market has experienced increases in sales price
and the number of home buyers.
21
ITEM 8. Financial Statements and Supplementary Data
Page No. Financial Statements:
- -------- ---------------------
25 Report of Independent Registered Public Accounting Firm
26 Consolidated Balance Sheets as of December 31, 2003 and 2002
27 Consolidated Statements of Operations For Each of the Three Years
Ended December 31, 2003
29 Consolidated Statements of Stockholders' Equity For Each of the
Three Years Ended December 31, 2003
30 Consolidated Statements of Cash Flows For Each of the Three Years
Ended December 31, 2003
32 Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULE:
-----------------------------
48 II - Valuation and Qualifying Accounts --Three Years Ended December
31, 2003
Schedules other than listed above are omitted because they are not
applicable, not required, or the information required to be set forth therein is
included in the financial statements or the notes thereto.
ITEM 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Items 10, 11, 12 and 13 are incorporated by reference from the Company's
definitive proxy statement to be filed within 120 days after the close of the
calendar year with the Commission, pursuant to Regulation 14A.
PART IV
Item 14. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
required to be filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure, except
during the period from August 2003 - June 2004 where the accounting department
was short of the required personnel needed to file its required reports timely.
The Company is in the process of taking corrective measures to ensure timely
filing of its required reports under the Securities Exchange Act of 1934. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
22
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) For a listing of financial statements and schedules, reference
is made to Item 8 included in this Form 10-K.
(3) The Exhibits listed on the accompanying Index to Exhibits immediately
following Schedule II are filed as part of this report. Exhibits 10.1
through 10.4 are compensatory plans.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K -
A Current Report on Form 8-K dated June 20, 2003 was filed with the
Securities and Exchange Commission (the "Commission") and included under item
7(a) its unaudited consolidated financial statements for the quarter ended March
31, 2003, and under item 7(c) a press release announcing Calprop Corporations'
first quarter results.
A Current Report on Form 8-K dated January 15, 2004 was filed with the
Securities and Exchange Commission (the "Commission") and included under item
7(a) its unaudited consolidated financial statements for the quarter ended June
30, 2003, and under item 7(c) a press release announcing Calprop Corporations'
second quarter results.
A Current Report on Form 8-K dated March 19, 2004 was filed with the
Securities and Exchange Commission (the "Commission") and included under item
7(a) its unaudited consolidated financial statements for the quarter ended
September 30, 2003, and under item 7(c) a press release announcing Calprop
Corporations' third quarter results.
23
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.
CALPROP CORPORATION
- ------------------------------
(Registrant)
/s/ Victor Zaccaglin June 29, 2004
- ------------------------------ ----------------------
Victor Zaccaglin, Date
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Mark F. Spiro June 29, 2004
- ------------------------------ ----------------------
Mark F. Spiro Date
Vice President/Secretary and
Treasurer (Chief Financial
and Accounting Officer)
/s/ Mark T. Duvall June 29, 2004
- ------------------------------ ----------------------
Mark T. Duvall Date
Director
/s/ Victor Zaccaglin June 29 2004
- ------------------------------ ----------------------
Victor Zaccaglin Date
Chairman of the Board
Chief Executive Officer
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of Calprop Corporation:
We have audited the accompanying consolidated balance sheets of Calprop
Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' (deficit)
equity, and cash flows for each of the three years in the period ended December
31, 2003. Our audits also included the financial statement schedule listed in
the Index at Item 8. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Calprop Corporation and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
June 29, 2004
25
CALPROP CORPORATION
CONSOLIDATED BALANCE SHEETS
Assets December 31,
------------------------------
2003 2002
------------------------------
Investment in Real Estate (Notes 3 and 4):
Real estate under development $ 13,175,441 $ 24,166,829
Assets held for sale 8,864,917 11,214,659
------------------------------
Total investment in real estate 22,040,358 35,381,488
OTHER ASSETS:
Cash and cash equivalents 190,770 3,444,541
Deferred tax asset (Note 7) 6,535,343
Other assets (Note 5) 1,292,744 713,574
------------------------------
Total other assets 1,483,514 10,693,458
------------------------------
Total assets $ 23,523,872 $ 46,074,946
==============================
Liabilities and Stockholders' Equity
LIABILITIES:
TRUST DEEDS AND NOTES PAYABLE (Note 6) $ 4,365,703 $ 11,784,923
RELATED-PARTY NOTES (Note 6) 16,482,631 13,987,634
------------------------------
Total trust deeds, notes payable and related-party notes 20,848,334 25,772,557
LIABILITIES RELATED TO ASSETS HELD FOR SALE (Note 4) 7,720,608 8,291,256
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Note 6) 2,521,487 2,374,863
DEPOSIT (Note 3) 2,000,000
WARRANTY RESERVES 686,376 757,550
------------------------------
Total liabilities 31,776,805 39,196,226
------------------------------
MINORITY INTERESTS (Note 1)
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' (DEFICIT) EQUITY (Note 9):
Common stock, no par value; $1 stated value, 20,000,000 shares authorized;
authorized, 10,239,105 and 10,235,305 shares issued and
outstanding at December 31, 2003 and 2002, respectively 10,239,105 10,235,305
Additional paid-in capital 25,850,776 25,849,446
Deferred Compensation (Note 8) (28,600)
Stock Purchase Loans (Note 8) (549,084) (527,858)
Accumulated deficit (43,793,730) (28,649,573)
------------------------------
Total (deficit) equity (8,252,933) 6,878,720
------------------------------
$ 23,523,872 $ 46,074,946
==============================
See notes to consolidated financial statements
26
CALPROP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------------
2003 2002 2001
------------------------------------------------
DEVELOPMENT OPERATIONS (Note 3):
Real estate sales $ 19,892,939 $ 91,641,620 $ 90,614,622
Cost of real estate sales (Note 6) 20,715,992 92,399,110 82,671,009
------------------------------------------------
(Loss) income from development operations before
recognition of impairment of real estate (823,053) (757,490) 7,943,613
Recognition of impairment of real estate development (Note 3) (5,046,150) (4,471,693) (2,018,088)
------------------------------------------------
(Loss) income from development operations (5,869,203) (5,229,183) 5,925,525
Income (loss) from investment in real estate venture (Note 3) 109,253 (118,764)
Other income:
Gain on sale of investment in real estate venture (Note 3) 2,000,000
Interest and miscellaneous 620,406 433,760 181,958
Management fee (Note 3) 222,957 542,818
------------------------------------------------
Total other income 2,620,406 656,717 724,776
Other expenses:
General and administrative (Note 5 and 10) 1,711,586 2,379,007 2,924,795
Interest expense (Note 6) 1,309,177 420,797 115,096
------------------------------------------------
Total other expenses 3,020,763 2,799,804 3,039,891
Minority interests 235 (1,325)
------------------------------------------------
(Loss) income from continuing operations before provision for
income taxes (6,269,560) (7,263,252) 3,492,971
Provision for income taxes (Note 7) 6,535,343 171,742
------------------------------------------------
(Loss) income from continuing operations (12,804,903) (7,263,252) 3,321,229
Discontinued operations (Note 11 ):
(Loss) income from discontinued operations (including impairment
of $2,268,948 for the year ended December 31, 2003) (2,339,254) (627,305) 4,877
------------------------------------------------
(Loss) income from discontinued operations (2,339,254) (627,305) 4,877
------------------------------------------------
NET (LOSS) INCOME $(15,144,157) $ 7,890,557 $ 3,326,106
================================================
27
(Loss) income from continuing operations per common share- basic ($ 1.25) ($ 0.71) $ 0.32
============ ============ ============
(Loss) income from continuing operations per common share - diluted ($ 1.25) ($ 0.71) $ 0.32
============ ============ ============
(Loss) income from discontinued operations per common share - basic ($ 0.23) ($ 0.06)
============ ============
(Loss) income from discontinued operations per common share - diluted ($ 0.23) ($ 0.06)
============ ============
Net (loss) income per common share - basic ($ 1.48) ($ 0.77) $ 0.32
============ ============ ============
Net (loss) income per common share - diluted ($ 1.48) ($ 0.77) $ 0.32
============ ============ ============
See notes to consolidated financial statements
28
CALPROP CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
Common Stock Additional Deferred Stock Total
----------------------- Paid-In Comp- Purchase Accumulated Stockholders'
Shares Amount Capital ensation Loans Deficit Equity
------------------------------------------------------------------------------------------------------
BALANCE,
January 1, 2001 10,290,535 $ 10,290,535 $ 25,849,961 $ (105,525) $ (519,733) $(24,085,122) $ 11,430,116
Net income 3,326,106 3,326,106
Cancellation of shares
under 1989 stock
incentive plan (Note 8) (2,300) (2,300) 2,300
Purchase of Company's (34,230) (34,230) (3,975) (38,205)
common stock
Accrual of interest
under stock purchase
loans (Note 8) (22,626) (22,626)
Repayment of stock
purchase loan (Note 8) 5,180 5,180
Amortization of deferred
compensation (Note 8) 52,225 52,225
-----------------------------------------------------------------------------------------------------
BALANCE,
December 31, 2001 10,254,005 10,254,005 25,845,986 (51,000) (537,179) (20,759,016) 14,752,796
Net loss (7,890,557) (7,890,557)
Cancellation of shares
under 1989 stock incentive
plan (Note 8) (1,400) (1,400) 1,400
Purchase of Company's
common stock (17,300) (17,300) 3,460 (13,840)
Accrual of interest
under stock purchase
loans (Note 8) (15,812) (15,812)
Repayment of stock
purchase loan (Note 8) 25,133 25,133
Amortization of deferred
compensation (Note 8) 21,000 21,000
-----------------------------------------------------------------------------------------------------
BALANCE,
December 31, 2002 10,235,305 10,235,305 25,849,446 (28,600) (527,858) (28,649,573) 6,878,720
Net loss (15,144,157) (15,144,157)
Common stock 3,800 3,800 1,330 5,130
Accrual of interest
under stock purchase
loans (Note 8) (21,226) (21,226)
Amortization of deferred
compensation (Note 8) 28,600 28,600
-----------------------------------------------------------------------------------------------------
BALANCE,
December 31, 2003 10,239,105 $ 10,239,105 $ 25,850,776 $ -- $ (549,084) $(43,793,730) $ (8,252,933)
=====================================================================================================
See notes to consolidated financial statements
29
CALPROP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------------
2003 2002 2001
------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(15,144,157) $ (7,890,557) $ 3,326,106
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Gain on sale of joint venture interest (2,000,000)
Minority interests 235 (1,325)
(Income) loss from investment in real estate venture (109,253) 118,764
Amortization of deferred compensation 28,600 21,000 52,225
Depreciation and amortization 183,739 165,287 45,807
Recognition of impairment of real estate
development Recognition of impairment of
asset held for sale 5,046,150 4,471,693 2,018,088
Recognition of impairment of rental property 2,268,948
Loss on sale of property and equipment 1,312
Provision for warranty reserves 54,000 252,105 332,899
Change in assets and liabilities
Other assets (672,607) 18,116 49,277
Receivable from affiliates 788,752 (788,752)
Deferred tax assets 6,535,343
Accounts payable and accrued liabilities (161,305) (2,609,594) (3,982,231)
Deposit 2,000,000
Warranty reserves (125,174) (164,670) (209,768)
Payable to affiliates (272,011)
Additions to real estate under development (14,770,754) (43,444,123) (74,779,330)
Cost of real estate sales 20,715,992 92,399,110 82,671,009
Accrued interest for executive stock purchase loans (21,226) (15,812) (22,626)
------------------------------------------------
Net cash provided by operating activities 1,938,861 45,882,289 8,558,132
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in rental property (5,680)
Proceeds from sale of property and equipment 1,000
Capital expenditures (6,140) (31,993) (6,554)
------------------------------------------------
Net cash used in investing activities (10,820) (31,993) (6,554)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under related-party notes 2,618,274 1,663,977 12,280,542
Payments under related-party notes (123,277) (13,895,903) (6,763,225)
Borrowings under trust deeds and notes payable 18,909,061 32,681,856 67,603,361
Payments under trust deeds and notes payable (26,591,000) (64,946,449) (81,954,070)
Common stock 5,130 (13,840) (38,205)
Repayment of stock purchase loans 25,133 5,180
------------------------------------------------
Net cash used in financing activities (5,181,812) (44,485,226) (8,866,417)
------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,253,771) 1,365,070 (314,839)
Cash and cash equivalents at beginning of the year 3,444,541 2,079,471 2,394,310
------------------------------------------------
Cash and cash equivalents at end of the year $ 190,770 $ 3,444,541 $ 2,079,471
================================================
See notes to consolidated financial statements
Continued
30
CALPROP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------------
2003 2002 2001
------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refunded) during the year for:
Interest (net of amount capitalized) $1,424,483 $699,849 $115,096
Income taxes $(55,998) $(44,331) $229,315
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of real estate under development to rental
property $11,304,761
Concluded
See notes to consolidated financial statements
31
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(1) Organization
Nature of operations - Calprop Corporation ("the Company"), a
California Corporation, primarily constructs and sells single-family
detached and attached homes and townhomes as part of condominiums or
planned unit developments in California and Colorado. As of December
31, 2003, the Company had three residential housing projects in various
stages of construction and development, consisting of 39 homes under
construction (including 8 homes in escrow and 2 model homes), and 89
lots under development. The Company's products range from homes for
first-time buyers to custom homes. In addition to the construction and
sale of single-family and multifamily housing, the Company is engaged
in the development of apartments and townhomes available for lease. As
of December 31, 2003, the Company has a 68-unit apartment building that
is substantially leased. During the year, management approved a plan of
action to sell the operating assets of the apartment building. As a
result, the rental property has been classified as held for sale and
depreciation has ceased as of the date the plan was approved.
Operations of the apartment building are classified as discontinued
operations in the consolidated statements of operations. The apartment
project was sold on March 12, 2004 at a gross sales price of $9,000,000
(see Note 4 and 11).
Based on its agreements with its lenders, the Company believes that it
will have sufficient liquidity to finance its construction projects in
2004 through funds generated from operations, funds available under its
existing bank commitments, funds generated from new lending
institutions, and, if necessary, funds that could be obtained by using
its internally financed real estate development in process as
collateral for additional loans.
Management's plan, with respect to managing cash flow includes the
following components: pay off debt that is coming due in 2004, minimize
operating expenses, and maintain control over costs. With regard to the
debt coming due in 2004, management expects to extend the maturity
dates of various loans and pay the remaining loans off through cashflow
from operations, prior to their maturity date. With regard to
minimizing operating expenses, management plans to achieve this by
continuing to closely examine overhead items. Management anticipates
that the funds generated from operations, including borrowings from
existing loan commitments, will be adequate to allow the Company to
continue operations throughout 2004.
Basis of presentation - The accompanying financial statements include
the accounts of Calprop Corporation and all its subsidiaries. All
significant intercompany transactions and balances have been eliminated
in consolidation. Such statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America.
32
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
The Company has consolidated the financial statements of the
following entities:
- ---------------------------------------------------------------------------------------------------------------
Entity Ownership interest at Development
December 31, 2003
- ---------------------------------------------------------------------------------------------------------------
Colorado Pacific Homes, Inc. ("CPH") 100% High Ridge Court and Saddlerock projects,
Colorado
DMM Development, LLC ("DMM") 67% Cierra del Lago and Antares projects,
California (Completed projects)
Rohnert Park Development Co., LLC 100% 77 lots in Rohnert, California
("Rohnert")
Parkland Farms Development Co., LLC 99% 115 lots in Healdsburg, California
("Parkland") (Completed project)
RGCCLPO Development Co., LLC ("RGCCLPO") 100% 382 lots in Milpitas, California
PWA Associates, LLC ("PWA") 100% 68-unit apartment building in Milpitas,
California
- ---------------------------------------------------------------------------------------------------------------
CPH: The Company was entitled to receive eighty percent of the profits
of CPH, and the other partner, an officer of CPH, was entitled to
receive the remaining twenty-percent of the profits. During November
2001, Calprop obtained all of the officer's ownership interest in CPH.
DMM: The Company is entitled to receive two-thirds of the profits of
DMM, and the other owner, RGC Courthomes, Inc. ("RGC"), is entitled to
receive the remaining one-third of the profits.
Rohnert: The Company is entitled to receive all of the profits of
Rohnert.
Parkland: Pursuant to the operating agreement of Parkland, Calprop is
entitled to receive ninety-nine percent of the profits of Parkland, and
the other member, an officer of the Company, is entitled to receive the
remaining one percent of the profits.
RGCCLPO: The Company is entitled to receive all of the profits of
RGCCLPO. As of December 31, 2003, all units have been sold.
PWA: Pursuant to the operating agreement of PWA, Calprop was entitled
to receive fifty percent of the profits of PWA, and the other member,
RGC, was entitled to receive the remaining fifty-percent of the
profits. During May 2001, Calprop purchased all of RGC's ownership
interest in PWA.
During the year ended December 31, 2003, the loss of $2,271 incurred by
the entities related to the minority interest was not allocated to the
minority interest because the minority interest had a deficit interest
in the Company. The Company does not reflect the deficit for the
minority interest because the minority owners are not responsible for
losses incurred beyond their equity. The unrecognized minority interest
in deficit of the Company as of December 31, 2003 and 2002 was $70,630
and $68,359, respectively. As a result, the Company has recorded
minority interest of $0 as of December 31, 2003 and 2002.
(2) Summary of Significant Accounting Policies
Revenue and cost recognition - Revenue from real estate sales and
related costs are recognized at the close of escrow, when title passes
to the buyer. Cost of real estate sales is based upon the relative
sales value of units sold to the estimated total sales value of the
respective projects.
The Company reviews the carrying value of its real estate developments
for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. If the
sum of the expected future cash flows is less than the carrying amount
of the asset, the Company recognizes an impairment loss. During 2003
and 2002, the Company recorded
33
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
an impairment loss of $5,046,150 and $4,471,693, respectively (Note 3)
related to its home-building activities. In addition, the Company
recorded an impairment loss of $2,268,948 during 2003 related to the
apartment building held for sale (Note 4).
Rental revenue recognition - The Company generally leases its rental
property under one year operating leases. Rental income is recognized
as it is earned on a straight-line basis over the appropriate lease
term.
Cash and cash equivalents - The Company considers readily marketable
securities with a maturity of 90 days or less at the date of purchase
to be cash equivalents.
Income taxes - Deferred income tax assets and liabilities are computed
for differences between the financial statement and income tax bases of
assets and liabilities. Such deferred income tax asset and liability
computations are based on enacted tax laws and rates applicable to
periods in which the differences are expected to reverse. A valuation
allowance is established, when necessary, to reduce deferred income tax
assets to the amount expected to be realized.
Office equipment and other - Office equipment and other is stated at
cost less accumulated depreciation. Equipment is depreciated utilizing
the straight-line method over its estimated useful life of five years.
Depreciation and amortization of building and improvements - The cost
of building and improvements are depreciated on a straight-line method
over the estimated useful life of 40 years.
Warranty reserves - The Company provides a one-year warranty to
purchasers of single-family homes. The Company accrues estimated
warranty costs on properties as they are sold. Estimated warranty costs
are based on historical warranty costs.
In addition to the Company's one-year warranty, California and Colorado
law provides the Company's customers certain implied warranties, the
scope and duration of which exceed the Company's express warranties.
The Company requires its subcontractors to indemnify the Company in
writing and requires the insurance of the subcontractor to provide that
the Company is a primary insured on their insurance policy and an
additional insured from its subcontractors for liabilities arising from
their work, except for liability arising through the sole negligence or
willful misconduct of the Company or from defects in designs furnished
by the Company. Nevertheless, the Company is primarily liable to its
customers for breach of warranty. The Company has builder's product
liability insurance coverage which it believes to be adequate in light
of the Company's claims history.
Employee stock plans - The Company adheres to APB Opinion No. 25 to
account for its stock-based compensation awards to employees and
discloses the required pro forma effect on net income and earnings per
share consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation."
Use of estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair value of financial instruments - Management believes the recorded
value of notes payable to financial institutions approximate the fair
market value as a result of variable interest rates and short-term
durations. Management also believes that it is not practical to
estimate the fair value of related-party notes.
Recent accounting pronouncements - On October 3, 2001, the FASB issued
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived
Assets." SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of." SFAS
144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion
No. 30 (APB 30), Reporting Results of Operations Reporting the
34
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
Effects of Disposal of a Segment of a Business. SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by
sale. SFAS 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that
(1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for the Company for all financial
statements issued in fiscal 2002. The adoption of SFAS 144 did not have
a material impact on the Company's financial position or results of
operations.
In April 2002, FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). The most significant provisions of this
statement relate to the rescission of Statement No. 4 "Reporting Gains
and Losses from Extinguishment of Debt." SFAS 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. Under SFAS 145, any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods
presented that does not meet certain defined criteria must be
reclassified. The provisions of SFAS 145 are effective for fiscal years
beginning after May 15, 2002. Management does not expect that the
adoption of this statement will have a material effect on the Company's
results of operations or financial condition.
In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity". SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of SFAS 146
are effective for exit or disposal activities that are initiated after
December 31, 2002. Management does not expect that the adoption of this
statement will have a material effect on the Company's results of
operations or financial condition.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
significantly changes the current practice in the accounting for, and
disclosure of, guarantees. Guarantees and indemnification agreements
meeting the characteristics described in FIN 45 are required to be
initially recorded as a liability at fair value. FIN 45 also requires a
guarantor to make significant new disclosures for virtually all
guarantees even if the likelihood of the guarantor having to make
payment under the guarantee is remote. The disclosure requirements
within FIN 45 are effective for financial statements for annual or
interim periods ending after December 15, 2002. The initial recognition
and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The
Company adopted the disclosure provisions of FIN 45 as of December 31,
2002. Management does not expect the adoption of the initial
recognition and measurement provisions will have a material effect on
the Company's results of operations or financial condition.
In December 2002, the Financial Accounting Standards Board, ("FASB")
issued SFAS 148, "Accounting for Stock-Based Compensation--Transition
and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123 "Accounting for
Stock Based Compensation" ("SFAS 123") to provide alternative methods
of transition for an entity that voluntarily changes to the fair value
recognition provision of recording stock option expense. SFAS 148 also
requires disclosure in the summary of significant accounting policies
of the effects of an entity's accounting policy with respect to stock
options on reported net income and earnings per share in annual and
interim financial statements. The Company voluntarily adopted the fair
value recognition provision prospectively, for all employee awards
granted or settled after January 1, 2002. Under this provision, total
compensation expense related to stock options is determined using the
fair value of the stock options on the date of grant and is recognized
on a straight-line basis over the option vesting period. Prior to 2002,
the Company accounted for stock options issued under this plan under
the recognition and measurement provision of APB Opinion 25 "Accounting
for Stock Issued to Employees and Related Interpretations".
35
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" and provides guidance on the
identification of entities for which control is achieved through means
other than voting rights ("variable interest entities" or "VIEs") and
how to determine when and which business enterprise should consolidate
the VIE. This new model for consolidation applies to an entity in which
either: (1) the equity investors (if any) lack one or more
characteristics deemed essential to a controlling financial interest or
(2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial
support from other parties. In December 2003, the FASB published a
revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the
interpretation and defer the effective date of implementation for
certain entities. The provisions of FIN 46R are effective for the first
reporting period ending after December 15, 2003 for entities considered
to be special-purpose entities. The provisions for all other entities
subject to FIN 46R are effective for financial statements of the first
reporting period ending after March 15, 2004. On February 1, 2003, the
Company adopted the provisions of this interpretation, which did not
have a material effect on the Company's results of operations or
financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this
statement did not have a material effect on the Company's results of
operations or financial condition.
(3) Real Estate Under Development
Real estate under development at December 31, 2003 and 2002 is
summarized as follows:
2003 2002
-----------------------------------------------------------------
Amount Units/Lots Amount Units/Lots
-----------------------------------------------------------------
Single-family residences $ 7,389,708 39 $ 12,750,091 48
Townhomes (1,082,607) 4,335,593 16
-----------------------------------------------------------------
Total residences 6,307,101 39 17,085,684 64
Land under development 4,237,525 89 4,474,884 91
-----------------------------------------------------------------
Total real estate under development before
investment in joint ventures 10,544,626 128 21,560,568 155
Investment in joint ventures 2,630,815 2,606,261
-----------------------------------------------------------------
Total real estate under development $ 13,175,441 128 $ 24,166,829 155
=================================================================
Investment in joint ventures represents the Company's investment in
Mission Gorge, LLC and RGC Carmel Country Associates, LLC. Such
investments are accounted for under the equity method of accounting.
In 1996, Mission Gorge, LLC, a California limited liability company,
was formed to develop and construct single-family homes and the Company
transferred its Mission Gorge property to the joint venture. In
connection with the formation, the Curci-Turner Company ("Curci"),
exchanged a $2,000,000 note receivable from the Company for a 50%
ownership interest in Mission Gorge, LLC. A principal of the
Curci-Turner Company is a stockholder of the Company.
In 1999, the Company formed RGC Carmel Country Associates, LLC, a
California limited liability company, ("RGC Carmel") with RGC to
develop, construct and lease a 181 townhome project. The profits and
losses of RGC Carmel were distributed between the members as follows:
50% to RGC and 50% to the Company. During
36
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
2000, RGC Carmel admitted additional members in the following
proportions: The John L. Curci Trust as to a 12.5% interest, The Janet
Curci Living Trust No. Il as to a 12.5% interest, and an officer of the
Company as to a 25% interest in exchange for financing for the project
as follows: $2,000,000 in equity and $2,000,000 in notes payable. As a
result, the Company's interest in RGC Carmel was reduced to 25%, which
is accounted for under the equity method of accounting. During 2002,
the Company transferred .5% of its interest in RGC Carmel to Calprop
Andalucia, a 100% wholly owned subsidiary of the Company. In January
2003, the Company sold the remaining 24.5% of its interest in RGC
Carmel to related parties in the following proportions: The Janet Curci
Living Trust No. II as to a 6.125%, JAMS Management as to a 6,125%, and
an officer of the Company as to a 12.25%. The Company's interest was
sold for $2,000,000 in cash, which was received in 2002 and resulted in
recording a deposit of $2,000,000 as of December 31, 2002. The Company
recorded a gain of $2,000,000 on the sale of the joint venture in 2003.
The gain equals the proceeds received of $2,000,000 as the Company had
no basis in the investment sold. As a result, the Company's interest in
RGC Carmel was reduced to .5%.
During 2003, 2002 and 2001, the Company recorded income (loss) from
investment in real estate venture of $0, $109,253 and $(118,764).
Development operations in 2003, 2002 and 2001 are summarized as
follows:
2003 2002 2001
-------------------------------------------------------------------------------
REAL ESTATE SALES: Amount Units Amount Units Amount Units
-------------------------------------------------------------------------------
Single-family residences $ 9,739,000 38 $ 32,160,152 100 $ 34,578,692 109
Townhomes 7,657,678 16 59,481,468 148 56,035,930 140
Lots 2,496,261 50
-------------------------------------------------------------------------------
Total Sales 19,892,939 104 91,641,620 248 90,614,622 249
COST OF REAL ESTATE SALES:
Single-family residences 10,698,724 31,977,269 32,548,574
Townhomes 7,609,716 60,169,736 49,773,731
Lots 2,296,560
Warranty 110,992 252,105 348,704
------------ ------------ ------------
Total Cost of Sales 20,715,992 92,399,110 82,671,009
Recognition of impairment of real estate
development (5,046,150) (4,471,693) (2,018,088)
------------ ------------ ------------
(Loss) income from development operations $ (5,869,203) $ (5,229,183) $ 5,925,525
============ ============ ============
The 2003 impairment loss on real estate development includes the
recording of an impairment loss for two projects. The impairment loss
on the Saddlerock project is primarily a result of the lack of demand
of the product lines resulted in a slower absorption rate. The Company
introduced three new product lines and converted certain upgrades as
standards to increase the absorption rate. The project consisted of 94
homes with five product lines in Aurora, Colorado. The introduction of
the new product lines increased direct construction cost, marketing,
production overhead and interest costs and as a result the Company
recorded an impairment loss on real estate under development of
$4,614,756. As of December 31, 2003, the Company has no remaining units
to construct, 18 units under construction, one of which have been sold.
The impairment loss on the High Ridge Court project is primarily a
result of an absorption rate slower than anticipated. The decrease in
absorption rate increased marketing, production and interest costs and
as a result the Company recorded an impairment loss on real estate
under development of $431,394. As of
37
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
December 31, 2003, the Company has 33 remaining units to construct, 21
units under construction, seven of which have been sold.
The 2002 impairment loss on real estate development includes the
recording of an impairment loss for three projects. The impairment loss
on the Saddlerock project is primarily a result of the lack of demand
of the product lines resulted in a slower absorption rate. The Company
introduced three new product lines and converted certain upgrades as
standards to increase the absorption rate. The project consisted of 94
homes with five product lines in Aurora, Colorado. The introduction of
the new product lines increased direct construction cost, marketing,
production overhead and interest costs and as a result the Company
recorded an impairment loss on real estate under development of
$1,503,792. As of December 31, 2002, the Company has 55 remaining units
to construct, 20 units under construction, three of which are in escrow
for sale. The impairment loss on the High Ridge Court project is
primarily a result of an absorption rate slower than anticipated. The
decrease in absorption rate increased marketing, production and
interest costs and as a result the Company recorded an impairment loss
on real estate under development of $1,407,520. As of December 31,
2002, the Company has 36 remaining units to construct, 28 units under
construction, two of which are in escrow for sale. The impairment loss
on the Parc Metropolitan project resulted from actual sales prices for
certain units were lower than anticipated. In addition, the lack of
demand for upgrades and options in the project also impacted the sales
revenue and as a result the Company recorded an impairment loss on real
estate under development of $1,560,381. As of December 31, 2002, the
Company has 16 units under construction, 7 of which are in escrow for
sale.
The 2001 impairment loss on the Mockingbird Canyon project is primarily
a result of the slow absorption rate. The sales price was not
sufficient to offset the increased marketing and sales incentives,
production overhead and interest costs and as a result the Company
recorded an impairment loss on real estate under development of
$2,018,088 during the third quarter of 2001. The Company has 12 units
remaining as of December 31, 2001. The project was completed during
2002.
(4) Assets and Related Liabilities Held for Sale
During the year ended December 31, 2003, management approved a plan of
action to sell the operating assets of PWA. As a result, the rental
property has been classified as held for sale and depreciation has
ceased as of the date the plan was approved. Operations of PWA are
classified as discontinued operations in the consolidated statements of
operations. The apartment project was sold on March 12, 2004 at a gross
sales price of $9,000,000 (see Note 11).
Assets held for sale at December 31 is summarized as follows:
2003 2002
Land $ 1,500,000 $ 1,500,000
Building and improvements, net 7,364,917 9,714,659
----------------------------
Assets held for sale, net 8,864,917 $11,214,659
============================
Depreciation expense for building and improvements for the year ended
December 31, 2003 and 2002 was $146,250 and $121,875, respectively.
Liabilities related to assets held for sale at December 31 is
summarized as follows:
2003 2002
Trust deed and note payable $7,678,544 $7,941,263
Accounts payable and accrued liabilities 42,064 349,993
--------------------------
Liabilities related to assets held for sale 7,720,608 $8,291,256
==========================
Trust deed and note payable secured by the apartment project bear
interest at 6.08% and mature on September 11, 2010.
38
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(5) Other Assets
Other assets at December 31, 2003 and 2002 are as follows:
Interest Rate Outstanding Balance
------------- -----------------------------
2003 2002
-----------------------------
Trust deeds receivable 11.75% $ 49,975 $ 52,370
Less reserve (30,000) (30,000)
-----------------------------
Net trust deeds receivable 19,975 22,370
Deposits in escrow 501,010 151,000
Office equipment and other, net of
accumulated depreciation of $362,580 and
$334,974 as of December 31, 2003 and 2002,
respectively 751,255 502,967
Prepaid expenses 20,504 37,237
-----------------------------
Other assets $ 1,292,744 $ 713,574
=============================
Depreciation expense included in general and administrative expenses
for the year ended December 31, 2003, 2002 and 2001 were $32,725,
$43,412 and $45,277, respectively.
(6) Trust Deeds, Notes Payable and Related-Party Notes
Trust deeds, notes payable and related party notes as of December 31,
2003 and 2002 are as follows:
2003 2002
--------------------------------
Trust Deeds and Notes Payable:
Notes payable to financial institutions, secured by development projects' trust
deeds - variable and fixed interest rates ranging from prime plus 1.25% to 10%,
interest payable monthly (prime rate equals 4.0% and 4.25% at
December 31, 2003 and 2002, respectively); maturing January 2005 through
June 2005 $ 2,744,158 $10,174,334
Line of credit to financial institution, unsecured - variable interest
rate at prime, interest payable monthly (prime rate equals 4.0% and 4.25% at
December 31, 2003 and 2002, respectively); maturing August 2004 1,500,000 1,500,000
Notes payable to financial institutions, unsecured - interest rate at
6.25%, interest payable monthly; maturing May 2004 121,545 110,589
--------------------------------
Total trust deeds and notes payable 4,365,703 11,784,923
--------------------------------
Related-Party Notes:
Notes payable to related parties, secured by development projects' trust deeds -
interest rate of 12%, interest payable monthly; maturing on demand
through January 2005 $ 6,943,443 $ 4,779,699
Notes payable to related parties, unsecured - interest rates of 10% to 15%,
interest payable monthly; maturing on demand through July 2004 9,539,188 9,207,935
--------------------------------
Total related party notes 16,482,631 13,987,634
--------------------------------
Total trust deeds, notes payable and related-party notes $20,848,334 $25,772,557
================================
39
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
As of December 31, 2003, the Company had remaining loan commitments
from banks and financial institutions of approximately $4,252,258 which
may be drawn down by the Company upon the satisfaction of certain
conditions. The Company continues to seek joint venture partners and
additional financing to fund its operations.
During 2003, 2002 and 2001, the Company paid interest of $592,028,
$2,323,387 and $10,680,033, respectively, on trust deeds and notes
payable. The Company capitalized interest of approximately $136,456,
$2,047,647 and $10,680,033 during 2003, 2002 and 2001, respectively.
During 2002, the Company paid and capitalized $6,200,000 of profit
participation. The Company had a profit participation agreement with
Ford for $6,200,00 to be paid on December 13, 2002. The Company had
acquired the land through seller financing with Ford Motor Company and
Ford Motor Land Development Corporation on the entire 382 lots and the
land for the Parcwest Apartments project. The original note balance of
$12,850,000 bore interest at 9%. The loan was repaid in 2001.
Related-Party Notes
Curci - The Company has the following notes payable to Curci at
December 31, 2003 and 2002. A principal of Curci is a stockholder of
the Company. Under the terms of certain of the notes payable, Curci
receives interest and participates in "Net Proceeds" from certain
projects, as defined in the loan agreement, which is comparable to net
profit:
December 31, December 31,
Project Profit share 2003 2002
---------------------- ---------------- ------------------ ------------------
Secured loans:
High Ridge Court 50% $2,499,024 $2,366,102
Saddlerock 50% 4,444,419 2,413,597
------------------ ------------------
6,943,443 4,779,699
Unsecured loans 5,356,254(1) 5,000,000(1)
------------------ ------------------
$12,299,697 $9,779,699
================== ==================
(1) During 2001, the Company obtained a $5,000,000 unsecured working
capital loan from Curci which bear interest at 15% and matures on July
16, 2004. Interest is payable monthly. Unpaid interest of $356,254 has
been added to the note principal.
During the years ended December 31, 2003, 2002, and 2001, net
participation proceeds expensed to cost of real estate sales in the
accompanying consolidated statements of operations were $0, $24,385,
and $675,198, respectively. Accrued participation proceeds included in
accounts payable and accrued liabilities in the accompanying
consolidated balance sheets at December 31, 2003 and 2002 was $0.
Other Related Parties
During 1996, the Company converted its Preferred Stock to Common Stock
and the accrued Preferred Stock dividend due to an officer of the
Company and a related party of $581,542 and $472,545, respectively, was
exchanged for notes with interest payable at 10%. As of both December
31, 2003 and 2002, the outstanding principal due on the officer and
related party loans was $581,542 and $462,330, respectively. The notes
mature on December 31, 2004.
Included in notes payable to related parties is a note payable to
Mission Gorge, LLC which bears interest at 12%. The outstanding balance
as of December 31, 2003 and 2002 was $2,000,000 and 2,000,000,
respectively. The note matures on December 31, 2004.
Included in notes payable to related parties are notes payable to an
officer which bear interest at 12%. Outstanding balances as of December
31, 2003 and 2002 were $499,062 and $424,063, respectively. The notes
mature on December 31, 2004.
40
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
As of December 31, 2003, the Company had other loans, which bear for
interest at 10%. $40,000 is due on demand and the remaining notes
mature through December 31, 2004. As of December 31, 2003 and 2002,
these loans totaled $640,000 and $740,000, respectively. Aggregate
future principal payments due on trust deeds payable, notes payable and
related party notes are as follows:
Year Ended
December 31,
--------------------------
2004 $15,605,152
2005 5,243,182
2006
2007
2008
Thereafter
--------------------------
Total $20,848,334
==========================
During 2003, 2002 and 2001, the Company paid interest of $1,589,309,
$2,918,200 and $5,300,889, respectively, on loans from related parties.
The Company capitalized interest of approximately $620,398, $2,494,091
and $5,185,793 during 2003, 2002 and 2001, respectively.
(7) Income Taxes
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------
Current income tax (benefit) expense $(2,429,776) $(3,152,732) $ 171,742
Net deferred income tax expense (benefit) 2,429,776 3,152,732
Increase in valuation allowance to write-off deferred
tax assets 6,535,343
---------------------------------------------
Provision for income taxes $ 6,535,343 $ 0 171,742
=============================================
As of December 31, 2003, the Company had gross deferred tax assets of
$13,403,868 which have been fully offset by a deferred tax asset
valuation allowance of $13,403,868. During 2003, the Company increased
the deferred tax valuation allowance to offset current year's net
income tax benefit of $2,338,785 as it has been determined that is it
unlikely that the deferred tax assets will be utilized. Furthermore in
the current year, as a result of Company's assessment of its past
earnings history and trends, sales backlog, budgeted sales, and
expiration dates of carryforwards, the Company determined that it would
not be able to realize its recorded net reserve for its deferred tax
assets since the likelihood of realization of the deferred tax benefits
cannot be determined.
As of December 31, 2003, the Corporation had net operating loss
carryforwards for federal and state income tax purposes of
approximately $24,869,625 and $6,800,746, respectively. For federal tax
purposes the net operating loss carryforwards expire from 2013 through
2022. For state tax purposes the net operating loss carryforwards
expire from 2005 through 2008.
41
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
The deferred income tax assets, resulting from differences between
accounting for financial statements purposes and tax purposes, less
valuation allowance, are as follows:
2002 2001
---------------------------------
Inventory reserves $ 284,113
Warranty reserves and others $ 4,399,475 1,651,075
State net operating loss 555,520 822,218
Federal net operating loss 8,448,873 8,307,677
---------------------------------
13,403,868 11,065,083
Valuation allowance (13,403,868) (4,529,740)
---------------------------------
$ 0 $ 6,535,343
=================================
The following is a reconciliation of the federal statutory rate to the
Company's effective rate for 2003, 2002, and 2001:
2003 2002 2001
------------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage
------------------------------------------------------------------------------
Statutory rate $(2,742,848) (34%) $(2,682,709) (34%) $ 1,189,268 34%
State franchise tax, net of federal tax
benefit (458,250) (5.7%) (460,005) (5.8%) 167,718 4.8%
$ 2,690 0%
Other 771,322 9.6% (10,018) (.1%)
Change in valuation allowance 8,965,119 111.1% 3,152,732 39.9% (1,187,934) (34%)
------------------------------------------------------------------------------
$ 6,535,343 81.0% $ 0 0% $ 171,742 4.9%
===============================================================================
(8) Qualified and Non-Qualified Stock Option Plans
The Company has three stock-based compensation plans, which are
described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its stock-based compensation.
Accordingly, no compensation costs have been recognized for its fixed
stock option plans during 2003, 2002, and 2001. The compensation cost
that has been charged against income for its stock incentive plan was
$28,600 in 2003, $21,000 in 2002 and $52,225 in 2001. Had compensation
costs for the Company's stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with SFAS No. 123, the Company's net (loss) income and net
(loss) income per share would have been adjusted to the pro forma
amounts indicated below:
2003 2002 2001
---- ---- ----
Net (loss) income: As reported $(15,144,157) $(7,890,557) $3,326,106
Pro forma $(15,148,227) $(7,894,021) $3,318,068
Diluted net (loss) income per share: As reported $ (1.48) $ (0.77) $ .32
Pro forma $ (1.48) $ (0.77) $ .32
42
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
The 1983 Stock Option Plan authorized an aggregate of 653,006 (adjusted
for stock dividends) shares of common stock to be reserved for grant.
The 1983 Stock Option Plan expired in September, 1993. Changes in the
1983 Stock Option Plan are summarized as follows for the years ended
December 31,:
2002 2001
------------------------ -------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------ -------------------------
Outstanding, beginning of year 58,000 $ 2.93 58,000 $ 2.93
Expired (58,000) $ 2.93
------------------------ -------------------------
Outstanding, end of year -- 58,000 $ 2.93
======================== ========================
Exercisable, end of year -- 53,000
========== ===========
The 1993 Stock Option Plan, (amended by the shareholders May 20, 1999)
authorizes an aggregate of 2,000,000 shares of the Company's common
stock to be reserved for grant. The options fully vest a year from the
date of grant. Changes in the 1993 Stock Option plan are summarized as
follows for the years ended December 31,:
2003 2002 2001
----------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------- ------------------------- -------------------------
Outstanding, beginning of year 697,700 $ 1.32 860,700 $ 1.27 860,700 $ 1.27
Canceled (258,200) $ 1.31 (163,000) $ 1.04
------------------------ ------------------------- ---------------------
Outstanding, end of year 439,500 $ 1.32 697,700 $ 1.32 860,700 $ 1.27
======================== ========================= =====================
Exercisable, end of year 439,500 697,700 860,700
============= ============== =============
Available for grant, end of year 749,450 491,250 328,250
============= ============== =============
The following table summarizes information about the outstanding
options as of and for the year ended December 31, 2003, from the
Company's 1993 stock option plan:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/03 Contractual Life Exercise Price at 12/31/03 Exercise Price
- -------------------- ----------------------------------------------------- --------------------------------
$0.49 to $0.96 114,950 3.3 years $0.70 114,950 $0.70
$1.00 to $1.88 324,550 5.0 years $1.55 324,550 $1.55
----------------------------------------------------- --------------------------------
$0.69 to $1.88 439,500 4.5 years $1.32 439,500 $1.32
=======================================================================================
The 1989 Executive Long-Term Stock Incentive Plan, (amended by the
shareholders May 23, 1996) authorizes an aggregate of 500,000 (adjusted
for stock dividends) shares of the Company's common stock to be
reserved for awards to key employees of the Company. The stock, once
granted to the key employees, vests at 20 percent a year from the date
of grant. The non-vested shares represent unearned compensation. The
1989 Executive Long-Term Incentive Plan expired in May, 1999. Changes
in the 1989 Executive Long-Term Stock Incentive plan are summarized as
follows for the years ended December 31,:
43
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
2003 2002 2001
--------------------------------------
Outstanding, beginning of year 418,580 419,980 422,280
Shares canceled (6,900) (1,400) (2,300)
--------------------------------------
Outstanding, end of year 411,680 418,580 419,980
======================================
Vested, end of year 411,680 400,980 368,980
======================================
Available for grant, end of year -- -- --
======================================
Included as a separate deduction of stockholder's equity is deferred
compensation relating to this plan of $0 and $28,600 as of December 31,
2003, and 2002, respectively.
The 1992 Director Stock Option Plan authorizes an aggregate amount of
100,000 shares to be granted. Each year, the directors that are members
of the stock option committee are eligible to be granted options to buy
7,500 shares at the market price at the date of grant, exercisable one
year after grant, and expire 10 years after the grant date. Options
were not granted to directors from the 1992 Director Stock Option Plan
during 2003. During 2002 and 2001, 15,000 shares and 15,000 shares,
respectively, were granted under this plan at an exercise prices of
$1.13 and $1.13 per share, respectively. The exercise prices represent
the market price at the date of grant. At December 31, 2003, 22,500
shares were outstanding related to this plan. In 1996, the Company
issued warrants to purchase 150,000 shares of common stock at an
exercise price of $1.00 that expired on September 30, 2003. As of
December 31, 2003, no warrants were outstanding.
The weighted-average fair value of the options granted during 2002 and
2001 is $0.51 and $0.46, respectively. The fair value of each option
was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions
for 2002 and 2001, respectively: risk-free interest rates of 6.5
percent for all years; dividend yield of zero percent for all years;
expected lives of 5.0 and 5.0 years; and volatility of 44 and 33
percent.
For the years ended December 31, 2003 and 2002, options were not
included in the computation of diluted net loss per common share
because the effect would be antidilutive to the net loss in the
periods. In addition, for the year ended December 31, 2001, options of
601,700 were not included in the computation of diluted net income
because their exercise prices were higher than the average market price
per share of common stock.
On March 10, 1998, three officers and a director of the Company
exercised options to purchase a total of 720,000 shares of common stock
with a weighted-average exercise price of $0.8989 per share. The
Company received $199,395 cash from an officer and received $447,813 in
notes receivable from the remaining two officers and the director as a
result of the exercise of these options. The notes receivable accrue
interest at 4.987% and mature on March 10, 2001 and are guaranteed by
the officers. The notes' maturity dates have been extended to March 10,
2004. During 2002, the director repaid his portion of the note
receivable in the amount of $22,188.
On October 15, 1998, one officer of the Company exercised options to
purchase a total of 10,000 shares of common stock with a
weighted-average exercise price of $0.8125 per share. The Company
received a note receivable for $8,125 from the officer as a result of
the exercise of these options. The note receivable accrued interest at
4.987% and was guaranteed by the officer. During 2001, the officer
partially repaid the note receivable, with the balance repaid during
2002.
As of December 31, 2003 and 2002, accrued interest for the stock
purchase loans was $123,459 and $102,233 respectively. The stock
purchase loans and the related accrued interest are reflected as
reductions to stockholder's equity.
44
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(9) Earnings Per Share
The following table sets forth the computation of basic and diluted net
(loss) income per common share:
2003 2002 2001
---------------------------------------------
Net (loss) income from continuing operations ($12,804,903) ($ 7,263,252) $ 3,321,229
Discontinued operations (2,339,254) (627,305) 4,877
---------------------------------------------
Numerator for basic and diluted net (loss) income per share ($15,144,157) ($ 7,890,557) $ 3,326,106
=============================================
Denominator for basic net (loss) income per share (weighted average
outstanding shares) 10,238,781 10,252,592 10,281,879
Effect of dilutive stock options 128,327
---------------------------------------------
Weighted average shares for dilutive net (loss) income per share 10,238,781 10,252,592 10,410,206
=============================================
(Loss) income from continuing operations per common share - basic ($ 1.25) ($ 0.71) $ 0.32
=============================================
(Loss) income from continuing operations per common share - diluted ($ 1.25) ($ 0.71) $ 0.32
=============================================
(Loss) income from discontinued operations per common share - basic ($ 0.23) ($ 0.06)
=============================================
(Loss) income from discontinued operations per common share - diluted ($ 0.23) ($ 0.06)
=============================================
Net (loss) income per common share - basic ($ 1.48) ($ 0.77) $ 0.32
=============================================
Net (loss) income per common share - diluted ($ 1.48) ($ 0.77) $ 0.32
=============================================
(10) Commitments and Contingencies
Land Acquisition - During 2004, the Company completed the sale of its
contractual rights to purchase approximately 60 acres of undeveloped
land in Southern California for a gross sales price of $11,700,000. The
Comapny estimates that the net sale proceeds will be approximately
$9,000,000. The Company has entered into approximately $8,625,000 in
contracts to acquire two properties and has acquired one project for
$600,000 in its current market in Riverside County in Southern
California. These three properties are zoned for residential
development and can be subdivided into approximately 213 single family
detached lots. The Company plans to start construction in the first
quarter of 2005.
Legal - There are several legal actions and claims pending against the
Company. Based on the advice of legal counsel, management believes that
the ultimate liability, if any, which may result from any of these
lawsuits will not materially affect the financial position or results
of operations of the Company.
Employee benefit plan - The Company has a 401(k) plan (the "Plan"),
which allows eligible employees to contribute from 1 percent to 15
percent of their annual compensation, not to exceed statutory limits.
Company matching is at management's discretion. The Company's
contribution to the Plan for the years ended December 31, 2003, 2002,
and 2001 was $0, $0, and $0, respectively.
Leases - The Company has operating leases that expire through 2006.
Future minimum rents are as follows:
Year Ending December 31, Amount
--------
2004 $205,854
2005 154,015
2006 122,669
--------
$482,538
========
45
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
Rent expense for the years ended December 31, 2003, 2002 and 2001 was
$219,387, $269,023, and $239,304, respectively.
(11) Discontinued operations
In accordance with the SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," the net loss of assets held for sale is
reflected in the consolidated statement of operations as discontinued
operations for all periods presented. For the years ended December 31,
2003, 2002 and 2001, discontinued operations relates to an apartment
project held for sale. The apartment project was sold on March 12, 2004
with a sales price of $9,000,000 (see Note 4). The following table
summarizes the income and expense components of discontinued operations
for the years ended December 31,:
2003 2002 2001
-----------------------------------------
Revenues:
Rental income $972,706 $256,117 $
Gain on forgiven debt 392,575
Interest and miscellaneous 26,966 12,516 4,877
-----------------------------------------
Total revenues 1,392,247 268,633 4,877
-----------------------------------------
Expenses:
Rental operating 660,793 502,059
Impairment loss 2,268,948
General and administrative
Depreciation 151,015 123,036
Interest 650,745 270,843
-----------------------------------------
Total expenses 3,731,501 895,938
-----------------------------------------
(Loss) income from discontinued operations ($2,339,254) ($627,305) $4,877
=========================================
(12) Subsequent events
On May 6, 2004, the Company sold the Saddlerock project for a gross
sales price of $1,390,000. There was no gain or loss on this
transaction.
On February 24, 2004, the Company purchased the remaining 50% interest
from The John L. Curci Trust and The Janet Curci Living Trust No. II
for a total purchase price of $3,600,000. On May 21, 2004, the Company
sold the Mission Gorge property for a gross sales price of $6,849,679.
As a result, the Company will record a gain on the sale of land of
$431,703 in the second quarter of 2004.
On June 18, 2004, the Company sold the contractual rights to purchase
land in the Riverside area for a gross sales price of $11,700,000.
46
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(13) Quarterly Financial Data - (unaudited)
Year Ended December 31, 2003
First Second Third Fourth
------------------------------------------------------------------
Sales $ 4,572,279 $ 7,592,899 $ 5,569,748 $ 2,158,013
==================================================================
(Loss) income from development $ (530,679) $ (4,430,598) $ (27,336) $ (880,590)
operations
==================================================================
Net income (loss) $ 413,344 $(12,843,593) $ (1,193,342) $ (1,520,566)
==================================================================
Basic income (loss) per share $ 0.04 $ (1.25) $ (0.12) $ (0.15)
==================================================================
Diluted income (loss) per share $ 0.04 $ (1.25) $ (0.12) $ (0.15)
==================================================================
Year Ended December 31, 2002
First Second Third Fourth
------------------------------------------------------------------
Sales $ 21,292,270 $ 43,058,399 $ 21,678,306 $ 5,612,645
==================================================================
Income (loss) from development
operations $ 94,774 $ (1,079,218) $ (3,587,274) $ (657,465)
==================================================================
Net loss $ (267,446) $ (1,224,951) $ (4,709,052) $ (1,689,108)
==================================================================
Basic loss per share $ (0.03) $ (0.12) $ (0.46) $ (0.16)
==================================================================
Diluted loss share $ (0.03) $ (0.12) $ (0.46) $ (0.16)
==================================================================
47
CALPROP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
CALPROP CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the three years ended December 31, 2003
Trust Deeds
Warranty Receivable
Reserve Reserve
------------------------
Balance January 1, 2001 $ 546,984 $ 30,000
Additions charged to operations 332,899
Reductions (209,768) --
------------------------
Balance December 31, 2001 670,115 30,000
Additions charged to operations 252,105
Reductions (164,670) --
------------------------
Balance December 31, 2002 757,550 30,000
Additions charged to operations 54,000 --
Reductions (125,174) --
------------------------
Balance December 31, 2003 $ 686,376 $ 30,000
========================
48
Index to Exhibits
-----------------
3.1 Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the Company's Amendment
No. 1 to Form S-1 filed with Securities Exchange Commission on
July 3, 1994 bearing File #33-62516.)
3.2 By-laws of the Company
(Incorporated by reference to Exhibit 3.2 to the Company's Amendment
No. 1 to Form S-1 filed with Securities Exchange Commission on July
3, 1994 bearing File #33-62516.)
10.1 1983 Calprop Corporation Stock Option Plan
(Incorporated by reference to the Company's Form S-8 Registration
Statement (File No. 2-86872), which became effective September 30,
1983.)
10.2 1989 Executive Long-Term Stock Incentive Option Plan
(Incorporated by reference to the Company's Form S-8 Registration
Statement (File No. 33-33640), which became effective March 18,
1991.)
10.3 1992 Directors Stock Option Plan
(Incorporated by reference to the Company's Form S-8 Registration
Statement (File No. 33-57226), which became effective January 18,
1993.)
10.4 1993 Calprop Corporation Stock Option Plan
(Incorporated by reference to Exhibit 10.3 to the Company's
Amendment No. 1 to Form S-1 filed with Securities Exchange
Commission on July 3, 1993 bearing File #33-62516.)
23 Consent of Independent Registered Public Accounting Firm
42 Financial Data Schedule
49
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.
CALPROP CORPORATION
- --------------------------------------
(Registrant)
June 29, 2004
- -------------------------------------- -----------------------
Victor Zaccaglin, Date
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
June 29, 2004
- -------------------------------------- -----------------------
Mark F. Spiro Date
Vice President/Secretary and
Treasurer (Chief Financial
and Accounting Officer)
June 29, 2004
- -------------------------------------- -----------------------
Mark T. Duvall Date
Director
June 29, 2004
- -------------------------------------- -----------------------
Victor Zaccaglin Date
Chairman of the Board
Chief Executive Officer
50