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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2001
COMMISSION FILE NUMBER: 001-09911
CAPITAL PACIFIC HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2956559
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4100 MACARTHUR BLVD., SUITE 200
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 622-8400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK $.10 PAR VALUE
(TITLE OF EACH CLASS)
THE AMERICAN STOCK EXCHANGE
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At May 1, 2001, the aggregate market value of the voting stock held by
persons other than the directors, executive officers and principal shareholders
filing Schedules 13D of the Registrant was $6,780,718 as determined by the
closing price on the American Stock Exchange. The basis of this calculation does
not constitute a determination by the Registrant that all of its principal
shareholders, directors and executive officers are affiliates as defined in Rule
405 under the Securities Act of 1933.
At May 1, 2001, there were 13,716,811 shares of Common Stock outstanding.
Part III incorporates certain information by reference to the Registrant's
definitive proxy statement to be filed with the Commission no later than June
28, 2001.
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PART I
ITEM 1. BUSINESS
GENERAL
Capital Pacific Holdings, Inc., together with its subsidiaries (the
"Company"), is a regional builder and developer with operations throughout
selected metropolitan areas of Southern California, Nevada, Texas, Arizona and
Colorado. The Company's principal business activities are to build and sell
single-family homes. The Company's single-family homes are targeted to
entry-level, move-up and luxury buyers. Since 1975, the Company has built and
sold over 23,000 homes in the markets it serves. During the fiscal year ended
February 28, 2001, the Company (including unconsolidated joint ventures) closed
2,199 home and lot sales, including 1,209 homes, at an average home sales price
of $315,000. The Company currently conducts its operations under various names,
including the name Capital Pacific Homes in California, Nevada, Arizona and
Colorado and Clark Wilson Homes, Inc. ("Clark Wilson") in Texas.
In fiscal year 1998, the Company consummated an equity and restructuring
transaction whereby the Company and certain of its subsidiaries transferred to
Capital Pacific Holdings, LLC ("CPH LLC") substantially all of their respective
assets and CPH LLC assumed all the liabilities of the Company and its
subsidiaries. An unaffiliated investment company, California Housing Finance,
L.P. ("CHF") then acquired a 32.07% minority interest in CPH LLC as a result of
a cash investment in CPH LLC. From fiscal 1998 through fiscal 2001, the Company
expanded its operating strategy to encompass the acquisition and development of
commercial and mixed-use projects, as well as ownership of existing commercial
properties, primarily through non-majority investments in joint ventures, with
approximately 99% of the capital for these projects being provided by CHF and
its affiliates.
In February 2001, the Company and CHF consummated an interest exchange
transaction (the "Exchange Transaction"), whereby the Company exchanged its
interests in the majority of the joint ventures capitalized by CHF (the
"Divested Joint Ventures") for approximately 75% of CHF's interest in CPH LLC
and all of CHF's interests in certain residential joint ventures. At February
28, 2001, the Company had a 93% interest in CPH LLC and CHF held a 7% minority
interest. The Company and CHF both have an option to convert CHF's remaining 7%
interest in CPH LLC into 1,235,000 shares of non-voting Common Stock of the
Company for the period extending from 90 to 180 days following the closing of
the Exchange Transaction. The Company expects that this option will be
exercised. In addition, Capital Pacific Homes, Inc., a subsidiary of the
Company, has entered or expects to enter into construction, management and
marketing agreements relating to certain of the Divested Joint Ventures with
residential components (the "Managed Projects").
The Exchange Transaction had the effect of lowering the Company's exposure
to the risks associated with land development activities and to commercial and
very high-end projects which were, in the Company's judgement, more vulnerable
than the Company's other operations in the event of an economic slowdown. The
Exchange Transaction also increased the Company's equity in CPH, LLC by
approximately $28 million and its equity in certain other residential joint
ventures. The Company was also released from any potential obligations to make
future investments in the Divested Joint Ventures. In addition, through the
management fees which will continue to be paid with respect to the Managed
Projects, the Company will retain some of the economic benefit of the Divested
Joint Ventures.
While the Company has relinquished the potential economic benefits of a
substantial increase in the realizable value of the Divested Joint Ventures, the
Company made the judgment to enter into the Exchange Transaction in light of the
benefits set forth above and the fact that any such increased value in any
particular Divested Joint Venture (1) would be potentially offset by the
potential loss of the Company's investment in other Divested Joint Ventures, (2)
would be subordinate to all bank and other debt financing and would in effect be
subordinate to the investment by CHF in such venture, since CHF's investment of
99% of the capital in such venture would receive a 12% annual preferred rate of
return before the Company would receive anything more than the same return on
its 1% capital, and (3) would be dependent upon a host of factors, including
regulatory approvals and economic conditions.
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Assets under management, including assets owned by unconsolidated joint
ventures and Managed Projects, totaled $475 million at February 28, 2001 in 55
residential properties. At February 28, 2001, CPH LLC had $244 million in assets
and a net worth of $109 million. The Company is the sole managing member of CPH
LLC. The Company maintains certain licenses and other assets as is necessary to
fulfill its obligations as managing member and under management agreements. The
Company and its subsidiaries perform their respective management functions for
CPH LLC and the Managed Projects pursuant to management agreements, which
include provisions for the reimbursement of Company and subsidiary costs and a
management fee. CPH LLC, the Managed Projects and certain other project-specific
entities indemnify the Company against liabilities arising from the projects
owned by such entities.
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC and the project-specific entities in which the Company has
an equity ownership interest. At the current time, all material financing
transactions and arrangements are incurred either by CPH LLC or by the
project-specific entities.
STRATEGY
The Company's long-term strategy includes the following key elements:
(1) Maintaining diversity in its geographic markets. The Company
believes that geographic market diversification is a key element in
achieving long-term stability and growth. While the Company has no specific
plans to expand outside the Southern California, Texas, Arizona, Colorado
and Nevada markets, it may consider expansion to other markets in the
future.
(2) Diversifying its product. The Company builds homes targeted for
all price segments, from entry level buyers to the semi-custom luxury
market move-up buyers, so that it is able to deliver well-priced homes to a
broad segment of its potential customer base. Within Texas, Arizona,
Colorado and Nevada, the Company serves the entry level as well as move-up
markets. Within Southern California, the Company has products targeted
toward second and third time move-up buyers, as well as the million dollar
luxury market. This product diversification enables the Company to adapt to
changing market conditions.
(3) Enhancing the Company's capital base and sources of financial
liquidity. In addition to the equity and restructuring transaction
described above, the Company has diversified sources of financing and will
continue to pursue new financing alternatives in the future. In fiscal year
1995, the Company accessed the public debt capital markets through the sale
of $100 million of 12 3/4% Senior Notes ("Senior Notes") including 790,000
warrants to purchase common stock (the "Offering"). The Senior Notes are
due May 1, 2002. The proceeds from the offering were used to repay certain
debt of the Company, acquire certain properties and for general working
capital purposes. Effective upon the completion of the October 1, 1997
equity and restructuring transaction, the obligations under the Senior
Notes were transferred to CPH LLC. Credit facilities in place at February
28, 2001 totaled $251 million, of which $104 million was outstanding. The
Company intends to maintain, through CPH LLC and other entities in which it
has an equity ownership interest, its traditional lending relationships as
a source of liquidity to the extent permitted by the indenture (the
"Indenture") to which the Notes are subject. The Company believes this
financing strategy allows orderly growth and greater flexibility to react
quickly to changing market conditions. The Company also utilizes joint
ventures within its operations as a source of financing and risk
management. The Company has repurchased approximately $44.4 million of the
Senior Notes and is currently considering alternatives for refinancing the
remaining Senior Notes.
(4) Controlling costs and maintaining operational efficiency. The
Company has job cost, warranty tracking and construction scheduling systems
and other quality control processes to control costs and to reduce the
effect of certain risks inherent in the home-building industry. These
systems and controls enable the Company to monitor and improve its
efficiencies.
(5) Minimizing inventory risk. The Company tries to carefully manage
its land and inventory risk in a variety of ways. The Company monitors its
supply of owned, optioned and controlled land to maintain
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an adequate pipeline of building lots in each of its markets while avoiding
excess land holdings. For its homebuilding projects, the Company generally
prefers to purchase entitled land, typically in parcels of 50 to 250 lots,
and makes use of options, seller financing and joint ventures, when
available, to reduce its capital commitment and exposure to risks.
"Entitled" land is generally defined as land that has received all
necessary land use approvals for residential development from the
appropriate state, county and local governments, including any required
tract maps and subdivision approvals. The Company generally tries to limit
its speculative building by commencing construction only after some sales
have been made and tries to limit the size of each construction phase. The
Company generally purchases and holds land in amounts sufficient to support
home production and sales over a 24 to 48 month period in California, and
in amounts sufficient to support home production and sales over an 18 to 36
month period in Texas, Arizona, Colorado and Nevada. In Nevada, the
Company's plans do not include any additional land purchases.
(6) Land Development. In certain project-specific joint ventures, the
Company has purchased unentitled land, with the intention of obtaining the
required entitlements and then either selling the unimproved land,
developing lots and selling them to other builders or building homes
itself. Due in part to a declining inventory of entitled land in certain of
the Company's markets, the Company's land development activities may
increase. The completion of the Exchange Transaction, however, has reduced
the Company's exposure to the risks arising from land development
activities.
HOMEBUILDING GEOGRAPHIC MARKETS
At February 28, 2001, the Company, either directly or through joint
ventures, including 6 Managed Projects in which the Company does not have an
equity ownership interest, controlled lots in various stages of development with
respect to approximately 55 residential projects, including 18 projects located
in the Orange, Los Angeles, Santa Barbara and Riverside Counties of Southern
California, 5 projects located in Las Vegas, Nevada, 10 projects located in
Austin, Texas, 12 projects located in Phoenix, Arizona and 10 projects in the
Denver metropolitan and Colorado Springs areas of Colorado. The Company is
currently selling homes in 28 of these projects. The Company's homes for sale
currently range in size from 950 to 8,000 square feet in Southern California,
from 1,600 to 3,600 square feet in Nevada, from 1,500 to 4,500 square feet in
Texas, from 1,000 to 3,300 square feet in Arizona and from 1,200 to 2,500 square
feet in Colorado. The Company's homes are currently priced from $75,000 to
$5,800,000 in Southern California, from $115,000 to $385,000 in Nevada, from
$170,000 to $1,300,000 in Texas, from $113,000 to $324,000 in Arizona, and from
$128,000 to $243,000 in Colorado.
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The following table sets forth the estimated number of homes under
construction and lots owned, under option and controlled as of February 28,
2001:
ESTIMATED NUMBER OF HOUSING UNITS THAT COULD BE
CONSTRUCTED ON LAND CONTROLLED AS OF FEBRUARY 28, 2001(a)
LOTS
HOMES UNDER LOTS UNDER LOTS
REGION CONSTRUCTION(b) OWNED OPTION(c) CONTROLLED(d) TOTAL
------ --------------- ----- --------- ------------- -----
Southern California.................. 115 300 57 590 1,062
Managed Projects (Southern
California)........................ 34 248 -- -- 282
Nevada............................... 69 -- 46 -- 115
Texas................................ 240 236 263 2,092 2,831
Arizona.............................. 116 350 144 636 1,246
Colorado............................. 90 838 14 2,102 3,044
--- ----- --- ----- -----
Total...................... 664 1,972 524 5,420 8,580
=== ===== === ===== =====
---------------
(a) Based upon current management estimates, which are subject to change. This
table includes housing units in the Managed Projects in which the Company's
sole economic interest is through management agreements.
(b) Including completed model homes.
(c) Lots under option represent lots under rolling option contracts within
existing projects. There can be no assurance that the Company will actually
acquire any lots under option.
(d) Controlled home sites include those properties for which the Company has
entered into a variety of contractual relationships including non-binding
letters of intent, binding purchase agreements with customary conditions
precedent and similar arrangements. There can be no assurance that the
Company will actually acquire any such properties.
The table below summarizes the residential developments currently in
process in the Company's geographic markets:
PROJECTS AND UNITS CURRENTLY IN PROCESS(a)
UNITS
NUMBER OF NUMBER OF TOTAL UNITS REMAINING
PROJECTS HELD FOR PROJECTS IN UNITS CLOSED IN AT
REGION DEVELOPMENT(b) SALES STAGE(c) PLANNED(d) FY 2001 2/28/01(d)
------ ----------------- -------------- ---------- --------- ----------
Southern California.......... 12 7 809 80 415
Managed Projects (Southern
California)................ 6 2 335 46 282
Nevada....................... 5 4 671 446 115
Texas........................ 10 5 2,281 894 739
Arizona...................... 12 5 1,056 243 610
Colorado..................... 10 5 1,322 490 942
-- -- ----- ----- -----
Total.............. 55 28 6,474 2,199 3,103
== == ===== ===== =====
---------------
(a) This table includes the Managed Projects in which the Company's sole
economic interest is through management agreements.
(b) The number of projects held for development includes projects with houses in
the planning, development, construction and sales stages.
(c) The number of projects in the sales stage includes projects where the sales
office has opened, reservations are being taken or sales contracts are being
executed.
(d) Includes units under construction, in backlog and lots under option in
projects owned by the Company or the Managed Projects.
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JOINT VENTURES
The Company conducts its operations as either wholly owned projects or
through joint ventures in which the joint venture partner typically provides
more than a majority of the capital and/or financing required for the project.
The Company has utilized joint ventures in order to increase access to sources
of capital, financing and quality sites. The Company expects to continue to
utilize joint ventures in the future on a selective basis, taking into account
other available sources of financing, project risk and the potential return to
the Company. The Company typically is required to fund a small percentage of the
capital requirements of each joint venture, which amount is included in
investments in and advances to unconsolidated joint ventures in the Company's
consolidated balance sheets.
Residential Subsidiaries, Joint Ventures and Managed Projects
At February 28, 2001, the Company's residential subsidiaries (wholly-owned
as a result of the Exchange Transaction), joint ventures and Managed Projects,
were as follows:
UNITS
TOTAL UNITS UNITS CLOSED REMAINING
PLANNED IN FY 2001 AT 2/28/01
----------- ------------ ----------
CONSOLIDATED SUBSIDIARIES(a)
CPH Newport Coast, LLC -- Orange County............ 97 35 61
CPH Yucaipa I, LLC -- Riverside County............. 100 4 96
----- ---- -----
197 39 157
----- ---- -----
UNCONSOLIDATED JOINT VENTURES
CPH Colorado, LLC -- Boulder County................ 485 -- 485
CPH Providence Ranch, LLC -- Riverside County...... 98 -- 98
----- ---- -----
583 583
----- ---- -----
MANAGED PROJECTS(b)
Makallon RPV Associates, LLC -- Los Angeles
County........................................... 79 9 70
Makallon Dana Point, LLC -- Orange County.......... 44 -- 44
Makallon Monarch Beach, LLC -- Orange County....... 65 37 21
Makallon Resorts I, LLC -- Orange County(c)........ 92 -- 92
Makallon Vista Palisades, LLC -- San Diego
County........................................... 55 -- 55
----- ---- -----
335 46 282
----- ---- -----
1,115 85 1,022
===== ==== =====
---------------
(a) Previously consolidated joint ventures. Minority interest in these joint
ventures was acquired in Exchange Transaction.
(b) Previously unconsolidated joint ventures.
(c) Residential portion of joint venture. Includes two projects.
LAND ACQUISITION
For typical residential developments, the Company tries to purchase and
hold land in California in amounts sufficient to support home production and
sales over a 24 to 48 month period. The Company also tries to maintain an
additional 18-month supply of entitled land through options and other means. The
Company typically purchases or options entitled land in Texas, Arizona and
Colorado in amounts sufficient to support home production and sales over an 18
month to 36 month period. In Nevada, the Company's plans do not include any
additional land purchases. The Company typically does not acquire and hold land
for speculative investment.
The Company typically considers numerous factors when analyzing the
suitability of land for acquisition and development including, but not limited
to, proximity to existing developed areas; population growth
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patterns; availability of existing community services (i.e., utilities, schools
and transportation); employment growth rates; anticipated absorption rates for
new housing; and the estimated cost of development.
The Company tries to avoid speculative building by constraining project
phase sizes, and entitlement risks by acquiring entitled land when practicable
and acquiring lots through the use of options, development agreements and joint
ventures with lot owners, when appropriate. Additionally, by forming strategic
alliances with partners, the Company has been able to obtain access to
additional capital and construction financing to spread project risk, which
allows the Company to minimize the risk of holding property and to preserve its
capital. To date, the Company's alliances have been conducted through joint
ventures.
During fiscal years 2000 and 2001, the Company expanded its land
development presence in the Southern California market. The Company has reduced
its exposure to the risks associated with land development through completion of
the Exchange Transaction. Due in part to a declining inventory of entitled land
in certain of the Company's markets, the Company's land development activities
may increase.
PRODUCT DESIGN
The Company has received numerous industry design awards for its homes and
developments. One of the Company's Managed Projects has been featured in several
nationally known periodicals, on network television and in various international
publications. The Company's homes are noted for their innovative design,
attention to detail and quality construction. By emphasizing the right product
designs, the Company has also been able to build brand loyalty while attempting
to reduce warranty costs. In many markets, resales of the Company's homes
include the Company's name as a sign of quality construction and design.
The Company contracts with a number of outside architects, designers,
engineers, consultants and subcontractors. While some of the Company's employees
are involved in various stages of the design process, the Company believes that
the use of third parties for the production of the final design, engineering and
construction reduces its costs, increases design innovation and quality, and
reduces the risks of liability associated with the design and construction
process. The Company monitors the work of outside architects, designers and
engineers through consultants and employees of the Company. The Company believes
it is critical to coordinate the design process with the construction and sales
and marketing efforts of the Company to ensure an appropriate balance between
market responsiveness, design innovation, construction effectiveness and
quality.
The Company creates architectural variety within its projects by offering
numerous models, floor plans, and exterior styles in an effort to enhance home
values by creating diversified neighborhood looks within its projects.
Generally, the Company selects the exterior finishes of its homes. The Company
offers homebuyers the opportunity to engage interior design consultants to
personalize the interior of their homes. Such services are offered at an
additional cost to buyers in California through the Company's wholly owned
subsidiary, Newport Design Center ("Newport Design"), or the services may be
provided through the homebuyer's own consultants.
DEVELOPMENT AND CONSTRUCTION
The Company acts as the general contractor for the construction of its
projects and the Managed Projects. Virtually all construction work for the
Company is performed by subcontractors. The Company's consultants and employees
coordinate the construction of each project and the activities of subcontractors
and suppliers, and subject their work to quality and cost controls and
compliance with zoning and building codes. Subcontractors typically are retained
on a phase-by-phase basis to complete construction at a fixed price. Agreements
with the Company's subcontractors are generally entered into after competitive
bidding on a project by project basis. The Company has established relationships
with a large number of subcontractors and is not dependent to any material
degree upon the services of any one subcontractor and believes that, if
necessary, it can generally retain sufficient qualified subcontractors for each
aspect of construction. The Company believes that conducting its operations in
this manner enables it not only to readily and efficiently adapt to changes in
housing demand, but also to avoid fixed costs associated with retaining
construction personnel.
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The Company typically develops its residential projects in several phases
generally averaging approximately 10 to 15 homes per phase. From market studies,
the Company determines the number of homes to be built in the first phase, the
appropriate price range for the market and other factors. The first phase of
home construction is typically small to reduce risk while the Company measures
consumer demand. Construction generally does not begin until some sales have
occurred, except for construction of model homes. Subsequent phases are
generally not started until 50% to 75% of the homes in the previous phase have
been sold. Sales prices in the second phase are then adjusted to reflect market
demand as evidenced by sales experience in the first phase. With each subsequent
phase, the Company continues to accumulate market data which, along with
information such as time of year, the local labor situation and the availability
of materials and supplies, enables the Company to determine the pricing, timing
and size of subsequent phases. Although the time required to complete a phase
varies from development to development depending on the above factors, the
Company typically completes construction of a phase within one of its California
developments in approximately six to ten months for larger homes and four to
five months for smaller homes and within its Texas, Arizona, Colorado and Nevada
developments within three to five months.
SALES AND MARKETING
The Company typically builds, furnishes and landscapes model homes for each
residential project and maintains on-site sales offices, which are usually open
seven days a week. Management believes that model homes play a particularly
important role in the Company's marketing efforts. Consequently, the Company
expends a significant effort in creating an attractive atmosphere at its model
homes. Interior decorations vary among the Company's models and are carefully
selected based upon the lifestyles of targeted buyers. Structural changes in
design from the model homes generally are not permitted, but homebuyers may
select various optional construction and design amenities.
The Company normally sells all of its homes through Company sales
representatives who typically work from the sales offices located either at the
model homes or at sales centers used in each subdivision. When appropriate, the
Company also uses cooperative brokers to sell its homes. Company sales
representatives are available to assist prospective buyers by providing them
with floor plans, price information and tours of model homes, and to assist them
with the selection of options and upgrades. Sales representatives attend
periodic meetings at which they are provided with information regarding other
products in the area, the variety of financing programs available, construction
schedules and marketing and advertising plans.
The Company generally opens an on-site sales office before the construction
of the model homes is completed. This on-site sales office is utilized as a
temporary sales center to commence the sales process to potential customers.
Potential homebuyers may reserve a home by submitting a refundable deposit (a
reservation deposit) usually ranging from $500 to $20,000 and executing a
reservation document. The Company then conducts preliminary research concerning
the credit status of the potential homebuyer in order to "pre-qualify" the
homebuyer. Once the prospective homebuyer has been "pre-qualified" and there is
a strong indication that the homebuyer will qualify for a mortgage (although
final loan approval is still pending), the homebuyer must then convert the
reservation deposit to an "earnest money deposit" and complete a purchase
contract for the purchase of their home. The Company attempts to keep its
contract cancellation rate low by attempting to pre-qualify prospective
homebuyers and by allowing homebuyers to customize their homes at an early point
in the purchase process. When home purchase contracts are canceled, damages are
usually limited to a percentage of the purchase price of the home and may be
less pursuant to applicable law or to the terms of the purchase contract. The
Company generally determines whether to seek to obtain such damages on a case-
by-case basis. When home purchase contracts are canceled, the Company is usually
able to identify alternate homebuyers.
The Company makes extensive use of advertising and promotional resources,
including newspaper and magazine advertisements, brochures, direct mail and the
placement of strategically located signboards in the immediate areas of its
projects, and occasionally places radio and television advertisements. Because
the Company usually offers multiple projects within a market area, it is able to
utilize regional advertising that highlights all of the Company's projects
within that same market area. The Company's wholly-owned
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subsidiary, Creative Design & Media, designs most advertising materials and
brochures for the Company's California operations.
The Company has established a highly sophisticated website on the Internet,
www.cph-inc.com. In addition, Clark Wilson Homes' website can be found at
www.clarkwilsonhomes.com. The Company utilizes the Internet through its website
address to augment its advertising and promotional activities. The Company
intends to continue to pursue B2C and B2B opportunities with the intention of
increasing communication and operating efficiencies.
The Company provides flooring and other amenities and upgrades to its
homebuyers in California through Newport Design and through its design center in
Texas.
OPERATING DATA
The following table shows new home and lot deliveries, net new orders and
average sales prices for each of the last three fiscal years for each of the
Company's residential operations, including unconsolidated joint ventures:
YEAR ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
------------ ------------ ------------
New homes delivered:
California..................................... 119 58 68
Texas.......................................... 438 471 426
Nevada......................................... 217 339 231
Arizona........................................ 70 358 240
Colorado....................................... -- 42 198
-------- -------- ----------
Subtotal.................................... 844 1,268 1,163
Unconsolidated Joint Ventures (California)..... 88 28 46
-------- -------- ----------
Total homes delivered.................. 932 1,296 1,209
-------- -------- ----------
Lots delivered................................. 50 710 990
-------- -------- ----------
Total homes and lots delivered......... 982 2,006 2,199
======== ======== ==========
Net new orders................................. 1,053 1,397 1,155
======== ======== ==========
Average sales price for homes delivered:
California (excluding unconsolidated joint
ventures)................................... $566,000 $898,000 $1,518,000
California (including unconsolidated joint
ventures)................................... 698,000 935,000 1,458,000
Texas.......................................... 164,000 189,000 203,000
Nevada......................................... 190,000 206,000 211,000
Arizona........................................ 148,000 144,000 159,000
Colorado....................................... -- 193,000 212,000
Combined (excluding unconsolidated joint
ventures)................................... 224,000 216,000 274,000
Combined (including unconsolidated joint
ventures)................................... 287,000 233,000 315,000
BACKLOG AND INVENTORY
The Company typically pre-sells homes prior to and during construction
through home purchase contracts requiring earnest money deposits or through
reservation documents requiring reservation deposits. Generally, reservation
deposits are refundable, but home purchase contracts are not cancelable unless
the customer is unable to sell their existing home, qualify for financing or
under certain other circumstances. A home sale is placed in backlog status upon
execution of such a contract or reservation and receipt of an earnest money
deposit or reservation deposit and is removed when such contracts or
reservations are canceled as described above or the home purchase escrow is
closed.
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The following table shows backlog in units and dollars at the end of each
of the last three fiscal years for each of the Company's residential operations,
including unconsolidated joint ventures. Backlog data does not include Managed
Projects at February 28, 2001.
ENDING BACKLOG
-----------------------------------------------------------
FEBRUARY 28, 1999 FEBRUARY 29, 2000 FEBRUARY 28, 2001
----------------- ----------------- -----------------
UNITS ($000S) UNITS ($000S) UNITS ($000S)
----- -------- ----- -------- ----- --------
California.......................... 51 $ 45,700 52 $ 62,000 71 $ 69,900
Texas............................... 252 47,600 272 54,700 265 68,800
Nevada.............................. 57 12,200 97 20,200 45 11,400
Arizona............................. 137 18,500 71 11,100 56 8,500
Colorado............................ -- -- 106 18,400 75 15,000
--- -------- --- -------- --- --------
Total..................... 497 $124,000 598 $166,400 512 $173,600
=== ======== === ======== === ========
The following table shows net new orders (sales made less cancellations and
credit rejections), homes closed and ending backlog relating to sales of the
Company's homes and homes under contract or reservation for each quarter since
the beginning of fiscal year 2000, including unconsolidated joint ventures, and
excluding Managed Projects as of February 28, 2001. The Company's backlog at any
given time is typically a good indicator of the number of units that will be
closed in the four to six months following such date:
ENDING BACKLOG
NET NEW HOMES -----------------
ORDERS CLOSED UNITS ($000S)
------- ------ ----- --------
FISCAL YEAR 2000
1st Quarter........................................... 349 303 543 $124,900
2nd Quarter........................................... 364 308 599 138,000
3rd Quarter........................................... 380 291 688 176,800
4th Quarter........................................... 304 394 598 166,400
----- -----
Total Fiscal Year 2000........................ 1,397 1,296
===== =====
FISCAL YEAR 2001
1st Quarter........................................... 375 326 647 $235,300
2nd Quarter........................................... 302 319 630 247,800
3rd Quarter........................................... 290 260 660 249,400
4th Quarter........................................... 188 304 512 173,600
----- -----
Total Fiscal Year 2001........................ 1,155 1,209
===== =====
MORTGAGE COMPANY
The Company offers mortgage broker services to certain of its homebuyers
through its wholly owned subsidiary Capital Pacific Mortgage, Inc., formed
during fiscal year 1996. The Company also offers mortgage broker services to
certain of its Texas homebuyers through its subsidiary, Fairway Financial
Company (Fairway), established in fiscal year 1995. In addition, the Company has
established certain relationships, including joint venture investments, with
local mortgage broker operations in other operating regions.
HOMEOWNER WARRANTY
The Company provides homeowners with a limited warranty on the terms of
which the Company will correct, for a limited period, deficiencies listed in the
homeowner warranty manual. The warranty does not, however, include items that
are covered by manufacturer's warranties (such as appliances and air
conditioning) or items that are not installed by employees or contractors of the
Company (such as flooring installed by an outside contractor employed by the
homeowner). The Company also provides certain homebuyers with policies issued by
third-parties that extend protection beyond the Company's warranty period.
Statutory requirements in the states in which the Company does business may
grant to homebuyers rights in addition to those provided by the Company.
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COMPETITION
The homebuilding industry is highly competitive. In each of the markets in
which it operates, the Company competes in terms of location, design, quality
and price with numerous other residential builders, including large national and
regional firms, some of which have greater financial resources than the Company.
As the Company enters and until it develops a reputation in a new market area,
the Company can expect to face even more significant competitive pressures. In
certain markets, the Company may from time to time engage in redesigns of
product and/or make changes in existing model homes to make the Company's
product more competitive. Such redesigns and/or changes may cause the Company to
incur additional expenses and/or to write-off previous investments in such
design or model homes.
REGULATION
The housing and land development industries are subject to increasing
environmental, building, zoning and real estate sales regulations by various
federal, state and local authorities. Such regulations affect home building by
specifying, among other things, the type and quality of building materials that
must be used, certain aspects of land use and building design, as well as the
manner in which the Company conducts sales activities and otherwise deals with
customers. Such regulations affect development activities by directly affecting
the viability and timing of projects.
The Company must increasingly obtain the approval of numerous government
authorities which regulate such matters as land use and level of density, the
installation of utility services, such as water and waste disposal, and the
dedication of acreage for open space, parks, schools and other community
purposes. If such authorities determine that existing utility services will not
adequately support proposed development, especially in light of the electrical
power shortages in California, building moratoriums may be imposed. As a result,
the Company devotes an increasing amount of time to evaluating the impact of
governmental restrictions imposed upon a new residential development.
Furthermore, as local circumstances or applicable laws change, the Company may
be required to obtain additional approvals or modifications of approvals
previously obtained. Such increasing regulation has resulted in a significant
increase in time between the Company's initial acquisition of land and the
commencement and completion of its developments, particularly in California. In
addition, the extent to which the Company participates in land development
activities subjects it to greater exposure to regulatory risks. The Company has
decreased its land development activities through completion of the Exchange
Transaction, but such activities may increase in the future.
EMPLOYEES
As of April 30, 2001, the Company employed 297 persons full-time, compared
to 335 persons at April 30, 2000. Of these, 20 were in executive positions, 41
were engaged in sales activities, 132 in project management activities and 104
in administrative and clerical activities. None of the Company's employees is
represented by a union and the Company considers its employee relationships to
be good.
RAW MATERIALS
All of the raw materials and most of the components used in the Company's
business are readily available in the United States. Most are standard items
carried by major suppliers. However, a rapid increase in the number of homes
started could cause shortages in the availability of such materials, thereby
leading to delays in the delivery of homes under construction. In addition,
increases in the price of lumber and other materials have a negative impact on
margins. In order to maintain its quality standards while providing a product at
good value, the Company has used and will under appropriate market circumstances
consider the further use of alternative materials, such as metal studs and
framing in some of its projects.
ITEM 2. PROPERTIES
The Company leases several facilities in California, Texas, Arizona,
Colorado and Nevada.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine claims and litigation arising in the
ordinary course of its business. The legal responsibility and financial impact
with respect to pending litigation cannot be presently ascertained.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange (AMEX)
under the Symbol "CPH." The following table sets forth the quarterly high and
low sales prices for the Common Stock for the periods indicated.
HIGH LOW
----- -----
FISCAL 2000
Fourth Quarter............................................ $2.88 $2.44
Third Quarter............................................. 2.69 1.88
Second Quarter............................................ 3.88 2.88
First Quarter............................................. 3.50 2.44
FISCAL 2001
Fourth Quarter............................................ $3.63 $2.38
Third Quarter............................................. 3.69 2.38
Second Quarter............................................ 2.69 2.38
First Quarter............................................. 3.00 2.75
Payment of dividends is within the discretion of the Company's Board of
Directors and holders of shares of Common Stock are entitled to receive
dividends when and if declared by the Board of Directors out of funds legally
available therefore. The Company has not paid dividends for over ten years, and
has historically retained its earnings. The covenants in the Indenture and in
the Company's bank loan documents have restrictions on permissible dividend
payments to the Company from Capital Pacific Holdings, LLC. There can be no
assurance that such limits may not become more restrictive.
On May 1, 2001, the Company had approximately 1,000 beneficial holders of
its Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information of the Company is
presented as of and for the fiscal years ended February 28, 1997, February 28,
1998, February 28, 1999, February 29, 2000 and February 28, 2001. The selected
financial information and other data should be read in conjunction with the
Company's audited Consolidated Financial Statements and the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, both of which are included elsewhere in this report. Certain
reclassifications have been made to the prior years' balances to conform to the
current year presentation.
LAST DAY OF FEBRUARY
--------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS AND OPERATING DATA)
INCOME STATEMENT DATA:
Sales of homes and land.................................. $216,549 $191,098 $192,422 $290,791 $363,743
Cost of sales............................................ 164,814 148,702 156,493 231,273 272,332
Impairment loss on real estate assets.................... -- 8,000 -- -- --
-------- -------- -------- -------- --------
Gross margin............................................. 51,735 34,396 35,929 59,518 91,411
Income (loss) from unconsolidated joint ventures......... 259 764 7,949 1,730 (874)
Selling, general and administrative expenses............. (30,282) (24,744) (21,186) (30,813) (38,615)
Interest expense(1)...................................... (18,743) (14,264) (17,842) (22,141) (35,707)
Interest and other income, net........................... 900 1,391 1,381 1,513 1,927
-------- -------- -------- -------- --------
Income (loss) from operations............................ 3,869 (2,457) 6,231 9,807 18,142
Minority interest(2)..................................... 192 (469) (1,850) (2,835) (5,628)
-------- -------- -------- -------- --------
Income (loss) before income taxes and extraordinary
item................................................... 4,061 (2,926) 4,381 6,972 12,514
Income tax provision (benefit)........................... 539 (735) 1,095 1,745 1,786
-------- -------- -------- -------- --------
Income (loss) before extraordinary item.................. 3,522 (2,191) 3,286 5,227 10,728
Extraordinary gain on debt retired at less than face
value, net of minority interest and taxes.............. -- -- -- 955 1,461
-------- -------- -------- -------- --------
Net income (loss)........................................ $ 3,522 $ (2,191) $ 3,286 $ 6,182 $ 12,189
======== ======== ======== ======== ========
Income (loss) per common share before extraordinary
item -- basic and diluted.............................. $ .23 $ (.15) $ .23 $ .37 $ .77
Extraordinary item....................................... -- -- -- .07 .11
-------- -------- -------- -------- --------
Net income (loss) per share -- basic and diluted......... $ .23 $ (.15) $ .23 $ .44 $ .88
======== ======== ======== ======== ========
Weighted average share -- basic.......................... 14,995 14,795 14,237 13,923 13,773
======== ======== ======== ======== ========
Weighted average shares -- diluted(3).................... 14,995 14,795 14,271 14,014 13,896
======== ======== ======== ======== ========
Pro forma revenues (including unconsolidated joint
ventures).............................................. $227,750 $214,093 $271,372 $319,064 $426,447
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Real estate projects..................................... $233,562 $192,347 $261,333 $282,497 $259,873
Total assets............................................. 271,918 251,655 324,763 358,281 309,412
Notes payable............................................ 73,474 36,714 91,489 125,809 110,223
Senior Unsecured Notes Payable........................... 100,000 100,000(4) 100,000(4) 88,392(4) 55,592(4)
Minority interest........................................ 360 30,061(4) 30,032(4) 33,594(4) 7,743(4)
Stockholders' equity..................................... 66,868 63,050(4) 65,354(4) 70,886(4) 82,780(4)
OPERATING DATA (IN UNITS):
Homes delivered.......................................... 1,113 909 932 1,296 1,209
Total homes and lots delivered........................... 1,140 969 982 2,006 2,199
Net new orders........................................... 1,039 919 1,053 1,397 1,155
Homes in backlog......................................... 366 376 497 598 512
---------------
(1) Represents interest costs initially capitalized which are recognized as
homes and land are sold.
(2) Includes the minority interest share of earnings of CPH LLC since the
financial restructuring in fiscal year 1998.
(3) Reflects dilution due to outstanding warrants and stock options. See Note 1
to the Consolidated Financial Statements.
(4) At February 28, 1998 and 1999, February 29, 2000 and February 28, 2001,
respectively, minority interest includes $29.8 million, $29.9 million, $32.6
and $7.7 million of capital in CPH LLC attributable to CHF. At February 28,
1998 and 1999, February 29, 2000 and February 28, 2001, respectively, CPH
LLC had total capital accounts of $91.4 million, $92.5 million, $100.1 and
$109.5 million and was the sole obligor for the balance of the Senior
Unsecured Notes Payable.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements in the financial discussion and analysis by management
contain "forward-looking" information (as defined in the Private Securities
Litigation Reform Act of 1995 and within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended) that involves risk and uncertainty, including projections and
assumptions regarding the business environment in which the Company operates.
Actual future results and trends may differ materially depending on a variety of
factors, including the Company's successful execution of internal performance
strategies; changes in general national and regional economic conditions, such
as levels of employment, consumer confidence and income, availability to
homebuilders of financing for acquisitions, development and construction,
availability to homebuyers of permanent mortgages, interest rate levels and the
demand for housing; supply levels of land, labor and materials; difficulties in
obtaining permits or approvals from governmental authorities; difficulties in
marketing homes; regulatory changes and weather and other environmental
uncertainties; competitive influences; and the outcome of pending and future
legal claims and proceedings.
RESULTS OF OPERATIONS -- GENERAL
The following table illustrates the actual and pro forma results of the
Company's operations for the past three fiscal years. The pro forma results have
been adjusted to reflect the inclusion of the operating results of the Company's
unconsolidated joint ventures, including the portion attributable to the
Company's joint venture partners, and are used throughout this discussion for
comparative purposes wherever the phrase "pro forma" is utilized.
RESULTS OF OPERATIONS
YEAR ENDED
------------------------------------------------------------------------------------
FEBRUARY 28, 1999 FEBRUARY 29, 2000 FEBRUARY 28, 2001
-------------------------- -------------------------- --------------------------
PRO FORMA PRO FORMA PRO FORMA
(INCLUDING (INCLUDING (INCLUDING
ACTUAL JOINT VENTURES) ACTUAL JOINT VENTURES) ACTUAL JOINT VENTURES)
-------- --------------- -------- --------------- -------- ---------------
(AMOUNTS IN THOUSANDS)
Sales of homes and
land................... $192,422 $271,372 $290,791 $319,064 $363,743 $426,447
Cost of sales............ 156,493 217,059 231,273 254,666 272,332 319,951
-------- -------- -------- -------- -------- --------
Gross margin........... $ 35,929 $ 54,313 $ 59,518 $ 64,398 $ 91,411 $106,496
======== ======== ======== ======== ======== ========
As is noted in footnote 1 to the financial statements presented herein, the
Company is reporting its results on a consolidated basis with the results of CPH
LLC. References to the Company in this Item 7 are, unless the context indicates
otherwise, also references to CPH LLC. At the current time, all material
financing transactions and arrangements are incurred either by CPH LLC or by
project-specific entities.
The Company has migrated to structuring certain California projects and one
project in Colorado through joint ventures, most of which are not consolidated.
Non-California operations are conducted primarily through wholly-owned,
consolidated subsidiaries. The Company has increased its activities in Arizona
and Colorado, markets which have not provided significant revenues in prior
years. Activity has also increased in Texas and decreased in Nevada.
The unconsolidated California projects from which significant equity in
earnings was derived through early fiscal 2000 are substantially completed. The
Company does not expect to derive substantial equity in earnings from its
current unconsolidated joint ventures until future years due to (1) the stage of
development of the current projects, and/or (2) the preferred returns to be
initially paid to capital partners, as discussed in Note 4 to the consolidated
financial statements.
FISCAL 2001 (YEAR ENDED FEBRUARY 28, 2001) COMPARED TO FISCAL 2000 (YEAR ENDED
FEBRUARY 29, 2000):
The Company reported income from operations of $18.1 million in fiscal
2001, as compared to income from operations of $9.8 million in fiscal 2000. The
Company reported net income of $12.2 million, or $0.88 per
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16
share, in fiscal 2001, as compared to net income of $6.2 million, or $0.44 per
share, in fiscal 2000. Net income for fiscal 2001 included an extraordinary gain
of $1.5 million, or $0.11 per share, as compared to $1.0 million, or $0.07 per
share, in fiscal 2000, as a result of the retirement of debt at less than face
value.
Sales of homes and land including unconsolidated joint ventures were $426.4
million for fiscal 2001 compared to $319.1 million for fiscal 2000. The increase
was due to an increase in total unit closings from 2,006 for fiscal 2000 to
2,199 in fiscal 2001 and an increase in average sales price. Home closings
declined slightly from 1,296 in fiscal 2000 to 1,209 in fiscal 2001, including
28 and 46 homes, respectively, closed in unconsolidated joint ventures. The
average home sales price increased from $233,000 in fiscal 2000 to $315,000 in
fiscal 2001.
The increase in total unit closings was due primarily to increased activity
in the Company's Colorado market and to a few significant lot sales. The
increase in average sales price is due to the closing of a higher number of
units in the higher-priced California market in fiscal 2001. The Company's
actual gross margin increased from 20.5% in fiscal 2000 to 25.1% in fiscal 2001,
due to a change in the mix of closings to certain higher-margin projects. The
pro forma gross margin increased from 20.2% in fiscal 2000 to 25.0% in fiscal
2001.
As a percentage of revenue, selling, general and administrative expense
remained stable at 10.6% in both fiscal 2000 and fiscal 2001. Selling, general
and administrative expense of $38.6 million for fiscal 2001 increased $7.8
million or 25.3% as compared to fiscal 2000 due to a higher level of sales
activity.
Income from unconsolidated joint ventures decreased from $1.7 million
fiscal 2000 to a loss of $874,000 in fiscal 2001, due to the establishment of
certain reserves in connection with the wind down of some of the older joint
ventures, as well as the fact that the profits from the newer joint ventures
were being allocated primarily to cover preferred return on partner's capital
during fiscal 2001.
Interest and other income increased from $1.5 million in fiscal 2000 to
$1.9 million in fiscal 2001 and consists primarily of the results of operations
of the Company's mortgage broker operations, as well as certain financing and
other transactions.
Minority interest of $2.8 million in fiscal 2000 and $5.6 million in fiscal
2001 primarily represents the share of income from CPH LLC and CPH Newport
Coast, LLC attributable to CHF.
Interest incurred was $25.7 million in fiscal 2001, as compared to $24.5
million in fiscal 2000, while interest expensed was $35.7 million in fiscal 2001
as compared to $22.1 million in fiscal 2000. Substantially all interest costs
are initially capitalized and are recognized as homes and land are sold. As
presented in the consolidated statements of operations, income from
unconsolidated joint ventures for fiscal 2000 excludes the recognition of
approximately $519,000 in interest previously capitalized to the lots
contributed to MPE. Such interest costs are included in interest expense.
The Company recorded a provision for income taxes of $1.8 million in fiscal
2001, as compared to $1.7 million in fiscal 2000. The effective tax rate in both
years was reduced from the statutory rate by the use of available loss
carryforwards. Such loss carryforwards have now been substantially fully
utilized.
FISCAL 2000 (YEAR ENDED FEBRUARY 29, 2000) COMPARED TO FISCAL 1999 (YEAR ENDED
FEBRUARY 28, 1999):
The Company reported income from operations of $9.8 million in fiscal 2000,
as compared to income from operations of $6.2 million in fiscal 1999. The
Company reported net income of $6.2 million, or $0.44 per share, in fiscal 2000,
as compared to net income of $3.3 million, or $0.23 per share, in fiscal 1999.
Net income for fiscal 2000 included an extraordinary gain of $1.0 million, or
$0.07 per share, as a result of the retirement of debt at less than face value.
Sales of homes and land including unconsolidated joint ventures were $319.1
million for fiscal 2000 compared to $271.4 million for fiscal 1999. The increase
was due to an increase in total home closings from 932 in fiscal 1999 to 1,296
in fiscal 2000, including 88 and 28 homes, respectively, closed in
unconsolidated joint ventures, offset by a decrease in average sales price from
$287,000 in fiscal 1999 to $233,000 in fiscal
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2000. Total unit closings increased from 982 in fiscal 1999 to 2,006 in fiscal
2000, reflecting an increase in lot sales.
The increase in closings was due primarily to stronger demand in the
Company's Nevada and Texas markets and the addition of several projects in
Arizona and Colorado, offset by reduction in closings attributable to the
buildout of certain California projects. The decrease in average sales price is
due to the shift in relative unit closings from the higher-priced California
market to the Company's other markets. The Company's actual gross margin
increased from 18.7% in fiscal 1999 to 20.5% in fiscal 2000, due to the close
out of certain lower-margin projects in fiscal 1999 and a gradual shift to
certain higher-margin projects. The pro forma gross margin increased marginally
from 20.0% in fiscal 1999 to 20.2% in fiscal 2000.
Selling, general and administrative expense of $30.8 million for fiscal
2000 increased $9.6 million or 45.4% as compared to fiscal 1999 due to a higher
level of activity. As a percentage of revenue, selling, general and
administrative expense decreased from 11.0% in fiscal 1999 to 10.6% in fiscal
2000.
Income from unconsolidated joint ventures decreased from $7.9 million
fiscal 1999 to $1.7 million in fiscal 2000, due to lower unit closings in the
existing joint ventures, principally Grand Coto Estates, L.P. and M.P.E.
Partners, L.P. (MPE).
Interest and other income increased slightly from $1.4 million in fiscal
1999 to $1.5 million in fiscal 2000 and consists primarily of the results of
operations of the Company's mortgage broker operations, as well as certain
financing and other transactions.
Minority interest of $1.9 million in fiscal 1999 and $2.8 million in fiscal
2000 primarily represents the share of CPH LLC's income attributable to CHF.
Interest incurred was $24.5 million in fiscal 2000, as compared to $22.3
million in fiscal 1999, while interest expensed was $22.1 million in fiscal 2000
as compared to $17.8 million in fiscal 1999. Substantially all interest costs
are initially capitalized and are recognized as homes and land are sold. As
presented in the consolidated statements of operations, income from
unconsolidated joint ventures for fiscal 2000 and 1999 excludes the recognition
of approximately $519,000 and $2.1 million, respectively, in interest previously
capitalized to the lots contributed to MPE. Such interest costs are included in
interest expense.
The Company recorded a provision for income taxes of $1.7 million in fiscal
2000, as compared to $1.1 million in fiscal 1999. The effective tax rate in both
years was reduced from the statutory rate by the use of available loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements are for the acquisition,
development, construction, marketing and overhead of its projects. The need to
stage the acquisition and use of raw materials such as land and finished lots
and the need, on certain projects, to construct community facilities ahead of
the start of home construction requires homebuilders such as the Company to
commit working capital for longer periods than many traditional manufacturing
companies. When building inventory, the Company uses substantial amounts of cash
that are generally obtained from borrowings, available cash flow from operations
and partners' contributions to joint ventures.
At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain project specific entities. As of
February 28, 2001, the Company has in place several credit facilities with
contingent availabilities totaling $251 million (the "Facilities") with various
bank lenders (the "Banks"), of which $104 million was outstanding. The
Facilities are secured by liens on various completed or under construction homes
and lots held by CPH LLC and CPH Newport Coast, LLC and CPH Yucaipa I, LLC,
which are consolidated subsidiaries. Pursuant to the Facilities, CPH LLC and the
consolidated subsidiaries are subject to certain covenants, which require, among
other things, the maintenance of a consolidated liabilities to net worth ratio,
minimum liquidity, minimum net worth and loss limitations, all as defined in the
documents that evidence the Facilities. At February 28, 2001, CPH LLC was in
compliance with these covenants. The Facilities also define certain events that
constitute events of default. As of
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February 28, 2001, no such event had occurred. Commitment fees are payable
annually on some of the Facilities.
Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors, including CHF, the investor in CPH LLC. In addition,
development work undertaken in certain of the Company's joint ventures is
financed through various non-recourse lending arrangements. The Company
anticipates that it will continue to utilize both third party financing and
joint ventures to cover financing needs in excess of internally generated cash
flow.
In May, 1994 the Company completed the sale of $100 million of 12 3/4%
Senior Notes including 790,000 warrants to purchase common stock. The proceeds
from the offering were used to repay certain debt of the Company, acquire
certain properties and for general working capital and construction purposes.
The obligations associated with the Senior Notes have been transferred from the
Company to CPH LLC. The Senior Notes are due May 1, 2002. During fiscal 2000 and
2001, the Company repurchased $11.6 million and $32.8 million (face value),
respectively, of the Senior Notes.
The Indenture to which the Senior Notes are subject contains restrictions
on CPH LLC on the incurring of indebtedness, which affect the availability of
the Facilities based on various measures of the financial performance of CPH
LLC. Subject to such restrictions, the Facilities are available to augment cash
flow from operations and joint venture financing to fund CPH LLC's operations.
Management expects that cash flow generated from operations and from
additional financing permitted by the terms of the Indenture will be sufficient
to cover the debt service and to fund CPH LLC's current development and
homebuilding activities for the reasonably foreseeable future, and expects that
capital commitments from its joint venture partners and other bank facilities
will provide sufficient financing for the operation of its joint ventures.
INTEREST RATES AND INFLATION
The long-term impact of inflation on the Company is manifested in increased
land prices, land development, construction and overhead costs balanced by
increased sales prices.
The Company generally contracts for land significantly before development
and sales efforts begin and, accordingly, to the extent land acquisition costs
are fixed, increases or decreases in the sales prices of homes, land and other
real estate properties may affect the Company's profits. Since the sales prices
of homes are fixed at the time of sale and the Company generally sells its homes
prior to commencement of construction, any inflation of construction costs in
excess of those anticipated may result in lower gross margins. The Company
generally attempts to minimize that effect by entering into fixed-price
contracts with its subcontractors and material suppliers for specified periods
of time, which generally do not exceed one year.
Housing demand, in general, is adversely affected by increases in interest
costs, as well as materials and other costs. Interest rates, the length of time
that land remains in inventory and the proportion of inventory that is financed
affect the Company's interest costs. If the Company is unable to duplicate its
past ability to raise sales prices enough to compensate for higher costs, or if
mortgage interest rates increase significantly, affecting prospective buyers'
ability to adequately finance a home purchase, the Company's homebuilding
revenues, gross margins and net income would be adversely affected. Increases in
sales prices, whether the result of inflation or demand, may affect the ability
of prospective buyers to afford a new home.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). Under the provisions of SFAS 133, companies
are required to recognize all derivatives as either assets or liabilities in the
statements of financial position and measure those instruments at fair value.
The Company is required to adopt SFAS 133, as amended by SFAS No. 137 and 138,
effective March 1, 2001. Currently, the Company does not have any instruments
that would qualify as derivatives under SFAS 133. Accordingly, the Company
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does not believe SFAS 133 would have a material impact on the Company's
financial position, results of operations, or liquidity at the current time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in interest
rates on its debt. Currently, the Company does not utilize interest rate swaps,
forward or option contracts on foreign currencies or commodities, or other types
of derivative financial instruments. The purpose of the following analysis is to
provide a framework to understand the Company's sensitivity to hypothetical
changes in interest rates as of February 28, 2001. Many of the statements
contained in this section are forward looking and should be read in conjunction
with the Company's disclosures under the heading "Forward-Looking Statements."
The Company uses debt financing primarily for the purpose of acquiring and
developing land and constructing and selling homes. Historically, the Company
has made short-term borrowings under its revolving credit facilities to fund
these expenditures. In addition, the Company has previously issued $100 million
in fixed rate debt to provide longer-term financing. At February 28, 2001, $55.6
million of the Senior Notes remain outstanding.
For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt instrument, but not the Company's earnings or cash
flows. Conversely, for variable rate debt, changes in interest rates generally
do not impact fair market value of the debt instrument, but do affect the
Company's future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a result,
interest rate risk and changes in fair market value should not have a
significant impact on such debt until the Company would be required to refinance
such debt. Based on the amount of variable rate debt outstanding at February 28,
2001, and holding the variable rate debt balance constant, each one-percentage
point increase in interest rates would result in an increase in interest
incurred for the coming year of approximately $1.0 million.
The table below details the principal amount and the average interest rates
for debt for each category based upon the expected maturity dates. The carrying
value of the Company's variable rate debt approximates fair value due to the
frequency of repricing of this debt. The Company's fixed rate debt consists of
the Senior Notes payable. The Senior Notes payable are publicly traded debt
instruments and their fair values are based on their quoted market prices as of
February 28, 2001.
EXPECTED MATURITY DATE
------------------------------------
YEAR ENDING FEBRUARY 28,
------------------------ FAIR
2002 2003 TOTAL VALUE
--------- --------- -------- --------
(DOLLARS IN THOUSANDS)
LIABILITIES:
Fixed rate debt................................. $ -- $55,592 $ 55,592 $ 51,978
Average interest rate......................... -- 12.75% 12.75%
Variable rate debt.............................. $48,411 $61,812 $110,223 $110,223
Average interest rate......................... 9.31% 7.75% 8.40%
The Company does not believe that the future market rate risks related to
the above securities will have a material adverse impact on the Company's
financial position, results of operations or liquidity.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
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CAPITAL PACIFIC HOLDINGS, INC.
Report of Independent Public Accountants.................... 21
Consolidated Balance Sheets as of February 29, 2000 and
February 28, 2001......................................... 22
Consolidated Statements of Income for the years ended
February 28, 1999, February 29, 2000 and February 28,
2001...................................................... 23
Consolidated Statements of Stockholders' Equity for the
years ended February 28, 1999, February 29, 2000 and
February 28, 2001......................................... 24
Consolidated Statements of Cash Flows for the years ended
February 28, 1999, February 29, 2000 and February 28,
2001...................................................... 25
Notes to Consolidated Financial Statements.................. 27
GRAND COTO ESTATES, L.P.
Report of Independent Public Accountants.................... 42
Balance Sheets as of December 31, 2000 and 1999............. 43
Statements of Operations for the years ended December 31,
2000, 1999 and 1998....................................... 44
Statements of Partners' Capital (Deficit) for the years
ended December 31, 2000, 1999 and 1998.................... 45
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998....................................... 46
Notes to Financial Statements............................... 47
M.P.E. PARTNERS, L.P.
Report of Independent Public Accountants.................... 50
Balance Sheets as of December 31, 2000 and 1999............. 51
Statements of Operations for the years ended December 31,
2000, 1999 and 1998....................................... 52
Statements of Partners' Capital (Deficit) for the years
ended December 31, 2000, 1999 and 1998.................... 53
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998....................................... 54
Notes to Financial Statements............................... 55
20
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Capital Pacific Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Capital
Pacific Holdings, Inc. (a Delaware corporation) and subsidiaries as of February
29, 2000 and February 28, 2001, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended February 28, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of certain Joint Ventures as of February 29, 2000 and for
the two years then ended (Notes 1 and 4), the investments in which are reflected
in the accompanying financial statements using the equity method of accounting.
The investments in these Joint Ventures represent less than one percent of the
Company's total assets at February 29, 2000, and the equity in the net income of
these Joint Ventures was $5,819,000, and $1,197,000 for the years ended February
28, 1999 and February 29, 2000, respectively. Those financial statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to the amounts included for those entities, is
based on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Capital Pacific Holdings, Inc. and subsidiaries as of
February 29, 2000 and February 28, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended February 28,
2001, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Orange County, California
May 16, 2001
21
22
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
FEBRUARY 29, FEBRUARY 28,
2000 2001
------------ ------------
Cash and cash equivalents................................... $ 19,389 $ 7,552
Restricted cash............................................. 1,373 781
Accounts and notes receivable............................... 22,862 25,082
Real estate projects........................................ 282,497 259,873
Property and equipment...................................... 8,536 --
Investment in and advances to unconsolidated joint
ventures.................................................. 15,379 5,273
Prepaid expenses and other assets........................... 8,245 10,851
--------- ---------
Total assets...................................... $ 358,281 $ 309,412
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 39,600 $ 43,150
Notes payable............................................... 125,809 110,223
Senior unsecured notes payable.............................. 88,392 55,592
--------- ---------
Total liabilities................................. 253,801 208,965
--------- ---------
Negative goodwill........................................... -- 9,924
--------- ---------
Minority interest........................................... 33,594 7,743
--------- ---------
Stockholders' equity:
Common stock, par value $.10 per share; 30,000,000 shares
authorized; 14,995,000 shares issued; 13,815,911 and
13,767,311 shares outstanding, respectively............ 1,500 1,500
Additional paid-in capital................................ 211,888 211,888
Accumulated deficit....................................... (139,243) (127,054)
Treasury stock............................................ (3,259) (3,554)
--------- ---------
Total stockholders' equity........................ 70,886 82,780
--------- ---------
Total liabilities and stockholders' equity........ $ 358,281 $ 309,412
========= =========
See accompanying notes to financial statements.
22
23
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
------------ ------------ ------------
Sales of homes and land................................. $192,422 $290,791 $363,743
Cost of sales........................................... 156,493 231,273 272,332
-------- -------- --------
Gross margin.......................................... 35,929 59,518 91,411
Income (loss) from unconsolidated joint ventures........ 7,949 1,730 (874)
Selling, general and administrative expenses............ (21,186) (30,813) (38,615)
Interest expense........................................ (17,842) (22,141) (35,707)
Interest and other income, net.......................... 1,381 1,513 1,927
-------- -------- --------
Income from operations................................ 6,231 9,807 18,142
Minority interest....................................... (1,850) (2,835) (5,628)
-------- -------- --------
Income before income taxes............................ 4,381 6,972 12,514
Provision for income taxes.............................. 1,095 1,745 1,786
-------- -------- --------
Income before extraordinary item...................... 3,286 5,227 10,728
Extraordinary gain on debt retired at less than face
value, net of minority interest and taxes............. -- 955 1,461
-------- -------- --------
Net income............................................ $ 3,286 $ 6,182 $ 12,189
======== ======== ========
Net income per share -- basic and diluted:
Income per share before extraordinary item............ $ 0.23 $ 0.37 $ 0.77
Extraordinary gain on debt retired at less than face
value, net of minority interest and taxes.......... -- 0.07 0.11
-------- -------- --------
Net income per common share........................... $ 0.23 $ 0.44 $ 0.88
======== ======== ========
Weighted average number of common shares -- basic..... 14,237 13,923 13,773
======== ======== ========
Weighted average number of common shares -- diluted... 14,271 14,014 13,896
======== ======== ========
See accompanying notes to financial statements.
23
24
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED FEBRUARY 28, 2001
(IN THOUSANDS, EXCEPT SHARES)
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
---------- ------ ---------- ----------- -------- -------
BALANCE, FEBRUARY 28, 1998.......... 14,305,511 $1,500 $211,888 $(148,711) $(1,627) $63,050
Repurchase of common stock........ (277,600) -- -- -- (982) (982)
Net income........................ -- -- -- 3,286 -- 3,286
---------- ------ -------- --------- ------- -------
BALANCE, FEBRUARY 28, 1999.......... 14,027,911 1,500 211,888 (145,425) (2,609) 65,354
Repurchase of common stock........ (212,000) -- -- -- (650) (650)
Net income........................ -- -- -- 6,182 -- 6,182
---------- ------ -------- --------- ------- -------
BALANCE, FEBRUARY 29, 2000.......... 13,815,911 1,500 211,888 (139,243) (3,259) 70,886
Repurchase of common stock and
warrants....................... (48,600) -- -- -- (295) (295)
Net income........................ -- -- -- 12,189 -- 12,189
---------- ------ -------- --------- ------- -------
BALANCE, FEBRUARY 28, 2001.......... 13,767,311 $1,500 $211,888 $(127,054) $(3,554) $82,780
========== ====== ======== ========= ======= =======
See accompanying notes to financial statements.
24
25
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income............................................ $ 3,286 $ 6,182 $ 12,189
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on retirement of senior unsecured notes
payable.......................................... -- (955) (1,461)
Gain on sale of building........................... -- -- (1,040)
Depreciation and amortization...................... 1,768 1,897 1,458
Changes in Assets and Liabilities:
(Increase) decrease in accounts and notes
receivable.................................... 13,658 (10,329) (2,301)
(Increase) decrease in real estate projects...... (68,986) (21,164) 18,695
(Increase) decrease in prepaid expenses and other
assets........................................ 610 2,020 (2,689)
Increase (decrease) in accounts payable and
accrued liabilities........................... 16,058 1,394 (1,517)
(Income) loss from unconsolidated joint ventures,
including interest expense....................... (5,822) (1,211) 874
Minority interest.................................. 1,850 3,424 5,628
--------- --------- --------
Net cash provided by (used in) operating
activities.................................. (37,578) (18,742) 29,836
--------- --------- --------
INVESTING ACTIVITIES:
Proceeds from sale of building........................ -- -- 3,500
Purchases of property and equipment................... (2,164) (1,039) (1,410)
Cash distributed with Divested Joint Ventures......... -- -- (3,983)
Decrease (increase) in investments in and advances to
unconsolidated joint ventures...................... (10,718) 9,133 5,162
--------- --------- --------
Net cash provided by (used in) investing
activities.................................. (12,882) 8,094 3,269
--------- --------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable........................... 208,383 306,169 417,072
Principal payments of notes payable................... (153,608) (271,849) (431,409)
Capital contributions (distributions) to minority
interest, net...................................... (1,879) 106 (660)
Retirement of senior unsecured notes payable.......... -- (9,521) (29,650)
Repurchase of common stock and warrants............... (982) (650) (295)
--------- --------- --------
Net cash provided by (used in) financing
activities.................................. 51,914 24,255 (44,942)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents.... 1,454 13,607 (11,837)
Cash and cash equivalents, beginning of year............ 4,328 5,782 19,389
--------- --------- --------
Cash and cash equivalents, end of year.................. $ 5,782 $ 19,389 $ 7,552
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH AND NON-CASH ACTIVITIES:
Cash paid during the year for interest, all
capitalized to real estate projects................ $ 22,289 $ 25,450 $ 27,614
========= ========= ========
Cash paid during the year for income taxes............ $ -- $ -- $ 1,771
========= ========= ========
25
26
NON-CASH ACTIVITIES:
During fiscal 2001, the Company consummated an Exchange Transaction with
CHF (see Note 1) which was an entirely non-cash transaction, other than the
distribution of cash balances held by the Divested Joint Ventures. The
transaction resulted in the elimination of a substantial portion of the
Company's minority interest and certain other accounts as summarized below:
Assets and liabilities held by Divested Joint Ventures
exchanged by the Company:
Cash...................................................... $(3,983)
Accounts receivable....................................... (81)
Real estate projects...................................... (3,929)
Property and equipment.................................... (3,038)
Prepaid expenses and other assets......................... (213)
Accounts payable and accrued liabilities.................. 103
Notes payable............................................. 1,249
-------
$(9,892)
=======
Summary of amounts recorded as a result of the Exchange
Transaction:
Minority interest acquired................................ $31,685
Assets exchanged:
Divested Joint Ventures................................ (9,892)
Investment in unconsolidated joint ventures............ (4,070)
-------
17,723
Deferred income taxes and accrued expenses recorded....... (4,805)
Adjustment of remaining property and equipment to zero.... (2,994)
Negative goodwill recorded................................ (9,924)
-------
$ --
=======
See accompanying notes to financial statements.
26
27
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Company Organization and Operations
Capital Pacific Holdings, Inc., together with its subsidiaries, (the
"Company") conducts business under various names, including the name Capital
Pacific Homes in California, Arizona, Colorado and Nevada and Clark Wilson Homes
in Texas.
In fiscal year 1998, the Company consummated an equity and restructuring
transaction whereby the Company and certain of its subsidiaries transferred to
Capital Pacific Holdings, LLC ("CPH LLC") substantially all of their respective
assets and CPH LLC assumed all the liabilities of the Company and its
subsidiaries. An unaffiliated investment company, California Housing Finance,
L.P. ("CHF") then acquired a 32.07% minority interest in CPH LLC as a result of
a cash investment in CPH LLC. From fiscal 1998 through fiscal 2001, the Company
expanded its operating strategy to encompass the acquisition and development of
commercial and mixed-use projects, as well as ownership of existing commercial
properties, primarily through non-majority investments in limited liability
companies, with approximately 99% of the capital for these projects being
provided by CHF.
Effective February 23, 2001, the Company and CHF consummated an interest
exchange transaction (the "Exchange Transaction"), whereby the Company exchanged
its interests in the majority of the joint ventures capitalized by CHF,
including certain entities which were previously consolidated, (the "Divested
Joint Ventures") for approximately 75% of CHF's interest in CPH LLC and all of
CHF's interests in certain residential joint ventures. At February 28, 2001, the
Company had a 93% interest in CPH LLC and CHF held a 7% minority interest. The
Company and CHF both have an option to convert CHF's remaining 7% interest in
CPH LLC into 1,235,000 shares of non-voting Common Stock of the Company for the
period extending from 90 to 180 days following the closing of the Exchange
Transaction. The Company expects that this option will be exercised. In
addition, Capital Pacific Homes, Inc., a subsidiary of the Company, has entered
or expects to enter into construction, management and marketing agreements
relating to certain of the Divested Joint Ventures with residential components,
(the "Managed Projects"), whereby the Company will be compensated for performing
such services through a management fee arrangement.
The Exchange Transaction has been accounted for as the simultaneous
acquisition of the majority of CHF's minority interest in CPH LLC and certain
other residential joint ventures and the disposition of the Company's interest
in the Divested Joint Ventures. As a result, no gain has been recognized, the
remaining balance of the Company's property and equipment was adjusted to zero
at February 28, 2001, and the balance of the transaction was recorded as
negative goodwill.
Assets under management, including assets owned by unconsolidated joint
ventures and Managed Projects, totaled $475 million at February 28, 2001 in 55
residential properties. At February 28, 2001, CPH LLC had $244 million in assets
and a net worth of $109 million. The Company is the sole managing member of CPH
LLC. The Company maintains certain licenses and other assets as is necessary to
fulfill its obligations as managing member and under management agreements. The
Company and its subsidiaries perform their respective management functions for
CPH LLC and the Managed Projects, pursuant to management agreements, which
include provisions for the reimbursement of Company and subsidiary costs and a
management fee. CPH LLC, the Managed Projects and certain other project-specific
entities indemnify the Company against liabilities arising from the projects
owned by such entities.
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC and the project-specific entities in which the Company has
an equity ownership interest. At the current time, all material financing
transactions and arrangements are incurred either by CPH LLC or by the
project-specific entities.
27
28
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is a regional builder and developer with operations throughout
selected metropolitan areas of Southern California, Nevada, Texas, Arizona and
Colorado. The Company's principal business activities are to build and sell
single-family homes. The Company's single-family homes are targeted to
entry-level, move-up and luxury buyers.
Approximately 42, 12, 24, 9 and 13 percent of the Company's total revenues
(including the unconsolidated joint ventures) were in California, Nevada, Texas,
Arizona and Colorado, respectively, for the year ended February 28, 2001.
The Company's business, and the markets which it serves in California,
Nevada, Texas, Arizona and Colorado are affected by local, national and world
economic conditions and events, in particular by the level of mortgage interest
rates, consumer confidence and real estate prices. The Company cannot predict
whether mortgage interest rates will be at levels attractive to prospective
homebuyers. If interest rates increase, in particular mortgage interest rates,
the Company's operating results could be adversely impacted.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingencies at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Significant estimates include projected revenues and costs of projects,
which impact the allocation of costs to homes sold. Actual results could differ
from estimated amounts.
Principles of Consolidation and Minority Interest in Joint Ventures
The consolidated financial statements include the accounts of the Company
and wholly owned subsidiaries and certain majority-owned joint ventures, as well
as the accounts of CPH LLC, including the capital accounts of CPH LLC totaling
$109.5 million at February 28, 2001, $7.7 million of which is required to be
presented as minority interest in the accompanying consolidated balance sheets.
All other investments (See Note 4) are accounted for under the equity method.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Long-Lived Assets
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identified intangibles to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable based on the estimated future cash flows
(undiscounted and without interest charges). SFAS No. 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less costs to sell.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives of three to thirty years using the straight-line method.
Total property and equipment was $8,536,000 (net of accumulated depreciation of
$6,608,000) as of February 29, 2000. During fiscal 2001, a building with a book
value of $2,460,000 was sold, resulting in a gain of $1,040,000. In addition, a
building with a book value of $3,038,000 was exchanged as part of the Exchange
Transaction. As a result of the Exchange Transaction, the remaining balance of
$2,994,000 in property and equipment was adjusted to zero at February 28, 2001.
28
29
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Real Estate Projects
All direct and indirect land costs, offsite and onsite improvements and
applicable interest and carrying charges are capitalized to real estate projects
under development. Capitalized costs are expensed as real estate is sold; direct
marketing costs are expensed in the period incurred. Land and land development
costs are accumulated by project and are allocated to individual phases using
the relative sales value method.
SFAS No. 121 requires long-lived assets that are expected to be held and
used in operations are to be carried at the lower of cost or, if impaired, the
fair value of the asset, rather than the net realizable value. Long-lived assets
to be disposed of should be reported at the lower of carrying amount or fair
value less cost to sell. For purposes of applying SFAS No. 121, real estate
under development is considered to be held for use whereas finished units are
considered assets to be disposed of. In evaluating long-lived assets held for
use, a review for impairment loss is triggered if the sum of the expected future
cash flows (undiscounted and without interest charge) is less than the carrying
amount of the asset. Various assumptions and estimates are used to determine
fair value in determining the amount of any impairment loss including, among
others, estimated costs of construction, development and direct marketing, sales
absorption rates, anticipated sales prices and carrying costs. The estimates
used to determine any impairment adjustment can change in the near term as the
economy in the Company's key areas changes.
Negative Goodwill
Negative goodwill recorded as a result of the Exchange Transaction is being
accreted over five years. No accretion was recorded during fiscal 2001.
Revenue Recognition
The Company's revenue recognition policy follows the provisions of SFAS No.
66 "Accounting for Sales of Real Estate," which specify minimum down payment
requirements, financing terms and certain other requirements for sales of real
estate.
Income from sales is recognized when title has passed, the buyer has met
minimum down payment requirements and the terms of any notes received by the
Company satisfy continuing investment requirements. At the time of sale,
accumulated costs are relieved from real estate projects and charged to cost of
sales on a relative sales value basis.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
which requires the liability method of accounting for income taxes.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, short-term
investments which have a maturity of 90 days or less from the date of purchase
are considered cash equivalents.
Stock Options
The Company accounts for equity-based compensation under SFAS No. 123
"Accounting for Stock-Based Compensation." Under SFAS No. 123, companies have
the option to implement a fair value-based accounting method or continue to
account for employee stock options and stock purchase plans using the intrinsic
value based method of accounting as prescribed by Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities
electing to remain under APB Opinion No. 25 must make pro forma disclosures of
net income or loss and earnings per share as if the fair value based method
29
30
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of accounting defined in SFAS No. 123 had been applied. The Company has adopted
the disclosure requirements of SFAS No. 123 and will continue accounting for
stock options under APB Opinion No. 25.
Net Income Per Common Share
Effective February 28, 1998, the Company adopted SFAS No. 128. This
statement requires the presentation of both basic and diluted net income per
share for financial statement purposes. Basic net income per share is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding. Diluted net income per share includes the
effect of the potential shares outstanding, including dilutive securities using
the treasury stock method. The table below reconciles the components of the
basic net income per share calculation to diluted net income per share (in
thousands, except per share data):
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, 1999 FEBRUARY 29, 2000 FEBRUARY 28, 2001
----------------------- ----------------------- ------------------------
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------ ------ ----- ------- ------ -----
Basic Net Income Per Share:
Income available to common stockholders
before extraordinary item.................. $3,286 14,237 $0.23 $5,227 13,923 $0.37 $10,728 13,773 $0.77
Effect of Dilutive Securities:
Warrants..................................... -- 32 -- -- -- -- -- -- --
Stock options................................ -- 2 -- -- 91 -- -- 123 --
------ ------ ----- ------ ------ ----- ------- ------ -----
Diluted Net Income Per Share before
extraordinary item........................... $3,286 14,271 $0.23 $5,227 14,014 $0.37 $10,728 13,896 $0.77
====== ====== ===== ====== ====== ===== ======= ====== =====
Comprehensive Income
During the year ended February 28, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and the display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. For each of the three years ended February
28, 2001 comprehensive income equaled net income; therefore, a separate
statement of comprehensive income is not included in the accompanying financial
statements.
Segment Reporting
Effective February 28, 1999, the Company adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." Under the provisions
of SFAS No. 131, the Company's operations are conducted primarily under one
segment, homebuilding, at this time.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Under the
provisions of SFAS 133, companies are required to recognize all derivatives as
either assets or liabilities in the statements of financial position and measure
those instruments at fair value. The Company is required to adopt SFAS 133, as
amended by SFAS No. 137 and 138, effective March 1, 2001. Currently, the Company
does not have any instruments that would qualify as derivatives under SFAS 133.
Accordingly, the Company does not believe SFAS 133 would have a material impact
on the Company's financial position, results of operations, or liquidity at the
current time.
30
31
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications
Certain reclassifications have been made to certain prior year balances in
order to conform with the current year presentation.
2. RESTRICTED CASH
The Company has restricted cash totaling $1,373,000 and $781,000 as of
February 29, 2000 and February 28, 2001, respectively. Restricted cash primarily
consists of deposits to various municipalities, banks, and utilities to
guarantee future performance of development obligations.
3. REAL ESTATE PROJECTS
Real estate projects consist of the following at February 29, 2000 and
February 28, 2001 (in thousands):
2000 2001
-------- --------
Land and improvements under construction............... $254,206 $229,207
Completed residential homes............................ 11,592 12,678
Completed model homes.................................. 16,699 17,988
-------- --------
$282,497 $259,873
======== ========
Total interest costs incurred during the years ended February 28, 1999,
February 29, 2000 and February 28, 2001 were $22,346,000, $24,465,000 and
$25,696,000 respectively, all of which was initially capitalized.
31
32
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company is a general partner or member and has a 50 percent or less
ownership in 6 unconsolidated entities at February 28, 2001. In addition, the
Company had certain advances outstanding to the Divested Joint Ventures at
February 28, 2001, which were repaid subsequent to year end. The Company's net
investments in and advances to unconsolidated entities are as follows at
February 29, 2000 and February 28, 2001 (in thousands):
2000 2001
------- ------
UNCONSOLIDATED JOINT VENTURES:
JMP Canyon Estates, L.P................................... $ 159 $ 162
JMP Harbor View, L.P...................................... 621 609
Grand Coto Estates, L.P................................... (633) 231
M.P.E. Partners, L.P...................................... 1,710 983
LB/L -- CPH Providence, LLC............................... -- 715
LB/L -- CPH Longmont, LLC................................. -- 1,087
------- ------
1,857 3,787
------- ------
DIVESTED JOINT VENTURES(1):
RPV Associates, LLC....................................... 2,759 76
CPH Dana Point, LLC....................................... 266 (79)
CPH Monarch Beach, LLC.................................... 445 260
CPH Resorts I, LLC........................................ 4,700 689
CPH Vista Palisades, LLC.................................. 435 376
Atlanta Huntington Beach, LLC............................. 1,259 25
CPH Dos Pueblos, LLC...................................... 3,595 139
CPH Airport Office Building, LLC.......................... 7 --
CPH Redhill Office Building, LLC.......................... 56 --
------- ------
13,522 1,486
------- ------
$15,379 $5,273
======= ======
---------------
(1) These entities were unconsolidated joint ventures at February 29, 2000 and
until February 23, 2001, the closing of the Exchange Transaction. The names
of these entities were changed subsequent to the Exchange Transaction.
The Company's ownership interests in the unconsolidated joint ventures
vary. Generally, the Company receives a portion of earnings although a preferred
return on invested capital is provided. Typically, the majority of capital is
provided by capital partners. The Company is typically a general partner or
managing member in each of the above entities and is the managing entity
pursuant to terms in each venture's agreement. In the case of Divested Joint
Ventures which are also Managed Projects, the Company or its subsidiary manages
the development of the project under a management contract. The Company's
carrying amount in each of the unconsolidated joint ventures (and the Divested
Joint Ventures prior to the Exchange Transaction) equals the underlying equity
in the joint venture, and there are generally no significant amounts of
undistributed earnings. The Company provides for income taxes currently on its
share of distributed and undistributed earnings and losses from the investments.
The Company uses the equity method of accounting for its investments in the
unconsolidated 50 or less percent-owned entities. The accounting policies of the
entities are substantially the same as those of the Company.
32
33
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Following is summarized, combined financial information for the
unconsolidated entities at February 29, 2000 and February 28, 2001 (in
thousands). The balance sheet information at February 28, 2001 does not include
the Divested Joint Ventures, but the income statement information does reflect
the results of the Divested Joint Ventures because the Company held an ownership
interest in those entities for substantially all of fiscal 2001:
2000 2001
-------- -------
ASSETS
Cash........................................................ $ 11,225 $ 512
Real estate projects........................................ 281,402 14,620
Commercial buildings........................................ 21,071 --
Other assets................................................ 31,281 611
-------- -------
$344,979 $15,743
======== =======
2000 2001
-------- -------
LIABILITIES AND EQUITY
Accounts payable and other liabilities...................... $ 15,136 $ 1,962
Due to the Company.......................................... 10,588 2,205
Notes payable............................................... 37,722 1,878
-------- -------
63,446 6,045
-------- -------
Equity
The Company............................................... 4,791 1,278
Others.................................................... 276,742 8,420
-------- -------
281,533 9,698
-------- -------
$344,979 $15,743
======== =======
1999 2000 2001
------- ------- -------
INCOME STATEMENT
Sales of homes and land............................... $78,950 $28,274 $62,704
Interest and other income, net........................ 7,151 16,296 16,214
------- ------- -------
86,101 44,570 78,918
Costs and expenses.................................... 72,416 33,428 63,505
------- ------- -------
Net income............................................ $13,685 $11,142 $15,413
======= ======= =======
The fiscal years of Grand Coto Estates, L.P. (Grand Coto) and M.P.E.
Partners, L.P. (MPE) end on December 31, pursuant to which the last year audited
by other auditors was the year ended December 31, 1999.
Equity in earnings (losses) from unconsolidated joint ventures consisted of
the following for the years ended February 28, 1999, February 29, 2000 and
February 28, 2001.
1999 2000 2001
------ ------ -----
MPE....................................................... $3,994 $ 932 $(476)
Grand Coto................................................ 3,939 785 (395)
Others.................................................... 16 13 (3)
------ ------ -----
$7,949 $1,730 $(874)
====== ====== =====
33
34
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As presented in the consolidated statements of operations, income from
unconsolidated joint ventures for fiscal 1999 and fiscal 2000 excludes the
recognition of approximately $2.1 million and $519,000, respectively, of
interest previously capitalized to the lots contributed to MPE. Such interest
costs are included in interest expense.
As of February 28, 2001, there were no remaining homes to be sold by MPE or
Grand Coto. Several other unconsolidated joint ventures were disposed of in the
Exchange Transaction. The Company has recently commenced development and/or
sales activity at certain new projects that are owned by unconsolidated joint
ventures.
5. NOTES PAYABLE
Notes payable consist of the following at February 29, 2000 and February
28, 2001 (in thousands):
2000 2001
-------- --------
Notes payable to banks, including interest varying from
LIBOR plus two to prime plus two percent maturing between
July 31, 2001 and February 3, 2003 secured by certain real
estate projects on a non-recourse basis................... $105,951 $ 88,272
Notes payable to bank, including interest at prime with the
term of the commitment reducing commencing August 1, 2002
secured by certain real estate projects on a recourse
basis..................................................... 19,281 16,158
Other....................................................... 577 5,793
-------- --------
$125,809 $110,223
======== ========
At February 29, 2000 and February 28, 2001, the aggregate carrying value of
assets collateralizing the above notes was $249,581,000 and $252,534,000,
respectively.
At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain project specific entities. As of
February 28, 2001, CPH LLC has in place several credit facilities with
contingent availabilities totaling $251 million (the "Facilities") with various
bank lenders (the "Banks"), of which $104 million was outstanding. The
Facilities are secured by liens on various completed or under construction homes
and lots held by CPH LLC and CPH Newport Coast, LLC and CPH Yucaipa I, LLC,
which are consolidated subsidiaries. Pursuant to the Facilities, CPH LLC and the
consolidated subsidiaries are subject to certain covenants, which require, among
other things, the maintenance of a consolidated liabilities to net worth ratio,
minimum liquidity, minimum net worth and loss limitations, all as defined in the
documents that evidence the Facilities. At February 28, 2001, CPH LLC was in
compliance with these covenants. The Facilities also define certain events that
constitute events of default. As of February 28, 2001, no such event had
occurred. Commitment fees are payable annually on some of the Facilities.
Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors, including CHF, the investor in CPH LLC. In addition,
development work undertaken in certain of the Company's joint ventures is
financed through various non-recourse lending arrangements. The Company
anticipates that it will continue to utilize both third party financing and
joint ventures to cover financing needs in excess of internally generated cash
flow.
During the years ended February 28, 1999, February 29, 2000 and February
28, 2001, the highest month-end balance on notes payable was $101,943,000,
$125,809,000 and $204,983,000, respectively, and the weighted average
outstanding balance was $70,073,000, $110,830,000 and $124,059,000,
respectively. The weighted average interest rates on notes payable during the
years ended February 28, 1999, February 29, 2000 and February 28, 2001, were 8.7
percent, 9.0 percent and 10.0 percent, respectively. The weighted average
34
35
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interest rates on notes payable at February 28, 1999, February 29, 2000 and
February 28, 2001, were 8.6 percent, 9.7 percent and 8.4 percent, respectively.
The aggregate scheduled principal maturities of notes payable are as
follows (in thousands):
AS OF
FEBRUARY 28,
FISCAL YEARS ENDING: 2001
-------------------- ------------
2002..................................................... $ 48,411
2003..................................................... 61,812
--------
Total.......................................... $110,223
========
6. SENIOR UNSECURED NOTES PAYABLE; WARRANTS
In May, 1994, the Company issued $100 million principal amount of its
12 3/4 percent Senior Notes due May 1, 2002 (the "Notes"). In connection with
the issuance of the Notes, the Company issued 790,000 warrants to purchase the
Company's common stock at a price of $3.30 per share, all of which are fully
exercisable until 2002. Interest is due and payable on May 1 and November 1 of
each year. Effective May 1, 2000, the Notes became redeemable at the option of
CPH LLC at 103.1875% of their principal amount, declining to par on and after
May 1, 2001, plus accrued interest.
The obligations associated with the Notes have been transferred to CPH LLC.
CPH LLC will be obligated to make an offer to purchase 10% of the outstanding
principal balance of the Notes at a purchase price equal to 100% of the
principal amount, plus accrued interest, in the event there are two consecutive
fiscal quarters that the CPH LLC's Consolidated Tangible Net Worth (as defined)
is less than $37 million. The Notes also contain certain restrictive covenants,
which, among other things, limit the incurrence of additional indebtedness, the
payment of dividends, the ability to create liens, make restricted payments (as
defined) and the ability to enter into certain transactions with affiliates. As
of February 28, 2001 CPH LLC was in compliance with these covenants and was not
required to make any such offer.
During fiscal 2000 and 2001, the Company repurchased $11.6 and $32.8
million of the Notes (face value), respectively, resulting in an extraordinary
gain of $955,000 and $1,461,000, respectively.
At February 28, 2001, unamortized bond issuance cost was $650,000, net of
accumulated amortization of $5.2 million, which is being amortized over the term
of the Notes utilizing the effective interest rate method. Unamortized bond
issuance cost is included in prepaid expenses and other assets in the
accompanying consolidated balance sheets.
7. INCOME TAXES
The provision for income taxes consists of the following for the years
ended February 28, 1999, February 29, 2000 and February 28, 2001 (in thousands):
1999 2000 2001
------ ------ -------
Current
Federal............................................. $ 75 $ 745 $ 2,996
State............................................... 220 700 865
------ ------ -------
295 1,445 3,861
------ ------ -------
Deferred.............................................. 800 300 (2,075)
------ ------ -------
Provision for income taxes............................ $1,095 $1,745 $ 1,786
====== ====== =======
35
36
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred income tax provision (benefit) at February 28, 1999, February
29, 2000 and February 28, 2001 results from the following temporary differences
between financial and tax reporting (in thousands):
1999 2000 2001
------- ---- -------
Accrued expenses....................................... $ 524 $ 22 $ (921)
Construction period expenses........................... 46 197 569
Depreciation........................................... (30) (40) (78)
Built-in losses........................................ 1,213 722 1,159
Net operating loss carryforward........................ 664 (823) 1,950
Other.................................................. -- -- 135
Increase (decrease) in valuation allowance............. (1,617) 222 (4,889)
------- ---- -------
$ 800 $300 $(2,075)
======= ==== =======
The components of the Company's deferred income tax asset as of February
29, 2000 and February 28, 2001 are as follows:
2000 2001
------- ------
Accrued expenses.......................................... $ 49 $ 975
Construction period expenses.............................. 1,529 1,878
Depreciation.............................................. (40) 14
Built-in losses........................................... 2,204 2,367
Real estate projects...................................... -- (5,701)
Property and equipment.................................... -- 1,197
Net operating loss carryforward........................... 1,147 --
Other..................................................... -- (41)
Valuation allowance....................................... (4,889) --
------- ------
$ -- $ 689
======= ======
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
A reconciliation of the income tax provision computed at the federal
statutory rate and the income tax provision for financial reporting purposes for
the years ended February 28, 1999, February 29, 2000 and February 28, 2001, are
as follows:
1999 2000 2001
---- ---- ----
Income taxes at statutory rate.............................. 34% 34% 34%
State income taxes, net of federal tax benefit.............. 3 3 6
Franchise tax liability..................................... 2 2 3
Income tax accrued on Exchange Transaction.................. -- -- 10
Reversal of valuation allowance............................. -- -- (39)
Utilization of loss carryforwards........................... (14) (14) --
--- --- ---
25% 25% 14%
=== === ===
8. REPURCHASE OF COMMON STOCK
During the third quarter of fiscal 1998, CPH LLC repurchased 1,015,000
shares of the Company's common stock which were issued to Roger Nix, the
previous owner of Durable Homes, Inc. ("Durable"), a wholly owned subsidiary of
the Company operating in Nevada, in connection with the Company's acquisition
36
37
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of Durable in 1993, and distributed such shares to the Company and CHF in
proportion to their respective ownership percentages in CPH LLC. Accordingly,
689,489 shares were distributed to the Company and are being held as treasury
stock. As a result, the number of outstanding shares of the Company was reduced
from 14,995,000 to 14,305,511.
In addition, in fiscal 1998, the Company announced a stock repurchase
program whereby up to 1,000,000 additional shares of the Company's outstanding
common stock may be repurchased by CPH LLC. As of February 28, 2001, 538,200
shares had been repurchased and held by CPH LLC under this program. In addition,
the Company has repurchased 220,268 of the warrants originally issued in
connection with the issuance of the Senior Notes.
9. STOCK OPTION PLAN
Effective February 28, 1995, the Board of Directors of the Company approved
the 1995 Stock Incentive Plan (the "1995 Plan"). The 1995 Plan permits a
committee designated by the Board of Directors to make awards to key employees
and directors of the Company and its subsidiaries. Subject to various
restrictions, awards could be in the form of stock options, restricted or
unrestricted stock, stock appreciation rights or a combination of the above. The
maximum number of shares or share equivalents that may be awarded under the 1995
Plan is 1,500,000.
Options are granted to purchase shares at prices equal to the fair market
value of the shares at the date of grant. The options are typically intended to
vest over a one to five year period and are generally intended to be exercisable
at various dates over one to 10 year periods. When the options are exercised,
the proceeds will be credited to equity along with the related income tax
benefits, if any.
The following is a summary of the transactions relating to the Company's
stock option plan for the years ended February 28, 1999, February 29, 2000 and
February 28, 2001:
FISCAL 1999 FISCAL 2000 FISCAL 2001
-------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- -------- --------
Options outstanding, beginning of
year............................... -- $ -- 256,000 $2.75 463,000 $2.28
Granted.............................. 256,000 2.75 250,000 1.88 250,000 2.50
Exercised............................ -- -- -- -- -- --
Canceled............................. -- -- (43,000) 2.75 (112,500) 2.39
--------- ----- --------- ----- -------- -----
Options outstanding, end of year..... 256,000 $2.75 463,000 $2.28 600,500 $2.37
========= ===== ========= ===== ======== =====
Options exercisable at end of year... -- 71,000 171,499
========= ========= ========
Options available for future grant... 1,244,000 1,037,000 899,500
========= ========= ========
The following information is provided pursuant to the requirements of SFAS
No. 123. The fair value of each option granted during the years ended February
28, 1999, February 29, 2000 and February 28, 2001, is estimated using the
Black-Scholes option-pricing model on the date of grant using the following
weighted average assumptions:
FISCAL 1999 FISCAL 2000 FISCAL 2001
----------- ----------- -----------
Dividend yield.................................... 0% 0% 0%
Expected volatility............................... 35.5% 56.5% 25.8%
Risk-free interest rate........................... 4.67% 6.12% 5.88%
Expected life..................................... 5 years 5 years 5 years
37
38
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 164,000, 186,500 and 250,000 options granted in fiscal 1999, 2000 and
2001, respectively, which remain outstanding as of February 28, 2001 have
exercise prices of $2.75, $1.875 and $2.50, respectively, and a remaining
contractual life of 7.92 and 8.58 and 9.59 years, respectively. As of February
28, 2001, 171,499 of these options are exercisable. The per share fair value of
all options granted during fiscal 1999, 2000 and 2001 was $1.07, $1.03 and
$0.87, respectively.
During the years ended February 28, 1999, February 29, 2000 and February
28, 2001, no compensation expense was recognized related to the stock options
granted, however, had compensation expense been determined consistent with SFAS
No. 123 for the Company's stock option grants for its stock-based compensation
plan, the Company's net income and diluted net income per share for the years
ended February 28, 1999, February 29, 2000 and February 28, 2001 would
approximate the pro forma amounts below (Dollars in thousands, except per share
amounts):
FISCAL 1999 FISCAL 2000 FISCAL 2001
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Income before
extraordinary
item................ $3,286 $3,281 $5,227 $5,144 $10,728 $10,638
Diluted income per
common share before
extraordinary
item................ $ 0.23 $ 0.23 $ 0.37 $ 0.37 $ 0.77 $ 0.77
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
10. RELATED PARTY TRANSACTIONS
In fiscal 1999, the Company contributed cash totaling $3,176,000 to
unconsolidated joint ventures. In fiscal 2000, the Company contributed cash
totaling $3,278,000 to unconsolidated joint ventures. In fiscal 2001, the
Company contributed cash totaling $1,244,000 to unconsolidated joint ventures.
The Company has made reimbursable advances to unconsolidated joint ventures
(including the Divested Joint Ventures) for construction and other expenditures.
The balance of advances at February 29, 2000 and February 28, 2001 was
$10,588,000 and $3,725,000, respectively. These amounts are included in
investment in and advances to unconsolidated joint ventures in the accompanying
consolidated balance sheets. During fiscal 2000 and fiscal 2001, the Company
charged interest totaling $1,422,000 and $338,163, respectively, to the joint
ventures based on these advances.
During fiscal 1999, 2000 and 2001, the Company recognized $10,452,000,
$12,446,000 and $12,092,000, respectively, in construction overhead
reimbursements from unconsolidated joint ventures (including the Divested Joint
Ventures). Amounts are received pursuant to terms of the joint venture
agreements, which generally specify a fixed payment per month over the
anticipated period of development. Such amounts are included in selling, general
and administrative expenses in the accompanying statements of operations. As a
result of the Exchange Transaction, the amount of overhead incurred, as well as
the corresponding reimbursements, will decrease in the future years with respect
to the Divested Joint Ventures.
During fiscal 1999, the Company acquired four parcels of land for total
consideration of approximately $3,283,000 from a partnership in which an officer
of one of the Company's subsidiaries held an ownership interest. The terms of
this transaction had been agreed upon prior to the time that this officer became
an employee of the Company. This officer is no longer an employee.
Included in accounts receivable at February 29, 2000 and February 28, 2001
is $1,633,000 and $1,805,000, respectively, of amounts owed from the Company's
various unconsolidated joint ventures to the Company's wholly-owned subsidiary,
Newport Design Center, Inc. for goods and services rendered.
38
39
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the Exchange Transaction, the Company transferred its interests in
the Divested Joint Ventures to Makallon, LLC ("Makallon"), which is beneficially
owned by CHF and a former director and officer of the Company, who is a relative
of the Chairman of the Board of the Company. In connection with the Exchange
Transaction, Capital Pacific Homes, Inc., a subsidiary of the Company, has
entered or expects to enter into construction, management and marketing
agreements with Makallon relating to the Managed Projects whereby the Company
will be compensated for performing such services through a management fee
arrangement. In addition, the Company has entered into lease agreements with
Makallon for office space in two buildings owned by certain joint ventures
controlled by Makallon.
During fiscal 1999 and 2000, approximately $207,000, $193,000,
respectively, was paid to a company owned by a relative of the Chairman of the
Board for services rendered in connection with website design and maintenance
and the development of virtual reality home tour models. In addition, this
company paid approximately $15,000 in rent for office space leased from the
Company during fiscal 1999.
An officer of the Company purchased a home from one of the Company's joint
ventures in fiscal 1999 for $780,000.
An officer of the Company purchased a home from one of the Company's joint
ventures in fiscal 2001 for $1,450,000.
11. COMMITMENTS AND CONTINGENCIES
General
Approximately $38,480,000 and $47,352,000 of performance bonds which have
been issued on behalf of both CPH LLC and certain joint ventures, and for which
the Company has been indemnified, were outstanding at February 29, 2000 and
February 28, 2001, respectively. The estimated cost to complete the development
work related to the performance bonds is $24,026,000 and $33,147,000 at February
29, 2000 and February 28, 2001, respectively. The beneficiaries of these bonds
are certain municipalities.
CPH LLC has entered into agreements to lease certain office equipment and
facilities under operating leases which expire at various dates through fiscal
year 2005. The facility leases generally provide that CPH LLC shall pay property
taxes, insurance and other items. Minimum payments under noncancelable leases at
February 28, 2001, are as follows (in thousands):
FISCAL YEARS ENDING:
--------------------
2002..................................................... $1,259
2003..................................................... 1,113
2004..................................................... 841
2005..................................................... 282
------
Total.......................................... $3,495
======
Total rent expense was $442,000, $769,000 and $1,153,000 for the years
ended February 28, 1999, February 29, 2000 and February 28, 2001, respectively.
As discussed in Notes 1 and 4, CPH LLC is a general partner in certain
joint venture partnerships. As a general partner, CPH LLC is liable for all
debts of the partnerships without limitation to the respective partnership
interest.
Dividends
No dividends were declared or paid for the years ended February 28, 1999,
February 29, 2000 and February 28, 2001.
39
40
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Legal Proceedings
The Company is involved in routine claims and litigation arising in the
ordinary course of its business. Although the legal responsibility and financial
impact with respect to pending claims and litigation cannot be presently
ascertained, the Company does not believe that these matters will result in the
payment by the Company, giving consideration to any applicable insurance
proceeds or contributions by other parties, that, in the aggregate, would be
material in relation to the financial position of the Company. It is reasonably
possible that the estimate of reserves provided for by the Company with respect
to such claims and litigation could change in the near term and such change
could be material.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate:
Cash and Equivalents -- The carrying amount is a reasonable estimate
of fair value. These assets primarily consist of short-term investments and
demand deposits.
Notes Payable to Banks -- These notes payable mature in two to three
years. The rates of interest paid on the notes approximate the current
rates available for secured real estate financing with similar terms and
maturities.
Senior Unsecured Notes Payable Due 2002 -- This issue is not publicly
traded on a major exchange. Consequently, the fair value of this issue is
based on the repurchase closest to the year ended February 28, 2001.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
AT FEBRUARY 29, 2000 AT FEBRUARY 28, 2001
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial Assets:
Cash and equivalents.......................... $ 19,389 $ 19,389 $ 7,552 $ 7,552
Financial Liabilities:
Notes payable................................. 125,809 125,809 110,223 110,223
Senior unsecured notes payable................ 88,392 74,028 55,592 51,978
40
41
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the years ended February 29, 2000
and February 28, 2001 is as follows (in thousands except for per share data):
QUARTER
--------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- -------- --------
2000:
Sales of homes and land...................... $61,974 $67,383 $63,430 $ 98,004 $290,791
Gross margin................................. 11,304 12,493 14,137 21,584 59,518
Net income................................... $ 820 $ 1,100 $ 812 $ 3,450 $ 6,182
======= ======= ======= ======== ========
Net income per common share -- basic and
diluted................................... $ 0.06 $ 0.08 $ 0.06 $ 0.24 $ 0.44
======= ======= ======= ======== ========
2001:
Sales of homes and land...................... $65,034 $96,215 $84,583 $117,911 $363,743
Gross margin................................. 14,388 22,893 21,438 32,692 91,411
Net income................................... $ 2,289 $ 2,544 $ 1,830 $ 5,526 $ 12,189
======= ======= ======= ======== ========
Net income per common share -- basic and
diluted................................... $ 0.17 $ 0.18 $ 0.13 $ 0.40 $ 0.88
======= ======= ======= ======== ========
41
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners
Grand Coto Estates, L.P.
We have audited the accompanying balance sheet of Grand Coto Estates, L.P.,
a California limited partnership (the "Partnership"), as of December 31, 1999,
and the related statements of operations, partners' capital (deficit) and cash
flows for the years ended December 31, 1999 and 1998. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Grand Coto Estates, L.P. at
December 31, 1999, and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Irvine, California
January 28, 2000
42
43
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
----------- -----------
(UNAUDITED)
Cash........................................................ $ 51,213 $ 236,795
Other assets................................................ 48,445 106,880
--------- -----------
$ 99,658 $ 343,675
========= ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and accrued liabilities (Note 2)........... $ 55,160 $ 1,297,177
Due to general partner (Note 4)............................. 836,207 176,493
--------- -----------
891,367 1,473,670
Commitments and contingencies (Note 5)
Partners' capital (deficit)................................. (791,709) (1,129,995)
--------- -----------
$ 99,658 $ 343,675
========= ===========
See accompanying notes to financial statements.
43
44
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
(UNAUDITED)
Sales................................................ $ 2,991 $37,557,500 $23,172,946
Cost of sales........................................ (259,449) 28,116,357 16,659,863
--------- ----------- -----------
Gross profit......................................... 262,440 9,441,143 6,513,083
Other expenses (income)
Selling and marketing.............................. 4,800 2,650,480 1,572,850
Other income....................................... -- (18,032) (35,473)
--------- ----------- -----------
Net income........................................... $ 257,640 $ 6,808,695 $ 4,975,706
========= =========== ===========
See accompanying notes to financial statements.
44
45
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
IHP
INVESTMENT CAPITAL PACIFIC
FUND I, L.P. HOLDINGS, LLC TOTAL
------------ --------------- ------------
BALANCE -- DECEMBER 31, 1997..................... $ 14,760,274 $ 814,964 $ 15,575,238
Contributions from partner....................... 18,395,326 -- 18,395,326
Distributions to partners........................ (20,832,471) (1,307,681) (22,140,152)
Net income....................................... 3,027,853 1,947,853 4,975,706
------------ ------------ ------------
BALANCE -- DECEMBER 31, 1998..................... 15,350,982 1,455,136 16,806,118
Contributions from partners...................... 7,688,262 2,801,787 10,490,049
Distributions to partners........................ (27,318,352) (7,916,505) (35,234,857)
Net income....................................... 3,686,647 3,122,048 6,808,695
------------ ------------ ------------
BALANCE -- DECEMBER 31, 1999..................... (592,461) (537,534) (1,129,995)
Contributions from partners...................... 67,602 67,602 135,204
Distributions to partners........................ -- (54,558) (54,558)
Net income....................................... 128,820 128,820 257,640
------------ ------------ ------------
BALANCE -- DECEMBER 31, 2000 (UNAUDITED)......... $ (396,039) $ (395,670) $ (791,709)
============ ============ ============
See accompanying notes to financial statements.
45
46
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 257,640 $ 6,808,695 $ 4,975,706
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Cost of sales................................... -- 28,116,357 16,659,863
Changes in operating assets and liabilities
Additions to real estate inventories......... -- (7,951,363) (19,413,753)
Due from general partner..................... -- 56,467 (56,467)
Other assets................................. 58,435 (33,386) 42,504
Accounts payable and accrued liabilities..... (1,242,017) (2,651,401) 2,759,099
Due to general partner....................... 659,714 176,493 (214,166)
----------- ------------ ------------
Net cash provided by (used in) operating
activities............................ (266,228) 24,521,862 4,752,786
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable............... -- -- (575,206)
Capital contributions from partner................ 135,204 10,490,049 18,395,326
Capital distributions to partners................. (54,558) (35,234,857) (22,140,152)
----------- ------------ ------------
Net cash (used in) provided by financing
activities............................ 80,646 (24,744,808) (4,320,032)
----------- ------------ ------------
Net (decrease) increase in cash................... (185,582) (222,946) 432,754
Cash -- beginning of year......................... 236,795 459,741 26,987
----------- ------------ ------------
Cash -- end of year............................... $ 51,213 $ 236,795 $ 459,741
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest during the year............ $ -- $ -- $ 28,875
=========== ============ ============
See accompanying notes to financial statements.
46
47
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Grand Coto Estates, L.P., a California limited partnership (the
"Partnership"), was formed on October 30, 1996 in accordance with the provisions
of the laws of the State of California for the purpose of developing and selling
93 single-family homes in Coto de Caza, California (the "Project"). The general
partner, Peters Ranchland Company, Inc. ("Peters"), and the limited partner, IHP
Investment Fund I, L.P. ("IHP"), each owned a 50% interest in the Partnership at
inception. On October 1, 1997, Peters transferred its interest in the
Partnership to Capital Pacific Holdings, LLC ("CPH").
The Partnership Agreement provides that cash flows, as defined, are
distributed to the partners first, in the amount of the adjusted GAAP profit
component (as defined) from the sale of each home, in accordance with their
percentage interests; second, in satisfaction of unpaid preferred returns;
third, for payment of partners' capital contributions; fourth, in accordance
with their percentage interests.
Net income is allocated to the partners in the following order of priority:
first, to recover any net losses allocated previously; second, to the extent of
and in proportion to the amount by which cash flow distributed in satisfaction
of preferred returns and the adjusted GAAP profit component (as defined in the
partnership agreement) exceeds previously allocated net income; thereafter, in
accordance with their percentage interests. Net losses are allocated first, to
the general partner up to $2,076,921 plus all previously allocated net income;
second, to the limited partner until the limited partner's capital account is
reduced to zero; any remaining losses are allocated to the general partner.
Certain distributions reflected in the statement of partners' capital were
not in accordance with the provisions of the partnership agreement and it is
management's and the partners' intent to cumulatively adjust future
contributions and distributions of the Partnership to reflect the provisions of
the partnership agreement.
The partnership agreement provides, among other things, that the partners
shall be entitled to receive a preferred return on contributed capital computed
using an interest rate equal to prime plus 2%. As of December 31, 1999 and 1998,
the Partnership has unpaid preferred returns of $0 and $394,827, respectively,
on IHP's capital contributions, and $0 and $8,178, respectively, on CPH's
capital contributions.
Use of Estimates
The preparation of the Partnership's financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of December 31, 1999 and 1998, and revenues and expenses for each
of the years in the period ended December 31, 1999. Actual results could
materially differ from those estimates in the near term.
Real Estate Inventories
Real estate inventories include direct and indirect land costs, offsite
costs and onsite improvement costs, project commitment fees and builder overhead
fees which are capitalized to the real estate project. Selling and marketing
costs are expensed as incurred.
The Partnership complies with the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"). SFAS No. 121
requires the Partnership to review the Project whenever events or changes in
circumstances indicate that the cost basis of such assets may not be
recoverable. If the cost basis of the Project is greater than the projected
future net cash flows from the Project, an impairment loss is recognized.
Impairment losses are calculated as the difference between the Project's cost
basis and its estimated fair value,
47
48
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
net of disposal costs on completed units, if any. No impairment losses were
recorded in December 31, 1999 and 1998, Accordingly, the Project was carried at
its historical cost basis. The Partnership sold all of its remaining homes in
1999, therefore, there is no inventory balance as of December 31, 1999.
Sales and Profit Recognition
Sales are recorded and profit is recognized when title has passed to a
buyer who has met down payment and continuing investment criteria and
substantially all of the risks and rewards of ownership have been transferred to
the buyer. At the time of sale, accumulated costs are relieved from real estate
inventories by a method that approximates relative sales value and are charged
to cost of sales.
Income Taxes
The Partnership is not a taxable entity and the results of its operations
are included in the tax returns of the partners. Accordingly, no provision for
income taxes is reflected in the accompanying financial statements.
2. REAL ESTATE INVENTORIES
During 1999, the Project's remaining 45 homes were sold. At December 31,
1999, included in accounts payable and accrued liabilities is $1,155,219 of
estimated costs to complete the development of the Project and $141,958 of
warranty cost reserves.
3. NOTE PAYABLE
The Partnership had a noninterest-bearing note payable issued to the seller
in connection with the acquisition of the land on which the Project is being
developed. The note payable was secured by real estate inventories and was paid
off in May 1998. Imputed interest of $19,252 was capitalized to real estate
inventories during the year ended December 31, 1998.
4. RELATED PARTY TRANSACTIONS
The partnership agreement provides that a total of $1,579,199 be paid to
the general partner in monthly installments for builder overhead fees. If, after
all of the homes in the Project are sold, actual sales prices (as defined) are
less than budgeted sales prices, the general partner shall be liable to the
Partnership for all overhead fees received in excess of 3% of actual gross sales
prices (as defined). If actual sales prices are greater than budgeted sales
prices, the general partner shall be entitled to receive from the Partnership an
amount equal to 3% of actual gross sales prices less overhead fees already
received. An additional $394,154 of builder overhead fees was incurred by the
Partnership as actual sale prices were greater than budget.
The following fees were paid to the partners and capitalized to the Project
during the years ended December 31, 1999 and 1998:
1999 1998
-------- --------
Commitment fees paid to IHP............................ $ -- $131,600
Builder overhead fees paid to CPH...................... 218,920 717,540
-------- --------
$218,920 $849,140
======== ========
48
49
GRAND COTO ESTATES, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
5. COMMITMENTS AND CONTINGENCIES
The Partnership's commitments and contingencies include the usual
obligations incurred by real estate developers in the normal course of business.
In the opinion of management, these matters will not have a material effect on
the Partnership's financial position.
In the jurisdiction in which the Partnership develops and constructs the
Project, community facilities district bonds are issued by government
instrumentalities to finance major infrastructure and other improvements. As a
land owner benefited by these improvements, the Partnership is responsible for
the assessments on its land until the property is sold to buyers. When homes
within the Project are sold, the buyers assume the responsibility for the
related assessment.
49
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners
M.P.E. Partners, L.P.
We have audited the accompanying balance sheet of M.P.E. Partners, L.P., a
California limited partnership (the "Partnership"), as of December 31, 1999, and
the related statements of operations, partners' capital (deficit) and cash flows
for the years ended December 31, 1999 and 1998. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of M.P.E. Partners, L.P. at
December 31, 1999, and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Irvine, California
January 28, 2000
50
51
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
----------- ----------
(UNAUDITED)
Cash........................................................ $ 323,102 $ 529,158
Receivables and other assets................................ -- 2,846
---------- ----------
$ 323,102 $ 532,004
========== ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and accrued liabilities.................... $ 542,621 $ 823,388
Due to partners (Note 3).................................... 471,683 455,935
---------- ----------
1,014,304 1,279,323
Commitments and contingencies (Note 4)
Partners' capital (deficit)................................. (691,202) (747,319)
---------- ----------
$ 323,102 $ 532,004
========== ==========
See accompanying notes to financial statements.
51
52
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
(UNAUDITED)
Sales................................................ $ -- $24,345,000 $32,056,400
Cost of sales........................................ -- 19,039,542 25,739,557
------- ----------- -----------
Gross profit......................................... -- 5,305,458 6,316,843
Other expenses
Selling and marketing (Note 3)..................... 1,600 2,701,810 2,100,750
Other expense...................................... -- 17,045 6,170
------- ----------- -----------
Net income (loss).................................... $(1,600) $ 2,586,603 $ 4,209,923
======= =========== ===========
See accompanying notes to financial statements.
52
53
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
IHP
INVESTMENT CAPITAL PACIFIC
FUND I, L.P. HOLDINGS, LLC TOTAL
------------ --------------- ------------
BALANCE -- DECEMBER 31, 1997..................... $ 20,405,433 $ 2,506,554 $ 22,911,987
Contributions from partner....................... 18,799,859 -- 18,799,859
Distributions to partners........................ (29,918,842) (2,176,899) (32,095,741)
Net income....................................... 2,621,826 1,588,097 4,209,923
------------ ----------- ------------
BALANCE -- DECEMBER 31, 1998..................... 11,908,276 1,917,752 13,826,028
Contributions from partner....................... 6,149,660 -- 6,149,660
Distributions to partners........................ (21,609,165) (1,700,445) (23,309,610)
Net income....................................... 1,677,956 908,647 2,586,603
------------ ----------- ------------
BALANCE -- DECEMBER 31, 1999..................... (1,873,273) 1,125,954 (747,319)
Contributions from partner....................... 57,717 -- 57,717
Distributions to partners........................ -- -- --
Net income....................................... (1,494) (106) (1,600)
------------ ----------- ------------
BALANCE -- DECEMBER 31, 2000 (UNAUDITED)......... $ (1,817,050) $ 1,125,848 $ (691,202)
============ =========== ============
See accompanying notes to financial statements.
53
54
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................. $ (1,600) $ 2,586,603 $ 4,209,923
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Cost of sales.................................... -- 19,039,542 25,739,557
Changes in operating assets and liabilities
Receivables and other assets.................. 2,846 275,698 1,604,686
Additions to real estate inventories.......... -- (2,937,194) (19,091,151)
Accounts payable and accrued liabilities...... (280,767) (2,042,853) 2,349,522
Due to partners............................... 15,748 346,797 (1,118,257)
--------- ------------ ------------
Net cash provided by (used in) operating
activities............................. (263,773) 17,268,593 13,694,280
--------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from partners................ 57,717 6,149,660 18,799,859
Capital distributions to partners.................. -- (23,309,610) (32,095,741)
--------- ------------ ------------
Net cash (used in) provided by financing
activities....................................... 57,717 (17,159,950) (13,295,882)
--------- ------------ ------------
Net increase (decrease) in cash.................... (206,056) 108,643 398,398
Cash -- beginning of period........................ 529,158 420,515 22,117
--------- ------------ ------------
Cash -- end of period.............................. $ 323,102 $ 529,158 $ 420,515
========= ============ ============
See accompanying notes to financial statements.
54
55
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
M.P.E. Partners, L.P., a California limited partnership (the
"Partnership"), was formed on March 14, 1997 (inception) in accordance with the
provisions of the laws of the State of California for the purpose of developing
and selling 51 single-family homes in Tarzana, California (the "Project"). The
general partner, Peters Ranchland Company, Inc. ("Peters"), and the limited
partner, IHP Investment Fund I, L.P. ("IHP"), each owned a 50% interest in the
Partnership at inception. On October 1, 1997, Peters transferred its interest in
the Partnership to Capital Pacific Holdings, LLC ("CPH").
The partnership agreement provides that cash flows, as defined, are
distributed to the partners first, in the amount of the adjusted GAAP profit
component (as defined) from the sale of each home, in accordance with their
percentage interests; second, in satisfaction of unpaid preferred returns;
third, for payment of partners' capital contributions in accordance with their
percentage interests; any remaining cash flows are distributed to the partners
in accordance with their percentage interests.
Net income is allocated to the partners in the following order of priority:
first, to recover any net losses allocated previously; second, to the extent of
and in proportion to the amount by which cash flow distributed in satisfaction
of preferred returns and the adjusted GAAP profit component (as defined in the
partnership agreement) distributed from the sale of each home exceeds previously
allocated profits; third, to the extent other cash flows distributed, as
defined, exceed previously allocated net income; thereafter, in accordance with
their percentage interests. Net losses are allocated first, to the general
partner up to $4,063,045 plus all previously allocated net income; second, to
the limited partner until the limited partner's capital account is reduced to
zero; any remaining losses are allocated to the general partner.
Certain distributions reflected in the statement of partners' capital were
not in accordance with the provisions of the partnership agreement and it is
management's and the partners' intent to cumulatively adjust future
contributions and distributions of the Partnership to reflect the provisions of
the partnership agreement.
The partnership agreement provides, among other things, that the partners
shall be entitled to receive a preferred return on contributed capital computed
at the rate of prime plus 1%. As of December 31, 1999 and 1998, the Partnership
has unpaid preferred returns of $0 and $6,391, respectively, on IHP's capital
contributions, and $307,434 and $245,829, respectively, on CPH's capital
contributions.
Use of Estimates
The preparation of the Partnership's financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of December 31, 1999 and 1998, and revenues and expenses for the
years ended December 31, 1999 and 1998. Actual results could materially differ
from those estimates in the near term.
Real Estate Inventories
Real estate inventories include direct and indirect land costs, offsite
costs and onsite improvement costs, project commitment fees and builder overhead
fees which are capitalized to the Project. Selling and marketing costs are
expensed as incurred.
The Partnership complies with the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"). SFAS No. 121
requires the Partnership to review the Project whenever events or changes in
circumstances indicate that the cost basis of the Project may not be
recoverable. If the cost basis of the Project
55
56
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
is greater than the projected future net cash flows from the Project, an
impairment loss is recognized. Impairment losses are calculated as the
difference between the Project's cost basis and its estimated fair value, net of
disposal costs on completed units, if any. No impairment losses were recorded in
1999 and 1998. Accordingly, the Project was carried at its historical cost
basis. The Partnership sold all of its remaining homes in 1999, therefore, there
is no inventory balance at December 31, 1999.
Sales and Profit Recognition
Sales are recorded and profit is recognized when title has passed to a
buyer who has met down payment and continuing investment criteria, and
substantially all of the risks and rewards of ownership have been transferred to
the buyer. At the time of sale, accumulated costs are relieved from real estate
inventories by a method that approximates relative sales value and are charged
to cost of sales.
Income Taxes
The Partnership is not a taxable entity and the results of its operations
are included in the tax returns of the partners. Accordingly, no provision for
income taxes is reflected in the accompanying financial statements.
2. REAL ESTATE INVENTORIES
During 1999, the Project's remaining 20 homes were sold. At December 31,
1999, included in accounts payable and accrued liabilities is $552,475 of
estimated costs to complete the development of the Project and $270,913 of
warranty cost reserves.
3. RELATED PARTY TRANSACTIONS
The Partnership acquired the Project on April 11, 1997 from a related
party, Capital Pacific Holdings, Inc. and two other affiliates (collectively,
"CPH, Inc."), for $12,392,547, utilizing IHP's initial cash contribution.
CPH, Inc. incurred certain costs in connection with the development of the
Partnership's models and sales office. In accordance with the Partnership
Agreement, $2,710,000 was credited to CPH's capital account relating to these
development costs.
The Partnership entered into a cost sharing agreement with CPH, Inc. which
requires the Partnership to reimburse CPH, Inc. for certain costs related to
advertising and the operation and maintenance of the models and sales office.
Total shared costs allocated to the Partnership during the years ended December
31, 1999 and 1998 and the period ended December 31, 1997 were $0, $1,520,811 and
$471,646, respectively, and are included in selling and marketing costs in the
Partnership's statements of operations.
The partnership agreement provides that a total of $1,623,655 be paid to
the general partner in monthly installments for builder overhead fees. If, after
all of the homes in the Project are sold, actual sales prices (as defined) are
less than budgeted sales prices, the general partner shall be liable to the
Partnership for all overhead fees received in excess of 3% of actual gross sales
prices (as defined). If actual sales prices are greater than budgeted sales
prices, the general partner shall be entitled to receive from the Partnership an
amount equal to 3% of actual gross sales prices less overhead fees already
received. An additional $126,725 of builder overhead fees was incurred by the
Partnership as actual sale prices were greater than budget.
56
57
M.P.E. PARTNERS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
The following fees were paid to the partners and capitalized to the Project
during the years ended December 31, 1999 and 1998:
1999 1998
-------- ----------
Commitment fees paid to IHP.......................... $ -- $ 270,609
Builder overhead fees paid to CPH.................... 267,913 847,128
-------- ----------
$267,913 $1,117,737
======== ==========
The amounts due to the partners as of December 31, 1999 and 1998 consist of
amounts due to CPH for the payment of builder overhead fees and development
fees.
4. COMMITMENTS AND CONTINGENCIES
The Partnership's commitments and contingencies include the usual
obligations incurred by real estate developers in the normal course of business.
In the opinion of management, these matters will not have a material effect on
the Partnership's financial position.
57
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the
Company's definitive proxy statement to be filed with the Commission no later
than June 28, 2001 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Company's definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Company's definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Company's definitive Proxy Statement.
58
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. FINANCIAL STATEMENTS. The following Financial Statements, together
with the Notes thereto and Reports of Independent Public Accountants
thereon, are included in Part II, Item 8 of this report.
CAPITAL PACIFIC HOLDINGS, INC.
Report of Independent Public Accountants
Consolidated Balance Sheets as of February 29, 2000 and February 28, 2001
Consolidated Statements of Income for the years ended February 28, 1999,
February 29, 2000 and
February 28, 2001
Consolidated Statements of Stockholders' Equity for the years ended
February 28, 1999, February 29,
2000 and February 28, 2001
Consolidated Statements of Cash Flows for the years ended February 28,
1999, February 29, 2000 and
February 28, 2001
Notes to Consolidated Financial Statements
GRAND COTO ESTATES, L.P.
Report of Independent Public Accountants
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the years ended December 31, 2000, 1999 and
1998
Statements of Partners' Capital (Deficit) for the years ended December 31,
2000, 1999 and 1998
Statements of Cash Flows for the years ended December 31, 2000, 1999 and
1998
Notes to Financial Statements
M.P.E. PARTNERS, L.P.
Report of Independent Public Accountants
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the years ended December 31, 2000, 1999, and
1998
Statements of Partners' Capital (Deficit) for the years ended December 31,
2000, 1999 and 1998
Statements of Cash Flows for the years ended December 31, 2000, 1999 and
1998
Notes to Financial Statements
59
60
2. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Second Restated Certificate of Incorporation of the
Registrant, as Amended. (Incorporated by reference to
Exhibit 3.3 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998).
3.2 Second Amended and Restated Bylaws of the Registrant.
(Incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
4.1 See the Articles of Incorporation and Bylaws of the
Registrant (Exhibits 3.1 - 3.2) and the Indenture and
related agreements (Exhibits 10.1 - 10.6).
10.1 Indenture agreement by and between Capital Pacific Holdings,
Inc., as Issuer; Durable Homes, Inc., J.M. Peters Nevada,
Inc., and Peters Ranchland, Inc., as Guarantors, and United
States Trust Company of New York, as Trustee, dated as of
May 13, 1994. (Incorporated by reference to Exhibit 10.1 of
the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 28, 1994 filed on May 27, 1994, SEC File
No. 001-09911).
10.2 Warrant Agreement by and between Capital Pacific Holdings,
Inc., and United States Trust Company of New York, Warrant
Agent, dated as of May 13, 1994. (Incorporated by reference
to Exhibit 10.2 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1994 filed on
May 27, 1994, SEC File No. 001-09911).
10.3 Warrant Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911).
10.4 Notes Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911).
10.5 Second Supplemental Indenture dated as of September 10, 1997
to the Indenture agreement dated as of May 13, 1998.
(Incorporated by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
10.6 Third Supplemental Indenture, dated as of October 1, 1997 to
the Indenture agreement dated as of May 13, 1994, as
amended. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998).
10.7 Capital Pacific Holdings, Inc. Stock Incentive Agreement
(Non-Qualified). (Incorporated by reference to Exhibit 10.7
of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1999).
21.1 Subsidiaries of the Registrant. (Incorporated by reference
to Exhibit 21.1 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1999).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
99.1 Amended and Restated Limited Liability Company Agreement
(Incorporated by reference to Exhibit 99.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1997).
99.2 Registration Rights Agreement (Incorporated by reference to
Exhibit 99.3 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997).
99.3 Interest Exchange Agreement dated as of February 15, 2001.
60
61
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year ended
February 29, 2000. A report on Form 8-K was filed on March 9, 2001, regarding
the Interest Exchange Agreement between the Registrant and California Housing
Finance, L.P.
61
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned; thereunto duly authorized, in the City of Newport
Beach, State of California, on May 29, 2001.
CAPITAL PACIFIC HOLDINGS, INC.
By /s/ HADI MAKARECHIAN
------------------------------------
Hadi Makarechian
Chairman of the Board,
Chief Executive Officer and
President
Date: May 29, 2001
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Hadi Makarechian and Steven O. Spelman, Jr., and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for each person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments to
this report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully and to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes, may
lawfully do or cause to be done by virtue of the powers herein granted.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HADI MAKARECHIAN Chairman of the Board, May 29, 2001
--------------------------------------------------- Chief Executive Officer and
Hadi Makarechian President
/s/ STEVEN O. SPELMAN, JR. Chief Financial Officer May 29, 2001
--------------------------------------------------- and Corporate Secretary
Steven O. Spelman, Jr.
/s/ KARLHEINZ M. KAISER Director May 29, 2001
---------------------------------------------------
Karlheinz M. Kaiser
/s/ ALLAN L. ACREE Director May 29, 2001
---------------------------------------------------
Allan L. Acree
/s/ WILLIAM J. HADAWAY Director May 29, 2001
---------------------------------------------------
William J. Hadaway
62
63
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
3.1 Second Restated Certificate of Incorporation of the
Registrant, as Amended. (Incorporated by reference to
Exhibit 3.3 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998)................
3.2 Second Amended and Restated Bylaws of the Registrant.
(Incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998)....................................
4.1 See the Articles of Incorporation and Bylaws of the
Registrant (Exhibits 3.1 - 3.2) and the Indenture and
related agreements (Exhibits 10.1 - 10.6)...................
10.1 Indenture agreement by and between Capital Pacific Holdings,
Inc., as Issuer; Durable Homes, Inc., J.M. Peters Nevada,
Inc., and Peters Ranchland, Inc., as Guarantors, and United
States Trust Company of New York, as Trustee, dated as of
May 13, 1994. (Incorporated by reference to Exhibit 10.1 of
the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 28, 1994 filed on May 27, 1994, SEC File
No. 001-09911)..............................................
10.2 Warrant Agreement by and between Capital Pacific Holdings,
Inc., and United States Trust Company of New York, Warrant
Agent, dated as of May 13, 1994. (Incorporated by reference
to Exhibit 10.2 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1994 filed on
May 27, 1994, SEC File No. 001-09911).......................
10.3 Warrant Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911)..............
10.4 Notes Registration Rights Agreement by and between Capital
Pacific Holdings, Inc., and Morgan Stanley & Co.
Incorporated dated as of May 13, 1994. (Incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994
filed on May 27, 1994, SEC File No. 001-09911)..............
10.5 Second Supplemental Indenture dated as of September 10, 1997
to the Indenture agreement dated as of May 13, 1998.
(Incorporated by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998)....................................
10.6 Third Supplemental Indenture, dated as of October 1, 1997 to
the Indenture agreement dated as of May 13, 1994, as
amended. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998)....................................
10.7 Capital Pacific Holdings, Inc. Stock Incentive Agreement
(Non-Qualified). (Incorporated by reference to Exhibit 10.7
of the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1999)........................
21.1 Subsidiaries of the Registrant. (Incorporated by reference
to Exhibit 21.1 of the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1999)...........
23.1 Consent of Ernst & Young LLP................................
23.2 Consent of Arthur Andersen LLP..............................
99.1 Amended and Restated Limited Liability Company Agreement
(Incorporated by reference to Exhibit 99.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1997)......................................
63
64
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
99.2 Registration Rights Agreement (Incorporated by reference to
Exhibit 99.3 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997).................
99.3 Interest Exchange Agreement dated as of February 15,
2001........................................................
64