<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
incorporation or organization) Identification Number)
4100 MacArthur Blvd., Suite 200, Newport Beach, CA 92660
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 622-8400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class and Title of Shares Outstanding as of
Capital Stock October 1, 1998
---------------------------- -------------------------
Common Stock, $.10 Par Value 14,305,511
<PAGE> 2
CAPITAL PACIFIC HOLDINGS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets -
August 31, 1998 and February 28, 1998 3
Consolidated Statements of Income for the
Three and Six Months Ended August 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Six Months Ended August 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-12
Part II - Other Information:
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
August 31, 1998 February 28, 1998
--------------- -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 6,366 $ 4,328
Restricted cash 1,434 1,361
Accounts and notes receivable 15,742 26,191
Real estate projects 232,263 192,347
Property, plant and equipment 7,918 7,857
Investment in and advances to unconsolidated
joint ventures 11,793 6,762
Prepaid expenses and other assets 14,952 12,809
--------- ---------
Total assets $ 290,468 $ 251,655
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 21,143 $ 21,830
Notes payable 75,407 36,714
Senior unsecured notes payable 100,000 100,000
--------- ---------
Total liabilities 196,550 158,544
--------- ---------
Minority Interest 29,953 30,061
--------- ---------
Stockholders' equity:
Common stock, par value $ .10 per share, 30,000,000
shares authorized; 14,305,511 shares issued and
outstanding 1,500 1,500
Additional paid-in capital 211,888 211,888
Accumulated deficit (147,796) (148,711)
Treasury stock (1,627) (1,627)
--------- ---------
Total stockholders' equity 63,965 63,050
--------- ---------
Total liabilities and stockholders' equity $ 290,468 $ 251,655
========= =========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
August 31, August 31,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales of homes and land $ 47,411 $ 46,114 $ 75,703 $ 81,070
Cost of sales 43,278 37,924 68,131 66,145
-------- -------- -------- --------
Gross margin 4,133 8,190 7,572 14,925
Selling, general and administrative
expenses (5,699) (6,307) (10,245) (11,942)
Income (loss) from unconsolidated
joint ventures 2,462 (5) 3,855 (15)
Interest and other income, net 168 194 490 347
-------- -------- -------- --------
Income from operations 1,064 2,072 1,672 3,315
Minority Interest (286) -- (452) --
-------- -------- -------- --------
Income before income taxes 778 2,072 1,220 3,315
Provision for income taxes 203 648 305 828
-------- -------- -------- --------
Net income $ 575 $ 1,424 $ 915 $ 2,487
======== ======== ======== ========
Net income per common share -
basic and diluted $ 0.04 $ 0.10 $ 0.06 $ 0.17
======== ======== ======== ========
Weighted average number of common
shares 14,306 14,995 14,306 14, 995
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
August 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 915 $ 2,487
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Change in restricted cash (73) 58
Depreciation and amortization 847 885
(Increase) decrease in real estate projects (39,916) 10,193
Decrease in receivables, prepaid expenses
and other assets 8,306 2,456
Decrease in accounts payable and accrued
liabilities (687) (9,716)
Minority interest 452 --
-------- --------
Net cash provided by (used in) operating
activities (30,156) 6,363
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (908) (1,534)
Distributions to minority interest (560) --
Decrease (increase) in investment in and advances
to unconsolidated joint ventures (5,031) --
-------- --------
Net cash provided by (used in) investing
activities (6,499) (1,534)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on notes payable, net 38,693 (5,683)
-------- --------
Net cash provided by (used in) financing
activities 38,693 (5,683)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,038 (854)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,328 11,434
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,366 $ 10,580
======== ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The unaudited financial statements presented herein have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements, and notes thereto, included in the Form 10-K/A for the
fiscal year ended February 28, 1998, of Capital Pacific Holdings, Inc. (the
"Company"). In the opinion of management, the financial statements presented
herein include all adjustments (which are solely of a normal recurring nature)
necessary to present fairly the Company's financial position and results of
operations. The results of operations for the three and six month periods ended
August 31, 1998, are not necessarily indicative of the results that may be
expected for the year ending February 28, 1999. The consolidated financial
statements for fiscal 1999 include the accounts of the Company, wholly owned
subsidiaries and certain majority owned joint ventures, as well as the accounts
of Capital Pacific Holdings, LLC ("CPH LLC") of which the Company owns a
majority interest. The accompanying consolidated balance sheets (See Note 3),
include the capital accounts of CPH LLC totaling $91 million, $30 million of
which is required to be presented as minority interest. The consolidated
financial statements for fiscal 1998 include only the accounts of the Company,
wholly owned subsidiaries and certain majority owned joint ventures. All other
investments are accounted for on the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.
2. Reclassifications
Certain items in prior period financial statements have been
reclassified in order to conform with current year presentation.
3. Company Organization and Operations
The Company is a regional builder and developer with operations
throughout selected metropolitan areas of Southern California, Nevada, Texas and
Arizona. In addition, the Company is currently pursuing the acquisition and
development of one or more projects in the state of Colorado. The Company's
principal business activity is to build and sell single-family homes targeted to
entry-level, move-up and luxury buyers. The Company has recently expanded its
operations to include the acquisition and development of commercial and
mixed-use projects, as well as ownership of existing commercial properties. The
Company is in the preliminary stages of considering an offer to purchase the
Company's interest in these new operations.
Effective as of October 1, 1997, the Company consummated an equity and
restructuring transaction whereby the Company and certain of its subsidiaries
transferred to CPH LLC substantially all of their respective assets and CPH LLC
assumed all the liabilities of the Company and its subsidiaries. Immediately
thereafter, a newly formed unaffiliated investment company, California Housing
Finance, L.P. ("CHF"), contributed to the capital of CPH LLC the sum of $30
million in cash and acquired a 32.07% interest in CPH LLC. The Company, together
with its subsidiaries, has a 67.93% interest in CPH LLC. Subject to adjustment
and exceptions under certain circumstances, CHF has the same interest in all
future business of the Company, all of which will be
6
<PAGE> 7
conducted either within CPH LLC or through newly formed project specific
entities. At August 31, 1998, CPH LLC had $288 million in assets and a net worth
of $91 million. The Company is the sole managing member of CPH LLC and expects
that it will be the sole managing member of any newly formed project specific
entity. The Company maintains certain licenses and other assets as is necessary
to fulfill its obligations as managing member. The Company and its subsidiaries
perform their respective management functions for CPH LLC pursuant to management
agreements, which include provisions for the reimbursement of Company and
subsidiary costs, a management fee and indemnification by CPH LLC.
References to the Company are, unless the context indicates otherwise,
also references to CPH LLC. At the current time, all material financing
transactions and arrangements are incurred either by CPH LLC or by certain newly
formed project specific entities.
4. Notes Payable
Notes payable at August 31, 1998 and February 28, 1998, are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
August 31, 1998 February 28, 1998
--------------- -----------------
<S> <C> <C>
Notes payable to banks, including interest varying
from prime to prime plus two percent, maturing between
September 30, 1998 and July 31, 1999 secured by certain
real estate projects on a non-recourse basis $60,571 $24,709
Notes payable to banks, including interest at prime with
the terms of the commitment reducing commencing
December 1, 1998, secured by certain real estate
projects on a recourse basis 11,884 11,736
Other 2,952 269
------- -------
$75,407 $36,714
======= =======
</TABLE>
5. Net Income Per Common Share
Effective February 28, 1998 the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (FAS 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------------- ----------------------------------------------
August 31, 1997 August 31, 1998 August 31, 1997 August 31, 1998
---------------------- --------------------- ---------------------- ---------------------
Income Shares EPS Income Shares EPS Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ --- ------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Net Income Per Share:
Income available to common
stockholders before
discontinued operations.. $1,424 14,995 $0.10 $575 14,306 $0.04 $2,487 14,995 $0.17 $915 14,306 $0.06
Effect of Dilutive Securities:
Warrants................... -- -- -- -- 148 -- -- -- -- -- 144 --
------ ------ ----- ---- ------ ----- ------ ------ ----- ---- ------ -----
Diluted Net Income (Loss) Per
Share: $1,424 14,995 $0.10 $575 14,454 $0.04 $2,487 14,995 $0.17 $915 14,450 $0.06
====== ====== ===== ==== ====== ===== ====== ====== ===== ==== ====== =====
</TABLE>
6. Common Stock Repurchase Program
The Company has announced a stock repurchase program whereby up to
500,000 shares of the Company's outstanding common stock may be repurchased by
CPH LLC. As of August 31, 1998, approximately 182,900 shares have been
repurchased under this program.
7
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
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, the
demand for housing and office space and commercial lease rates; supply levels of
land, labor and materials; difficulties in obtaining permits or approvals from
governmental authorities; difficulties in marketing homes; regulatory changes,
weather and other environmental uncertainties; competitive influences; and the
outcome of pending and future legal claims and proceedings.
RESULTS OF OPERATIONS -- GENERAL
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 2 are, unless the context
indicates otherwise, also references to CPH LLC. At the current time, all
material financing transactions and arrangements are incurred either by CPH LLC
or by certain newly formed project specific entities.
The following table illustrates the actual and pro forma results of the
Company's operations for the three and six months ended August 31, 1997 and
1998. 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. This pro forma information is presented because the results
of the joint ventures are becoming more significant to the Company's overall
results of operations, and the pro forma results are more reflective of the
volume of business being managed by the Company.
RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------- ------------------------------------------
AUGUST 31, 1997 AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1998
------------------ ------------------- ------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of homes and land........ $46,114 $46,114 $47,411 $63,739 $81,070 $81,368 $75,703 $101,418
Cost of sales.................. 37,924 37,924 43,278 56,574 66,145 66,420 68,131 88,372
------- ------- ------- ------- ------- ------- ------- --------
Gross margin............... $ 8,190 $ 8,190 $ 4,133 $ 7,165 $14,925 $14,948 $ 7,572 $ 13,046
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
8
<PAGE> 9
Since the financial restructuring in October 1997, the Company, together
with its financial partners, has invested over $220 million in nine new joint
ventures. The Company typically is required to fund a small percentage of the
capital requirements of each joint venture, which amount is included in
investments in and advances to unconsolidated joint ventures in the Company's
consolidated balance sheets.
The following table summarizes the joint ventures established since the
financial restructuring:
<TABLE>
<CAPTION>
Description Date Closed Location Total Invested
----------- ----------- -------- --------------
<S> <C> <C> <C>
Residential Development December, 1997 Dana Point, CA $ 10 Million
Residential Development March, 1998 Vista, CA $ 2 Million
Mixed Use April, 1998 Huntington Beach, CA $ 26 Million
Commercial Office Bldg. April, 1998 Newport Beach, CA $ 4 Million
Commercial Office Bldg. May, 1998 Costa Mesa, CA $ 9 Million
Commercial Office Bldg. June, 1998 Laguna Hills, CA $ 8 Million
Residential Development June, 1998 Monarch Beach, CA $ 25 Million
Hotel, Residential and
Golf Operations July, 1998 Monarch Beach, CA $120 Million
Residential Development July, 1998 Newport Beach, CA $ 20 Million
</TABLE>
As is further discussed in Item 5, the Company is in the preliminary
stages of considering an offer to purchase its interest in the majority of
these ventures on terms to be determined.
OPERATING DATA
The following table shows new home deliveries, net new orders and
average sales prices for each of the Company's operations, including
unconsolidated joint ventures:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
New homes delivered:
California 55 37 102 54
Texas 81 110 130 178
Nevada 40 50 79 98
Arizona 23 14 41 24
-------- -------- -------- --------
Subtotal 199 211 352 354
Unconsolidated Joint
Ventures (California) -- 24 1 33
-------- -------- -------- --------
Total 199 235 353 387
======== ======== ======== ========
Net new orders 228 261 466 457
======== ======== ======== ========
Average sales price:
California $405,000 $569,000 $403,000 $587,000
Texas 163,000 157,000 161,000 159,000
Nevada 170,000 192,000 159,000 178,000
Arizona 130,000 150,000 117,000 157,000
Combined 226,000 269,000 225,000 260,000
</TABLE>
9
<PAGE> 10
The following table shows backlog in units and dollars at August 31,
1997 and 1998 for each of the Company's operations, including unconsolidated
joint ventures:
<TABLE>
<CAPTION>
ENDING BACKLOG
-------------------------------------------------
AUGUST 31,1997 AUGUST 31, 1998
-------------------- ---------------------
UNITS ($000s) UNITS ($000s)
----- -------- ----- --------
<S> <C> <C> <C> <C>
California 166 $ 83,700 97 $ 61,200
Texas 211 32,000 259 42,400
Nevada 83 14,300 55 11,000
Arizona 19 3,700 35 6,200
--- -------- --- --------
Total 479 $133,700 446 $120,800
=== ======== === ========
</TABLE>
SECOND QUARTER OF FISCAL 1999 COMPARED TO SECOND QUARTER OF FISCAL 1998:
The Company reported net income of $575,000, or $0.04 per share, in the
second quarter of fiscal 1999, as compared to net income of $1.4 million, or
$0.10 per share, in the second quarter of fiscal 1998.
Sales of homes and land including unconsolidated joint ventures were
$63.7 million for the second quarter of fiscal 1999 compared to $46.1 million
for the second quarter of fiscal 1998. This increase is due in part to the fact
that the Company's average sales price per unit has increased to $269,000 in the
second quarter of fiscal 1999 from $226,000 in the second quarter of fiscal
1998. In addition, total home closings increased from 199 in the second quarter
of fiscal 1998 to 235 in the second quarter of fiscal 1999, including 0 and 24
homes, respectively, closed in unconsolidated joint ventures.
The Company continued to experience strong margins of 18.6% in its
unconsolidated joint ventures during the second quarter of fiscal 1999. The
Company's pro forma gross margin of home and lot closings was 11.2 % during the
second quarter of fiscal 1999 as compared to 17.8% for the second quarter of
fiscal 1998. The Company's actual gross margin on home and lot closings
decreased to 8.7 % for the second quarter of fiscal 1999 as compared to 17.8%
for the second quarter of fiscal 1998. The decrease in actual gross margin was
primarily due to a shift in the mix of home closings between quarters from
certain higher-margin company-owned projects in the second quarter of fiscal
1998 and lower-margin projects in the second quarter of fiscal 1999. The Company
continued to close out certain lower-margin projects, particularly in
California, while activity in unconsolidated joint ventures is becoming a more
significant portion of the Company's business. Margins in Texas and Arizona, and
to some extent in Nevada, were negatively impacted by a recent shift in mix
between projects within the respective markets.
Selling, general and administrative expense of $5.7 million for the
second quarter of fiscal 1999 decreased $608,000 or 9.6 % as compared to the
second quarter of fiscal 1998. As a percentage of revenue, selling, general and
administrative expense decreased from 13.7 % to 12.0 % between quarters.
Income from unconsolidated joint ventures increased from a loss of
$5,000 in the second quarter of fiscal 1998 to income of $2.5 million, due to
both the higher unit closings and higher margins experienced in the Company's
current joint ventures.
Interest and other income decreased slightly from $194,000 in the second
quarter of fiscal 1998 to $168,000 in the second quarter of fiscal 1999.
Minority interest of $286,000 for fiscal 1999 represents the share of
CPH LLC's income attributable to CHF.
Interest incurred was $4.2 million in the second quarter of fiscal 1999,
as compared to $5.4 million in the second quarter of fiscal 1998, while interest
included in cost of sales was $3.6 million during the second quarter of fiscal
1999, as compared to $3.5 million in the second quarter of fiscal 1998.
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FIRST SIX MONTHS OF FISCAL 1999 COMPARED TO FIRST SIX MONTHS OF FISCAL 1998
The Company reported net income of $915,000, or $0.06 per share, for the
first six months of fiscal 1999, as compared to net income of $2.5 million, or
$0.17 per share, for the six months ended August 31, 1997.
Sales of homes and land including unconsolidated joint ventures were
$101.4 million for the first six months of fiscal 1999 compared to $81.4 million
for the first six months of fiscal 1998. This increase is due to both an
increase in home closings from 353 units to 387 units between periods and an
increase in average sales price per unit from $225,000 to $260,000.
The Company's actual gross margin decreased from 18.4% for the first six
months of fiscal 1998 to 10.0% for the first six months of fiscal 1999. The
Company's pro forma gross margin was 12.9% for the first six months of fiscal
1999 as compared to 18.4% for the first six months of fiscal 1998. The reason
for the decrease in the gross margins between periods is due to increased volume
in certain lower-margin, company-owned projects, which is partially offset at
the pro forma level by the higher-margin joint venture projects. The Company
closed a total of 33 homes in unconsolidated joint ventures in the six months
ended August 31, 1998, as compared to one home during the first six months of
fiscal 1998.
Selling, general and administrative expense of $10.2 million for the
first six months of fiscal 1999 decreased $1.7 million, or 14.2% as compared to
the first six months of fiscal 1998. As a percentage of revenue, selling,
general and administrative expense decreased from 14.7% for the first six months
of fiscal 1998 to 13.5% for the first six months of fiscal 1999.
Income from unconsolidated joint ventures went from a loss of $15,000 in
the first six months of fiscal 1998 to income of $3.9 million for the six months
ended August 31, 1998, due to the higher unit closings and higher margins.
Interest and other income increased from $347,000 in the first six
months of fiscal 1998 to $490,000 in the first six months of fiscal 1999,
primarily as a result of increased activity in the Company's mortgage broker
operations.
Minority interest of $452,000 represents the share of CPH LLC's income
attributable to CHF.
Interest incurred for the first six months of fiscal 1999 was $8.6
million, as compared to $10.0 million for the first six months of fiscal 1998.
Interest included in cost of sales was $5.7 million for the first six months of
fiscal 1999 compared to $6.2 million in the first six months of fiscal 1998.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
At the current time, all material financing transactions and
arrangements are incurred either by CPH LLC or by certain newly formed project
specific entities. As of August 31, 1998, CPH LLC has in place several credit
facilities totaling $170 million (the "Facilities") with various bank lenders
(the "Banks"), of which $44 million was outstanding. In addition, CPH Newport
Coast, LLC (Newport Coast), a consolidated joint venture, has two credit
facilities in place totaling $80 million, of which $29 million is outstanding.
The Facilities are secured by liens on various completed or under construction
homes and lots held by CPH LLC and such project entities. Pursuant to the
Facilities, CPH LLC is subject to certain covenants, which require, among other
things, the maintenance of a consolidated liabilities to net worth ratio,
minimum liquidity, minimum net worth and loss limitations, all as defined in the
documents that evidence the Facilities. At August 31, 1998, CPH LLC was in
compliance with these covenants. The Facilities also define certain events that
constitute events of default. As of August 31, 1998, no such event had occurred.
Commitment fees are payable annually on some of the Facilities.
Other notes payable of $2.9 million at August 31, 1998, represent
financing vehicles for certain of the Company's insurance policies.
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. Commercial
acquisitions and development activities are typically financed through third
party financing and bank debt. 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 and 790,000 warrants to purchase common stock. The proceeds from
the offering were used to repay certain debt of the Company, acquire certain
properties and for general working capital and construction purposes. The
obligations associated with the Senior Notes have been transferred from the
Company to CPH LLC.
The Indenture contains restrictions 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
will be 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.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company held on June 26,
1998, the following directors were elected: Hadi Makarechian, Dale Dowers,
Karlheinz M. Kaiser, Allan L. Acree and William A. Funk. 14,139,654 shares were
voted for the election of the named nominees for directors and 19,613 shares
were voted withholding authority for such nominees. In addition, the Company's
Certificate of Incorporation was amended to authorize the issuance of up to
Thirty Million (30,000,000) shares of non-voting common stock, par value $0.10
per share, with 13,742,564 shares voting in favor of the amendment, 402,852
shares voting against the amendment and 13,851 shares voting to withhold
authority for such amendment.
Item 5 - Other Information
The Corporation has recently received from Farallon Capital Management,
LLC ("Farallon"), an affiliate of CHF, an indication of its interest in
purchasing, for consideration to be determined, all of the Company's interest in
the recently acquired commercial real estate, mixed-use and land projects listed
below:
<TABLE>
<CAPTION>
Company
Description Date Closed Location Investment
----------- ----------- -------- ----------
<S> <C> <C> <C>
Residential Development December, 1997 Dana Point, CA $ 10,000
Residential Development March, 1998 Vista, CA $ 11,000
Mixed Use April, 1998 Huntington Beach, CA $234,000
Commercial Office Bldg. April, 1998 Newport Beach, CA $ 73,000
Commercial Office Bldg. May, 1998 Costa Mesa, CA $ 38,000
Commercial Office Bldg. June, 1998 Laguna Hills, CA $ 38,000
Residential Development June, 1998 Monarch Beach, CA $170,000
Hotel, Residential and
Golf Operations July, 1998 Monarch Beach, CA $844,000
</TABLE>
The offer is contingent on agreement between the Company and Farallon
on the terms of any such transaction and upon coming to a mutually acceptable
arrangement with Hadi Makarechian, the Chairman of the Company, on the terms on
which he, or an entity which he controls (other than the Company), will manage
the projects. The Board of Directors of the Company (with Mr. Makarechian
abstaining) is in the preliminary stages of considering such a transaction and
the terms which the Company might propose for such a transaction. The joint
ventures which are the possible subject of such a transaction have had no
material historical effect on the operations of the Company and the Company's
total capital investment in the joint ventures is approximately $1.4 million.
Item 6 - Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibit
Number Description Method of Filing
------- ----------- ----------------
<S> <C> <C>
3.1 Third Restated Certificate of Incorporation of
the Registrant (Incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
May 31, 1998)
3.2 Second Amended and Restated By laws 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)
27 Financial Data Schedule Filed with this document
99 Letter dated September 28, 1998 from Farallon
Capital Management LLC Filed with this document
</TABLE>
(b) Reports on Form 8-K
None Filed
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements 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.
CAPITAL PACIFIC HOLDINGS, INC.
Date: October 15, 1998 By: /s/ HADI MAKARECHIAN
-------------------------------------
Hadi Makarechian, Chairman of the
Board and Chief Executive Officer
Date: October 15, 1998 By: /s/ STEVEN O. SPELMAN, JR.
-------------------------------------
Steven O. Spelman, Jr., Vice
President and Chief Financial Officer
(Principal Financial Officer)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
3.1 Third Restated Certificate of Incorporation of
the Registrant (Incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
May 31, 1998)
3.2 Second Amended and Restated By laws 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)
27 Financial Data Schedule Filed with this document
99 Letter dated September 28, 1998 from Farallon
Capital Management LLC Filed with this document
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 6,366
<SECURITIES> 0
<RECEIVABLES> 15,742
<ALLOWANCES> 0
<INVENTORY> 232,263
<CURRENT-ASSETS> 0
<PP&E> 7,918
<DEPRECIATION> 0
<TOTAL-ASSETS> 290,468
<CURRENT-LIABILITIES> 21,143
<BONDS> 100,000
0
0
<COMMON> 1,500
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 290,468
<SALES> 75,703
<TOTAL-REVENUES> 75,703
<CGS> 68,131
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,220
<INCOME-TAX> 305
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 915
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
<PAGE> 1
EXHIBIT 99
FARALLON CAPITAL MANAGEMENT, L.L.C.
One Maritime Plaza, Suite 1325
San Francisco, California 94111
September 28, 1998
The Board of Directors
c/o Mr. Hadi Makarechian
Capital Pacific Holdings, Inc.
4100 MacArthur Boulevard, Suite 200
Newport Beach, California 92660
Gentlemen:
As you may know, we have had discussions with Mr. Hadi Makarechian, the
chairman of Capital Pacific, about our purchase, through one or more affiliated
entities, of all or a substantial part of Capital Pacific's interests (the
"Interests") in the various recently acquired commercial real estate, mixed use
and land development joint ventures including those listed below (the "Joint
Ventures"). As you know, certain of our affiliates have contributed 99% of
these Joint Ventures' capital, entitling them to a preferred return and a
contingent profit participation in the Joint Ventures after the preferred
return. The Interests of Capital Pacific, therefore, in general terms, consist
of 1% of the existing capital in the Joint Ventures and contingent profit
participations based on the future performance of these Joint Ventures. Mr.
Makarechian suggested we directly notify Capital Pacific's board of directors
of any interest we may have in pursuing this acquisition. This letter expresses
our preliminary interest in acquiring the Interests.
<TABLE>
<CAPTION>
Date of Acquisition
Joint Venture Project by Capital Pacific Joint Venture Equity
- --------------------- ------------------ --------------------
<S> <C> <C>
Dana Point 12/15/97 CPHDP, LLC
Vista Palisades 3/12/98 CPHVP, LLC
Huntington Beach 4/6/98 CPHAHB, LLC
Airport Office & 4667 MacArthur Buildings 4/22/98 CPHAOB, LLC
Redhill & Summit Office Buildings 5/12/98 and 6/30/98 CPHROB, LLC
Monarch Beach (Ritz Pointe) 6/19/98 CPHMB, LLC
Monarch Beach (Resorts 1) 7/15/98 CPHR-1, LLC
</TABLE>
<PAGE> 2
If you have an interest in discussing a potential acquisition by us,
please let us know. Whether it is worthwhile to consider such a transaction
will depend on the price at which CPH would be interested in entering into the
transaction and the other terms and conditions CPH might require. We suggest
that CPH obtain an independent evaluation of the price for such Interests. To
the extent we can reach an agreement on price, our interest in pursuing such a
transaction would, of course, be conditioned on our also agreeing on the
structure of the transaction and other terms and conditions of the transaction
and entering into acceptable definitive documentation, as well as overall
market conditions at the time. Our interest would also be conditioned upon
reaching an acceptable arrangement with Mr. Hadi Makarechian, or an entity
controlled by him, to manage the Joint Ventures.
Please feel free to contact the undersigned with any questions regarding
the contents of this letter.
Yours sincerely,
FARALLON CAPITAL MANAGEMENT, L.L.C.
By: /s/ Stephen L. Millham
-----------------------------------
Stephen L. Millham
Managing Member
