<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, 1999
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 95-2956559
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS AND TITLE OF SHARES OUTSTANDING AS OF
CAPITAL STOCK OCTOBER 1, 1999
------------------ ------------------------
<S> <C>
Common Stock, $.10 Par Value 13,879,811
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CAPITAL PACIFIC HOLDINGS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -- August 31, 1999 and February
28, 1999.................................................... 3
Consolidated Statements of Income for the Three and Six
Months Ended August 31, 1999 and 1998....................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended August 31, 1999 and 1998.............................. 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 11
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
</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, FEBRUARY 28,
1999 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 2,643 $ 5,782
Restricted cash............................................. 1,204 1,029
Accounts and notes receivable............................... 14,648 12,533
Real estate projects........................................ 271,688 261,333
Property, plant and equipment............................... 8,732 9,014
Investment in and advances to unconsolidated joint
ventures.................................................. 20,033 23,301
Prepaid expenses and other assets........................... 11,264 11,771
-------- --------
Total assets...................................... $330,212 $324,763
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 25,835 $ 37,888
Notes payable............................................... 108,448 91,489
Senior unsecured notes payable.............................. 97,800 100,000
-------- --------
Total liabilities................................. 232,083 229,377
-------- --------
Minority Interest........................................... 31,265 30,032
-------- --------
Stockholders' equity:
Common stock, par value $ .10 per share, 30,000,000 shares
authorized; 13,909,211 and 14,027,911 shares issued and
outstanding, respectively.............................. 1,500 1,500
Additional paid-in capital................................ 211,888 211,888
Accumulated deficit....................................... (143,505) (145,425)
Treasury stock............................................ (3,019) (2,609)
-------- --------
Total stockholders' equity........................ 66,864 65,354
-------- --------
Total liabilities and stockholders' equity........ $330,212 $324,763
======== ========
</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,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales of homes and land............................ $67,383 $47,411 $129,357 $75,703
Cost of sales...................................... 54,890 39,684 105,560 62,450
------- ------- -------- -------
Gross margin.................................. 12,493 7,727 23,797 13,253
Income from unconsolidated joint ventures.......... 516 2,462 1,552 3,855
Selling, general and administrative expenses....... (7,387) (5,699) (13,607) (10,245)
Interest expense................................... (4,385) (3,594) (8,886) (5,681)
------- ------- -------- -------
Income from operations................... 1,237 896 2,856 1,182
Interest and other income, net..................... 278 168 291 490
Minority Interest.................................. (407) (286) (893) (452)
------- ------- -------- -------
Income before income taxes and
extraordinary items.................... 1,108 778 2,254 1,220
Provision for income taxes......................... 208 203 534 305
------- ------- -------- -------
Income before extraordinary items........ 900 575 1,720 915
Extraordinary gain for debt retired at less than
face value, net of minority interest and taxes... 200 -- 200 --
------- ------- -------- -------
Net income............................... $ 1,100 $ 575 $ 1,920 $ 915
======= ======= ======== =======
Net income per share-basic and diluted:
Income per share before extraordinary item....... $ 0.06 $ 0.04 $ 0.12 $ 0.06
Extraordinary gain for debt retired at less than
face value, net of minority interest and
taxes......................................... 0.02 -- 0.02 --
------- ------- -------- -------
Net income per share............................. $ 0.08 $ 0.04 $ 0.14 $ 0.06
======= ======= ======== =======
Weighted average number of common shares-basic... 13,938 14,306 13,968 14,306
======= ======= ======== =======
Weighted average number of common
shares-diluted................................ 14,007 14,454 14,001 14,450
======= ======= ======== =======
</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,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,920 $ 915
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on retirement of senior unsecured notes
payable......................................... (200) --
Depreciation and amortization..................... 1,136 847
Change in restricted cash......................... (175) (73)
Increase in real estate projects.................. (10,355) (39,916)
(Increase) decrease in receivables, prepaid
expenses and other assets....................... (2,039) 8,306
Decrease in accounts payable and accrued
liabilities..................................... (12,119) (687)
Minority interest................................. 1,203 452
-------- --------
Net cash provided by (used in) operating
activities................................... (20,629) (30,156)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.......... (474) (908)
Distributions to minority interest................ (83) (560)
Decrease (increase) in investment in and advances
to unconsolidated joint ventures................ 3,268 (5,031)
-------- --------
Net cash provided by (used in) investing
activities................................... 2,711 (6,499)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on notes payable, net....... 16,959 38,693
Retirement of senior unsecured notes payable...... (1,770) --
Repurchase of common stock........................ (410) --
-------- --------
Net cash provided by (used in) financing
activities................................... 14,779 38,693
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (3,139) 2,038
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 5,782 4,328
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2,643 $ 6,366
======== ========
</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 for the
fiscal year ended February 28, 1999, 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, 1999, are not necessarily indicative of the results that may be
expected for the year ending February 29, 2000. The consolidated financial
statements 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 $92 million, $30 million of which is required to be
presented as minority interest. 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, Arizona and
Colorado. The Company's principal business activity is to build and sell
single-family homes as well as develop and build commercial and mixed-use
projects. The Company's single-family homes are 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 through non-majority investments in
limited liability companies.
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 conducted either within CPH
LLC or through project specific entities. At August 31, 1999, CPH LLC had $278
million in assets and a net worth of $92 million. In addition, the Company has
interests in unconsolidated joint ventures which have total assets of $298
million and a combined net worth of $247 million at August 31, 1999. Assets
under management, including unconsolidated joint ventures, totaled $628 million
at August 31, 1999. The Company is the sole managing member of CPH LLC. The
Company maintains certain licenses and other assets as is necessary to fulfill
its obligations as managing member. The Company and its subsidiaries perform
their respective management functions for CPH LLC as well as other
project-specific entities of which the Company is the managing member pursuant
to management agreements, which include provisions for the reimbursement of
Company and subsidiary costs, a management fee and indemnification by CPH LLC
and the project-specific entities.
6
<PAGE> 7
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC and the project-specific entities. At the current time,
all material financing transactions and arrangements are incurred either by CPH
LLC or by the project specific entities.
4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company is a general partner or a direct or indirect managing member
and has a 50 percent or less ownership in 13 unconsolidated entities at August
31, 1999. The Company's net investment in and advances to unconsolidated
entities are as follows at August 31, 1999 and February 28, 1999 (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
---------- ------------
<S> <C> <C>
JMP Canyon Estates, L.P. ................................... $ 196 $ 207
JMP Harbor View, L.P. ...................................... 627 677
Grand Coto Estates, L.P. ................................... 755 3,753
M.P.E. Partners, L.P. ...................................... 1,815 2,370
RPV Associates, LLC......................................... 1,817 1,644
CPH Dana Point, LLC......................................... 585 793
CPH Monarch Beach, LLC...................................... 1,015 1,205
CPH Resorts I, LLC.......................................... 3,868 4,268
CPH Vista Palisades, LLC.................................... 423 637
Atlanta Huntington Beach, LLC............................... 5,919 5,195
CPH Dos Pueblos, LLC........................................ 2,952 2,086
CPH Airport Office Building, LLC............................ 29 55
CPH Redhill Office Building, LLC............................ 32 411
------- -------
$20,033 $23,301
======= =======
</TABLE>
The Company's ownership interests in the above entities vary. Generally,
the Company receives a percentage of earnings after 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 the terms
of each venture's agreement. The Company's carrying amount in each of the
entities equals the underlying equity and reimbursable advances, 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
these unconsolidated 50 or less percent-owned entities. The accounting policies
of the entities are substantially the same as those of the Company.
7
<PAGE> 8
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Following is summarized, combined financial information for the
unconsolidated entities at August 31, 1999 and February 28, 1999 and for the
three and six month periods ended August 31, 1999 and August 31, 1998 (in
thousands):
ASSETS
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
---------- ------------
<S> <C> <C>
Cash........................................................ $ 4,831 $ 4,373
Real estate projects........................................ 239,744 215,620
Commercial buildings........................................ 21,040 21,094
Other assets................................................ 32,884 57,998
-------- --------
$298,499 $299,085
======== ========
</TABLE>
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
---------- ------------
<S> <C> <C>
Accounts payable and other liabilities...................... $ 31,327 $ 37,113
Notes payable............................................... 19,940 12,100
-------- --------
51,267 49,213
-------- --------
Equity
The Company............................................... 15,917 10,680
Others.................................................... 231,315 239,192
-------- --------
247,232 249,872
-------- --------
$298,499 $299,085
======== ========
</TABLE>
INCOME STATEMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales of homes and land................. $ 8,968 $16,686 $19,871 $26,326
Interest and other income, net.......... 2,636 97 4,938 109
------- ------- ------- -------
11,604 16,783 24,809 26,435
Costs and expenses...................... 10,062 14,703 21,931 21,935
------- ------- ------- -------
Net income.............................. $ 1,542 $ 2,080 $ 2,878 $ 4,500
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. NOTES PAYABLE
Notes payable at August 31, 1999 and February 28, 1999, are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
---------- ------------
<S> <C> <C>
Notes payable to banks, including interest varying from
prime to thirteen percent, maturing between October 31,
1999 and July 31, 2001 secured by certain real estate
projects on a non-recourse basis.......................... $ 79,344 $72,602
Notes payable to banks, including interest at prime with the
terms of the commitment reducing commencing December 1,
1999, secured by certain real estate projects on a
recourse basis............................................ 28,074 17,386
Other....................................................... 1,030 1,501
-------- -------
$108,448 $91,489
======== =======
</TABLE>
6. 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
AUGUST 31, 1999 AUGUST 31, 1998
------------------------- -------------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share:
Income available to common
stockholders before
extraordinary item........ $ 900 13,938 $0.06 $575 14,306 $0.04
Effect of dilutive securities:
Warrants..................... -- 22 -- -- 148 --
Stock options................ -- 47 -- -- -- --
------ ------ ----- ---- ------ -----
Diluted net income per share
before extraordinary item.... $ 900 14,007 $0.06 $575 14,454 $0.04
====== ====== ===== ==== ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------------------
AUGUST 31, 1999 AUGUST 31, 1998
------------------------- -------------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share:
Income available to common
stockholders before
extraordinary item........ $1,720 13,968 $0.12 $915 14,306 $0.06
Effect of dilutive securities:
Warrants..................... -- -- -- -- 144 --
Stock options................ -- 33 -- -- -- --
------ ------ ----- ---- ------ -----
Diluted net income per share
before extraordinary item.... $1,720 14,001 $0.12 $915 14,450 $0.06
====== ====== ===== ==== ====== =====
</TABLE>
9
<PAGE> 10
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. COMMON STOCK REPURCHASE PROGRAM
The Company has announced a stock repurchase program whereby up to
1,000,000 shares of the Company's outstanding common stock may be repurchased by
CPH LLC. As of August 31, 1999, approximately 396,300 shares have been
repurchased under this program.
10
<PAGE> 11
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
and 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
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, 1999 and
1998. The pro forma results reflect the inclusion of the operating results of
the Company's unconsolidated joint ventures, including the portion attributable
to the Company's joint venture partners, and are used throughout this discussion
for comparative purposes wherever the phrase "pro forma" is utilized.
RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
AUGUST 31, 1999 AUGUST 31, 1998
--------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
Sales of homes and land.................. $ 67,383 $ 76,351 $47,411 $ 63,739
Cost of sales............................ 54,890 61,653 39,684 52,326
-------- -------- ------- --------
Gross margin........................... $ 12,493 $ 14,698 $ 7,727 $ 11,413
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------
AUGUST 31, 1999 AUGUST 31, 1998
--------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
Sales of homes and land.................. $129,357 $149,228 $75,703 $101,418
Cost of sales............................ 105,560 121,431 62,450 81,662
-------- -------- ------- --------
Gross margin........................... $ 23,797 $ 27,797 $13,253 $ 19,756
======== ======== ======= ========
</TABLE>
Since the financial restructuring in October 1997, the Company, together
with its financial partners, has invested over $305 million in ten 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.
11
<PAGE> 12
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 $ 13 Million
Residential Development March, 1998 Vista, CA 3 Million
Mixed Use April, 1998 Huntington Beach, CA 34 Million
Commercial Office Bldg April, 1998 Newport Beach, CA 4 Million
Commercial Office Bldg.(1) May, 1998 Costa Mesa, CA 9 Million
Commercial Office Bldg.(1) June, 1998 Laguna Hills, CA 8 Million
Residential Development June, 1998 Monarch Beach, CA 31 Million
Hotel, Residential and Golf July, 1998 Monarch Beach, CA 134 Million
Operations
Residential Development (2) July, 1998 Newport Beach, CA 52 Million
Golf Course Development December, 1998 Santa Barbara, CA 14 Million
Industrial Building (2) August, 1999 Ontario, CA 3 Million
------------
$305 Million
============
</TABLE>
- ---------------
(1) Included in a single joint venture.
(2) Consolidated joint ventures.
OPERATING DATA
The following table shows new home deliveries, lot 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,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
New homes delivered:
California........................ 8 37 29 54
Texas............................. 116 110 228 178
Nevada............................ 80 50 163 98
Arizona........................... 97 14 173 24
---------- -------- -------- --------
Subtotal....................... 301 211 593 354
Unconsolidated Joint Ventures
(California)................... 7 24 18 33
---------- -------- -------- --------
Total..................... 308 235 611 387
========== ======== ======== ========
Lot deliveries...................... 341 1 347 2
========== ======== ======== ========
Net new orders...................... 364 261 713 457
========== ======== ======== ========
Average sales price:
California........................ $1,027,000 $569,000 $821,000 $587,000
Texas............................. 187,000 157,000 187,000 159,000
Nevada............................ 211,000 192,000 209,000 178,000
Arizona........................... 146,000 150,000 145,000 157,000
Combined.......................... 221,000 269,000 230,000 260,000
</TABLE>
12
<PAGE> 13
The following table shows backlog in units and dollars at August 31, 1999
and 1998 for each of the Company's operations, including unconsolidated joint
ventures:
<TABLE>
<CAPTION>
ENDING BACKLOG
--------------------------------------
AUGUST 31,1999 AUGUST 31, 1998
----------------- -----------------
UNITS ($000S) UNITS ($000S)
----- -------- ----- --------
<S> <C> <C> <C> <C>
California..................................... 37 $ 37,600 97 $ 61,200
Texas.......................................... 263 52,200 259 42,400
Nevada......................................... 118 23,100 55 11,000
Arizona........................................ 145 19,400 35 6,200
Colorado....................................... 36 5,700 -- --
--- -------- --- --------
Total................................ 599 $138,000 446 $120,800
=== ======== === ========
</TABLE>
SECOND QUARTER OF FISCAL 2000 (ENDED AUGUST 31, 1999) COMPARED TO SECOND
QUARTER OF FISCAL 1999 (ENDED AUGUST 31, 1998)
The Company reported net income of $1.1 million, or $0.08 per share, in the
second quarter of fiscal 2000, as compared to net income of $575,000, or $0.04
per share, in the second quarter of fiscal 1999. The current quarter's income
included an extraordinary gain of $200,000, or $0.02 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 $76.4
million for the second quarter of fiscal 2000 compared to $63.7 million for the
second quarter of fiscal 1999. On a consolidated basis, sales of homes and land
increased from $47.4 million to $67.4 million for the respective quarters. These
increases are due to the significant increase in home closings, offset by a
decrease in Company's average sales price per unit to $221,000 in the second
quarter of fiscal 2000 from $269,000 in the second quarter of fiscal 1999. Total
home closings increased from 235 in the second quarter of fiscal 1999 to 308 in
the second quarter of fiscal 2000, including 24 and 7 homes, respectively,
closed in unconsolidated joint ventures. The decrease in closings, revenue and
backlog in California are due to the recent completion of several projects prior
to the opening of several new projects in future quarters.
The Company's actual gross margin on home and lot closings increased to
18.5% for the second quarter of fiscal 2000 as compared to 16.3% for the second
quarter of fiscal 1999. The Company's pro forma gross margin on home and lot
closings also increased to 19.3% during the second quarter of fiscal 2000 as
compared to 17.9% for the second quarter of fiscal 1999. These increases are due
to stronger demand experienced in the Company's markets in the current year.
Selling, general and administrative expense of $7.4 million for the second
quarter of fiscal 2000 increased $1.7 million or 29.6% as compared to the second
quarter of fiscal 1999. As a percentage of revenue, selling, general and
administrative expense decreased from 12.0 % to 11.0% between quarters,
primarily as a function of the 42.1% increase in sales of homes and land in
Company-owned projects in the current quarter.
Income from unconsolidated joint ventures decreased from $2.5 million in
the second quarter of fiscal 1999 to $516,000 in the second quarter of fiscal
2000, due to both fewer unit closings and somewhat lower margins experienced in
the Company's current joint ventures.
Interest and other income increased from $168,000 in the second quarter of
fiscal 1999 to $278,000 in the second quarter of fiscal 2000.
Minority interest of $407,000 for the second quarter of fiscal 2000 and
$286,000 for the second quarter of fiscal 1999 represents the share of CPH LLC's
income attributable to CHF.
Interest incurred was $5.5 million in the second quarter of fiscal 2000, as
compared to $4.2 million in the second quarter of fiscal 1999, while interest
expensed was $4.4 million during the second quarter of fiscal 2000, as compared
to $3.6 million in the second quarter of fiscal 1999.
13
<PAGE> 14
FIRST SIX MONTHS OF FISCAL 2000 (ENDED AUGUST 31, 1999) COMPARED TO FIRST
SIX MONTHS OF FISCAL 1999 (ENDED AUGUST 31, 1998)
The Company reported net income of $1.9 million, or $0.14 per share, for
the first six months of fiscal 2000, as compared to $915,000, or $0.06 per
share, for the six months ended August 31, 1998. The current period's income
included an extraordinary gain of $200,000, or $0.02 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 $149.2
million for the first six months of fiscal 2000 compared to $101.4 million for
the first six months of fiscal 1999. On a consolidated basis, sales of homes and
land increased from $75.7 million to $129.4 million for the respective quarters.
These increases are due to an increase in home closings from 387 units to 611
units between periods offset by a decrease in average sales price per unit from
$260,000 to $230,000.
The Company's actual gross margin increased from 17.5% for the first six
months of fiscal 1999 to 18.4% for the first six months of fiscal 2000. The
Company's pro forma gross margin was 18.6% for the first six months of fiscal
2000 as compared to 19.5% for the first six months of fiscal 1999. The reason
for the slight decrease in the proforma gross margins between periods is due to
slightly lower margins in the Company's joint ventures in the current year. The
Company closed a total of 18 homes in unconsolidated joint ventures in the six
months ended August 31, 1999, as compared to 33 homes during the first six
months of fiscal 1999.
Selling, general and administrative expense of $13.6 million for the first
six months of fiscal 2000 increased $3.4 million, or 32.8% as compared to the
first six months of fiscal 1999. As a percentage of revenue, selling, general
and administrative expense decreased from 13.5% for the first six months of
fiscal 1999 to 10.5% for the first six months of fiscal 2000, again, due to the
significant increase in sales of homes and land in company-owned projects in the
current year.
Income from unconsolidated joint ventures decreased from $3.9 million in
the first six months of fiscal 1999 to $1.6 million for the six months ended
August 31, 1999, due to the smaller number of unit closings and lower margins.
Interest and other income decreased from $490,000 in the first six months
of fiscal 1999 to $291,000 in the first six months of fiscal 2000, primarily as
a result of decreased activity in the Company's mortgage broker operations.
Minority interest of $893,000 and $452,000 for the six months ended August
31, 2000 and 1999, respectively, represents the share of CPH LLC's income
attributable to CHF.
Interest incurred for the first six months of fiscal 2000 was $10.2
million, as compared to $8.6 million for the first six months of fiscal 1999.
Interest expensed was $8.9 million for the first six months of fiscal 2000
compared to $5.7 million in the first six months of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
At the current time, all material financing transactions and arrangements
are incurred either by CPH LLC or by certain project specific entities. As of
August 31, 1999, the Company has in place several credit facilities totaling
$220 million (the "Facilities") with various bank lenders (the "Banks"), of
which $107 million was outstanding. The Facilities are secured by liens on
various completed or under construction homes and lots held by CPH LLC and CPH
Newport Coast, LLC, a consolidated joint venture. Pursuant to the Facilities,
CPH LLC is subject to certain covenants, which require, among other things, the
maintenance of a consolidated liabilities to net worth ratio, minimum liquidity,
minimum net worth and loss limitations, all as defined in the documents that
evidence the Facilities. At August 31, 1999, CPH LLC was in compliance with
these covenants. The Facilities also define certain events that constitute
events of default. As of August 31, 1999, no such event had occurred. Commitment
fees are payable annually on some of the Facilities.
Homebuilding activity and other development is being financed out of CPH
LLC cash, bank financing, and the existing joint ventures, including joint
ventures with institutional investors, including CHF, the
14
<PAGE> 15
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. As of August 31, 1999, Senior Notes with a face value of
$2,200,000 have been repurchased by the Company. The Senior Notes mature in May,
2002.
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.
YEAR 2000 COMPLIANCE
The Company began assessing its Year 2000 ("Y2K") compliance issues during
fiscal 1998 and at that time determined that its primary internal computer
hardware and computer software were not Y2K compliant. Subsequently, the Company
determined that it would be more cost efficient to install a new Y2K compliant
software package than to modify the existing software package. In late 1998, the
Company contracted to purchase a new software package and upgraded its existing
primary computer hardware system to support the new computer software package,
as well as more fully integrate the Company's operations. The Company's current
goal is full implementation of the new software package by October 31, 1999.
As part of a program of continuous technology updates, for the past several
years, the Company has upgraded personal computers in its locations and this
process will continue. As this occurs during the current year, personal
computers at each company location are being tested for Y2K compliance. These
personal computer upgrades are considered to be ongoing and are not considered
to be specifically Y2K related. The Company has incurred and expects to incur
some additional costs to replace or repair such equipment, but has not presently
determined the ultimate amount of these costs, which are not expected to be
material.
The Company also is investigating the Y2K compliance status of its vendors,
subcontractors and suppliers through the Company's own vendor compliance
program. For example, the Company determined that its voicemail and security
systems at its Newport Beach headquarters are not Y2K compliant, and upgrades to
both systems were required. The Company's goal is to complete this investigation
and any corrective efforts by October 31, 1999, as well. Since the Company does
not rely on any individual vendor, subcontractor or supplier for a significant
portion of its operations, the potential impact of Y2K noncompliance risks
arising from such entities is not expected to have any material effect on the
Company. The Company does not believe that it is reasonably likely that Y2K
non-compliance will result in disruptions to its business that will have a
material adverse effect on the Company.
To date, the Company has incurred approximately $1,000,000 in connection
with Y2K readiness, including hardware, software, consulting fees, and other
expenses. The Company expects to incur additional expenditures of less than
$100,000 during the remainder of fiscal 2000 in the course of completing its Y2K
compliance program. These costs consist primarily of costs of hardware and
software which would otherwise be incurred by the Company in the normal course
of its business. The additional costs incurred by the Company may vary from
these estimates but any such variance is not expected to be material.
15
<PAGE> 16
The Company's estimates of costs and completion dates for its Y2K readiness
program represent management's best estimates. These estimates are based upon
many assumptions, including the availability of external resources to assist
with systems remediation and replacement efforts, and key third party suppliers,
vendors and customers being Y2K compliant. If any of the assumptions ultimately
proves to have been incorrect, the cost estimates and completion dates set forth
above could be substantially and adversely affected.
While the Company believes it is taking all appropriate steps to achieve
internal Y2K compliance, any potential future business interruptions, costs,
damages or losses related thereto, also are dependent upon the Y2K compliance of
third parties. In the event that the Company or any of the Company's vendors,
subcontractors or suppliers experience disruptions due to the Y2K issue, the
Company's operations could be adversely affected. The Y2K issue is universal and
complex, as virtually every computer operation will be affected in some way.
Consequently, no assurance can be given that complete Y2K compliance can be
achieved without significant additional costs. Also, the Company could be
materially impacted by widespread economic or financial market disruptions or by
Y2K computer system failures at financial institutions or government agencies on
which the Company is dependent for financing, utilities, zoning, building
permits and related matters. There can be no assurance that Y2K will not
adversely affect the Company and its operations.
A formal Y2K internal contingency plan has not been prepared because the
Company does not anticipate a material disruption to its business and because
the Company is able to rely on a variety of systems, vendors, subcontractors and
suppliers in the event of Y2K disruptions that are likely to occur.
MARKET RISK EXPENSE
The "Market Risk Exposure" paragraphs are presented to provide an update
about material changes to the "Quantitative and Qualitative Disclosures about
Market Risk" paragraphs included in the Company's 1999 Annual Report on Form
10-K filed with the Securities and Exchange Commission and should be read in
conjunction with those paragraphs.
The Company is exposed to market risks related to fluctuations in interest
rates on its debt. The Company does not use interest rate swaps, forward or
option contracts on foreign currencies or commodities, or other types of
derivative financial instruments.
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
those expenditures. In addition, the Company has previously issued $100 million
in fixed-rate debt to provide longer-term financing.
For fixed rate debt, changes in interest rates generally affect the fair
market value, 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, 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 upon the amount of variable rate debt outstanding at
the end of the second quarter, and holding the variable rate debt balance
constant, each one percentage point increase in interest rates occurring on the
first day of an annual period would result in an increase in interest incurred
for the coming year of approximately $1.0 million.
The Company does not believe that future market interest rate risks related
to its debt obligations will have a material impact on the Company's financial
position, results of operations or liquidity.
16
<PAGE> 17
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 July 15, 1999,
the following directors were elected: Hadi Makarechian, Karlheinz M. Kaiser,
Allan L. Acree and William A. Funk. 13,869,973 shares were voted for the
election of the named nominees for directors and 2,590 shares were voted
withholding authority for such nominees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <S> <C>
27 Financial Data Schedule................................ Filed with this document
</TABLE>
(b) Reports on Form 8-K
None Filed
17
<PAGE> 18
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, 1999 By: /s/ HADI MAKARECHIAN
------------------------------------
Hadi Makarechian,
Chairman of the Board and Chief
Executive
Officer
Date: October 15, 1999 By: /s/ STEVEN O. SPELMAN, JR.
------------------------------------
Steven O. Spelman, Jr.,
Senior Vice President, Chief
Financial Officer
and Corporate Secretary
(Principal Financial Officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 2,643
<SECURITIES> 0
<RECEIVABLES> 14,648
<ALLOWANCES> 0
<INVENTORY> 271,688
<CURRENT-ASSETS> 0
<PP&E> 8,732
<DEPRECIATION> 0
<TOTAL-ASSETS> 330,212
<CURRENT-LIABILITIES> 0
<BONDS> 97,800
0
0
<COMMON> 1,500
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 330,212
<SALES> 129,357
<TOTAL-REVENUES> 129,357
<CGS> 105,560
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,886
<INCOME-PRETAX> 2,254
<INCOME-TAX> 534
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 200
<CHANGES> 0
<NET-INCOME> 1,920
<EPS-BASIC> .14
<EPS-DILUTED> .14
</TABLE>
