<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 NOVEMBER 30, 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)
<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 JANUARY 5, 1999
------------------ ------------------------
<S> <C>
Common Stock, $.10 Par Value 14,305,511
</TABLE>
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<PAGE> 2
CAPITAL PACIFIC HOLDINGS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
PAGE
----
<S> <C> <C>
Item 1 -- Financial Statements
Consolidated Balance Sheets -- November 30, 1998 and
February 28, 1998........................................... 3
Consolidated Statements of Operations for the Three and Nine
Months Ended November 30, 1998 and 1997................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended November 30, 1998 and 1997.......................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2 -- Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 8
PART II -- OTHER INFORMATION
Item 5 -- Other Information........................................... 14
Item 6 -- Exhibits and Reports on Form 8-K............................ 14
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 3,865 $ 4,328
Restricted cash............................................. 1,455 1,361
Accounts and notes receivable............................... 11,862 26,191
Real estate projects........................................ 250,194 192,347
Property, plant and equipment............................... 8,439 7,857
Investment in and advances to unconsolidated joint
ventures.................................................. 13,770 6,762
Prepaid expenses and other assets........................... 15,245 12,809
--------- ---------
Total assets...................................... $ 304,830 $ 251,655
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 23,112 $ 21,830
Notes payable............................................... 87,185 36,714
Senior unsecured notes payable.............................. 100,000 100,000
--------- ---------
Total liabilities................................. 210,297 158,544
--------- ---------
Minority Interest........................................... 30,083 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....................................... (147,311) (148,711)
Treasury stock............................................ (1,627) (1,627)
--------- ---------
Total stockholders' equity........................ 64,450 63,050
--------- ---------
Total liabilities and stockholders' equity........ $ 304,830 $ 251,655
========= =========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------ --------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Sales of homes and land........................... $47,717 $47,722 $123,420 $128,792
Cost of sales..................................... 42,408 41,692 110,539 107,837
Impairment loss on real estate assets............. -- 8,000 -- 8,000
------- ------- -------- --------
Gross margin.................................... 5,309 (1,970) 12,881 12,955
Selling, general and administrative expenses...... (5,607) (5,121) (15,852) (17,063)
Income (loss) from unconsolidated joint
ventures........................................ 874 (98) 4,729 (113)
Interest and other income, net.................... 234 579 724 926
------- ------- -------- --------
Income (loss) from operations................... 810 (6,610) 2,482 (3,295)
Minority Interest................................. (163) (286) (615) (286)
------- ------- -------- --------
Income (loss) before income taxes............... 647 (6,896) 1,867 (3,581)
Provision (benefit) for income taxes.............. 162 (1,723) 467 (895)
------- ------- -------- --------
Net income (loss)............................... $ 485 $(5,173) $ 1,400 $ (2,686)
======= ======= ======== ========
Net income (loss) per common share -- basic and
diluted...................................... $ 0.03 $ (0.35) $ 0.10 $ (0.18)
======= ======= ======== ========
Weighted average number of common shares........ 14,306 14,874 14,306 14,955
======= ======= ======== ========
</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 NINE MONTHS ENDED
NOVEMBER 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,400 $ (2,686)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Change in restricted cash............................ (94) 58
Depreciation and amortization........................ 1,298 1,408
(Increase) decrease in real estate projects.......... (57,847) 19,719
(Increase) decrease in receivables, prepaid expenses
and other assets.................................... 11,322 (720)
Increase (decrease) in accounts payable and accrued
liabilities......................................... 1,282 (14,028)
Minority interest.................................... 615 286
-------- --------
Net cash provided by (used in) operating
activities...................................... (42,024) 4,037
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net............. (1,309) (1,288)
Contributions to minority interest................... -- 30,000
Distributions to minority interest................... (593) (768)
Decrease (increase) in investment in and advances to
unconsolidated joint ventures....................... (7,008) --
-------- --------
Net cash provided by (used in) investing
activities...................................... (8,910) (27,944)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on notes payable, net.......... 50,471 (36,025)
Repurchase of common stock........................... -- (1,627)
-------- --------
Net cash provided by (used in) financing
activities...................................... 50,471 (37,652)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (463) (5,671)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 4,328 11,434
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,865 $ 5,763
======== ========
</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 (fiscal 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 nine month periods
ended November 30, 1998, are not necessarily indicative of the results that may
be expected for the year ending February 28, 1999 (fiscal 1999). The
consolidated financial statements for fiscal 1999, and for the period from
October 1, 1997 to November 30, 1997 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") a limited liability
company of which the Company owns a majority interest. The consolidated
financial statements for fiscal 1998, through September 30, 1997, include only
the accounts of the Company, wholly owned subsidiaries and certain majority
owned joint ventures. 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 in selected
metropolitan areas of Southern California, Nevada, Texas, Arizona and Colorado.
The Company's principal business activity is to build and develop projects
including the sale of single-family homes targeted to entry-level, move-up and
luxury buyers. The Company has recently expanded its operations through
non-controlling investments in limited liability companies to include the
acquisition and development of commercial and mixed-use projects, as well as
ownership of existing commercial properties.
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 newly formed project specific entities. At November 30, 1998, CPH
LLC had $268 million in assets and a net worth of $92 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. 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. In addition, the Company is a managing member of
certain 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. At the current time, all material financing transactions
and arrangements involving the business of the Company are incurred either by
CPH LLC or by project-specific entities.
4. NOTES PAYABLE
Notes payable at November 30, 1998 and February 28, 1998, are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------ ------------
<S> <C> <C>
Notes payable to banks, including interest varying from
prime to prime plus two percent, maturing between July 31,
1999 and July 6, 2001 secured by certain real estate
projects on a non-recourse basis.......................... $62,752 $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............................................ 21,689 11,736
Other....................................................... 2,744 269
------- -------
$87,185 $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
(loss) per share calculation to diluted net income per share (in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
NOVEMBER 30, 1998 NOVEMBER 30, 1997
----------------------- -------------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic Net Income (loss) Per Share:
Income (loss) available to common
stockholders.............................. $ 485 14,306 $0.03 $(5,173) 14,874 $(0.35)
Effect of Dilutive Securities:
Warrants..................................... -- -- -- -- -- --
------ ------ ----- ------- ------ ------
Diluted Net Income (Loss) Per Share:........... $ 485 14,306 $0.03 $(5,173) 14,874 $(0.35)
====== ====== ===== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------------
NOVEMBER 30, 1998 NOVEMBER 30, 1997
----------------------- -------------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic Net Income (loss) Per Share:
Income (loss) available to common
stockholders.............................. $1,400 14,306 $0.10 $(2,686) 14,955 $(0.18)
Effect of Dilutive Securities:
Warrants..................................... -- 78 -- -- -- --
------ ------ ----- ------- ------ ------
Diluted Net Income (Loss) Per Share:........... $1,400 14,384 $0.10 $(2,686) 14,955 $(0.18)
====== ====== ===== ======= ====== ======
</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 November 30, 1998, approximately 278,000 shares have been repurchased and
held by CPH LLC 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 involving the business of the Company
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 nine months ended November 30, 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 the exclusion
of the $8 million non-cash charge recorded in the third quarter of fiscal 1998
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
----------------------------------------------
NOVEMBER 30, 1997 NOVEMBER 30, 1998
--------------------- ---------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales of homes and land......................... $ 47,722 $ 49,300 $ 47,717 $ 56,561
Cost of sales................................... 49,692 42,959 42,408 50,376
-------- -------- -------- --------
Gross margin.................................. $ (1,970) $ 6,341 $ 5,309 $ 6,185
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------------
NOVEMBER 30, 1997 NOVEMBER 30, 1998
--------------------- ---------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales of homes and land......................... $128,792 $130,673 $123,420 $157,979
Cost of sales................................... 115,837 109,379 110,539 138,748
-------- -------- -------- --------
Gross margin.................................. $ 12,955 $ 21,294 $ 12,881 $ 19,231
======== ======== ======== ========
</TABLE>
Since the financial restructuring in October 1997, the Company, together
with its financial partners, has invested over $240 million in ten new joint
ventures. The Company typically is required to fund a small
8
<PAGE> 9
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 $ 11 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 $ 26 Million
Hotel, Residential and Golf
Operations July, 1998 Monarch Beach, CA $122 Million
Residential Development July, 1998 Newport Beach, CA $ 27 Million
Golf Course Development December, 1998 Santa Barbara, CA $ 11 Million
</TABLE>
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 NINE MONTHS ENDED
--------------------------- ---------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
New homes delivered:
California................................ 63 35 165 89
Texas..................................... 103 119 233 297
Nevada.................................... 48 34 127 132
Arizona................................... 12 9 53 33
-------- -------- -------- --------
Subtotal............................... 226 197 578 551
Unconsolidated Joint Ventures
(California)........................... 3 8 4 41
-------- -------- -------- --------
Total............................. 229 205 582 592
======== ======== ======== ========
Net new orders.............................. 201 249 667 706
======== ======== ======== ========
Average sales price:
California................................ $326,000 $660,000 $371,000 $608,000
Texas..................................... 159,000 168,000 160,000 162,000
Nevada.................................... 177,000 194,000 166,000 182,000
Arizona................................... 167,000 155,000 128,000 156,000
Combined.................................. 212,000 273,000 220,000 264,000
</TABLE>
9
<PAGE> 10
The following table shows backlog in units and dollars at November 30, 1997
and 1998 for each of the Company's operations, including unconsolidated joint
ventures:
<TABLE>
<CAPTION>
ENDING BACKLOG
----------------------------------------
NOVEMBER 30, 1997 NOVEMBER 30, 1998
------------------ ------------------
UNITS ($000S) UNITS ($000S)
------ --------- ------ ---------
<S> <C> <C> <C> <C>
California................................................. 189 $ 99,300 83 $ 73,213
Texas...................................................... 179 27,100 246 44,574
Nevada..................................................... 74 11,300 76 14,841
Arizona.................................................... 9 1,500 85 12,678
--- -------- --- --------
Total............................................ 451 $139,200 490 $145,306
=== ======== === ========
</TABLE>
THIRD QUARTER OF FISCAL 1999 COMPARED TO THIRD QUARTER OF FISCAL 1998
The Company reported net income of $485,000 or $0.03 per share, in the
third quarter of fiscal 1999, as compared to a net loss of $5.2 million, or
$0.35 per share, in the third quarter of fiscal 1998. The results for the third
quarter of fiscal 1998 included a non-cash charge of $8.0 million for the
impairment of certain real estate assets.
Sales of homes and land including unconsolidated joint ventures were $56.6
million for the third quarter of fiscal 1999 compared to $49.3 million for the
third quarter of fiscal 1998, an increase of 14.7%. This increase is due in part
to the fact that the Company's average sales price per unit has increased by
28.8% to $273,000 in the third quarter of fiscal 1999 from $212,000 in the third
quarter of fiscal 1998. Conversely, the total number of home closings decreased
from 229 in the third quarter of fiscal 1998 to 205 in the third quarter of
fiscal 1999, including 3 and 8 homes, respectively, closed in unconsolidated
joint ventures.
The Company's pro forma gross margin on home and lot closings was 10.9%
during the third quarter of fiscal 1999 as compared to 12.9% for the third
quarter of fiscal 1998. The decrease in gross margin was primarily due to a
shift in the relative mix of home closings between quarters from certain
higher-margin company-owned projects in the third quarter of fiscal 1998 to
certain lower-margin projects in the third quarter of fiscal 1999. The Company
continued to close out certain lower-margin projects, particularly in
California, while activity in unconsolidated joint ventures continues to become
a more significant portion of the Company's business.
Selling, general and administrative expense increased from $5.1 million in
the third quarter of fiscal 1998 to $5.6 million in the third quarter of fiscal
1999. As a percentage of revenue, selling, general and administrative expense
increased from 10.7% to 11.8 % between quarters, primarily due to additional
spending in certain markets in advance of closings on new projects.
Income from unconsolidated joint ventures increased from a loss of $98,000
in the third quarter of fiscal 1998 to income of $874,000 in the third quarter
of fiscal 1999, due to both the higher unit closings and higher margins
experienced in the Company's current joint ventures.
Interest and other income decreased from $579,000 in the third quarter of
fiscal 1998 to $234,000 in the third quarter of fiscal 1999.
Minority interest of $286,000 for the third quarter of fiscal 1998 and
$163,000 for the third quarter of fiscal 1999 represents the share of CPH LLC's
income attributable to CHF.
Interest incurred was $6.7 million in the third quarter of fiscal 1999, as
compared to $4.6 million in the third quarter of fiscal 1998, while interest
included in cost of sales was $5.7 million during the third quarter of fiscal
1999, as compared to $3.3 million in the third quarter of fiscal 1998.
10
<PAGE> 11
FIRST NINE MONTHS OF FISCAL 1999 COMPARED TO FIRST NINE MONTHS OF FISCAL 1998
The Company reported net income of $1.4 million or $0.10 per share, for the
first nine months of fiscal 1999, as compared to a net loss of $2.7 million, or
$0.18 per share, for the first nine months of fiscal 1998. The results for
fiscal 1998 included a non-cash charge of $8.0 million for the impairment of
certain real estate assets.
Sales of homes and land including unconsolidated joint ventures were $158.0
million for the first nine months of fiscal 1999 compared to $130.7 million for
the first nine months of fiscal 1998, an increase of 20.9%. This increase is due
to both an increase in home closings from 582 units to 592 units between periods
and an increase in average sales price per unit of 20.0% from $220,000 to
$264,000.
The Company's actual gross margin increased from 10.1% for the first nine
months of fiscal 1998 to 10.4% for the first nine months of fiscal 1999. The
Company's pro forma gross margin was 12.2% for the first nine months of fiscal
1999 as compared to 16.3% for the first nine months of fiscal 1998. The reason
for the decrease in the pro forma gross margin between periods is due to a
higher volume in certain lower-margin, company-owned projects in the current
year, which is partially offset by increased revenues in the generally
higher-margin joint venture projects. The Company closed a total of 41 homes in
unconsolidated joint ventures in the nine months ended November 30, 1998, as
compared to 4 homes during the first nine months of fiscal 1998.
Selling, general and administrative expense of $15.9 million for the first
nine months of fiscal 1999 decreased $1.2 million, or 7.1% as compared to the
first nine months of fiscal 1998. As a percentage of revenue, selling, general
and administrative expense decreased from 13.2% for the first nine months of
fiscal 1998 to 12.8% for the first nine months of fiscal 1999.
Income from unconsolidated joint ventures increased from a loss of $113,000
in the first nine months of fiscal 1998 to income of $4.7 million for the first
nine months of fiscal 1999, due to the significantly higher unit closings and
higher margins in the Company's joint ventures.
Interest and other income decreased from $926,000 in the first nine months
of fiscal 1998 to $724,000 in the first nine months of fiscal 1999.
Minority interest of $286,000 for the first nine months of fiscal 1998 and
$615,000 for the first nine months of fiscal 1999 represents the share of CPH
LLC's income attributable to CHF.
Interest incurred for the first nine months of fiscal 1999 was $15.3
million, as compared to $14.6 million for the first nine months of fiscal 1998.
Interest included in cost of sales was $11.4 million for the first nine months
of fiscal 1999 compared to $9.5 million in the first nine months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
At the current time, all material financing transactions and arrangements
involving the business of the Company are incurred either by CPH LLC or by
project-specific entities. As of November 30, 1998, CPH LLC has in place several
credit facilities totaling $140 million (the "Facilities") with various bank
lenders (the "Banks"), of which $54 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 $31 million is outstanding.
In addition, the Company is currently negotiating an increase and extension of
its primary credit facility. The Facilities are secured by liens on various
completed or under construction homes and lots held by CPH LLC and Newport
Coast. 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 November 30,
1998, CPH LLC was in compliance with these covenants. The Facilities also define
certain events that constitute events of default. As of November 30, 1998, no
such event had occurred. Commitment fees are payable annually on some of the
Facilities.
Other notes payable of $2.7 million at November 30, 1998, primarily
represent financing vehicles for certain of the Company's insurance policies.
11
<PAGE> 12
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 and asset base 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.
YEAR 2000 READINESS DISCLOSURE
The Company began assessing its Year 2000 ("Y2K") compliance issues during
fiscal 1998 and at that time determined that its primary internal computer
hardware and computer software were not Y2K compliant. Subsequently, the Company
determined that it would be more cost efficient to install a new Y2K compliant
software package than to modify the existing software package. In late 1998, the
Company contracted to purchase a new software package and upgraded its existing
primary computer hardware system to support the new computer software package,
as well as more fully integrate the Company's operations. The Company's goal is
full implementation of the new software package by August 31, 1999.
As part of a program on continuous technology updates, for the past several
years, the Company has upgraded personal computers in its locations and this
process will continue. As this occurs during 1999, personal computers at each
company location will be tested for Y2K compliance. These personal computer
upgrades are considered to be ongoing and are not considered to be specifically
Y2K related. The Company expects to incur some costs to replace or repair such
equipment, but has not presently determined the amount of these costs, which are
not expected to be material.
The Company also is investigating the Y2K compliance status of its vendors,
subcontractors and suppliers through the Company's own vendor compliance
program. For example, the Company has determined that its voicemail and security
systems at its Newport Beach headquarters are not Y2K compliant, and upgrades to
both systems will be required. This investigation is in its preliminary stages
and the Company's goal is to complete this investigation and any corrective
efforts by June 30, 1999. Since the Company does not rely on any individual
vendor, subcontractor or supplier for a 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 $300,000 in connection with
Y2K readiness, including hardware, software, consulting fees, and other
expenses. The Company expects to incur additional expenditures of approximately
$400,000 in the next fiscal year in the course of becoming Y2K compliant. These
costs include the costs of hardware and software which would otherwise be
incurred by the Company in the normal course of its business. The additional
costs incurred by the Company may vary from these estimates but are not expected
to be material.
The Company's estimates of costs and completion dates for its Y2K readiness
program represent management's best estimates. These estimates are based upon
many assumptions, including the availability of external resources to assist
with systems remediation and replacement efforts, and key third party suppliers,
12
<PAGE> 13
vendors and customers being Y2K compliant. If any of the assumptions ultimately
prove to have been incorrect, the cost estimates and completion dates set forth
above could be substantially and adversely affected.
While the Company believes it is taking all appropriate steps to achieve
internal Y2K compliance, any potential future business interruptions, costs,
damages or losses related thereto, also are dependent upon the Y2K compliance of
third parties. In the event that the Company or any of the Company's vendors,
subcontractors or suppliers experience disruptions due to the Y2K issue, the
Company's operations could be adversely affected. The Y2K issue is universal and
complex, as virtually every computer operation will be affected in some way.
Consequently, no assurance can be given that complete Y2K compliance can be
achieved without significant additional costs. Also, the Company could be
materially impacted by widespread economic or financial market disruptions or by
Y2K computer system failures at financial institutions or government agencies on
which the Company is dependent for financing, utilities, zoning, building
permits and related matters. There can be no assurance that Y2K will not
adversely affect the Company and its operations.
A formal Y2K internal contingency plan has not been prepared because the
Company does not anticipate a material disruption to its business and because
the Company is able to rely on a variety of systems, vendors, subcontractors and
suppliers in the event of Y2K disruptions that are likely to occur.
13
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In September, 1998, the Company 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
its recently acquired commercial real estate, mixed-use and land projects. In
December, 1998, Farallon formally withdrew such offer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<C> <S> <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
</TABLE>
(b) REPORTS ON FORM 8-K
None Filed.
14
<PAGE> 15
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: January 14, 1999 By: /s/ HADI MAKARECHIAN
------------------------------------
Hadi Makarechian,
Chairman of the Board and Chief
Executive Officer (Principal
Executive Officer)
Date: January 14, 1999 By: /s/ STEVEN O. SPELMAN, JR.
------------------------------------
Steven O. Spelman, Jr.,
Vice President, Secretary and
Chief Financial Officer (Principal
Financial Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<C> <S> <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
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 3,865
<SECURITIES> 0
<RECEIVABLES> 11,862
<ALLOWANCES> 0
<INVENTORY> 250,194
<CURRENT-ASSETS> 0
<PP&E> 8,439
<DEPRECIATION> 0
<TOTAL-ASSETS> 304,830
<CURRENT-LIABILITIES> 0
<BONDS> 100,000
0
0
<COMMON> 1,500
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 304,830
<SALES> 123,420
<TOTAL-REVENUES> 123,420
<CGS> 110,539
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,852
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,867
<INCOME-TAX> 467
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,400
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
