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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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-09911
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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 [X] 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 DECEMBER 31, 2001
------------------------------------------ ------------------------------------------
Common Stock, $.10 Par Value 13,665,111
Non-Voting Common Stock, $.10 Par Value 1,235,000
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CAPITAL PACIFIC HOLDINGS, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 1
Consolidated Balance Sheets -- November 30, 2001 and
February 28, 2001........................................... 1
Consolidated Statements of Income for the Three and Nine
Months Ended November 30, 2001 and 2000..................... 2
Consolidated Statements of Cash Flows for the Nine Months
Ended November 30, 2001 and 2000............................ 3
Notes to Consolidated Financial Statements.................. 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 11
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 17
i
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
NOVEMBER 30, FEBRUARY 28,
2001 2001
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 12,182 $ 7,552
Restricted cash............................................. 801 781
Accounts and notes receivable............................... 14,336 25,082
Real estate projects........................................ 230,333 259,873
Property and equipment...................................... 419 --
Investment in and advances to unconsolidated joint
ventures.................................................. 7,972 5,273
Prepaid expenses and other assets........................... 13,632 10,851
--------- ---------
Total assets...................................... $ 279,675 $ 309,412
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 27,741 $ 43,150
Notes payable............................................... 152,559 110,223
Senior unsecured notes payable.............................. -- 55,592
--------- ---------
Total liabilities................................. 180,300 208,965
--------- ---------
Negative goodwill........................................... 8,789 9,924
--------- ---------
Minority interest........................................... -- 7,743
--------- ---------
Stockholders' equity:
Common stock, par value $.10 per share, 60,000,000 shares
authorized; 16,230,000 and 14,995,000 shares issued;
14,900,111 and 13,767,311 shares outstanding,
respectively........................................... 1,623 1,500
Additional paid-in capital................................ 216,853 211,888
Accumulated deficit....................................... (123,537) (127,054)
Treasury stock............................................ (3,898) (3,554)
Accumulated other comprehensive income (loss)............. (455) --
--------- ---------
Total stockholders' equity........................... 90,586 82,780
--------- ---------
Total liabilities and stockholders' equity........... $ 279,675 $ 309,412
========= =========
See accompanying notes to financial statements.
1
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Sales of homes and land.............................. $60,209 $84,583 $218,909 $245,832
Cost of sales........................................ 46,074 63,145 164,963 187,113
------- ------- -------- --------
Gross margin....................................... 14,135 21,438 53,946 58,719
Income from unconsolidated joint ventures............ 446 56 304 13
Selling, general and administrative expenses......... (7,594) (9,183) (27,780) (27,725)
Interest expense..................................... (5,698) (9,454) (21,352) (23,013)
Interest and other income, net....................... 271 364 1,221 1,376
------- ------- -------- --------
Income from operations............................. 1,560 3,221 6,339 9,370
Minority interest.................................... -- (990) (159) (2,836)
------- ------- -------- --------
Income before income taxes and extraordinary
item............................................ 1,560 2,231 6,180 6,534
Provision for income taxes........................... 688 472 2,663 1,332
------- ------- -------- --------
Income before extraordinary item................... 872 1,759 3,517 5,202
Extraordinary gain for debt retired at less than face
value, net of minority interest and taxes.......... -- 71 -- 1,461
------- ------- -------- --------
Net income...................................... $ 872 $ 1,830 $ 3,517 $ 6,663
======= ======= ======== ========
Net income per share -- basic and diluted:
Income per share before extraordinary item......... $ 0.06 $ 0.13 $ 0.24 $ 0.38
Extraordinary gain for debt retired at less than
face value, net of minority interest and
taxes........................................... -- -- -- 0.10
------- ------- -------- --------
Net income per share............................... $ 0.06 $ 0.13 $ 0.24 $ 0.48
======= ======= ======== ========
Weighted average number of common shares --basic... 14,913 13,768 14,530 13,775
======= ======= ======== ========
Weighted average number of common
shares -- diluted............................... 15,129 13,904 14,761 13,885
======= ======= ======== ========
See accompanying notes to financial statements.
2
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED NOVEMBER 30,
-------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income.................................................. $ 3,517 $ 6,663
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on retirement of senior unsecured notes payable...... -- (1,461)
Depreciation and amortization............................. 142 1,124
Accretion of negative goodwill............................ (1,528) --
Change in restricted cash................................. (20) 516
Decrease in real estate projects.......................... 29,540 6,653
Decrease in receivables, prepaid expenses and other
assets................................................. 7,965 1,197
Increase (decrease) in accounts payable and accrued
liabilities............................................ (17,925) 494
Minority interest......................................... 159 2,836
-------- --------
Net cash provided by (used in) operating
activities....................................... 21,850 18,022
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net.................. (921) (694)
Distributions to minority interest........................ -- (365)
Increase in investment in and advances to unconsolidated
joint ventures......................................... (2,699) (2,880)
-------- --------
Net cash provided by (used in) investing
activities....................................... (3,620) (3,939)
-------- --------
Cash flows from financing activities:
Borrowings on notes payable, net.......................... 42,336 3,221
Retirement of senior unsecured notes payable.............. (55,592) (29,650)
Repurchase of common stock................................ (344) (256)
-------- --------
Net cash provided by (used in) financing
activities....................................... (13,600) (26,685)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 4,630 (12,602)
Cash and cash equivalents at beginning of period............ 7,552 19,389
-------- --------
Cash and cash equivalents at end of period.................. $ 12,182 $ 6,787
======== ========
Non-Cash Activities:
During the nine month period ended November 30, 2001, the Company issued
1,235,000 shares of non-voting common stock to CHF in return for CHF's remaining
7% interest in CPH LLC in connection with the Exchange Transaction described in
Note 3 to the financial statements. Below is a summary of amounts recorded as a
result of this transaction:
Minority interest acquired.................................. $ 7,902
Issuance of non-voting common stock......................... (5,088)
Deferred income taxes and accrued expenses recorded......... (2,061)
Adjustment of remaining property and equipment to zero...... (360)
Negative goodwill recorded.................................. (393)
-------
$ --
=======
See accompanying notes to financial statements.
3
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 accounting principles generally
accepted in the United States. 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, 2001, 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, 2001, are not necessarily indicative of
the results that may be expected for the year ending February 28, 2002. 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"). 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 the 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, Texas, Arizona, Colorado
and, until recently, Nevada. The Company's principal business activities are to
build and sell single-family homes. The Company's single-family homes are
targeted to entry-level, move-up and luxury buyers.
In fiscal year 1998, 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. An unaffiliated investment
company, California Housing Finance, L.P. ("CHF") then acquired a 32.07%
minority interest in CPH LLC as a result of a cash investment in CPH LLC. From
fiscal 1998 through fiscal 2001, the Company expanded its operating strategy to
encompass the acquisition and development of commercial and mixed-use projects,
as well as ownership of existing commercial properties, primarily through
non-majority investments in limited liability companies, with approximately 99%
of the capital for these projects being provided by CHF.
Effective February 23, 2001, the Company and CHF consummated an interest
exchange transaction (the "Exchange Transaction"), whereby the Company exchanged
its interests in the majority of the joint ventures capitalized by CHF,
including certain entities which were previously consolidated, (the "Divested
Joint Ventures") for approximately 78% of CHF's interest in CPH LLC and all of
CHF's interests in certain residential joint ventures. At February 28, 2001, and
during the three month period ended May 31, 2001, the Company had a 93% interest
in CPH LLC and CHF held a 7% minority interest. The Company and CHF both had an
option to convert CHF's remaining 7% interest in CPH LLC into 1,235,000 shares
of non-voting Common Stock of the Company at the equivalent of approximately
$6.40 per share. This option was exercised by the Company on May 31, 2001, thus,
as of this date, the Company owned 100% of CPH LLC. In addition, Capital Pacific
Homes, Inc., a subsidiary of the Company, has entered into construction,
management and marketing agreements relating to certain of the Divested Joint
Ventures with residential components, (the "Managed Projects"), whereby the
Company is compensated for performing such services through a management fee
arrangement. As a result of the Exchange Transaction, the Company has no further
exposure to the market or entitlement risks associated with the Managed
Projects.
4
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Exchange Transaction was accounted for as the simultaneous acquisition
of CHF's minority interest in CPH LLC and certain other residential joint
ventures and the disposition of the Company's interest in the Divested Joint
Ventures. As a result, no gain was initially recognized, the remaining balance
of the Company's property and equipment was adjusted to zero at February 28,
2001, and again at May 31, 2001, and the balance of the transaction was recorded
as negative goodwill. Negative goodwill in the total initial amount of $9.9
million represents the positive difference between the Company's basis in the
assets acquired in the Exchange Transaction as compared to the assets which were
divested. Negative goodwill is being accreted over five years, which accretion
is included as a reduction in selling, general and administrative expenses. As
further discussed in footnote 9 below, due to a recently promulgated change in
accounting principles, the expected remaining $8.3 million in unaccreted
negative goodwill as of February 28, 2002 will increase net income in the first
quarter of fiscal 2003 through a cumulative effect of change in accounting
principle.
Assets under management, including assets owned by unconsolidated joint
ventures and Managed Projects, totaled $515 million at November 30, 2001 in 50
residential projects. At November 30, 2001, CPH LLC, which is now 100% owned by
the Company, had $240 million in assets and a net worth of $107 million. The
Company and its subsidiaries perform their respective management functions for
CPH LLC and the Managed Projects, pursuant to management agreements, which
include provisions for the reimbursement of Company and subsidiary costs and a
management fee. CPH LLC, the Managed Projects and certain other project-specific
entities indemnify the Company against liabilities arising from the projects
owned by such entities. The Company maintains certain licenses and other assets
as is necessary to fulfill its obligations as managing member and under
management agreements.
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC and the project-specific entities in which the Company has
an equity ownership interest. At the current time, all material financing
transactions and arrangements are incurred either by CPH LLC or by the
project-specific entities.
5
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company is a general partner or a direct or indirect managing member
and has a 50 percent or lesser ownership in 14 unconsolidated entities at
November 30, 2001. The Company's net investment in and advances to
unconsolidated entities are as follows at November 30, 2001 and February 28,
2001 (in thousands):
NOVEMBER 30, FEBRUARY 28,
2001 2001
------------ ------------
Unconsolidated Joint Ventures:
JMP Canyon Estates, L.P. ................................. $ 113 $ 162
JMP Harbor View, L.P...................................... 320 609
Grand Coto Estates, L.P................................... 508 231
M.P.E. Partners, L.P...................................... 904 983
LB/L -- CPH Providence, LLC............................... 1,073 715
LB/L -- CPH Longmont, LLC................................. 910 1,087
LB/L -- CPH Laguna Street, LLC............................ 832 --
CPH Daily Ranch, L.P...................................... 3,080 --
CPH Banning-Lewis Ranch, LLC.............................. 55 --
Other..................................................... 140 --
------ ------
7,935 3,787
Divested Joint Ventures..................................... 37 1,486
------ ------
$7,972 $5,273
====== ======
The Company's ownership interest in the unconsolidated joint ventures
varies. Generally, the Company receives a portion of any earnings, although a
preferred return on invested capital is provided. Typically, the majority of
capital is provided by capital partners. The Company is typically a general
partner or managing member in each of the above entities and is the managing
entity pursuant to terms in each venture's agreement. In the case of Divested
Joint Ventures which are also Managed Projects, the Company or its subsidiaries
manage the development of the project under a management contract. The Company's
carrying amount in each of the unconsolidated joint ventures (and the Divested
Joint Ventures prior to the Exchange Transaction) equals the underlying equity
in the joint venture, and there are generally no significant amounts of
undistributed earnings. The Company provides for income taxes currently on its
share of distributed and undistributed earnings and losses from the investments.
The Company uses the equity method of accounting for its investments in the
unconsolidated 50 percent or less owned entities. The accounting policies of the
entities are substantially the same as those of the Company.
6
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Following is summarized, combined financial information for the
unconsolidated entities at November 30, 2001 and February 28, 2001 and for the
three and nine month periods ended November 30, 2001 and November 30, 2000 (in
thousands). The balance sheet information at both dates and the income statement
information for the period ended November 30, 2001 does not include the Divested
Joint Ventures, but the income statement information for the three and nine
month periods ended November 30, 2000 does reflect the results of the Divested
Joint Ventures because the Company held an ownership interest in those entities
during that period. This information includes in each case the interest of all
equity owners of the entities, not just that of the Company and its
subsidiaries.
ASSETS
NOVEMBER 30, FEBRUARY 28,
2001 2001
------------ ------------
Cash........................................................ $ 456 $ 512
Real estate projects........................................ 93,635 14,620
Other assets................................................ 542 611
------- -------
$94,633 $15,743
======= =======
LIABILITIES AND EQUITY
NOVEMBER 30, FEBRUARY 28,
2001 2001
------------ ------------
Accounts payable and other liabilities...................... $ 5,965 $ 4,167
Notes payable............................................... 5,817 1,878
------- -------
11,782 6,045
------- -------
Equity...................................................... 82,851 9,698
------- -------
$94,633 $15,743
======= =======
INCOME STATEMENT
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales of homes and land............ $4,937 $11,577 $7,905 $39,699
Interest and other income, net..... 2 4,437 20 10,198
------ ------- ------ -------
4,939 16,014 7,925 49,897
Costs and expenses................. 4,633 8,529 7,336 40,629
------ ------- ------ -------
Net income......................... $ 306 $ 7,485 $ 589 $ 9,268
====== ======= ====== =======
7
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
5. NOTES PAYABLE
Notes payable at November 30, 2001 and February 28, 2001, are summarized as
follows (in thousands):
NOVEMBER 30, FEBRUARY 28,
2001 2001
------------ ------------
Senior unsecured revolving credit facility, bearing interest
varying from LIBOR to prime, as selected by the Company,
plus applicable margins................................... $112,658 $ --
Notes payable to banks, including interest varying from
prime plus one quarter percent to LIBOR plus three and one
half percent, maturing between March 31, 2002 and November
30, 2003, secured by certain real estate projects on a
non-recourse basis........................................ 37,802 88,272
Notes payable to banks, including interest at prime, secured
by certain real estate projects on a recourse basis,
refinanced during the quarter via the revolving credit
facility.................................................. -- 16,158
Other....................................................... 2,099 5,793
-------- --------
$152,559 $110,223
======== ========
During the third quarter of fiscal 2002, CPH LLC entered into a senior
unsecured revolving credit facility with several participant banks. The facility
has a maximum commitment of $125 million and a two year revolving term. Proceeds
from this facility were used to pay down CPH LLC's existing facilities and
retire the remaining $55.6 million of Senior Notes at face value. In addition,
the Company fixed the interest rate on $50 million and $25 million of borrowings
at 5.68% and 5.65%, respectively, until September 2003 through interest rate
swap agreements with a bank.
6. NET INCOME PER COMMON SHARE
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):
THREE MONTHS ENDED
-------------------------------------------------
NOVEMBER 30, 2001 NOVEMBER 30, 2000
----------------------- -----------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------ ------ -----
Basic net income per share:
Income available to common stockholders
before extraordinary item.............. $ 872 14,913 $0.06 $1,759 13,768 $0.13
Effect of dilutive securities:
Warrants.................................. -- 35 -- -- -- --
Stock options............................. -- 181 -- -- 136 --
------ ------ ----- ------ ------ -----
Diluted net income per share before
extraordinary item........................ $ 872 15,129 $0.06 $1,759 13,904 $0.13
====== ====== ===== ====== ====== =====
8
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
-------------------------------------------------
NOVEMBER 30, 2001 NOVEMBER 30, 2000
----------------------- -----------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------ ------ -----
Basic net income per share:
Income available to common stockholders
before extraordinary item.............. $3,517 14,530 $0.24 $5,202 13,775 $0.38
Effect of dilutive securities:
Warrants.................................. -- 44 -- -- -- --
Stock options............................. -- 187 -- -- 110 --
------ ------ ----- ------ ------ -----
Diluted net income per share before
extraordinary item........................ $3,517 14,761 $0.24 $5,202 13,885 $0.38
====== ====== ===== ====== ====== =====
7. COMMON STOCK REPURCHASE PROGRAM
The Company has a stock repurchase program in place whereby up to 1,000,000
shares of the Company's outstanding common stock may be repurchased. As of
November 30, 2001, 640,400 shares have been repurchased cumulatively under this
program. In addition, the Company has repurchased 248,511 of the warrants
originally issued in connection with the issuance of the Senior Notes.
8. COMPREHENSIVE INCOME AND IMPLEMENTATION OF SFAS NO. 133
Effective March 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities by
requiring that all derivatives be recognized in the balance sheet and measured
at fair value. The Company's policy is to designate at a derivative's inception
the specific assets, liabilities, or future commitments being hedged and monitor
the derivative to determine if it remains an effective hedge.
The Company has various interest rate swap agreements which effectively fix
the variable interest rate on a notional amount of $75 million of the senior
unsecured revolving credit facility related to its homebuilding operations. The
swap agreements have been designated as cash flow hedges and, accordingly, are
reflected at their fair value in the consolidated balance sheet at November 30,
2001. The unrealized loss, as of November 30, 2001, of $455,000 is recorded in
stockholders' equity as accumulated other comprehensive loss.
Amounts to be received or paid as a result of the swap agreements are
recognized as adjustments to interest incurred on the related debt instruments.
The Company believes that there will be no ineffectiveness related to the
interest rate swaps and therefore no portion of the accumulated other
comprehensive loss would be reclassified into future earnings. The net effect on
the Company's operating results is that interest on the variable-rate debt being
hedged is recorded based on fixed interest rates.
9. RECENT ACCOUNTING PRONOUNCEMENT
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). This Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The Company will adopt SFAS 141 for all business combinations initiated after
June 30, 2001.
9
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Also in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This
pronouncement addresses, among other things, how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Goodwill will no longer be amortized but will be assessed
at least annually for impairment using a fair value methodology. The Company
will adopt this statement for all goodwill and other intangible assets acquired
after June 30, 2001 and for all existing goodwill and other intangible assets
beginning March 1, 2002. Upon adoption of this standard on March 1, 2002 the
Company is required to accrete the remaining balance of negative goodwill
through a cumulative effect of change in accounting principle, which will
increase net income in fiscal 2003 by approximately $8.3 million, or
approximately $0.55 per diluted share. Other than the accretion of the remaining
negative goodwill, the Company does not anticipate that the adoption of SFAS 142
will have a significant effect on the Company's financial position or results of
operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). The provisions of SFAS 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001, with early application encouraged and generally are to be applied
prospectively. The Company does not expect the adoption of SFAS 144 to have a
material impact on the Company's financial position or results of operations.
10
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, uncertainty arising
from acts of terrorism and similar factors, 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 summarizes the results of the Company's operations for
the three and nine months ended November 30, 2001 and 2000.
RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
---------------------------
NOVEMBER 30, NOVEMBER 30,
2001 2000
------------ ------------
Sales of homes and land..................................... $60,209 $84,583
Cost of sales............................................... 46,074 63,145
------- -------
Gross margin...................................... $14,135 $21,438
======= =======
NINE MONTHS ENDED
---------------------------
NOVEMBER 30, NOVEMBER 30,
2001 2000
------------ ------------
Sales of homes and land..................................... $218,909 $245,832
Cost of sales............................................... 164,963 187,113
-------- --------
Gross margin...................................... $ 53,946 $ 58,719
======== ========
11
In addition to the results shown above, the Company was responsible for the
following activity in certain Managed Projects (including the Divested Joint
Ventures) for the three and nine months ended November 30, 2001 and 2000:
MANAGED AND DIVESTED OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Number of managed projects................. 3 3 3 3
Unit closings.............................. 7 10 18 33
Revenues................................... $14,005 $11,578 $32,647 $39,700
Over the past year, the Company has:
- shed its non-core commercial and resort development business to focus on
homebuilding;
- substantially reduced its leverage (debt as a proportion of capital) year
over year, including by exiting the underperforming Las Vegas market; and
- called or repurchased $100 million in 12 3/4% Senior Notes and
substantially reduced its borrowing costs.
As a result of this restructuring, which is now complete, as well as
through earnings, the Company has increased stockholder's equity by $13.3
million since November 30, 2000, from $77.3 million to $90.6 million. As the
financial statement effects of the restructuring are fully realized,
stockholders' equity will further increase by the remaining $8.8 million in
negative goodwill generated by the disposition of the Company's non-core assets.
12
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 but excluding the Divested Joint Ventures:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
New homes delivered:
California............................... 24 20 66 42
Texas.................................... 56 88 230 340
Nevada................................... -- 46 68 181
Arizona.................................. 52 50 137 165
Colorado................................. 31 46 99 144
-------- ---------- -------- ----------
Subtotal.............................. 163 250 600 872
Unconsolidated Joint Ventures
(California).......................... 18 -- 29 --
-------- ---------- -------- ----------
Total homes delivered............ 181 250 629 872
Lot deliveries............................. 59 133 135 663
-------- ---------- -------- ----------
Total homes and lots delivered............. 240 383 764 1,535
======== ========== ======== ==========
Net new orders............................. 181 280 509 904
======== ========== ======== ==========
Average home sales price:
California............................... $776,000 $1,402,000 $975,000 $1,475,000
Texas.................................... 266,000 222,000 250,000 195,000
Nevada................................... -- 204,000 235,000 208,000
Arizona.................................. 156,000 162,000 155,000 160,000
Colorado................................. 245,000 222,000 232,000 204,000
Combined................................. 348,000 307,000 335,000 251,000
The following table shows backlog in units and dollars at November 30, 2001
and 2000 for each of the Company's operations, including unconsolidated joint
ventures but excluding backlog of the Divested Joint Ventures:
ENDING BACKLOG
--------------------------------------
NOVEMBER 30, 2001 NOVEMBER 30, 2000
----------------- ------------------
UNITS ($000S) UNITS ($000S)
------ -------- ------ ---------
California................................................. 88 $43,767 74 $ 92,425
Texas...................................................... 111 31,648 272 70,000
Nevada..................................................... -- -- 50 13,000
Arizona.................................................... 40 5,635 101 14,900
Colorado................................................... 52 10,132 144 22,000
--- ------- --- --------
Total............................................ 291 $91,182 641 $212,325
=== ======= === ========
THIRD QUARTER OF FISCAL 2002 (ENDED NOVEMBER 30, 2001) COMPARED TO THIRD
QUARTER OF FISCAL 2001 (ENDED NOVEMBER 30, 2000)
The Company reported net income of $872,000, or $0.06 per share, in the
third quarter of fiscal 2002, as compared to net income of $1.8 million, or
$0.13 per share, in the third quarter of fiscal 2001. Income for the quarter
ended November 30, 2000 included an extraordinary gain of $71,000, or less than
one cent per share,
13
as a result of the retirement of debt at less than face value. Excluding the
extraordinary gain, operating net income decreased from $1.8 million in the
third quarter of fiscal 2001 to $872,000 in the corresponding quarter of fiscal
2002. As further discussed below, the decrease in net income was due to a
variety of factors, including the Company's decision to exit the Nevada market,
a higher effective tax rate and decreased demand in certain of the Company's
markets.
On a consolidated basis, sales of homes and land decreased to $60.2 million
for the third quarter of fiscal 2002 compared to $84.6 million for the third
quarter of fiscal 2001. This decrease is due to a decrease in total home and lot
closings, partially offset by an increase in the Company's average sales price
per home to $348,000 in the third quarter of fiscal 2002 from $307,000 in the
third quarter of fiscal 2001. Sales of homes and land including unconsolidated
joint ventures, but excluding Divested Joint Ventures, decreased to $65.1
million from $84.6 million for the respective quarters. Total home closings
decreased from 250 in the third quarter of fiscal 2001 to 181 in the third
quarter of fiscal 2002, including zero and 18 homes, respectively, closed in
unconsolidated joint ventures. The decrease in the Company's backlog from 641
units to 291 units between quarters is primarily due to a decrease in demand in
certain of the Company's markets and to a lesser extent, the reduction in
backlog units in Nevada in connection with the Company's exit from that market.
In addition, the number of actively selling projects has decreased from 27 at
November 30, 2000 to 20 at November 30, 2001, which affected both backlog and
net new orders. The Company anticipates opening between 8 and 10 new communities
over the next few quarters.
The Company's gross margin on home and lot closings decreased to 23.5% for
the third quarter of fiscal 2002 as compared to 25.3% for the third quarter of
fiscal 2001. This decrease is due to a more competitive environment in some of
the Company's markets and the close out of certain less-profitable projects in
the current quarter.
As a percentage of revenue, selling, general and administrative expense
increased from 10.9% for the third quarter of fiscal 2001 to 12.6% for the third
quarter of fiscal 2002. Selling, general and administrative expense of $7.6
million for the third quarter of fiscal 2002 decreased $1.6 million or 17.3% as
compared to the third quarter of fiscal 2001 due principally to a reduction in
overhead associated with certain projects in which the Company is no longer
active. The increased percentage of such expense compared to revenue is
primarily due to a lower level of sales activity.
Income from unconsolidated joint ventures increased from $56,000 in the
third quarter of fiscal 2001 to $446,000 in the third quarter of fiscal 2002,
due to an increased level of profit participation in the active joint ventures
in the current quarter.
Interest and other income decreased from $364,000 in the third quarter of
fiscal 2001 to $271,000 in the third quarter of fiscal 2002.
Minority interest of $1.0 million for the third quarter of fiscal 2001
primarily represents the share of CPH LLC's income attributable to CHF. Due to
the fact that CHF no longer holds an ownership interest in CPH LLC, no minority
interest was recorded in the current quarter.
Interest incurred was $3.5 million in the third quarter of fiscal 2002, as
compared to $6.6 million in the third quarter of fiscal 2001, while interest
expensed was $5.7 million during the third quarter of fiscal 2002, as compared
to $9.5 million in the third quarter of fiscal 2001. Once the Company sells out
of certain older projects, it anticipates that interest expensed will be closer
to its currently lower level of interest incurred.
The Company recorded a provision for income taxes of $688,000 in the third
quarter of fiscal 2002, utilizing an effective tax rate of 44 percent, as
compared to $472,000 in the third quarter of fiscal 2001, with an effective tax
rate of 21 percent. The increase in the effective tax rate was due primarily to
the utilization of the remaining net operating loss carryforwards during fiscal
2001.
14
FIRST NINE MONTHS OF FISCAL 2002 (ENDED NOVEMBER 30, 2001) COMPARED TO FIRST
NINE MONTHS OF FISCAL 2001 (ENDED NOVEMBER 30, 2000)
The Company reported net income of $3.5 million, or $0.24 per share, for
the first nine months of fiscal 2002, as compared to $6.7 million, or $0.48 per
share, for the nine months ended November 30, 2000. Net income for the nine
months ended November 30, 2000 included an extraordinary gain of $1.5 million,
or $0.10 per share, as a result of the retirement of debt at less than face
value. Excluding the extraordinary gain, operating net income decreased from
$5.2 million for the nine months ended November 30, 2000 to $3.5 million for the
nine months ended November 30, 2001.
On a consolidated basis, sales of homes and land decreased from $245.8
million to $218.9 million for the respective quarters. Sales of homes and land
including unconsolidated joint ventures, but excluding Divested Joint Ventures,
were $226.8 million for the first nine months of fiscal 2002 compared to $245.8
million for the first nine months of fiscal 2001. The Company closed a total of
29 homes in unconsolidated joint ventures in the nine months ended November 30,
2001, as compared to zero homes during the first nine months of fiscal 2001.
These amounts were impacted by a decrease in home closings from 872 units to 629
units between periods, an increase in average sales price per unit from $251,000
to $335,000 and the closing of certain land sales totaling 450 lots and $14.2
million in the prior year.
The Company's gross margin increased from 23.9% for the first nine months
of fiscal 2001 to 24.6% for the first nine months of fiscal 2002. The reason for
the increase in the gross margins between periods is due in part to stronger
demand in certain of the Company's markets in the first half of the current year
combined with an overall shift in mix to more profitable projects.
Selling, general and administrative expense of $27.8 million for the first
nine months of fiscal 2002 remained consistent with $27.7 million for the first
nine months of fiscal 2001. As a percentage of revenue, selling, general and
administrative expense increased from 11.3% for the first nine months of fiscal
2001 to 12.7% for the first nine months of fiscal 2002, primarily due to
slightly lower sales volume combined with development and other activities
undertaken in certain projects prior to the generation of revenues as well as
certain additional expenses recorded in connection with the Exchange
Transaction.
Income from unconsolidated joint ventures increased from $13,000 in the
first nine months of fiscal 2001 to $304,000 for the nine months ended November
30, 2001, due to an increased level of profit participation in the active joint
ventures in the current period.
Interest and other income was $1.2 million for the first nine months of
fiscal 2002, as compared to $1.4 million for the first nine months of fiscal
2001.
Minority interest of $159,000 for the first nine months of fiscal 2002 and
$2.8 million for the nine months of fiscal 2001 primarily represents the share
of CPH LLC's income attributable to CHF. The decrease between years is due to
the lower percentage ownership in CPH LLC held by CHF during fiscal 2002 as
compared to fiscal 2001, which ownership ended on May 31, 2001.
Interest incurred for the first nine months of fiscal 2002 was $12.6
million, as compared to $19.6 million for the first nine months of fiscal 2001.
Interest expensed was $21.4 million for the first nine months of fiscal 2002
compared to $23.0 million in the first nine months of fiscal 2001. Once the
Company sells out of certain older projects, it anticipates that interest
expensed will be closer to its currently lower level of interest incurred.
The Company recorded a provision for income taxes of $2.7 million for the
first nine months of fiscal 2002, as compared to $1.3 for the first nine months
of fiscal 2001. The increase in the effective tax rate was due primarily to the
utilization of the remaining net operating loss carryforwards during fiscal
2001.
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. During
the third quarter of fiscal 2002, CPH LLC entered into a senior unsecured
revolving credit facility ("the Senior Facility") with several participant
banks. The facility has a maximum commitment of $125 million and a two year
revolving term. Proceeds from this facility
15
were used to pay down CPH LLC's existing facilities and retire the remaining
Senior Notes during the quarter ending November 30, 2001, as discussed below.
The new credit facility has substantially more favorable pricing than the Senior
Notes which have been retired.
As of November 30, 2001, the Company has in place several credit
facilities, including the Senior Facility, totaling $215 million (the
"Facilities") with various bank lenders (the "Banks"), of which approximately
$150 million was outstanding. The Facilities other than the Senior Facility are
secured by liens on various completed or under construction homes and lots held
by CPH LLC, CPH Newport Coast, LLC and CPH Yucaipa I, LLC, which are
consolidated subsidiaries. Pursuant to the Facilities, the Company 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, 2001, the Company was in compliance with these
covenants. The Facilities also define certain events that constitute events of
default. As of November 30, 2001, no such event had occurred. Commitment fees
are payable annually on some of the Facilities. Neither the Company nor CPH LLC
has any financial exposure under any of the project-specific facilities entered
into by the Divested Joint Ventures.
Homebuilding activity is being financed out of CPH LLC cash, bank
financing, and the existing joint ventures, including joint ventures with
institutional investors. 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 ("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 were
transferred from the Company to CPH LLC. Prior to the third quarter of fiscal
2002, the Company had repurchased Senior Notes with a face value of $44.4
million. During the third quarter of fiscal 2002, the Company redeemed at face
value the remaining $55.6 million of Senior Notes.
Management expects that cash flow generated from operations and from bank
financing 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.
MARKET RISK EXPOSURE
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 2001 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. Under the new credit facility, the Company utilized interest
rate swaps in order to fix the interest rate on $75 million of its variable rate
debt. The Company has not used 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 Senior Notes to provide longer-term financing. Prior to the third
quarter of fiscal 2002, the Company had repurchased Senior Notes with a face
value of $44.4 million. During the third quarter of fiscal 2002, the Company
redeemed at face value the remaining $55.6 million of the Senior Notes.
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 have an
16
impact on 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 third 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 $700,000.
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.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None Filed.
(b) Reports on Form 8-K
None Filed.
17
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.
By: /s/ HADI MAKARECHIAN
------------------------------------
Hadi Makarechian
Chairman of the Board,
Chief Executive Officer and
President
(Principal Executive Officer)
Date: January 14, 2002
By: /s/ STEVEN O. SPELMAN, JR.
------------------------------------
Steven O. Spelman, Jr.
Chief Financial Officer and
Corporate Secretary
(Principal Financial Officer)
Date: January 14, 2002
18