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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 AUGUST 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-09911
---------------------
CAPITAL PACIFIC HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2956559
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4100 MACARTHUR BLVD., SUITE 200, NEWPORT BEACH, CA 92660
(Address of principal executive offices) (Zip Code)
(949) 622-8400
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [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 SEPTEMBER 28, 2001
------------------ ------------------------
Common Stock, $.10 Par Value 13,694,111
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 -- August 31, 2001 and February
28, 2001.................................................... 1
Consolidated Statements of Income for the Three and Six
Months Ended August 31, 2001 and 2000....................... 2
Consolidated Statements of Cash Flows for the Six Months
Ended August 31, 2001 and 2000.............................. 3
Notes to Consolidated Financial Statements.................. 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 10
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 16
i
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
AUGUST 31, FEBRUARY 28,
2001 2001
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 7,244 $ 7,552
Restricted cash............................................. 788 781
Accounts and notes receivable............................... 13,558 25,082
Real estate projects........................................ 241,351 259,873
Property and equipment...................................... 250 --
Investment in and advances to unconsolidated joint
ventures.................................................. 4,918 5,273
Prepaid expenses and other assets........................... 13,141 10,851
--------- ---------
Total assets...................................... $ 281,250 $ 309,412
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 31,494 $ 43,150
Notes payable............................................... 94,584 110,223
Senior unsecured notes payable.............................. 55,592 55,592
--------- ---------
Total liabilities................................. 181,670 208,965
--------- ---------
Negative goodwill........................................... 9,305 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;
14,932,111 and 13,767,311 shares outstanding,
respectively........................................... 1,623 1,500
Additional paid-in capital................................ 216,853 211,888
Accumulated deficit....................................... (124,409) (127,054)
Treasury stock............................................ (3,792) (3,554)
--------- ---------
Total stockholders' equity........................ 90,275 82,780
--------- ---------
Total liabilities and stockholders' equity........ $ 281,250 $ 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 SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Sales of homes and land............................ $ 81,206 $ 96,215 $158,700 $161,249
Cost of sales...................................... 61,007 73,322 118,889 123,968
-------- -------- -------- --------
Gross margin..................................... 20,199 22,893 39,811 37,281
Loss from unconsolidated joint ventures............ (146) (54) (142) (43)
Selling, general and administrative expenses....... (10,223) (10,885) (20,186) (18,542)
Interest expense................................... (7,986) (8,776) (15,654) (13,559)
Interest and other income, net..................... 331 567 950 1,012
-------- -------- -------- --------
Income from operations........................... 2,175 3,745 4,779 6,149
Minority Interest.................................. -- (1,122) (159) (1,846)
-------- -------- -------- --------
Income before income taxes and extraordinary
item.......................................... 2,175 2,623 4,620 4,303
Provision for income taxes......................... 960 524 1,975 860
-------- -------- -------- --------
Income before extraordinary item................. 1,215 2,099 2,645 3,443
Extraordinary gain for debt retired at less than
face value, net of minority interest and taxes... -- 445 -- 1,390
-------- -------- -------- --------
Net income.................................... $ 1,215 $ 2,544 $ 2,645 $ 4,833
======== ======== ======== ========
Net income per share -- basic and diluted:
Income per share before extraordinary item....... $ 0.08 $ 0.15 $ 0.18 $ 0.25
Extraordinary gain for debt retired at less than
face value, net of minority interest and
taxes......................................... -- 0.03 -- 0.10
-------- -------- -------- --------
Net income per share............................. $ 0.08 $ 0.18 $ 0.18 $ 0.35
======== ======== ======== ========
Weighted average number of common
shares -- basic............................... 14,932 13,769 14,334 13,778
======== ======== ======== ========
Weighted average number of common
shares -- diluted............................. 15,267 13,834 14,586 13,853
======== ======== ======== ========
See accompanying notes to financial statements.
2
CAPITAL PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED AUGUST 31,
-------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income.................................................. $ 2,645 $ 4,833
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on retirement of senior unsecured notes payable...... -- (1,390)
Depreciation and amortization............................. 45 747
Accretion of negative goodwill............................ (1,012) --
Change in restricted cash................................. (7) 455
Decrease in real estate projects.......................... 18,522 4,628
Decrease (increase) in receivables, prepaid expenses and
other assets........................................... 9,234 (471)
Decrease in accounts payable and accrued liabilities...... (13,717) (1,522)
Minority interest......................................... 159 1,846
-------- --------
Net cash provided by (used in) operating
activities....................................... 15,869 9,126
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net.................. (655) (490)
Distributions to minority interest........................ -- (90)
Decrease in investment in and advances to unconsolidated
joint ventures......................................... 355 150
-------- --------
Net cash provided by (used in) investing
activities....................................... (300) (430)
-------- --------
Cash flows from financing activities:
Borrowings (payments) on notes payable, net............... (15,639) 5,860
Retirement of senior unsecured notes payable.............. -- (25,622)
Repurchase of common stock................................ (238) (120)
-------- --------
Net cash provided by (used in) financing
activities....................................... (15,877) (19,882)
-------- --------
Net decrease in cash and cash equivalents................... (308) (11,186)
Cash and cash equivalents at beginning of period............ 7,552 19,389
-------- --------
Cash and cash equivalents at end of period.................. $ 7,244 $ 8,203
======== ========
Non-Cash Activities:
During the six month period ended August 31, 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
six month periods ended August 31, 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 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 or expects to enter into
construction, management and marketing agreements relating to certain of the
Divested Joint Ventures with residential components, (the "Managed Projects"),
whereby the Company 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 has been 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 8 below, due to a recently
promulgated change in accounting principles, approximately $8.3 million in
unaccreted negative goodwill will increase net income in fiscal 2003.
Assets under management, including assets owned by unconsolidated joint
ventures and Managed Projects, totaled $461 million at August 31, 2001 in 47
residential projects. At August 31, 2001, CPH LLC, which is now 100% owned by
the Company, had $236 million in assets and a net worth of $107 million. The
Company maintains certain licenses and other assets as is necessary to fulfill
its obligations as managing member and under management agreements. The Company
and its subsidiaries perform their respective management functions for CPH LLC
and the Managed Projects, pursuant to management agreements, which include
provisions for the reimbursement of Company and subsidiary costs and a
management fee. CPH LLC, the Managed Projects and certain other project-specific
entities indemnify the Company against liabilities arising from the projects
owned by such entities.
References to the Company are, unless the context indicates otherwise, also
references to CPH LLC and the project-specific entities in which the Company has
an equity ownership interest. At the current time, all material financing
transactions and arrangements are incurred either by CPH LLC or by the
project-specific entities.
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 less ownership in 10 unconsolidated entities at August
31, 2001. The Company's net investment in and advances to unconsolidated
entities are as follows at August 31, 2001 and February 28, 2001 (in thousands):
AUGUST 31, FEBRUARY 28,
2001 2001
---------- ------------
Unconsolidated Joint Ventures:
JMP Canyon Estates, L.P................................... $ 113 $ 162
JMP Harbor View, L.P...................................... 319 609
Grand Coto Estates, L.P................................... 501 231
M.P.E. Partners, L.P...................................... 1,006 983
LB/L -- CPH Providence, LLC............................... 1,098 715
LB/L -- CPH Longmont, LLC................................. 906 1,087
LB/L -- CPH Laguna Street, LLC............................ 810 --
Other..................................................... 134 --
------ ------
4,887 3,787
Divested Joint Ventures..................................... 31 1,486
------ ------
$4,918 $5,273
====== ======
5
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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.
Following is summarized, combined financial information for the
unconsolidated entities at August 31, 2001 and February 28, 2001 and for the
three and six month periods ended August 31, 2001 and August 31, 2000 (in
thousands). The balance sheet information at both dates and the income statement
information for the period ended August 31, 2001 does not include the Divested
Joint Ventures, but the income statement information for the three and six month
periods ended August 31, 2000 does reflect the results of the Divested Joint
Ventures because the Company held an ownership interest in those entities during
that period.
ASSETS
AUGUST 31, FEBRUARY 28,
2001 2001
---------- ------------
Cash........................................................ $ 793 $ 512
Real estate projects........................................ 19,424 14,620
Other assets................................................ 392 611
------- -------
$20,609 $15,743
======= =======
LIABILITIES AND EQUITY
AUGUST 31, FEBRUARY 28,
2001 2001
---------- ------------
Accounts payable and other liabilities...................... $ 4,143 $ 4,167
Notes payable............................................... 4,361 1,878
------- -------
8,504 6,045
------- -------
Equity...................................................... 12,105 9,698
------- -------
$20,609 $15,743
======= =======
6
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
INCOME STATEMENT
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Sales of homes and land............................ $1,859 $ 8,027 $2,968 $28,122
Interest and other income, net..................... 15 2,926 18 5,761
------ ------- ------ -------
1,874 10,953 2,986 33,883
Costs and expenses................................. 1,654 10,314 2,703 32,100
------ ------- ------ -------
Net income......................................... $ 220 $ 639 $ 283 $ 1,783
====== ======= ====== =======
5. NOTES PAYABLE
Notes payable at August 31, 2001 and February 28, 2001, are summarized as
follows (in thousands):
AUGUST 31, FEBRUARY 28,
2001 2001
---------- ------------
Notes payable to banks, including interest varying from
LIBOR plus two percent to LIBOR plus three and one half
percent, maturing between December 1, 2001 and February 3,
2003, secured by certain real estate projects on a
non-recourse basis........................................ $78,659 $ 88,272
Notes payable to banks, including interest at prime with the
terms of the commitment reducing commencing August 1,
2001, secured by certain real estate projects on a
recourse basis............................................ 13,479 16,158
Other....................................................... 2,446 5,793
------- --------
$94,584 $110,223
======= ========
Subsequent to August 31, 2001, CPH LLC entered into a senior unsecured
credit facility with several participant banks. The facility has a maximum
commitment of $125 million and a two year revolving term.
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
7
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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
-------------------------------------------------
AUGUST 31, 2001 AUGUST 31, 2000
----------------------- -----------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------ ------ -----
Basic net income per share:
Income available to common stockholders
before extraordinary item.............. $1,215 14,932 $0.08 $2,099 13,769 $0.15
Effect of dilutive securities:
Warrants.................................. -- 95 -- -- -- --
Stock options............................. -- 240 -- -- 65 --
------ ------ ----- ------ ------ -----
Diluted net income per share before
extraordinary item........................ $1,215 15,267 $0.08 $2,099 13,834 $0.15
====== ====== ===== ====== ====== =====
SIX MONTHS ENDED
-------------------------------------------------
AUGUST 31, 2001 AUGUST 31, 2000
----------------------- -----------------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ ----- ------ ------ -----
Basic net income per share:
Income available to common stockholders
before extraordinary item.............. $2,645 14,334 $0.18 $3,443 13,778 $0.25
Effect of dilutive securities:
Warrants.................................. -- 49 -- -- -- --
Stock options............................. -- 203 -- -- 75 --
------ ------ ----- ------ ------ -----
Diluted net income per share before
extraordinary item........................ $2,645 14,586 $0.18 $3,443 13,853 $0.25
====== ====== ===== ====== ====== =====
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
August 31, 2001, 608,400 shares have been repurchased cumulatively under this
program. In addition, the Company has repurchased 244,363 of the warrants
originally issued in connection with the issuance of the Senior Notes.
8. 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.
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
8
CAPITAL PACIFIC HOLDINGS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 $0.57 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements in the financial discussion and analysis by management
contain "forward-looking" information (as defined in the Private Securities
Litigation Reform Act of 1995 and within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended) that involves risk and uncertainty, including projections and
assumptions regarding the business environment in which the Company operates.
Actual future results and trends may differ materially depending on a variety of
factors, including the Company's successful execution of internal performance
strategies; changes in general national and regional economic conditions, such
as levels of employment, consumer confidence and income, availability to
homebuilders of financing for acquisitions, development and construction,
availability to homebuyers of permanent mortgages, interest rate levels, the
demand for housing and office space and commercial lease rates; supply levels of
land, labor and materials; difficulties in obtaining permits or approvals from
governmental authorities; difficulties in marketing homes; regulatory changes
and weather and other environmental uncertainties; competitive influences; and
the outcome of pending and future legal claims and proceedings.
RESULTS OF OPERATIONS -- GENERAL
As is noted in footnote 1 to the financial statements presented herein, the
Company is reporting its results on a consolidated basis with the results of CPH
LLC. References to the Company in this Item 2 are, unless the context indicates
otherwise, also references to CPH LLC. At the current time, all material
financing transactions and arrangements are incurred either by CPH LLC or by
project-specific entities.
The following table summarizes the results of the Company's operations for
the three and six months ended August 31, 2001 and 2000.
RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
---------------------------
AUGUST 31, AUGUST 31,
2001 2000
------------ ------------
Sales of homes and land..................................... $81,206 $96,215
Cost of sales............................................... 61,007 73,322
------- -------
Gross margin...................................... $20,199 $22,893
======= =======
SIX MONTHS ENDED
---------------------------
AUGUST 31, AUGUST 31,
2001 2000
------------ ------------
Sales of homes and land..................................... $158,700 $161,249
Cost of sales............................................... 118,889 123,968
-------- --------
Gross margin...................................... $ 39,811 $ 37,281
======== ========
10
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 six months ended August 31, 2001 and 2000:
MANAGED AND DIVESTED OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Number of managed projects...................... 3 3 3 3
Unit closings................................... 5 5 11 23
Revenues........................................ $8,649 $8,026 $18,642 $28,122
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 $14.7
million since August 31, 2000, from $75.6 million to $90.3 million. As the
financial statement effects of the restructuring are fully realized,
stockholders' equity will further increase by the remaining $9.3 million in
negative goodwill generated by the disposition of the Company's non-core assets.
11
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 SIX MONTHS ENDED
----------------------- -----------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
New homes delivered:
California................................. 18 18 42 22
Texas...................................... 87 125 174 252
Nevada..................................... 22 72 68 135
Arizona.................................... 37 51 85 115
Colorado................................... 24 48 68 98
---------- ---------- ---------- ----------
Subtotal................................ 188 314 437 622
Unconsolidated Joint Ventures
(California)............................ 7 -- 11 --
---------- ---------- ---------- ----------
Total homes delivered.............. 195 314 448 622
Lot deliveries............................... 65 501 76 530
---------- ---------- ---------- ----------
Total homes and lots delivered............... 260 815 524 1,152
========== ========== ========== ==========
Net new orders............................... 119 285 328 624
========== ========== ========== ==========
Average home sales price:
California................................. $1,528,000 $1,150,000 $1,281,000 $1,336,000
Texas...................................... 251,000 190,000 247,000 186,000
Nevada..................................... 304,000 217,000 235,000 209,000
Arizona.................................... 157,000 175,000 154,000 159,000
Colorado................................... 229,000 200,000 227,000 195,000
Combined................................... 400,000 250,000 347,000 228,000
The following table shows backlog in units and dollars at August 31, 2001
and 2000 for each of the Company's operations, including unconsolidated joint
ventures but excluding backlog of the Divested Joint Ventures:
ENDING BACKLOG
-----------------------------------
AUGUST 31, 2001 AUGUST 31, 2000
---------------- ----------------
UNITS ($000s) UNITS ($000s)
----- -------- ----- --------
California................................................ 75 $ 53,800 58 $ 85,700
Texas..................................................... 161 43,400 265 65,000
Nevada.................................................... -- -- 65 14,100
Arizona................................................... 54 8,100 99 15,500
Colorado.................................................. 60 11,400 117 24,700
--- -------- --- --------
Total........................................... 350 $116,700 604 $205,000
=== ======== === ========
SECOND QUARTER OF FISCAL 2002 (ENDED AUGUST 31, 2001) COMPARED TO SECOND
QUARTER OF FISCAL 2001 (ENDED AUGUST 31, 2000)
The Company reported net income of $1.2 million, or $0.08 per share, in the
second quarter of fiscal 2002, as compared to net income of $2.5 million, or
$0.18 per share, in the second quarter of fiscal 2001. Income for the quarter
ended August 31, 2000 included an extraordinary gain of $445,000, or $0.03 per
share, as a result of the retirement of debt at less than face value. Excluding
the extraordinary gain, operating net
12
income decreased from $2.1 million in the second quarter of fiscal 2001 to $1.2
million 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 $81.2 million
for the second quarter of fiscal 2002 compared to $96.2 million for the second
quarter of fiscal 2001. This decrease is due to a decrease in total home
closings and the closing of certain land sales totaling 450 lots and $14.2
million in the year-ago quarter, partially offset by an increase in the
Company's average sales price per home to $400,000 in the second quarter of
fiscal 2002 (which, in turn, is due primarily to a relatively higher number of
home closings in the California market) from $250,000 in the second quarter of
fiscal 2001. Sales of homes and land including unconsolidated joint ventures,
but excluding Divested Joint Ventures, decreased to $83.1 million from $96.2
million for the respective quarters. Total home closings decreased from 314 in
the second quarter of fiscal 2001 to 195 in the second quarter of fiscal 2002,
including zero and 7 homes, respectively, closed in unconsolidated joint
ventures. The decrease in the Company's backlog from 604 units to 350 units
between quarters is primarily due to the reduction in backlog units in Nevada in
connection with the Company's exit from that market, combined with a decrease in
demand in certain of the Company's other markets. In addition, the number of
actively selling projects has decreased from 29 at August 31, 2000 to 22 at
August 31, 2001, which affected both backlog and net new orders. The Company
anticipates opening between 8 and 10 new communities over the next quarters.
The Company's gross margin on home and lot closings increased to 24.9% for
the second quarter of fiscal 2002 as compared to 23.8% for the second quarter of
fiscal 2001. This increase is due in part to stronger demand experienced in
certain of the Company's markets for homes which closed in the current year,
combined with a shift in mix to more profitable projects.
As a percentage of revenue, selling, general and administrative expense
increased from 11.3% for the second quarter of fiscal 2001 to 12.6% for the
second quarter of fiscal 2002. Selling, general and administrative expense of
$10.2 million for the second quarter of fiscal 2002 decreased $662,000 or 6.1%
as compared to the second quarter of fiscal 2001 due principally to a reduction
in overhead associated with certain projects in which the Company is no longer
active. The slightly increased percentage of such expense compared to revenue is
primarily due to a lower level of sales activity.
Loss from unconsolidated joint ventures increased from $54,000 in the
second quarter of fiscal 2001 to $146,000 in the second quarter of fiscal 2002,
due to a minimal level of profit participation in the active joint ventures in
both periods and certain wind down costs.
Interest and other income decreased from $567,000 in the second quarter of
fiscal 2001 to $331,000 in the second quarter of fiscal 2002.
Minority interest of $1.1 million for the second 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 $3.9 million in the second quarter of fiscal 2002, as
compared to $6.8 million in the second quarter of fiscal 2001, while interest
expensed was $8.0 million during the second quarter of fiscal 2002, as compared
to $8.8 million in the second quarter of fiscal 2001. As 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 $1.0 million in the
second quarter of fiscal 2002, utilizing an effective tax rate of 44 percent, as
compared to $524,000 in the second quarter of fiscal 2001, with an effective tax
rate of 20 percent. The increase in the effective tax rate was due primarily to
the utilization of the remaining net operating loss carryforwards during fiscal
2001.
13
FIRST SIX MONTHS OF FISCAL 2002 (ENDED AUGUST 31, 2001) COMPARED TO FIRST SIX
MONTHS OF FISCAL 2001 (ENDED AUGUST 31, 2000)
The Company reported net income of $2.6 million, or $0.18 per share, for
the first six months of fiscal 2002, as compared to $4.8 million, or $0.35 per
share, for the six months ended August 31, 2000. Net income for the six months
ended August 31, 2000 included an extraordinary gain of $1.4 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 $3.4
million for the six months ended August 31, 2000 to $2.6 million for the six
months ended August 31, 2001.
On a consolidated basis, sales of homes and land decreased from $161.2
million to $158.7 million for the respective quarters. Sales of homes and land
including unconsolidated joint ventures were $161.7 million for the first six
months of fiscal 2002 compared to $161.2 million for the first six months of
fiscal 2001. These amounts were impacted by a decrease in home closings from 622
units to 448 units between periods, an increase in average sales price per unit
from $228,000 to $347,000 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 23.1% for the first six months of
fiscal 2001 to 25.1% for the first six 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 current year combined with a shift in
mix to more profitable projects. The Company closed a total of 11 homes in
unconsolidated joint ventures in the six months ended August 31, 2001, as
compared to zero homes during the first six months of fiscal 2001.
Selling, general and administrative expense of $20.2 million for the first
six months of fiscal 2002 increased $1.6 million, or 8.9% as compared to the
first six months of fiscal 2001. As a percentage of revenue, selling, general
and administrative expense increased from 11.5% for the first six months of
fiscal 2001 to 12.7% for the first six 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.
Loss from unconsolidated joint ventures increased from $43,000 in the first
six months of fiscal 2001 to $142,000 for the six months ended August 31, 2001,
due to a minimal level of profit participation in the active joint ventures in
both periods and certain wind down costs.
Interest and other income was $1.0 million in the first six months of both
fiscal 2001 and 2002.
Minority interest of $159,000 for the first six months of fiscal 2002 and
$1.8 million for the six 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 six months of fiscal 2002 was $9.0 million,
as compared to $13.0 million for the first six months of fiscal 2001. Interest
expensed was $15.7 million for the first six months of fiscal 2002 compared to
$13.6 million in the first six months of fiscal 2001. As 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 $2.0 million for the
first six months of fiscal 2002, as compared to $860,000 for the first six
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. As of
August 31, 2001, the Company has in place several credit facilities totaling
$255 million (the "Facilities") with various bank lenders (the "Banks"), of
which $92 million was outstanding. The Facilities 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
14
require, among other things, the maintenance of a consolidated liabilities to
net worth ratio, minimum liquidity, minimum net worth and loss limitations, all
as defined in the documents that evidence the Facilities. At August 31, 2001,
the Company was in compliance with these covenants. The Facilities also define
certain events that constitute events of default. As of August 31, 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 have
been transferred from the Company to CPH LLC. The indenture to which the Senior
Notes are subject (the "Indenture") contains restrictions on CPH LLC on the
incurring of indebtedness, which affect the availability of the Facilities based
on various measures of the financial performance of CPH LLC. Subject to such
restrictions, the Facilities are available to augment cash flow from operations
and joint venture financing to fund CPH LLC's operations. As of August 31, 2001,
Senior Notes with a face value of $44.4 million have been repurchased by the
Company. The Senior Notes mature in May, 2002 and the remaining outstanding
Senior Notes have been called by CPH LLC at par and are scheduled to be paid off
on October 22, 2001.
Subsequent to August 31, 2001, CPH LLC entered into a senior unsecured
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 will be used to pay down CPH LLC's existing facilities and retire the
remaining Senior Notes during the quarter ending November 30, 2001. The new
credit facility contains customary financial covenants and limitations which are
not materially more restrictive than under the Indenture or the previous
facility. The new credit facility has substantially more favorable pricing than
the Senior Notes which are being retired.
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. The Company has not used interest rate swaps, forward or
option contracts on foreign currencies or commodities, or other types of
derivative financial instruments. Under its new credit facility it will be
required to use certain of these financial instruments in order to fix the rate
on a significant portion of its floating rate debt.
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. At August 31, 2001,
$55.6 million of the Senior Notes remain outstanding.
15
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not the Company's earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact fair
market value, but do affect the Company's future earnings and cash flows. The
Company does not have an obligation to prepay fixed rate debt prior to maturity,
and as a result, interest rate risk and changes in fair market value should not
have a significant impact on such debt until the Company would be required to
refinance such debt. Based upon the amount of variable rate debt outstanding at
the end of the second quarter, and holding the variable rate debt balance
constant, each one percentage point increase in interest rates occurring on the
first day of an annual period would result in an increase in interest incurred
for the coming year of approximately $1.0 million.
The Company does not believe that future market interest rate risks related
to its debt obligations will have a material impact on the Company's financial
position, results of operations or liquidity.
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.
16
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: October 15, 2001
By: /s/ STEVEN O. SPELMAN, JR.
------------------------------------
Steven O. Spelman, Jr.
Chief Financial Officer and
Corporate Secretary
(Principal Financial Officer)
Date: October 15, 2001
17