ITEM 1. Business
General
Calprop Corporation ("Calprop") designs, constructs and sells single-family detached homes and townhomes as part of condominiums or planned unit developments in California and Colorado. The Company selects and acquires the site, secures construction financing and constructs and sells homes. The Company also sells improved lots in California and Colorado. The Company selects projects of varying types in several local markets in an effort to reduce the risks inherent in the residential housing industry. To enable the Company to adapt to the changing market conditions and to control its overhead expenses, the Company performs its construction activities through independent subcontractors under the direction of on-site construction supervisors employed by the Company rather than employing a permanent construction work force. The Company does not generally finance the purchase of its homes, but has done so in the past to facilitate sales and may do so in the future to the extent it is feasible, if market conditions require such financing. In addition to the continuing emphasis on single-family construction, the Company also develops raw land through the planning, zoning, and entitlement process.
During 2000, the Company was primarily engaged in the development of lots, and the construction and marketing of single-family detached homes and townhomes. As of December 31, 2000, the Company had eight residential housing projects in various stages of development, consisting of 341 homes and townhomes under construction (128 were in escrow), 542 lots under development, and 19 model homes used in selling the various types of housing developed. The Company's products range from homes for first-time buyers to custom homes.
Residential Housing Industry
The residential housing industry includes several hundred developers and home builders of various sizes and capabilities. The development process starts with the acquisition of a raw parcel of land. The developer prepares preliminary plans, environmental reports and obtains all necessary governmental approvals, including zoning and conditional use permits before subdividing the land into final tract maps and approved development plans. The subdivided parcel is then graded and the infrastructure of roads, sewers, storm drains, and public utilities are added to develop finished lots. Building permits are obtained and housing is constructed, and then sold or rented. Residential housing is constructed in a variety of types, including single-family detached homes (ranging from the less expensive "first-time buyer" homes to the medium priced "trade-up" homes to the more expensive "custom" homes), patio-homes (adjacent homes with party walls), condominiums (owner-occupied multifamily housing), and multifamily rental housing (apartments, retirement homes and other types of nonowner occupied multifamily housing). Any of these types can be built as part of a planned unit development with common areas such as green belts, swimming pools and other recreational facilities for common use by occupants.
The Company's Strategy
The Company's strategy has been to acquire land in or near major urban centers in California and Colorado and to construct single-family housing for resale. The Company does not specialize in the construction of a specific type or design of housing and does not limit its operation to any specific location. The Company usually acquires project sites which are zoned and subdivided so that the Company can construct and sell single-family housing in a relatively short period of time, usually two to three years. The Company will also acquire raw land that is not zoned or subdivided for investment or for development by processing it through the entitlement process to obtain zoning and other permits necessary for development into single-family housing and other urban uses.
Future Projects
As the Company intends to continue specializing in the construction and sale of single-family and multifamily housing, the Company is continually considering potential projects for development. In addition to the construction and sale of single-family and multifamily housing, the Company is entering the market to construct and lease single-family and multifamily housing. This market would provide consistent cash flow in the cyclical industry of real estate development. During 1999, the Company purchased land in the Northern California area for the construction of apartments. The Company also entered into a ground lease agreement for land for the construction of townhomes in the Southern California area for lease. The following discussion is the process which the Company follows to acquire land, entitle, market and build residential housing projects.
Land Acquisition and Construction
In considering the purchase of land for the construction of housing, the Company takes various factors into account, including, among others, population growth patterns, availability of utilities and community services such as water, gas, electricity, sewer, transportation and schools, the estimated absorption rate for new housing, estimated costs of construction and success of the Company's past projects in and familiarity with the area.
The Company's long-term strategy is to acquire or option project sites which are properly zoned and subdivided so that the Company can construct and sell single-family housing in a relatively short period of time, usually less than three years, after acquiring the land. Larger projects are constructed in phases, and the Company determines the number of homes in each phase based upon the estimated costs of construction and estimated sales schedule. The division of a project into phases may also be required by the project construction lender. Although a construction and marketing schedule is established for all phases at the commencement of a project, the precise timing of construction of each phase depends on the rate of sales of homes in previous phases.
In certain instances, the Company purchases land which is not substantially ready for construction. Depending on the stage of development of the parcel, the Company might be required to obtain necessary entitlements to subdivide the parcel of land; these entitlements include environmental clearances, zoning, subdivision mapping, permits and other governmental approvals. After the entitlement process the Company would then develop the land through grading lots and streets, and building the infrastructure of water, sewer, storm drains, utilities, curbs, streets, and possibly amenities, such as parks, pools and recreational facilities.
The Company acts as its own general contractor, and its supervisory employees coordinate all work on a project. The services of independent architectural, design, engineering and other consulting firms are engaged to assist in the pre-construction aspects of the project. The Company's construction activities are conducted through independent subcontractors, under fixed-price contracts, operating in conformity with plans, specifications and detailed drawings furnished by the Company and under the direction of on-site construction supervisors employed by the Company. Generally, the Company solicits bids from several potential subcontractors and awards a contract for a single phase of a project based on the subcontracting bid as well as the Company's knowledge of the subcontractor's work and reputation. Subcontracting enables the Company to retain the necessary flexibility to react to changes in the demand for housing, and to utilize the management strengths, specialization capabilities, equipment and facilities of its subcontractors without large capital investments of its own.
The Company does not have long-term contractual commitments with any of its subcontractors, consultants or suppliers of materials. The Company selects subcontractors who it believes will perform the required work in a timely manner and whose quality of workmanship meets the Company's standards. Although some subcontractors employ unionized labor, the Company has not signed a master labor agreement or experienced any significant delays in construction as a result of strikes or stoppages; however, there can be no assurances that the Company will not experience such delays in the future.
The Company secures raw materials, fixtures and furnishings directly or through its subcontractors from customary trade sources. Although certain products have been in short supply from time to time, such shortages have not impaired the Company's ability to conduct its business in the past and are not expected to do so in the foreseeable future.
Marketing
The Company's marketing department coordinates the design of the homes to be built and the interior design of model units and the design and preparation of advertising materials. The Company builds, landscapes and furnishes model units for public display. After each project is sufficiently completed so as to permit retail sales to begin, the Company selects a realtor or realty company to market homes which are under construction or completed.
Projects in which product is currently in the marketing stage are Montserrat Classics and Saddlerock. All such projects are being marketed through realtors who have no other affiliation with the Company.
Warranties
The Company provides a one-year express warranty against defects in workmanship and materials to purchasers of homes in its projects. In addition, California and Colorado law provides the Company's customers certain implied warranties, the scope and duration of which exceed the Company's express warranties. The Company requires its subcontractors to indemnify the Company in writing and requires the insurance of the subcontractor to provide that the Company is a primary insured and an additional insured from its subcontractors for liabilities arising from their work, except for liability arising through the sole negligence or willful misconduct of the Company or from defects in designs furnished by the Company. Nevertheless, the Company is primarily liable to its customers for breach of warranty. The Company has builder's product liability insurance coverage which it believes to be adequate in light of the Company's claims history.
Schedule II to the financial statements sets forth the Company's warranty reserves which the Company believes are adequate. Normal warranty costs are accrued at the close of escrow and held on a project until two years after the project is completed and all completion bonds posted with governmental agencies are released.
Financing
Generally, the Company acquires a project site for a purchase price paid with cash or a combination of cash and short-term acquisition financing secured by the project site. The amount and terms of financing vary from project to project.
After final working drawings from architects are prepared, the Company obtains a construction loan, secured by the portion of the project site to which the loan relates. The Company's construction loans are used to finance projected construction costs. In order to obtain the construction loan, the Company must repay all acquisition financing or obtain a reconveyance of that portion of the project site which is used to secure the construction loan. The construction loan is due and payable shortly after completion of the construction being financed. The Company repays construction financing from the proceeds of project unit sales. The construction financing provides for release of individual lots for sale during the term of the financing upon partial repayment of principal in a specified amount per lot. All cash sales proceeds in excess of the specified release amount are retained by the Company. If the Company experienced a delay in unit sales following construction and was unable to extend the term of its construction financing, the Company would be required to repay the construction financing or obtain other financing in order to hold the unsold units until market conditions improved. Although the Company does not arrange third-party financing for its customers, it has provided secured purchase money financing from time to time to the extent required by market conditions. In addition, the Company in the future may also subsidize home purchasers, as an alternative to providing direct financing, by "buying down" the interest rate on loans from lending institutions, the extent and amount of which would depend upon prevailing market conditions and interest rate levels at the time.
The Company usually receives the full sales price for its homes in cash at the closing of purchase escrows. Most of the Company's home purchasers obtain conventional financing from independent financial institutions. Depending upon the price range of the homes in a particular project and the prevailing mortgage market in the area, the financing obtained by the Company's qualifying home purchasers may be insured either by the Federal Housing Administration ("FHA") or guaranteed by the Veterans Administration ("VA"). As a result of government regulations, FHA and VA financing of the purchase of homes from the Company is limited because, among other things, the loan amount may not exceed certain specified levels.
Competition
The home building industry is highly competitive, particularly in the large urban areas of California. In each of the areas in which it operates, the Company competes in terms of location, design, quality, price and available mortgage financing with numerous other residential construction firms, including large
national and regional firms, many of which have greater financial resources than the Company. The Company believes that no single competitor dominates any single market area served by the Company.
For projects in master planned developments, the Company's units are adjacent to those of other builders and usually marketed at the same time through participation in joint advertising programs. While this often increases direct competition for the Company, it also attracts a larger group of potential purchasers than would be the case if the Company advertised by itself.
Business Risks
The development, construction and sale of single-family homes generally are subject to various risks, including, among others, possible changes in the governmental structure of the project locality, possible shortages of suitable undeveloped land at reasonable prices, unfavorable general and local economic conditions such as employment conditions and income levels of the general population, adverse local market conditions resulting from such unfavorable economic conditions or competitive overbuilding, increases in prevailing interest rates, increases in real estate taxes and the cost of materials and labor, and the availability of construction financing and home mortgage financing attractive to home purchasers. In addition, the demand for residential housing depends in part on the tax consequences of home ownership to home purchasers. There have been various tax legislation proposals before Congress over the past few years which could reduce the tax advantages currently associated with home ownership. There can be no assurances that any such legislation, if enacted, would not adversely impact the residential housing industry in general or the Company's business and results of operations.
The Company's business in particular depends upon the successful completion of construction and sale of homes on established schedules. Construction and sale schedules may be adversely affected by a variety of factors which are not within the Company's control, including the factors described above, inclement weather conditions, earthquakes, labor and material shortages and strikes. Although the Company has not experienced any serious labor or material shortages in recent years, the residential housing industry from time to time experiences serious labor and material shortages.
Governmental Regulations
The residential housing industry is also subject to increasing environmental, building, zoning and real estate sales regulation by various federal, state and local governmental authorities. Such regulations affect home building by specifying, among other things, the type and quality of building material which must be used, certain aspects of land use and building design, as well as the manner in which the Company conducts its sales, lending activities and other dealings with its customers. For example, the Federal Consumer Credit Protection Act requires, among other things, certain disclosures to purchasers about finance charges in credit transactions, such as sales financed by the Company. California law requires that full information concerning certain subdivisions be filed with the California Real Estate Commissioner, and in such instances no sales may be made to the public until the Commissioner has issued a public report which is delivered to purchasers. Because the Company's competitors are also subject to the foregoing regulation, the Company believes that it is not placed at a competitive disadvantage, except to the extent that competitors with greater financial resources and greater volume of development activity may more readily withstand longer delays and increased costs in the development of projects.
Although the strategy of the Company is to build homes on land which is already subdivided, zoned and improved with utilities, the Company occasionally undertakes projects which entail the subdivision of partially improved land. In such cases the Company is required to obtain the approval of numerous governmental authorities regulating such matters as permitted land uses and levels of population density, access to utility services such as water and waste disposal, and the dedication of acreage for open space, parks, schools and other community purposes. Furthermore, changes in prevailing local circumstances or applicable law, including moratoria, zoning changes and other governmental actions, can require additional approvals or modification of approvals previously obtained. As a result of such regulation, the time between the original acquisition and the commencement and completion of a project can increase significantly. Furthermore, the commencement or completion of a project could be precluded entirely, in which case the Company would sustain a substantial loss on the project.
Employees
The Company has approximately fifty four full-time employees, including five executive officers, twenty eight persons in its finance, marketing and operations departments, and twenty one field superintendents and general laborers. The Company also employs temporary and part-time laborers from time to time as necessary. None of the Company's employees is currently represented by a collective bargaining unit. The Company compensates its employees with salaries and fringe benefits that it believes are competitive
with the building industry and the local economy. The Company believes that relations with its employees generally are excellent.
Licensing
The Company is licensed by the State of California as a general building contractor, and this license is essential to its operations. This license must be renewed every two years. The Company's current license expires in July 2002 and the Company expects to renew its license on or before expiration.
ITEM 2.
ITEM 2. Properties
Current projects
The table below sets forth certain information relating to the Company's current projects as of December 31, 2000 and certain information relating to the Company's development operations during the previous twelve months.
Backlog- As noted in the above table, the total number of units sold subject to construction ("backlog") at December 31, 2000, was 128 units, with gross revenues of such backlog equal to $49,456,600. As of March 11, 2001, the backlog was 117 units, representing $43,900,000 compared to a backlog of 166 units representing $45,750,000 as of March 12, 2000. See also "Management Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion of Real Estate Sales for 2000 and 1999.
1. Antares (Del Mar Heights, San Diego County, California)
The Antares project, formerly Elysian 2, consists of 100 units of single-family detached housing. The project consists of three models ranging from 1,212 to 1,567 square feet with base sales prices before lot premiums or sales incentives of $210,500 to $310,500. The Company closed escrow on all units as of December 31, 2000.
The project is located about 20 miles north of San Diego along Interstate 5.
In 1996, the Company formed DMM with RGC Courthomes, Inc., a California Corporation, ("RGC"). In December, 1996, 100 lots in the Antares project were acquired by DMM. The profits and losses of DMM are to be distributed between the members as follows, 33.3% to RGC and 66.7% to the Company.
The Company's construction loans for the 100 units was secured by Imperial Bank in 1997. The loans
permitted borrowings by the Company of $17,029,313 on this project and bore interest at the bank's reference rate plus 1.5%. The loan was repaid in 1999.
The Company had an acquisition loan with the Curci-Turner Company on the entire 100 lots of the project. The loan permitted borrowing by the Company of $3,050,000 on this project and bore interest at 12%. The loan contains a profit sharing provision in the amount of 33.3% of "net proceeds" as defined in the agreement. As of December 31, 2000, the loan had been paid in its entirety.
2. Summertree Park (Elk Grove, Sacramento County, California)
The Summertree Park project consisted of 120 units of single-family detached housing. The Company closed escrow on all units as of December 31, 2000.
The project is located about 20 miles south of Sacramento along Highway 99.
The Company's construction loan for the fifth and sixth phase of construction was secured with Imperial Bank in 1999. The loan permited borrowing by the Company of $4,425,000 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2000, the loan had been paid in its entirety.
The Company had an acquisition/construction loan with the Curci-Turner Company on the entire 120 lots of the project. The loan permited borrowing by the Company of $4,000,000 on this project and bore interest at the prime plus 1.5%. The loan contained a profit sharing provision in the amount of 40% of "net proceeds" as defined in the agreement. As of December 31, 2000, the loan had been paid in its entirety.
3. Montserrat Classics (Murrieta, Riverside County, California)
The Montserrat Classics project consists of 105 lots. The Company is building single-family homes averaging 2,280 to 3,411 square feet with average sales prices before lot premiums or sales incentives of $229,900 to $289,900. As of December 31, 2000, the Company had 77 lots under development, 25 units under construction, and three models.
The project is located about 65 miles southeast of Los Angeles along Highway 15.
The Company has an acquisition/construction loan with the Curci-Turner Company on the entire 105 lots of the project. The loan permits borrowing by the Company of $3,450,000 on this project and bears interest at 12%. The loan contains a profit sharing provision in the amount of 50% of "net proceeds" as defined in the agreement. As of December 31, 2000, $3,450,000 of the principal of this loan was outstanding.
The Company's construction loan on the 52 units in the first and second phase of construction was secured in 2000 with Imperial Bank. The loan permits borrowing by the Company of $12,465,000 and bears interest at the prime plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $3,551,408, and the Company had available $8,520,448. The Company believes these funds are adequate to complete the construction of the first two phases of construction.
4. Mockingbird Canyon (Unincorporated Territory of Riverside County, California)
The Mockingbird Canyon project consists of 31 lots. The project consists of single-family homes averaging 3,694 to 4,137 square feet with average sales prices before lot premiums or sales incentives of $409,900 to $451,900. As of December 31, 2000, the Company had eleven lots under development, 14 units under construction (eight were in escrow), and one model.
The project is located about 90 miles east of Los Angeles and 30 miles south of San Bernardino along Interstate 15.
The Company has an acquisition/construction loan with the Curci-Turner Company on the entire 31 lots of the project. The loan permits borrowing by the Company of $3,500,000 on this project and bears interest at 12%. The loan contains a profit sharing provision in the amount of 50% of "net proceeds" as defined in the agreement. As of December 31, 2000, $2,608,912 of the principal of this loan was outstanding.
The Company's construction loan on the entire 31 units was secured in 2000 with Imperial Bank. The loan permits borrowing by the Company of $10,000,000 and bears interest at the prime plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $5,641,625, and the Company had available $2,130,213. The Company believes these funds are adequate to complete the construction of the project.
5. Parkland Farms (Healdsburg, Sonoma County, California)
The Parkland Farms project, formerly Parkland Hills, consists of 115 units of single-family detached housing. The project consists of three models ranging from 1,488 to 1,926 square feet with base sales prices before lot premiums or sales incentives of $299,900 to $329,900. As of December 31, 2000, the Company had 20 units under construction (all units were in escrow).
The project is located about 75 miles north of San Francisco along highway 101.
In 1998, the Company formed Parkland Farms Development Co., LLC, a California limited liability company, ("Parkland") with an officer of the Company. In September, 1998, 115 lots in the Parkland Farms project were acquired by Parkland. The profits and losses of Parkland are to be distributed between the members as follows: 1% to Partner and 99% to the Company.
The Company has acquisition/construction loans with the Curci-Turner Company on the entire 115 lots of the project. The loans permit borrowing by the Company of $4,808,201 on this project and bears interest at 12%. The loan contains a profit sharing provision in the amount of 50% of "net proceeds" as defined in the agreement. As of December 31, 2000, the loan had been paid in its entirety.
The Company's construction loan on the 45 units in the first and second phase of construction was secured in 1998 with Imperial Bank. The loan permits borrowing by the Company of $14,679,000 and bears interest at the prime plus 1.0%. As of December 31, 2000, the loan had been paid in its entirety.
The Company's construction loan on the remaining 70 units, phases three through five was secured in 1999 with Imperial Bank. The loan permits borrowing by the Company of $15,628,616 and bears interest at the prime plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $1,775,269 and the Company had available $1,250,287. The Company believes these funds are adequate to complete the construction of the last three phases of construction.
6. Parc Metropolitan
The Parc Metropolitan project consists of three separate projects/products, Product A, Product B, and Product C for a total of 382 units.
Product A consists of 130 townhomes. The project consists of two models ranging from 1,404 to 1,764 square feet with base sales prices before lot premiums or sales incentives of $432,900 to $540,900.
Product B consists of 108 townhomes. The project consists of six models ranging from 1,012 to 1,369 square feet with base sales prices before lot premiums or sales incentives of $354,900 to $420,900.
Product C consists of 144 townhomes. The project consists of two models ranging from 1,353 to 1,534 square feet with base sales prices before lot premiums or sales incentives of $407,900 to $470,900.
As of December 31, 2000, the Company had 44 lots under development, 250 units under construction (92 were in escrow), and ten models.
The project is located approximately 45 miles south of San Francisco along highway 880 in the Silicon Valley area.
In 1998, the Company formed RGCCLPO Development Co., LLC, a California limited liability company, ("RGCCLPO") with RGC. In September, 1998, 382 lots in the Metropolitan project were acquired by RGCCLPO. The profits and losses of RGCCLPO are to be distributed between the members as follows, 50% to RGC and 50% to the Company. During 1999, the Company acquired RGC's 50% partnership interest in RGCCLPO to attain 100% ownership as of December 31, 1999.
The Company acquired the land through seller financing with Ford Motor Company and Ford Motor Land Development Corporation on the entire 382 lots and the land for the Parcwest Apartments project. The original note balance of $12,850,000 bears interest at 9%. As of December 31, 2000, $2,551,015 was outstanding.
The Company's acquisition and development loan on the entire 382 lots of the project was secured in 1998 with Lowe Enterprises Residential Advisors, ("Lowe"). The loan permits borrowing by the Company of $9,700,000 and bears interest at the prime plus 2.0%. After repayment of principal and interest, Lowe will receive, as participating interest, a 27% IRR calculated on an annual basis. As of December 31, 2000, the outstanding principal of this loan was $9,700,000.
The Company's construction loan on the first phase of construction for Product A was secured with Imperial Bank in 1998. The loan permits borrowing by the Company of $13,773,142 on this project and bears interest at the bank's reference rate plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $112,493, and the Company had available $34,874. The Company believes these funds are adequate to complete the construction of the first phase of construction.
The Company's construction loan on the first phase of construction for Product B was secured with Imperial Bank in 1999. The loan permits borrowing by the Company of $10,604,352 on this project and bears interest at the bank's reference rate plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $8,521,504, and the Company had available $2,111,288. The Company believes these funds are adequate to complete the construction of the first phase of construction.
The Company's construction loan on the first phase of construction for Product C was secured with Imperial Bank in 1999. The loan permits borrowing by the Company of $12,342,388 on this project and bears interest at the bank's reference rate plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $1,167,972, and the Company had available $1,390,110. The Company believes these funds are adequate to complete the construction of the first phase of construction.
The Company's construction loan on the second phase of construction for Product A was secured with Imperial Bank in 2000. The loan permits borrowing by the Company of $13,612,993 on this project and bears interest at the bank's reference rate plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $9,109,202, and the Company had available $4,218,083. The Company believes these funds are adequate to complete the construction of the second phase of construction.
The Company's construction loan on the second phase of construction for Product B was secured with Imperial Bank in 2000. The loan permits borrowing by the Company of $10,661,232 on this project and bears interest at the bank's reference rate plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $4,853,100 and the Company had available $5,539,269. The Company believes these funds are adequate to complete the construction of the second phase of construction.
The Company's construction loan on the second phase of construction for Product C was secured with Imperial Bank in 2000. The loan permits borrowing by the Company of $12,897,860 on this project and bears interest at the bank's reference rate plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $6,811,538, and the Company had available $5,007,662. The Company believes these funds are adequate to complete the construction of the second phase of construction.
7. Parcwest
The Parcwest project consists of 68 lots. The Company is in the preliminary planning stages of the project to start construction in 2001.
The project is located approximately 45 miles south of San Francisco along highway 880 in the Silicon Valley area.
In 1999, the Company formed PWA Associates, LLC, a California limited liability company, ("PWA") with RGC Associates, LLC (RGC Associates). In December, 1999, 68 lots in the Parcwest project were acquired by PWA. The profits and losses of PWA are to be distributed between the members as follows, 50% to RGC Associates and 50% to the Company.
The Company has an acquisition loan with the City of Milpitas. The loan permits borrowing by the Company of $1,000,000 on this project and bears interest at 6.35%. As of December 31, 2000, $1,000,000 of the principal of this loan was outstanding.
8. High Ridge Court
The High Ridge Court project, formerly Hunters Chase, consists of 170 units of single-family detached housing. The project consists of three models ranging from 1,146 to 1,884 square feet with base sales prices before lot premiums or sales incentives of $169,900 to $203,900. As of December 31, 2000, the Company had 86 lots under development, 15 units under construction (8 were in escrow), and three models.
The project is located approximately 3 miles west of I-25 in the city of Thornton.
The Company has an acquisition loan with the Curci-Turner Company on the entire 170 lots of the project. The loan permits borrowing by the Company of $4,250,000 on this project and bears interest at 12%. The loan contains a profit sharing provision in the amount of 50% of "net proceeds" as defined in the agreement. As of December 31, 2000, $3,084,491 of the principal of this loan was outstanding.
The Company's acquisition and development loan for the remaining three phases of the project was secured in 1999 with First American Bank Texas. The loan permits borrowing by the Company of $2,041,000 and bears interest at the prime rate plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $1,063,595, and the Company had available $322,497. The Company believes these funds are adequate to complete the land development of phases three through five.
The Company's revolving construction loan on the entire 170 lots of the project was secured in 1998 with First American Bank Texas. The revolving loan permits the Company to have a maximum outstanding balance of $5,000,000 for the construction of the High Ridge and Saddlerock projects. The loan bears interest at the prime rate plus 1.0%. As of December 31, 2000, the outstanding principal balance of the High Ridge construction loan was $1,251,646.
9. Saddlerock
The Saddlerock project consists of 94 units of single-family detached housing. The project consists of two models ranging from 1,899 to 2,900 square feet with base sales prices before lot premiums or sales incentives of $289,900 to $356,900. As of December 31, 2000, the Company had 74 lots under development, 17 units under construction, and two models.
The project is located adjacent to highway E470 approximately 7 miles east of I-25 in the city of Aurora.
The Company has an acquisition/construction loan with the Curci-Turner Company on the entire 94 lots of the project. The loan permits borrowing by the Company of $3,000,000 on this project and bears interest at 12%. The loan contains a profit sharing provision in the amount of 50% of "net proceeds" as defined in the agreement. As of December 31, 2000, $2,600,000 of the principal of this loan was outstanding.
The Company's acquisition and development on the entire 94 lots of the project was secured in 1998 with First American Bank Texas. The loan permits borrowing by the Company of $2,606,800 and bears interest at the prime plus 1.0%. As of December 31, 2000, the loan had been paid in its entirety.
The Company's revolving construction loan on the entire 94 lots of the project was secured in 1998 with First American Bank Texas. The revolving loan permits the Company to have a maximum outstanding balance of $5,000,000 for the construction of the Saddlerock and High Ridge projects. The loan bore interest at the prime plus 1.0%. During 2000, the construction loan for the remaining units was refinanced and secured with Imperial Bank. The loan permits borrowing by the Company of $13,538,913 on this project and bears interest at the bank's reference rate plus 1.0%. As of December 31, 2000, the outstanding principal of this loan was $6,230,976 and the Company had available $6,635,665. The Company believes these funds are adequate to complete the construction of the remaining units under construction.
10. McGuire Luxury Apartments (San Diego, California)
The McGuire project consists of 182 units of single-family attached housing for lease. The Company entered into a 50 year ground lease agreement with an option to extend 20 additional years and the right of first refusal to purchase the land.
The project is located about 20 miles north of San Diego along Interstate 5.
In 1999, the Company formed RGC Carmel Country Associates, LLC, a California limited liability company, ("RGC Carmel") with RGC. The profits and losses of RGC Carmel are to be distributed
between the members as follows, 50% to RGC and 50% to the Company. During 2000, RGC Carmel admitted additional members in the following proportions: The John L. Curci Trust as to a 12.5% interest, The Janet Curci Living Trust No. Il as to a 12.5% interest, and an officer of the Company as to a 25% interest. As a result, the Company's interest in RGC Carmel was reduced to 25%.
11. Mission Gorge (San Diego, San Diego County, California)
In 1987, the Company purchased approximately 200 acres of land in San Diego. The previous owners, as a part of a group of property owners, had entered into an option agreement with another developer to acquire the group's property, upon obtaining an Amended Community Plan for the community in which the property is located. At the present time, the Amended Community Plan has not been completed. The Company is actively pursuing alternative land development opportunities.
The Company formed Mission Gorge, LLC, a California limited liability company, with the Curci-Turner, LLC for the purposes of developing the 200 acres of the Mission Gorge project. The net proceeds are to be divided equally, as defined in the operating agreement, among the two members, Calprop and Curci-Turner, LLC. In December 2000, the Curci-Turner, LLC made a distribution of its 50% interest to the members of Curci-Turner, LLC in the following proportions: The John L. Curci Trust as to a 25% interest and The Janet Curci Living Trust No. II as to a 25% interest.
ITEM 3.
ITEM 3. Legal Proceedings
There are no pending legal proceedings to which the Company is a party or to which any of its properties are subject other than routine litigation incidental to the Company's business, none of which is considered by the Company to be material to its business or operations.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Company's security holders during the fourth quarter of 2000.
PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Transactions in the Company's common stock, its only class of common equity security, are quoted on the OTC Bulletin Board under the symbol CLPO.
First Second Third Fourth Quarter Quarter Quarter Quarter --------- ------- ------- -------- 2000 stock price range- High $ 1.53 $ 1.37 $ 1.50 $ 1.31 Low 1.19 1.25 1.25 1.00
1999 stock price range- High $ 1.63 $ 2.00 $ 2.31 $ 2.06 Low 1.38 1.50 2.00 1.56
As of January 31, 2001, there were 498 record holders of common stock.
Dividends: There have been no cash dividends declared in the past two years, nor was there a stock dividend declared during 2000 or 1999. The dividend policy, whether cash or stock, is reviewed by the Board of Directors on an annual basis. During 2000, there were no restrictions, as a result of a loan or other agreement, limiting the Company's ability to issue a dividend.
ITEM 6.
ITEM 6. Selected Financial Data
The following data should be read in conjunction with the financial statements of the Company and the related notes thereto which are included elsewhere in this Form 10K and in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is also included elsewhere in this Form 10K.
FOR THE FIVE YEAR PERIOD ENDED DECEMBER 31, 2000
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion relates to the consolidated financial statements of the Company and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. You are cautioned not to place undue reliance on these forward-looking statements.
The Company began experiencing difficulties due to the downturn in the California real estate market during the second quarter of 1990, and through 1996 the Company continued to be impacted by the general economic downturn. In response to these conditions the Company began utilizing marketing programs which included price reductions and incentives to potential buyers. During 1997 however, the California real estate market began to experience a recovery. In general, the Company's products were well received, exemplified by an increase in the number of units sold subject to construction ("backlog") at December 31, 2000, 1999, and 1998 of 128, 88, and 123 units, respectively compared to 33 units as of 1996. Additionally, the Company's real estate sales increased from $33,071,722 in 1998 to $52,598,849 in 1999, and to $64,238,615 in 2000. The increase in real estate sales between 1998, 1999, and 2000 is primarily attributable to an increase in units available for sale resulting from an increase in production. Units increased from 162 in 1998 to 226 in 1999, and decreased to 219 in 2000.
The Company increased its gross profit to $5,676,912 in 2000 from $2,356,734 in 1999. As a percentage of real estate sales, gross profit increased by 4.36 percentage points to 8.84% in 2000 compared to 4.48% in 1999. The significant increase of gross profit as a percentage of gross revenues during 2000 from 1999 results from the increase in the number of home sales in the higher profit margin projects in 2000 compared to 1999. The Company decreased its gross profit to $2,356,734 in 1999 from $2,627,524 in 1998. As a percentage of real estate sales, gross profit decreased by 3.46 percentage points to 4.48% in 1999 compared to 7.94% in 1998. The significant decrease of gross profit as a percentage of gross revenues during 1999 results from the increase in the number of home sales in the lower profit margin projects Summertree Park and Antares compared to the higher profit margin project Montserrat Estates primarily sold during 1998. In addition, the Cierra Del Lago project which completed construction in early 1998 and all homes were sold in the third quarter of 1998 had incurred warranty costs of approximately $615,000 recognized in 1999.
The 1999 impairment loss on the Summertree Park, Elk Grove project is primarily a result of the introduction of two new product lines during the second quarter of 1999 to increase the absorption rate and these were primarily sold during the third quarter. The increase in sales price was not sufficient to offset the increased direct construction cost, marketing and sales incentives, production overhead and interest costs and as a result the Company recorded an impairment loss on real estate under development of $2,519,521 during the third quarter of 1999. The Company closed escrow on all units as of December 31, 2000.
Results of operations
The Company had income before benefit for income taxes of $3,486,452 in 2000, a loss before benefit for income taxes of $2,435,955 in 1999, and income before benefit for income taxes of $594,306 in 1998. The income in 2000 is primarily due to increase in profit from operations as the Company began selling homes in its Parc Metropolitan project. The net loss suffered in 1999 is primarily a reflection of the recognition of asset impairment of the Summertree Park, Elk Grove project in the amount of $2,519,521. The change from a loss to income in 1998 is primarily due to increase in profit from operations as the Company began selling homes in its Cierra Del Lago and Montserrat Estates projects.
Real estate sales increased to $64,238,615 in 2000 from $52,598,849 in 1999, up 22%. Real estate sales were $33,071,722 in 1998. In 2000, the Company sold 219 homes, with an average sales price of $293,327. In 1999, the Company sold 226 homes, with an average sales price of $232,738. In 1998, the Company sold 162 homes, with an average sales price of $204,146.
The overall gross profit percentage before recognition of impairment loss of the Company was 8.8%, 4.5%, and 7.9% in 2000, 1999, and 1998, respectively.
General and administrative expenses were $2,637,496 in 2000 and $2,309,225 in 1999, up 14.2%. General and administrative expenses were $1,752,909 in 1998. The increase in 2000 from 1999 is the result of an increase in payroll costs, and increased accounting costs due to the growth of the Company.
Benefit for income taxes of $141,488 in 2000 includes the utilization of unrecognized deferred income tax benefit of $1,538,994 to offset current year income taxes. The remaining benefit for income taxes of $141,488 represents the net refund resulting from a claim filed for the carryback of losses related to certain qualifying expenses incurred in 1994. Benefit for income taxes in 1999 of $1,683,373 includes the utilization of unrecognized deferred income tax benefit of $871,775 to recognize a deferred tax asset. The recognized deferred tax asset is based upon expected utilization of net operating loss carryforwards.
Liquidity and capital resources
As of December 2000, the Company has loans outstanding to financial institutions, secured by the development projects' trust deeds, with rates ranging from 6.25% to prime plus 2.0% and maturing January 2001 through July 2029. As of December 31, 2000, the outstanding balances owing on these loans totaled $66,341,488.
As of December 31, 2000, the Company had remaining loan commitments from banks and financial institutions of approximately $40,746,000, which may be drawn down by the Company upon the satisfaction of certain conditions. The Company continues to seek joint venture partners and additional financing to fund its operations.
As of December 31, 2000, the Company does not have any material commitments for capital expenditures in 2000.
Related-Party Notes - The Company has the following notes payable to Curci at December 31, 2000 and 1999. Under the terms of certain of the notes payable, Curci participates in "Net Proceeds" from certain projects, as defined in the loan agreement, which is comparable to net profit:
December 31, December 31, Project Profit share 2000 1999 - -------------------------------- ------------ ------------ ------------- Summertree Park 40% $ -- $ 860,150 Antares 33% -- -- Montserrat 50% -- -- Parkland Farms 50% -- 2,999,888 High Ridge Court 50% 3,084,491 2,196,261 Saddlerock 50% 2,600,000 2,350,000 Mockingbird Canyon 50% 2,608,912 2,750,000 Montserrat Classics 50% 3,450,000 3,450,000 ----------- ----------- 11,743,403 14,606,299 ----------- ----------- Other: Unsecured loans 2,129,357 1,604,250 ----------- ----------- $13,872,760 $16,210,549 =========== ===========
During 1999, the Company purchased RGC's fifty percent ownership in RGCCLPO. Consideration for the purchase consisted of issuance of a note payable for $2,000,000 and payment of cash of $1,000,000. As of December 31, 2000, the outstanding principal balance on this loan totaled $2,000,000.
During 1996, the Company converted its Preferred Stock to Common Stock and the accrued Preferred Stock dividend due to an officer of the Company and a related party of $581,542 and $472,545, respectively, was exchanged for notes with interest payable at 10%. As of December 31, 2000, the outstanding principal due an officer of the Company and a related party on these notes was $581,542 and $462,330, respectively. As of December 31, 1999, $581,542 and $462,330 was outstanding.
Included in notes payable to related parties is a note payable to Mission Gorge, LLC which bear interest at 12%. Outstanding balances as of December 31, 2000 and 1999 was $2,000,000.
Included in notes payable to related parties are notes payable to an officer which bear interest at 12%. Outstanding balances as of December 31, 2000 and 1999 were $1,045,611 and $2,865,611, respectively.
The Company has other loans from related parties, which provide for interest at 10% and prime plus 1% (9,50% at December 31, 2000) per annum and in which certain loans are due on demand. As of December 31, 2000 and 1999 these loans totaled $740,000.
As of December 31, 2000, the Company had eight remaining projects in various stages of development. During 2000, the Company had seven producing revenues from completed homes: Antares, Summertree Park, Creekside Estates, Parkland Farms, Parc Metropolitan, High Ridge Court, and Saddlerock. As of December 31, 2000, the Antares and Summertree Park projects were completed and all homes were closed in escrow. The remaining three projects, Montserrat Classics, McGuire Luxury Apartments, and Parcwest Apartments are in the initial stages of development. The Company enters 2001 with 341 homes under construction, of which 128 are sold, and 19 model units. Additionally, the Company has an inventory of 542 lots under development.
Based on its agreements with its lenders, the Company believes that it will have sufficient liquidity to finance its construction projects in 2001 through funds generated from operations, funds available under its existing bank commitments, funds generated from new lending institutions, and, if necessary, funds that could be obtained by using its internally financed real estate development in process as collateral for additional loans.
Management's plan, with respect to managing cash flow includes the following components: pay off debt that is coming due in 2001, minimize operating expenses, and maintain control over costs. With regard to the debt coming due in 2001, management expects to extend the maturity dates of various loans and pay the remaining loans off through cashflow from operations, prior to their maturity date. With regard to minimizing operating expenses, management plans to achieve this by continuing to closely examine overhead items. Management anticipates that the funds generated from operations, including borrowings from existing loan commitments, will be adequate to allow the Company to continue operations throughout 2001.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The table below represents the contractual balances of our financial instruments at the expected maturity dates as well as their fair value at December 31, 2000. The expected maturity categories take into consideration actual amortization of principal and does not take into consideration reinvestment of cash. The weighted average interest rate for various liabilities presented are actual as of December 31, 2000.
The table below represents the contractual balances of our financial instruments at the expected maturity dates as well as their fair value at December 31, 1999. The expected maturity categories take into consideration actual amortization of principal and does not take into consideration reinvestment of cash. The weighted average interest rate for various liabilities presented are actual as of December 31, 1999.
Effects of inflation
Real estate has long been considered a hedge against inflation, and inflation has often contributed to dramatic growth in property values. During normal markets, the Company has been able to pass increased costs of materials and labor to its buyers by increasing its sales prices. However, growth in property values slowed or reversed during 1996 and 1997 in California, thus preventing the Company from increasing sales prices to cover increased costs. In 1998, 1999 and 2000, due to the strength and stability of the economy, the real estate market has experienced increases in sales price and the number of home buyers.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Page No. Financial Statements: - -------- ---------------------
24 Independent Auditors' Report
25 Consolidated Balance Sheets as of December 31, 2000 and 1999
26 Consolidated Statements of Operations For Each of the Three Years Ended December 31, 2000
27 Consolidated Statements of Stockholders' Equity For Each of the Three Years Ended December 31, 2000
28 Consolidated Statements of Cash Flows For Each of the Three Years Ended December 31, 2000
30 Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULE:
42 II - Valuation and Qualifying Accounts --Three Years Ended December 31, 2000
Schedules other then listed above are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the financial statements or the notes thereto.
ITEM 9.
ITEM 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Items 10, 11, 12 and 13 are incorporated by reference from the Company's definitive proxy statement to be filed within 120 days after the close of the calendar year with the Commission, pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) For a listing of financial statements and schedules, reference is made to Item 8 included in this Form 10-K.
(3) The Exhibits listed on the accompanying Index to Exhibits immediately following Schedule II are filed as part of this report. Exhibits 10.1 through 10.4 are compensatory plans.
(b) Reports on Form 8-K -
A Current Report on Form 8-K dated April 19, 2000 was filed with the Securities and Exchange Commission (the "Commission") and included under item 7(a) its audited consolidated financial statements for the year ended December 31, 1999 and unaudited consolidated financial statements for the quarter ended December 31, 1999, and under item 7(c) a press release announcing Calprop Corporations' 1999 annual and fourth quarter results.
A Current Report on Form 8-K dated May 17, 2000 was filed with the Securities and Exchange Commission (the "Commission") and included under item 7(a) its unaudited consolidated financial statements for the quarter ended March 31, 2000, and under item 7(c) a press release announcing Calprop Corporations' first quarter results.
A Current Report on Form 8-K dated August 15, 2000 was filed with the Securities and Exchange Commission (the "Commission") and included under item 7(a) its unaudited consolidated financial statements for the quarter ended June 30, 2000, and under item 7(c) a press release announcing Calprop Corporations' second quarter results.
A Current Report on Form 8-K dated November 14, 2000 was filed with the Securities and Exchange Commission (the "Commission") and included under item 7(a) its unaudited consolidated financial statements for the quarter ended September 30, 2000, and under item 7(c) a press release announcing Calprop Corporations' third quarter results.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CALPROP CORPORATION - ---------------------------- (Registrant)
/s/ Victor Zaccaglin March 26, 2001 - -------------------- --------------- Victor Zaccaglin, Date Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Mark F. Spiro March 26, 2001 - -------------------- --------------- Mark F. Spiro Date Vice President/Secretary and Treasurer (Chief Financial and Accounting Officer)
/s/ Ronald S. Petch March 26, 2001 - -------------------- --------------- Ronald S. Petch, Date President
/s/ E. James Murar March 26, 2001 - -------------------- --------------- E. James Murar Date Director
/s/ Mark T. Duvall March 26, 2001 - -------------------- --------------- Mark T. Duvall Date Director
/s/ John L. Curci March 26, 2001 - -------------------- --------------- John L. Curci Date Director
/s/ Victor Zaccaglin March 26, 2001 - -------------------- --------------- Victor Zaccaglin Date Chairman of the Board Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Calprop Corporation:
We have audited the accompanying consolidated balance sheets of Calprop Corporation and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Calprop Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California March 26, 2001
CALPROP CORPORATION CONSOLIDATED BALANCE SHEETS
Assets December 31, ------------------------------ 2000 1999 ------------------------------ REAL ESTATE UNDER DEVELOPMENT (Notes 3 and 5) $98,544,447 $79,070,791 ------------------------------ OTHER ASSETS: Cash and cash equivalents 2,394,310 1,405,663 Deferred tax asset (Note 6) 6,535,343 6,500,000 Other assets (Note 4) 863,412 841,189 ------------------------------ Total other assets 9,793,065 8,746,852 ------------------------------ $108,337,512 $87,817,643 ============================== Liabilities and Stockholders' Equity
TRUST DEEDS AND NOTES PAYABLE (Note 5) $66,341,488 $48,216,139 RELATED-PARTY NOTES (Note 5 ) 20,702,243 24,860,032 ------------------------------ Total trust deeds, notes payable and 87,043,731 73,076,171 related-party notes ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Note 5) 9,316,681 6,391,621 WARRANTY RESERVES 546,984 358,287 ------------------------------ Total liabilities 96,907,396 79,826,079 ------------------------------
MINORITY INTERESTS 228,191 ------------------------------ COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 8):
Common stock, no par value; $1 stated value, 20,000,000 shares authorized; authorized, 10,290,535 and 10,293,735 shares issued and outstanding at December 31, 2000 and 1999, respectively 10,290,535 10,293,735 Additional paid-in capital 25,849,961 25,849,961 Deferred Compensation (Note 7) (105,525) (170,327) Stock Purchase Loans (Note 7) (519,733) (496,934) Accumulated deficit (24,085,122) (27,713,062) ------------------------------ Total Equity 11,430,116 7,763,373 ------------------------------ $108,337,512 $87,817,643 ==============================
See notes to consolidated financial statements
CALPROP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements
CALPROP CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2000
See notes to consolidated financial statements
CALPROP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
CALPROP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(1) Organization
Nature of operations - Calprop Corporation ("the Company"), a California Corporation, constructs and sells single-family detached and attached homes and townhomes as part of condominiums or planned unit developments in California and Colorado. As of December 31, 2000, the Company had eight residential housing projects in various stages of development, consisting of 341 homes under construction (128 were in escrow), 542 lots under development, and 19 model homes used in selling the various types of housing developed. The Company's products range from homes for first-time buyers to custom homes.
Basis of presentation - The accompanying financial statements include the accounts of Calprop Corporation and all its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Such statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
The Company has consolidated the financial statements of the following entities:
DMM: The Company is entitled to receive two-thirds of the profits of DMM, and the other owner, RGC Courthomes, Inc. ("RGC"), is entitled to receive the remaining one-third of the profits.
Mont II: Pursuant to the operating agreement of Mont II, income was allocated first to PICal Housing Associates, L.P. ("PICaL") to obtain the return of its capital. Subsequent income is allocated 100% to the Company.
Parkland: Pursuant to the operating agreement of Parkland, Calprop is entitled to receive ninety-nine percent of the profits of Parkland, and the other member, an officer of the Company, is entitled to receive the remaining one percent of the profits.
RGCCLPO: Pursuant to the operating agreement of RGCCLPO, Calprop was entitled to receive fifty percent of the profits of RGCCLPO, and the other member, RGC, was entitled to receive the remaining fifty-percent of the profits. During December 1999, Calprop purchased all of RGC's ownership interest in RGCCLPO.
As a result of the consolidations, the Company has recorded minority interest of $0 and $228,191 as of December 31, 2000, and December 31, 1999, respectively.
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(2) Summary of Significant Accounting Policies
Revenue and cost recognition - Revenue from real estate sales and related costs are recognized at the close of escrow, when title passes to the buyer. Cost of real estate sales is based upon the relative sales value of units sold to the estimated total sales value of the respective projects.
The Company reviews the carrying value of its real estate developments for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss. During 1999, the Company recorded an impairment loss of $2,519,521 (Note 3).
Cash and cash equivalents - The Company considers readily marketable securities with a maturity of 90 days or less at the date of purchase to be cash equivalents.
Income taxes - Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
Office equipment and other - Office equipment and other is stated at cost less accumulated depreciation. Equipment is depreciated utilizing the straight-line method over its estimated useful life of five years.
Warranty reserves - The Company provides a one-year warranty to purchasers of single-family homes. The Company accrues estimated warranty costs on properties as they are sold. Estimated warranty costs are based on actual warranty costs.
In addition to the Company's one-year warranty, California and Colorado law provides the Company's customers certain implied warranties, the scope and duration of which exceed the Company's express warranties. The Company requires its subcontractors to indemnify the Company in writing and requires the insurance of the subcontractor to provide that the Company is a primary insured on their insurance policy and an additional insured from its subcontractors for liabilities arising from their work, except for liability arising through the sole negligence or willful misconduct of the Company or from defects in designs furnished by the Company. Nevertheless, the Company is primarily liable to its customers for breach of warranty. The Company has builder's product liability insurance coverage which it believes to be adequate in light of the Company's claims history.
Employee stock plans - The Company adheres to APB Opinion No. 25 to account for its stock-based compensation awards to employees and discloses the required pro forma effect on net income and earnings per share consistent with SFAS No. 123, "Accounting for Stock-Based Compensation."
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment information - The Company is in one business segment, the residential housing industry, and as a result, substantially all of the assets of the Company are devoted to that segment and accordingly the Company does not provide additional segment disclosure.
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
Reclassifications - Certain prior year amounts have been reclassified to conform to the 2000 presentation.
Fair value of financial instruments - Management believes the recorded value of notes payable to financial institutions approximate the fair market value as a result of variable interest rates and short-term durations. Management also believes that it is not practical to estimate the fair value of related-party notes.
Recent accounting pronouncements - The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" and No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133" in June 1998 and June 2000, respectively. SFAS 133 and 138 are effective for fiscal years beginning after June 15, 2000 and require all derivatives to be recorded on the balance sheet at fair value. If the derivative instrument qualifies as a hedge, depending on the nature of the hedge, changes in fair value of the derivative will either be offset against the change in fair value of the hedge, depending on the nature of the hedge, changes in fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedge item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS 133 and 138 will not have a material impact on the Company's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). In June 2000, the SEC issued SAB 101B to defer the effective date for implementation of SAB 101 until the fourth quarter of fiscal 2000. SAB 101 summarizes certain of the SEC's views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements. The adoption of SAB 101 did not have a material impact on the Company's financial position or results of operations.
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(3) Real Estate Under Development
Real estate under development at December 31, 2000 and 1999 is summarized as follows:
Investment in joint ventures represents the Company's investment in Mission Gorge, LLC and RGC Carmel County Associates, LLC. In 1996, Mission Gorge, LLC, a California limited liability company, was formed and the Company transferred its Mission Gorge property to the joint venture. In connection with the formation, the Curci-Turner Company ("Curci"), exchanged a $2,000,000 note receivable from the Company for a 50% ownership interest in Mission Gorge, LLC. A principal of the Curci-Turner Company is a stockholder of the Company. In 1999, the Company formed RGC Carmel Country Associates, LLC, a California limited liability company, ("RGC Carmel") with RGC. The profits and losses of RGC Carmel are to be distributed between the members as follows, 50% to RGC and 50% to the Company. During 2000, RGC Carmel admitted additional members in the following proportions: The John L. Curci Trust as to a 12.5% interest, The Janet Curci Living Trust No. II as to a 12.5% interest, and an officer of the Company as to a 25% interest in exchange for financing for the project as follows: $2,000,000 in equity and $2,000,000 in notes payable. As a result, the Company's interest in RGC Carmel was reduced to 25%, which is accounted for under the equity method of accounting.
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
Development operations in 2000, 1999 and 1998 are summarized as follows:
During 1999, the Company recorded an impairment loss on its Summertree Park, Elk Grove project of $2,519,521. The impairment loss on the Summertree Park, Elk Grove project was primarily a result of a slower absorption caused by a sagging real estate market in the Sacramento area since the inception of the project. The Company introduced two new product lines at the Summertree Park, Elk Grove project during the second quarter of 1999 to increase the absorption rate and these were primarily sold during the third quarter. The increase in sales price was not sufficient to offset the increased direct construction cost, marketing and sales incentives, production overhead and interest costs and as a result the Company recorded an impairment loss on real estate under development of $2,519,521 during the third quarter.
(4) Other Assets
Other assets at December 31, 2000 and 1999 are as follows:
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(5) Trust Deeds, Notes Payable and Related-Party Notes
Trust deeds, notes payable and related party notes as of December 31, 2000 and 1999 are as follows:
As of December 31, 2000, the Company had remaining loan commitments from banks and financial institutions of approximately $40,746,000 which may be drawn down by the Company upon the satisfaction of certain conditions. The Company continues to seek joint venture partners and additional financing to fund its operations.
Related-Party Notes - The Company has the following notes payable to Curci at December 31, 2000 and 1999. Under the terms of certain of the notes payable, Curci receives interest and participates in "Net Proceeds" from certain projects, as defined in the loan agreement, which is comparable to net profit:
December 31, December 31, Project Profit share 2000 1999 ------------------------- -------------- ------------ ------------ Summertree Park 40% $ -- $860,150 Parkland Farms 50% -- 2,999,888 High Ridge Court 50% 3,084,491 2,196,261 Saddlerock 50% 2,600,000 2,350,000 Mockingbird Canyon 50% 2,608,912 2,750,000 Montserrat Classics 50% 3,450,000 3,450,000 ------------ ------------ 11,743,403 14,606,299 ------------ ------------ Other: Unsecured loans 2,129,357 1,604,250 ------------ ------------ Total - Curci $13,872,760 $16,210,549 ============ ===========
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
During the years ended December 31, 2000, 1999, and 1998, net participation proceeds expensed to cost of real estate sales in the accompanying consolidated statements of operations were $514,105, $391,960, and $0, respectively. Accrued participation proceeds included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets at December 31, 2000 and 1999 was $906,065 and $391,960, respectively.
Other Related Parties
During 1999, the Company purchased RGC's fifty percent ownership in RGCCLPO. Consideration for the purchase consisted of issuance of a note payable for $2,000,000 and payment of cash of $1,000,000. As of December 31, 2000, the outstanding principal balance on this loan totaled $2,000,000. The note matures on December 20, 2001.
During 1996, the Company converted its Preferred Stock to Common Stock and the accrued Preferred Stock dividend due to an officer of the Company and a related party of $581,542 and $472,545, respectively, was exchanged for notes with interest payable at 10%. As of December 31, 2000, the outstanding principal due on these notes was $581,542 and $462,330, respectively. As of December 31, 1999, $581,542 and $462,330 was outstanding. The notes mature on December 31, 2001.
Included in notes payable to related parties is a note payable to Mission Gorge, LLC which bears interest at 12%. The outstanding balance as of December 31, 2000 and 1999 was $2,000,000. The note matures on December 31, 2001.
Included in notes payable to related parties are notes payable to an officer which bear interest at 12%. Outstanding balances as of December 31, 2000 and 1999 were $1,045,611 and $2,865,611, respectively. The notes mature on demand through December 31, 2001.
As of December 31, 2000, the Company had loans, which bear for interest at 10% and prime plus 1% (9.50% at December 31, 2000) and in which certain loans are due on demand from related parties. The remaining notes mature on September 1, 2001. As of December 31, 2000 and 1999, these loans totaled $740,000.
Aggregate future principal payments due on trust deeds payable, notes payable and related party notes are as follows:
Years Ended December 31 --------------------------------------- 2001 $86,043,731 Thereafter 1,000,000 --------------------------------------- Total $87,043,731 =======================================
During 2000, 1999 and 1998, the Company paid interest of $2,432,635, $2,124,618 and $1,446,132, respectively, on loans from related parties. The Company capitalized interest of approximately $2,412,029, $2,067,094 and $1,311,051 for 2000, 1999 and 1998, respectively.
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(6) Income Taxes
The benefit for income taxes consists of the following:
During the years ended December 31, 2000, 1999 and 1998, the Company reduced the deferred tax valuation allowance to recognize a deferred income tax benefit of $35,343, $1,700,000 and $4,800,000, respectively. The deferred tax benefit is based upon expected utilization of net operating loss carryforwards. The Company has assessed its past earnings history and trends, sales backlog, budgeted sales, and expiration dates of carryforwards and has determined that it is more likely than not that the $6,535,343 of deferred tax assets will be realized.
As of December 31, 2000, the Corporation had net operating loss carryforwards for federal and state income tax purposes of approximately $20,650,000 and $3,900,000, respectively. For federal and state tax purposes the net operating loss carryforwards expire from 2007 through 2013, and from 2001 through 2003, respectively.
Benefit for income taxes in 2000 of $141,488 represents the net refund resulting from a claim filed for the carryback of losses related to certain qualifying expenses incurred in 1994.
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
The deferred income tax assets, resulting from differences between accounting for financial statements purposes and tax purposes, less valuation allowance, are as follows:
2000 1999 ---------------------------------------
Inventory reserves $214,000 $1,128,000 Warranty reserves and others 500,000 218,000 State net operating loss 235,000 376,000 Federal net operating loss 7,020,000 7,768,000 --------------------------------------- 7,969,000 9,490,000 Valuation allowance (1,433,657) (2,990,000) --------------------------------------- $6,535,343 $6,500,000 =======================================
The following is a reconciliation of the federal statutory rate to the Company's effective rate for 2000, 1999, and 1998:
(7) Qualified and Non-Qualified Stock Option Plans
The Company has three stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related Interpretations in accounting for its stock-based compensation. Accordingly, no compensation costs have been recognized for its fixed stock option plans during 2000, 1999, and 1998. The compensation cost that has been charged against income for its stock incentive plan was $61,602 in 2000, $61,203 in 1999 and $28,290 in 1998. Had compensation costs for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been adjusted to the pro forma amounts indicated below:
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
The 1983 Stock Option Plan authorized an aggregate of 653,006 (adjusted for stock dividends) shares of common stock to be reserved for grant. The 1983 Stock Option Plan expired in September, 1993. Changes in the 1983 Stock Option Plan are summarized as follows:
The 1993 Stock Option Plan, (amended by the shareholders May 20, 1999) authorizes an aggregate of 2,000,000 shares of the Company's common stock to be reserved for grant. The options fully vest a year from the date of grant. Changes in the 1993 Stock Option plan are summarized as follows:
The following table summarizes information about the outstanding options at December 31, 2000, from the Company's 1983 and 1993 stock option plans:
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
The 1989 Executive Long-Term Stock Incentive Plan , (amended by the shareholders May 23, 1996) authorizes an aggregate of 500,000 (adjusted for stock dividends) shares of the Company's common stock to be reserved for awards to key employees of the Company. The stock, once granted to the key employees, vests at 20 percent a year from the date of grant. The non-vested shares represent unearned compensation. The 1989 Executive Long-Term Incentive Plan expired in May, 1999. Changes in the 1989 Executive Long-Term Stock Incentive plan are summarized as follows:
Included as a separate deduction of stockholder's equity is deferred compensation relating to this plan of $105,525 and $170,327 as of December 31, 2000, and 1999, respectively.
The 1992 Director Stock Option Plan authorizes an aggregate amount of 100,000 shares to be granted. Each year, the directors that are members of the stock option committee are granted options to buy 7,500 shares at the market price at the date of grant, exercisable one year after grant, and expire 10 years after the grant date. During 2000, 1999, and 1998, 15,000 shares, 15,000 shares and 15,000 shares, respectively, were granted under this plan at an exercise prices of $1.27, $1.63, and $1.13 per share, respectively. The exercise prices represent the market price at the date of grant. At December 31, 2000, 15,000 shares were outstanding related to this plan. In 1996, the Company issued warrants to purchase 150,000 shares of common stock. As of December 31, 2000, 150,000 warrants were outstanding.
The weighted-average fair value of the options granted during 2000, 1999 and 1998 is $0.61, $0.98 and $1.20, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 6.5 percent for all years; dividend yield of zero percent for all years; expected lives of 5.0, 9.7, and 9.7 years; and volatility of 44, 28, and 61 percent.
For the year ended December 31, 1999, options were not included in the computation of diluted net loss per common share because the effect would be antidilutive to the net loss in the period. However, for the years ended December 31, 2000 and 1998, 579,700 and 328,900 options were not included in the computation of diluted net income because their exercise prices were higher than the average market price per share of common stock.
On March 10, 1998, three officers and a director of the Company exercised options to purchase a total of 720,000 shares of common stock with a weighted-average exercise price of $0.8989 per share. The Company received $199,395 cash from an officer and received $447,813 in notes receivable from the remaining two officers and the director as a result of the exercise of these options. The notes receivable accrue interest at 4.987% and mature on March 10, 2001 and are guaranteed by the officers. The notes' maturity dates have been extended to March 10, 2004.
On October 15, 1998, one officer of the Company exercised options to purchase a total of 10,000 shares of common stock with a weighted-average exercise price of $0.8125 per share. The Company received a note receivable for $8,125 from the officer as a result of the exercise of these options. The note receivable accrues interest at 4.987% and matures on October 15, 2001 and is guaranteed by the officer.
As of December 31, 2000 and 1999, accrued interest for the stock purchase loans was $63,796 and $40,996, respectively.
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(8) Earnings Per Share
The following table sets forth the computation of basic and diluted net income (loss) per common share:
(9) Commitments and Contingencies
Legal - There are several legal actions and claims pending against the Company. Based on the advice of legal counsel, management believes that the ultimate liability, if any, which may result from any of these lawsuits will not materially affect the financial position or results of operations of the Company.
Employee benefit plan - The Company has a 401(k) plan (the "Plan"), which allows eligible employees to contribute from 1 percent to 15 percent of their annual compensation, not to exceed statutory limits. Company matching is at management's discretion. Currently, the Company matches 100 percent of the first 6 percent of base compensation that participants contribute any plan year. The Company's contribution to the Plan for the years ended December 31, 2000, 1999, and 1998 was $116,312, $123,924, and $0, respectively.
Leases - The Company has operating leases that expire through 2005. Future minimum rent as of December 31, 2000, is $170,758 in 2001, $95,902 in 2002, $84,931 in 2003, $68,851 in 2004, $11,531 in 2005, and $0 thereafter, for a total of $431,973. Rent expense for the years ended December 31, 2000, 1999 and 1998 was $188,711, $159,431, and $137,854, respectively.
(10) Quarterly Financial Data - (unaudited)
Year Ended December 31, 2000
CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
Year Ended December 31, 1999
CALPROP CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the three years ended December 31, 2000
Trust Deeds Warranty Receivable Reserve Reserve --------------------------------- Balance January 1, 1998 $288,278 $50,000
Additions charged to operations 288,977 --
Reductions (292,631) -- --------------------------------- Balance December 31, 1998 284,624 50,000
Additions charged to operations 456,282 --
Reductions (382,619) -- --------------------------------- Balance December 31, 1999 358,287 50,000
Additions charged to operations 283,732 --
Reductions (95,035) (20,000) --------------------------------- Balance December 31, 2000 $546,984 $30,000 =================================
Index to Exhibits
3.1 Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the Company's Amendment No. 1 to Form S-1 filed with Securities Exchange Commission on July 3, 1994 bearing File #33-62516.)
3.2 By-laws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's Amendment No. 1 to Form S-1 filed with Securities Exchange Commission on July 3, 1994 bearing File #33-62516.)
10.1 1983 Calprop Corporation Stock Option Plan (Incorporated by reference to the Company's Form S-8 Registration Statement (File No. 2-86872), which became effective September 30, 1983.)
10.2 1989 Executive Long-Term Stock Incentive Option Plan (Incorporated by reference to the Company's Form S-8 Registration Statement (File No. 33-33640), which became effective March 18, 1991.)
10.3 1992 Directors Stock Option Plan (Incorporated by reference to the Company's Form S-8 Registration Statement (File No. 33-57226), which became effective January 18, 1993.)
10.4 1993 Calprop Corporation Stock Option Plan (Incorporated by reference to Exhibit 10.3 to the Company's Amendment No. 1 to Form S-1 filed with Securities Exchange Commission on July 3, 1993 bearing File #33-62516.)
23 Independent Auditors' Consent
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CALPROP CORPORATION - ---------------------------- (Registrant)
March 26, 2001 -------------------- - ----------------------------- Date Victor Zaccaglin, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
March 26, 2001 - ----------------------------- -------------------- Mark F. Spiro Date Vice President/Secretary and Treasurer (Chief Financial and Accounting Officer)
March 26, 2001 - ----------------------------- -------------------- Ronald S. Petch Date President
March 26, 2001 - ----------------------------- -------------------- E. James Murar Date Director
March 26, 2001 - ----------------------------- -------------------- Mark T. Duvall Date Director
March 26, 2001 - ----------------------------- -------------------- John L. Curci Date Director
March 26, 2001 - ----------------------------- -------------------- Victor Zaccaglin Date Chairman of the Board Chief Executive Officer