-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WpgOK73xe6qc+VAcuc1fYIA7hZQVl3h1VG9XIASjY8mgDuLuGw1+F+0tWeZ7Dw4L o22pNETIZ/NIJ34H7LH8mw== 0001145443-04-001047.txt : 20040706 0001145443-04-001047.hdr.sgml : 20040705 20040706171657 ACCESSION NUMBER: 0001145443-04-001047 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040706 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALPROP CORP CENTRAL INDEX KEY: 0000016496 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 954044835 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06844 FILM NUMBER: 04902960 BUSINESS ADDRESS: STREET 1: 13160 MINDANAO WAY STREET 2: STE 180 CITY: MARINA DEL REY STATE: CA ZIP: 90292 BUSINESS PHONE: 3103064314 MAIL ADDRESS: STREET 1: 13160 MINDANAO WAY STREET 2: STE 180 CITY: MARINA DEL REY STATE: CA ZIP: 90292 10-K 1 d14922.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2003 Commission File Number 1-6844 ------ CALPROP CORPORATION Incorporated in California I.R.S. Employer Identification No. 13160 Mindanao Way, #180 95-4044835 Marina Del Rey, California 90292 (310) 306-4314 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the registrant (1) has 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K X . --- State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $463,339 at June 24, 2004 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 10,235,305 Shares Outstanding at June 24, 2004 Documents Incorporated by reference: Portions of the registrant's definitive Proxy Statement for 2003 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. PART I 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 designs, constructs, and leases apartments and townhomes in Southern and Northern California. During 2003, 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, 2003, the Company had three residential housing projects in various stages of construction and development, consisting of 39 homes and townhomes under construction (including 8 homes in escrow and two model homes), and 89 lots under development. The Company's products range from homes for first-time buyers to custom homes. In addition to the construction and sale of single-family and multifamily housing, the Company was engaged in the development of apartments available for lease. During the year, management approved a plan of action to sell the operating assets of the apartment building. As a result, the rental property has been classified as held for sale and depreciation has ceased as of the date the plan was approved. Operations of the apartment building are classified as discontinued operations in the consolidated statements of operations. The apartment project was sold on March 12, 2004 with a gross sales price of $9,000,000 (see Notes 4 and 11). 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 2 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 Land Acquisition - During 2004, the Company completed the sale of its contractual rights to purchase approximately 60 acres of undeveloped land in Southern California for a gross sales price of $11,700,000. The Company has entered into approximately $8,625,000 in contracts to acquire two properties and has acquired one project for $600,000 in its current market in Riverside County in Southern California. These three properties are zoned for residential development and can be subdivided into approximately 213 single family detached lots. The Company plans to start construction in the first quarter of 2005. 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 has entered 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. 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. 3 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. 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 4 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. 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 5 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 eleven full-time employees, including four executive officers, five persons in its finance, marketing and operations departments, and two field superintendents and general laborers at June 10, 2004. The Company also employs temporary and part-time laborers from time to time as necessary. None of the Company's employees are 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 2006. 6 ITEM 2. Properties Current projects The table below sets forth certain information relating to the Company's current projects as of December 31, 2003 and certain information relating to the Company's development operations during the previous twelve months.
Units sold Remaining Units sold Units under Units subject to units to 12 months construction completed construction construct ended as of as of as of as of Project 12/31/03 12/31/03 (1) 12/31/03 12/31/03 12/31/03 - ------- ------------------------------------------------------------------- Units Held For Sale 1. Parc Metropolitan 16 -- -- -- -- 2. High Ridge Court 31 21 -- 7 12 3. Saddlerock 57 18 -- 1 -- 4. Rohnert Park -- -- -- -- 77 5. Mission Gorge (accounted for under the equity method) -- -- -- -- -- ------------------------------------------------------------------- Total 104 39 -- 8 89 =================================================================== Total inventory units as of 12/31/03 128 ============== (1) Units under construction includes 8 units sold subject to construction and 2 model units Assets Held For Sale 6. Parcwest Apartments -- -- 68 -- -- ------------------------------------------------------------------- Total 68 ===================================================================
Backlog- As noted in the above table, the total number of units sold subject to construction ("backlog") at December 31, 2003, was 8 units, with gross revenues of such backlog equal to $2,020,000. As of March 31, 2004, the backlog was 11 units, representing $2,877,000 compared to a backlog of 21 units representing $6,620,000 as of March 28, 2003. See also "Management Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion of Real Estate Sales for 2003 and 2002. 1. Parc Metropolitan (Milpitas, California) 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 $405,900 to $513,000. 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 $423,900. 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 $395,900 to $458,900. 7 The Company closed escrow on all units as of December 31, 2003. 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 Parc Metropolitan project were acquired by RGCCLPO. The profits and losses of RGCCLPO were 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 bore interest at 9%. As of December 31, 2001, the loan had been paid in its entirety. The Company has a profit participation agreement with Ford for $6,200,000 to be paid on or before December 13, 2002. The amount was paid off on December 6, 2002. The Company's acquisition and development loan on the entire 382 lots of the project was obtained in 1998 from Lowe Enterprises Residential Advisors, ("Lowe"). The loan permitted borrowing by the Company of $9,700,000 and bore interest at the prime plus 2.0%. After repayment of principal and interest, Lowe received, as participating interest, a 27% IRR calculated on an annual basis. In December of 2001, the loan was refinanced and obtained with Curci for $4,500,000. The loan bore interest at 20%. As of December 31, 2002, the loan was paid in its entirety. The Company's construction loan on the first phase of construction for Product A was obtained from Comerica Bank in 1998. The loan permitted borrowing by the Company of $13,773,142 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2001, the loan had been paid in its entirety. The Company's construction loan on the first phase of construction for Product B was obtained from Comerica Bank in 1999. The loan permitted borrowing by the Company of $10,604,352 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2001, the loan had been paid in its entirety. The Company's construction loan on the first phase of construction for Product C was obtained from Comerica Bank in 1999. The loan permitted borrowing by the Company of $12,342,388 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2001, the loan had been paid in its entirety. The Company's construction loan on the second phase of construction for Product A was obtained from Comerica Bank in 2000. The loan permitted borrowing by the Company of $13,612,993 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2002, the loan was paid in its entirety. The Company's construction loan on the second phase of construction for Product B was obtained from Comerica Bank in 2000. The loan permitted borrowing by the Company of $10,661,232 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2002, the loan was paid in its entirety. The Company's construction loan on the second phase of construction for Product C was obtained from Comerica Bank in 2000. The loan permitted borrowing by the Company of $12,897,860 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2002, the loan was paid in its entirety. The Company's construction loan on the third phase of construction for Product A was obtained from Comerica Bank in 2001. The loan permitted borrowing by the Company of $15,900,000 on this project 8 and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2002, the loan had been paid in its entirety. The Company's construction loan on the third phase of construction for Product C was obtained from Comerica Bank in 2001. The loan permitted borrowing by the Company of $9,321,000 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2002, the loan had been paid in its entirety. The Company's construction loan on the build-out units in the third phase of construction for Product A was obtained from Comerica Bank in 2002. The loan permits borrowing by the Company of $7,520,000 on this project and bears interest at the bank's reference rate plus 1.0%. As of December 31, 2003, the loan had been paid in its entirety. 2. High Ridge Court (Thornton, Colorado) The High Ridge Court project, consists of 170 units of single-family detached housing. The project consists of two models ranging from 1,238 to 1,884 square feet with base sales prices before lot premiums or sales incentives of $209,900 to $231,600. As of December 31, 2003, the Company had 12 lots under development, 19 units under construction (7 were in escrow), and two models. The project is located approximately 3 miles west of I-25 in the city of Thornton. The Company has an acquisition loan with Curci 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, 2003, $2,499,024 of the principal of this loan was outstanding. The Company's acquisition and development loan for the remaining three phases of the project was obtained in 1999 from First American Bank Texas. The loan permitted borrowing by the Company of $2,041,000 and bore interest at the prime rate plus 1.0%. As of December 31, 2002, the loan had been paid in its entirety. The Company's revolving construction loan on the entire 170 lots of the project was obtained in 1998 from First American Bank Texas. The revolving loan permitted the Company to have a maximum outstanding balance of $5,000,000 for the construction of the High Ridge and Saddlerock projects. The loan bore interest at the prime rate plus 1.0%. During 2001, the Company paid the revolving construction loan in its entirety and obtained a construction loan on the third and fourth phase with Imperial Capital Bank. The loan permitted borrowing by the Company of $9,340,000 on this project and bore interest at the bank's reference rate plus 1.0%. As of December 31, 2003, the loan had been paid in its entirety. The Company's construction loan on the fifth phase of construction was obtained from Imperial Capital in 2003. The loan permits borrowing by the Company of $8,500,000 on this project and bears interest at the bank's reference rate plus 1.25%. As of December 31, 2003, the outstanding principal of this loan was $32,204, and the Company had available $4,252,258. The Company believes these funds are adequate to complete the construction of the final phase of construction. 3. Saddlerock (Aurora, Colorado) 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 $335,653 to $372,769. As of December 31, 2003, the Company had 18 units under construction with one in escrow. As of December 31, 2003, the two models were sold. 9 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 Curci 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. During 2003, the loan amount to be borrowed under this loan was increased to pay of the projects construction loan for the first and second phase of the project. As of December 31, 2003, $4,444,419 of the principal of this loan was outstanding. The Company's acquisition and development loan on the entire 94 lots of the project was obtained in 1998 from First American Bank Texas. The loan permitted borrowing by the Company of $2,606,800 and bore interest at the prime rate 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 obtained in 1998 from First American Bank Texas. The revolving loan permitted 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 rate plus 1.0%. During 2000, the construction loan for the remaining units was refinanced and obtained with Comerica Bank. The loan permitted borrowing by the Company of $13,538,913 on this project and bears interest at the bank's reference rate plus 1.0%. During 2003, the loan was refinanced with Curci-Turner. The Company believes these funds are adequate to complete the construction of the final phase of construction. On May 6, 2004, the Company sold the Saddlerock project for a gross sales price of $1,390,000. There was no gain or loss on this transaction. 4. Rohnert Park, (Sonoma County, California) The Rohnert Park project consists of lots available to build 77 units of single-family attached housing. As of December 31, 2003, the Company had 77 lots under development. The project is located approximately 48 miles north of San Francisco along highway 101 in the Sonoma County area. The Company acquired the land through financing with CC Santa Rosa 77, LLC, on the entire 77 lots. The original notes balances of $2,210,000 and $390,000 bears interest at 10%. As of December 31, 2003, $2,210,000 and $390,000 of the principal of these loans were outstanding. 5. 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. Il as to a 25% interest. 10 On February 24, 2004, the Company purchased the remaining 50% interest from The John L. Curci Trust and The Janet Curci Living Trust No. II for a total purchase price of $3,600,000. On May 21, 2004, the Company sold the Mission Gorge property for a gross sales price of $6,849,679. As a result, the Company will record a gain on the sale of land of $431,703 in the second quarter of 2004. 6. Parcwest (Milpitas, California) The Parcwest project consists of a 68-unit affordable apartment project adjacent to the Parc Metropolitan project. The 68 units were completed in 2002 and substantially leased as of December 31, 2003. During the year, management approved a plan of action to sell the operating assets of the apartment building. As a result, the rental property has been classified as held for sale and depreciation has ceased as of the date the plan was approved. Operations of the apartment building are classified as discontinued operations in the consolidated statements of operations. The apartment project was sold on March 12, 2004 with a gross sales price of $9,000,000 (see Note 4 and 11). 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, land for the 68-unit apartment in the Parcwest project was acquired by PWA. The profits and losses of PWA were distributed between the members as follows: 50% to RGC Associates and 50% to the Company. In May of 2001, the Company acquired RGC's 50% partnership interest in PWA to attain 100% ownership as of December 31, 2003. The Company had an acquisition loan with the City of Milpitas. The loan permitted borrowing by the Company of $1,000,000 on this project and bore interest at 6.35%. As of December 31, 2003, the loan was paid in its entirety. The Company's construction loans were obtained from Comerica Bank in 2001. The loans permitted borrowing by the Company of $6,816,000 and $1,061,670 on this project and bore interest at the bank's reference rate plus 1.0% and 5.5%, respectively. During 2003, the construction loans were refinanced and obtained a permanent loan with UBS Warburg. As of December 31, 2003, $7,678,544 of the principal of this loan was outstanding. 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. 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 2003. 11 PART II 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 ------- ------- ------- ------- 2003 stock price range- High $ .85 $ .73 $ .56 $ .65 Low .73 .31 .35 .15 2002 stock price range- High $ 1.01 $ 1.02 $ .95 $ .93 Low .80 .60 .80 .75 As of June 24, 2004, there were 434 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 2003 or 2002. The dividend policy, whether cash or stock, is reviewed by the Board of Directors on an annual basis. During 2003, there were no restrictions, as a result of a loan or other agreement, limiting the Company's ability to issue a dividend. 12 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, 2003 ------------------------------------------------
2003 2002 2001 2000 1999 SALES AND OPERATING REVENUE $ 19,892,939 $ 91,641,620 $ 90,614,622 $ 64,238,615 $ 52,598,849 NET (LOSS) INCOME (15,144,157) (7,890,557) 3,326,106 3,627,940 (752,582) (LOSS) INCOME FROM CONTINUING OPERATIONS PER SHARE: BASIC $ (1.25) $ (0.71) $ 0.32 $ 0.35 $ (0.07) DILUTED $ (1.25) $ (0.71) $ 0.32 $ 0.35 $ (0.07) (LOSS) INCOME FROM DISCONTINUED OPERATIONS PER SHARE: BASIC $ (0.23) $ (0.06) DILUTED $ (0.23) $ (0.06) AS OF DECEMBER 31: TOTAL ASSETS $ 23,523,872 $ 46,074,946 $ 98,967,700 $108,609,523 $ 87,817,643 LONG TERM OBLIGATIONS $ 5,243,182 $ 6,000,000 $ 7,979,090 $ 1,000,000 $ 17,201,168
13 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 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. However, the number of units sold subject to construction ("backlog") has decreased due to having fewer completed homes available for sale at December 31, 2003, 2002 and 2000 of 8, 12 and 60 units, respectively compared to 87 and 128 units as of December 31, 1999 and 2000, respectively. As of December 31, 2003, the Company has entered into contracts to purchase three new development projects to start construction in 2004. Additionally, the Company's real estate sales increased from $90,614,622 in 2001 to $91,641,620 in 2002, and decreased to $19,892,939 in 2003. The increase in real estate sales in 2001 and 2002 is primarily attributable to an increase in units available for sale resulting from an increase in production of 249 and 248, respectively from previous years. The decrease in real estate sales between 2002 and 2003 is primarily attributable to a decrease in units available for sale resulting from a decrease in production of 37 in 2003. The Company had a loss of $823,053 from development operations before recognition of impairment of real estate in 2003 as compared to a loss of $757,490 in 2002. As a percentage of real estate sales, a loss from development operations before recognition of impairment of real estate decreased by 3.31 percentage points to (4.14)% in 2003 compared to (0.83)% in 2002. The Company had a loss from development operations before recognition of impairment of real estate in 2002 of $757,490 from income from development operations before recognition of impairment of real estate of $7,943,613 in 2001. As a percentage of real estate sales, a loss from development operations before recognition of impairment of real estate decreased by 9.6 percentage points to (0.83)% in 2002 compared to as a percentage of real estate, income from development operations before recognition of impairment of real estate to 8.77% in 2001. The significant decrease of income before recognition of impairment of real estate as a percentage of gross revenues from 2003 to 2001 results from a slower absorption rate, and increased production overhead costs. The increased sales price was not sufficient to offset the increased direct construction cost, marketing and sales incentives, production overhead and interest costs. The 2003 impairment loss on real estate development includes the recording of an impairment loss for two projects. The impairment loss on the Saddlerock project is primarily a result of the lack of demand of the product lines resulted in a slower absorption rate. The Company introduced three new product lines and converted certain upgrades as standards to increase the absorption rate. The project consisted of 94 homes with five product lines in Aurora, Colorado. The introduction of the new product lines increased direct construction cost, marketing, production overhead and interest costs and as a result the Company recorded an impairment loss on real estate under development of $4,614,756. As of December 31, 2003, the Company has no remaining units to construct, 18 units under construction, one of which has been sold. On May 6, 2004, the Company sold the Saddlerock project for a gross sales price of $1,390,000. There was no gain or loss on this transaction. The impairment loss on the High Ridge Court project is primarily a result of an absorption rate slower than anticipated. The decrease in absorption rate increased marketing, production and interest costs and as a result the Company recorded an impairment loss on real estate under development of $431,394. As of December 31, 2003, the Company has 33 remaining units to construct, 21 units under construction, seven of which have been sold. 14 In January 2003, the Company sold its 24.5% interest in RGC Carmel Country, LLC, the ("Joint Venture") to related parties. The Joint Venture consisted of 181 townhomes available for lease in San Diego. The Company's basis in the Joint Venture was $0. The proceeds from the sale, in the amount of $2,000,000, was received in 2002 and was recorded as a deposit at December 31, 2002. The Company recorded a gain of $2,000,000 on the sale of the joint venture in 2003. The Company developed and constructed a 68-unit affordable apartment, the Parc West Apartment Homes located in Milpitas, California, adjacent to the Parc Metropolitan project owned by RGCCLPO. Construction was completed in August 2002 and the 68 units were available for lease. As of December 31, 2003, the apartment project was substantially leased. The apartment project was sold on March 12, 2004 at a gross sales price of $9,000,000. In accordance with the SFAS 144 "Accounting for the Impairment or Disposal of Long-lived Assets," the net loss of assets held for sale is reflected in the consolidated statement of operations as discontinued operations for all periods presented. The loss from discontinued operations during the year ended December 31, 2003 includes an impairment loss of $2,268,948. Results of operations The Company had a loss from continuing operations before income taxes of $6,269,560 in 2003, a loss from continuing operations before income taxes of $7,263,252 in 2002, and income from continuing operations before income taxes of $3,492,971 in 2001. The net loss suffered in 2003 and 2002 is primarily a result of loss from development operations and a reflection of the recognition of asset impairment of the High Ridge and Saddlerock projects in the amount of $5,046,150 and $4,471,693, respectively. The income in 2001 is primarily due to increase in profit from operations as the Company began selling homes in its Parkland Farms, Montserrat Estates and Parc Metropolitan projects. Real estate sales decreased to $19,892,939 in 2003 from $90,641,620 in 2002, down 78.1%. Real estate sales were $90,614,622 in 2001. In 2003, the Company sold 54 homes, with an average sales price of $322,160 and 50 lots, with an average sales price of $49,925. In 2002, the Company sold 248 homes, with an average sales price of $369,523. In 2001, the Company sold 249 homes, with an average sales price of $363,914. The overall gross profit percentage before recognition of impairment loss of the Company was (4.1)%, (0.8)%, and 8.8% in 2003, 2002, and 2001, respectively. General and administrative expenses were $1,711,586 in 2003 and $2,379,007 in 2002, down 28.1%. General and administrative expenses were $2,924,795 in 2001. The decrease in 2003 from 2002 and 2001 is the result of a decrease in payroll costs, and decreased accounting costs due to the efforts of management to function more effectively. The decrease is also attributed to the decrease of the number of projects currently in construction. The provision for income taxes of $6,535,343 in 2003 represents the increase in the deferred tax valuation allowance to fully offset the deferred tax asset. During 2002, the Company increased the deferred tax valuation allowance to offset current year's net income tax benefit of $3,152,732. The provision for income taxes of $171,742 in 2001 includes the decrease of the deferred income tax valuation to offset 2001 deferred income taxes of $1,187,934. Liquidity and capital resources As of December 2003, the Company has construction loans outstanding to financial institutions, secured by the development projects' trust deeds, with rates ranging from prime plus 1.25% to 10% and maturing January 2005 through June 2005. As of December 31, 2003, the outstanding balances owing on these loans totaled $2,744,158. Additionally, the Company has an unsecured line of credit with a financial institution available to borrow up to $1,500,000 at prime and mature on August 1, 2004. As of December 31, 2003, $1,500,000 is outstanding. The Company also have notes payable to financial institutions to finance general liability policies for the Company's projects for $121,545. The notes are 15 unsecured with interest rate at 6.25% and mature through May 31, 2004. The balance of these loans as of December 31, 2003 is $4,365,703. As of December 31, 2003, the Company had remaining construction loan commitments from banks and financial institutions of approximately $4,252,000, 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: Curci-The Company has the following notes payable to Curci at December 31, 2003 and 2002. A principal of Curci is a stockholder of the Company. 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 2003 2002 - --------------------- ----------------- ------------------ ---------------- Secured loans: High Ridge Court 50% $ 2,499,024 $ 2,366,102 Saddlerock 50% 4,444,419 2,413,597 ----------- ----------- 6,943,443 4,779,699 Unsecured loans 5,356,254(1) 5,000,000(1) ----------- ----------- $12,299,697 $ 9,779,699 =========== =========== (1) During 2001, the Company obtained a $5,000,000 unsecured working capital loan from Curci which bear interest at 15% and matures on July 16, 2004. Interest is payable monthly. Unpaid interest of $356,254 has been added to the note principal. Other Related Parties-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 both December 31, 2003 and 2002, the outstanding principal due an officer of the Company and a related party on these notes was $581,542 and $462,330, respectively. 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, 2003 and 2002 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, 2003 and 2002 were $499,062 and $424,063, respectively. The Company has other loans from related parties, which provide for interest at 10% per annum. As of December 31, 2003 and 2002 these loans totaled $640,000 and $740,000, respectively. Included in accounts payable as of December 31, 2003 and 2002 is interest payable on the notes discussed above of $503,798 and $259,913, respectively. As of December 31, 2003, the Company had three remaining projects in various stages of construction and development. During 2003, the Company had four projects producing revenues from completed homes and apartments: Parc Metropolitan, High Ridge Court, Saddlerock and Parcwest Apartments. As of December 31, 2003, Parc Metropolitan was completed and all homes were sold. The Company enters 2004 with 39 homes under construction, of which 8 are in escrow for sale, and 2 model 16 units. The Company has an inventory of 89 lots under development. In addition, the Company has a 68 unit apartment building that is substantially leased as of December 31, 2003, and is being held for sale. Based on its agreements with its lenders, the Company believes that it will have sufficient liquidity to finance its construction projects in 2004 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 2004, minimize operating expenses, and maintain control over costs. With regard to the debt coming due in 2004, 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 2004. Contractual Obligations Our significant contractual obligations as of December 31, 2003 follows:
Payments Due by Period - ------------------------------------- -------------------------------------------------------------------------- 2004 2005-2006 2007-2008 After 2008 Total Debt related to assets held for sale $ 7,678,544 $ 7,678,544 Debt $15,605,152 $ 5,243,182 20,848,334 Operating leases 205,854 276,684 482,538 -------------------------------------------------------------------------- Total contractual obligations $15,811,006 $ 5,519,866 $ 7,678,544 $29,009,416 ==========================================================================
At December 31, 2003 we had scheduled maturities on existing debt of $15,605,152 through December 31, 2004. Our ability to make scheduled payments of principal or interest on or to refinance this indebtedness depends on our future performance, which to a certain extent, is subject to general economic, financial, competitive and other factors beyond our control. We believe our borrowing availability under existing credit facilities, our operating cash flow, and our ability to obtain new borrowings and/or raise new capital, should provide the funds necessary to meet our working capital requirements, debt service and maturities and short- and long-term needs based upon currently anticipated levels of growth. However, limitations on access to financing constrain our ability to take advantage of opportunities that might lead to more significant growth. Critical Accounting Policies In the preparation of our financial statements, we select and apply accounting principles generally accepted in the United States of America. The application of some of these generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying results. The accounting policies that include significant estimates and assumptions are in the areas of valuing our real estate under development and rental property and determining if any are impaired. We review our real estate under development and rental property for impairment of value. This includes considering certain indications of impairment such as significant declines in occupancy, other significant changes in property operations, significant deterioration in the surrounding economy or environmental 17 problems. If such indications are present, we estimate the total future cash flows from the property and compare the total future cash flows to the carrying value of the property. If the total future cash flows are less than the carrying value, we adjust the carrying value down to its estimated fair value. Fair value may be based on third-party appraisals or our estimate of the property's fair value. Recent Accounting Pronouncements On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the Effects of Disposal of a Segment of a Business. SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for the Company for all financial statements issued in fiscal 2002. The adoption of SFAS 144 did not have a material impact on the Company's financial position or results of operations. In April 2002, FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). The most significant provisions of this statement relate to the rescission of Statement No. 4 "Reporting Gains and Losses from Extinguishment of Debt." SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002. Management does not expect that the adoption of this statement will have a material effect on the Company's results of operations or financial condition. In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Management does not expect that the adoption of this statement will have a material effect on the Company's results of operations or financial condition. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees. Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote. The disclosure requirements within FIN 45 are effective for financial statements for annual or interim periods ending after December 15, 2002. The initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002. Management does not expect the adoption of the initial recognition and measurement provisions will have a material effect on the Company's results of operations or financial condition. In December 2002, the Financial Accounting Standards Board, ("FASB") issued SFAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123 "Accounting for Stock Based Compensation" ("SFAS 123") to provide alternative methods of transition for 18 an entity that voluntarily changes to the fair value recognition provision of recording stock option expense. SFAS 148 also requires disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock options on reported net income and earnings per share in annual and interim financial statements. The Company voluntarily adopted the fair value recognition provision prospectively, for all employee awards granted or settled after January 1, 2002. Under this provision, total compensation expense related to stock options is determined using the fair value of the stock options on the date of grant and is recognized on a straight-line basis over the option vesting period. Prior to 2002, the Company accounted for stock options issued under this plan under the recognition and measurement provision of APB Opinion 25 "Accounting for Stock Issued to Employees and Related Interpretations". In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and provides guidance on the identification of entities for which control is achieved through means other than voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity in which either: (1) the equity investors (if any) lack one or more characteristics deemed essential to a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the interpretation and defer the effective date of implementation for certain entities. The provisions of FIN 46R are effective for the first reporting period ending after December 15, 2003 for entities considered to be special-purpose entities. The provisions for all other entities subject to FIN 46R are effective for financial statements of the first reporting period ending after March 15, 2004. On February 1, 2003, the Company adopted the provisions of this interpretation, which did not have a material effect on the Company's results of operations or financial condition. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and provides guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. The provisions of this interpretation are immediately effective for VIEs formed after January 31, 2003. For VIEs formed prior to January 31, 2003, the provisions of this interpretation apply to the first fiscal year or interim period beginning after June 15, 2003. Management does not expect that the adoption of this standard will have a material effect on the Company's results of operations or financial condition. 19 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, 2003. 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, 2003.
Principal maturing in: Fair value ------------------------------------------------------------------------- December 31, 2004 2005 2006 2007 2008 Thereafter Total 2003 --------------------------------------------------------------------------------------------------- Interest rate sensitive liabilities Variable rate borrowings $ 1,500,000 $ 144,158 $ 1,644,158 $ 1,644,158 Average interest rate 4.00% 5.25% 4.11% Fixed rate borrowings 14,105,152 5,099,024 7,678,544 26,882,720 26,882,720 Average interest rate 12.85% 8.56% 6.08% 10.10% --------------------------------------------------------------------------------------------------- $15,605,152 $5,243,182 $7,678,544 $28,526,878 $28,526,878 =================================================================================================== Weighted average interest rate 12.00% 8.47% 6.08% 9.76% ===================================================================================================
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, 2002. 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, 2002.
Principal maturing in: Fair value ------------------------------------------------------------------------- December 31, 2003 2004 2005 2006 2007 Thereafter Total 2002 --------------------------------------------------------------------------------------------------- Interest rate sensitive liabilities Variable rate borrowings $18,615,597 $ -- $ -- $18,615,597 $18,615,597 Average interest rate 6.48% 6.48% Fixed rate borrowings 9,098,223 5,000,000 1,000,000 15,098,223 14,287,932 Average interest rate 11.54% 15.00% 6.35% 12.34% --------------------------------------------------------------------------------------------------- $27,713,820 $5,000,000 $1,000,000 $33,713,820 $32,903,529 =================================================================================================== Weighted average interest rate 8.14% 15.00% 6.35% 9.10% ===================================================================================================
20 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, 1997 then again in 2002 and 2003 in California, thus preventing the Company from increasing sales prices to cover increased costs. In 1998, 1999, 2000, and 2001 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. 21 ITEM 8. Financial Statements and Supplementary Data Page No. Financial Statements: - -------- --------------------- 25 Report of Independent Registered Public Accounting Firm 26 Consolidated Balance Sheets as of December 31, 2003 and 2002 27 Consolidated Statements of Operations For Each of the Three Years Ended December 31, 2003 29 Consolidated Statements of Stockholders' Equity For Each of the Three Years Ended December 31, 2003 30 Consolidated Statements of Cash Flows For Each of the Three Years Ended December 31, 2003 32 Notes to Consolidated Financial Statements FINANCIAL STATEMENT SCHEDULE: ----------------------------- 48 II - Valuation and Qualifying Accounts --Three Years Ended December 31, 2003 Schedules other than 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. 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. Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports required to be filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, except during the period from August 2003 - June 2004 where the accounting department was short of the required personnel needed to file its required reports timely. The Company is in the process of taking corrective measures to ensure timely filing of its required reports under the Securities Exchange Act of 1934. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 22 Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. ITEM 15. 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. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer (b) Reports on Form 8-K - A Current Report on Form 8-K dated June 20, 2003 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, 2003, and under item 7(c) a press release announcing Calprop Corporations' first quarter results. A Current Report on Form 8-K dated January 15, 2004 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, 2003, and under item 7(c) a press release announcing Calprop Corporations' second quarter results. A Current Report on Form 8-K dated March 19, 2004 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, 2003, and under item 7(c) a press release announcing Calprop Corporations' third quarter results. 23 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 June 29, 2004 - ------------------------------ ---------------------- 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 June 29, 2004 - ------------------------------ ---------------------- Mark F. Spiro Date Vice President/Secretary and Treasurer (Chief Financial and Accounting Officer) /s/ Mark T. Duvall June 29, 2004 - ------------------------------ ---------------------- Mark T. Duvall Date Director /s/ Victor Zaccaglin June 29 2004 - ------------------------------ ---------------------- Victor Zaccaglin Date Chairman of the Board Chief Executive Officer 24 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2003 and 2002, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2003. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 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 June 29, 2004 25 CALPROP CORPORATION CONSOLIDATED BALANCE SHEETS
Assets December 31, ------------------------------ 2003 2002 ------------------------------ Investment in Real Estate (Notes 3 and 4): Real estate under development $ 13,175,441 $ 24,166,829 Assets held for sale 8,864,917 11,214,659 ------------------------------ Total investment in real estate 22,040,358 35,381,488 OTHER ASSETS: Cash and cash equivalents 190,770 3,444,541 Deferred tax asset (Note 7) 6,535,343 Other assets (Note 5) 1,292,744 713,574 ------------------------------ Total other assets 1,483,514 10,693,458 ------------------------------ Total assets $ 23,523,872 $ 46,074,946 ============================== Liabilities and Stockholders' Equity LIABILITIES: TRUST DEEDS AND NOTES PAYABLE (Note 6) $ 4,365,703 $ 11,784,923 RELATED-PARTY NOTES (Note 6) 16,482,631 13,987,634 ------------------------------ Total trust deeds, notes payable and related-party notes 20,848,334 25,772,557 LIABILITIES RELATED TO ASSETS HELD FOR SALE (Note 4) 7,720,608 8,291,256 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Note 6) 2,521,487 2,374,863 DEPOSIT (Note 3) 2,000,000 WARRANTY RESERVES 686,376 757,550 ------------------------------ Total liabilities 31,776,805 39,196,226 ------------------------------ MINORITY INTERESTS (Note 1) COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' (DEFICIT) EQUITY (Note 9): Common stock, no par value; $1 stated value, 20,000,000 shares authorized; authorized, 10,239,105 and 10,235,305 shares issued and outstanding at December 31, 2003 and 2002, respectively 10,239,105 10,235,305 Additional paid-in capital 25,850,776 25,849,446 Deferred Compensation (Note 8) (28,600) Stock Purchase Loans (Note 8) (549,084) (527,858) Accumulated deficit (43,793,730) (28,649,573) ------------------------------ Total (deficit) equity (8,252,933) 6,878,720 ------------------------------ $ 23,523,872 $ 46,074,946 ==============================
See notes to consolidated financial statements 26 CALPROP CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------------------------------ 2003 2002 2001 ------------------------------------------------ DEVELOPMENT OPERATIONS (Note 3): Real estate sales $ 19,892,939 $ 91,641,620 $ 90,614,622 Cost of real estate sales (Note 6) 20,715,992 92,399,110 82,671,009 ------------------------------------------------ (Loss) income from development operations before recognition of impairment of real estate (823,053) (757,490) 7,943,613 Recognition of impairment of real estate development (Note 3) (5,046,150) (4,471,693) (2,018,088) ------------------------------------------------ (Loss) income from development operations (5,869,203) (5,229,183) 5,925,525 Income (loss) from investment in real estate venture (Note 3) 109,253 (118,764) Other income: Gain on sale of investment in real estate venture (Note 3) 2,000,000 Interest and miscellaneous 620,406 433,760 181,958 Management fee (Note 3) 222,957 542,818 ------------------------------------------------ Total other income 2,620,406 656,717 724,776 Other expenses: General and administrative (Note 5 and 10) 1,711,586 2,379,007 2,924,795 Interest expense (Note 6) 1,309,177 420,797 115,096 ------------------------------------------------ Total other expenses 3,020,763 2,799,804 3,039,891 Minority interests 235 (1,325) ------------------------------------------------ (Loss) income from continuing operations before provision for income taxes (6,269,560) (7,263,252) 3,492,971 Provision for income taxes (Note 7) 6,535,343 171,742 ------------------------------------------------ (Loss) income from continuing operations (12,804,903) (7,263,252) 3,321,229 Discontinued operations (Note 11 ): (Loss) income from discontinued operations (including impairment of $2,268,948 for the year ended December 31, 2003) (2,339,254) (627,305) 4,877 ------------------------------------------------ (Loss) income from discontinued operations (2,339,254) (627,305) 4,877 ------------------------------------------------ NET (LOSS) INCOME $(15,144,157) $ 7,890,557 $ 3,326,106 ================================================ 27 (Loss) income from continuing operations per common share- basic ($ 1.25) ($ 0.71) $ 0.32 ============ ============ ============ (Loss) income from continuing operations per common share - diluted ($ 1.25) ($ 0.71) $ 0.32 ============ ============ ============ (Loss) income from discontinued operations per common share - basic ($ 0.23) ($ 0.06) ============ ============ (Loss) income from discontinued operations per common share - diluted ($ 0.23) ($ 0.06) ============ ============ Net (loss) income per common share - basic ($ 1.48) ($ 0.77) $ 0.32 ============ ============ ============ Net (loss) income per common share - diluted ($ 1.48) ($ 0.77) $ 0.32 ============ ============ ============
See notes to consolidated financial statements 28 CALPROP CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2003
Common Stock Additional Deferred Stock Total ----------------------- Paid-In Comp- Purchase Accumulated Stockholders' Shares Amount Capital ensation Loans Deficit Equity ------------------------------------------------------------------------------------------------------ BALANCE, January 1, 2001 10,290,535 $ 10,290,535 $ 25,849,961 $ (105,525) $ (519,733) $(24,085,122) $ 11,430,116 Net income 3,326,106 3,326,106 Cancellation of shares under 1989 stock incentive plan (Note 8) (2,300) (2,300) 2,300 Purchase of Company's (34,230) (34,230) (3,975) (38,205) common stock Accrual of interest under stock purchase loans (Note 8) (22,626) (22,626) Repayment of stock purchase loan (Note 8) 5,180 5,180 Amortization of deferred compensation (Note 8) 52,225 52,225 ----------------------------------------------------------------------------------------------------- BALANCE, December 31, 2001 10,254,005 10,254,005 25,845,986 (51,000) (537,179) (20,759,016) 14,752,796 Net loss (7,890,557) (7,890,557) Cancellation of shares under 1989 stock incentive plan (Note 8) (1,400) (1,400) 1,400 Purchase of Company's common stock (17,300) (17,300) 3,460 (13,840) Accrual of interest under stock purchase loans (Note 8) (15,812) (15,812) Repayment of stock purchase loan (Note 8) 25,133 25,133 Amortization of deferred compensation (Note 8) 21,000 21,000 ----------------------------------------------------------------------------------------------------- BALANCE, December 31, 2002 10,235,305 10,235,305 25,849,446 (28,600) (527,858) (28,649,573) 6,878,720 Net loss (15,144,157) (15,144,157) Common stock 3,800 3,800 1,330 5,130 Accrual of interest under stock purchase loans (Note 8) (21,226) (21,226) Amortization of deferred compensation (Note 8) 28,600 28,600 ----------------------------------------------------------------------------------------------------- BALANCE, December 31, 2003 10,239,105 $ 10,239,105 $ 25,850,776 $ -- $ (549,084) $(43,793,730) $ (8,252,933) =====================================================================================================
See notes to consolidated financial statements 29 CALPROP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------------ 2003 2002 2001 ------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $(15,144,157) $ (7,890,557) $ 3,326,106 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Gain on sale of joint venture interest (2,000,000) Minority interests 235 (1,325) (Income) loss from investment in real estate venture (109,253) 118,764 Amortization of deferred compensation 28,600 21,000 52,225 Depreciation and amortization 183,739 165,287 45,807 Recognition of impairment of real estate development Recognition of impairment of asset held for sale 5,046,150 4,471,693 2,018,088 Recognition of impairment of rental property 2,268,948 Loss on sale of property and equipment 1,312 Provision for warranty reserves 54,000 252,105 332,899 Change in assets and liabilities Other assets (672,607) 18,116 49,277 Receivable from affiliates 788,752 (788,752) Deferred tax assets 6,535,343 Accounts payable and accrued liabilities (161,305) (2,609,594) (3,982,231) Deposit 2,000,000 Warranty reserves (125,174) (164,670) (209,768) Payable to affiliates (272,011) Additions to real estate under development (14,770,754) (43,444,123) (74,779,330) Cost of real estate sales 20,715,992 92,399,110 82,671,009 Accrued interest for executive stock purchase loans (21,226) (15,812) (22,626) ------------------------------------------------ Net cash provided by operating activities 1,938,861 45,882,289 8,558,132 ------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Investment in rental property (5,680) Proceeds from sale of property and equipment 1,000 Capital expenditures (6,140) (31,993) (6,554) ------------------------------------------------ Net cash used in investing activities (10,820) (31,993) (6,554) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under related-party notes 2,618,274 1,663,977 12,280,542 Payments under related-party notes (123,277) (13,895,903) (6,763,225) Borrowings under trust deeds and notes payable 18,909,061 32,681,856 67,603,361 Payments under trust deeds and notes payable (26,591,000) (64,946,449) (81,954,070) Common stock 5,130 (13,840) (38,205) Repayment of stock purchase loans 25,133 5,180 ------------------------------------------------ Net cash used in financing activities (5,181,812) (44,485,226) (8,866,417) ------------------------------------------------ Net (decrease) increase in cash and cash equivalents (3,253,771) 1,365,070 (314,839) Cash and cash equivalents at beginning of the year 3,444,541 2,079,471 2,394,310 ------------------------------------------------ Cash and cash equivalents at end of the year $ 190,770 $ 3,444,541 $ 2,079,471 ================================================
See notes to consolidated financial statements Continued 30 CALPROP CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------------ 2003 2002 2001 ------------------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid (refunded) during the year for: Interest (net of amount capitalized) $1,424,483 $699,849 $115,096 Income taxes $(55,998) $(44,331) $229,315 NON-CASH INVESTING AND FINANCING ACTIVITIES: Transfer of real estate under development to rental property $11,304,761
Concluded See notes to consolidated financial statements 31 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 (1) Organization Nature of operations - Calprop Corporation ("the Company"), a California Corporation, primarily 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, 2003, the Company had three residential housing projects in various stages of construction and development, consisting of 39 homes under construction (including 8 homes in escrow and 2 model homes), and 89 lots under development. The Company's products range from homes for first-time buyers to custom homes. In addition to the construction and sale of single-family and multifamily housing, the Company is engaged in the development of apartments and townhomes available for lease. As of December 31, 2003, the Company has a 68-unit apartment building that is substantially leased. During the year, management approved a plan of action to sell the operating assets of the apartment building. As a result, the rental property has been classified as held for sale and depreciation has ceased as of the date the plan was approved. Operations of the apartment building are classified as discontinued operations in the consolidated statements of operations. The apartment project was sold on March 12, 2004 at a gross sales price of $9,000,000 (see Note 4 and 11). Based on its agreements with its lenders, the Company believes that it will have sufficient liquidity to finance its construction projects in 2004 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 2004, minimize operating expenses, and maintain control over costs. With regard to the debt coming due in 2004, 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 2004. 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. 32 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 The Company has consolidated the financial statements of the following entities:
- --------------------------------------------------------------------------------------------------------------- Entity Ownership interest at Development December 31, 2003 - --------------------------------------------------------------------------------------------------------------- Colorado Pacific Homes, Inc. ("CPH") 100% High Ridge Court and Saddlerock projects, Colorado DMM Development, LLC ("DMM") 67% Cierra del Lago and Antares projects, California (Completed projects) Rohnert Park Development Co., LLC 100% 77 lots in Rohnert, California ("Rohnert") Parkland Farms Development Co., LLC 99% 115 lots in Healdsburg, California ("Parkland") (Completed project) RGCCLPO Development Co., LLC ("RGCCLPO") 100% 382 lots in Milpitas, California PWA Associates, LLC ("PWA") 100% 68-unit apartment building in Milpitas, California - ---------------------------------------------------------------------------------------------------------------
CPH: The Company was entitled to receive eighty percent of the profits of CPH, and the other partner, an officer of CPH, was entitled to receive the remaining twenty-percent of the profits. During November 2001, Calprop obtained all of the officer's ownership interest in CPH. 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. Rohnert: The Company is entitled to receive all of the profits of Rohnert. 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: The Company is entitled to receive all of the profits of RGCCLPO. As of December 31, 2003, all units have been sold. PWA: Pursuant to the operating agreement of PWA, Calprop was entitled to receive fifty percent of the profits of PWA, and the other member, RGC, was entitled to receive the remaining fifty-percent of the profits. During May 2001, Calprop purchased all of RGC's ownership interest in PWA. During the year ended December 31, 2003, the loss of $2,271 incurred by the entities related to the minority interest was not allocated to the minority interest because the minority interest had a deficit interest in the Company. The Company does not reflect the deficit for the minority interest because the minority owners are not responsible for losses incurred beyond their equity. The unrecognized minority interest in deficit of the Company as of December 31, 2003 and 2002 was $70,630 and $68,359, respectively. As a result, the Company has recorded minority interest of $0 as of December 31, 2003 and 2002. (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 2003 and 2002, the Company recorded 33 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 an impairment loss of $5,046,150 and $4,471,693, respectively (Note 3) related to its home-building activities. In addition, the Company recorded an impairment loss of $2,268,948 during 2003 related to the apartment building held for sale (Note 4). Rental revenue recognition - The Company generally leases its rental property under one year operating leases. Rental income is recognized as it is earned on a straight-line basis over the appropriate lease term. 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. Depreciation and amortization of building and improvements - The cost of building and improvements are depreciated on a straight-line method over the estimated useful life of 40 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 historical 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. 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 - On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the 34 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 Effects of Disposal of a Segment of a Business. SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for the Company for all financial statements issued in fiscal 2002. The adoption of SFAS 144 did not have a material impact on the Company's financial position or results of operations. In April 2002, FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). The most significant provisions of this statement relate to the rescission of Statement No. 4 "Reporting Gains and Losses from Extinguishment of Debt." SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002. Management does not expect that the adoption of this statement will have a material effect on the Company's results of operations or financial condition. In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Management does not expect that the adoption of this statement will have a material effect on the Company's results of operations or financial condition. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees. Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote. The disclosure requirements within FIN 45 are effective for financial statements for annual or interim periods ending after December 15, 2002. The initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002. Management does not expect the adoption of the initial recognition and measurement provisions will have a material effect on the Company's results of operations or financial condition. In December 2002, the Financial Accounting Standards Board, ("FASB") issued SFAS 148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123 "Accounting for Stock Based Compensation" ("SFAS 123") to provide alternative methods of transition for an entity that voluntarily changes to the fair value recognition provision of recording stock option expense. SFAS 148 also requires disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock options on reported net income and earnings per share in annual and interim financial statements. The Company voluntarily adopted the fair value recognition provision prospectively, for all employee awards granted or settled after January 1, 2002. Under this provision, total compensation expense related to stock options is determined using the fair value of the stock options on the date of grant and is recognized on a straight-line basis over the option vesting period. Prior to 2002, the Company accounted for stock options issued under this plan under the recognition and measurement provision of APB Opinion 25 "Accounting for Stock Issued to Employees and Related Interpretations". 35 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and provides guidance on the identification of entities for which control is achieved through means other than voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity in which either: (1) the equity investors (if any) lack one or more characteristics deemed essential to a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the interpretation and defer the effective date of implementation for certain entities. The provisions of FIN 46R are effective for the first reporting period ending after December 15, 2003 for entities considered to be special-purpose entities. The provisions for all other entities subject to FIN 46R are effective for financial statements of the first reporting period ending after March 15, 2004. On February 1, 2003, the Company adopted the provisions of this interpretation, which did not have a material effect on the Company's results of operations or financial condition. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material effect on the Company's results of operations or financial condition. (3) Real Estate Under Development Real estate under development at December 31, 2003 and 2002 is summarized as follows:
2003 2002 ----------------------------------------------------------------- Amount Units/Lots Amount Units/Lots ----------------------------------------------------------------- Single-family residences $ 7,389,708 39 $ 12,750,091 48 Townhomes (1,082,607) 4,335,593 16 ----------------------------------------------------------------- Total residences 6,307,101 39 17,085,684 64 Land under development 4,237,525 89 4,474,884 91 ----------------------------------------------------------------- Total real estate under development before investment in joint ventures 10,544,626 128 21,560,568 155 Investment in joint ventures 2,630,815 2,606,261 ----------------------------------------------------------------- Total real estate under development $ 13,175,441 128 $ 24,166,829 155 =================================================================
Investment in joint ventures represents the Company's investment in Mission Gorge, LLC and RGC Carmel Country Associates, LLC. Such investments are accounted for under the equity method of accounting. In 1996, Mission Gorge, LLC, a California limited liability company, was formed to develop and construct single-family homes 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 to develop, construct and lease a 181 townhome project. The profits and losses of RGC Carmel were distributed between the members as follows: 50% to RGC and 50% to the Company. During 36 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 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 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. During 2002, the Company transferred .5% of its interest in RGC Carmel to Calprop Andalucia, a 100% wholly owned subsidiary of the Company. In January 2003, the Company sold the remaining 24.5% of its interest in RGC Carmel to related parties in the following proportions: The Janet Curci Living Trust No. II as to a 6.125%, JAMS Management as to a 6,125%, and an officer of the Company as to a 12.25%. The Company's interest was sold for $2,000,000 in cash, which was received in 2002 and resulted in recording a deposit of $2,000,000 as of December 31, 2002. The Company recorded a gain of $2,000,000 on the sale of the joint venture in 2003. The gain equals the proceeds received of $2,000,000 as the Company had no basis in the investment sold. As a result, the Company's interest in RGC Carmel was reduced to .5%. During 2003, 2002 and 2001, the Company recorded income (loss) from investment in real estate venture of $0, $109,253 and $(118,764). Development operations in 2003, 2002 and 2001 are summarized as follows:
2003 2002 2001 ------------------------------------------------------------------------------- REAL ESTATE SALES: Amount Units Amount Units Amount Units ------------------------------------------------------------------------------- Single-family residences $ 9,739,000 38 $ 32,160,152 100 $ 34,578,692 109 Townhomes 7,657,678 16 59,481,468 148 56,035,930 140 Lots 2,496,261 50 ------------------------------------------------------------------------------- Total Sales 19,892,939 104 91,641,620 248 90,614,622 249 COST OF REAL ESTATE SALES: Single-family residences 10,698,724 31,977,269 32,548,574 Townhomes 7,609,716 60,169,736 49,773,731 Lots 2,296,560 Warranty 110,992 252,105 348,704 ------------ ------------ ------------ Total Cost of Sales 20,715,992 92,399,110 82,671,009 Recognition of impairment of real estate development (5,046,150) (4,471,693) (2,018,088) ------------ ------------ ------------ (Loss) income from development operations $ (5,869,203) $ (5,229,183) $ 5,925,525 ============ ============ ============
The 2003 impairment loss on real estate development includes the recording of an impairment loss for two projects. The impairment loss on the Saddlerock project is primarily a result of the lack of demand of the product lines resulted in a slower absorption rate. The Company introduced three new product lines and converted certain upgrades as standards to increase the absorption rate. The project consisted of 94 homes with five product lines in Aurora, Colorado. The introduction of the new product lines increased direct construction cost, marketing, production overhead and interest costs and as a result the Company recorded an impairment loss on real estate under development of $4,614,756. As of December 31, 2003, the Company has no remaining units to construct, 18 units under construction, one of which have been sold. The impairment loss on the High Ridge Court project is primarily a result of an absorption rate slower than anticipated. The decrease in absorption rate increased marketing, production and interest costs and as a result the Company recorded an impairment loss on real estate under development of $431,394. As of 37 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 December 31, 2003, the Company has 33 remaining units to construct, 21 units under construction, seven of which have been sold. The 2002 impairment loss on real estate development includes the recording of an impairment loss for three projects. The impairment loss on the Saddlerock project is primarily a result of the lack of demand of the product lines resulted in a slower absorption rate. The Company introduced three new product lines and converted certain upgrades as standards to increase the absorption rate. The project consisted of 94 homes with five product lines in Aurora, Colorado. The introduction of the new product lines increased direct construction cost, marketing, production overhead and interest costs and as a result the Company recorded an impairment loss on real estate under development of $1,503,792. As of December 31, 2002, the Company has 55 remaining units to construct, 20 units under construction, three of which are in escrow for sale. The impairment loss on the High Ridge Court project is primarily a result of an absorption rate slower than anticipated. The decrease in absorption rate increased marketing, production and interest costs and as a result the Company recorded an impairment loss on real estate under development of $1,407,520. As of December 31, 2002, the Company has 36 remaining units to construct, 28 units under construction, two of which are in escrow for sale. The impairment loss on the Parc Metropolitan project resulted from actual sales prices for certain units were lower than anticipated. In addition, the lack of demand for upgrades and options in the project also impacted the sales revenue and as a result the Company recorded an impairment loss on real estate under development of $1,560,381. As of December 31, 2002, the Company has 16 units under construction, 7 of which are in escrow for sale. The 2001 impairment loss on the Mockingbird Canyon project is primarily a result of the slow absorption rate. The sales price was not sufficient to offset the increased 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 $2,018,088 during the third quarter of 2001. The Company has 12 units remaining as of December 31, 2001. The project was completed during 2002. (4) Assets and Related Liabilities Held for Sale During the year ended December 31, 2003, management approved a plan of action to sell the operating assets of PWA. As a result, the rental property has been classified as held for sale and depreciation has ceased as of the date the plan was approved. Operations of PWA are classified as discontinued operations in the consolidated statements of operations. The apartment project was sold on March 12, 2004 at a gross sales price of $9,000,000 (see Note 11). Assets held for sale at December 31 is summarized as follows: 2003 2002 Land $ 1,500,000 $ 1,500,000 Building and improvements, net 7,364,917 9,714,659 ---------------------------- Assets held for sale, net 8,864,917 $11,214,659 ============================ Depreciation expense for building and improvements for the year ended December 31, 2003 and 2002 was $146,250 and $121,875, respectively. Liabilities related to assets held for sale at December 31 is summarized as follows:
2003 2002 Trust deed and note payable $7,678,544 $7,941,263 Accounts payable and accrued liabilities 42,064 349,993 -------------------------- Liabilities related to assets held for sale 7,720,608 $8,291,256 ==========================
Trust deed and note payable secured by the apartment project bear interest at 6.08% and mature on September 11, 2010. 38 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 (5) Other Assets Other assets at December 31, 2003 and 2002 are as follows:
Interest Rate Outstanding Balance ------------- ----------------------------- 2003 2002 ----------------------------- Trust deeds receivable 11.75% $ 49,975 $ 52,370 Less reserve (30,000) (30,000) ----------------------------- Net trust deeds receivable 19,975 22,370 Deposits in escrow 501,010 151,000 Office equipment and other, net of accumulated depreciation of $362,580 and $334,974 as of December 31, 2003 and 2002, respectively 751,255 502,967 Prepaid expenses 20,504 37,237 ----------------------------- Other assets $ 1,292,744 $ 713,574 =============================
Depreciation expense included in general and administrative expenses for the year ended December 31, 2003, 2002 and 2001 were $32,725, $43,412 and $45,277, respectively. (6) Trust Deeds, Notes Payable and Related-Party Notes Trust deeds, notes payable and related party notes as of December 31, 2003 and 2002 are as follows:
2003 2002 -------------------------------- Trust Deeds and Notes Payable: Notes payable to financial institutions, secured by development projects' trust deeds - variable and fixed interest rates ranging from prime plus 1.25% to 10%, interest payable monthly (prime rate equals 4.0% and 4.25% at December 31, 2003 and 2002, respectively); maturing January 2005 through June 2005 $ 2,744,158 $10,174,334 Line of credit to financial institution, unsecured - variable interest rate at prime, interest payable monthly (prime rate equals 4.0% and 4.25% at December 31, 2003 and 2002, respectively); maturing August 2004 1,500,000 1,500,000 Notes payable to financial institutions, unsecured - interest rate at 6.25%, interest payable monthly; maturing May 2004 121,545 110,589 -------------------------------- Total trust deeds and notes payable 4,365,703 11,784,923 -------------------------------- Related-Party Notes: Notes payable to related parties, secured by development projects' trust deeds - interest rate of 12%, interest payable monthly; maturing on demand through January 2005 $ 6,943,443 $ 4,779,699 Notes payable to related parties, unsecured - interest rates of 10% to 15%, interest payable monthly; maturing on demand through July 2004 9,539,188 9,207,935 -------------------------------- Total related party notes 16,482,631 13,987,634 -------------------------------- Total trust deeds, notes payable and related-party notes $20,848,334 $25,772,557 ================================
39 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 As of December 31, 2003, the Company had remaining loan commitments from banks and financial institutions of approximately $4,252,258 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. During 2003, 2002 and 2001, the Company paid interest of $592,028, $2,323,387 and $10,680,033, respectively, on trust deeds and notes payable. The Company capitalized interest of approximately $136,456, $2,047,647 and $10,680,033 during 2003, 2002 and 2001, respectively. During 2002, the Company paid and capitalized $6,200,000 of profit participation. The Company had a profit participation agreement with Ford for $6,200,00 to be paid on December 13, 2002. The Company had 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 bore interest at 9%. The loan was repaid in 2001. Related-Party Notes Curci - The Company has the following notes payable to Curci at December 31, 2003 and 2002. A principal of Curci is a stockholder of the Company. 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 2003 2002 ---------------------- ---------------- ------------------ ------------------ Secured loans: High Ridge Court 50% $2,499,024 $2,366,102 Saddlerock 50% 4,444,419 2,413,597 ------------------ ------------------ 6,943,443 4,779,699 Unsecured loans 5,356,254(1) 5,000,000(1) ------------------ ------------------ $12,299,697 $9,779,699 ================== ==================
(1) During 2001, the Company obtained a $5,000,000 unsecured working capital loan from Curci which bear interest at 15% and matures on July 16, 2004. Interest is payable monthly. Unpaid interest of $356,254 has been added to the note principal. During the years ended December 31, 2003, 2002, and 2001, net participation proceeds expensed to cost of real estate sales in the accompanying consolidated statements of operations were $0, $24,385, and $675,198, respectively. Accrued participation proceeds included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets at December 31, 2003 and 2002 was $0. Other Related Parties 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 both December 31, 2003 and 2002, the outstanding principal due on the officer and related party loans was $581,542 and $462,330, respectively. The notes mature on December 31, 2004. 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, 2003 and 2002 was $2,000,000 and 2,000,000, respectively. The note matures on December 31, 2004. Included in notes payable to related parties are notes payable to an officer which bear interest at 12%. Outstanding balances as of December 31, 2003 and 2002 were $499,062 and $424,063, respectively. The notes mature on December 31, 2004. 40 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 As of December 31, 2003, the Company had other loans, which bear for interest at 10%. $40,000 is due on demand and the remaining notes mature through December 31, 2004. As of December 31, 2003 and 2002, these loans totaled $640,000 and $740,000, respectively. Aggregate future principal payments due on trust deeds payable, notes payable and related party notes are as follows: Year Ended December 31, -------------------------- 2004 $15,605,152 2005 5,243,182 2006 2007 2008 Thereafter -------------------------- Total $20,848,334 ========================== During 2003, 2002 and 2001, the Company paid interest of $1,589,309, $2,918,200 and $5,300,889, respectively, on loans from related parties. The Company capitalized interest of approximately $620,398, $2,494,091 and $5,185,793 during 2003, 2002 and 2001, respectively. (7) Income Taxes The provision (benefit) for income taxes consists of the following:
Year Ended December 31, --------------------------------------------- 2003 2002 2001 --------------------------------------------- Current income tax (benefit) expense $(2,429,776) $(3,152,732) $ 171,742 Net deferred income tax expense (benefit) 2,429,776 3,152,732 Increase in valuation allowance to write-off deferred tax assets 6,535,343 --------------------------------------------- Provision for income taxes $ 6,535,343 $ 0 171,742 =============================================
As of December 31, 2003, the Company had gross deferred tax assets of $13,403,868 which have been fully offset by a deferred tax asset valuation allowance of $13,403,868. During 2003, the Company increased the deferred tax valuation allowance to offset current year's net income tax benefit of $2,338,785 as it has been determined that is it unlikely that the deferred tax assets will be utilized. Furthermore in the current year, as a result of Company's assessment of its past earnings history and trends, sales backlog, budgeted sales, and expiration dates of carryforwards, the Company determined that it would not be able to realize its recorded net reserve for its deferred tax assets since the likelihood of realization of the deferred tax benefits cannot be determined. As of December 31, 2003, the Corporation had net operating loss carryforwards for federal and state income tax purposes of approximately $24,869,625 and $6,800,746, respectively. For federal tax purposes the net operating loss carryforwards expire from 2013 through 2022. For state tax purposes the net operating loss carryforwards expire from 2005 through 2008. 41 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 The deferred income tax assets, resulting from differences between accounting for financial statements purposes and tax purposes, less valuation allowance, are as follows: 2002 2001 --------------------------------- Inventory reserves $ 284,113 Warranty reserves and others $ 4,399,475 1,651,075 State net operating loss 555,520 822,218 Federal net operating loss 8,448,873 8,307,677 --------------------------------- 13,403,868 11,065,083 Valuation allowance (13,403,868) (4,529,740) --------------------------------- $ 0 $ 6,535,343 ================================= The following is a reconciliation of the federal statutory rate to the Company's effective rate for 2003, 2002, and 2001:
2003 2002 2001 ------------------------------------------------------------------------------ Amount Percentage Amount Percentage Amount Percentage ------------------------------------------------------------------------------ Statutory rate $(2,742,848) (34%) $(2,682,709) (34%) $ 1,189,268 34% State franchise tax, net of federal tax benefit (458,250) (5.7%) (460,005) (5.8%) 167,718 4.8% $ 2,690 0% Other 771,322 9.6% (10,018) (.1%) Change in valuation allowance 8,965,119 111.1% 3,152,732 39.9% (1,187,934) (34%) ------------------------------------------------------------------------------ $ 6,535,343 81.0% $ 0 0% $ 171,742 4.9% ===============================================================================
(8) 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 2003, 2002, and 2001. The compensation cost that has been charged against income for its stock incentive plan was $28,600 in 2003, $21,000 in 2002 and $52,225 in 2001. 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 (loss) income and net (loss) income per share would have been adjusted to the pro forma amounts indicated below:
2003 2002 2001 ---- ---- ---- Net (loss) income: As reported $(15,144,157) $(7,890,557) $3,326,106 Pro forma $(15,148,227) $(7,894,021) $3,318,068 Diluted net (loss) income per share: As reported $ (1.48) $ (0.77) $ .32 Pro forma $ (1.48) $ (0.77) $ .32
42 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 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 for the years ended December 31,:
2002 2001 ------------------------ ------------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price ------------------------ ------------------------- Outstanding, beginning of year 58,000 $ 2.93 58,000 $ 2.93 Expired (58,000) $ 2.93 ------------------------ ------------------------- Outstanding, end of year -- 58,000 $ 2.93 ======================== ======================== Exercisable, end of year -- 53,000 ========== ===========
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 for the years ended December 31,:
2003 2002 2001 ----------------------- ------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------------------- ------------------------- ------------------------- Outstanding, beginning of year 697,700 $ 1.32 860,700 $ 1.27 860,700 $ 1.27 Canceled (258,200) $ 1.31 (163,000) $ 1.04 ------------------------ ------------------------- --------------------- Outstanding, end of year 439,500 $ 1.32 697,700 $ 1.32 860,700 $ 1.27 ======================== ========================= ===================== Exercisable, end of year 439,500 697,700 860,700 ============= ============== ============= Available for grant, end of year 749,450 491,250 328,250 ============= ============== =============
The following table summarizes information about the outstanding options as of and for the year ended December 31, 2003, from the Company's 1993 stock option plan:
Options Outstanding Options Exercisable ----------------------------------------------------- -------------------------------- Number Weighted-Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/03 Contractual Life Exercise Price at 12/31/03 Exercise Price - -------------------- ----------------------------------------------------- -------------------------------- $0.49 to $0.96 114,950 3.3 years $0.70 114,950 $0.70 $1.00 to $1.88 324,550 5.0 years $1.55 324,550 $1.55 ----------------------------------------------------- -------------------------------- $0.69 to $1.88 439,500 4.5 years $1.32 439,500 $1.32 =======================================================================================
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 for the years ended December 31,: 43 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 2003 2002 2001 -------------------------------------- Outstanding, beginning of year 418,580 419,980 422,280 Shares canceled (6,900) (1,400) (2,300) -------------------------------------- Outstanding, end of year 411,680 418,580 419,980 ====================================== Vested, end of year 411,680 400,980 368,980 ====================================== Available for grant, end of year -- -- -- ====================================== Included as a separate deduction of stockholder's equity is deferred compensation relating to this plan of $0 and $28,600 as of December 31, 2003, and 2002, 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 eligible to be 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. Options were not granted to directors from the 1992 Director Stock Option Plan during 2003. During 2002 and 2001, 15,000 shares and 15,000 shares, respectively, were granted under this plan at an exercise prices of $1.13 and $1.13 per share, respectively. The exercise prices represent the market price at the date of grant. At December 31, 2003, 22,500 shares were outstanding related to this plan. In 1996, the Company issued warrants to purchase 150,000 shares of common stock at an exercise price of $1.00 that expired on September 30, 2003. As of December 31, 2003, no warrants were outstanding. The weighted-average fair value of the options granted during 2002 and 2001 is $0.51 and $0.46, 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 2002 and 2001, 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 and 5.0 years; and volatility of 44 and 33 percent. For the years ended December 31, 2003 and 2002, 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 periods. In addition, for the year ended December 31, 2001, options of 601,700 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. During 2002, the director repaid his portion of the note receivable in the amount of $22,188. 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 accrued interest at 4.987% and was guaranteed by the officer. During 2001, the officer partially repaid the note receivable, with the balance repaid during 2002. As of December 31, 2003 and 2002, accrued interest for the stock purchase loans was $123,459 and $102,233 respectively. The stock purchase loans and the related accrued interest are reflected as reductions to stockholder's equity. 44 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 (9) Earnings Per Share The following table sets forth the computation of basic and diluted net (loss) income per common share:
2003 2002 2001 --------------------------------------------- Net (loss) income from continuing operations ($12,804,903) ($ 7,263,252) $ 3,321,229 Discontinued operations (2,339,254) (627,305) 4,877 --------------------------------------------- Numerator for basic and diluted net (loss) income per share ($15,144,157) ($ 7,890,557) $ 3,326,106 ============================================= Denominator for basic net (loss) income per share (weighted average outstanding shares) 10,238,781 10,252,592 10,281,879 Effect of dilutive stock options 128,327 --------------------------------------------- Weighted average shares for dilutive net (loss) income per share 10,238,781 10,252,592 10,410,206 ============================================= (Loss) income from continuing operations per common share - basic ($ 1.25) ($ 0.71) $ 0.32 ============================================= (Loss) income from continuing operations per common share - diluted ($ 1.25) ($ 0.71) $ 0.32 ============================================= (Loss) income from discontinued operations per common share - basic ($ 0.23) ($ 0.06) ============================================= (Loss) income from discontinued operations per common share - diluted ($ 0.23) ($ 0.06) ============================================= Net (loss) income per common share - basic ($ 1.48) ($ 0.77) $ 0.32 ============================================= Net (loss) income per common share - diluted ($ 1.48) ($ 0.77) $ 0.32 =============================================
(10) Commitments and Contingencies Land Acquisition - During 2004, the Company completed the sale of its contractual rights to purchase approximately 60 acres of undeveloped land in Southern California for a gross sales price of $11,700,000. The Comapny estimates that the net sale proceeds will be approximately $9,000,000. The Company has entered into approximately $8,625,000 in contracts to acquire two properties and has acquired one project for $600,000 in its current market in Riverside County in Southern California. These three properties are zoned for residential development and can be subdivided into approximately 213 single family detached lots. The Company plans to start construction in the first quarter of 2005. 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. The Company's contribution to the Plan for the years ended December 31, 2003, 2002, and 2001 was $0, $0, and $0, respectively. Leases - The Company has operating leases that expire through 2006. Future minimum rents are as follows: Year Ending December 31, Amount -------- 2004 $205,854 2005 154,015 2006 122,669 -------- $482,538 ======== 45 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 Rent expense for the years ended December 31, 2003, 2002 and 2001 was $219,387, $269,023, and $239,304, respectively. (11) Discontinued operations In accordance with the SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," the net loss of assets held for sale is reflected in the consolidated statement of operations as discontinued operations for all periods presented. For the years ended December 31, 2003, 2002 and 2001, discontinued operations relates to an apartment project held for sale. The apartment project was sold on March 12, 2004 with a sales price of $9,000,000 (see Note 4). The following table summarizes the income and expense components of discontinued operations for the years ended December 31,:
2003 2002 2001 ----------------------------------------- Revenues: Rental income $972,706 $256,117 $ Gain on forgiven debt 392,575 Interest and miscellaneous 26,966 12,516 4,877 ----------------------------------------- Total revenues 1,392,247 268,633 4,877 ----------------------------------------- Expenses: Rental operating 660,793 502,059 Impairment loss 2,268,948 General and administrative Depreciation 151,015 123,036 Interest 650,745 270,843 ----------------------------------------- Total expenses 3,731,501 895,938 ----------------------------------------- (Loss) income from discontinued operations ($2,339,254) ($627,305) $4,877 =========================================
(12) Subsequent events On May 6, 2004, the Company sold the Saddlerock project for a gross sales price of $1,390,000. There was no gain or loss on this transaction. On February 24, 2004, the Company purchased the remaining 50% interest from The John L. Curci Trust and The Janet Curci Living Trust No. II for a total purchase price of $3,600,000. On May 21, 2004, the Company sold the Mission Gorge property for a gross sales price of $6,849,679. As a result, the Company will record a gain on the sale of land of $431,703 in the second quarter of 2004. On June 18, 2004, the Company sold the contractual rights to purchase land in the Riverside area for a gross sales price of $11,700,000. 46 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 (13) Quarterly Financial Data - (unaudited) Year Ended December 31, 2003
First Second Third Fourth ------------------------------------------------------------------ Sales $ 4,572,279 $ 7,592,899 $ 5,569,748 $ 2,158,013 ================================================================== (Loss) income from development $ (530,679) $ (4,430,598) $ (27,336) $ (880,590) operations ================================================================== Net income (loss) $ 413,344 $(12,843,593) $ (1,193,342) $ (1,520,566) ================================================================== Basic income (loss) per share $ 0.04 $ (1.25) $ (0.12) $ (0.15) ================================================================== Diluted income (loss) per share $ 0.04 $ (1.25) $ (0.12) $ (0.15) ================================================================== Year Ended December 31, 2002 First Second Third Fourth ------------------------------------------------------------------ Sales $ 21,292,270 $ 43,058,399 $ 21,678,306 $ 5,612,645 ================================================================== Income (loss) from development operations $ 94,774 $ (1,079,218) $ (3,587,274) $ (657,465) ================================================================== Net loss $ (267,446) $ (1,224,951) $ (4,709,052) $ (1,689,108) ================================================================== Basic loss per share $ (0.03) $ (0.12) $ (0.46) $ (0.16) ================================================================== Diluted loss share $ (0.03) $ (0.12) $ (0.46) $ (0.16) ==================================================================
47 CALPROP CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2003 CALPROP CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the three years ended December 31, 2003 Trust Deeds Warranty Receivable Reserve Reserve ------------------------ Balance January 1, 2001 $ 546,984 $ 30,000 Additions charged to operations 332,899 Reductions (209,768) -- ------------------------ Balance December 31, 2001 670,115 30,000 Additions charged to operations 252,105 Reductions (164,670) -- ------------------------ Balance December 31, 2002 757,550 30,000 Additions charged to operations 54,000 -- Reductions (125,174) -- ------------------------ Balance December 31, 2003 $ 686,376 $ 30,000 ======================== 48 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 Consent of Independent Registered Public Accounting Firm 42 Financial Data Schedule 49 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) June 29, 2004 - -------------------------------------- ----------------------- 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. June 29, 2004 - -------------------------------------- ----------------------- Mark F. Spiro Date Vice President/Secretary and Treasurer (Chief Financial and Accounting Officer) June 29, 2004 - -------------------------------------- ----------------------- Mark T. Duvall Date Director June 29, 2004 - -------------------------------------- ----------------------- Victor Zaccaglin Date Chairman of the Board Chief Executive Officer 50 EX-23 2 ex23-1.txt CONSENT OF INDEPENDENT ACCOUNTING FIRM Exhibit 23 CALPROP CORPORATION CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-92633 and 333-92635 of Calprop Corporation on Form S-8 of our report dated June 29, 2004 appearing in this Annual Report on Form 10-K of Calprop Corporation for the year ended December 31, 2003. Deloitte & Touche LLP Los Angeles, California June 29, 2004 EX-31 3 ex31-1.txt CERTIFICATION OF CEO RE: SECTION 302 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, Victor Zaccaglin, certify that: 1. I have reviewed this annual report on Form 10-K of Calprop Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's board of directors (or persons performing the equivalent functions): 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: June 29, 2004 /s/ Victor Zaccaglin -------------------------- Victor Zaccaglin Chairman of the Board Chief Executive Officer EX-31.2 4 ex31-2.txt CERTIFICATION OF CFO RE: SECTION 302 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, Mark F. Spiro, certify that: 1. I have reviewed this annual report on Form 10-K of Calprop Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's board of directors (or persons performing the equivalent functions): 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: June 29, 2004 /s/ Mark F. Spiro ---------------------------------------- Mark F. Spiro VicePresident/Secretary/Treasurer (Chief Financial and Accounting Officer) EX-32.1 5 ex32-1.txt CERTIFICATION OF CEO RE: SECTION 906 Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Calprop Corporation (the "Company") hereby certifies, to his knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 29, 2004 /s/ Victor Zaccaglin -------------------------------- Victor Zaccaglin Chairman of the Board Chief Executive Officer EX-32.2 6 ex32-2.txt CERTIFICATION OF CFO RE: SECTION 906 Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Calprop Corporation (the "Company") hereby certifies, to his knowledge, that: (i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 29, 2004 /s/ Mark F. Spiro ------------------------------------ Mark F. Spiro VicePresident/Secretary/Treasurer (Chief Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----