-----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, WTuoP1Aby/CdSQgcHgNL2YimLowVldUa+Bob21eSns5RaLbigPQqv7W2txXtVAmz CSJjvEbgNIzJYtRzeLJPig== 0001047469-98-020287.txt : 19980515 0001047469-98-020287.hdr.sgml : 19980515 ACCESSION NUMBER: 0001047469-98-020287 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA COASTAL COMMUNITIES INC CENTRAL INDEX KEY: 0000840216 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 020426634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17189 FILM NUMBER: 98621487 BUSINESS ADDRESS: STREET 1: 4343 VON KARMAN AVE STREET 2: NULL CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7148333030 MAIL ADDRESS: STREET 1: 4343 VON KARMAN AVE CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FORMER COMPANY: FORMER CONFORMED NAME: KOLL REAL ESTATE GROUP INC DATE OF NAME CHANGE: 19931006 FORMER COMPANY: FORMER CONFORMED NAME: BOLSA CHICA CO/ DATE OF NAME CHANGE: 19921229 FORMER COMPANY: FORMER CONFORMED NAME: HENLEY GROUP INC/DE/ DATE OF NAME CHANGE: 19910415 10-Q 1 FORM 10-Q This Form 10-Q consists of 15 sequentially numbered pages. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 -------------- Commission file number 0-17189 ------- CALIFORNIA COASTAL COMMUNITIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 02-0426634 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization.) Identification No.) 4343 Von Karman Avenue Newport Beach, California 92660 ------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 833-3030 KOLL REAL ESTATE GROUP, INC. ---------------------------- (Former name, address and fiscal year, if changed since last report) 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 whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- The number of shares of Class A Common Stock outstanding at April 30, 1998, including the shares being delivered to former debenture holders upon surrender of their debenture certificates was 11,906,378. CALIFORNIA COASTAL COMMUNITIES, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 I N D E X -----------------------------------------
Page No. -------- PART I - Financial Information: Item 1 - Financial Statements Introduction to the Financial Statements . . . . . . .3 Balance Sheets - December 31, 1997 and March 31, 1998 . . . . . . . . .4 Statements of Operations - Three Months Ended March 31, 1997 and 1998 . . . . . .5 Statements of Cash Flows - Three Months Ended March 31, 1997 and 1998 . . . . . .6 Notes to Financial Statements. . . . . . . . . . . . .7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . 12 PART II - Other Information: Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . 15 Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . 15 SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2 CALIFORNIA COASTAL COMMUNITIES, INC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INTRODUCTION TO THE FINANCIAL STATEMENTS The condensed financial statements included herein have been prepared by California Coastal Communities, Inc. and its consolidated subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The financial information presented herein reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the full year. 3 CALIFORNIA COASTAL COMMUNITIES, INC. BALANCE SHEETS (in millions)
December 31, March 31, 1997 1998 ---- ---- ASSETS Cash and cash equivalents. . . . . . . . . . . . . $ 7.2 $ 6.2 Real estate held for development or sale . . . . . 4.0 4.0 Land held for development. . . . . . . . . . . . . 133.2 134.7 Reorganization value in excess of amounts allocated to net assets. . . . . . . . . . . . . 3.1 3.1 Discontinued operations. . . . . . . . . . . . . . 19.3 20.8 Other assets . . . . . . . . . . . . . . . . . . . 6.5 6.5 ------ ------ $173.3 $175.3 ------ ------ ------ ------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities. . . $ 3.5 $ 5.2 Other liabilities . . . . . . . . . . . . . . 29.7 30.0 ------ ------ Total liabilities . . . . . . . . . . . . . . 33.2 35.2 ------ ------ Stockholders' equity: Common stock. . . . . . . . . . . . . . . . . .6 .6 Capital in excess of par value. . . . . . . . 140.0 140.0 Accumulated deficit . . . . . . . . . . . . . (.5) (.5) ------ ------ Total stockholders' equity. . . . . . . . . . 140.1 140.1 ------ ------ $173.3 $175.3 ------ ------ ------ ------
See the accompanying notes to financial statements. 4 CALIFORNIA COASTAL COMMUNITIES, INC. STATEMENTS OF OPERATIONS (in millions, except per share amounts)
PREDECESSOR COMPANY SUCCESSOR COMPANY ------------------- ----------------- THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 1997 MARCH 31, 1998 -------------- -------------- Revenues . . . . . . . . . . . . . . . . . . . . $28.9 $ .4 Costs of Sales . . . . . . . . . . . . . . . . . . 28.7 .1 ----- ----- Gross operating margin. . . . . . . . . . . . .2 .3 General and administrative expenses. . . . . . . . 1.4 1.1 Interest expense . . . . . . . . . . . . . . . . . 6.3 .3 Other expense (income), net. . . . . . . . . . . . (3.7) -- ----- ----- Loss from continuing operations before reorganization costs and income taxes . . . . (3.8) (1.1) Reorganization costs . . . . . . . . . . . . . . . .2 -- ----- ----- Loss from continuing operations before income taxes. . . . . . . . . . . . . . . . . (4.0) (1.1) Provision for income taxes . . . . . . . . . . . . .1 -- ----- ----- Loss from continuing operations. . . . . . . . . . (4.1) (1.1) Income (loss) from discontinued operations, net of income tax benefit of $0 and $0, respectively. . . . . . . . . . . . . . . . . (.8) 1.1 ----- ----- Net (loss) income . . . . . . . . . . . . . . . . $(4.9) $ -- ----- ----- ----- ----- Net income per common share - basic and diluted: Continuing operations. . . . . . . . . . . . . N/A $(.09) Discontinued operations. . . . . . . . . . . . N/A .09 ----- $ -- ----- -----
See the accompanying notes to financial statements. 5 CALIFORNIA COASTAL COMMUNITIES, INC. STATEMENTS OF CASH FLOWS (in millions)
PREDECESSOR COMPANY SUCCESSOR COMPANY ------------------- ----------------- THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 1997 MARCH 31, 1998 -------------- -------------- Cash flows from operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . $(4.9) $ -- Adjustments to reconcile to cash (used) provided by operating activities: Non-cash interest expense. . . . . . . . . . . . . . . 6.2 .3 Gains on asset sales . . . . . . . . . . . . . . . . . (.2) (.3) Proceeds from asset sales, net . . . . . . . . . . . . 28.8 .3 Investments in real estate held for development or sale . . . . . . . . . . . . . . . . . . . . . . . . (1.6) -- Investments in land held for development . . . . . . . (.8) (1.5) Decrease in other assets . . . . . . . . . . . . . . . .1 -- (Decrease) increase in accounts payable, accrued and other liabilities. . . . . . . . . . . . . . . . (4.6) 1.7 ----- ----- Cash provided by operating activities of continuing operations. . . . . . . . . . . . 23.0 .5 ----- ----- Cash used by operating activities of discontinued operations. . . . . . . . . . . . . (19.3) (16.7) ----- ----- Cash flows from financing activities: Borrowings of bank debt . . . . . . . . . . . . . . . . . . .9 -- Repayments of bank debt . . . . . . . . . . . . . . . . . . (9.1) -- Use of restricted cash. . . . . . . . . . . . . . . . . . . .2 -- ----- ----- Cash used by financing activities of continuing operations . . . . . . . . . . . . . . . . . . . . (8.0) -- ----- ----- Cash provided by financing activities of discontinued operations. . . . . . . . . . . . . . 18.6 15.2 ----- ----- Net (decrease) increase in cash and cash equivalents . . . . . . 14.3 (1.0) Cash and cash equivalents - beginning of period. . . . . . . . . 2.1 7.2 ----- ----- Cash and cash equivalents - end of period. . . . . . . . . . . . $16.4 $ 6.2 ----- ----- ----- -----
See the accompanying notes to financial statements. 6 CALIFORNIA COASTAL COMMUNITIES, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION On May 1, 1998, following completion of the sale of the commercial development business (see Note 4), Koll Real Estate Group, Inc. changed its name to California Coastal Communities, Inc. (the "Company"). The Company expects the corresponding change of its stock symbol from "KREG" to "CALC" to become effective on May 29, 1998. The accompanying financial statements should be read in conjunction with the Financial Statements and Notes thereto included in the Annual Report on Form 10-K of the Company for the year ended December 31, 1997. NOTE 2 - RECAPITALIZATION On September 2, 1997, the Company completed its recapitalization (the "Recapitalization") which became effective pursuant to a prepackaged plan of reorganization that was confirmed by the U.S. Bankruptcy Court for the District of Delaware on August 19, 1997. The prepackaged plan was filed by the Company, excluding all of its subsidiaries and affiliates, contemporaneously with a voluntary petition for relief under Chapter 11 of the bankruptcy code on July 14, 1997. The Recapitalization had previously received over 95% approval of each class of stock and bondholders that voted through a public solicitation process in June 1997. On September 2, 1997, the effective date of the Recapitalization, the Company (referred to as "Successor Company" for periods after September 2, 1997) adopted the provisions of Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting") as promulgated by the American Institute of Certified Public Accountants in November 1990. Accordingly, all assets and liabilities were revalued to reflect their reorganization value, approximating their fair value at the effective date of the Recapitalization. In addition, the accumulated deficit of the Company was eliminated and its capital structure recast in conformity with the Recapitalization, and as such, the Company has recorded the effects of the Recapitalization and Fresh-Start Reporting as of the effective date. The Recapitalization provided for a restructuring of the Company's capital structure. The only impaired parties under the Recapitalization were the holders of (a) the Company's 12% Senior Subordinated Pay-In-Kind Debentures due March 15, 2002 ("Senior Debentures"), (b) the Company's 12% Subordinated Pay-In-Kind Debentures due March 15, 2002 ("Subordinated Debentures") (collectively, the "Debentures"), (c) liquidated, non-contingent claims, and (d) equity securities of the Company. The prepackaged plan did not alter the Company's obligations to its other creditors, including its trade creditors, customers, employees, holders of contingent and unliquidated claims, holders of guaranty claims, and parties to contracts with the Company. The results of operations and cash flows for three months ended March 31, 1997 include operations prior to completion of the Recapitalization (referred to as "Predecessor Company"). The results of operations and cash flows for the three months ended March 31, 1998 include operations subsequent to the Company's Recapitalization and are not comparable with prior periods for the reasons discussed above. The reorganization value of the Company's common equity was determined by the Company with the assistance of financial advisors after consideration of several factors and by reliance on various valuation methods, including discounted projected cash flows, and other economic and industry information relevant to the operations of the Company. The reorganization value of the Company was allocated to specific asset categories pursuant to Fresh-Start Reporting. Reorganization Value in Excess of Amounts Allocated to Net Assets, which represents the difference in the Company's estimated valuation and the Company's net assets at fair value, of approximately $3.1 million is amortized on a straight-line basis over 15 years. In addition, $13.6 million of Reorganization Value in Excess of Amounts Allocated to Net Assets has been allocated to the commercial development business, which was sold on April 30, 1998, and is reflected in discontinued operations as of December 31, 1997 and March 31, 1998, net of related amortization. Reorganization costs during the period ended March 31, 1997 consisted primarily of legal, financial advisors and other professional fees and expenditures directly related to the Company's Recapitalization and were expensed as incurred. 7 NOTE 3 - EARNINGS (LOSS) PER COMMON SHARE The Company computes earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". Earnings per share is computed using the weighted average number of outstanding shares of the Successor Company's Common Stock, including the conversion rights of all Debenture holders, which expire on September 2, 1998, for periods commencing September 2, 1997. For the period ended March 31, 1998 the weighted average common shares outstanding was 11.9 million shares. Earnings per share assuming dilution is computed using the weighted average number of common shares outstanding and the dilutive effect of potential common shares outstanding. Per share data for periods prior to September 2, 1997 have been omitted as these amounts do not reflect the Successor Company's current capital structure. NOTE 4 - DISPOSITION On April 30, 1998 the Company completed the sale of its commercial development business to Koll Development Company LLC ("KDC") and NorthStar Capital Investment Corp. for (1) $33.4 million in cash, which included approximately $3.4 million for 1998 activity and (2) the assumption by KDC of all liabilities related to the business. KDC is a newly formed limited liability company, whose members include the Company's former Chairman and Chief Executive Officer, Donald M. Koll and its former President, Richard M. Ortwein, along with an affiliate of NorthStar Capital Investment Corp. Upon completion of the transaction Messrs. Koll and Ortwein resigned from their positions with the Company and Raymond J. Pacini, the Company's Chief Financial Officer since 1992, was appointed as the new President and Chief Executive Officer. The Company expects to realize a gain of approximately $9.5 million from this transaction during the second quarter. The following pro forma financial data as of March 31, 1998 gives effect to the sale of the commercial development business, including accruals for estimated fees of the Company's investment bankers and legal counsel, and estimated taxes payable, offset by deferred income related to a $1 million deposit received from KDC, as if the transaction had occurred on March 31, 1998 (in millions):
HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Assets: Cash . . . . . . . . . . . . . $ 6.2 $ 30.3 $ 36.5 Discontinued operations. . . . 20.8 (20.8) -- All other assets . . . . . . . 148.3 -- 148.3 ------- ------ ------ $ 175.3 $ 9.5 $184.8 ------- ------ ------ ------- ------ ------ Total liabilities . . . . . . . . . $ 35.2 $ -- $ 35.2 Stockholders' equity. . . . . . . . 140.1 9.5 149.6 ------- ------ ------ $ 175.3 $ 9.5 $184.8 ------- ------ ------ ------- ------ ------
Discontinued operations is comprised of the following (in millions):
DECEMBER 31, MARCH 31, 1997 1998 ---- ---- Restricted cash . . . . . . . . . . . . . $ .2 $ .2 Real estate held for development or sale. 87.9 101.2 Reorganization value in excess of amounts allocated to net assets . . . . . . . . 13.3 13.0 Other assets. . . . . . . . . . . . . . . 8.5 9.3 Accounts payable and other liabilities. . (13.1) (9.5) Bank debt . . . . . . . . . . . . . . . . (74.6) (89.8) Minority interest . . . . . . . . . . . . (2.9) (3.6) ------ ------- Net assets. . . . . . . . . . . . . . . . $ 19.3 $ 20.8 ------ ------- ------ -------
Revenues related to discontinued operations were $2.0 million and $27.2 million for the three months ended March 31, 1997 and 1998, respectively. The net loss from discontinued operations for the three months ended March 31, 1997 was $.8 million. Net income from discontinued operations for the three months ended March 31, 1998, was $1.1 million. 8 NOTE 5 - LAND HELD FOR DEVELOPMENT The Company owns approximately 340 acres located in Orange County, California adjacent to the Pacific Ocean and the Bolsa Chica lowlands (which were sold by the Company to the State of California as described below), surrounded by the City of Huntington Beach and approximately 35 miles south of downtown Los Angeles. The Company's holdings include approximately 200 acres to be developed on a mesa north of the Bolsa Chica lowlands ("Warner Mesa"), approximately 100 acres on, or adjacent to, the Huntington mesa and approximately 40 acres of lowlands which were acquired in September 1997. The planned community at Warner Mesa is expected to offer a broad mix of home choices, including primarily single-family homes, as well as townhomes, at a wide range of prices. A Local Coastal Program ("LCP") for development of up to 3,300 homes (up to 2,500 on Warner Mesa and up to 900 on the Bolsa Chica lowlands, which were subsequently sold as discussed below) was approved by the Orange County Board of Supervisors in December 1994 and by the California Coastal Commission (the "Coastal Commission") in January 1996. On February 14, 1997, the Company completed the sale of its approximately 880-acre Bolsa Chica lowlands, which had previously been planned for the development of up to 900 homes, to the California State Lands Commission for $25 million. Under an interagency agreement among various state and federal agencies, these agencies have agreed to restore the Bolsa Chica wetlands habitat utilizing escrowed funds from the Ports of Los Angeles and Long Beach. A lawsuit (the "CEQA Lawsuit") challenging the approvals of the Board of Supervisors was filed in January 1995. After remanding the matter to the Board of Supervisors for additional processing and findings, in January 1997 the court entered a judgment in favor of the Company. Plaintiffs in the CEQA Lawsuit have appealed the court's decision and the appeal is pending. The California Court of Appeal has notified the parties that a hearing will be held in June 1998, and the Company currently anticipates that a decision on this appeal may be rendered during the third quarter of 1998. In March 1996, a lawsuit (the "Coastal Act Lawsuit") was filed challenging the approvals of the Coastal Commission. The judgment in the Coastal Act Lawsuit was entered by the court in August 1997, and required the Coastal Commission to reconsider the filling of a 1.7 acre pond on the Warner Mesa ("Warner Pond") and development of any homes in the Bolsa Chica lowlands. On October 9, 1997, in response to the court's decision, the Coastal Commission approved modifications to the LCP which eliminated the filling of Warner Pond and thereby reduced the maximum density from 2,500 homes to no more than 1,235 homes on the mesa. On November 18, 1997 and February 3, 1998, the Orange County Board of Supervisors accepted the Coastal Commission's suggested modifications. On February 20, 1998, the court ruled that the Coastal Commission should not have narrowed the scope of public comments during the Coastal Commission's October 1997 hearing, and ordered the Coastal Commission to hold a third hearing on the LCP. There are numerous appeals now pending with respect to the Coastal Act Lawsuit. In addition, the Company has appealed the trial court's latest decision, and is pursuing all other available legal and administrative options. In May 1998, the Court of Appeal ordered that all pending appeals be consolidated and heard on an expedited basis. The Company currently anticipates that a decision on these appeals may be rendered during the fourth quarter of 1998. The litigation process will delay the previously planned start of infrastructure construction beyond December 31, 1998; however, the Company is unable to predict the length of such delay at this time. The Company does not believe that the litigation process will permanently prevent the Company from completing the Warner Mesa project; however, there can be no assurance in that regard or that further delays will not result. Upon completion of the Company's Recapitalization as discussed in Note 2, the Company applied the principles required by Fresh-Start Reporting and the carrying value of land held for development (Warner Mesa) was adjusted to fair value as of September 2, 1997, after consideration of the October 9, 1997 Coastal Commission action discussed above. The estimation process involved in the determination of fair value is inherently uncertain since it requires estimates as to future events and market conditions. Such estimation process assumes the Company's ability to complete development and dispose of its real estate properties in the ordinary course of business based on management's present plans and intentions. Economic, market, environmental and political conditions may affect management's development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. Accordingly, the ultimate fair values of the Company's real estate properties are dependent upon future economic and market conditions, the availability of financing, and the resolution of political, environmental and other related issues. 9 NOTE 6 - BANK DEBT During the first quarter of 1997, the Company fully repaid the outstanding loan balance of approximately $7.1 million under a letter of credit and reimbursement agreement with Nomura Asset Capital Corporation. A prepayment of $.6 million was made in January in connection with a sale of Rancho San Pasqual lots, and the remaining balance was repaid upon the sale of the Bolsa Chica lowlands. Cash payments for interest on bank debt were approximately $.1 million for the three months ended March 31, 1997. NOTE 7 - INCOME TAXES Upon completion of the Recapitalization, the Company experienced an "ownership change" under Section 382 of the Internal Revenue Code (the "Code") as a result of the increase in the percentage of the Company's stock by value held by certain persons (including creditors who exchanged debt for stock) of more than 50 percentage points at any time during a three-year period. Subsequent to an ownership change, the Company's annual use of its net operating losses ("NOLs") is generally limited to the value of the Company's equity immediately before the ownership change multiplied by the long-term tax-exempt rate, which for September 1997 was 5.45%. Section 382(l)(5) of the Code, the "bankruptcy exception", provides that if the ownership change occurs through a bankruptcy, such as the Company's Recapitalization which utilized a prepackaged plan, and if the continuing shareholders and "qualifying creditors" before the ownership change own at least 50% of the Company's stock after the ownership change, the general limitations of Section 382 will not apply. "Qualifying creditors" generally must have held their debt at least 18 months before the prepackaged plan was filed on July 14, 1997, or the debt must have arisen in the ordinary course of the Company's business. The Company believes that it qualifies for the "bankruptcy exception" of Section 382(l)(5). Under this exception, the Company is required to reduce its NOLs by (i) the amount of interest accrued on any debt exchanged for stock in the bankruptcy proceeding during the year of the proceeding and the three prior taxable years and (ii) an additional amount required to make the total reduction equal to the amount of cancellation of indebtedness income realized. Accordingly, the Company's NOLs of approximately $286 million as of September 2, 1997 have been reduced by approximately $81 million, resulting in remaining NOLs available of approximately $205 million as of September 2, 1997. As reduced, and subject to any disallowance resulting from the proposed IRS adjustments discussed below, the Company's NOL carryovers will be fully deductible against post-reorganization income provided there is not a second ownership change as discussed below, and subject to the general rules regarding expiration of NOLs. Assuming that Section 382(1)(5) applies, the NOLs available as of March 31, 1998 are approximately $223 million. If the Company were to experience another ownership change within two years of the September 2, 1997 effective date of the Recapitalization, as the result of a 50 percentage point change in ownership, the second ownership change would not qualify for Section 382(l)(5) treatment and the use of all remaining NOLs would be disallowed. Pursuant to Section 382(l)(5)(D), the Section 382 Limitation from and after the second ownership change would be zero, and thus would eliminate the availability of any remaining unused portion of the $205 million of NOLs which existed as of September 2, 1997. If the Company experiences or expects a successive ownership change prior to the filing of its 1997 tax return, a determination could be made to elect out of Section 382(l)(5), which would preserve some of the NOL carryovers. The election out of Section 382(l)(5) would be irrevocable and must be made by the due date (including any extensions of time) of the Company's 1997 tax return and would bind the Company without regard to whether or not subsequent ownership changes (expected or not) occur. If the Company elects out of Section 382(l)(5) or if the requirements of such section are not met, the general rules of Section 382 would apply. However, in determining the limitation placed on the Company's annual use of its net operating losses under those general rules, Section 382(l)(6) provides that the value of the equity of the Company immediately before the ownership change would be deemed to include the increase in the value of the Company's equity resulting from any surrender or cancellation of creditors' claims due to implementation of the Recapitalization. Accordingly, assuming the Company's post-Recapitalization equity market value of approximately $140 million, and the long-term tax exempt rate for September 1997 of 5.45%, Section 382(l)(6) would limit the Company's utilization of its NOLs to approximately $7.6 million per year, plus any built-in gains recognized during the five year period following the ownership change. In summary, under Section 382(l)(5), the Company would have approximately $205 million of NOLs available as of September 2, 1997, which the Company has estimated could be fully utilized over the next ten years (1998-2007), whereas 10 under Section 382(l)(6) only approximately $76 million of NOLs would be available to the Company during that time frame, due to the annual limitation described above. The Internal Revenue Service ("IRS") has completed its examinations of the tax returns of the Company and its consolidated subsidiaries, including formerly affiliated entities, for the years ended December 31, 1989, 1990 and 1991. With respect to each examination, the IRS has proposed material audit adjustments. The Company disagrees with the positions taken by the IRS and has filed a protest with the IRS to vigorously contest the proposed adjustments. After review of the IRS's proposed adjustments, the Company estimates that, if upheld, the adjustments could result in Federal tax liability, before interest, of approximately $17 million (net of amounts which may be payable by former affiliates pursuant to tax sharing agreements). The IRS proposed adjustments, if upheld, could result in a disallowance of up to $132 million of available NOL carryforwards, of which none are recognized after consideration of the valuation allowance, as of March 31, 1998. The Company has not determined the extent of potential accompanying state tax liability adjustments should the proposed IRS adjustments be upheld. The Company's protest was filed in August 1995 and is still being considered by the IRS Appeals Division. Management currently believes that the IRS's positions will not ultimately result in any material adjustments to the Company's financial statements. The Company is prepared to pursue all available administrative and judicial appeal procedures with regard to this matter and the Company is advised that its dispute with the IRS could take up to five years to resolve. Cash payments for federal, state and local income taxes were approximately $.1 million for the periods ended March 31, 1997 and 1998. NOTE 8 - COMMITMENTS AND CONTINGENCIES GUARANTEES OF COMMERCIAL PROJECT DEBT As of March 31, 1998, the Company had guaranteed approximately $286.8 million of the commercial development business' project loans from various banks for construction of commercial projects. On April 30, 1998, upon completion of sale of the commercial development business, all of these guarantees were assumed by KDC and the Company was released from most of its guarantee obligations by the respective banks. The Company has not been released by certain banks from the remaining guarantees aggregating approximately $22.7 million. KDC has fully indemnified the Company against any and all liability with respect to these guarantees, and has obtained a letter of credit in favor of the Company in the amount of $1.1 million to secure any such obligation. 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a residential land development and homebuilding company with properties located primarily in Southern California. The principal activities of the Company and its consolidated subsidiaries include: (i) obtaining zoning and other entitlements for land it owns and improving the land for residential development; (ii) single-family residential construction in Southern California; and (iii) providing residential real estate development services to third parties. Once the residential land owned by the Company is entitled, the Company may sell unimproved land to other developers or homebuilders; sell improved land to homebuilders; or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes. On April 30, 1998, the Company sold its commercial development business as further described in Note 4 to the Company's Financial Statements, and accordingly the financial statements have been reclassified to present the commercial development business as discontinued operations. The Company's immediate strategic goals are to (i) successfully appeal the February 20, 1998 court decision which ordered a third hearing before the California Coastal Commission (the "Coastal Commission") to approve the Warner Mesa (formerly known as Bolsa Chica mesa) project; (ii) complete the permitting for development of Warner Mesa; and (iii) commence infrastructure construction on Warner Mesa as soon as possible; however, the Company may also consider other strategic and joint venture opportunities. There can be no assurance that the Company will accomplish, in whole or in part, all or any of these strategic goals. Historically, the Company has not been able to generate significant gross operating margins or cash flows from operating activities due to the nature of its principal assets. The substantial majority of the Company's assets is residential land which has required significant investments before the land could be sold to homebuilders or developed in joint ventures. In addition, the relatively high book value of these assets has resulted in sales approximating break-even. Pursuant to Fresh Start Reporting, implementation of the Recapitalization through the prepackaged plan resulted in a write-down of Warner Mesa to fair value (which will reduce future costs of sales) and therefore, once the litigation delays are overcome and the entitlement process is completed, the Company expects to begin generating profits from the Warner Mesa project. However, with the February 1998 court decision which ordered a third hearing before the Coastal Commission to approve the LCP, the Company is faced with further delays in implementing its plans for residential development on Warner Mesa. Furthermore, due to the uncertainties associated with the appeals process, the Company is unable to predict the length of such delays at this time. Real estate held for development or sale and land held for development (real estate properties) are carried at fair value as of September 2, 1997, following adoption of Fresh-Start Reporting as discussed in Note 3, as adjusted by subsequent activity. The Company's real estate properties are subject to a number of uncertainties which can affect the fair values of those assets. These uncertainties include litigation or appeals of regulatory approvals (as discussed above) and availability of adequate capital, financing and cash flow. In addition, future values may be adversely affected by increases in property taxes, increases in the costs of labor and materials and other development risks, changes in general economic conditions, including higher mortgage interest rates, and other real estate risks such as the demand for housing generally and the supply of competitive products. Real estate properties do not constitute liquid assets and, at any given time, it may be difficult to sell a particular property for an appropriate price. Recently, the strengthened economy of California has resulted in improvement in the real estate market, and the number of potential purchasers and capital sources interested in Southern California residential properties appears to have increased, resulting in improving prices. However, there can be no assurance regarding the continued health of the California economy and the strength and longevity of current conditions affecting the residential real estate market. LIQUIDITY AND CAPITAL RESOURCES. The principal assets in the Company's portfolio are residential land which must be held over an extended period of time in order to be developed to a condition that, in management's opinion, will ultimately maximize the return to the Company. Consequently, the Company requires significant capital to finance its real estate development operations. Historically, sources of capital have included bank lines of credit, specific property financings, asset sales and available internal funds. The Company has reported losses since 1991, with the exception of 1993 results which included gains on dispositions and extinguishment of debt, and 1997 results which included an extraordinary gain on extinguishment of debt, and except for the projected gain on disposition of the commercial development business in 1998, expects to report losses until such time as sales can commence at Warner Mesa. In 12 addition, the Company's capital expenditures for project development and infrastructure are significant. The Company completed the sale of its commercial development business on April 30, 1998 as further described in Note 4 to the Company's Financial Statements, which provided substantial liquidity to fund project development costs for Warner Mesa and general and administrative expenses. The following pro forma financial data as of March 31, 1998 gives effect to the sale of the commercial development business, including accruals for estimated fees of the Company's investment bankers and legal counsel, and estimated taxes payable, offset by deferred income related to a $1 million deposit received from KDC, as if the transaction had occurred on March 31, 1998 (in millions):
HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Assets: Cash . . . . . . . . . . . . . $ 6.2 $ 30.3 $ 36.5 Discontinued operations. . . . 20.8 (20.8) -- All other assets . . . . . . . 148.3 -- 148.3 -------- ------ -------- $ 175.3 $ 9.5 $ 184.8 -------- ------ -------- -------- ------ -------- Total liabilities . . . . . . . . . $ 35.2 $ -- $ 35.2 Stockholders' equity. . . . . . . 140.1 9.5 149.6 -------- ------ -------- $ 175.3 $ 9.5 $ 184.8 -------- ------ -------- -------- ------ --------
FINANCIAL CONDITION MARCH 31, 1998 COMPARED WITH DECEMBER 31, 1997 The $1.0 million decrease in cash and cash equivalents primarily reflects spending for project development costs for Warner Mesa, and general and administrative expenses, offset by net proceeds from the sale of two commercial development projects and an industrial building in Naples, Florida during the first quarter of 1998, and the receipt of a $1.0 million deposit in connection with the sale of the commercial development business which was completed on April 30, 1998, as well as other activity presented in the Statements of Cash Flows. The $1.5 million increase in land held for development reflects investment in the Warner Mesa project during the first quarter. The $1.7 million increase in accounts payable and accrued liabilities primarily reflects the deposit received in connection with the sale of the commercial development business. RESULTS OF OPERATIONS The nature of the Company's business is such that individual transactions often cause significant fluctuations in operating results from year to year. In addition, the Company's completion of the Recapitalization has significantly deleveraged its capital structure. Furthermore, the restatement of assets and liabilities to reflect fair value as of September 2, 1997 under Fresh-Start Reporting will reduce future costs of sales for Warner Mesa, while increasing interest and amortization expense related to discounted liabilities and Reorganization Value in Excess of Amounts Allocated to Net Assets. THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1997 The decrease in revenues from $28.9 million in the 1997 period to $.4 million in the 1998 period and the decrease in the related costs of sales from $28.7 million in the 1997 period to $.1 million in the 1998 period reflect the first quarter 1997 sale of the Bolsa Chica lowlands to the State of California for $25 million and the $3.1 million sale of a build-to-suit project in Signal Hill, California, compared with the sale of an industrial building in Naples, Florida in the first quarter of 1998. Except for the remaining 35 phase I residential lots at Rancho San Pasqual in Escondido, California which were sold on April 3, 1998 to a homebuilder for approximately $1.6 million, the Company does not currently expect to report any further revenues during the remainder of 1998, primarily due to the litigation delays with respect to the Warner Mesa project. The Company is completing plans to build homes on the 112 lots remaining in phase II at Rancho San Pasqual which are expected to open for sales in 1999. 13 General and administrative expenses in the first quarter of 1997 include approximately $.2 million of non-recurring costs incurred in connection with the exchange offer for the Company's subordinated debentures. The decrease in interest expense reflects the absence in the first quarter of 1998 of (i) interest on the subordinated debentures after they were cancelled on September 2, 1997, the effective date of the Recapitalization, and (ii) interest on bank debt which was repaid in February 1997. The $.3 million of noncash interest expense in the first quarter of 1998 reflects interest expense on (i) discounted liabilities under Fresh-Start Reporting and (ii) capital contribution notes due to a partnership. The absence of other expense, net for the three months ended March 31, 1998 primarily reflects amortization of Reorganization Value in Excess of Net Assets offset by interest income. The $3.7 million in other income, net for the three months ended March 31, 1997 primarily reflects nonrecurring income from (i) the sale of a minority interest in a privately held company, and (ii) gains recognized in connection with the settlement of certain claims. The benefits for income taxes for the three months ended March 31, 1997 and 1998 have been offset by corresponding valuation allowances. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NONE. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain of the foregoing information as well as certain information set forth in Part II of this report under the heading "Legal Proceedings" is forward looking in nature and involves risks and uncertainties that could significantly impact the ability of the Company to achieve its currently anticipated goals and objectives. These risks and uncertainties include, but are not limited to litigation or appeals of regulatory approvals (including appeals of the trial court decisions in the CEQA Lawsuit and the Coastal Act Lawsuit related to the Company's principal asset, Warner Mesa), injunctions prohibiting implementation of approved development plans pending the outcome of litigation, and availability of adequate capital, financing and cash flow. In addition, future values may be adversely affected by increases in property taxes, increases in the costs of labor and materials and other development risks, changes in general economic conditions, including higher mortgage interest rates, and other real estate risks such as the demand for housing generally and the supply of competitive products. Real estate properties do not constitute liquid assets and, at any given time, it may be difficult to sell a particular property for an appropriate price. Other significant risks and uncertainties are discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 14 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS See Note 5 of "Notes to Financial Statements" included herein and "Item 1 - Business - Corporate Idemnification Matters" and "Item 3 - Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Employment Agreement dated as of May 1, 1998 between the Registrant and Mr. Raymond J. Pacini. 10.2 Employment Agreement dated as of May 1, 1998 between the Registrant and Ms. Sandra G. Sciutto. 27.1 Financial Data Schedule. (b) Reports on Form 8-K: Current Report on Form 8-K dated February 20, 1998 attaching a press release announcing the Registrant's plans to appeal the San Diego Superior Court's ruling that the California Coastal Commission did not fully comply with the requirements of the Coastal Act when it reconsidered the Bolsa Chica Local Coastal Program Amendment during a hearing in October 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CALIFORNIA COASTAL COMMUNITIES, INC. Date May 14, 1998 By: /s/ Sandra G. Sciutto --------------- ------------------------------------ SANDRA G. SCIUTTO Senior Vice President and Chief Financial Officer 15 EX-10.1 2 EXH. 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into as of May 1, 1998 by and between California Coastal Communities, Inc., a Delaware corporation (formerly known as Koll Real Estate Group, Inc.) ("Employer"), and RAYMOND J. PACINI ("Executive"). WITNESSETH: WHEREAS, Executive has served Employer in various executive capacities and Employer desires to obtain the benefit of continued service by Executive, and Executive desires to render continued services to Employer; WHEREAS, the Board of Directors of Employer (the "Board") has determined that because of Executive's substantial experience and business relationships in connection with the business of Employer, it is in the Employer's best interest and that of its stockholders to secure services of Executive and to provide Executive certain additional benefits; and WHEREAS, Employer and Executive desire to set forth in this Agreement the terms and conditions of Executive's employment with Employer. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: SECTION 1. TERM. Employer agrees to employ Executive and Executive agrees to serve Employer, in accordance with the terms of this Agreement, for a term of two (2) years, commencing on the date hereof. SECTION 2. SERVICES. So long as this Agreement shall continue in effect, Executive shall use his commercially reasonably efforts and abilities to promote Employer's business, affairs and interests, and shall perform the services contemplated by this Agreement in accordance with policies established by and under the direction of the Board. SECTION 3. SPECIFIC POSITION; DUTIES AND RESPONSIBILITIES. Employer and Executive agree that, subject to the provisions of this Agreement, Employer will employ Executive and Executive will serve Employer as a senior officer for the duration of this Agreement. The specific job position in which Executive shall serve shall be President and Chief Executive Officer. Executive agrees to observe and comply with the rules and regulations of Employer as adopted by the Board respecting the performance of Executive's duties and agrees to carry out and perform directions and policies of Employer and its Board as they may be, from time to time, stated either orally or in writing. Employer agrees that the duties which may be assigned to Executive shall be usual and customary duties of the job position set forth in this Section 3, and shall not be inconsistent with the provisions of the charter documents of Employer or applicable law. Executive 1. shall have such corporate power and authority as shall reasonably be required to enable the discharge of duties in any office that may be held. SECTION 4. COMPENSATION. (a) BASE SALARY AND TAX EQUALIZATION. (i) BASE SALARY. During the term of this Agreement, Employer agrees to pay Executive a base salary of at least Two Hundred Seventy Five Thousand Dollars ($275,000) per year in semi-monthly installments on the same dates the other senior officers of Employer are paid ("Base Salary"). (ii) TAX EQUALIZATION. Executive shall also be entitled to receive a tax equalization payment of One Million Fifty Eight Thousand Four Hundred Forty Six Dollars ($1,058,446), which is intended to reimburse Executive for the amount of federal and state income taxes payable in connection with this amount and the grant of the restricted shares provided in Section 4(d) below, and which amount shall be paid on the date the restricted shares are issued to Executive. (b) ADDITIONAL BENEFITS. Executive shall also be entitled to all rights and benefits under any bonus plan, incentive, participation or extra compensation plan, pension plan, profit-sharing plan, life, medical, dental, disability, or insurance plan or policy or other plan or benefit that Employer or its subsidiaries may provide for Executive (provided Executive is eligible to participate therein) or employees of Employer generally as from time to time in effect during the term of this Agreement (the "Plans"). In any event, Employer shall provide Executive with term life insurance, health insurance and long-term disability insurance provided for Employer's executive employees generally. Executive shall also be entitled to fringe benefits in accordance with the plans, practices, programs and policies as in effect generally with respect to other peer executives of Employer. (c) STOCK OPTIONS. The stock options ("Stock Options") previously granted to Executive as of April 28, 1997 shall remain in full force and effect with respect to the purchase of 189,996 shares of Employer's common stock ("Option Shares"), at the exercise price per share equal to $11.99. The Stock Options will continue to vest, subject to Employer's Amended and Restated 1993 Stock Option/Stock Issuance Plan, over the three year period that commenced on April 28, 1997 with 40%, 30% and 30% vesting on each of the first, second and third anniversaries of the effective date of the grant of the Stock Options. The vesting of the Stock Options shall continue to be subject to acceleration as provided in Section 5(d) below upon a termination without cause or upon the occurrence of a Change in Control, as defined below in Section 5(d). The more specific terms and conditions of such Stock Options shall continue to be governed by the Stock Option Agreement entered into by and between Employer and Executive ("Stock Option Agreement"). (d) RESTRICTED STOCK. Executive shall immediately be granted 100,000 shares of common stock of Employer 50% of which shall vest on each anniversary of the effective date of this Agreement, and which shall be subject to the following restrictions (the "Restricted Stock"): 2. (i) the number of unvested shares of the Restricted Stock, shall be subject to forfeiture and return to the Employer in the event that Employee is terminated "for cause" pursuant to the provisions of Section 5(c), or voluntarily terminates his employment prior to the expiration of the term of this Agreement; (ii) during the term of this Agreement, without the prior consent of the Board of Directors of Employer, none of the shares of Restricted Stock shall be subject to sale, transfer, hypothecation or encumbrance; and (iii) during the term of this Agreement, the stock certificate(s) representing the Restricted Stock shall bear a legend with respect to the foregoing restrictions. (e) PERQUISITES. (i) VACATION. Executive shall be entitled to four (4) weeks of paid vacation each twelve-month period, which shall accrue on a monthly basis. Such vacation shall be taken at such time or times as shall not unduly disrupt the orderly conduct of the business of Employer and the duties of Executive. At the time of any termination of employment, Executive shall be paid for all accrued but unused vacation. (ii) AUTO ALLOWANCE. During the term of this agreement, Employer shall provide Executive a monthly automobile allowance in the amount of $800 plus reimbursement of operating costs as is currently covered under Employer's Auto Allowance Policy. (f) OVERALL QUALIFICATION. Employer reserves the right to modify, suspend or discontinue any and all practices, policies and programs generally applicable to executives and other similarly situated executives at any time (whether before or after termination of employment) without notice to or recourse by Executive; however, Employer shall not amend the perquisites set forth in Section 4(e) to reduce Executive's benefits thereunder during the term of this Agreement. SECTION 5. TERMINATION. The compensation and other benefits provided to Executive pursuant to this Agreement, and the employment of Executive by Employer, shall be terminated prior to expiration of the term of this Agreement only as provided in this Section 5: (a) DISABILITY. In the event that Executive shall fail, because of illness, incapacity or injury which is determined to be total ("Disability") by a physician selected by Employer or its insurers and acceptable to Executive or Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably), to render, for three consecutive months or for shorter periods aggregating ninety (90) or more business days in any twelve (12)-month period, the services contemplated by this Agreement, Executive's employment hereunder may be terminated by sixty (60) days' prior written notice of termination from Employer to Executive. Thereafter, Employer shall continue to (i) pay the Base Salary to Executive for a period of six (6) months after the date of termination, subject to adjustments referenced in the following paragraph, and (ii) provide medical insurance as in effect prior to such termination for a period of six (6) months following the date of termination. Thereafter, no further salary shall be paid or medical insurance be provided. Executive's rights under the Plans subsequent to termination of employment 3. pursuant to this paragraph shall be determined under the applicable provisions of the respective Plans, unless otherwise expressly stated herein. This Agreement in all other respects will terminate upon the termination of employment pursuant to this paragraph. The amount of compensation to be paid to Executive pursuant to the preceding paragraph shall be adjusted in the event Executive becomes entitled to and receives disability benefits under any disability payment plan, including disability insurance. The amount of Executive's compensation otherwise payable by Employer pursuant to the preceding paragraph shall be reduced, on a dollar-for-dollar basis, but not to less than zero, by the amount of any such disability benefits received by Executive, but only to the extent such benefits are attributable to payments made by Employer. (b) DEATH. In the event of Executive's death during the term of this Agreement, Executive's Base Salary shall immediately terminate and Employer shall pay to the estate of Executive the Base Salary accrued to the date of Executive's death to the extent not theretofore paid. If Executive's death occurs while receiving payments under Section 5(a) above, such payments shall cease. Executive's rights under the Plans subsequent to his death shall be determined under the applicable provisions of the respective Plans; PROVIDED that, notwithstanding any provisions to the contrary therein, (i) Employer shall continue to provide medical insurance to the dependents of Executive for a period of six (6) months following the death of Executive, (ii) Stock Options shall be exercisable only to the extent the rights had vested at the time of death of Executive. This Agreement in all other respects will terminate upon the death of Executive; and (iii) all restrictions applicable to the Restricted Stock shall be removed. (c) FOR CAUSE. The employment of Executive hereunder shall be terminable by Employer in the event that Executive (i) is or has been engaging in willful or grossly negligent conduct which has resulted in a failure to perform Executive's duties hereunder or, (ii) has committed an act of dishonesty, gross negligence or misconduct, which has a direct, substantial and adverse effect on Employer, its business or reputation. Notwithstanding the foregoing, Executive shall not be terminated for cause pursuant to the first paragraph of this subsection 5(c) unless and until Executive has received written notice of a proposed termination for cause and Executive has had an opportunity to be heard before at least a majority of the number of members of the Board authorized to take such action. Executive shall be deemed to have had such opportunity if given written or telephonic notice by any director at least 72 hours in advance of a meeting. In the event of Executive's termination pursuant to this subsection 5(c), Executive's rights to receive Base Salary shall immediately terminate and Employer shall pay to Executive his Base Salary and vacation accrued to the date of such termination to the extent not theretofore paid. Executive's rights under the Plans subsequent to termination shall be determined under the applicable provisions of the respective plans; provided, however, that Stock Options shall be exercisable only to the extent the rights had vested at the time of such termination, and only the shares of Restricted Stock determined in accordance with the provisions of Section 4(d) shall be retained by Executive with all other shares of Restricted Stock shall be returned to Employer for cancellation. This Agreement in all other respects will terminate upon such termination. 4. (d) WITHOUT CAUSE. Notwithstanding any other provision of this Section 5, the Board shall have the right to terminate Executive's employment with Employer without cause at any time upon at least thirty (30) days' prior written notice to Executive. The following conditions shall thereupon become applicable: (i) SEVERANCE PAY. Employer shall continue to pay Executive the Base Salary on a semi-monthly basis for the remainder of the two (2) year term of this Agreement. (ii) MEDICAL INSURANCE CONTINUATION. Employer shall continue to provide (under COBRA) medical insurance as in effect prior to such termination for twelve (12) months following such termination, and Employer shall bear all costs for such insurance. (iii) ACCELERATED VESTING; REMOVAL OF STOCK RESTRICTIONS. Despite the vesting requirements set forth in the Stock Option Agreement and the restrictions applicable to the Restricted Stock as set forth in Section 4(d), termination of employment pursuant to this subsection 5(d) or the occurrence of a Change in Control (as defined below) shall result in an immediate vesting of the right to exercise the Stock Options with respect to one hundred percent (100%) of the Option Shares and the immediate removal of all restrictions applicable to then Restricted Stock. For purposes of the foregoing paragraph, a "Change of Control" means, and shall be deemed to have taken place upon, the occurrence of: (i) a transaction requiring stockholder approval involving the sale of all or substantially all of the assets of Employer or the merger of Employer with or into another corporation or business entity, other than a transaction in which stockholders of Employer immediately prior to the closing of such transaction own a majority of the acquiring corporation or entity immediately after giving effect to such transaction, or (ii) the acquisition by any Person as Beneficial Owner (as such terms are defined in the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of Employer representing fifty percent (50%) or more of the total voting power represented by Employer's then outstanding voting securities. (e) VOLUNTARY TERMINATION. At any time during the term of this Agreement, Executive shall have the right, upon thirty (30) days' prior written notice to Employer, to terminate his employment with Employer. Upon termination of Executive's employment pursuant to this subsection 5(e), (i) Executive's right to receive Base Salary shall immediately terminate and Employer shall pay to Executive his Base Salary accrued to the date of such termination to the extent not theretofore paid, (ii) Executive's rights under the Plans subsequent to such termination shall be determined under the applicable provisions of the respective Plans, and (iii) Stock Options held by Executive shall be exercisable only to the extent the rights had vested at the time of such termination, and only the shares of Restricted Stock determined in accordance with the provisions of Section 4(d) shall be retained by Executive and all other shares of Restricted Stock shall be returned to Employer for cancellation. This Agreement in all other respects will terminate upon such termination. 5. (f) TERMINATION BY EXECUTIVE FOR "GOOD REASON". Notwithstanding any other provisions of this Agreement, Employer shall provide Executive with the payments and benefits set forth in Section 5(d) in the event Executive terminates employment for "Good Reason." For purposes of this Agreement, "Good Reason" for Executive to terminate employment shall mean voluntary termination as a result of (i) the assignment to Executive of duties inconsistent with the position and status of Executive as set forth in this Agreement without Executive's prior written consent, (ii) a substantial alteration in the nature, status or prestige of Executive's responsibilities as set forth in this Agreement or a change in Executive's title or reporting level from that set forth in this Agreement, (iii) the relocation of Employer's executive offices or principal business location to a point more than twenty-five (25) miles from the location of such offices or business as of the date of this Agreement, (iv) reduction by Employer of Executive's Base Salary in effect on the date hereof or as the same may be increased from time to time, (v) any action by Employer (including the elimination of benefit plans without providing substitutes therefor or the reduction of Executive's benefits thereunder) that would substantially diminish the aggregate value of Executive's incentive awards and other fringe benefits, or (vi) a failure by Employer to obtain from any successor, before the succession takes place, an agreement to assume and perform this Agreement. SECTION 6. BUSINESS EXPENSES. During the term of this Agreement, Employer shall reimburse Executive promptly for reasonable business expenditures, including travel, entertainment, parking, business meetings, Pacific Club dues, and professional dues made and substantiated in accordance with policies, practices and procedures established from time to time by the Board and incurred in pursuit and furtherance of Employer's business and goodwill. SECTION 7. MISCELLANEOUS. (a) SUCCESSION; SURVIVAL. This Agreement shall inure to the benefit of and shall be binding upon Employer, its successors and assigns. Absent the prior written consent of Executive, this Agreement may not be assigned by Employer other than in connection with a merger or sale of all or substantially all the assets of Employer or a similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all obligations of Employer hereunder. The obligations and duties of Executive hereunder are personal and otherwise not assignable. Executive's obligations and representations under this Agreement will survive the termination of Executive's employment, regardless of the manner of such termination. (b) NOTICES. Any notice or other communication provided for in this Agreement shall be in writing and sent if to Employer to its office at: California Coastal Communities, Inc. 4343 Von Karman Avenue Newport Beach, California 92660 Attention: Secretary or at such other address as Employer may from time to time in writing designate, and if to Executive at such address as Executive may from time to time in writing designate (or Executive's business address of record in the absence of such designation). Each such 6. notice or other communication shall be effective (i) if given by telecommunication, when transmitted to the applicable number so specified in (or pursuant to) this Section 7 and an appropriate answer back is received, (ii) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when actually delivered at such address. (c) ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and it supersedes any prior agreements, undertakings, commitments and practices relating to Executive's employment by Employer including, without limitation, the Employment Agreement between Employer and Executive dated as of April 28, 1997. No amendment or modification of the terms of this Agreement shall be valid unless made in writing and signed by Executive and, on behalf of Employer, by an officer expressly so authorized by the Board. (d) WAIVER. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof or of any other right, nor shall any single or partial exercise preclude any further or other exercise of such right or any other right. (e) CHOICE OF LAW. This Agreement, the legal relations between the parties and any action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement, the relationship of the parties or the subject matter hereof shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts made and performed in such State and without regard to conflicts of law doctrines, to the extent permitted by law. (f) ATTORNEY'S FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees, costs and necessary disbursements from the non-prevailing party in addition to any other relief to which such party may be entitled. (g) CONFIDENTIALITY; PROPRIETARY INFORMATION. Executive agrees to not make use of, divulge or otherwise disclose, directly or indirectly, any trade secret or other confidential or proprietary information concerning the business (including but not limited to its products, employees, services, practices or policies) of Employer or any of its affiliates of which Executive may learn or be aware as a result of Executive's employment during the term of the Agreement or prior thereto as stockholder, employee, officer or director of, or consultant to, Employer, except to the extent such use or disclosure is (i) necessary to the performance of this Agreement and in furtherance of Employer's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other public sources, or (iv) authorized in writing by or pursuant to a written agreement with Employer. The provisions of this subsection (g) shall survive the expiration, suspension or termination, for any reason, of this Agreement. (h) SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular 7. circumstances, it shall nevertheless remain in full force and effect in all other circumstances, to the fullest extent permitted by law. (i) WITHHOLDING; DEDUCTIONS. All compensation payable hereunder, including salary and other benefits, shall be subject to applicable taxes, withholding and other required, normal or elected employee deductions. (j) SECTION HEADINGS. Section and other headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. (k) COUNTERPARTS. This Agreement and any amendment hereto may be executed in one or more counterparts. All of such counterparts shall constitute one and the same agreement and shall become effective when a copy signed by each party has been delivered to the other party. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EMPLOYER" CALIFORNIA COASTAL COMMUNITIES, INC. By /s/ SANDRA G. SCIUTTO --------------------------------- Sandra G. Sciutto Chief Financial Officer "EXECUTIVE" /s/ RAYMOND J. PACINI ------------------------------------ RAYMOND J. PACINI 8. EX-10.2 3 EXH. 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into as of May 1, 1998 by and between California Coastal Communities, Inc., a Delaware corporation (formerly known as Koll Real Estate Group, Inc.) ("Employer"), and SANDRA G. SCIUTTO ("Executive"). WITNESSETH: WHEREAS, Executive has served Employer in various executive capacities and Employer desires to obtain the benefit of continued service by Executive, and Executive desires to render continued services to Employer; WHEREAS, the Board of Directors of Employer (the "Board") has determined that because of Executive's substantial experience and business relationships in connection with the business of Employer, it is in the Employer's best interest and that of its stockholders to secure services of Executive and to provide Executive certain additional benefits; and WHEREAS, Employer and Executive desire to set forth in this Agreement the terms and conditions of Executive's employment with Employer. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: SECTION 1. TERM. Employer agrees to employ Executive and Executive agrees to serve Employer, in accordance with the terms of this Agreement, for a term of two (2) years, commencing on the date hereof. SECTION 2. SERVICES. So long as this Agreement shall continue in effect, Executive shall use her commercially reasonably efforts and abilities to promote Employer's business, affairs and interests, and shall perform the services contemplated by this Agreement in accordance with policies established by the Company. SECTION 3. SPECIFIC POSITION; DUTIES AND RESPONSIBILITIES. Employer and Executive agree that, subject to the provisions of this Agreement, Employer will employ Executive and Executive will serve Employer as a senior officer for the duration of this Agreement. The specific job position in which Executive shall serve shall be Senior Vice President, Chief Financial Officer, Treasurer and Secretary. Executive agrees to observe and comply with the rules and regulations of Employer as adopted by the Board respecting the performance of Executive's duties and agrees to carry out and perform directions and policies of Employer and its Board as they may be, from time to time, stated either orally or in writing. Employer agrees that the duties which may be assigned to Executive shall be usual and customary duties of the job position set forth in this Section 3, and shall not be inconsistent with the provisions of the charter documents of Employer or 1. applicable law. Executive shall have such corporate power and authority as shall reasonably be required to enable the discharge of duties in any office that may be held. SECTION 4. COMPENSATION. (a) BASE SALARY AND TARGET BONUS. (i) BASE SALARY. During the term of this Agreement, Employer agrees to pay Executive a base salary of at least One Hundred Fifty Thousand Dollars ($150,000) per year in semi-monthly installments on the same dates the other senior officers of Employer are paid ("Base Salary"). (ii) BONUS. Employer agrees to provide Executive with an incentive bonus of up to One Hundred Fifty Thousand Dollars ($150,000), based upon the amounts for each performance target which will be mutually agreed upon and set forth on SCHEDULE A to be attached hereto. (b) ADDITIONAL BENEFITS. Executive shall also be entitled to all rights and benefits under any bonus plan, incentive, participation or extra compensation plan, pension plan, profit-sharing plan, life, medical, dental, disability, or insurance plan or policy or other plan or benefit that Employer or its subsidiaries may provide for Executive (provided Executive is eligible to participate therein) or employees of Employer generally as from time to time in effect during the term of this Agreement (the "Plans"). In any event, Employer shall provide Executive with term life insurance, health insurance and long-term disability insurance provided for Employer's executive employees generally. Executive shall also be entitled to fringe benefits in accordance with the plans, practices, programs and policies as in effect generally with respect to other peer executives of Employer. (c) PERQUISITES. (i) VACATION. Executive shall be entitled to four (4) weeks of paid vacation each twelve-month period, which shall accrue on a monthly basis. Such vacation shall be taken at such time or times as shall not unduly disrupt the orderly conduct of the business of Employer and the duties of Executive. At the time of any termination of employment, Executive shall be paid for all accrued but unused vacation. (ii) AUTO ALLOWANCE. During the term of this agreement, Employer shall provide Executive a monthly automobile allowance in the amount of $550 plus reimbursement of operating costs as is currently covered under Employer's Auto Allowance Policy. (d) OVERALL QUALIFICATION. Employer reserves the right to modify, suspend or discontinue any and all practices, policies and programs generally applicable to executives and other similarly situated executives at any time (whether before or after termination of employment) without notice to or recourse by Executive; however, Employer shall not amend the perquisites set forth in Section 4(c) to reduce Executive's benefits thereunder during the term of this Agreement. 2. SECTION 5. TERMINATION. The compensation and other benefits provided to Executive pursuant to this Agreement, and the employment of Executive by Employer, shall be terminated prior to expiration of the term of this Agreement only as provided in this Section 5: (a) DISABILITY. In the event that Executive shall fail, because of illness, incapacity or injury which is determined to be total ("Disability") by a physician selected by Employer or its insurers and acceptable to Executive or Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably), to render, for three consecutive months or for shorter periods aggregating ninety (90) or more business days in any twelve (12)-month period, the services contemplated by this Agreement, Executive's employment hereunder may be terminated by sixty (60) days' prior written notice of termination from Employer to Executive. Thereafter, Employer shall continue to (i) pay the Base Salary to Executive for a period of six (6) months after the date of termination, subject to adjustments referenced in the following paragraph, and (ii) provide medical insurance as in effect prior to such termination for a period of six (6) months following the date of termination. Thereafter, no further salary shall be paid or medical insurance be provided. Executive's rights under the Plans subsequent to termination of employment pursuant to this paragraph shall be determined under the applicable provisions of the respective Plans, unless otherwise expressly stated herein. This Agreement in all other respects will terminate upon the termination of employment pursuant to this paragraph. The amount of compensation to be paid to Executive pursuant to the preceding paragraph shall be adjusted in the event Executive becomes entitled to and receives disability benefits under any disability payment plan, including disability insurance. The amount of Executive's compensation otherwise payable by Employer pursuant to the preceding paragraph shall be reduced, on a dollar-for-dollar basis, but not to less than zero, by the amount of any such disability benefits received by Executive, but only to the extent such benefits are attributable to payments made by Employer. (b) DEATH. In the event of Executive's death during the term of this Agreement, Executive's Base Salary shall immediately terminate and Employer shall pay to the estate of Executive the Base Salary accrued to the date of Executive's death to the extent not theretofore paid. If Executive's death occurs while receiving payments under Section 5(a) above, such payments shall cease. Executive's rights under the Plans subsequent to her death shall be determined under the applicable provisions of the respective Plans; PROVIDED that, notwithstanding any provisions to the contrary therein, Employer shall continue to provide medical insurance to the dependents of Executive for a period of six (6) months following the death of Executive. This Agreement in all other respects will terminate upon the death of Executive. (c) FOR CAUSE. The employment of Executive hereunder shall be terminable by Employer in the event that Executive (i) is or has been engaging in willful or grossly negligent conduct which has resulted in a failure to perform Executive's duties hereunder or, (ii) has committed an act of dishonesty, gross negligence or misconduct, which has a direct, substantial and adverse effect on Employer, its business or reputation. Notwithstanding the foregoing, Executive shall not be terminated for cause pursuant to the first paragraph of this subsection 5(c) unless and until Executive has 3. received written notice of a proposed termination for cause and Executive has had an opportunity to be heard before at least a majority of the number of members of the Board authorized to take such action. Executive shall be deemed to have had such opportunity if given written or telephonic notice by any director at least 72 hours in advance of a meeting. In the event of Executive's termination pursuant to this subsection 5(c), Executive's rights to receive Base Salary shall immediately terminate and Employer shall pay to Executive her Base Salary and vacation accrued to the date of such termination to the extent not theretofore paid. Executive's rights under the Plans subsequent to termination shall be determined under the applicable provisions of the respective plans. This Agreement in all other respects will terminate upon such termination. (d) WITHOUT CAUSE. Notwithstanding any other provision of this Section 5, the Board shall have the right to terminate Executive's employment with Employer without cause at any time upon at least thirty (30) days' prior written notice to Executive. The following conditions shall thereupon become applicable: (i) SEVERANCE PAY. Employer shall continue to pay Executive the Base Salary on a semi-monthly basis for the remainder of the two (2) year term of this Agreement. (ii) MEDICAL INSURANCE CONTINUATION. Employer shall continue to provide (under COBRA) medical insurance as in effect prior to such termination for twelve (12) months following such termination, and Employer shall bear all costs for such insurance. (iii) BONUS PAYMENT. If Executive is terminated without cause, Executive shall also be paid for any potential bonuses under this Agreement (the "Bonus Severance"). The amount of any such Bonus Severance shall be equal to the full amount of any unpaid target bonus payment(s) set forth on SCHEDULE A. (e) VOLUNTARY TERMINATION. At any time during the term of this Agreement, Executive shall have the right, upon thirty (30) days' prior written notice to Employer, to terminate her employment with Employer. Upon termination of Executive's employment pursuant to this subsection 5(e), (i) Executive's right to receive Base Salary shall immediately terminate and Employer shall pay to Executive her Base Salary accrued to the date of such termination to the extent not theretofore paid and (ii) Executive's rights under the Plans subsequent to such termination shall be determined under the applicable provisions of the respective Plans. This Agreement in all other respects will terminate upon such termination. (f) TERMINATION BY EXECUTIVE FOR "GOOD REASON". Notwithstanding any other provisions of this Agreement, Employer shall provide Executive with the payments and benefits set forth in Section 5(d) in the event Executive terminates employment for "Good Reason." For purposes of this Agreement, "Good Reason" for Executive to terminate employment shall mean voluntary termination as a result of (i) the assignment to Executive of duties inconsistent with the position and status of Executive as set forth in this Agreement without Executive's prior written consent, (ii) a substantial alteration in the 4. nature, status or prestige of Executive's responsibilities as set forth in this Agreement or a change in Executive's title or reporting level from that set forth in this Agreement, (iii) the relocation of Employer's executive offices or principal business location to a point more than twenty-five (25) miles from the location of such offices or business as of the date of this Agreement, (iv) reduction by Employer of Executive's Base Salary in effect on the date hereof or as the same may be increased from time to time, (v) any action by Employer (including the elimination of benefit plans without providing substitutes therefor or the reduction of Executive's benefits thereunder) that would substantially diminish the aggregate value of Executive's incentive awards and other fringe benefits, or (vi) a failure by Employer to obtain from any successor, before the succession takes place, an agreement to assume and perform this Agreement. SECTION 6. BUSINESS EXPENSES. During the term of this Agreement, Employer shall reimburse Executive promptly for reasonable business expenditures, including travel, entertainment, parking, business meetings and professional dues made and substantiated in accordance with policies, practices and procedures established from time to time by the Board and incurred in pursuit and furtherance of Employer's business and goodwill. SECTION 7. MISCELLANEOUS. (a) SUCCESSION; SURVIVAL. This Agreement shall inure to the benefit of and shall be binding upon Employer, its successors and assigns. Absent the prior written consent of Executive, this Agreement may not be assigned by Employer other than in connection with a merger or sale of all or substantially all the assets of Employer or a similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all obligations of Employer hereunder. The obligations and duties of Executive hereunder are personal and otherwise not assignable. Executive's obligations and representations under this Agreement will survive the termination of Executive's employment, regardless of the manner of such termination. (b) NOTICES. Any notice or other communication provided for in this Agreement shall be in writing and sent if to Employer to its office at: California Coastal Communities, Inc. 4343 Von Karman Avenue Newport Beach, California 92660 Attention: Chief Executive Officer or at such other address as Employer may from time to time in writing designate, and if to Executive at such address as Executive may from time to time in writing designate (or Executive's business address of record in the absence of such designation). Each such notice or other communication shall be effective (i) if given by telecommunication, when transmitted to the applicable number so specified in (or pursuant to) this Section 7 and an appropriate answer back is received, (ii) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when actually delivered at such address. 5. (c) ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and it supersedes any prior agreements, undertakings, commitments and practices relating to Executive's employment by Employer. No amendment or modification of the terms of this Agreement shall be valid unless made in writing and signed by Executive and, on behalf of Employer, by an officer expressly so authorized by the Board. (d) WAIVER. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof or of any other right, nor shall any single or partial exercise preclude any further or other exercise of such right or any other right. (e) CHOICE OF LAW. This Agreement, the legal relations between the parties and any action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement, the relationship of the parties or the subject matter hereof shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts made and performed in such State and without regard to conflicts of law doctrines, to the extent permitted by law. (f) ATTORNEY'S FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees, costs and necessary disbursements from the non-prevailing party in addition to any other relief to which such party may be entitled. (g) CONFIDENTIALITY; PROPRIETARY INFORMATION. Executive agrees to not make use of, divulge or otherwise disclose, directly or indirectly, any trade secret or other confidential or proprietary information concerning the business (including but not limited to its products, employees, services, practices or policies) of Employer or any of its affiliates of which Executive may learn or be aware as a result of Executive's employment during the term of the Agreement or prior thereto as stockholder, employee, officer or director of, or consultant to, Employer, except to the extent such use or disclosure is (i) necessary to the performance of this Agreement and in furtherance of Employer's best interests, (ii) required by applicable law, (iii) lawfully obtainable from other public sources, or (iv) authorized in writing by or pursuant to a written agreement with Employer. The provisions of this subsection (g) shall survive the expiration, suspension or termination, for any reason, of this Agreement. (h) SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances, to the fullest extent permitted by law. (i) WITHHOLDING; DEDUCTIONS. All compensation payable hereunder, including salary and other benefits, shall be subject to applicable taxes, withholding and other required, normal or elected employee deductions. 6. (j) SECTION HEADINGS. Section and other headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. (k) COUNTERPARTS. This Agreement and any amendment hereto may be executed in one or more counterparts. All of such counterparts shall constitute one and the same agreement and shall become effective when a copy signed by each party has been delivered to the other party. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "EMPLOYER" CALIFORNIA COASTAL COMMUNITIES, INC. By /s/ RAYMOND J. PACINI -------------------------------- Raymond J. Pacini Chief Executive Officer "EXECUTIVE" /s/ SANDRA G. SCIUTTO ------------------------------------ SANDRA G. SCIUTTO 7. EX-27 4 EXHIBIT 27
5 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 6 0 0 0 139 0 0 0 175 0 0 0 0 1 139 175 0 0 0 0 0 0 0 (1) 0 (1) 1 0 0 0 0 0
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