-----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, LUpDXvcWhZkUtuTfFSDVx8di0yILduPG7AJnqbLkiRpkQEMrGq30s8EToBk3VnGv KWQIWhulgm+zntloK8PzGg== 0001047469-98-029642.txt : 19980807 0001047469-98-029642.hdr.sgml : 19980807 ACCESSION NUMBER: 0001047469-98-029642 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980806 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: 98678388 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 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 June 30, 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 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 Common Stock outstanding at August 1, 1998, including shares to be delivered to former debenture holders upon surrender of their debenture certificates, was 12,006,378. CALIFORNIA COASTAL COMMUNITIES, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 I N D E X
Page No. -------- PART I - Financial Information: Item 1 - Financial Statements Balance Sheets - December 31, 1997 and June 30, 1998 . . . . . . . . . . . . . 3 Statements of Operations - Three Months and Six Months Ended June 30, 1997 and 1998. . . 4 Statements of Cash Flows - Six Months Ended June 30, 1997 and 1998 . . . . . . . . . . . 5 Notes to Financial Statements . . . . . . . . . . . . . . . . 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 11 Item 3 - Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . 13 PART II - Other Information: Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . .14 Item 4 - Submission of Matters to a Vote of Security Holders . . .14 Item 5 - Other Information . . . . . . . . . . . . . . . . . . . .14 Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . .14 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
2 CALIFORNIA COASTAL COMMUNITIES, INC. BALANCE SHEETS (in millions)
December 31 , June 30, 1997 1998 ------ ------ ASSETS Cash and cash equivalents . . . . . . . . . . . . . . $ 7.2 $ 33.3 Real estate held for development or sale . . . . . . . 4.0 2.4 Land held for development. . . . . . . . . . . . . . . 133.2 135.6 Reorganization value in excess of amounts allocated to net assets . . . . . . . . . . . . . . 3.1 .3 Discontinued operations. . . . . . . . . . . . . . . . 19.3 -- Other assets . . . . . . . . . . . . . . . . . . . . . 6.5 7.2 ----------- ----------- $ 173.3 $ 178.8 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities. . . . . $ 3.5 $ 1.8 Other liabilities . . . . . . . . . . . . . . . . 29.7 29.5 ----------- ----------- Total liabilities . . . . . . . . . . . . . . . . 33.2 31.3 ----------- ----------- Stockholders' equity: Common Stock. . . . . . . . . . . . . . . . . . . .6 .6 Capital in excess of par value. . . . . . . . . . 140.0 141.1 Retained earnings (accumulated deficit) . . . . . (.5) 5.8 ----------- ----------- Total stockholders' equity. . . . . . . . . . . . 140.1 147.5 ----------- ----------- $ 173.3 $ 178.8 ----------- ----------- ----------- -----------
See the accompanying notes to financial statements. 3 CALIFORNIA COASTAL COMMUNITIES, INC. STATEMENTS OF OPERATIONS (in millions, except per share amounts)
Predecessor Successor Predecessor Successor Company Company Company Company ------- ------- ------- ------- Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998 ------------- ------------- ------------- ------------- Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 4.5 $ 1.7 $ 33.4 $ 2.1 Costs of sales . . . . . . . . . . . . . . . . . . . . 4.3 1.7 33.0 1.8 ------ ------ ------ ------ Gross operating margin. . . . . . . . . . . . . . .2 -- .4 .3 General and administrative expenses. . . . . . . . . . 1.8 .8 3.3 1.9 Interest expense . . . . . . . . . . . . . . . . . . . 6.5 .4 12.7 .7 Other expense (income), net. . . . . . . . . . . . . . .4 (.5) (3.3) (.5) ------ ------ ------ ------ Loss from continuing operations before reorganization costs and income taxes. . . . . . . . (8.5) (.7) (12.3) (1.8) Reorganization costs . . . . . . . . . . . . . . . . . .8 -- 1.0 -- ------ ------ ------ ------ Loss from continuing operations before income taxes. . . . . . . . . . . . . . . . . . . . (9.3) (.7) (13.3) (1.8) Provision (benefit) for income taxes . . . . . . . . . .1 (.4) .2 (.4) ------ ------ ------ ------ Loss from continuing operations. . . . . . . . . . . . (9.4) (.3) (13.5) (1.4) Discontinued operations: Income (loss) from operations, net of income taxes of $0, $.2, $0 and $.2, respectively . . . . . . . . . . . . . . . . (.1) (.6) (.9) .5 Gain on disposition, net of income taxes of $3.3. . . . . . . . . . . . . . . . -- 7.2 -- 7.2 ------ ------ ------ ------ Net income (loss). . . . . . . . . . . . . . . . . . . $ (9.5) $ 6.3 $(14.4) $ 6.3 ------ ------ ------ ------ ------ ------ ------ ------ Earnings (loss) per common share - basic and diluted: Continuing operations . . . . . . . . . . . . . . N/A $ (.02) N/A $ (.12) Discontinued operations . . . . . . . . . . . . . N/A .55 N/A .65 ------ ------ Earnings (loss) per common share - basic and diluted . N/A $ .53 N/A $ .53 ------ ------ ------ ------
See the accompanying notes to financial statements. 4 CALIFORNIA COASTAL COMMUNITIES, INC. STATEMENTS OF CASH FLOWS (in millions)
Predecessor Successor Company Company ------- ------- Six Months Six Months Ended Ended June 30, 1997 June 30, 1998 ------------- ------------- Cash flows from operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $(14.4) $ 6.3 Adjustments to reconcile to cash provided (used) by operating activities: Non-cash interest expense. . . . . . . . . . . . . . . . . . 12.6 .7 Deferred income taxes. . . . . . . . . . . . . . . . . . . . -- (.5) Gain on sale of discontinued operation . . . . . . . . . . . -- (7.2) Gains on asset sales . . . . . . . . . . . . . . . . . . . . (.2) (.3) Proceeds from asset sales, net . . . . . . . . . . . . . . . 33.0 2.0 Investments in real estate held for development or sale. . . (2.2) (.1) Investments in land held for development . . . . . . . . . . (2.2) (2.4) Decrease (increase) in other assets. . . . . . . . . . . . . .7 (.7) Decrease in accounts payable, accrued and other liabilities. . . . . . . . . . . . . . . . . . . (7.7) (2.6) ------ ------ Cash provided (used) by operating activities of continuing operations . . . . . . . . . . . . . 19.6 (4.8) ------ ------ Cash used by operating activities of discontinued operations . . . . . . . . . . . . . . (32.7) (28.1) ------ ------ Cash flows from investing activities: Proceeds from sale of discontinued operation. . . . . . . . . . . -- 33.3 ------ ------ Cash flows from financing activities: Borrowings of bank debt . . . . . . . . . . . . . . . . . . . . . .9 -- Repayments of bank debt . . . . . . . . . . . . . . . . . . . . . (9.1) -- Use of restricted cash. . . . . . . . . . . . . . . . . . . . . . .2 -- Issuance of restricted stock. . . . . . . . . . . . . . . . . . . -- 1.1 ------ ------ Cash (used) provided by financing activities of continuing operations. . . . . . . . . . . . . . (8.0) 1.1 ------ ------ Cash provided by financing activities of discontinued operations. . . . . . . . . . . . . 30.7 24.6 ------ ------ Net increase in cash and cash equivalents. . . . . . . . . . . . . . . 9.6 26.1 Cash and cash equivalents - beginning of period. . . . . . . . . . . . 2.1 7.2 ------ ------ Cash and cash equivalents - end of period. . . . . . . . . . . . . . . $ 11.7 $ 33.3 ------ ------ ------ ------
See the accompanying notes to financial statements. 5 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 corresponding change of the Company's stock symbol from "KREG" to "CALC" was effective on May 29, 1998. The accompanying financial statements 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 and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and the current year's previously issued Quarterly Report on Form 10-Q. The financial information presented herein reflects all adjustments, including Fresh-Start Reporting adjustments as discussed below, 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. This report contains forward looking statements. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties that actual events or results may differ materially from those described herein as a result of various factors, including without limitation, the factors discussed generally in this report. 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 for the three and six months ended June 30, 1997 and cash flows for the six months ended June 30, 1997 include operations prior to completion of the Recapitalization (referred to as "Predecessor Company"). The results of operations for the three and six months ended June 30, 1998 and cash flows for the six months ended June 30, 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 6 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 represented 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. Such amount has been reduced in the current period by the amount of the net income tax provision recorded for the gain on the sale of the commercial development business pursuant to Fresh-Start Reporting. In addition, $13.6 million of Reorganization Value in Excess of Amounts Allocated to Net Assets was allocated to the commercial development business, and is reflected in discontinued operations net of related amortization, as of December 31, 1997. Reorganization costs during the periods ended June 30, 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. NOTE 3 - EARNINGS 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 three months and six months ended June 30, 1998, the weighted average common shares outstanding were 12.0 million and 11.9 million shares, respectively. The weighted average common shares outstanding reflect the issuance, effective May 6, 1998, of 100,000 shares to the Company's Chief Executive Officer under a restricted stock grant. 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) $33.3 million in cash, which included approximately $3.3 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 Company's new President and Chief Executive Officer. The Company realized an after-tax gain of approximately $7.2 million ($10.5 million pretax) from this transaction. Discontinued operations as of December 31, 1997 was comprised of the following (in millions): Restricted cash . . . . . . . . . . . . . . . . . . . . $ .2 Real estate held for development or sale. . . . . . . . 87.9 Reorganization value in excess of amounts allocated to net assets . . . . . . . . . . . . . . . . 13.3 Other assets. . . . . . . . . . . . . . . . . . . . . . 8.5 Accounts payable and other liabilities. . . . . . . . . (13.1) Bank debt . . . . . . . . . . . . . . . . . . . . . . . (74.6) Minority interest . . . . . . . . . . . . . . . . . . . (2.9) --------- Net assets. . . . . . . . . . . . . . . . . . . . . . . $ 19.3 --------- ---------
Revenues related to discontinued operations were $2.7 million and $4.7 million for the three and six months ended June 30, 1997, respectively, and $.9 million and $28.1 million for the three and six months ended June 30, 1998, respectively, through the date of sale. The net loss from discontinued operations for the three month and six month periods ended June 30, 1997 was $(.1) million and $(.9) million, repectively. Net income (loss) from discontinued operations for the three month and six month periods ended June 30, 1998, was $(.6) million and $.5 million, respectively, through the date of sale. 7 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 by the Company 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 California Environmental Quality Act 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 appealed the trial court's decision and on June 16, 1998, the California Court of Appeal ruled in the Company's favor by affirming the trial court's earlier decision that the Board of Supervisor's approval of the LCP was in compliance with CEQA. With this decision, the Court of Appeal rejected the contentions of the plaintiffs by concluding that the final Environmental Impact Report ("EIR") adequately considered the alternatives for treatment of archeological sites and that the County's efforts complied with the requirements for involving the federal government in the EIR process. In addition, the Court of Appeal reversed the trial court's award of attorney fees and costs to the Company's opponents because certain aspects of the trial court's decision erred on the merits and the project opponents did not accomplish anything meaningful in the CEQA Lawsuit. 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 trial 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. In October 1997, in response to the trial court's decisions, 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 Warner Mesa. The Orange County Board of Supervisors subsequently accepted the Coastal Commission's suggested modifications. However, in February 1998, the trial court ruled that the Coastal Commission should not have narrowed the scope of public comments during the Coastal Commission's October 1997 hearing, and in March 1998 the trial court ordered the Coastal Commission to hold a third hearing on the LCP. In May 1998, the Company appealed the trial court's latest decision, and there are numerous other appeals pending with respect to the Coastal Act Lawsuit. The first set of appeals relates to the trial court's August 1997 decision. Opponents of the Warner Mesa project appealed the trial court's decision on the basis that the trial court should have reversed the Coastal Commission's January 1996 approval allowing relocation of certain raptor habitat. The Company appealed the trial court's decisions which reversed the Coastal Commission's January 1996 approval (a) allowing Warner Pond to be filled and (b) allowing residential development in lowlands. All of these appeals have been consolidated and will be heard on an expedited basis. However, the Company's recent appeal of the trial court's March 1998 decision ordering a third hearing on the LCP (the "Second Appeal") has not been consolidated with the prior appeals. The Company currently anticipates that a decision on the first set of consolidated appeals may be rendered during either the fourth quarter of 1998 or the first quarter of 1999; however, various procedural aspects of the appellate process may result in further delay. In the event that the Company prevails on all of the issues raised in the first set of appeals, it would not be necessary to pursue its Second Appeal. The Company would then pursue its secondary permits to commence infrastructure construction on Warner Mesa. However, if the trial court's decisions prohibiting the filling of Warner Pond or residential development in the lowlands are upheld by the Court of Appeal, the Company will continue to pursue its Second Appeal. A favorable decision in the Second Appeal would then result in an approved LCP for up to 1,235 homes, upon certification by the Coastal Commission, which would allow the Company to complete the processing of secondary permits and commence infrastructure construction on Warner Mesa. 8 Alternatively, if the trial court's decision allowing relocation of the raptor habitat is overturned by the Court of Appeal, the Coastal Commission would be required to hold a third public hearing. While the Company is unable to predict exactly when these litigation delays will end, it hopes to start infrastructure construction sometime in 1999. The Company does not believe that the litigation process will permanently prevent it 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. 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 month and six month periods ended June 30, 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 available NOLs 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 June 30, 1998 are approximately $212 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 9 382(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 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 June 30, 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 three and six month periods ended June 30, 1997. NOTE 8 - COMMITMENTS AND CONTINGENCIES GUARANTEES OF COMMERCIAL PROJECT DEBT The Company 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 the sale of the commercial development business, all of these guarantees were assumed by KDC, which fully indemnified the Company against any and all liability with respect to these guarantees. In addition, the Company was released from the substantial majority of these guarantees by the various banks, although the Company has not been released by one bank from a remaining guarantee of approximately $22.7 million. KDC has fully indemnified the Company against any and all liability with respect to such guarantee, and has obtained a letter of credit in favor of the Company in the amount of $1.1 million to secure any related obligation. 10 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 trial court's decisions which reversed the California Coastal Commission's (the "Coastal Commission") approval of the Warner Mesa (formerly known as Bolsa Chica mesa) project, as further discussed in Note 5 to the Company's Financial Statements; (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. 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. Prior to the adoption of Fresh-Start Reporting, the relatively high book value of these assets 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, upon favorable completion of the litigation and entitlement processes, 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 litigation 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 2, 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. Except for the gain on disposition of the commercial development business in 1998, the Company expects to report losses or insignificant income until such time as sales can commence at Warner Mesa. Historically, sources of capital have included bank lines of credit, specific property financings, asset sales and available internal funds. 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. 11 FINANCIAL CONDITION JUNE 30, 1998 COMPARED WITH DECEMBER 31, 1997 The $26.1 million increase in cash and cash equivalents primarily reflects the $33.3 million in proceeds from the sale of the commercial development business which was completed on April 30, 1998, along with net proceeds from the sales of 35 lots at Rancho San Pasqual, and an industrial building in Naples, Florida, partially offset by spending for project development costs for Warner Mesa and general and administrative expenses, as well as other activity presented in the Statements of Cash Flows. The $2.4 million increase in land held for development reflects investment in the Warner Mesa project during the first six months. The $2.8 million decrease in Reorganization value in excess of amounts allocated to net assets primarily reflects a credit resulting from the income tax provision recorded on the gain on sale of the commercial development business, pursuant to Fresh-Start Reporting as discussed in Note 2. The $19.3 million decrease in Discontinued operations reflects completion of the sale of the commercial development business on April 30, 1998. The $1.7 million decrease in accounts payable and accrued liabilities primarily reflects the payment of accrued expenses. 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 JUNE 30, 1998 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1997 The decrease in revenues from $4.5 million in the 1997 period to $1.7 million in the 1998 period and the decrease in the related costs of sales from $4.3 million in the 1997 period to $1.7 million in the 1998 period reflect the decrease in sales of Rancho San Pasqual lots in the second quarter of 1998 as compared with the same period of 1997. The Company does not currently expect to report any revenues during the remainder of 1998 due primarily to the litigation delays with respect to the Warner Mesa project (see Note 5). 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. General and administrative expenses in the second quarter of 1997 include approximately $.9 million of non-recurring costs incurred in connection with the exchange offer for the Company's subordinated debentures. The decrease in interest expense primarily reflects the absence in the second quarter of 1998 of interest on the subordinated debentures after they were cancelled on September 2, 1997, the effective date of the Recapitalization. The $.4 million of noncash interest expense in the second quarter of 1998 reflects interest expense on (i) discounted liabilities under Fresh-Start Reporting and (ii) capital contribution notes due to a partnership. Other income, net of $.5 million for the three months ended June 30, 1998 primarily reflects interest income, partially offset by amortization of Reorganization value in excess of amounts allocated to net assets. The $.4 million in other expense, net for the three months ended June 30, 1997 primarily reflects non-recurring professional fees. The benefit for income taxes for the three months ended June 30, 1997 has been offset by a corresponding valuation allowance. 12 SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1997 The decrease in revenues from $33.4 million in the 1997 period to $2.1 million in the 1998 period and the decrease in the related costs of sales from $33.0 million in the 1997 period to $1.8 million in the 1998 period reflect the 1997 sales of the Bolsa Chica lowlands to the State of California for $25 million, lots at Rancho San Pasqual for $5.1 million and the $3.1 million sale of a build-to-suit project in Signal Hill, California, compared with the $1.7 million sale of the remaining 35 phase I residential lots at Rancho San Pasqual and the $.4 million sale of an industrial building in Naples, Florida in the first six months of 1998. The Company does not currently expect to report any further revenues during the remainder of 1998 due primarily to the litigation delays with respect to the Warner Mesa project (see Note 5). 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. General and administrative expenses in the first six months of 1997 include approximately $1.1 million of non-recurring costs incurred in connection with the exchange offer for the Company's subordinated debentures. The decrease in interest expense primarily reflects the absence in the first six months 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 $.7 million of noncash interest expense in the first six months of 1998 reflects interest expense on (i) discounted liabilities under Fresh-Start Reporting and (ii) capital contribution notes due to a partnership. Other income, net of $.5 million for the six months ended June 30, 1998 primarily reflects interest income, partially offset by amortization of Reorganization value in excess of amounts allocated to net assets. The $3.3 million in other income, net for the six months ended June 30, 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 benefit for income taxes for the six months ended June 30, 1997 has been offset by a corresponding valuation allowance. 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 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. 13 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS See Note 5 of "Notes to Financial Statements" included herein, and "Item 1 - - Business - Corporate Indemnification Matters" and "Item 3 - Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Proposal No. 1: THE DIRECTOR PROPOSAL. The Company's director proposal recommended election of five directors to a one year term. Set forth below is a table of how the votes were cast for each nominee. Such votes constituted the affirmative votes for the Director Proposal, including all nominees, by the holders of approximately 99.7% of the outstanding Common Stock.
Name Votes Cast "For Nominee" Votes "Withheld" ---- ------------------------ ---------------- Phillip R. Burnaman II 8,680,093 22,263 Robert J. Gagalis 8,680,032 22,324 Raymond J. Pacini 8,681,740 20,616 Thomas W. Sabin, Jr. 8,680,303 22,053 J. Thomas Talbot 8,681,083 21,273
Proposal No. 2: THE AUDITOR PROPOSAL. The holders of Common Stock cast 8,113,998 votes for and 10,047 votes against the Company's proposal to ratify the appointment of Deloitte & Touche, LLP as the Company's independent auditors for the fiscal year ending December 31, 1998 (the "Auditor Proposal"). There were 578,311 abstentions and no broker non-votes by the holders of shares of Common Stock with respect to the Auditor Proposal. Such votes constituted the affirmative vote for the Auditor Proposal by the holders of approximately 93.2% of the outstanding Common Stock represented in person or by proxy at the Annual Meeting, at which the holders of a majority of the outstanding shares were present in person or by proxy to constitute a quorum. ITEM 5 - OTHER INFORMATION Stockholders wishing to bring a proposal before the Registrant's 1999 Annual Meeting of Stockholders (but not wishing to include such proposal in the Registrant's Proxy Statement) must cause written notice of such proposal to be received by the Secretary of the Registrant at its principal executive offices no later than February 26, 1999. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Independent Contractor Consulting Agreement dated as of May 20, 1998, among the Registrant, GSSW-REO, L.C., a Texas limited liability company, and Thomas W. Sabin, Jr. 27.1 Financial Data Schedule. (b) Reports on Form 8-K: Current Report on Form 8-K dated May 1, 1998 reporting the Registrant's name change from "Koll Real Estate Group, Inc." to "California Coastal Communities, Inc." Current Report on Form 8-K dated June 19, 1998 attaching a press release describing the results of the California Court of Appeal's ruling in favor of the Registrant with respect to its compliance with the California Environmental Quality Act in connection with the Registrant's development of its Warner Mesa residential community. 14 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 August 6, 1998 By /s/ Sandra G. Sciutto -------------- ------------------------- SANDRA G. SCIUTTO Senior Vice President and Chief Financial Officer 15 EX-10.1 2 EXHIBIT 10.1 INDEPENDENT CONTRACTOR CONSULTING AGREEMENT This INDEPENDENT CONTRACTOR CONSULTING AGREEMENT ("Agreement") is entered into as of May 20, 1998 between California Coastal Communities, Inc., a Delaware corporation (formerly known as Koll Real Estate Group, Inc.) (the "Company"), GSSW-REO, L.C., a Texas limited liability company ("GSSW") and Thomas W. Sabin, Jr. ("Consultant"). This Agreement is subject to ratification by a majority of the Board of Directors of the Company (the "Board") at its next scheduled Board of Directors meeting on June 9, 1998, and the grant of Stock Options provided for below in Section 4(b) is subject to approval of the Compensation Committee of the Board (the "Committee") at that time. WHEREAS, the Company and GSSW desire to enter into an agreement regarding consulting services to be provided to the Company by Consultant, a Manager of GSSW; WHEREAS, at the request of GSSW, Consultant is willing to provide consulting services to the Company; and WHEREAS, the Company, GSSW and the Consultant have agreed to execute and deliver this Agreement to memorialize the terms and conditions of the above described relationship, subject to the aforementioned Board ratification and Committee approval. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and obligations set forth herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. TERM. The Company agrees with GSSW to engage Consultant and Consultant agrees with the Company and GSSW to provide consulting services to the Company, in accordance with the terms of this Agreement, for a term of two (2) years, which commenced on February 1, 1998. 2. CONSULTING SERVICES. Consultant hereby agrees to provide, on a non-exclusive basis, consulting services to the Company, including without limitation the following: - developing and implementing a strategic plan for the Company, consistent with the directives established by the Company's Board of Directors; - reviewing and commenting on individual development projects and strategic opportunities, including without limitation, financing and equity structures applicable thereto; - assisting in analysis of alternative approaches to maximizing the value of the Company's business and opportunities; 1. - providing motivational advice and counsel to the Company's staff; and - assisting in sourcing new and continuing development opportunities for the Company and procuring staff to support such opportunities. 3. INDEPENDENT CONTRACTOR STATUS. This Agreement is not intended to be an employment agreement and there does not exist any intent to create any employment relationship between the Company and Consultant. At all times during the term of this Agreement, Consultant shall be an independent contractor. GSSW shall be solely responsible for all federal, state and local taxes, withholdings and related obligations which may arise from any payments from the Company to GSSW hereunder, and subsequent payments by GSSW to Consultant, including without limitation, federal and state income tax obligations and contributions to social security, disability and workers' compensation insurance benefits. GSSW agrees that GSSW will indemnify, defend and hold the Company harmless from and against any and all claims or liability arising out of or in connection with any alleged failure to satisfy any such obligations. 4. COMPENSATION. (a) Until November 1, 1998, the Company hereby agrees to pay GSSW compensation at the monthly rate of Ten Thousand Dollars ($10,000.00). Compensation for the balance of the term of this Agreement shall be determined by Agreement of the Company's Board of Directors and GSSW during November, 1998. (b) STOCK OPTIONS. GSSW shall immediately be granted options ("Stock Options") to purchase 200,000 shares of Employer's common stock ("Option Shares"), at the exercise price per share equal to the $9.875 closing selling price as reported on the Nasdaq National Market on May 20, 1998. The Stock Options will be issued immediately following Committee approval and will vest, subject to the Company's Amended and Restated 1993 Stock Option/Stock Issuance Plan, 50% on each anniversary of the effective date of this Agreement. The vesting of the Stock Options shall be subject to acceleration as provided in Section 5 below upon a termination without cause or upon the occurrence of a Change in Control, as defined below in Section 5. The more specific terms and conditions of such Stock Options shall be governed by the Stock Option Agreement to be entered into by and between the Company and GSSW within thirty (30) days following the execution of this Agreement. 5. TERMINATION. This Agreement may be terminated by either party, without cause, upon thirty (30) days prior written notice. However, GSSW's Stock Options shall immediately vest upon any subsequent Change of Control (as defined below) if such transaction occurs as a result of a letter-of-intent or understanding entered into by the Company and the Third-party, prior to such termination; or in the event that the Company terminates this Agreement without cause where "cause" is defined as the event where GSSW or Consultant (i) is or has been engaging in willful or grossly negligent conduct which has resulted in a failure to perform Consultant's services hereunder or, (ii) has committed an act of dishonesty, gross negligence or misconduct, which has a direct, substantial and adverse effect on the Company, its business or reputation. 2. 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 shareholder approval involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation or business entity, other than a transaction in which shareholders of the Company 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 the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities. Notwithstanding the foregoing, neither GSSW nor Consultant shall be terminated for cause unless and until GSSW and Consultant have received written notice of a proposed termination for cause and GSSW and Consultant have had an opportunity to be heard before at least a majority of the number of members of the Board of Directors of the Company authorized to take such action. GSSW and Consultant shall be deemed to have had such an opportunity if given written notice of telephonic notice by any director at least three (3) business days in advance of a meeting of the Board of Directors of the Company called for the purpose of such hearing. 6. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof. This Agreement supersedes any and all prior agreements and understandings between the parties hereto respecting the subject matter hereof. 7. CHANGES. The terms and provisions of this Agreement may not be modified or amended except pursuant to the written consent of the Consultant and of the Company. The waiver by either party of any breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach. 8. ASSIGNABILITY. The obligations of the Consultant may not be delegated by GSSW or Consultant, and neither GSSW nor Consultant may, without the Company's written consent thereto, assign, transfer, convey, pledge, encumber, hypothecate or otherwise dispose of this Agreement or the Stock Options or Option Shares or any interest herein or therein, except as among GSSW and Consultant, or by operation of law. Any such attempted delegation or disposition shall be null and void AND INITIO and without effect. This Agreement and all of the Company's rights and obligations hereunder may be assigned or transferred by the Company to, and shall be binding upon and inure to the benefit of, any subsidiary of the Company or any successor to the Company. 9. NOTICES. All notices, requests, consents and other communications hereunder to either party shall be deemed to be sufficient if contained in a written instrument delivered in person, duly sent by first class registered or certified airmail, postage prepaid, or telecopied or telexed addressed to such party at his or its address as set forth below. All such notices, requests, consents and communications shall be deemed to have been delivered (a) in the case of personal delivery, on the date of such delivery, (b) in the case of telex or facsimile transmission, on the date on which the sender receives machine confirmation of such transmission, and (c) in the case of mailing, on the fifth (5th) business day following the date of such mailing. Either party may change the address to which 3. notices, requests, consents and other communications hereunder shall be sent by sending written notice of such change of address to the other party. If to the Company: California Coastal Communities, Inc. 4343 Von Karman Avenue Newport Beach, California 92660 Attention: Raymond J. Pacini Telephone: (949) 833-3030 Facsimile: (949) 261-6550 If to GSSW and/or Consultant: Thomas W. Sabin, Jr. GSSW, REO, L.C. Lincoln Plaza 500 N. Akard, Suite 328 Dallas, Texas 75201 Telephone: (214) 954-8701 Facsimile: (214) 954-8704 10. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the state of California, without regard to the conflicts of law provisions thereof. While governed by the laws of the state of California, GSSW and Consultant shall be deemed to perform this Agreement and the services contemplated by this Agreement in and from the state of Texas, in which both GSSW and Consultant shall be and remain resident and domiciled for purposes of this Agreement. In no event shall the performance of the consulting service by Consultant require either GSSW or Consultant to be or become resident or domiciled in the state of California. 11. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 12. HEADINGS. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 13. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability. Such prohibition or unenforceability in any one jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Any provision of this Agreement that is prohibited or unenforceable by reason of its temporal duration or geographical scope shall be deemed to be changed to the longest duration and widest geographical scope that is enforceable. 14. EXPENSES. Consultant shall be reimbursed for all reasonable out-of-pocket expenses incurred by Consultant incident to the performance of the consulting services contemplated by this Agreement such as travel, hotel, telephone and similar expenses, subject to delivery of an itemized invoice therefor. 4. 15. D&O AND E&O INSURANCE. In the event that Consultant shall be elected an officer or director of the Company, the Company shall provide Consultant with coverage under the Company's insurance policies for officers and directors for purposes of D&O and E&O coverage. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written, in the case of the Corporation and GSSW by an officer thereunto duly authorized, and in the case of Consultant, by Consultant individually. CALIFORNIA COASTAL COMMUNITIES, INC. By /s/ RAYMOND J. PACINI --------------------------------- Raymond J. Pacini Chief Executive Officer CONSULTANT: /s/ THOMAS W. SABIN, JR. ------------------------------------ Thomas W. Sabin, Jr. GSSW-REO, L.C. a Texas limited liability company By /s/ THOMAS W. SABIN, JR. --------------------------------- Thomas W. Sabin, Jr. Manager 5. EX-27 3 EXHIBIT 27
5 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 33 0 0 0 138 0 0 0 179 0 0 0 0 1 147 179 2 2 2 2 (1) 0 1 (2) 0 (2) 8 0 0 6 .53 .53
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