-----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, SHk4ANjRNMjnvliDYLSYcp1g6nrnrnVe+o3ZWULOU6xKuwcElZ8YDzyqwShXglOh 24G1gh/w/txv032WhCBR4g== 0001047469-98-040285.txt : 19981113 0001047469-98-040285.hdr.sgml : 19981113 ACCESSION NUMBER: 0001047469-98-040285 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98745016 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 September 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.) 6 Executive Circle, Suite 250 IRVINE, CALIFORNIA 92614 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 250-7700 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 November 1, 1998 was 11,968,075. CALIFORNIA COASTAL COMMUNITIES, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 I N D E X -----------------
Page No. -------- PART I - Financial Information: Item 1 - Financial Statements Balance Sheets - December 31, 1997 and September 30, 1998..................3 Statements of Operations - Two-Month Period Ended September 2, 1997, One-Month Period Ended September 30, 1997, Three Months Ended September 30, 1998, Eight-Month Period Ended September 2, 1997 and Nine Months Ended September 30, 1998..............4 Statements of Cash Flows - Eight-Month Period Ended September 2, 1997, One-Month Period Ended September 30, 1997 and Nine Months Ended September 30, 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 6 - Exhibits and Reports on Form 8-K............................14 SIGNATURE........................................................................15
2 CALIFORNIA COASTAL COMMUNITIES, INC. BALANCE SHEETS -------------- (in millions)
December 31, September 30, 1997 1998 ------------ ------------- ASSETS Cash and cash equivalents ........................ $ 7.2 $ 31.8 Real estate held for development or sale ......... 4.0 2.7 Land held for development ........................ 133.2 136.2 Reorganization value in excess of amounts allocated to net assets ........................ 3.1 .3 Discontinued operations .......................... 19.3 -- Other assets ..................................... 6.5 7.3 ------ ------ $173.3 $178.3 ------ ------ ------ ------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities........ $ 3.5 $ 1.9 Other liabilities .............................. 29.7 29.9 ------ ------ Total liabilities .............................. 33.2 31.8 ------ ------ Stockholders' equity: Common stock ................................... .6 .6 Capital in excess of par value ................. 140.0 141.1 Retained earnings (accumulated deficit)......... (.5) 4.8 ------ ------ Total stockholders' equity ..................... 140.1 146.5 ------ ------ $173.3 $178.3 ------ ------ ------ ------
See the accompanying notes to financial statements. 3 CALIFORNIA COASTAL COMMUNITIES, INC. STATEMENTS OF OPERATIONS ------------------------ (in millions, except per share amounts)
Predecessor Successor Successor Predecessor Successor Company Company Company Company Company ------- ------- ------- ------- Two-Month One-Month Three Months Eight-Month Nine Months Period Ended Period Ended Ended Period Ended Ended September 2, 1997 September 30, 1997 September 30, 1998 September 2, 1997 September 30, 1998 ----------------- ------------------ ------------------ ----------------- ------------------ Revenues ............................. $ .5 $ 1.6 $ -- $ 33.9 $ 2.1 Costs of sales ....................... .4 1.6 -- 33.4 1.8 ------ ----- ----- ------ ----- Gross operating margin ............. .1 -- -- .5 .3 General and administrative expenses .. 2.2 .2 .9 5.5 2.8 Interest expense ..................... 4.4 -- .3 17.1 1.0 Other expense (income), net .......... (.3) .1 (.2) (3.7) (.7) ------ ----- ----- ------ ----- Loss from continuing operations before reorganization costs and income taxes ....................... (6.2) (.3) (1.0) (18.4) (2.8) Reorganization items: Reorganization costs ............... 1.8 -- -- 2.8 -- Fresh-start adjustments ............ 63.8 -- -- 63.8 -- ------ ----- ----- ------ ----- Loss from continuing operations before income taxes ................ (71.8) (.3) (1.0) (85.0) (2.8) Provision (benefit) for income taxes .............................. .1 -- -- .3 (.3) ------ ----- ----- ------ ----- Loss from continuing operations ...... (71.9) (.3) (1.0) (85.3) (2.5) Discontinued operations: Income from operations, net of income taxes of $0, $.2, $0, $0 and $.2 ................... 6.4 .5 -- 5.4 .5 Gain on disposition, net of income taxes of $3.3 ............. -- -- -- -- 7.2 ------ ----- ----- ------ ----- Income (loss) before extraordinary gain ............................... (65.5) .2 (1.0) (79.9) 5.3 Extraordinary gain on extinguishment of debt, net of income taxes of $0 .................. 89.5 -- -- 89.5 -- ------ ----- ----- ------ ----- Net income (loss) .................... $ 24.0 $ .2 $(1.0) $ 9.6 $ 5.3 ------ ----- ----- ------ ----- ------ ----- ----- ------ ----- Earnings (loss) per common share - basic and diluted: Continuing operations ............ $(.02) $(.08) $(.20) Discontinued operations .......... .04 -- .64 ----- ----- ----- N/A $ .02 $(.08) N/A $ .44 ------ ----- ----- ------ ----- ------ ----- ----- ------ ----- Weighted average common shares outstanding ................. N/A 11.9 12.0 N/A 12.0 ------ ----- ----- ------ ----- ------ ----- ----- ------ -----
See the accompanying notes to financial statements. 4 CALIFORNIA COASTAL COMMUNITIES, INC. STATEMENTS OF CASH FLOWS ------------------------ (in millions)
Predecessor Successor Successor Company Company Company ------- ------- ------- Eight-Month One-Month Nine Months Period Ended Period Ended Ended September 2, 1997 September 30, 1997 September 30, 1998 ----------------- ------------------ ------------------ Cash flows from operating activities: Net income ................................................... $ 9.6 $ .2 $ 5.3 Adjustments to reconcile to cash provided (used) by operating activities: Fresh-start adjustments .................................... 63.8 -- -- Extraordinary gain on extinguishment of debt ............... (89.5) -- -- Non-cash reorganization costs .............................. 1.9 -- -- Non-cash interest expense .................................. 17.1 -- 1.0 Deferred income taxes ...................................... -- -- (.5) Gain on sale of discontinued operation ..................... -- -- (7.2) Gains on asset sales ....................................... (.4) -- (.3) Proceeds from asset sales, net ............................. 33.5 1.6 2.0 Investments in real estate held for development or sale..... (2.3) (.1) (.4) Investment in land held for development .................... (4.2) (1.8) (3.0) Decrease (increase) in other assets ........................ 1.0 (.1) (.8) Decrease in accounts payable, accrued and other liabilities ........................................ (6.8) (1.0) (2.4) ----- ----- ----- Cash provided (used) by operating activities of continuing operations ............................ 23.7 (1.2) (6.3) ----- ----- ----- Cash used by operating activities of discontinued operations ............................. (37.6) (2.2) (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 ............................... 27.1 1.1 24.6 ----- ----- ----- Net increase (decrease) in cash and cash equivalents ........... 5.2 (2.3) 24.6 Cash and cash equivalents - beginning of period ................ 2.1 7.3 7.2 ----- ----- ----- Cash and cash equivalents - end of period ...................... $ 7.3 $ 5.0 $ 31.8 ----- ----- ----- ----- ----- -----
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 Reports 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 two-month and eight-month periods ended September 2, 1997 and cash flows for the eight-month period ended September 2, 1997 include operations prior to completion of the Recapitalization (referred to as "Predecessor Company"). The results of operations and cash flows for the one-month period ended September 30, 1997 and the nine months ended September 30, 1998 include operations subsequent to the Company's Recapitalization and are not comparable with prior periods for the reasons discussed above. 6 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 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 was reduced in the second quarter of 1998 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 September 2, 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". For periods commencing September 2, 1997, earnings per share is computed using the weighted average number of outstanding shares of the Successor Company's Common Stock. For the three months and nine months ended September 30, 1998, the weighted average common shares outstanding were 12.0 million. 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, became 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 $2.4 million and $26.9 million for the two and eight-month periods ended September 2, 1997, respectively, $12.3 million for the one-month period ended September 30, 1997 and $28.1 million for the nine months ended September 30, 1998, through the date of sale. The net income from discontinued operations for the two-month and eight-month periods ended September 2, 1997 was $6.3 million and $5.4 million, repectively, and $.5 million for the one-month period ended September 30, 1997. Net income from discontinued operations for the nine month period ended September 30, 1998, was $.5 million 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. On October 14, 1998, the Court of Appeal completed its hearing on the first set of appeals, which relates to the trial court's August 1997 decision. The Court of Appeal normally renders its decision within the 90 day period following such a hearing. 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 also 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. A hearing date for the Company's appeal of the trial court's March 1998 decision on the LCP (the "Second Appeal") has not yet been scheduled by the Court of Appeal. In the event that the Company prevails on all of the relevant issues raised in the first set of appeals, it would not be necessary for the Company to pursue its Second Appeal. If the Company pursues and is successful in the Second Appeal, it would be allowed to complete the processing of secondary permits and commence infrastructure construction for up to 1,235 homes on Warner Mesa. If the Company does not prevail in the first set of appeals with respect to affirmation of the trial court's decision allowing relocation of raptor habitat, then the Coastal Commission would be required to hold a third public hearing. 8 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 developing the planned community at Warner Mesa; 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 eight-month period ended September 2, 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. However, 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 $279 million as of September 2, 1997 have been reduced by approximately $79 million, resulting in remaining available NOLs of approximately $200 million as of September 2, 1997 after reflecting the tentative settlement with the IRS discussed below. As reduced, 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. The NOLs available as of September 30, 1998 are approximately $199 million after reflecting the tentative settlement with the IRS discussed below. 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 9 eliminate the availability of any remaining unused portion of the $200 million of NOLs which existed as of September 2, 1997. The Internal Revenue Service ("IRS") has proposed material audit adjustments with respect to the tax returns of the Company and its consolidated subsidiaries, including formerly affiliated entities, for the years ended December 31, 1989, 1990 and 1991. The Company disagreed with the positions taken by the IRS and filed protests with the IRS to contest the 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 also 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 September 30, 1998. The Company has reached a tentative settlement agreement with the IRS with respect to the proposed adjustments described above. As a result of this agreement, the Company expects to pay approximately $744,000 (which includes $280,000 of tax and $464,000 of interest through November 1998), net of the Company's refund claim for 1992 NOL carry backs of approximately $1.6 million, in full settlement of such claims. Under this agreement approximately $10 million of the Company's NOL carryforward will be disallowed. The Company expects to carry back NOLs of $8.1 million from 1992 to 1991 in connection with its refund claim. There can be no assurance that the agreement with the IRS will be completed or that the refund will be received. The Company has reviewed the extent of potential accompanying state tax liability adjustments and does not believe that any such adjustments would have a material impact on the Company's financial statements. Cash payments for federal, state and local income taxes were approximately $.2 million for the eight-month period ended September 2, 1997 and approximately $.1 million for the three and nine months ended September 30, 1998. 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 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 March 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 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 for $33.3 million 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 SEPTEMBER 30, 1998 COMPARED WITH DECEMBER 31, 1997 The $24.6 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 $3.0 million increase in land held for development reflects investment in the Warner Mesa project during the first nine months of 1998. 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 for 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 $1.6 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 SEPTEMBER 30, 1998 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1997 The absence of revenues and related costs of sales in the 1998 period as compared to revenues of $2.1 million and related costs of sales of $2.0 million in the 1997 period reflect the second quarter 1998 completion of phase I lot sales at Rancho San Pasqual. As a result of litigation delays with respect to the Warner Mesa project (see Note 5), the Company does not currently expect to report any revenues until the third quarter of 1999, when home sales are expected to commence at the Company's 112 home project in phase II at Rancho San Pasqual. General and administrative expenses in the third quarter of 1997 include approximately $1.7 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 third quarter of 1998 of interest on the subordinated debentures after they were cancelled on September 2, 1997, the effective date of the Recapitalization. The $.3 million of noncash interest expense in the third 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 $.2 million for the three months ended September 30, 1998 primarily reflects interest income, partially offset by period costs on the Warner Mesa project. The $.2 million in other expense, net for the three months ended September 30, 1997 primarily reflects non-recurring professional fees. The benefit for income taxes for the three months ended September 30, 1997 has been offset by a corresponding valuation allowance. 12 NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1997 The decrease in revenues from $35.5 million in the 1997 period to $2.1 million in the 1998 period and the decrease in the related costs of sales from $35.0 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 $7.1 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 nine months of 1998. As a result of litigation delays with respect to the Warner Mesa project (see Note 5), the Company does not currently expect to report any revenues until the third quarter of 1999, when home sales are expected to commence at the Company's 112 home project in phase II at Rancho San Pasqual. General and administrative expenses in the first nine months of 1997 include approximately $2.8 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 nine 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 $1.0 million of noncash interest expense in the first nine 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 $.7 million for the nine months ended September 30, 1998 primarily reflects interest income, partially offset by amortization of Reorganization value in excess of amounts allocated to net assets. The $3.7 million in other income, net for the nine months ended September 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 nine months ended September 30, 1997 has been offset by a corresponding valuation allowance. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. YEAR 2000 COMPLIANCE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. The Company has completed its accounting software conversion to programs that are Year 2000 compliant at a nominal cost. The Company is conducting formal communications with all of its significant suppliers to determine the extent to which those third parties' failure to remediate their own Year 2000 issue may pose problems for the Company. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company anticipates completing its third party inquiries regarding Year 2000 compliance and executing any actions required, including changing suppliers if necessary, within six months, but not later than June 30, 1999, which is prior to any anticipated impact on its operating systems. The total cost of the Year 2000 project will be expensed as incurred and is not expected to have a material adverse effect on the Company's results of operations. 13 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 pending 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. 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. On October 30, 1998 the Company's motion was granted in San Diego Superior Court settling the construction defect lawsuit against Signal Landmark, the Company's subsidiary, regarding homes in Coronado, California. The details of the case are more fully described in "Item 3 - Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The Company's insurance carriers will pay the settlement, and additional contributions from sub-contractors are expected to reimburse the Company's required deductible and share of attorney fees, resulting in no cost to the Company. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule. (b) Reports on Form 8-K: None. 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 November 12, 1998 By /s/ Sandra G. Sciutto ----------------- --------------------------------- SANDRA G. SCIUTTO Senior Vice President and Chief Financial Officer 15 EX-27 2 EXHIBIT 27
5 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 32 0 0 0 139 0 0 0 178 0 0 0 0 1 145 0 2 2 2 2 (1) 0 1 (3) 0 (3) 8 0 0 5 .44 .44
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