** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

 
| **(Mark One)** | ** ** | ** **                                                                                                                                                                              |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**          | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                  |
|           |       |                                                                                                                                                                                    |
| ** **     | ** ** | **For the  quarterly period ended June 30, 2006**                                                                                                                                       |
| ** **     | ** ** | ** **                                                                                                                                                                              |
| ** **     | ** ** | **OR**                                                                                                                                                                                  |
|           |       |                                                                                                                                                                                    |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                 |
|           |       |                                                                                                                                                                                    |
| ** **     | ** ** | **For the  transition period from                          to** |
|           |       |                                                                                                                                                                                    |
| ** **     | ** ** | **Commission  file number: 0-17189**                                                                                                                                                    |

 

**CALIFORNIA COASTALCOMMUNITIES, INC.**

**(Exactname 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**   |   | **92614**            |
| **Irvine,  California**                   |   | (Zip Code)           |
| (Address of  principal executive offices) |   |                 |

 

Registrant’s telephonenumber, including area code:**(949) 250-7700**

Securities registeredpursuant to Section 12(b) of the Act: **NONE**

Securities registeredpursuant to Section 12(g) of the Act:

**Common Stock, par value $.05per  share**(Title of Class)

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES x  NO o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of  “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| **Large accelerated filer  ****o** |   | **Accelerated  filer ****x** |   | **Non-accelerated  filer ****o** |
|-----------------------------------------|--------|-----------------------------------|--------|---------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). YES **o**  NO **x**

Thenumber of shares of Common Stock outstanding as of July 31, 2006 was10,172,712.

 

 

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CALIFORNIACOASTAL COMMUNITIES, INC.

FORM10-Q

FORTHE QUARTER ENDED JUNE 30, 2006

I N D E X
|                                                       |                    |                                                                        |
|-------------------------------------------------------|-------------------------|-----------------------------------------------------------------------------|
| Cautionary Statement About Forward-Looking Statements |                    |                                                                        |
|                                                  |                    |                                                                        |   |   |
| Part I -                                         | Financial  Information: |                                                                        |   |
|                                                  |                    |                                                                        |   |
|                                                  | Item  1 -               | Consolidated  Financial Statements                                          |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  |                    | Consolidated  Balance Sheets -                                              |   |   |
|                                                  |                    | June  30, 2006 and December 31, 2005 (unaudited)                            |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  |                    | Consolidated Statements of Income -                                         |   |   |
|                                                  |                    | Three and Six Months Ended June 30, 2006 and 2005  (unaudited)              |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  |                    | Consolidated Statements of Cash Flows -                                     |   |   |
|                                                  |                    | Six Months Ended June 30, 2006 and 2005 (unaudited)                         |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  |                    | Notes to Consolidated Financial Statements                                  |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  | Item 2 -                | Management’s Discussion and Analysis of Financial                      |   |   |
|                                                  |                    | Condition and Results of Operations                                         |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  | Item 3 -                | Quantitative and Qualitative Disclosures About                              |   |   |
|                                                  |                    | Market Risk                                                                 |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  | Item 4 -                | Evaluation of Disclosure Controls and Procedures                            |   |   |
|                                                  |                    |                                                                        |   |   |
| Part II  -                                       | Other  Information:     |                                                                        |   |
|                                                  |                    |                                                                        |   |
|                                                  | Item 1 -                | Legal Proceedings                                                           |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  | Item 1A -               | Risk Factors That May Affect Results of Operations and  Financial Condition |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  | Item 4 -                | Submission of Matters to a Vote of Security Holders                         |   |   |
|                                                  |                    |                                                                        |   |   |
|                                                  | Item 6 -                | Exhibits                                                                    |   |   |
|                                                  |                    |                                                                        |   |   |
| SIGNATURE                                             |                    |                                                                        |
|                                                       |                         |                                                                             |  |  |  |

 

 

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CAUTIONARYSTATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q containsforward-looking statements within the meaning of Section 27A of the SecuritiesExchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 thatrelate to future events or our future financial performance. In addition, otherstatements we may make from time to time, such as press releases, oralstatements made by our officials and other reports that we file with theSecurities and Exchange Commission may also contain such forward-lookingstatements. Undue reliance should not be placed on these statements whichinvolve known and unknown risks, uncertainties and other factors which maycause our actual results, performance or achievements to be materiallydifferent from any future results, performances or achievements expressed orimplied by the forward-looking statements. In some cases, you can identifyforward-looking statements by terminology such as “may”, “will”, “should”, “expects”,“plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue”,or the negative of such terms or other comparable terminology.

Theseforward-looking statements include, but are not limited to:

·                    statementsabout our strategies, plans, objectives, goals, expectations and intentions;

·                    informationrelating to anticipated operating results, financial resources, changes inrevenues, changes in profitability, interest expense, growth and expansion,anticipated income to be realized from our investments in unconsolidatedentities;

·                    the impact ofdemographic trends and supply constraints on the demand for and supply ofhousing;

·                    housing marketconditions in the geographic markets in which we operate;

·                    the number andtypes of homes and number of acres of land that we may develop and sell;

·                    the ability todeliver homes from backlog;

·                    the timing andoutcomes of regulatory approval processes or administrative proceedings, whichmay result in delays in the land entitlement, development, construction, or theopening of new communities (including, but not limited to ongoingadministrative proceedings related to our joint venture near Oxnard,California);

·                    the ability tosecure materials and subcontractors;

·                    the ability toproduce the liquidity and capital necessary to expand and take advantage ofopportunities in the future;

·                    our ability torealize the value of our net operating loss carry forwards;

·                    our ability tocontinue relationships with current or future partners;

·                    theeffectiveness and adequacy of our disclosure and internal controls;

·                    the impact ofrecent accounting pronouncements; and

·                    stock marketvaluations.

Any or all of the forward-looking statements includedin this report and in any other reports or public statements made by us mayturn out to be inaccurate. This can occur as a result of incorrect assumptionsor as a consequence of known or unknown risks and uncertainties. These risksand uncertainties include the competitive environment in which we operate,local, regional and national economic conditions, the demand for homesfluctuations in interest rates, changes in home prices, the availability andcost of land for future growth, the availability of capital, uncertainties andfluctuations in capital and securities markets, changes in tax laws and theirinterpretation, legal proceedings, the ability of customers to finance thepurchase of homes, the availability and cost of labor and materials, weatherconditions, domestic and international political events, uncertainties createdby terrorist attacks, and the effects of governmental regulation. Many factorsmentioned in this report or in other reports or public statements made by us,such as government regulation and the competitive environment, will beimportant in determining our future performance. Consequently, actual resultsmay differ materially from those that might be anticipated from ourforward-looking statements. You should not place undue reliance on any of theseforward-looking statements because they are based on current expectations orbeliefs regarding future events or circumstances, which involve known andunknown risks, uncertainties and other factors which may cause our actualresults, performance or achievements to be materially different from any futureresults, performances or achievements expressed or implied by theseforward-looking statements.

Although we believe that our strategies, plans,objectives, goals, expectations and intentions reflected in, or suggested bythese forward-looking statements are reasonable given current informationavailable to us, we can give no assurance that any of them will be achieved.

These forward-looking statements should be consideredin light of the information included in this report and our other filings withthe Securities and Exchange Commission, including, without limitation, the “RiskFactors”, as well as the description of trends

3

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and other factors in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”, set forth in ourForm 10-K for the year ended December 31, 2005. You should also read thefollowing “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in conjunction with the unaudited condensed consolidatedfinancial statements and the related notes that appear elsewhere in thisreport.

We assume no, andhereby disclaim any, obligation to update any of the foregoing or any otherforward-looking statements. We nonetheless reserve the right to make suchupdates from time to time by press release, periodic report or other method ofpublic disclosure without the need for specific reference to this Form 10-Q orany other report filed by us.  No suchupdate shall be deemed to indicate that other statements not addressed by suchupdate remain correct or create an obligation to provide any other updates.

4

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**PARTI.  FINANCIAL INFORMATION**

**ITEM 1 - FINANCIAL STATEMENTS**

 CALIFORNIA COASTAL COMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions)
| ** **                                                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                              |       |              |       |                  |       |
| ** **                                                                                                                              |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                               |       | $                 | 2.7        |                  | $          | 7.7 |   |
| Short-term investments                                                                                                                  |       | 15.1              |       | 30.3                  |       |
| Restricted cash                                                                                                                         |       | 3.5               |       | 2.3                   |       |
| Real estate inventories                                                                                                                 |       | 267.8             |       | 253.6                 |       |
| Deferred tax assets                                                                                                                     |       | 34.0              |       | 35.4                  |       |
| Other assets                                                                                                                            |       | 1.6               |       | 1.1                   |       |
|                                                                                                                                    |       | $                 | 324.7      |                  | $          | 330.4 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                          |       |              |       |                  |       |
| ** **                                                                                                                              |       |              |       |                  |       |
| Liabilities:                                                                                                                            |       |              |       |                  |       |
| Accounts payable and accrued liabilities                                                                                                |       | $                 | 17.8       |                  | $          | 17.4 |   |
| Project debt                                                                                                                            |       | 48.7              |       | 57.9                  |       |
| Other liabilities                                                                                                                       |       | 7.9               |       | 7.9                   |       |
| Total liabilities                                                                                                                       |       | 74.4              |       | 83.2                  |       |
| Minority interest                                                                                                                       |       | —            |       | .3                    |       |
|                                                                                                                                    |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                          |       |              |       |                  |       |
|                                                                                                                                    |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                             |       |              |       |                  |       |
| Common Stock—$.05 par value; 13,500,000 shares  authorized; 10,172,712 and 10,160,212 shares issued and outstanding,  respectively |       | .5                |       | .5                    |       |
| Excess Stock—$.05 par value; 13,500,000 shares  authorized; no shares outstanding                                                  |       | —            |       | —                |       |
| Capital in excess of par value                                                                                                          |       | 191.9             |       | 191.6                 |       |
| Retained earnings                                                                                                                       |       | 59.7              |       | 56.6                  |       |
| Accumulated other comprehensive loss                                                                                                    |       | (1.8              | )          | (1.8                  | )          |
| Total stockholders’ equity                                                                                                         |       | 250.3             |       | 246.9                 |       |
|                                                                                                                                    |       | $                 | 324.7      |                  | $          | 330.4 |   |

 

See the accompanying notes to consolidated financialstatements.

5

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CALIFORNIA COASTALCOMMUNITIES, INC.

CONSOLIDATEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in millions,except per share amounts)

(unaudited)
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                 | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                  |       |                             |       |                           |       |   |   |   |   |
| Homebuilding                                               |       | $                                | 18.8       |                           | $          | 3.1 |   | $ | 46.7 |   | $ | 9.6 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Costs of sales:                                            |       |                             |       |                           |       |   |   |   |   |
| Homebuilding                                               |       | 15.6                             |       | 2.2                            |       | 38.8 |   | 7.0 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Gross operating profit                                     |       | 3.2                              |       | .9                             |       | 7.9 |   | 2.6 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Selling, general  and administrative expenses              |       | 1.4                              |       | .7                             |       | 3.1 |   | 1.9 |   |
| Other (income)  expense, net                               |       | (.2                              | )          | .1                             |       | (.5 | ) | .3 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Income before income taxes                                 |       | 2.0                              |       | .1                             |       | 5.3 |   | .4 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Provision  (benefit) for income taxes                      |       | .8                               |       | .1                             |       | 2.2 |   | (4.4 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Minority  interest in income of consolidated joint venture |       | —                           |       | —                         |       | — |   | .1 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Net income                                                 |       | 1.2                              |       | —                         |       | 3.1 |   | 4.7 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Other comprehensive  income, net of income taxes:          |       |                             |       |                           |       |   |   |   |   |
| Minimum pension liability income tax benefit               |       | —                           |       | —                         |       | — |   | .9 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Comprehensive income                                       |       | $                                | 1.2        |                           | $          | — |   | $ | 3.1 |   | $ | 5.6 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Net earnings per common  share:                            |       |                             |       |                           |       |   |   |   |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                                      |       | $                                | .12        |                           | $          | — |   | $ | .30 |   | $ | .46 |   |
| Diluted                                                    |       | $                                | .11        |                           | $          | — |   | $ | .30 |   | $ | .43 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Common equivalent  shares:                                 |       |                             |       |                           |       |   |   |   |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                                      |       | 10.2                             |       | 10.2                           |       | 10.2 |   | 10.2 |   |
| Diluted                                                    |       | 10.5                             |       | 10.9                           |       | 10.5 |   | 10.9 |   |

 

See the accompanying notes to consolidated financialstatements.

6

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CALIFORNIA COASTALCOMMUNITIES, INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(in millions)

(unaudited)
| ** **                                                                 | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                 | ** ** | **June 30,**              | ** ** |
| ** **                                                                 | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                     |       |                           |       |   |   |
| Net income                                                                 |       | $                              | 3.1        |   | $ | 4.7 |   |
| Adjustments to  reconcile net income to cash used in operating activities: |       |                           |       |   |   |
| Stock-based compensation expense                                           |       | .1                             |       | — |   |
| Distributions from unconsolidated joint ventures                           |       | .1                             |       | — |   |
| Non-cash benefit from reversal of deferred tax asset  allowance            |       | —                         |       | (4.7 | ) |
| Deferred taxes                                                             |       | 1.4                            |       | .2 |   |
| Gains on sales of real estate inventories                                  |       | (7.9                           | )          | (2.6 | ) |
| Minority interest in income of consolidated joint  venture                 |       | —                         |       | .2 |   |
| Proceeds from asset sales, net                                             |       | 46.5                           |       | 9.6 |   |
| Investments in real estate inventories                                     |       | (52.8                          | )          | (59.0 | ) |
| Investments in land held for future development or  sale                   |       | —                         |       | (1.4 | ) |
| Changes in assets and  liabilities:                                        |       |                           |       |   |   |
| (Increase) decrease in other assets                                        |       | (.2                            | )          | 4.0 |   |
| Increase (decrease) in accounts payable, accrued and  other liabilities    |       | .4                             |       | (6.3 | ) |
|                                                                       |       |                           |       |   |   |
| Cash used in operating activities                                          |       | (9.3                           | )          | (55.3 | ) |
|                                                                       |       |                           |       |   |   |
| Cash flows from  investing activities:                                     |       |                           |       |   |   |
| Sales of short-term investments                                            |       | 51.6                           |       | — |   |
| Purchases of short-term investments                                        |       | (36.4                          | )          | — |   |
| Investments in unconsolidated joint ventures                               |       | (.4                            | )          | — |   |
| Change in restricted cash                                                  |       | (1.2                           | )          | .5 |   |
|                                                                       |       |                           |       |   |   |
| Cash provided by  investing activities:                                    |       | 13.6                           |       | .5 |   |
|                                                                       |       |                           |       |   |   |
| Cash flows from  financing activities:                                     |       |                           |       |   |   |
| Borrowings of project debt                                                 |       | 5.6                            |       | 58.3 |   |
| Repayments of project debt                                                 |       | (14.8                          | )          | (7.0 | ) |
| Proceeds from exercise of stock options                                    |       | .1                             |       | .3 |   |
| Tax benefit from exercise of stock options                                 |       | .1                             |       | — |   |
| Minority interest distributions                                            |       | (.3                            | )          | (.4 | ) |
|                                                                       |       |                           |       |   |   |
| Cash (used in) provided by financing activities                            |       | (9.3                           | )          | 51.2 |   |
|                                                                       |       |                           |       |   |   |
| Net decrease in  cash and cash equivalents                                 |       | (5.0                           | )          | (3.6 | ) |
|                                                                       |       |                           |       |   |   |
| Cash and cash  equivalents - beginning of period                           |       | 7.7                            |       | 9.0 |   |
|                                                                       |       |                           |       |   |   |
| Cash and cash  equivalents - end of period                                 |       | $                              | 2.7        |   | $ | 5.4 |   |
|                                                                       |       |                           |       |   |   |
| Supplemental  disclosures of cash flow information:                        |       |                           |       |   |   |
| Cash paid during  the period for income taxes, net of refunds received     |       | $                              | 4.7        |   | $ | .9 |   |

 

See the accompanying notes to consolidated financialstatements.

7

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CALIFORNIA COASTAL COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

**Note 1 - Basis ofPresentation**

The accompanying financial statements have beenprepared by California Coastal Communities, Inc. and its consolidatedsubsidiaries (the “Company”), without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. The Company believes that theseunaudited consolidated financial statements reflect all material adjustments(consisting only of normal recurring adjustments) and disclosures necessary forthe fair presentation of the results of operations and statements of financialposition when read in conjunction with the Financial Statements and Notesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005 and the current year’s previously issued QuarterlyReport on Form 10-Q. Intercompany accounts and transactions have beeneliminated.  Certain prior year amountshave been reclassified to conform to the current year presentation.

The results for interim periods are not necessarilyindicative of the results to be expected for the full year. This reportcontains forward-looking statements. Readers are cautioned that any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties that actual events or results may differ materiallyfrom those described herein as a result of various factors, including withoutlimitation, the factors discussed generally in this report.

**Note 2 -Significant Accounting Policies**

*Consolidation ofVariable Interest Entities*

A Variable Interest Entity (“VIE”) is created when (i)the equity investment at risk is not sufficient to permit the entity to financeits activities without additional subordinated financial support from otherparties or (ii) equity holders either (a) lack direct or indirect ability tomake decisions about the entity, (b) are not obligated to absorb expectedlosses of the entity or (c) do not have the right to receive expected residualreturns of the entity if they occur.  Ifan entity is deemed to be a VIE, pursuant to Financial Interpretation FIN No.46, “Consolidation of Variable Interest Entities — an interpretation of ARB No.51” (“FIN 46”), an enterprise that has the majority of the variability in gainsand losses of the VIE is considered to be the primary beneficiary and mustconsolidate the VIE.  FIN 46 waseffective immediately for VIEs created after January 31, 2003.

Based on the provisions of FIN 46, the Company hasconcluded that whenever it options land or lots from an entity and pays anon-refundable deposit, a VIE may be created under condition (ii)(b) and (c) ofthe previous paragraph. The Company may be deemed to have provided subordinatedfinancial support, which refers to variable interests that will absorb some orall of an entity’s expected theoretical losses if they occur.  For each VIE created with a significantnonrefundable option fee, the Company will compute expected losses and residualreturns based on the probability of future cash flows as outlined in FIN46.  If the Company is deemed to be theprimary beneficiary of the VIE, the VIE will be consolidated on the Company’sbalance sheet.

The Company’s exposure to loss as the result of apurchase contract with a VIE is limited to the amount of the non-refundableoption deposit, which is generally 5% to 15% of the purchase price, not totalassets on the balance sheet of the VIE. Therefore, the Company believes that consolidating the VIE does notreflect the economic realities or risks of owning and developing land.  The Company has no material third partyguarantees related to these contracts. Creditors of these VIEs, if any, have no recourse against the Company.

As of June 30, 2006, the Company has no deposits withVIEs. See Note 7 — Real Estate Matters.

8

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*Real Estate*

Real estate inventories primarily consists of homesunder construction and lots under development and are carried at the lower ofcost or fair value less costs to sell. The estimation process involved in thedetermination of fair value is inherently uncertain since it requires estimatesas to future events and market conditions. Such estimation process assumes theCompany’s ability to complete development and dispose of its real estateproperties in the ordinary course of business based on management’s presentplans and intentions. Economic, market, and environmental conditions may affectmanagement’s development and marketing plans. In addition, the implementationof such development and marketing plans could be affected by the availabilityof future financing for development and construction activities. Accordingly, theultimate values of the Company’s real estate properties are dependent uponfuture economic and market conditions, and the availability of financing.

The cost of sales of multi-unit projects isgenerally computed using the relative sales value method. Interest and othercarrying costs are capitalized to real estate projects during their developmentand construction period.

*Impairment ofLong-Lived Assets*

The Company assesses the impairment of real estateinventories and other long-lived assets in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets”, which requires that animpaired asset, for which costs cannot be recovered from estimated undiscountedfuture cash flows, be written down to fair value. Long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. As provided bySFAS No. 144, impairment is evaluated by comparing an asset’s carrying value tothe undiscounted estimated cash flows expected from the asset’s operations andeventual disposition. If the sum of the undiscounted estimated future cashflows is less than the carrying value of the asset, an impairment loss isrecognized based on the fair value of the asset. If impairment occurs, the fairvalue of an asset for purposes of SFAS No. 144 is deemed to be the amounta willing buyer would pay a willing seller for such asset in a currenttransaction.

In accordance with SFAS No. 144, in developingestimated future cash flows for impairment testing, the Company hasincorporated its own market assumptions including those regarding home prices,infrastructure, home-building costs and financing costs regarding real estateinventories.  Additionally, asappropriate, the Company identifies alternative courses of action to recoverthe carrying value of its long-lived assets and evaluates all likelyalternatives under a probability-weighted approach as described in SFAS No. 144.

*Earnings PerCommon Share*

Earnings per common share is accounted for inaccordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per commonshare is computed using the weighted-average number of common sharesoutstanding for the period. Diluted earnings per common share is computed usingthe weighted-average number of common shares outstanding and the dilutiveeffect of potential common shares outstanding. For the three and six monthsended June 30, 2006 and 2005, the average market price of the Company’s commonstock exceeded the exercise price of outstanding stock options.  Therefore, diluted earnings per shareincludes the dilutive effect of the weighted average number of common sharesfrom potential exercise of approximately 700,000 options.

The table below sets forth the reconciliation of thedenominator of the earnings per share calculation (in millions):
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                  | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Shares used in  computing basic earnings per common share   |       | 10.2                             |       | 10.2                           |       | 10.2 |   | 10.2 |   |
| Dilutive effect  of stock options                           |       | .3                               |       | .7                             |       | .3 |   | .7 |   |
| Shares used in  computing diluted earnings per common share |       | 10.5                             |       | 10.9                           |       | 10.5 |   | 10.9 |   |

* *

9

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*Recent AccountingPronouncements*

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS123(R)”).  This Statement replaces SFAS123, “Accounting for Stock-Based Compensation” and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25. “Accounting for Stock Issued toEmployees.”  SFAS 123(R) addresses theaccounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for (a) equity instruments of the enterprise or(b) liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equityinstruments.  SFAS 123(R) eliminates theability to account for share-based compensation transactions using theintrinsic value method under APB No. 25, and generally would require insteadthat such transactions be accounted for using a fair-value-based method.  The Company adopted SFAS 123(R) in the firstquarter of 2006 using the modified prospective method, which requires thatcompensation is recognized on or after the required effective date for theportion of outstanding awards for which the requisite service has not yet beenrendered, based on the grant-date fair value of those awards calculated underSFAS 123 for either recognition or pro forma disclosures. The Companypreviously adopted the fair value recognition provisions of SFAS 123 in 2003.The adoption of SFAS 123(R) did not have a material impact on the Company’sconsolidated financial position, results of operations, or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets — An amendment of APB 29, Accounting for NonmonetaryTransactions” (“SFAS 153”).  Thisstatement amends APB No. 29 to eliminate the exception for nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance.  A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. This statement was effective beginning in the Company’s first quarter of2006. The adoption of SFAS 153 did not have a material impact on the Company’sconsolidated financial position, results of operations, or cash flows.

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS 154”). This statement replaces APBOpinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting AccountingChanges in Interim Financial Statements,” and changes the requirements for theaccounting for and reporting of a change in accounting principle. SFAS 154requires retrospective application of changes in accounting principle to priorperiods’ financial statements unless it is impracticable to determine theperiod-specific effects or the cumulative effect of the change. This statementwas effective beginning in the Company’s first quarter of 2006. The adoption ofSFAS 154 did not have a material impact on the Company’s consolidated financialposition, results of operations, or cash flows.

In June 2005, the Emerging Issues Task Force (“EITF”)reached a final consensus on Issue No. 04-5, “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”).EITF 04-5 affects the consolidation of entities in which a general partner ormanaging member is presumed to control a partnership or limited liabilitycompany. EITF 04-5 was effective for the Company beginning in the first quarterof 2006. The adoption of EITF 04-5 did not have a material impact on theCompany’s consolidated financial position, results of operations, or cash flowsupon initial adoption. EITF 04-5 may materially impact the Company’s consolidatedfinancial position, results of operations, or cash flows in future periodsshould the Company form new limited partnerships or modify existing limitedpartnerships such that the Company is deemed to control the limitedpartnership. Under those circumstances, the Company may be required by EITF04-5 to consolidate the limited partnership.

In July 2006, the FASB issued FASB InterpretationNo. 48  (“FIN 48”),*Accounting forUncertainty in Income Taxes*, which prescribes a recognitionthreshold and measurement process for recording in the financial statementsuncertain tax positions taken or expected to be taken in a tax return.Additionally, FIN 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosurerequirements for uncertain tax positions. The accounting provisions of FIN 48are effective for reporting periods beginning after December 15, 2006. The Company is currently assessing the impact of the adoption of FIN 48 and itsimpact on the Company’s consolidated financial statements.

**Note 3 - RealEstate Inventories**

Real estate inventories primarily consist of homesunder construction and lots under development in communities in five SouthernCalifornia counties.  At June 30, 2006,real estate inventories include 858 lots and homes under construction, and ninecompleted homes.  Approximately $142.0million of real estate inventories at June 30, 2006 reflects the 105-acre

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parcel of land on a mesa north of the Bolsa Chicawetlands (“Upper Mesa”), which is planned for 356 homes as discussed below. Inaddition, the balance includes approximately 51 acres nearby which have beenoffered for dedication to the County of Orange for inclusion in the Harriet M.Weider Linear Park in conjunction with the development of the Upper Mesa, and51 additional acres which are subject to a conservation easement. The Companycapitalizes direct carrying costs including interest and property taxes, aswell as direct construction costs, to real estate inventories.

The planned community on the Upper Mesa, known as “Brightwater,”will offer a broad mix of home choices, averaging 2,850 square feet and rangingin size from 1,700 square feet to 4,100 square feet.  The plan also includes 37 acres of open spaceand conservation area.  With 349 homespermitted on 68 acres of the Upper Mesa, the resulting low-density plan equatesto approximately five homes per acre, consistent and compatible with theneighboring Huntington Beach communities. In addition, the Company owns land adjacent to the planned Brightwaterdevelopment, on which it intends to process permits to build seven additionalhomes which will be included in the Brightwater community. The Company expectsto (i) complete grading during the third quarter of 2006, (ii) begin buildingmodel homes during the fourth quarter of 2006, (iii) start selling homes duringthe second quarter of 2007, and (iv) begin delivering homes during the fourthquarter of 2007.  However, there can beno assurance in that regard, or as to the absence of further administrative orconstruction delay.

The estimation process involved in the determinationof value is inherently uncertain since it requires estimates as to futureevents and market conditions. Such estimation process assumes the Company’s abilityto complete development and disposition of its real estate properties in theordinary course of business based on management’s present plans and intentions.Economic and market conditions may affect management’s development andmarketing plans. In addition, the implementation of such development andmarketing plans could be affected by the availability of future financing fordevelopment and construction activities. Accordingly, the amount ultimatelyrealized from such project may differ materially from current estimates and theproject’s carrying value.

Capitalized interest is allocated to real estateinventories when incurred, and charged to cost of sales when the relatedproperty is delivered. Certain information regarding interest follows (in millions):

|                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                 | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Capitalized  interest, beginning of period |       | $                                | 6.1        |                           | $          | 1.7 |   | $ | 6.1 |   | $ | 1.3 |   |
| Interest  incurred and capitalized         |       | 1.1                              |       | 2.1                            |       | 2.2 |   | 2.6 |   |
| Charged to cost  of sales                  |       | (.7                              | )          | (0.1                           | )          | (1.8 | ) | (0.2 | ) |
| Capitalized interest,  end of period       |       | $                                | 6.5        |                           | $          | 3.7 |   | $ | 6.5 |   | $ | 3.7 |   |

 

**Note 4 - ProjectDebt**

In conjunction with the acquisition of single-familyresidential lots, the Company’s homebuilding subsidiary, Hearthside Homes, Inc.and its subsidiaries, enter into construction loan agreements with commercialbanks.  These loan facilities finance aportion of the land acquisition and the majority of the construction of infrastructureand homes.  Each loan facility requires aguaranty of project completion and an environmental indemnity. The loanssecured by first trust deeds bear an interest rate of prime plus three-fourthspercent (9.0 % at June 30, 2006), and some of these loan facilities have aminimum interest rate ranging from 5.75% to 7.5%. Additional borrowings underthese loan facilities totaled $5.6 million during the six months ended June 30,2006, and consisted primarily of draws on the Lancaster loan and interest onoutstanding borrowings. The $14.8 million of repayments during the six monthsended June 30, 2006 included full repayment of $8.7 million outstanding underthe Rancho Santa Fe facility due in March 2006 and $6.1 million on theLancaster and Corona loans upon deliveries of homes. During the three and sixmonths ended June 30, 2006, Hearthside Homes, Inc. entered into no new loanfacilities.  The following amounts wereavailable and outstanding under these loan facilities as of June 30, 2006 andDecember 31, 2005 ($ in millions):

11

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|                                 | ** ** | ** ** | ** ** | ** **           | ** ** | ** **       | ** ** | **Outstanding at** | ** ** |
|---------------------------------|------------|------------|------------|----------------------|------------|------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **Amount** | ** ** | **Number**           | ** ** | **Maturity**     | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
| **First Trust Deeds** | ** ** | ** ** | ** ** | **of Facility** | ** ** | **of Lots** | ** ** | **Date**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Rancho Santa Fe                 |       | $          | 15.4       |                 | —     |             | 3/27/06    |                    | $          | — |   | $ | 8.5 |   |
| Lancaster                       |       | 9.5        |       | —               |       | 5/10/06          |       | —                  |       | .2 |   |
| Rancho Santa Fe                 |       | 1.8        |       | 2                    |       | 9/13/06          |       | 1.8                     |       | 1.7 |   |
| Ontario                         |       | 11.7       |       | 26                   |       | 10/19/06         |       | 4.8                     |       | 4.6 |   |
| Corona                          |       | 1.9        |       | 4                    |       | 10/26/06         |       | 1.9                     |       | 1.8 |   |
| Corona                          |       | 14.8       |       | 35                   |       | 10/26/06         |       | 6.5                     |       | 7.0 |   |
| Lancaster                       |       | 1.0        |       | 3                    |       | 11/17/06         |       | 1.0                     |       | 1.0 |   |
| Lancaster                       |       | 10.5       |       | 20                   |       | 11/17/06         |       | 2.0                     |       | 3.6 |   |
| Corona                          |       | 41.1       |       | 151                  |       | 1/7/07           |       | 19.6                    |       | 18.8 |   |
| Beaumont                        |       | 20.7       |       | 102                  |       | 2/17/07          |       | 7.9                     |       | 7.6 |   |
| Lancaster                       |       | 17.7       |       | 77                   |       | 7/1/07           |       | 3.2                     |       | 3.1 |   |
|                            |       |       |       |                 |       |             |       | $                       | 48.7       |   | $ | 57.9 |   |
|                                 |            |            |            |                      |            |                  |            |                         |            |  |  |  |  |  |  |  |

 

**Note 5 - OtherLiabilities**

Other liabilities were comprised of the following (inmillions):

|                                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Accrued pensions  and benefits                      |       | $                 | 4.7        |                  | $          | 4.8 |   |
| Home warranty  reserves                             |       | 2.2               |       | 2.1                   |       |
| Contingent  indemnity and environmental obligations |       | 1.5               |       | 1.5                   |       |
| Unamortized  discount                               |       | (.5               | )          | (.5                   | )          |
|                                                |       | $                 | 7.9        |                  | $          | 7.9 |   |

 

Contingent indemnity and environmental obligationsprimarily reflect reserves before related discount (recorded pursuant toFresh-Start Reporting) for contingent indemnity obligations for businessesdisposed of by former affiliates and unrelated to the Company’s currentoperations.

*Home WarrantyReserve*

The Company provides a home warranty reserve toreflect its contingent obligation for product liability. The Company generallyrecords a provision as homes are delivered, based upon historical and industryexperience, for the items listed in the homeowner warranty manual, which doesnot include items that are covered by manufacturers’ warranties or items thatare not installed by the Company’s employees or contractors. The home warrantyreserve activity is presented below (in millions):

|                                 | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30,**              | ** ** |
| ** **                      | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Balance at  beginning of period |       | $                              | 2.1        |   | $ | 1.6 |   |
| Provision                       |       | .2                             |       | .1 |   |
| Payments                        |       | (.1                            | )          | (.2 | ) |
| Balance at end of  period       |       | $                              | 2.2        |   | $ | 1.5 |   |

 

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**Note 6 - IncomeTaxes**

The following is a summary of the tax provision(benefit):
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current taxes                                           |       | $                                | .2         |                           | $          | — |   | $ | .7 |   | $ | .1 |   |
| Deferred taxes                                          |       | .6                               |       | .1                             |       | 1.5 |   | .2 |   |
| Reversal of valuation  allowance on deferred tax assets |       | —                           |       | —                         |       | — |   | (4.7 | ) |
| Provision (benefit) for  income taxes                   |       | $                                | .8         |                           | $          | .1 |   | $ | 2.2 |   | $ | (4.4 | ) |

 

Deferred tax benefits resulting from reductions in thedeferred tax asset valuation allowance on NOLs are recorded when the Companyconcludes that it is more likely than not that it will utilize additional NOLsto offset future taxable income.  As aresult of the California Coastal Commission’s approval of the Company’sdevelopment plan for the Bolsa Chica Upper Mesa on April 14, 2005, the Companyconcluded that it is more likely than not that it will utilize all of itsdeferred tax assets.  Therefore, duringthe six months ended June 30, 2005, the Company recorded a reversal ofvaluation allowance on post-reorganization NOLs and other deferred tax assetsof approximately $4.7 million, which is reflected in the tax benefit.  Pursuant to Fresh Start Reporting, alsoduring the six months ended June 30, 2005, a reversal of valuation allowance onfederal Pre-reorganization NOLs of approximately $38.5 million was reflected byincreasing the Company’s capital in excess of par value.

The Internal Revenue Code (the “Code”) generallylimits the availability of NOLs if an ownership change occurs within anythree-year period under Section 382. If the Company were to experience anownership change of more than 50%, the use of all remaining NOLs wouldgenerally be subject to an annual limitation equal to the value of the Company’sequity before the ownership change, multiplied by the long-term tax-exemptrate. The Company estimates that after giving effect to various transactions bystockholders who hold a 5% or greater interest in the Company, it hasexperienced a three-year cumulative ownership shift of approximately 44% as ofJuly 31, 2006.

The federal NOLs available as of June 30, 2006 wereapproximately $122 million. The amount of federal NOLs which expire if notutilized is zero for 2006, 2007 and 2008 and $6 million, $49 million, and $67million for 2009, 2010 and thereafter, respectively.

In October 1999, in response to an unsolicited writtenconsent from a majority of its stockholders, the Company amended itscertificate of incorporation in order to protect the ability of the Company toutilize its tax loss carryforwards. Since the Company’s use of its NOLs wouldbe severely restricted if it experiences an ownership change of more than 50%,the Company’s majority stockholders requested that the Board of Directors enactthe amendments, which were determined to be in the best interest of the Companyand its stockholders. The amendments prohibit future purchases of the Company’scommon stock by persons who would become new 5% holders, and also prohibitcurrent holders of over 5% from increasing their positions, except in certainpermissible circumstances which would not jeopardize the Company’s ability touse its NOLs. While these amendments reduced the Company’s risk of an ownershipchange occurring due to the acquisition of shares by 5% stockholders, the riskremains that an ownership change could result from the sale of shares byexisting 5% stockholders. The Company’s Board of Directors evaluates requeststo purchase any amounts in excess of 5% of the Company’s common stock andauthorizes such transactions which are not expected to jeopardize the Company’sability to use its NOLs.

**Note 7 -Commitments and Contingencies**

*Real EstateMatters*

The Company is subject to the usual obligationsassociated with entering into contracts for the purchase of land and improvedhome sites. The purchase of properties under these contracts is generallycontingent upon satisfaction of certain requirements by the sellers, includingobtaining applicable property entitlements. The Company also utilizes optioncontracts with third-party land sellers and financial entities as a method ofacquiring land in staged takedowns and minimizing the use of funds from othercorporate financing sources. These option contracts also help to manage the

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financial and market risk associated with landholdings. Option contracts generally require the payment of a non-refundablecash deposit of 5% to 15% of the purchase price for the right to acquire lotsover a specified period of time (usually one to two years) at predeterminedprices. The Company has the right at its discretion to terminate itsobligations under these land purchase and option agreements by forfeiting thecash deposit with no further financial responsibility.  As of December 31, 2005, the Company had noland option deposits. As of June 30, 2006, the Company had one $25,000refundable land option deposit. In addition, our unconsolidated Oxnard jointventure has land deposits (discussed below).

In February 2003, the Company entered into two optioncontracts to acquire land adjacent to the City of Oxnard in Ventura County, Californiaaggregating approximately 168 acres. The Company is in the process ofdeveloping a land plan for the area, which also includes an additional 149acres owned by other landowners, with the intention of entitling the propertyfor residential development and annexing it into Oxnard. During October 2003,the Company entered into a limited liability company joint venture agreementwith a major financial partner to pursue the Oxnard development opportunity.The Company assigned the land purchase option contracts to the Oxnard limitedliability company. Hearthside Homes, Inc., the Company’s homebuildingsubsidiary, is the managing member of the Oxnard joint venture, and made aninitial contribution of $500,000. The non-managing member also made an initial contributionof $500,000 to the joint venture and, as of December 31, 2005, had made anaggregate of $4 million of first tier additional contributions. The membershave agreed to provide a second tier of additional capital contributions of upto $2 million, as necessary, to complete the business plan.  For contributions in excess of $5 million,the first $500,000 is to be contributed equally by the Company and the Company’spartner.  At the Company’s discretion,the Company could continue to contribute equally to the next $500,000.Thereafter, the next $1 million is to be contributed equally between themembers. During the fourth quarter of 2005 and the first six months of 2006,the members each contributed approximately $160,000 and $440,000, respectively,of the additional $2 million.  TheCompany’s total investment in the venture as of June 30, 2006 is $1.1 million.The Company expects to make additional aggregate capital contributions ofapproximately $700,000 to the joint venture during the next 15 months, bringingthe Company’s total expected investment in the venture to $1.8 million.

The Company has outstanding performance and suretybonds, for the benefit of city and county jurisdictions, related principally toits obligations for site improvements at various projects.  The Company does not believe that draws uponthese bonds, if any, will have a material effect on the Company’s financialposition, results of operations or cash flows.

*Legal Proceedings*

There are various lawsuits and claims pending againstthe Company and certain subsidiaries. In the opinion of the Company’smanagement, ultimate liability, if any, will not have a material adverse effecton the Company’s financial condition or results of operations.

See Note 5 for a discussion of other contingencies.

*CorporateIndemnification Matters*

The Company and its former affiliates have, through avariety of transactions effected since 1986, disposed of several assets andbusinesses, many of which are unrelated to the Company’s current operations. Byoperation of law or contractual indemnity provisions, the Company may haveretained liabilities relating to certain of these assets and businesses. Thereis generally no maximum obligation or amount of indemnity provided for suchliabilities. A portion of such liabilities is supported by insurance or byindemnities from certain of the Company’s previously affiliated companies. TheCompany believes its consolidated balance sheet reflects adequate reserves forthese matters.

**Note 8 - SubsequentEvent**

On August 1, 2006, the Company obtained a commitmentfrom KeyBank to underwrite a $125 million five-year, senior secured term loanto finance the distribution of a “special dividend” of between $11 and $13 pershare. On June 27, 2006, the Company announced that this “special dividend” isexpected to be paid to the holders of the Company’s common stock by the end ofSeptember 2006. The term loan will be secured by a pledge of the stock of theCompany’s material subsidiaries, including the subsidiary that owns the BolsaChica mesa. KeyBank is also in the process of syndicating a $100 millionthree-year, Senior Secured Revolving Credit Facility (“Facility”) to financedevelopment and construction costs for the Company’s Brightwater project. TheFacility will be secured by a first trust deed on the Bolsa

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Chica mesa and includes financial covenants thatrequire the Company to, among other requirements, meet compliance tests forbudgeted Brightwater revenue and cost amounts, maintain an interest reserve, maintaina minimum net worth of $100 million plus 25% of future earnings, and not exceedcertain leverage ratios. The term loan is expected to bear interest at theCompany’s option at either Libor plus 275 basis points or Prime plus 25 basispoints and the revolver will bear interest at the Company’s option at eitherLibor plus 200 basis points or Prime minus 25 basis points. The Company expectsboth of these financing transactions to be completed within the next 30 days;however, there can be no assurances that there will not be delays or that thetransactions will be completed and the special dividend distribution will bemade.

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**ITEM 2 - MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Overview ofCalifornia Coastal Communities, Inc**

We are a residential land development and homebuildingcompany with properties owned or controlled in six Southern California counties(Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura). Ourprincipal activities include:

·                  obtainingzoning and other entitlements for land we own or control through purchaseoptions or joint ventures;

·                  improvingthe land for residential development; and

·                  designing,constructing and selling single-family homes in Southern California.

Once our residential land is entitled, we may buildhomes, sell unimproved land to other developers or homebuilders, sell improvedland to homebuilders, or participate in joint ventures with other developers,investors or homebuilders to finance and construct infrastructure andhomes.  The majority of these homes aredesigned to appeal to move-up homebuyers and are generally offered for sale inadvance of their construction. During the next 12 months, we will focus ourprimary efforts to:

·                  completegrading and begin building model homes for our Brightwater project located on105 acres of the Bolsa Chica mesa in Orange County, California in accordancewith the Coastal Development Permit for 349 homes issued by the CaliforniaCoastal Commission in December 2005;

·                  completethe entitlement process for a 168-acre joint venture project near Oxnard,California; and

·                  increasedeliveries, revenues and profitability of our homebuilding operationsthroughout Southern California.

However, we are also considering other strategicopportunities as discussed below; and there can be no assurance that we willaccomplish, in whole or in part, all or any of these strategic goals.

Our total revenues for the three months ended June 30,2006 and 2005 were $18.8 million and $3.1 million, respectively, and $46.7million and $9.6 million for the six months ended June 30, 2006 and 2005,respectively. For the three months ended June 30, 2006 and 2005, we delivered28 and four homes, respectively, and for the six months ended June 30, 2006 and2005, we delivered 77 and 14 homes, respectively. Our total assets as of June30, 2006 and December 31, 2005 were $324.7 million and $330.4 million,respectively. Over the last 11 years, we have delivered over 1,900 homes tofamilies throughout Southern California.

We were formed in 1988 and our executive offices arelocated at 6 Executive Circle, Suite 250, Irvine, California 92614. Ourtelephone number is (949) 250-7700.

**StrategicAlternatives**

Our Board of Directors and management have always beenand continue to be committed to enhancing value for all stockholders. In thatregard, we continue to evaluate strategic alternatives. From time to time wehave considered the various strategic alternatives available to us with respectto our businesses, assets, operations and available cash. We have engagedinvestment bankers and other advisors for this purpose, with a view towardsassessing alternatives which would enhance the value of our current businesses,create additional business opportunities, or otherwise maximize the value ofour company for our stockholders. Included in this process has been anexploration of merger, acquisition and disposition possibilities; analysis ofequity and debt financings; open market and other repurchases of our stock;dividends and other distributions to our stockholders; and combinations ofthese alternatives.

Prior to obtaining the Coastal Development Permit forour Brightwater project in December 2005, we have historically maintained aminimal amount of leverage. We currently have $48.7 million of project-specificdebt against

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$250 million of book equity and a $326 million equitymarket capitalization as of June 30, 2006. The Bolsa Chica mesa is currently unencumbered by debt; however, if thefinancing transactions described below and in Note 8 to the FinancialStatements are completed, the Bolsa Chica mesa will be encumbered by a firsttrust deed.

On June 27, 2006, we announced our plan to distributea special tax-advantaged “dividend” of $11 to $13 per share by the end ofSeptember 2006. We expect this special dividend to be treated as a return ofcapital to the extent of each stockholder’s tax basis in our stock. Our Boardof Directors will declare the dividend amount, record date and payment dateupon completion of the KeyBank financing transactions discussed below and inNote 8.

On August 1, 2006, we obtained a commitment fromKeyBank to underwrite a $125 million five-year, senior secured term loan tofinance the special dividend payment. The term loan will be secured by a pledgeof the stock of our material subsidiaries, including the subsidiary that ownsthe Bolsa Chica mesa. KeyBank is also in the process of syndicating a $100million three-year, senior secured revolving construction loan for ourBrightwater project, which will be secured by a first trust deed on the BolsaChica mesa. The term loan is expected to bear interest at the Company’s optionat either Libor plus 275 basis points or Prime plus 25 basis points and therevolver will bear interest at the Company’s option at either Libor plus 200basis points or Prime minus 25 basis points. We expect both of these financingtransactions to be completed within the next 30 days; however, there can be noassurances that there will not be any delays or that the transactions will be completedand the special dividend distribution will be made.

As we continue to develop Brightwater, we will alsocontinue to evaluate any other available strategic alternative that willmaximize value to our stockholders.

**Our Current andFuture Homesites**

We currently have on-going Southern Californiahomebuilding projects in:

·                  RiversideCounty near the cities of Corona and North Corona, and in the City of Beaumont;

·                  SanBernardino County in the City of Ontario;

·                  NorthernLos Angeles County in the City of Lancaster;

·                  SanDiego County in the Rancho Santa Fe area; and

·                  OrangeCounty in the Huntington Beach area.

We began grading our Brightwater development projectduring June 2006 and plan to process permits for seven homes on adjacentparcels, which would bring the total unit count up to 356.  The following chart describes our currentprojects, their location and our lot inventories as of June 30, 2006:

** **

| Project              | ** ** | ** **                      | ** ** | **Location** | ** ** | ** ** | ** ** | ** ** | **Lot  Inventory** | ** ** |
|----------------------|------------|---------------------------------|------------|--------------|------------|------------|------------|------------|--------------------|------------|
| Chandler Ranch       |       | North Corona                    |       |         | 39         |       |
| Alisal at  Ontario   |       | Ontario                         |       |         | 26         |       |
| Woodhaven            |       | Beaumont                        |       |         | 102        |       |
| Hearthside Lane      |       | Corona                          |       |         | 151        |       |
|                 | * *   | *Subtotal — Inland Empire* |       |         | 318        |       |
| Alisal at  Lancaster |       | Lancaster                       |       |         | 23         |       |
| Lancaster II         |       | Lancaster                       |       |         | 73         |       |
| Quartz Hill          |       | Lancaster                       |       |         | 77         |       |
|                 | * *   | *Subtotal - Lancaster*          |       |         | 173        |       |
| Cancion              |       | Rancho Santa Fe                 |       |         | 20         |       |
| Brightwater          |       | Bolsa Chica                     |       |         | 356        |       |
|                 |       | *Total - All Projects*          |       |         | 867        |       |
|                      |            |                                 |            |              |            |            |            |            |                    |            |  |  |

 

These homebuilding projects are currently expected togenerate cash flows and gross operating margins through mid-2010.  Up to approximately 555 additionalsingle-family lots would be available for homebuilding operations if we obtainentitlements for our Oxnard project; however, the exact number of homes willdepend on the final outcome of the entitlement process.

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*Brightwater atBolsa Chica*

The Bolsa Chica upper mesa is the largest property inour portfolio, representing approximately 44% of our total assets as of June30, 2006. The Bolsa Chica upper mesa is one of the last large undevelopedcoastal properties in Southern California, and is located in Orange County,approximately 35 miles south of downtown Los Angeles. Bolsa Chica is borderedon the north and east by residential development in the City of HuntingtonBeach and Huntington Harbor, to the south by open space and the Bolsa Chicawetlands, and to the west by open space, Pacific Coast Highway, Bolsa ChicaState Beach, and the Pacific Ocean. Our holdings include 68 acres ofdevelopable land on the Bolsa Chica upper mesa planned for a residentialcommunity known as Brightwater, 37 acres of open space and conservation area inthe planned community, five acres in the City of Huntington Beach which arecurrently zoned agricultural, and approximately 104 non-developable acres on,or adjacent to, the Huntington Mesa. Approximately 51 acres of land on theHuntington Mesa have been offered for dedication to the County of Orange forinclusion in the Harriet M. Weider Linear Park in conjunction with thedevelopment of Brightwater and an additional 51 acres are subject to aconservation easement. We are analyzing development alternatives for the 5-acreHuntington Beach parcel and expect to submit a proposed site plan to the Cityof Huntington Beach later this year.

On December 15, 2005, we received a permit from theCalifornia Coastal Commission for development of the 349-home Brightwaterresidential community, which will offer a broad mix of home choices averaging2,850 square feet and ranging in size from 1,700 square feet to 4,100 squarefeet.  In addition, we own land adjacentto the planned Brightwater development in the City of Huntington Beach, forwhich we intend to process permits to build seven additional homes which wouldbe included in the Brightwater community. We began grading the Brightwaterdevelopment this past June and we currently expect to:

·                  completegrading during the third quarter of 2006,

·                  beginbuilding model homes during the fourth quarter of 2006, and

·                  startselling homes during the second quarter of 2007;

however, there can be no assurance in that regard, oras to the absence of any delays.

Our Brightwater plan also includes 37 acres of openspace and conservation area. With 356 homes on 68 acres of the upper mesa, theresulting low-density plan equates to approximately five homes per acre,consistent and compatible with the neighboring Huntington Beach communities.

During the first quarter of 2005, following theCoastal Commission’s conditional approval of our permit to develop Brightwater,we concluded that it is more likely than not that we will utilize all of our deferredtax assets, including net operating losses, to offset future taxable income. Asa result, we recorded a $4.7 million reversal of valuation allowance onpost-reorganization net operating losses and other deferred tax assets and a$38.5 million reversal of valuation allowance on federal pre-reorganization netoperating losses. See Note 6 in our Consolidated Financial Statements.

We used the following facts and assumptions inevaluating the value that we expect to receive from the Brightwater developmentproject:

·                  TheBrightwater coastal development permit provides for 349 homes aggregatingapproximately 995,000 square feet.

·                  Weown land adjacent to Brightwater in the City of Huntington Beach, for which weintend to process permits to build seven additional homes which would beincluded in the Brightwater community.

·                  Developmentat Brightwater is projected to take approximately four to six months forinfrastructure, approximately eight months to build 14 model homes, and two tothree years for home construction.

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·                  Weare currently planning to: (i) complete grading during the third quarter of2006, (ii) begin building model homes during the fourth quarter of 2006, (iii)begin selling homes during the second quarter of 2007, and (iv) begindelivering homes in the fourth quarter of 2007.

·                  Asof January 2006, new home prices approximated $650 per square foot, includingview and other premiums, in the local residential market (coastal HuntingtonBeach).

·                  Thefinished lot component of home prices ranges from 60% to 65%.

·                  Coststo improve the lots from their raw condition to finished lots, includingbuilding permits and city fees, approximate $140,000 per lot.

·                  Whiledemand continues to exceed the supply of housing in coastal Orange county, thevolume of home sales has slowed during the first half of 2006 and pressure forcontinued appreciation of home prices appears to have subsided.

The estimation process involved in the determinationof value is inherently uncertain because it requires estimates as to futureevents and market conditions. This estimation process assumes our ability tocomplete development and disposition of our real estate properties in theordinary course of business based on management’s present plans and intentions.Economic, market, and environmental conditions may affect our development andmarketing plans. In addition, the implementation of such development andmarketing plans could be affected by the availability of future financing fordevelopment and construction activities. The development of Brightwater isdependent upon various economic factors. Accordingly, the amount ultimatelyrealized from the Brightwater project may differ materially from our currentestimates and the project’s carrying value.

*Oxnard LandDevelopment - Unconsolidated Joint Venture*

In February 2003, we entered into two option contractsto acquire land adjacent to the City of Oxnard in Ventura County, Californiaaggregating approximately 168 acres. We are in the process of developing a landplan for the area, which also includes an additional 149 acres owned by otherlandowners, with the intention of entitling the property for residentialdevelopment and annexing it into Oxnard. We currently expect the residentialdevelopment plan to include approximately 800 single-family detached lots andapproximately 750 attached family residential units (townhomes, condominiums,and apartments); however, these numbers are subject to change during the courseof the entitlement process. Approximately 555 of the single-family lots and 490of the attached units would be developed on the 168 acres of optioned land thatwe currently expect to purchase.  Theoption contracts give us two years, plus up to three additional years throughthe exercise of extensions, to complete these entitlement activities beforepurchasing the land. We have the right to terminate these option agreements byforfeiting the cash deposits. We are striving to obtain approval of our planfrom the Oxnard City Council by the end of 2006 and approval of annexation intothe City of Oxnard from the Local Agency Formation Commission in the secondhalf of 2007; however, delays could be encountered.  We have exercised four six-month extensions,extending the current closing date for the option contracts to February 2007.

During October 2003, we entered into a limitedliability company joint venture agreement with a major financial partner topursue the Oxnard development opportunity. We assigned the land purchase optioncontracts to the Oxnard limited liability company. Hearthside Homes, Inc., ourhomebuilding subsidiary, is the managing member of the Oxnard joint venture,and made an initial contribution of $500,000. The non-managing member also madean initial contribution of $500,000 to the joint venture and, as of December31, 2005, had made an aggregate of $4 million of first tier additionalcontributions. The members have agreed to provide a second tier of additionalcapital contributions of up to $2 million, as necessary, to complete thebusiness plan.  For contributions inexcess of $5 million, the first $500,000 is to be contributed equally by us andour partner.  At our discretion, we couldcontinue to contribute equally to the next $500,000. Thereafter, the next $1million is to be contributed equally between us. During the fourth quarter of2005 and the first six months of 2006, we each contributed approximately$160,000 and $440,000, respectively, of the additional $2 million.  Our total investment in the venture as of June30, 2006 is $1.1 million. We expect to make additional aggregate capitalcontributions of approximately $700,000 to the joint venture during the next 15months, bringing our total expected investment in the project to $1.8million.  After payment of a 10%preferred return on invested capital to us and our partner, first tier profitsare generally allocated 75% to our partner and 25% to us and second tierprofits and losses over $5 million are generally allocated on a 50/50 basis.The first $5 million of losses are generally allocated 80% to our partner and20% to us.  While we exert a large degreeof influence over the joint venture, our partner does have

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various substantive participating rights such asapproval rights with regard to the majority of business decisions, includingapproval of project budgets.

*Homebuilding*

We acquired no single-family residential lots duringthe first six months of 2006. Although home prices in Southern Californiaincreased dramatically over the last few years, we have not seen priceappreciation in our markets in the first half of 2006, and expect modest, ifany, increases over the next year. We have noticed a number of large nationalhomebuilders offering various buyer incentives and there is also a possibilityof price decreases over the next 12 months. We delivered 28 homes during thesecond quarter of 2006, compared to only four deliveries during the comparableperiod in 2005. The record rainfall during the fourth quarter of 2004 and thefirst quarter of 2005 negatively impacted our construction schedule and contributedto our lower number of home deliveries in the second quarter of 2005.

Our homebuilding projects are described below:

|                      | ** ** | ** **       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **         | ** ** | **Deliveries**         | ** ** |
|----------------------|------------|------------------|------------|-----------------|------------|------------------|------------|--------------------|------------|------------------------|------------|
| ** **           | ** ** | ** **       | ** ** | ** **      | ** ** | ** **       | ** ** | ** **         | ** ** | **Quarter Ended** | ** ** |
| ** **           | ** ** | ** **       | ** ** | **Land**        | ** ** | **Commenced**    | ** ** | **Commenced**      | ** ** | **June 30,**      | ** ** |
| ** **           | ** ** | **Location**     | ** ** | **Acquisition** | ** ** | **Construction** | ** ** | **Sales**          | ** ** | **2006**               | ** ** | **2005** | ** ** |
|                 |       |             |       |            |       |             |       |               |       |                   |       |   |   |
| Completed  Projects  |       | Various          |       | n/a             |       |             | n/a        |               |       |                   | n/a        |   |   | — |   | 4 |   |
|                 |       |             |       |            |       |             |       |               |       |                   |       |   |   |   |   |   |   |
| Active Projects      |       |             |       |            |       |             |       |               |       |                   |       |   |   |   |   |   |   |
| Chandler Ranch       |       | North  Corona    |       | 2004            |       |             | 2005       |               |       |                   | 2005       |   |   | 6 |   | — |   |
| Cancion              |       | Rancho  Santa Fe |       | 2003-2005       |       |             | 2005       |               |       |                   | 2005       |   |   | 6 |   | — |   |
| Alisal at  Lancaster |       | Lancaster        |       | 2004            |       |             | 2004       |               |       |                   | 2005       |   |   | 16 |   | — |   |
| Alisal at  Ontario   |       | Ontario          |       | 2005            |       |             | 2005       |               |       |                   | 2006       |   |   | — |   | — |   |
| Woodhaven            |       | Beaumont         |       | 2005            |       |             | 2005       |               |       |                   | 2006       |   |   | — |   | — |   |
| Hearthside Lane      |       | Corona           |       | 2005            |       |             | 2005       |               |       |                   | 2006       | (a) |   | — |   | — |   |
| Quartz Hill          |       | Lancaster        |       | 2005            |       |             | 2006       |               |       |                   | 2006       | (a) |   | — |   | — |   |
| Brightwater          |       | Bolsa  Chica     |       | 1970            |       |             | 2006       |               |       |                   | 2007       | (a) |   | — |   | — |   |
|                 |       |             |       |            |       |             |       | *Total Deliveries* |       | 28                     |       | 4 |   |

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(a)             Pending

*RanchoSanta Fe.*   In October 2003, we entered into anagreement to acquire 32 lots in a luxury golf community known as Crosby Estatesin the Rancho Santa Fe area of San Diego County in California. We acquired thelots during the period from October 2003 to March 2005.  During 2005, two model homes averagingapproximately 3,370 square feet were completed and six homes were delivered atan average price of $1,223,000.  Wedelivered six homes during the first half of 2006 at an average price of$1,359,000. During July 2006, six additional homes were delivered at an averageprice of $1,421,000, and as of July 31, 2006, eight homes are in escrow at anaverage price of $1,420,000, two homes are completed and held for sale, andfour additional homes are under construction and held for sale.

*Lancaster.*   Weacquired 104 lots in the City of Lancaster in northern Los Angeles Countyduring May 2004. We began construction of model homes averaging approximately2,800 square feet during the third quarter of 2004 and opened for home sales inJanuary 2005.  During 2005, we delivered55 homes at an average price of $406,000. We delivered 26 homes during thefirst half of 2006 at an average price of $424,000, delivered an additionalnine homes during July and, as of July 31, 2006, seven homes are in escrow atan average price of $488,000, and six homes are completed models or are underconstruction and held for sale. In April 2005, we acquired an additional 73unentitled lots in Lancaster. We are completing the entitlement process andplans for the project and expect to begin construction during 2007.

In December 2005, we acquired 77 additional lots in anarea known as Quartz Hill in the City of Lancaster. The homes in this communitywill be on 10,000 square foot lots and will average 3,642 square feet.Construction of models began in May 2006 and we opened for sales during July2006. As of July 31, 2006, three model homes and the first 13 production homesare under construction, and six homes have been released for sale.

*Corona.*   Weacquired 83 lots in North Corona in May 2004. Following construction ofinfrastructure, during April 2005, we began construction of homes averaging3,160 square feet. We opened for sales during the third quarter of 2005 anddelivered 44 homes during the first half of 2006 at an average price of$607,000 and delivered two additional homes in July. As of July 31, 2006, fivehomes are in escrow at an average price of $595,000, six homes are completedand held for sale, and six additional homes are under construction and havebeen released for sale.

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During April 2005, we acquired 151 lots inCorona.  Following construction ofinfrastructure, construction of homes averaging 3,600 square feet on lots ofapproximately 7,200 square feet is expected to begin during the third quarterof 2006.

*Ontario.*   DuringApril 2005, we acquired 26 lots in the City of Ontario in Riverside County,California. This small community of homes, planned to average 3,380 squarefeet, is an infill site situated very close to the projects we recentlycompleted in the City of Chino. Construction began during the fourth quarter of2005, and we opened for sales during March 2006. As of July 31, 2006, fourhomes are in escrow at an average price of $690,000, and nine additional homesare under construction and have been released for sale.

*Beaumont.*   Weacquired 102 lots in the City of Beaumont during the third quarter of 2005.Following construction of infrastructure, construction of homes averaging 2,500square feet began during the first quarter of 2006, and sales commenced duringMarch 2006. As of July 31, 2006, 14 homes are in escrow at an average price of$403,000 and 26 additional homes are under construction and have been releasedfor sale.

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Outlook

The housing market in Southern California has slowedduring the first half of 2006.  For thesecond quarter of 2006, our net new orders decreased 57% to 16 homes from 37homes for the second quarter of 2005. The decrease in net new orders reflects theindustry-wide slowdown and is comparable to the 55% decrease in the firstquarter of 2006 (29 homes for the first quarter of 2006 compared with 64 homesfor the first quarter of 2005). At the same time, backlog as of quarter enddecreased 48% (49 as of June 30, 2006 compared with 94 as of June 30, 2005),while the value of homes in backlog decreased only 24% to $39.8 million from$52.3 million. Although the homebuilding business historically has been cyclical,it has not undergone an economic down cycle in a number of years. Further,during 2005, home prices rose significantly in all of our markets. This has ledsome people to assert that the prices of land, new homes and the stock pricesof homebuilding companies may be inflated and may decline further if the demandfor new homes weakens further. A decline in the prices for new homes couldadversely affect both our revenues and margins. A decline in our stock pricecould make raising capital through stock issuances more difficult andexpensive.

We believe this slowdown is attributable to an overallsoftening of demand for new homes as well as an oversupply of homes availablefor sale. We attribute the reduction in demand to reduced affordability of newhomes due to rapid price increases over the last six years and concerns on thepart of prospective home buyers about the future direction of home prices andinterest rates, and their ability to sell existing homes. In addition,speculators and investors are no longer helping to fuel demand. We try to avoidselling homes to speculators and build very few homes without having a signedagreement of sale. Nonetheless, we have been impacted by an overall increase inthe supply of homes available for sale in our markets as speculators attempt tosell the homes they previously purchased or cancel contracts for homes underconstruction. At the same time, many of the large national homebuildersoperating in our markets are attempting to reduce their inventories by offeringincentives and/or lowering prices.

In addition, based on the high cancellation ratesreported by other builders, and on the increased cancellation rates we haveexperienced, non-speculative buyer cancellations are also adding to the supplyof homes in the marketplace. Our cancellations increased to five and 17 in thethree and six months ended June 30, 2006, compared to none in the comparableperiods of 2005.

Despite this slowdown, we remain cautiously optimisticabout the future growth of our business. The long term outlook for homebuildingin Southern California remains strong due to the continuing regulation-inducedconstraints on lot supplies. We have traditionally employed a conservativeapproach to managing our real estate inventories and believe we arewell-positioned to withstand the effects of the market downturn as it unfolds.

There can be no assurance regarding the duration ofthe current slowdown of the Southern California residential real estatemarket.  In particular, (i) thesignificant increases in home prices over the last six years and the relateddecline in the affordability of new homes in Southern California, (ii)  the state of the national economy, continuedincreases in interest rates by the Federal Reserve Board and the possibility ofa recession in the future, and (iii) the volatility in the stock market,collectively may exert recessionary pressures on the California economy and mayhave further negative impacts on the Southern California housing market.

**CriticalAccounting Policies**

In the preparation of the Consolidated FinancialStatements, we applied accounting principles generally accepted in the UnitedStates of America. The application of generally accepted accounting principlesmay require management to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying results. Listedbelow are those policies and estimates that we believe are critical and requirethe use of complex judgment in their application. In particular, our criticalaccounting policies and estimates include the evaluation of the impairment oflong-lived assets and the evaluation of the probability of being able torealize the future benefits indicated by our significant federal tax netoperating losses, as discussed further in Notes 2 and 6 to the ConsolidatedFinancial Statements.

*Impairment ofLong-Lived Assets*

We assess the impairment of real estate inventoriesand other long-lived assets in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” which requires that an impaired asset, for which costscannot be recovered from estimated undiscounted future cash flows, be writtendown to fair value. Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. As provided by SFAS No. 144, impairment isevaluated by comparing an asset’s carrying value to the undiscounted estimatedcash flows expected from the asset’s operations and eventual disposition. Ifthe sum of the undiscounted estimated future cash flows is less than thecarrying value of the asset, an impairment loss is recognized based on the fairvalue of the asset. If impairment occurs, the fair value of an asset forpurposes of SFAS No. 144 is deemed to be the amount a willing buyer would pay awilling seller

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for such asset in a current transaction. These assetsare carried at cost, unless the carrying amount of the parcel or subdivision isdetermined not to be fully recoverable, in which case the impaired real estateis written down to fair value. Given the significance of the carrying value ofreal estate inventories, the application of SFAS No. 144 in evaluating anypotential impairment is critical to our consolidated financial statements, asdiscussed further in Note 2 to the Consolidated Financial Statements.

The Bolsa Chica property is our largest asset. Priorto the December 2005 receipt of our Brightwater permit, the property wasincluded in land held for future development or sale. In December 2005, we soldapproximately 146 acres of the property to the State. Beginning in December2005, the remaining portion consisting of approximately 214 acres is includedin real estate inventories.

In accordance with SFAS No. 144, in developingestimated future cash flows for impairment testing, we incorporated our ownmarket assumptions including those regarding home prices, infrastructure,home-building costs, and financing costs regarding real estateinventories.  Additionally, asappropriate, we identify alternative courses of action to recover the carryingvalue of our long-lived assets and evaluate all likely alternatives under aprobability-weighted approach as described in SFAS No. 144.

The estimation process involved in the determinationof value is inherently uncertain because it requires estimates as to futureevents and market conditions. Such estimation process assumes our ability tocomplete development and disposition of our real estate properties in theordinary course of business based on management’s present plans and intentions.Economic, market, and environmental conditions may affect management’sdevelopment and marketing plans. In addition, the implementation of suchdevelopment and marketing plans could be affected by the availability of futurefinancing for development and construction activities. The development of ourBrightwater project is dependent upon various economic factors. Accordingly,the amount ultimately realized from such project may differ materially fromcurrent estimates and the project’s carrying value.

*Basis ofConsolidation*

Certain of our wholly-owned subsidiaries are membersin joint ventures involved in the development and sale of residential projectsand residential loan production. Our consolidated statements include ouraccounts and all of our majority-owned and controlled subsidiaries and jointventures. The financial statements of joint ventures in which we generally havea controlling or majority economic interest (and thus are controlled by us) areconsolidated with our financial statements. Minority interest represents theequity interest of our joint venture partner for one consolidated venture. Ourinvestments in unconsolidated joint ventures are accounted for using the equitymethod when we do not have voting or economic control of the ventureoperations.

*Income Taxes*

We account for income taxes on the liability method.Deferred income taxes are determined based on the difference between thefinancial statement and tax bases of assets and liabilities. The liabilitymethod requires an evaluation of the probability of being able to realize thefuture benefits indicated by deferred tax assets, such as tax net operatinglosses. A valuation allowance related to the deferred tax asset is recordedwhen it is more likely than not that some portion or all of the deferred taxasset will not be realized. Given the significance of our historical federaltax net operating losses, as discussed in Note 6 to the Consolidated FinancialStatements, the application of our policy in evaluating the expected futurebenefit of net operating losses is critical. In applying those policies,estimates and judgments affect the amounts at which certain assets andliabilities are recorded. We apply our accounting policies on a consistentbasis. As circumstances change, they are considered in our estimates andjudgments, and future changes in circumstances could result in changes in amountsat which assets and liabilities are recorded.

We remain subject to the general rules of Section 382,which limit the availability of net operating losses if an ownership changeoccurs. If we were to experience another ownership change, the amount of net operatinglosses available would generally be limited to an annual amount equal to (i)the value of our equity immediately before the ownership change, multiplied bythe long-term tax-exempt rate (4.45% as of July 2006) plus (ii) recognizedbuilt-in-gains, defined as those gains recognized within five years of theownership change subject to an overall limitation of the net unrealizedbuilt-in gains  existing as of theownership change date. We believe we have net unrealized built-in gainssufficient to allow utilization of the entire net operating loss, assuming thatwe are able to recognize these gains within the five-year time limitation. Weestimate that as of July 31, 2006, we have experienced a three-year cumulativeownership shift of approximately 44%, as computed in accordance with Section382.

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*HomebuildingRevenues and Cost of Sales*

Our homebuilding operation generates revenues from thesale of homes to homebuyers. The majority of these homes are designed to appealto move-up homebuyers and the homes are generally offered for sale in advanceof their construction. Sales contracts are usually subject to certaincontingencies such as the buyer’s ability to qualify for financing. Revenuefrom the sale of homes is recognized at closing when title passes to the buyer,and the earnings process is complete. As a result, our revenue recognitionprocess does not involve significant judgments or estimates. However, we dorely on certain projections and estimates to determine the related constructioncosts and resulting gross margins associated with revenues recognized. The costof sales is recorded based upon total estimated costs within a subdivision andallocated using the relative sales value method. Our construction costs arecomprised of direct and allocated costs, including estimated costs for future warrantiesand indemnities. Our estimates are based on historical results, adjusted forcurrent factors.

*LitigationReserves*

We and certain of our subsidiaries have been named asdefendants in various cases arising in the normal course of business and regardingassets and businesses disposed of by us or our former affiliates. See Notes 5and 7 to the Consolidated Financial Statements. We have reserved for costsexpected to be incurred with respect to these cases based upon informationprovided by our legal counsel. There can be no assurance that total litigationcosts actually incurred will not exceed the amount of such reserve.

**Recent AccountingPronouncements**

See discussion regarding recent accountingpronouncements in Note 2 to the Consolidated Financial Statements.

**Results ofOperations**

*Three Months EndedJune 30, 2006 Compared with the Three Months Ended June 30, 2005*

We reported revenues of $18.8 million and grossoperating profit of $3.2 million for the second quarter of 2006, compared with$3.1 million in revenues and gross operating profit of $900,000 for the sameperiod of 2005. Revenues in the current period reflect deliveries of 28 homes,including 16 homes at the “Alisal” project in Lancaster, six homes at the “ChandlerRanch” project in North Corona and six homes at the Rancho Santa Feproject.  The comparable period of theprior year reflects deliveries of four homes at the “Jasper Ranch” project inRiverside.  The current quarter’s grossmargin of 17.0% is lower than the prior period gross margin of 29.0% due to thelower profitability of the Lancaster and North Corona (Chandler Ranch) homesdelivered during the current quarter as compared with the Riverside (JasperRanch) homes delivered during the comparable period of the prior year. Revenueper home declined by $104,000, reflecting the lower price level of homes inLancaster compared with homes in the Inland Empire and a higher-end productdelivered at our Jasper Ranch project in 2005. The decline in gross marginpercentage reflects lower levels of price appreciation resulting from shorterholding periods for the land underlying the homes delivered during the threemonths ended June 30, 2006.

The $700,000 increase in selling, general andadministrative expenses during the second quarter of 2006, as compared with thesecond quarter of 2005, primarily reflects an increased accrual forincentive-formula bonuses related to the increased profitability of ourhomebuilding business.

The $300,000 increase in other income during thesecond quarter of 2006 compared with the second quarter of 2005 primarilyreflects interest income on short-term investments during the 2006 period.

*Six Months EndedJune  30, 2006 Compared with Six MonthsEnded June 30, 2005*

We reported revenues of $46.7 million and gross operatingprofit of $7.9 million for the first six months of 2006 compared with $9.6million in revenues and gross operating profit of $2.6 million for the firstsix months of 2005.  Our revenues duringthe current six-month period were significantly higher than the prior six-monthperiod due to the greater number of homes delivered, while the average revenueper home decreased by $79,000 to $607,000. Revenues in the first six months of 2006 reflect deliveries of 77 homes,including 44 homes at our North Corona project, 26 homes at the Lancasterproject, six homes at our Rancho Santa Fe project, and one home at theRiverside (Jasper Ranch) project.  Thecomparable period of the prior year reflects an aggregate of 14 homes including10 homes at the Chino project and four

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homes at the Jasper Ranch project.  The decrease in revenue per home reflects thelower price level of homes in Lancaster compared with homes in the InlandEmpire and a higher-end product delivered at our Jasper Ranch project in 2005.The homebuilding gross margin for the first six months of 2006 of 16.9% islower than the prior period gross margin of 27.1% and the per unit averagegross margin decreased by $83,000 to $103,000. The decline in gross margin percentage reflects lower levels of priceappreciation resulting from shorter holding periods for the land underlying thehomes delivered during the six months ended June 30, 2006.

The $1.2 million increase in selling, general andadministrative expenses during the first six months of 2006 compared with thefirst six months of 2005 primarily reflects an increased accrual forincentive-formula bonuses related to the increased profitability of ourhomebuilding businesses.

The $800,000 increase in other income during the sixmonths ended June 30, 2006 as compared with the same period last year primarilyreflects interest income on short-term investments during the 2006 period.

During the quarter ended March 31, 2005, we recordedreversals of valuation allowances on post-Reorganization NOLs of $4.7 millionfollowing the Coastal Commission’s approval of the development plan for 349homes on the Upper Mesa (see Note 6), which is reflected in Results ofOperations for the six months ended June 30, 2005.

*Payments UnderContractual Obligations*

We have entered into certain contractual obligationsto make future payments for items such as project debt, lease agreements andliability insurance.  A summary of thepayments due under specified contractual obligations, aggregated by category ofcontractual obligation, for specified time periods is presented below as ofJune 30, 2006 (in millions):

|                            | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
|----------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | **Less**                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **More** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **than 1**                           | ** ** | **1-3** | ** ** | **4-5** | ** ** | **than 5** | ** ** |
| ** **                 | ** ** | **Total**  | ** ** | **year**                                  | ** ** | **years** | ** ** | **years** | ** ** | **years** | ** ** |
| Project debt               |       | $          | 48.7       |                                      | $          | 48.7 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases           |       | .1         |       | .1                                        |       | — |   | — |   | — |   |
| Insurance  premium payable |       | 4.3        |       | 4.3                                       |       | — |   | — |   | — |   |
| Total                      |       | $          | 53.1       |                                      | $          | 53.1 |   | $ | — |   | $ | — |   | $ | — |   |

 

Our purchase contracts which are made in the normalcourse of our homebuilding business for land acquisition and constructionsubcontracts are generally cancelable at will. Other contractual obligationsincluding our tax liabilities, accrued benefit liability for a frozenretirement plan and other accrued pensions, home warranty reserves andcontingent indemnity and environmental obligations are estimated based onvarious factors. Payments are not due as of a given date, but rather aredependent upon the incurrence of professional services, the lives of annuitantsand other factors. The estimation process involved in the determination ofcarrying values of these obligations is inherently uncertain since it requiresestimates as to future events and contingencies. We have provided additionaldisclosure in Item 1. “Legal Proceedings” and in Note 5 to our ConsolidatedFinancial Statements.

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**Liquidityand Capital Resources**

Year-over-year changes in the principal components ofour liquidity and capital resources are as follows (in millions, exceptpercentages):

 

|                                                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Cash and cash  equivalents                       |       | $                                             | 2.7        |   | $ | 5.4 |   |
|                                             |       |                                          |       |   |   |
| Short-term  investments                          |       | 15.1                                          |       | — |   |
|                                             |       |                                          |       |   |   |
| Cash used in  operating activities               |       | 9.3                                           |       | 55.3 |   |
|                                             |       |                                          |       |   |   |
| Cash provided by  investing activities           |       | 13.6                                          |       | .5 |   |
|                                             |       |                                          |       |   |   |
| Cash (used in) provided  by financing activities |       | (9.3                                          | )          | 51.2 |   |
|                                                  |            |                                               |            |  |  |  |  |

 

The principal assets in our portfolio are residentialland which must be held over an extended period of time in order to bedeveloped to a condition that, in management’s opinion, will ultimatelymaximize our return. Consequently, we require significant capital to financeour real estate development and homebuilding operations. Historically, sourcesof capital have included loan facilities secured by specific projects, assetsales and available internal funds. We are currently utilizing internallygenerated cash to fund our Brightwater development at Bolsa Chica and, alongwith joint venture contributions, to fund the Oxnard land developmentproject.  We expect to obtainconstruction financing for infrastructure and homebuilding activities atBrightwater during the third quarter of 2006 as further described in Note 8 tothe Financial Statements. We expect to make aggregate additional capitalcontributions of approximately $700,000 to the Oxnard joint venture during thenext 15 months, bringing our total expected investment in the project to $1.8million. For the year to date period, we have primarily utilized internallygenerated cash to fund new construction at our homebuilding projects in orderto reduce the negative arbitrage between interest costs on project debtcompared with interest income earned on short-term investments. As of June 30,2006, based on construction in place, the immediately available borrowingcapacity on our construction loan facilities is approximately $20 million, and additionalfacility availability for future construction costs is approximately $55million. Our current and pending homebuilding projects (excluding Brightwater),which are primarily in the “Inland Empire” area of Southern California(Riverside and San Bernardino counties) and Lancaster in northeastern LosAngeles County, are currently expected to generate approximately $95 million ofpositive cash flows over the next three years, based on present economicconditions and market assumptions. However, any adverse change in suchconditions or assumptions would adversely impact the amount of our cash flows.Our unrestricted cash and cash equivalents and short-term investments as ofJune 30, 2006 were $17.8 million. We believe that our cash and cash equivalents,short-term investments, future real estate sales proceeds, and funds availableunder our current and future credit agreements will be sufficient to meetanticipated operating and capital investment requirements, including payment ofthe special dividend discussed in “Strategic Alternatives” above and in Note 8to the Financial Statements and project development costs for homebuildingprojects, the Oxnard and Brightwater land development projects, and general andadministrative expenses, for at least the next 12 months.

We are subject to the usual obligations associatedwith entering into contracts for the purchase of land and improved homesites.The purchase of properties under these contracts is generally contingent uponsatisfaction of certain requirements by the sellers, including obtainingapplicable property entitlements. We also utilize option contracts withthird-party land sellers and financial entities as a method of acquiring landin staged takedowns and minimizing the use of funds from other corporatefinancing sources. These option contracts also help to manage the financial andmarket risk associated with land holdings. Purchase and option contractsgenerally require the payment of a non-refundable cash deposit of 5% to 15% ofthe purchase price for the right to acquire lots over a specified period oftime (usually one to two years) at predetermined prices. We have the right atour discretion to terminate our obligations under these land purchase andoption agreements by forfeiting the cash deposit with no further financialresponsibility. As of June 30, 2006, we have one consolidated land optiondeposit for $25,000 which is refundable. In addition, our unconsolidated Oxnardjoint venture has land deposits.

We may enter into land development and homebuildingjoint ventures from time to time as a means of expanding our marketopportunities, establishing strategic alliances, managing our risk profile andleveraging our capital base. These joint ventures may obtain securedacquisition, development and construction financing, which minimize the use offunds from other corporate financing sources.

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*June 30, 2006Compared with December 31, 2005*

Cash used in homebuilding operations of $9.3 millionfor the first half of 2006 primarily reflects real estate sales proceeds of$46.5 million from deliveries of 77 homes, offset by uses of cash forinvestments in real estate inventories and construction costs of $52.8 million.Additional significant uses of cash include approximately $9.2 million for netrepayments of project debt financing to reduce the negative arbitrage betweeninterest costs on project debt and interest income on short-term investments.The primary sources of cash during the period were net sales of short-terminvestments of $15.2 million. These items, as well as other activity presentedin the Statements of Cash Flows, resulted in a $5.0 million decrease in cashand cash equivalents.

The $1.4 million decrease in deferred tax assetsprimarily reflects the usage of $300,000 of federal Pre-reorganization netoperating losses (“NOLs”) and $1.1 million related to amounts not deductibleuntil paid.

**Off Balance SheetFinancing**

In the ordinary course of business, we enter into landoption contracts in order to procure land for the construction of homes. Theuse of such option agreements allows us to reduce the risks associated withland ownership and development; reduce our financial commitments, includinginterest and other carrying costs; and minimize land inventories. Under suchland option contracts, we will fund a specified option deposit or earnest moneydeposit in consideration for the right to purchase land in the future, usuallyat a predetermined price.  Our liability is generally limited toforfeiture of the nonrefundable deposits, letters of credit and othernonrefundable amounts incurred. As of June 30, 2006, we have no consolidatedland option deposits and no material third party guarantees.

We also acquire land and conduct residentialconstruction activities through participation in joint ventures in which wehold less than a controlling interest. Through joint ventures, we reduce andshare our risk and also reduce the amount invested in land, while increasingour access to potential future home sites. The use of joint ventures also, insome instances, enables us to acquire land which we might not otherwise obtainor access on as favorable terms, without the participation of a strategicpartner. While we view the use of unconsolidated joint ventures as beneficialto our homebuilding activities, we do not view them as essential to thoseactivities.

Our investment in unconsolidated joint venturestotaled $1.1 million and $700,000 at June 30, 2006 and December 31, 2005,respectively. These joint ventures had total assets of $7.1 million and $5.8million as of June 30, 2006 and December 31, 2005, respectively, which includedland deposits of $1.8 million and $1.6 million, respectively. In certaininstances, we may provide varying levels of guarantees on debt ofunconsolidated joint ventures. As of June 30, 2006, we provided no guaranteeson debt of unconsolidated joint ventures.

Under the requirements of FASB InterpretationNo. 46(R), “Consolidation of Variable Interest Entities” (“FASBInterpretation No. 46(R)”), certain of our land option contracts may create avariable interest for us, with the land seller being identified as a VIE.  In compliance with FASB InterpretationNo. 46(R), we analyze our land option contracts and other contractualarrangements and consider whether we should consolidate the fair value ofcertain VIEs from which we are purchasing land under option contracts. At June30, 2006, we had no deposits with VIEs.

**ITEM 3 -QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We utilize project debt financing for acquisition,development and construction of homes. The interest rates on our project debtapproximate the current rates available for secured real estate financing withsimilar terms and maturities, and as a result, their carrying amountsapproximate fair value. While changes in interest rates generally do not impactthe fair market value of the debt instrument, they do affect our earnings andcash flows. Holding our variable rate debt balance constant as of June 30,2006, each one point percentage increase in interest rates would result in anincrease in variable rate interest incurred for the next 12 months ofapproximately $487,000.

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**ITEM 4 -EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

*ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures*

No matter how well a control system is conceived andoperated, it can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. In addition, the design of a controlsystem must reflect the fact that there are resource constraints and thebenefits of controls must be considered relative to costs.  Therefore, no cost-effective control systemsand no evaluation of controls can provide absolute assurance that all controlissues and instances of misstatements due to error or fraud, if any, within ourcompany have been detected.

*Evaluation ofDisclosure Controls and Procedures*

Our chief executive officer and chief financialofficer, with the assistance of management, evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended) as of the end of theperiod covered by this report (the “Evaluation Date”). Based on thatevaluation, our chief executive officer and chief financial officer concludedthat, as of the Evaluation Date, our disclosure controls and procedures wereeffective to ensure that information required to be disclosed in our reportsunder the Exchange Act, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to management, including our chiefexecutive officer and chief financial officer, as appropriate to allow timelydecisions regarding required disclosure.

*Changes inInternal Controls*

There have been no significant changes in our internalcontrol over financial reporting during the three months ended June 30, 2006that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

**PART II - OTHER INFORMATION**

**ITEM 1 - LEGALPROCEEDINGS**

See Note 7 to the Consolidated Financial Statementsabove, and “Item 1 - Business - Corporate Indemnification Matters” and “Item 3- Legal Proceedings” in our Annual Report on Form 10-K for the year endedDecember 31, 2005.

**ITEM 1A - RISK FACTORS THAT MAY AFFECT RESULTS OFOPERATIONS AND FINANCIAL CONDITION**

There has not been any material change in the riskfactors disclosure from that contained in our Form 10-K for the fiscal yearended December 31, 2005; however, the risks and uncertainties described in theForm 10-K are not the only ones facing us. Other events that we do notcurrently anticipate or that we currently deem immaterial also may affect ourresults of operations and financial condition.

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**ITEM 4 -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

OurAnnual Meeting of stockholders was held on June 27, 2006. A quorum of commonstock was present in person or by proxy. The following proposals were approvedby the requisite vote of our stockholders entitled to vote, as follows:

**ProposalNo. 1:          *****The Director Proposal.***   Thedirector proposal recommended election of four directors to a one-year term.Set forth below is a table of how the votes were cast for each nominee, whichconstituted the affirmative votes for all nominees, by the holders of at least81.9% of the outstanding common stock represented in person or by proxy at theAnnual Meeting.
|                              | **Name**   | ** ** | ** ** | **Votes Cast “For Nominee”** | ** ** | ** ** | **Votes “Withheld”** | ** ** |
|------------------------------|------------|------------|------------|----------------------------------------|------------|------------|--------------------------------|------------|
| ** **                   | ** ** | ** ** |
|  Geoffrey W. Arens      | 7,470,225  | 1,615,881  |
|  Phillip R. Burnaman II | 7,470,225  | 1,615,881  |
|  Raymond J. Pacini      | 7,500,819  | 1,585,287  |
|  Thomas W. Sabin, Jr.   | 7,440,934  | 1,645,172  |

** **

**ProposalNo. 2:          *****The Stock Option/Stock IssuancePlan Amendment Proposal.***   The holders of common stockcast 6,143,933 votes “for” and 1,418,773 votes “against” the proposal to increasethe number of shares of common stock issuable under the Amended and Restated1993 Stock Option Stock Issuance Plan by an additional 250,000 shares, and toextend its term to December 31, 2020. Such votes constituted the affirmative vote “for” the Stock Option/StockIssuance Plan Amendment Proposal by the holders of approximately 60.5% of theoutstanding common stock. There were 190,524 abstentions and 1,332,876 brokernon-votes by the holders of shares of common stock with respect to the StockOption/Stock Issuance Plan Amendment Proposal.

**ProposalNo. 3:          *****The Auditor Proposal.***   Theholders of common stock cast 8,887,447 votes “for” and 12,659 votes “against”the proposal to ratify the appointment of Deloitte & Touche, LLP as ourindependent registered public accounting firm for the fiscal year endingDecember 31, 2006. Such votes constituted the affirmative vote “for” theAuditor Proposal by the holders of approximately 97.8% of the outstandingcommon stock represented in person or by proxy at the Annual Meeting. Therewere 186,000 abstentions and no broker non-votes by the holders of shares ofcommon stock with respect to the Auditor Proposal.

**ITEM 6 - EXHIBITS**

10.1              Amended and Restated 1993 Stock Option/StockIssuance Plan.

10.2                                RetirementPlan of the Registrant, Amended and Restated through December 19, 2001, datedDecember 21, 2001.

10.3              Amendment No. 1 to Retirement Plan ofthe Registrant dated December 30, 2002.

31.1                                Section302 Certificate of Raymond J. Pacini, Chief Executive Officer of CaliforniaCoastal Communities, Inc.

31.2              Section 302 Certificate of Sandra G.Sciutto, Chief Financial Officer of California Coastal Communities, Inc.

32                                         Section906 Certificate of Raymond J. Pacini, Chief Executive Officer and Sandra G.Sciutto, Chief Financial Officer of California Coastal Communities, Inc.*

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*               These certifications are being furnished solely toaccompany this report pursuant to 18 U.S.C. Section 1350, and are not beingfiled for purposes of Section 18 of the Securities Exchange Act of 1934, asamended, and are not to be incorporated by reference into any filing of theCompany, whether made before or after the date hereof, regardless of anygeneral incorporation language in such filing.

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**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
| Date: August 8, 2006 |   | CALIFORNIA COASTAL COMMUNITIES, INC. |
|----------------------|--------|--------------------------------------|
|                 |   |                                 |   |   |
|                 |   |                                 |   |   |
|                 |   | By:                                  | * * | */s/ Sandra G. Sciutto* |
|                 |   |                                 | * * | SANDRA G. SCIUTTO |
|                 |   |                                 |   | Senior Vice President and |
|                 |   |                                 |   | Chief Financial Officer |

 

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