**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON,D.C. 20549**

 

 

**QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

 

**Forthe quarterly period ended June 30, 2002**

 

 

**Commissionfile number 0-17189**

 

 

**CALIFORNIA COASTAL COMMUNITIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                                  |   | **02-0426634**      |
|-------------------------------------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                                               |   | (I.R.S. Employer    |
| incorporation or organization.)                                               |   | Identification No.) |
|                                                                          |   |                |
| **6 Executive Circle, Suite 250**                                             |   |                |
| **Irvine, California**                                                        |   | **92614**           |
| (Address of principal executive offices)                                      |   | (Zip Code)          |
|                                                                          |   |                |
| Registrant’s  telephone number, including area code: **(949)  250-7700** |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days:

 

Yes  ý                    No  o

 

Indicateby check mark whether the Registrant has filed all documents and reportsrequired to be filed by Sections 12, 13, or 15(d) of the Securities ExchangeAct of 1934 subsequent to the distribution of securities under a plan confirmedby a court.

 

Yes  ý                    No  o

 

Thenumber of shares of Common Stock outstanding at July 31, 2002 was 10,058,589.

 

 

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CALIFORNIA COASTAL COMMUNITIES,INC.

 

FORM 10-Q

 

FOR THE QUARTER ENDED JUNE 30, 2002

 

I N D E X

 
| Part I  - Financial Information: |
|---------------------------------------|
|                                  |   |
|                                  | Item  1 - | Consolidated  Financial Statements (unaudited) |
|                                  |   |   |
|                                  |   | Consolidated Balance Sheets  - December 31, 2001 and June 30, 2002 |
|                                  |   |   |
|                                  |   | Consolidated  Statements of Operations - Three and Six Months Ended June 30, 2001 and 2002 |
|                                  |   |   |
|                                  |   | Consolidated  Statements of Cash Flows - Six Months Ended June 30, 2001 and 2002 |
|                                  |   |   |
|                                  |   | 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 |
|                                  |   |   |
| Part II - Other  Information:    |
|                                  |   |   |
|                                  | Item  1 - Legal Proceedings |
|                                  |   |   |
|                                  | Item 6 -  Exhibits and Reports on Form 8-K |
|                                  |   |   |
| SIGNATURE                             |   |
|                                       |  |  |  |  |

 

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CALIFORNIA COASTALCOMMUNITIES, INC.

 

CONSOLIDATED BALANCESHEETS

 

(in millions)

 

(unaudited)

 

 
|                                             |   | **December 31,  2001** |   | **June 30, 2002** |   |
|--------------------------------------------------|--------|-----------------------------|--------|-------------------|--------|
|                                             |   |                        |   |              |   |
| ASSETS                                           |   |                        |   |              |   |
|                                             |   |                        |   |              |   |
| Cash and cash equivalents                        |   | $                           | 8.7    |              | $      | 6.7 |   |
| Short-term investments – available for sale |   | 7.5                         |   | —            |   |
| Restricted cash equivalents                      |   | 1.5                         |   | —            |   |
| Real estate held for current development or sale |   | 14.0                        |   | 18.3              |   |
| Land held for future development                 |   | 147.3                       |   | 150.3             |   |
| Other assets                                     |   | 1.4                         |   | .7                |   |
|                                             |   |                        |   |              |   |
|                                             |   | $                           | 180.4  |              | $      | 176.0 |   |
|                                             |   |                        |   |              |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY        |   |                        |   |              |   |
|                                             |   |                        |   |              |   |
| Liabilities:                                     |   |                        |   |              |   |
| Accounts payable and accrued liabilities         |   | $                           | 3.1    |              | $      | 3.3 |   |
| Project debt                                     |   | 3.1                         |   | .5                |   |
| Other liabilities                                |   | 15.2                        |   | 11.9              |   |
|                                             |   |                        |   |              |   |
| Total liabilities                                |   | 21.4                        |   | 15.7              |   |
|                                             |   |                        |   |              |   |
| Commitments and contingencies                    |   |                        |   |              |   |
|                                             |   |                        |   |              |   |
| Stockholders’ equity:                       |   |                        |   |              |   |
| Common stock                                     |   | .5                          |   | .5                |   |
| Capital in excess of par value                   |   | 139.8                       |   | 140.8             |   |
| Retained earnings                                |   | 18.8                        |   | 20.4              |   |
| Accumulated other comprehensive loss             |   | (.1                         | )      | (1.4              | )      |
| Total stockholders’ equity                  |   | 159.0                       |   | 160.3             |   |
|                                             |   |                        |   |              |   |
|                                             |   | $                           | 180.4  |              | $      | 176.0 |   |

 

See the accompanying notes to consolidated financial statements.

 

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CALIFORNIA COASTAL COMMUNITIES, INC.

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 

(in millions,except per share amounts)

 

(unaudited)

 
|                                                                        |   | **Three Months Ended  June 30,** |       | **Six Months Ended   June 30,** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------|------------|---------------------------------|--------|
|                                                                        |   | **2001**                         | ** ** | **2002**                        |   | **2001** |   | **2002** |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Revenues                                                                    |   | $                                | 13.3       |                            | $      | 5.1 |   | $ | 25.3 |   | $ | 8.0 |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Costs of sales                                                              |   | 11.4                             |       | 4.4                             |   | 21.4 |   | 7.1 |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Gross operating profit                                                      |   | 1.9                              |       | .7                              |   | 3.9 |   | .9 |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Selling, general and administrative expenses                                |   | .9                               |       | .9                              |   | 1.7 |   | 1.9 |   |
| Interest expense                                                            |   | —                           |       | —                          |   | .1 |   | .1 |   |
| Income from unconsolidated joint ventures                                   |   | (1.1                             | )          | —                          |   | (1.7 | ) | (.6 | ) |
| Other income, net                                                           |   | —                           |       | (.6                             | )      | (.2 | ) | (.6 | ) |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Income before income taxes                                                  |   | 2.1                              |       | .4                              |   | 4.0 |   | .1 |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Provision (benefit) for income taxes                                        |   | (2.3                             | )          | (.2                             | )      | (1.5 | ) | (1.5 | ) |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Net income                                                                  |   | $                                | 4.4        |                            | $      | .6 |   | $ | 5.5 |   | $ | 1.6 |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Other comprehensive income (loss):                                          |   |                             |       |                            |   |   |   |   |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Unrealized gain on short-term   investments – available for sale       |   | —                           |       | .5                              |   | — |   | — |   |
| Less:   Reclassification adjustment for   gains included in net income |   | —                           |       | (1.0                            | )      | — |   | (1.3 | ) |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Total comprehensive income                                                  |   | $                                | 4.4        |                            | $      | .1 |   | $ | 5.5 |   | $ | .3 |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Earnings per common share – basic                                      |   | $                                | .44        |                            | $      | .06 |   | $ | .55 |   | $ | .16 |   |
|                                                                        |   |                             |       |                            |   |   |   |   |   |
| Earnings per common share – diluted                                    |   | $                                | .44        |                            | $      | .06 |   | $ | .55 |   | $ | .15 |   |

 

See the accompanying notes toconsolidated financial statements.

 

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CALIFORNIA COASTAL COMMUNITIES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 

(in millions)

 
|                                                                                                                      |   | **Six Months Ended   June 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                                      |   | **2001**                        |   | **2002** |   |
|                                                                                                                      |   |                            |   |   |   |
| Cash flows from operating activities:                                                                                     |   |                            |   |   |   |
| Net income                                                                                                                |   | $                               | 5.5    |   | $ | 1.6 |   |
| Adjustments to reconcile to cash provided by (used in)  operating activities:                                             |   |                            |   |   |   |
| Non-cash interest expense                                                                                                 |   | .1                              |   | .1 |   |
| Deferred income taxes                                                                                                     |   | 1.5                             |   | (.1 | ) |
| Deferred compensation expense                                                                                             |   | .1                              |   | .3 |   |
| Gains on sales of real estate held for current  development or sale                                                       |   | (3.9                            | )      | (.9 | ) |
| Proceeds from asset sales, net                                                                                            |   | 24.9                            |   | 7.9 |   |
| Gains on sales of short-term investments                                                                                  |   | —                          |   | (1.2 | ) |
| Changes in assets and liabilities:                                                                                        |   |                            |   |   |   |
| Investments in real estate held for current  development or sale                                                          |   | (11.8                           | )      | (11.3 | ) |
| Investments in land held for future development                                                                           |   | (2.2                            | )      | (3.0 | ) |
| Decrease in other assets                                                                                                  |   | .9                              |   | .7 |   |
| Decrease in accounts payable, accrued and other  liabilities, net                                                         |   | (8.4                            | )      | (2.4 | ) |
|                                                                                                                      |   |                            |   |   |   |
| Cash provided by (used in) operating activities                                                                           |   | 6.7                             |   | (8.3 | ) |
|                                                                                                                      |   |                            |   |   |   |
| Cash flows from investing  activities:                                                                                    |   |                            |   |   |   |
| Proceeds from sales of short-term investments                                                                             |   | —                          |   | 7.4 |   |
|                                                                                                                      |   |                            |   |   |   |
| Cash provided by investing activities                                                                                     |   | —                          |   | 7.4 |   |
|                                                                                                                      |   |                            |   |   |   |
| Cash flows from financing activities:                                                                                     |   |                            |   |   |   |
| Borrowings of project debt                                                                                                |   | 6.5                             |   | .1 |   |
| Repayments of project debt                                                                                                |   | (13.2                           | )      | (2.7 | ) |
| Release of restricted cash                                                                                                |   | —                          |   | 1.5 |   |
|                                                                                                                      |   |                            |   |   |   |
| Cash used in financing activities                                                                                         |   | (6.7                            | )      | (1.1 | ) |
|                                                                                                                      |   |                            |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                                                      |   | —                          |   | (2.0 | ) |
|                                                                                                                      |   |                            |   |   |   |
| Cash and cash equivalents - beginning of period                                                                           |   | 6.9                             |   | 8.7 |   |
|                                                                                                                      |   |                            |   |   |   |
| Cash and cash equivalents - end of period                                                                                 |   | $                               | 6.9    |   | $ | 6.7 |   |
|                                                                                                                      |   |                            |   |   |   |
| Supplemental disclosures of cash flow information:                                                                        |   |                            |   |   |   |
| Cash paid during the period for  income taxes, net of refunds                                                             |   | $                               | .2     |   | $ | .5 |   |
|                                                                                                                      |   |                            |   |   |   |
| Supplemental disclosures of  non-cash investing and financing activities:                                                 |   |                            |   |   |   |
| Reclassification adjustment for  gains included in net income                                                             |   | —                          |   | (1.3 | ) |
| Utilization of  pre-Reorganization net operating losses to offset tax liabilities, credited  to stockholders’ equity |   | 1.6                             |   | .7 |   |

 

See the accompanying notes to consolidated financial statements.

 

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CALIFORNIA COASTALCOMMUNITIES, INC.

 

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

**Note 1 - Basisof Presentation**

 

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 year endedDecember 31, 2001, and the current year’s previously issued Quarterly Report onForm 10-Q. The results for interim periods are not necessarily indicative ofthe results to be expected for the full year. This report containsforward-looking statements. Readers are cautioned that any such forward-lookingstatements are not guarantees of future performance and involve risks anduncertainties that actual events or results may differ materially from thosedescribed herein as a result of various factors, including without limitation,the factors discussed generally in this report.

 

The Company completed its recapitalization (the “Recapitalization”) which became effective on September 2, 1997, pursuant to aprepackaged plan of reorganization which was confirmed by the U.S. BankruptcyCourt for the District of Delaware. The prepackaged plan was filed by theCompany, excluding all of its subsidiaries and affiliates, contemporaneouslywith a voluntary petition for relief under Chapter 11 of the bankruptcy code.On the effective date of the Recapitalization, the Company adopted theprovisions of Statement of Position No. 90-7, “Financial Reporting by Entities in Reorganization Under the BankruptcyCode” (“Fresh-Start Reporting”) as promulgated by the American Institute ofCertified Public Accountants. Accordingly, all assets and liabilities wererevalued to reflect their reorganization value, approximating their fair valueat the effective date of the Recapitalization. In addition, the accumulateddeficit of the Company was eliminated and its capital structure recast inconformity with the Recapitalization.

 

# **Note 2 –Significant Accounting Policies**

 

#### *Earnings Per Common Share*

 

For the three and six months ended June 30, 2001 and 2002, the weightedaverage common shares outstanding were 10.1 million. Earnings per share,assuming dilution, is computed using the weighted average number of commonshares outstanding and the dilutive effect of potential common sharesoutstanding. For the three and six months ended June 30, 2001, the exerciseprice of outstanding stock options and warrants exceeded the average marketprice of the Company’s common stock. Accordingly, no dilution is reflected inthe related statements of operations for the 2001 periods. For the three andsix months ended June 30, 2002, the average market price exceeded the exerciseprice of outstanding stock options, but not the exercise price of theoutstanding warrants. Therefore, the effect of the 754,996 common shares frompotential exercise of options is reflected for the 2002 periods.

 

### *New Accounting Pronouncements*

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issuedStatement of Accounting Standards (“SFAS”) No. 142, “Goodwill and otherIntangible Assets”. As required, the Company adopted the new standard effectiveJanuary 2002. The new standard did not have a significant impact on theCompany’s financial statements.

 

In August 2001,the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations”,which addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs. SFAS No. 143 is required to be adopted for fiscal yearsbeginning after June 15, 2002, with early adoption permitted. The Companyadopted this new standard effective January 2002, which did not have asignificant impact on the Company’s financial statements.

 

Also in August2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets”, which supersedes SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”.This new statement also supersedes certain aspects of APB 30, “Reporting theResults of Operations—

 

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Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions”, with regard to reporting theeffects of a disposal of a segment of a business and will require expectedfuture operating losses from discontinued operations to be reported indiscontinued operations in the period incurred (rather than as of themeasurement date as presently required by APB 30). In addition, moredispositions may qualify for discontinued operations treatment. SFAS No. 144retains the requirements of SFAS No. 121 whereby an impairment loss isrecognized if the carrying value of the asset is not recoverable from itsundiscounted cash flows or fair values are less than carrying values. Asrequired, the Company adopted this new standard in January 2002, which did nothave a significant impact on the Company’s financial statements.

 

In July 2002, the FASB issued SFAS146 “Accounting for Costs Associated with Exit or Disposal Activities,”which addresses financial accounting and reporting for costs associated withexit or disposal activities and supersedes Emerging Issues Task Force (“EITF”)Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).” SFAS 146 requires that a liability for a cost associated withan exit or disposal activity be recognized when the liability is incurred.Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 wasrecognized at the date of an entity’s commitment to an exit plan. SFAS 146 alsoestablishes that the liability should initially be measured and recorded atfair value. The Company will adopt the provisions of SFAS 146 for exit ordisposal activities that are initiated after December 31, 2002.

 

*Impairment ofLong-Lived Assets*

 

The Company assesses theimpairment of land held for future development and other long-lived assets inaccordance with SFAS No.144, which requires an impaired asset to bewritten down to fair value. Long-lived assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset 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 an impairment occurs, the fair value of an asset forpurposes of SFAS No. 144 is deemed to be the amount a willing buyer wouldpay a willing seller for such asset in a current transaction. On September 2,1997, the Company completed its Recapitalization as discussed in Note 1, andthe Company applied the principles required by the American Institute ofCertified Public Accountant’s SOP 90-7, “Financial Reporting by Entities inReorganization Under the Bankruptcy Code” (“Fresh-Start Reporting”) and thecarrying value of real estate properties was adjusted to fair value (see Note1). Following the California Coastal Commission’s November 2000 suggestedmodifications to the Bolsa Chica Local Coastal Program to limit development toonly the upper bench of the Company’s 208-acre Bolsa Chica mesa (see Note 3),the Company evaluated this asset’s carrying value. The Company updated itsanalysis as of December 31, 2001, and has noted no indicators of impairmentsince that date. Therefore, since the undiscounted estimated future cash flowsfrom the upper bench of the Bolsa Chica mesa and the Company’s additional 242acres at Bolsa Chica exceed its June 30, 2002 carrying value, there has been noimpairment.

 

**Note 3 - LandHeld for Future Development**

 

The Company owns approximately350acreslocatedin Orange County, California overlooking the Pacific Ocean and theBolsa Chica wetlands (which were sold by the Company to the State of Californiain 1997), surrounded bythe City of Huntington Beach and approximately 35 miles south of downtown Los Angeles. The Company’s holdings include 208 acres on a mesa north of the Bolsa Chica wetlands (“BolsaChica Mesa”), approximately 100 acres on,or adjacent to, the Huntington Mesa and 42 acres of lowlands which wereacquired by the Company in September 1997.

 

A Local Coastal Program (“LCP”) for development ofup to 2,500 homes on the Bolsa Chica Mesa was approved by the Orange CountyBoard of Supervisors in December 1994 and by the California Coastal Commission(the “Coastal Commission”) in January 1996. In October 1997, in response to atrial court decision in connection with a lawsuit which challenged the 1996approvals of the Coastal Commission (the “Coastal Act Lawsuit”), the Coastal Commission approved modifications tothe LCP which eliminated the filling of Warner Pond and thereby reduced themaximum number of homes to be built from 2,500 to no more than 1,235 homes onthe Bolsa Chica Mesa. The Orange County Board of Supervisors subsequentlyaccepted the Coastal Commission’s suggested modifications.

 

In November 2000, in response to the April 1999 Court of Appeal’sdecision in the Coastal Act Lawsuit which prohibited relocation of a 14-acregrove of dying eucalyptus trees which serves as raptor habitat, the CoastalCommission held another public hearing on the LCP and decided to limitdevelopment to only the upper bench of the Bolsa Chica Mesa (the “Upper Mesa”).The Coastal Commission’s latest suggested modifications to the LCP wouldprohibit the Company and other landowners from development on the approximately100-acre lower bench of the Bolsa Chica Mesa (the “Lower Mesa”). In May 2001,the County of Orange declined to consider the Coastal Commission’s November2000 suggested modifications. In 

 

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their response tothe Coastal Commission, the County stated that the Commission’s suggestedmodifications were infeasible and unacceptable. In particular, the County notedthat the Commission’s suggested modifications would remove 140 acres of viableresidentially-zoned land from the County’s plan.

 

In January 2001, the Company filed a complaint in Orange CountySuperior Court challenging the Coastal Commission’s November 2000 decision tosubstantially change the previously approved LCP. In February 2001, the OrangeCounty Superior Court ordered that the case be reassigned to San Diego SuperiorCourt based on the request of the Coastal Commission. The Company’s complaintalleges that the Coastal Commission arbitrarily abandoned decades of priorapprovals that would have permitted development on the entire Bolsa Chica Mesa.The complaint challenges the Commission’s November 2000 decision as to how toprotect certain raptor habitat on the Bolsa Chica Mesa, including theCommission’s recommendation that the Lower Mesa not be developed. The complaintalso includes causes of action for violation of the Company’s constitutionalrights of equal protection and due process, and for a public taking of itsprivate property without compensation in contravention of the U.S. andCalifornia Constitutions. After overcoming various legal challenges brought bythe Coastal Commission, the Company’s case is currently scheduled for a hearingon the merits on October 15, 2002. However, due to the uncertainty of thelitigation process, the Company cannot predict how long it will take to pursueits claims, or the probability for success.

 

While the Company vigorously pursues its litigation to obtainentitlement for residential construction on the Lower Mesa, it is also pursuingapproval of permits for development of the Upper Mesa. On May 8, 2002, theCounty of Orange Planning Commission approved the Company’s site plan fordevelopment of 379 single-family homes on the Upper Mesa. In response to anappeal, on July 23, 2002, the Orange County Board of Supervisors upheld thePlanning Commission’s prior approval of the site plan. The planned community onthe Upper Mesa is currently expected to offer a broad mix of home choices,ranging in size from 1,560 square feet to 4,450 square feet. This developmentplan will also require approval by the Coastal Commission. The Companycurrently expects to present this plan to the Coastal Commission early nextyear. The Company does not believe that the Coastal Commission process willpermanently prevent it from developing a planned community at Bolsa Chica,however, there can be no assurance in that regard, or as to when developmentcould commence, or as to the number of acres or homes the Company would bepermitted to develop, or that further litigation or administrative delay willnot result.

 

Upon completion of the Company’sRecapitalization as discussed in Note 1, the Company applied the principlesrequired by Fresh-Start Reporting and the carrying value of land held fordevelopment (Bolsa Chica) was adjusted to fair value as of September 2, 1997,after consideration of the October 1997 Coastal Commission action discussedabove. The fair value was determined in 1997 using discounted estimated cashflows expected from the asset’s operations and eventual disposition. Inaddition, given the significance of the Bolsa Chica asset to the financialstatements of the Company, the value of the Company’s stock immediatelyfollowing the closing of the Recapitalization was used as an indicator of valueof the subject property. Following the November 2000 Coastal Commission action,an assessment of impairment was conducted by the Company for the year endedDecember 31, 2000. The Company updated its analysis as of December 31, 2001,and has noted no indicators of impairment since that date. Therefore, in accordance with the Company’s policy described inNote 2 – Impairment of Long-Lived Assets and based upon the Company’sassessment of estimated undiscounted future cash flows, no provision forimpairment has been considered necessary subsequent to the Recapitalization.

 

 The estimationprocess involved in the determination of value is inherently uncertain since itrequires estimates as to future events and market conditions. Such estimationprocess assumes the Company’s ability to complete development and dispose ofits real estate properties in the ordinary course of business based onmanagement’s present plans and intentions. Economic, market, environmental andpolitical conditions may affect management’s development and marketing plans.In addition, the implementation of such development and marketing plans couldbe affected by the availability of future financing for development andconstruction activities. At such time as the Company’s homebuilding activitiesat Bolsa Chica commence, the Company would be required to account for suchproperty at the lower of cost or market, which may necessitate a write-down ofits carrying value. Accordingly, the ultimate values of the Company’s land heldfor future development are dependent upon future economic and marketconditions, the availability of financing, and the resolution of political,environmental and other related issues. The development of the Company’s BolsaChica Mesa project is dependent upon various governmental approvals, results oflitigation and economic factors. Accordingly, the amount ultimately realizedfrom such project may differ materially from current estimates and theproject’s carrying value.

 

**Note 4 - Project Debt**

 

In conjunction with the July 2001 acquisition of 83single-family residential lots in North Corona, California, the Company’shomebuilding subsidiary, Hearthside Homes, Inc. ("Hearthside"),entered into a construction loan agreement with a commercial 

 

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bank to finance the project. The $10.9 million loan facility is secured bya deed of trust on the North Corona project and requires principal repaymentsupon the sale of homes. The loan bears an interest rate of prime plusthree-fourths percent (5.5% at June 30, 2002) and matures on October 19, 2002.As of June 30, 2002, approximately $3.2 million had been drawn under thisfacility, and repayments of $2.7 million had been made resulting in a balanceof $.5 million.

 

On July 29, 2002, Hearthside entered into aconstruction loan agreement with a commercial bank to finance the majority ofHearthside’s April 23, 2002 acquisition of 37 lots near the city of Riversideand related home construction. The $7.8 million loan facility is secured by adeed of trust on the Riverside project and requires principal repayments uponthe sale of homes. The loan bears an interest rate of prime plus three-fourthspercent and matures on July 29, 2003 unless extended for six months, atHearthside’s option.

 

Approximately $.2 and $.1 million of constructionperiod interest was capitalized to projects in the construction stage for thesix months ended June 30, 2001 and 2002.

 

**Note 5 – Income Taxes**

 

The following isa summary of the tax provision (benefit):

 
|                                                     |   | **Three Months Ended   June 30,** |   | **Six Months Ended  June 30,** |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|
|                                                     |   | **2001**                          |   | **2002**                       |   | **2001** |   | **2002** |   |
| Current  tax (benefit)                                   |   | $                                 | .1     |                           | $      | .1 |   | $ | .2 |   | $ | (.1 | ) |
| Deferred  tax (benefit)                                  |   | —                            |   | (.1                            | )      | — |   | (.3 | ) |
| Deferred tax —  utilization of net operating losses |   | .8                                |   | .2                             |   | 1.5 |   | .2 |   |
| Reduction in  contingent tax liabilities                 |   | (3.2                              | )      | (.4                            | )      | (3.2 | ) | (1.3 | ) |
| Provision  (benefit) for income taxes                    |   | $                                 | (2.3   | )                              | $      | (.2 | ) | $ | (1.5 | ) | $ | (1.5 | ) |

 

The income tax benefits in all periods presented primarily reflectreductions in reserves for estimated state income taxes discussed below. Inaddition, for the six months ended June 30, 2002, current and deferred taxes on2002 income are more than offset by a reversal of $.2 million of alternativeminimum taxes payable due to a change in the federal income tax law enacted inthe first quarter and a $.3 million deferred tax benefit, primarily from afirst quarter reduction in the deferred tax asset valuation allowance onpost-Reorganization state net operating losses (“NOLs”). During each of the2001 periods the current tax provision consisted primarily of alternativeminimum taxes. Reductions in the deferred tax asset valuation allowance on NOLsare recorded when the Company concludes that it is more likely than not that itwill utilize additional NOLs to offset taxable income. Pursuant to Fresh-Start Reporting, reductions in valuation allowanceson pre-Reorganization NOLs are reflected by increasing the Company’s capital inexcess of par value.

 

The Internal Revenue Code (the “Code”) generally limits theavailability of NOLs if an ownership change occurs within any three-year periodunder Section 382. If the Company were to experience an ownership change ofmore than 50%, the use of all remaining NOLs would generally be subject to an annuallimitation equal to the value of the Company’s equity before the ownershipchange, multiplied by the long-term tax-exempt rate. The federal NOLs availableas of June 30, 2002 were approximately $182 million. The amount of NOLs whichexpire if not utilized is $7 million, $20 million and $155 million for 2005,2006 and thereafter, respectively.

 

In response to an unsolicited written consent from a majority of itsstockholders, the Company amended its certificate of incorporation in October 1999 in order to protect theability of the Company to utilize its tax loss carryforwards. Since theCompany’s use of its NOLs would be severely restricted if it experiences anownership change of more than 50%, the Company’s majority stockholdersrequested that the Board of Directors enact the amendments, which have beendetermined to be in the best interest of the Company and its stockholders. Theamendments prohibit future purchases of the Company’s common stock by personswho would become new 5% holders, and also prohibit current holders of over 5%from increasing their positions, except in certain permissible circumstanceswhich would not jeopardize the Company’s ability to use its NOLs. While theseamendments reduced the Company’s risk of an ownership change occurring due tothe acquisition of shares by 5% stockholders, the risk remains that anownership change could result from the sale of shares by existing 5%stockholders.

 

During April 2002, following reduction of the cumulative ownershipshift, as computed in accordance with Section 382, to below 20% due to the passage of time since certain stockholdertransactions, the Company’s Board of Directors authorized an investor topurchase up to a specified number of shares which, if purchased, would resultin the investor owning over 5% of the 

 

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Company’s commonstock. On April 25, 2002, this investor reported that it had become a 5%holder. In June 2002, the Company’s Board of Directors authorized an additionalinvestor to purchase up to a specified number of shares which, if purchased,would result in the investor owning over 5% of the Company’s stock. As ofAugust 9­­­­, 2002, this investor had not reported whether it had purchased anyadditional shares. The Company estimates that after giving effect to varioustransactions by stockholders who hold a 5% or greater interest in the Company,it has experienced a three-year cumulative ownership shift of approximately 5%.

 

In 1995, the Internal Revenue Service (“IRS”)proposed material audit adjustments with respect to the tax returns of theCompany and its consolidated subsidiaries, including formerly affiliatedentities, for the years ended December 31, 1989, 1990 and 1991. The adjustmentsproposed by the IRS could have resulted in federal tax liability, beforeinterest, of approximately $17 million and disallowance of up to $132 millionof NOL carryforwards. The Company disagreed with the positions taken by the IRSand filed protests with the IRS to contest the proposed adjustments. InDecember 1998, the Company executed a settlement agreement with the IRS withrespect to the proposed adjustments described above. As a result of thisagreement, in February 1999 the Company paid $759,000 (which included $280,000of tax and $479,000 of interest through January 1999), net of the Company’srefund claim for 1992 NOL carrybacks of approximately $1.6 million, in fullsettlement of such claims. Under this settlement agreement approximately $10million of the Company’s NOL carryforwards were disallowed. The Companyutilized $8.1 million of NOL carryback from 1992 to 1991 in connection with itsrefund claim. In June 2001, the Company received a refund of $28,000, includinginterest, indicating acceptance by the IRS of the refund claim. Accordingly,pursuant to Fresh-Start Reporting, the Company recorded utilization ofapproximately $1.6 million of pre-Reorganization NOL, through a reduction inthe valuation allowance, resulting in an equivalent amount credited to capitalin excess of par value, during the second quarter of 2001.

 

The Company has reviewed the extent of potential accompanying state taxliability adjustments and does not believe that any such adjustments would havea material negative impact on the Company’s financial statements. Certain ofthe state jurisdictions in which the Company filed amended returns for 1989,1990 and 1991 have accepted such returns, thereby reducing the Company’sexposure to potential claims. In conjunction with periodic reviews of theadequacy of reserves for estimated state income taxes, the Company reduced itsreserves by approximately $3.2 and $2.3 million in the second and fourthquarters of 2001, respectively, and by approximately $.9 and $.4 million,respectively, during the first and second quarters of 2002. The reductions inestimated tax liabilities are reflected as income tax (benefits).

 

##### **Note6 – Stock Plans**

 

In accordance with Financial Accounting StandardsBoard Interpretation No. 44 “Accounting for Certain Transactions InvolvingStock Compensation”, the May 2001 modification of stock options requires thatthey be accounted for as variable awards, which measures compensation expenseas the difference between the option exercise price and the quoted market priceof the Company shares. Accordingly, based upon the Company’s market price of$4.90 per share at June 30, 2002 versus the option exercise price of $4.50 pershare, during the first half of 2002, the Company recorded compensation expenseof approximately $.3 million, including approximately $.2 million during thecurrent quarter. Future increases or decreases in the fair value of theCompany’s common stock would result in additional or decreased compensationexpense, respectively, offset by an adjustment to capital in excess of parvalue.

 

##### **Note7 – Commitments and Contingencies**

 

The Company and its predecessors 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 has retainedliabilities relating to certain of these assets and businesses. Many of suchliabilities are supported by insurance or by indemnities from certain of theCompany’s predecessors and currently or previously affiliated companies. TheCompany believes its balance sheet reflects adequate reserves for thesematters.

 

See Note 3 for a discussion ofpending litigation relating to the California Coastal Commission’s decision toprohibit development on the Lower Mesa of Bolsa Chica.

 

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| ITEM 2 - |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|----------|--------|---------------------------------------------------------------------------------------------|

 

**General**

### * *

The Companyis a residential land development and homebuilding company with propertieslocated primarily in southern California. The principal activities of theCompany and its consolidated subsidiaries include: (i) obtaining zoningand other entitlements for land it owns and improving the land for residentialdevelopment; and (ii) single-family residential construction in southernCalifornia. Once the residential land owned by the Company is entitled, theCompany may build homes, sell unimproved land to other developers orhomebuilders, sell improved land to homebuilders, or participate in jointventures with other developers, investors or homebuilders to finance andconstruct infrastructure and homes. During the remainder of 2002, the Companywill focus its immediate efforts to (i) obtain approval from theCalifornia Coastal Commission (“Coastal Commission”) for development permits tobuild 379 homes on the upper bench of the Bolsa Chica Mesa (“Upper Mesa”), asfurther described in Note 3 to the Company’s Financial Statements;(ii) vigorously pursue litigation (the “Coastal Commission Lawsuit”)challenging the Coastal Commission’s November 2000 decision to prohibitdevelopment on the lower bench of the Bolsa Chica Mesa (“Lower Mesa”); and(iii) maintain profitable homebuilding operations. However, the Company mayalso consider other strategic joint venture opportunities. There can be noassurance that the Company will accomplish, in whole or in part, all or any ofthese strategic goals.

 

During 2001 and the first six months of 2002, theCompany generated gross operating margins and cash flows from homebuildingactivities on assets other than Bolsa Chica. Following the 2002 acquisition of37 lots in Riverside County, California, the Company currently has on-going southernCalifornia projects in Yucaipa, North Corona and near the city of Riverside.These homebuilding projects are expected to generate significant cash flows andmodest gross operating margins during the balance of 2002 and 2003. However,the Company’s inventory of entitled land available for homebuilding projects isstill limited. The Company expects that its inventory may be fully developed bythe second quarter of 2003, except for completion of the Riverside project.Given this limited inventory of buildable lots, the Company is striving tomaintain profitable operating results for 2002 and pursuing residential lotacquisition opportunities. Due to delays in approvals for homebuilding at BolsaChica, continuation of homebuilding operations beyond 2003 is dependent uponacquisition of suitable, entitled residential lots within the southernCalifornia area and Coastal Commission approval of the Company’s developmentplan for the Upper Mesa.

 

 Bolsa Chica isthe Company’s principal asset, representing 85% of total assets at June 30,2002. It has required and continues to require significant investments forentitlement and land development activities. Due to the November 2000 CoastalCommission decision to limit residential development to only the Upper Mesa,the Company is faced with further delays in implementing its plans forresidential development on the Bolsa Chica Mesa. While the Company vigorouslypursues its litigation to obtain entitlement for residential construction onthe Lower Mesa, it is also pursuing approval of development permits for theUpper Mesa. On May 8, 2002, the County of Orange Planning Commission approvedthe Company’s site plan for development of 379 single-family homes on the UpperMesa. In response to an appeal, on July 23, 2002, the Orange County Board ofSupervisors upheld the Planning Commission’s prior approval of the site plan.This development plan will also require approval by the Coastal Commission. TheCompany currently expects to present this plan to the Coastal Commission earlynext year. The Company does not believe that the Coastal Commission processwill ultimately prevent it from developing a planned community at Bolsa Chica,however, there can be no assurance in that regard, or as to when developmentcould commence, or as to the number of acres or homes the Company will bepermitted to develop, or that further litigation or administrative delay willnot result.

 

In addition to theUpper Mesa land, the Company holds several other Bolsa Chica parcelsaggregating approximately 242 acres which may be developed as residential lotsor sold as park lands to various governmental agencies, subject to the outcomeof litigation against the Coastal Commission and negotiations, if any, withpotential purchasers of the various parcels. The Company believes that thoseadditional parcels represent substantial value to be realized upon resolutionof litigation and/or through sales to third parties.

 

The Bolsa ChicaLand Trust and other environmental groups have periodically suggested that theCompany consider selling the Bolsa Chica Mesa to a nonprofit corporation or theState of California. Historically, there has been no source of funding tofinance such a transaction. However, a citizens’ initiative has qualified toplace a $3.4 billion bond measure on California’s November 2002 ballot known asProposition 50 and entitled the “Water Quality, Supply and Safe Drinking WaterProjects. Coastal Wetlands Purchase and Protection Bonds”. The bond initiativeincludes an unquantified line item for the State of California to acquire allor a part of the Bolsa Chica Mesa. The Company is in the process of evaluatingthe feasibility of this potential alternative. There can be no assurances thatsuch a bond measure will be approved by the voters; that the Company will everreach a mutually acceptable agreement on the price and terms of a sale of theBolsa Chica Mesa; or that a sale transaction will ever be completed.

 

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Real estate held for current development or sale andland held for future development (real estate properties) are carried at fairvalue as of September 2, 1997, following adoption of Fresh-Start Reporting asdiscussed in Notes 1 and 2 to the Financial Statements, as adjusted by subsequentactivity. The Company’s real estate properties are subject to a number ofuncertainties which can affect the values of those assets. These uncertaintiesinclude litigation or appeals of regulatory approvals (as discussed above) andavailability of adequate capital, financing and cash flow. In addition, futurevalues may be adversely affected by increases in property taxes, increases inthe costs of labor and materials and other development risks, changes ingeneral economic conditions, including higher mortgage interest rates, andother real estate risks such as the general demand for housing and the supplyof competitive products. Real estate properties do not constitute liquid assetsand, at any given time, it may be difficult to sell a particular property foran appropriate price.

 

During the last six months of 2001 it became apparentthat both the national and California economies were in a recession, andeconomic data for the first six months of 2002 has not yielded convincingevidence of a recovery. Therefore, there can be no assurance regarding thecontinued health of the southern California residential real estate market. Inparticular, (i) the slow-down in the national economy during the past year,(ii) the significant decreases in the value of national stock market indicesand the resulting volatility of those markets; (iii) the events of September11, 2001 and their effects on the economy; and (iv) potential electricityshortages and related price increases in California, collectively appear to beexerting recessionary pressures on the California economy and may have anegative impact on the southern California housing market.

 

While low mortgage rates appear to have sustainedhousing demand to date, any future increase in mortgage rates would most likelyslow demand for new homes. The tight supply of new homes in California hasresulted in significant home price increases over the last five years. As aresult, the affordability of new homes has been declining and could furtherjeopardize future demand.

 

All three of the Company’s active homebuilding projects are located inthe “Inland Empire” area of southern California, which includes Riverside andSan Bernardino counties. The Inland Empire has experienced significantpopulation and job growth in the past decade. While continued growth isexpected, partially due to the limited supply of affordably priced housing incoastal areas such as Orange County, there can be no assurance that economic,demographic or other factors will not slow, diminish or cause such growth todiscontinue. The Company is continuing to pursue lot acquisition opportunitiesthroughout southern California.

 

*ChapmanHeights.*  Between June 2000 and December 2001, theCompany acquired 86 finished lots, which are part of a master-planned communityknown as Chapman Heights, in the city of Yucaipa, California. The communitysurrounds an operating 18-hole public golf course and is planned for a total ofapproximately 2,100 homes, civic and commercial centers and two school sites.The Company opened for sales at the project in January of 2001, and hasreleased 77 homes for sale at an average price of approximately $250,000. As ofAugust 6, 2002, closings on 55 homes were completed and 21 additional homeswere in escrow.

 

*ProvidenceRanch. *In July 2001, the Company acquired 83 finished lots inthe master-planned community known as Providence Ranch in Riverside County,California near North Corona. The communities of Providence Ranch and theadjacent community of Corona Valley, are planned for a total of 2,600 homes,and are well-located to serve the employment centers of the greater Los Angelesarea, Orange County and the Ontario international airport. The Companycommenced home construction in October 2001, opened for sales in February 2002 andhas released 67 homes for sale at an average price of approximately $279,000.As of August 6, 2002, 18 homes had been delivered and 49 additional homes arein escrow.

 

*VictoriaGrove.* In April2002, the Company acquired 37 finished lots from a residential builder in themaster-planned community known as Victoria Grove, near the city of Riverside,in Riverside County. This well-established community is planned for a total of855 homes. The Company is in escrow to acquire 47 additional lots for a total projectof 84 homes. The Company began home construction and expects to open for salesduring August 2002. Home deliveries are expected to begin during the firstquarter of 2003 and home prices are expected to start at approximately$266,000.

 

**NewAccounting Pronouncements**

 

See Item 1, Notes toConsolidated Financial Statements.

 

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**Liquidityand Capital Resources**

 

The principal assets in theCompany’s portfolio are residential land which must be held over an extendedperiod of time in order to be developed to a condition that, in management’sopinion, will ultimately maximize the return to the Company. Consequently, theCompany requires significant capital to finance its real estate development andhomebuilding operations. Historically, sources of capital have included banklines of credit, specific property financings, asset sales and availableinternal funds. The Company is utilizing project debt and internally generatedcash to fund construction on the North Corona project and the recently acquiredRiverside project, and is utilizing internally generated cash to fund theYucaipa and Bolsa Chica projects. As of June 30, 2002, the Company hadinternally financed approximately $16.0 million of investments in homebuildingprojects. These projects are expected to generate approximately $20.0 millionof positive cash flows during the next 24 months, based on present economicconditions and market assumptions. The Company’s cash on hand and cashequivalents as of June 30, 2002 were approximately $6.7 million. The Companybelieves that its cash on hand and cash equivalents, future real estate salesproceeds, and funds available under its credit agreements for the North Coronaand Riverside projects will be sufficient to meet anticipated operating andcapital investment requirements, primarily project development costs forhomebuilding projects and Bolsa Chica, and general and administrative expenses,for the next 12 months.

 

## **Financial Condition**

 

*June 30, 2002 Compared withDecember 31, 2001*

 

The $2.0 million decrease in cashand cash equivalents primarily reflects spending on project development costs,partially offset by net proceeds from sales at the Yucaipa and Providence Ranchprojects, proceeds from sales on short-term investments, and the release ofrestricted cash, as well as other activity presented in the Statements of CashFlows.

 

Restricted cash equivalents as ofDecember 31, 2001 reflects a mortgage-backed security which was restricted ascollateral for a letter of credit obtained by the Company to secure certainindemnity obligations under a tax sharing agreement with a former affiliate.The security was released in May 2002 upon settlement of certain state taxaudits.

 

The absence of short-terminvestments as of June 30, 2002 reflects the sale of all such securities heldat December 31, 2001 for $7.4 million during the first half of 2002.

 

The $4.3 million increase in realestate held for current development or sale reflects an aggregate of $11.3million for land acquisition at the Company’s Riverside project and forinfrastructure and home-building costs for all three of the Company’shomebuilding projects. These investments were partially offset by $7.0 millioncharged to cost of sales for deliveries of an aggregate of 31 homes at theYucaipa and Providence Ranch projects during the first six months of 2002.

 

The $3.0 million increase in landheld for future development reflects investment in the Bolsa Chica Mesa projectduring the first six months of the year.

 

The $.7 million decrease in otherassets primarily reflects distributions from unconsolidated joint ventures.

 

Accounts payable and accruedliabilities increased by $.2 million, to a balance of $3.3 million as of June30, 2002, primarily reflecting an increase in accounts payable forconstruction, partially offset by the reversal of alternative minimum taxespayable due to a first quarter change in the federal income tax law.

 

The $3.3 million decrease in otherliabilities primarily reflects reductions in tax reserves and deferred taxliabilities. An aggregate of $1.3 million of reductions in reserves forestimated state income taxes was recorded in conjunction with the Company’speriodic review of the adequacy of such reserves. Such reserves were also reducedby payments in January and May 2002 of approximately $.6 million and $.3million, respectively to state jurisdictions based upon settlements of auditsof 1991 income tax returns. In addition, net deferred taxes payable decreasedby $.9 million, primarily due to reductions in the deferred tax asset valuationallowance on both pre-and post-Reorganization tax net operating losses (“NOLs”) as a result of the Company’s periodic review of thepotential utilization of NOLs.

 

The $1.0 million increase in capitalin excess of par value primarily reflects reductions of $.7 million in thedeferred tax asset valuation allowances on pre-Reorganization state and federalNOLs and an amount recorded to reflect variable accounting for stock options(see Note 6).

 

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**Results of Operations**

 

The nature of theCompany’s business, including its limited inventory of buildable lots, is suchthat individual transactions often cause significant fluctuations in operatingresults from quarter to quarter and from year to year.

 

*Three MonthsEnded June 30, 2002 Compared with the Three Months Ended June 30, 2001*

 

The Company reported revenues of $5.1 million and gross operatingprofit of $.7 million for the second quarter of 2002, compared with $13.3million in revenues and gross operating profit of $1.9 million for the secondquarter of 2001. Revenues in the current period reflect deliveries of eighthomes at the Company’s Yucaipa project and 11 homes at the Providence Ranchproject. The comparable period of the prior year reflects deliveries of 30homes, including 18 homes at the Company’s Rancho San Pasqual project inEscondido, California, six homes at the Sandover project on the Bolsa ChicaMesa in Huntington Beach, California and six homes at the Yucaipa project. Thecurrent quarter’s gross margin of 14% reflects sales at the Yucaipa andProvidence Ranch projects, and is comparable to the prior period margin of 14%which primarily reflects sales at the Escondido and Huntington Beach projects.

 

Selling, general and administrative expenses in the current period arecomparable to the same period of 2001.

 

The absence of income from unconsolidated joint ventures in the threemonths ended June 30, 2002 as compared to $1.1 million reflected in the secondquarter of 2001, reflects the completion of home closings for the FairbanksHighlands project during the first quarter of 2002.

 

Other income, net of $.6 million during the three months ended June 30,2002 primarily reflects gains on sales of short-term investments.

 

During the three months ended June 30, 2001 and 2002, the Companyrecorded reductions of reserves for estimated state tax liabilities of $3.2million and $.4 million, respectively, and recognized equivalent tax benefits.

 

*Six**Months Ended June 30,2002 Compared with the Six Months Ended June 30, 2001*

 

The Company reported revenues of $8.0 million and gross operatingprofit of $.9 million for the first six months of 2002, compared with revenuesof $25.3 million and gross operating profit of $3.9 million for the same periodof 2001. Revenues in the current period reflect deliveries of an aggregate of31 homes including 11 homes at the Providence Ranch project near North Corona,California and 20 homes at the Yucaipa project. Revenues in the prior periodreflect deliveries of an aggregate of 50 homes including 27 homes at the RanchoSan Pasqual project, 15 homes at the Sandover project and eight homes at theYucaipa project. The decrease in the average price of homes sold from $506,000in the first half of 2001 to $258,000 in the first half of 2002 reflects thelower price ranges commanded by the Inland Empire in comparison to OrangeCounty and San Diego County. The gross margin of 11% for the six months endedJune 30, 2002 reflects the aggregate margin on the Yucaipa and Providence Ranchprojects as compared to the gross margin of 15% for the comparable prior yearperiod primarily from the Rancho San Pasqual and Sandover projects, which hadlower land cost bases. The 14% gross margin for the second quarter of 2002compared with the 11% gross margin for the first six months of 2002 reflectshigher profitability at the Providence Ranch project where home deliveriescommenced in June 2002.

 

The $.2 million increase in selling, general and administrativeexpenses during the six months ended June 30, 2002, compared to the same periodof 2001, reflects compensation expense related to variable accounting for stockoptions (see Note 6 to the Company’s financial statements.)

 

The $1.1 million decrease in income from unconsolidated joint venturesin the six months ended June 30, 2002 of $.6 million as compared to $1.7million in the same period of 2001 reflects the decrease in the Company’s shareof venture profits from deliveries of four homes at Fairbanks Highlands athigher prices during the current period, as compared with deliveries of 18homes in the comparable period of last year.

 

The increase in other income, net from $.2 million in the 2001 periodto $.6 million in the six months ended June 30, 2002 primarily reflects $1.2million in gains on sales of short-term investments in the current period,partially offset by increased period costs for land held for futuredevelopment.

 

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During the six months ended June 30, 2001 and 2002, the Companyrecorded reductions of reserves for estimated state tax liabilities of $3.2million and $1.3 million, respectively, and recognized equivalent tax benefits.The income tax benefit in the 2002 period also reflects reversal of $.2 millionof alternative minimum taxes payable due to a change in the federal income taxlaw enacted in the first quarter and a $.2 million tax benefit from a reductionin the deferred tax asset valuation allowance on post-Reorganization stateNOLs.

 

ITEM 3  -               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None.

 

**Safe HarborStatement Under the Private Securities Litigation Reform Act of 1995**

 

Certainof the foregoing information contains forward-looking statements that relate tofuture events or the Company’s future financial performance.  These statements involve known and unknownrisks, uncertainties and other factors which may cause the Company’s actualresults, performance or achievements to be materially different from any futureresults, performances or achievements expressed or implied by theforward-looking statements.  In somecases, you can identify forward-looking statements by terminology such as“may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”,“estimates”, “predicts”, “potential”, “continue”, or the negative of such termsor other comparable terminology.  Theseforward-looking statements include, but are not limited to, statements aboutthe Company’s plans, objectives, goals, expectations and intentions, the numberand types of homes and number of acres of land that the Company may develop andsell, the timing and outcomes of litigation, regulatory approval processes oradministrative proceedings (including, but not limited to ongoing litigationand administrative proceedings in the Coastal Commission Lawsuit related to theCompany’s principal asset, the Bolsa Chica Mesa), the Company’s ability tocontinue relationships with current or future partners, the Company’s abilityto expend resources to comply with environmental regulations and localpermitting requirements, the effect of certain costs, contractual obligationsand tax liabilities, both known and unknown, on the Company’s business, resultsof operations and financial condition, the condition and adequacy of theCompany’s properties, the Company’s ability to estimate cash flow projectionsdue to uncertainties in valuing real property, the Company’s ability to acquireresidential lots in order to continue home-building operations, the adequacy ofcapital, financing and cash flow required to continue the Company’s operationsand land development activities, the future condition of the real estate marketin southern California, the Company’s ability to maintain profitableoperations, and other statements contained herein that are not historicalfacts.

 

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PART II - OTHER INFORMATION

 

ITEM 1 -                Legal Proceedings

 

See“Item 1 - Business -Corporate Indemnification Matters” and “Item 3 - Legal Proceedings” in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2001.

 

ITEM 4 -                Submissionof Matters to a Vote of Security Holders

 

The Annual Meeting of Company’s stockholders was heldon May 30, 2002. A quorum of common stock was presented in person or by proxy.The following proposals were approved by the requisite voice of the Companystockholders entitled to vote, as follows:

 

Proposal No. 1:  *The DirectorProposal*.  The Company’sdirector 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 ofapproximately 99.9% of the outstanding Common Stock represented in person or byproxy at the annual Meeting.

 
| **Name**               |   | **Votes Cast “For Nominee”** |   | **Votes “Withheld”** |   |
|------------------------|--------|----------------------------------------|--------|--------------------------------|--------|
|                   |   |                                   |   |                           |   |
| Phillip R. Burnaman II |   | 8,879,705                              |   | 9,688                          |   |
| Raymond J. Pacini      |   | 8,879,676                              |   | 9,717                          |   |
| Thomas W. Sabin, Jr.   |   | 8,878,320                              |   | 11,073                         |   |
| J. Thomas Talbot       |   | 8,878,291                              |   | 11,102                         |   |

 

Proposal No. 2:  *The AuditorProposal*.   The holders ofCommon Stock cast 8,879,882 votes for and 5,903 votes against the Company’sproposal to ratify the appointment of Deloitte & Touche, LLP as theCompany’s independent auditors for the fiscal year ending December 31, 2002.Such votes constituted the affirmative vote for the Auditor Proposal by theholders of approximately 99.9% of the outstanding Common Stock represented inperson or by proxy at the Annual Meeting. There were 3,608 abstentions and nobroker non-votes by the holders of shares of Common Stock with respect to theAuditor Proposal.

 

ITEM 5 -                OtherInformation

 

Stockholders wishing to bring a proposal before theRegistrant’s 2003 Annual Meeting of Stockholders (but not wishing to includesuch proposal in the Registrant’s Proxy Statement) must cause written notice ofsuch proposal to be received by the Secretary of the Registrant at itsprincipal executive offices no later than December 25, 2002.

 

ITEM 6 -                Exhibits and Reports on Form 8-K

 

(a)   Exhibits:

 

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

 

                        99.2 Certificate of Sandra G. Sciutto, Chief Financial Officer of CaliforniaCoastal Communities, Inc.

 

(b)   Reportson Form 8-K:

 

                        Current report on Form 8-K dated May 8, 2002attaching a press release announcing that Orange County’s Planning Commissionapproved the Company’s site plan for development of 379 single-family detachedhomes on the 105-acre upper bench of the Bolsa Chica mesa.

 

SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized. 

 
|   |            |   |   | CALIFORNIA COASTAL  COMMUNITIES, INC. |                         |
|--------|-----------------|--------|--------|---------------------------------------|------------------------------|
|   |            |   |   |                                  |                         |
| Date   | August 14, 2002 |   |   | By                                    | /s/   Sandra G. Sciutto |   |
|   |            |   |   |                                  | SANDRA G. SCIUTTO            |   |
|   |            |   |   |                                  | Senior Vice President and    |   |
|   |            |   |   |                                  | Chief Financial Officer      |   |
|        |                 |        |        |                                       |                              |  |  |

 

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