**Exhibit 10.1**

 

EMPLOYMENTAGREEMENT

 

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is enteredinto as of August 8, 2005 by and between MICHAEL J. RAFFERTY (“Executive”)and Hearthside Homes, Inc., a California corporation (“Employer”), whichis an indirect wholly-owned subsidiary of California Coastal Communities, Inc.,a Delaware corporation (“Parent”).

 

WITNESSETH:

 

WHEREAS, Executive hasserved Employer in various executive capacities and Employer desires to obtainthe benefit of continued service by Executive, and Executive desires to rendercontinued services to Employer;

 

 WHEREAS,Employer has determined that because of Executive’s substantial experience and businessrelationships in connection with the business of Employer, it is in theEmployer’s best interest and that of its stockholders to secure services ofExecutive and to provide Executive certain additional benefits; and

 

WHEREAS, Employer and Executive desire to set forth inthis Agreement the terms and conditions of Executive’s employment with Employer.

 

NOW, THEREFORE, in consideration of the mutualpromises and covenants herein contained, the parties agree as follows:

 

# SECTION 1.                                TERM. Employeragrees to employ Executive and Executive agrees to serve Employer, inaccordance with the terms of this Agreement, for a term commencing as of January 1,2005 and ending on December 31, 2006 (the “Term”).

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# SECTION 2.                                SERVICES. Solong as this Agreement shall continue in effect, Executive shall use hiscommercially reasonably efforts and abilities to promote Employer’s business,affairs and interests, and shall perform the services contemplated by thisAgreement in accordance with policies established by the Company.

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# SECTION 3.                                SPECIFIC POSITION;DUTIES AND RESPONSIBILITIES. Employer and Executive agree that, subject tothe provisions of this Agreement, Employer will employ Executive and Executivewill serve Employer as a senior officer for the duration of this Agreement. Thespecific job position in which Executive shall serve shall be President. Executiveagrees to observe and comply with the rules and regulations of Employerrespecting the performance of Executive’s duties and agrees to carry out andperform directions and policies of Employer as they may be, from time to time,stated either orally or in writing. Employer agrees that the duties which maybe assigned to Executive shall be usual and customary duties of the jobposition set forth in this Section 3, and shall not be inconsistent withthe provisions of the charter documents of Employer or applicable law. Executiveshall have such corporate power and authority as shall reasonably be requiredto enable the discharge of duties in any office that may be held.

 

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# SECTION 4.                                COMPENSATION.

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## (a)                                  BaseSalary and Bonus.

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##### (i)                                     BaseSalary. During the Term of this Agreement, Employer agrees to pay Executivea base salary of at least One Hundred Seventy Five Thousand Dollars ($175,000)per year in semi-monthly installments on the same dates the other seniorofficers of Employer are paid (“Base Salary”).

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##### (ii)                                  Bonus.Employer agrees to provide Executive with an opportunity to earn incentivebonuses based upon the bonus formula set forth on Schedules A and Battached hereto.

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## (b)                                 AdditionalBenefits. Executive shall also be entitled to all rights and benefits underany life, medical, dental, disability, or insurance plan or policy or otherplan or benefit that Employer or its subsidiaries may provide for Executive(provided Executive is eligible to participate therein) or employees ofEmployer generally as from time to time in effect during the Term of thisAgreement (the “Plans”). In any event, Employer shall provide Executive withterm life insurance, health insurance and long-term disability insuranceprovided for Employer’s executive employees generally. Executive shall also beentitled to fringe benefits in accordance with the plans, practices, programsand policies as in effect generally with respect to other peer executives ofEmployer.

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## (c)                                  Perquisites.

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### (i)                                     Vacation.Executive shall be entitled to four (4) weeks of paid vacation eachtwelve-month period, which shall accrue on a monthly basis. Such vacation shallbe taken at such time or times as shall not unduly disrupt the orderly conductof the business of Employer and the duties of Executive. At the time of anytermination of employment, Executive shall be paid for all accrued but unusedvacation up to 240 hours in accordance with Employer’s policy.

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### (ii)                                  AutoAllowance. During the Term of this Agreement, Employer shall provideExecutive a monthly automobile allowance in the amount of $800 plusreimbursement of operating costs as is currently covered under Employer’s AutoAllowance Policy.

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## (d)                                 OverallQualification. Employer reserves the right to modify, suspend ordiscontinue any and all practices, policies and programs generally applicableto executives and other similarly situated executives at any time (whetherbefore or after termination of employment) without notice to or recourse byExecutive; however, Employer shall not amend the perquisites provisions setforth in Section 4(c) to reduce Executive’s benefits thereunderduring the Term of this Agreement.

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# SECTION 5.                                TERMINATION. Thecompensation and other benefits provided to Executive pursuant to thisAgreement, and the employment of Executive by Employer, shall be terminatedprior to expiration of the Term of this Agreement only as provided in this Section 5:

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## (a)                                  Disability.In the event that Executive shall fail, because of illness, incapacity orinjury which is determined to be total (“Disability”) by a physician selectedby Employer or its

 

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## insurers and acceptable to Executive or Executive’s legalrepresentative (such agreement as to acceptability not to be withheldunreasonably), to render, for three consecutive months or for shorter periodsaggregating ninety (90) or more business days in any twelve (12)-month period,the services contemplated by this Agreement, Executive’s employment hereundermay be terminated by sixty (60) days’ prior written notice of termination fromEmployer to Executive. Thereafter, Employer shall continue to (i) pay theBase Salary to Executive for a period of six (6) months after the date oftermination, subject to adjustments referenced in the following paragraph, and (ii) providemedical insurance as in effect prior to such termination for a period of six (6) monthsfollowing the date of termination. Thereafter, no further salary shall be paidor medical insurance be provided. Executive’s rights under the Plans subsequentto termination of employment pursuant to this paragraph shall be determinedunder the applicable provisions of the respective Plans, unless otherwiseexpressly stated herein. This Agreement in all other respects will terminateupon the termination of employment pursuant to this paragraph.

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## The amount of compensation to be paid to Executive pursuant to thepreceding paragraph shall be adjusted in the event Executive becomes entitledto and receives disability benefits under any disability payment plan,including disability insurance. The amount of Executive’s compensationotherwise payable by Employer pursuant to the preceding paragraph shall bereduced, on a dollar-for-dollar basis, but not to less than zero, by the amountof any such disability benefits received by Executive, but only to the extentsuch benefits are attributable to payments made by Employer or an Employer-paidprogram.

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## (b)                                 Death.In the event of Executive’s death during the Term of this Agreement, Executive’sBase Salary shall immediately terminate and Employer shall pay to the estate ofExecutive the Base Salary accrued to the date of Executive’s death to theextent not theretofore paid. If Executive’s death occurs while receivingpayments under Section 5(a) above, such payments shall cease. Executive’srights under the Plans subsequent to his death shall be determined under theapplicable provisions of the respective Plans; provided that, notwithstandingany provisions to the contrary therein, Employer shall continue to providemedical insurance to the dependents of Executive for a period of six (6) monthsfollowing the death of Executive. This Agreement in all other respects willterminate upon the death of Executive.

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## (c)                                  ForCause. The employment of Executive hereunder shall be terminable byEmployer in the event that Executive (i) is or has been engaging inwillful or grossly negligent conduct which has resulted in a failure to performExecutive’s duties hereunder or, (ii) has committed an act of dishonesty,gross negligence or misconduct, which has a direct, substantial and adverseeffect on Employer, its business or reputation.

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## Notwithstanding the foregoing, Executive shall not beterminated for cause pursuant to the first paragraph of this subsection 5(c) unlessand until Executive has received written notice of a proposed termination forcause and Executive has had an opportunity to be heard by an officer of theCompany authorized to take such action. Executive shall be deemed to have hadsuch opportunity if given written or telephonic notice by any officer at least72 hours in advance of a meeting.

 

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## In the event of Executive’s termination pursuant tothis subsection 5(c), Executive’s rights to receive Base Salary shallimmediately terminate and Employer shall pay to Executive his Base Salary andvacation accrued to the date of such termination to the extent not theretoforepaid. Executive’s rights under the Plans subsequent to termination shall bedetermined under the applicable provisions of the respective plans. ThisAgreement in all other respects will terminate upon such termination.

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## (d)                                 WithoutCause. Notwithstanding any other provision of this Section 5, theBoard shall have the right to terminate Executive’s employment with Employerwithout cause at any time upon at least thirty (30) days’ prior written noticeto Executive. The following conditions shall thereupon become applicable:

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### (i)                                     SeverancePay. Employer shall continue to pay Executive the Base Salary on a semi-monthlybasis for the remainder of the Term of this Agreement.

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### (ii)                                  MedicalInsurance Continuation. Employer shall continue to provide (under COBRA)medical insurance as in effect prior to such termination for twelve (12) monthsfollowing such termination, and Employer shall bear all costs for suchinsurance.

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### (iii)                               SeveranceBonus Payment. If Executive is terminated without cause in connection withthe sale or merger of the business and operations of Employer and/or Parent toa third party (a “Transaction”) or if Executive is required to move outside ofSouthern California following a Transaction, Executive shall also be paid forany potential bonuses under this Agreement (the “Severance Bonus Payment”), which shall be determined as follows:

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# (A)            the bonus formula in Schedule A tothis Agreement will be applied to (i) the amount of the purchase price forthe Transaction that is agreed by the Parent and the third party purchaser forallocation to the value of homebuilding operations, excluding the valueof the Oxnard Project which is governed by the bonus formula in Schedule Bto this Agreement; or (ii), in the absence of such a negotiated allocation, theamount of such allocation that is determined in good faith by the Board ofDirectors of the Parent. The bonus formula shall then be applied as follows:

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# Deduct book basis, including accrued interest and preferred return on theParent’s capital (as provided in Schedule A), to determineafter-tax gain before bonus and then apply bonus formula in Schedule A;and

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# (B)              the bonus formula inSchedule B will be applied to (i) the amount of the purchaseprice that is agreed by the Parent and the third party purchaser for allocationto the value of the Oxnard Project; or (ii), in the absence of such anegotiated allocation, the amount of such allocation that is determined in goodfaith by the Board of Directors of the Parent.

 

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### (iv)                              TerminationWithout Cause Bonus Payment. If Executive is terminated by Employer withoutcause (and not in connection with a Transaction), Executive shall also be paidfor any potential bonuses under this Agreement (the “Termination Without CauseBonus Payment”). The amount of any suchTermination Without Cause BonusPayment shall be determined as follows:

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# (A)            the bonus formula in Schedule Awill be applied to the amount of the discounted cash flows (i.e. net present value)of the homebuilding operations, excluding the value of the OxnardProject which is governed by the bonus formula in Schedule B, basedon the most recent cash flow forecast for Hearthside Homes, Inc. and itssubsidiaries after applying a 20% discount rate, on an annual basis, toestimated future cash flows as of the date of Executive’s termination. Thebonus formula shall then be applied as follows:

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# Deduct book basis, including accrued interest and preferred return on theParent’s capital (as provided in Schedule A), to determineafter-tax gain before bonus and then apply bonus formula in Schedule A;and

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# (B)              thebonus formula in Schedule B will be applied to the amount of the discounted cash flows (i.e. net present value)of the Oxnard Project based on the most recent forecast for HearthsideHomes, Inc.’s share of the cash flows from Hearthside Homes Oxnard LLC afterapplying a 30% discount rate, on an annual basis, to estimated future cashflows as of the date of Executive’s termination.

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## (e)                                  VoluntaryTermination. At any time during the Term of this Agreement, Executive shallhave the right, upon thirty (30) days’ prior written notice to Employer, toterminate his employment with Employer. Upon termination of Executive’semployment pursuant to this subsection 5(e), (i) Executive’s right toreceive Base Salary shall immediately terminate and Employer shall pay toExecutive his Base Salary accrued to the date of such termination to the extentnot theretofore paid and (ii) Executive’s rights under the Planssubsequent to such termination shall be determined under the applicableprovisions of the respective Plans. This Agreement in all other respects willterminate upon such termination.

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## (f)                                    Terminationby Executive for “Good Reason”. Notwithstanding any other provisions ofthis Agreement, Employer shall provide Executive with the payments and benefitsset forth in Section 5(d) (i) and (ii) in the eventExecutive terminates employment for “Good Reason.”  For purposes of this Agreement, “Good Reason”for Executive to terminate employment shall mean voluntary termination as aresult of (i) the assignment to Executive of duties inconsistent with theposition and status of Executive as set forth in this Agreement withoutExecutive’s prior written consent, (ii) a substantial alteration in thenature, status or prestige of Executive’s responsibilities as set forth in thisAgreement or a change in Executive’s title or reporting level from that setforth in this Agreement, (iii) the relocation of Employer’s executiveoffices or principal business location to a point more than twenty-five (25)miles from the location of such offices or business as of the date of thisAgreement, (iv) reduction by

 

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## Employer of Executive’s Base Salary in effect on the date hereof or asthe same may be increased from time to time, (v) any action by Employer(including the elimination of benefit plans without providing substitutestherefor or the reduction of Executive’s benefits thereunder) that wouldsubstantially diminish the aggregate value of Executive’s other fringe benefits.

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# SECTION 6.                                BUSINESS EXPENSES.During the Term of this Agreement, Employer shall reimburse Executive promptlyfor reasonable business expenditures, including travel, entertainment, parking,business meetings and professional dues made and substantiated in accordancewith policies, practices and procedures established from time to time by theBoard and incurred in pursuit and furtherance of Employer’s business andgoodwill.

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# SECTION 7.                                MISCELLANEOUS.

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## (a)                                  Succession;Survival. This Agreement shall inure to the benefit of and shall be bindingupon Employer, its successors and assigns. Absent the prior written consent ofExecutive, this Agreement may not be assigned by Employer other than inconnection with a merger or sale of all or substantially all the assets ofEmployer or a similar transaction in which the successor or assignee assumes(whether by operation of law or express assumption) all obligations of Employerhereunder. The obligations and duties of Executive hereunder are personal andotherwise not assignable. Executive’s obligations and representations underthis Agreement will survive the termination of Executive’s employment,regardless of the manner of such termination.

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## (b)                                 Notices.Any notice or other communication provided for in this Agreement shall be inwriting and sent if to Employer to its office at:

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Hearthside Homes, Inc.6 Executive Circle, Suite 250Irvine, California 92614Attention: Chief Executive Officer

 

or at such other address as Employer may from time totime in writing designate, and if to Executive at such address as Executive mayfrom time to time in writing designate (or Executive’s business address ofrecord in the absence of such designation). Each such notice or othercommunication shall be effective (i) if given by telecommunication, whentransmitted to the applicable number so specified in (or pursuant to) this Section 7and an appropriate answer back is received, (ii) if given by mail, threedays after such communication is deposited in the mails with first classpostage prepaid, addressed as aforesaid or (iii) if given by any othermeans, when actually delivered at such address.

 

## (c)                                  EntireAgreement; Amendments. This Agreement contains the entire agreement of theparties relating to the subject matter hereof and it supersedes any prioragreements, undertakings, commitments and practices relating to Executive’semployment by Employer. No amendment or modification of the terms of thisAgreement shall be valid unless made in writing and signed by Executive and, onbehalf of Employer, by an officer expressly so authorized by its Board ofDirectors.

 

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## (d)                                 Waiver.No failure on the part of any party to exercise or delay in exercising anyright hereunder shall be deemed a waiver thereof or of any other right, norshall any single or partial exercise preclude any further or other exercise ofsuch right or any other right.

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## (e)                                  Choiceof Law. This Agreement, the legal relations between the parties and anyaction, whether contractual or non-contractual, instituted by any party withrespect to matters arising under or growing out of or in connection with or inrespect of this Agreement, the relationship of the parties or the subjectmatter hereof shall be governed by and construed in accordance with the laws ofthe State of California, applicable to contracts made and performed in suchState and without regard to conflicts of law doctrines, to the extent permittedby law.

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## (f)                                    Attorney’sFees. If any action at law or in equity is necessary to enforce orinterpret the terms of this Agreement, the prevailing party shall be entitledto recover reasonable attorney’s fees, costs and necessary disbursements fromthe non-prevailing party in addition to any other relief to which such partymay be entitled.

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## (g)                                 Confidentiality;Proprietary Information. Executive agrees to not make use of, divulge orotherwise disclose, directly or indirectly, any trade secret or otherconfidential or proprietary information concerning the business (including butnot limited to its products, employees, services, practices or policies) ofEmployer or any of its affiliates of which Executive may learn or be aware as aresult of Executive’s employment during the Term of the Agreement or priorthereto as stockholder, employee, officer or director of, or consultant to,Employer, except to the extent such use or disclosure is (i) necessary tothe performance of this Agreement and in furtherance of Employer’s bestinterests, (ii) required by applicable law, (iii) lawfully obtainablefrom other public sources, or (iv) authorized in writing by or pursuant toa written agreement with Employer. The provisions of this subsection (g) shallsurvive the expiration, suspension or termination, for any reason, of thisAgreement.

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## (h)                                 Severability.If any provision of this Agreement is held invalid or unenforceable, theremainder of this Agreement shall nevertheless remain in full force and effect,and if any provision is held invalid or unenforceable with respect toparticular circumstances, it shall nevertheless remain in full force and effectin all other circumstances, to the fullest extent permitted by law.

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## (i)                                     Withholding;Deductions. All compensation payable hereunder, including salary and otherbenefits, shall be subject to applicable taxes, withholding and other required,normal or elected employee deductions.

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## (j)                                     Section Headings.Section and other headings contained in this Agreement are for convenienceof reference only and shall not affect in any way the meaning or interpretationof this Agreement.

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## (k)                                  Counterparts.This Agreement and any amendment hereto may be executed in one or morecounterparts. All of such counterparts shall constitute one and the sameagreement and shall become effective when a copy signed by each party has beendelivered to the other party.

 

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IN WITNESS WHEREOF, the parties have executed thisAgreement as of the date first above written.

 
|   | “EMPLOYER”   |
|--------|------------------------|
|   |                   |
|   | HEARTHSIDE HOMES, INC. |
|   |                   |   |
|   |                   |   |
|   | By                     | /s/ RAYMOND J. PACINI |   |
|   |                   | Raymond J. Pacini |
|   |                   | Chief Executive Officer |
|   |                   |   |
|   |                   | “EXECUTIVE” |
|   |                   |   |
|   |                   |   |
|   |                   | /s/ MICHAEL J. RAFFERTY |   |
|   |                   | Michael J. Rafferty |
|        |                        |  |  |  |

 

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**Schedule A**

 

Homebuilding Bonus Formula *

 

Executive shall receive10% of the after-tax income of Hearthside Homes, Inc. after adjustmentsfor (a) preferred return to Parent at 16% per annum for “finished,blue-top lots” during 2005 (subject to annual adjustment based on changes inthe prime rate as of January 1st of each year thereafter) and at 20% perannum for “paper lots” during 2005 (subject to annual adjustment based onchanges in the prime rate as of January 1st of each year thereafter) basedon actual equity outstanding, or a 70/30 debt to equity ratio if there is nothird party debt outstanding; (b) interest payable to Parent at prevailingbank rates based on a 70/30 debt to equity ratio if there is no third partydebt outstanding or such third party debt is not fully utilized;  (c) state and federal income taxes(currently at an effective rate of 40.75%); and (d) any prior period booklosses based on generally accepted accounting principles.

 

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* This formula shall notapply to any income resulting from any homebuilding at Bolsa Chica or anyacquisition of another homebuilder, or homebuilding assets, which is initiatedand financed by Parent.

 

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**Schedule B**

 

Oxnard Project Bonus Formula

 

The Oxnard Project Bonus shall only be payable to theextent that certain profit levels on the Oxnard Project are realized in cash (“CashFlow”) as calculated below:

 

Executive shall receive 6% of the first $5.5 millionof Cash Flow received by Hearthside Homes, Inc. from Hearthside Homes OxnardLLC after adjustments for preferred return to Parent at 15% per annum based onactual equity outstanding. Thereafter, Executive shall receive 8% of the CashFlow received by Hearthside Homes, Inc. from Hearthside Homes Oxnard LLCin excess of $5.5 million and Parent’s preferred return.

 

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