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**This Form 10-Q consists of 16 sequentially numbered pages.**

**FORM 10-Q**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

**QUARTERLY REPORTUNDER SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended June 30, 2001**

**Commission file number 0-17189**

**CALIFORNIA COASTALCOMMUNITIES, 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

The number of shares of Common Stock outstanding at July31, 2001 was 10,058,589.

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CALIFORNIACOASTAL COMMUNITIES, INC.

FORM10-Q

FORTHE QUARTER ENDED JUNE 30, 2001

IN D E X

| Part I -  | Financial Information:                                             |
|----------------|--------------------------------------------------------------------|
|           |                                                               |
|           | Item 1 -                                                           | Consolidated Financial  Statements |   |
|           |                                                               |   |   |
|           |                                                               | Consolidated Balance Sheets  -  December 31, 2000 and June  30, 2001 |   |
|           |                                                               |   |   |
|           |                                                               | Consolidated  Statements of Operations -  Three  and Six Months Ended June 30, 2000 and 2001 |   |
|           |                                                               |   |   |
|           |                                                               | Consolidated  Statements of Cash Flows -  Six Months Ended  June 30, 2000 and 2001 |   |
|           |                                                               |   |   |
|           |                                                               | 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  4 – Submission of Matters to a Vote of Security Holders |
|           |                                                               |
|           | Item  5 – Other Information                                   |
|           |                                                               |
|           | Item 6 -  Exhibits and Reports on Form 8-K                         |
|           |                                                               |
| SIGNATURE      |
|                |                                                                    |  |  |  |

 

CALIFORNIACOASTAL COMMUNITIES, INC.

CONSOLIDATEDBALANCE SHEETS

(inmillions)

|                                             | **December 31,  2000**              |   | **June 30, 2001** |   |
|--------------------------------------------------|------------------------------------------|--------|-------------------|--------|
|                                             | ****                                     |   | ****              |   |
|                                             |                                     |   | (unaudited)       |   |
|                                             | ASSETS                                   |   |              |   |   |
|                                             |                                     |   |              |   |
| Cash and cash equivalents                        | $                                        | 6.9    |              | $      | 6.9 |   |
| Restricted cash                                  | 1.9                                      |   | 1.9               |   |
| Real estate held for current development or sale | 21.4                                     |   | 12.2              |   |
| Land held for future development                 | 142.0                                    |   | 144.2             |   |
| Other assets                                     | 6.5                                      |   | 5.6               |   |
|                                             |                                          |   |                   |   |
|                                             | $                                        | 178.7  |              | $      | 170.8 |   |
|                                             | LIABILITIES  AND STOCKHOLDERS' EQUITY    |        |              |        |   |
|                                             |                                     |   |              |   |   |
| Liabilities:                                     |                                     |   |              |   |
|                                             | Accounts payable and accrued liabilities | $      | 4.0               |   | $ | 2.7 |   |
|                                             | Project debt                             | 9.0    |              | 2.3    |   |
|                                             | Other liabilities                        | 23.1   |              | 14.5   |   |
|                                             |                                          |   |                   |   |
|                                             | Total liabilities                        | 36.1   |              | 19.5   |   |
|                                             |                                          |   |                   |   |
| Commitments and contingencies                    |                                     |   |              |   |
|                                             |                                     |   |              |   |
| Stockholders' equity:                            |                                     |   |              |   |
|                                             | Common stock                             | .5     |              | .5     |   |
|                                             | Capital in excess of par value           | 134.4  |              | 137.6  |   |
|                                             | Retained earnings                        | 7.7    |              | 13.2   |   |
|                                             |                                          |   |                   |   |
|                                             | Total stockholders' equity               | 142.6  |              | 151.3  |   |
|                                             |                                          |   |                   |   |
|                                             | $                                        | 178.7  |              | $      | 170.8 |   |
|                                             |                                          |   |                   |   |

 

See the accompanying notes to consolidated financialstatements.
CALIFORNIACOASTAL COMMUNITIES, INC.

STATEMENTSOF OPERATIONS(in millions, except per share amounts)

(unaudited)
 **Three Months Ended** **Six Months Ended**  **June 30,** **June 30,**  **2000** **2001** **2000** **2001**      Revenues$7.5 $13.3 $7.5 $25.3          Costs of sales5.9 11.4 5.9 21.4       Gross operating profit1.6 1.9 1.6 3.9          Selling, general and administrative expenses.9 .9 1.8 1.7          Interest expense— — .1 .1          Income from  unconsolidated joint ventures(.8)(1.1)(1.3)(1.7)Other income, net(.4)— (1.6)(.2)     Income before income  taxes1.9 2.1 2.6 4.0 Provision (benefit) for income taxes.8 (2.3)1.1 (1.5)     Net income$1.1 $4.4 $1.5 $5.5      Earnings per common share – basic and diluted$.11 $.44 $.15 $.55      
 

Seethe accompanying notes to consolidated financial statements.

CALIFORNIACOASTAL COMMUNITIES, INC.

CONSOLIDATED STATEMENTSOF CASH FLOWS

(inmillions)

(unaudited)
 **Six Months Ended**  **June 30,**  **2000** **2001**    Cash flows from  operating activities:     Net income$1.5 $5.5  Adjustments  to reconcile to cash used by operating activities:     Non-cash interest expense.1 .1  Interest income on restricted cash(.1)—  Deferred income taxes1.0 1.5  Utilization of pre-Reorganization net operating loss— 1.6  Deferred compensation  expense— .1  Gains on sales of real  estate held for current development or sale(1.7)(3.9) Proceeds from asset sales, net7.4 24.9  Changes  in assets and liabilities:     Investments in real  estate held for current development or sale(12.2)(11.8) Investments in land  held for future development(2.3)(2.2) Decrease in other  assets2.3 .9  Decrease in accounts payable, accrued and other  liabilities, net(1.1)(10.0)     Cash provided by (used in) operating activities(5.1)6.7     Cash flows from investing activities:     Maturity of short-term investments3.0 —      Cash provided by investing activities3.0 —    Cash flows from financing activities:     Borrowings of project debt8.6 6.5  Repayments of project  debt(5.5)(13.2) Return of interest income from restricted cash.2 —      Cash provided by (used in) financing activities3.3 (6.7)   Net increase in cash  and cash equivalents1.2 —      Cash and cash equivalents - beginning of period5.8 6.9    Cash and cash equivalents - end of period$7.0 $6.9    Supplemental disclosures of cash flow information:     Cash paid during the period for income taxes$— $.2 
 

See the accompanying notes to consolidated financialstatements.
CALIFORNIACOASTAL COMMUNITIES, INC.

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1 - Basis of Presentation**

             Theaccompanying financial statements have been prepared by California CoastalCommunities, Inc. and its consolidated subsidiaries (the "Company"),without audit, pursuant to the rules and regulations of the Securities andExchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to such rules andregulations. The Company believes that these unaudited consolidated financialstatements reflect all material adjustments (consisting only of normalrecurring adjustments) and disclosures necessary for the fair presentation ofthe results of operations and statements of financial position when read inconjunction with the Financial Statements and Notes thereto included in theCompany’s Annual Report on Form 10–K for the year ended December 31,2000, and the current year’s previously issued Quarterly Report on Form 10-Q.The results for interim periods are not necessarily indicative of the resultsto be expected for the full year. This report contains forward lookingstatements. Readers are cautioned that any such forward looking statements arenot guarantees of future performance and involve risks and uncertainties thatactual events or results may differ materially from those described herein as aresult of various factors, including without limitation, the factors discussedgenerally in this report.

             TheCompany completed its recapitalization (the "Recapitalization") whichbecame effective on September 2, 1997, pursuant to a prepackaged plan ofreorganization which was confirmed by the U.S. Bankruptcy Court for theDistrict of Delaware. The prepackaged plan was filed by the Company, excludingall of its subsidiaries and affiliates, contemporaneously with a voluntarypetition for relief under Chapter 11 of the bankruptcy code. On the effectivedate of the Recapitalization, the Company adopted the provisions of Statementof Position No. 90-7, "Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code" ("Fresh-Start Reporting") aspromulgated by the American Institute of Certified Public Accountants.Accordingly, all assets and liabilities were revalued to reflect theirreorganization value, approximating their fair value at the effective date ofthe Recapitalization. In addition, the accumulated deficit of the Company waseliminated and its capital structure recast in conformity with theRecapitalization.

**Note 2 – Significant Accounting Policies**

*Earnings Per Common Share*

             Forthe three and six months ended June 30, 2000 and 2001, the weighted averagecommon shares outstanding was 10.1 million. Earnings per share, assumingdilution, is computed using the weighted average number of common sharesoutstanding and the dilutive effect of potential common shares outstanding.

*New Accounting Pronouncements*

             InJune 1998, the Financial Accounting Standards Board issued SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities"("SFAS 133"), which establishes accounting and reporting standardsfor derivative instruments, including certain derivative instruments embeddedin other contracts, and for hedging activities. It requires that an entityrecognize all derivatives as either assets or liabilities in the statement offinancial position and measure those instruments at fair value. SFAS 133 wasadopted on January 1, 2001 as required. The Company does not currently holdderivatives or engage in hedging activities; therefore, the adoption of thisstandard did not have a material effect on the Company.

             InJuly 2001, the Financial Accounting Standards Board issued SFAS No. 141,"Business Combinations" and SFAS No. 142, "Goodwill and OtherIntangible Assets. " SFAS No. 141 is effective immediately and SFAS 142will be effective January 2002. The new standards are not expected to have asignificant impact on the Company’s financial statements.
*Impairment of Long-Lived Assets*

             TheCompany assesses the impairment of land held for future development and otherlong-lived assets in accordance with Statement of Financial AccountingStandards No. 121, "Accounting for the Impairment of Long-LivedAssets and Long-Lived Assets to Be Disposed Of"("SFAS 121"), which requires an impaired asset to be writtendown to fair value. Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. As provided by SFAS 121, impairment is evaluatedby comparing an asset’s carrying value to the undiscounted estimated cash flowsexpected from the asset’s operations and eventual disposition. If the sum ofthe undiscounted estimated future cash flows is less than the carrying value ofthe asset, an impairment loss is recognized based on the fair value of theasset. If an impairment occurs, the fair value of an asset for purposes ofSFAS 121 is deemed to be the amount a willing buyer would pay a willingseller for such asset in a current transaction. On September 2, 1997, theCompany completed its Recapitalization pursuant to court confirmation of aPrepackaged Plan of Reorganization, and applied the principles of Fresh-StartReporting including adjustments to the carrying value of real estate propertiesto fair value (see Note 1). Following the Coastal Commission’s November 2000suggested modifications to the Bolsa Chica Local Coastal Program to limitdevelopment to only 65 acres of the Company’s 208 acre Bolsa Chica Mesa (seeNote 4), the Company evaluated this asset’s carrying value. Since theundiscounted estimated future cash flows from the upper bench of the BolsaChica Mesa and the Company’s additional 245 acres at Bolsa Chica exceed itscarrying value, there has been no impairment.

**Note 3 – Restricted Cash**

             Restrictedcash as of June 30, 2001 reflects a mortgage-backed security recorded atamortized cost, maturing in December 2001. The security is held as collateralfor a letter of credit obtained by the Company to secure certain indemnityobligations under a tax sharing agreement with a former affiliate.

**Note 4 -Land Held for Future Development**

             The Company owns approximately 350 acreslocated in Orange County, Californiaoverlooking the Pacific Ocean and the Bolsa Chica wetlands (which were sold by theCompany to the State of California in 1997), surrounded by the Cityof Huntington Beach andapproximately 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 acreson, or adjacent to, the Huntington Mesa and 42 acres of lowlands which wereacquired by the Company in September 1997.

             Theplanned community at Bolsa Chica Mesa is expected to offer a broad mix of homechoices, including primarily single-family homes. A Local Coastal Program("LCP") for development of up to 2,500 homes on the Bolsa Chica Mesawas approved by the Orange County Board of Supervisors in December 1994 and bythe California Coastal Commission (the "Coastal Commission") inJanuary 1996. In October 1997, in response to a trial court decision inconnection with a lawsuit which challenged the 1996 approvals of the CoastalCommission (the "Coastal Act Lawsuit"), the Coastal Commissionapproved modifications to the LCP which eliminated the filling of Warner Pondand thereby reduced the maximum number of homes to be built from 2,500 to nomore than 1,235 homes on the Bolsa Chica Mesa. The Orange County Board ofSupervisors subsequently accepted the Coastal Commission’s suggestedmodifications.

             Inresponse to the April 1999 Court of Appeal’s decision in the Coastal ActLawsuit which prohibited relocation of a 14-acre grove of dying eucalyptustrees which serves as raptor habitat, on November 16, 2000, the CoastalCommission held another public hearing on the LCP and approved suggestedmodifications to the LCP which would limit development to only 65 acres of theBolsa Chica Mesa (the "Upper Mesa"). The Coastal Commission’s latestsuggested modifications would prohibit the Company and other landowners fromdevelopment on the approximately 140-acre remainder of the Bolsa Chica Mesa(the "Lower Mesa"). On January 12, 2001 the Company’s subsidiariesfiled a complaint in Orange County Superior Court challenging the CoastalCommission’s November 2000 suggested modifications to the County’s Bolsa ChicaLCP. The complaint includes causes of action for violation of the Company’sconstitutional rights of equal protection and due process, and for a publictaking of its private property without compensation in contravention of theU.S. and California Constitutions. The complaint alleges that the CoastalCommission arbitrarily abandoned decades of prior approvals which would havepermitted development on the entire Bolsa Chica Mesa. On February 28, 2001, theOrange County Superior Court ordered that the case be reassigned to San DiegoSuperior Court based on the request of the Coastal Commission. Due to theuncertainty of the litigation process, the Company cannot predict how long itwill take to pursue its claims, or the probability for success.
             OnMay 8, 2001, the County of Orange declined to consider the Coastal Commission’sNovember 2000 suggested modifications. In their response to the CoastalCommission, the County stated that the Commission’s suggested modificationswere infeasible and unacceptable. In particular, the County noted that theCommission’s suggested modifications would remove 140 acres of viableresidentially-zoned land from the County’s plan.

             Whilethe Company vigorously pursues its litigation to obtain entitlement forresidential construction on the Lower Mesa, it is also pursuing approval ofpermits for development of the Upper Mesa. After review of environmental,economic, marketing, construction and political considerations, the Companyplans to apply to the County of Orange in August 2001 for permits to buildapproximately 400 single-family homes on the Upper Mesa. A supplementalenvironmental impact report is expected to be circulated for public commentsduring the Fall of this year. If a plan is approved by the County of Orange inearly 2002, the Company could then seek approval from the Coastal Commissionduring the second quarter of 2002 and expect to commence infrastructureconstruction on the Upper Mesa during the third quarter of 2002 provided thatCounty and Coastal Commission approvals are obtained on a timely basis,followed by the start of home construction during the first quarter of 2003.The Company does not believe that the Coastal Commission process willultimately prevent it from developing a planned community at Bolsa Chica,however, there can be no assurance in that regard, or as to the number of acresor homes the Company would be permitted to develop, or that further litigationor administrative delay will not result.

             Theestimation process involved in the determination of value is inherentlyuncertain since it requires estimates as to future events and marketconditions. Such estimation process assumes the Company’s ability to completedevelopment and dispose of its real estate properties in the ordinary course ofbusiness based on management’s present plans and intentions. Economic, market,environmental and political conditions may affect management’s development andmarketing plans. In addition, the implementation of such development andmarketing plans could be affected by the availability of future financing fordevelopment and construction activities. At such time as the Company’shomebuilding activities at Bolsa Chica commence, the Company would be requiredto account for such property at the lower of cost or market, which maynecessitate a write-down of its carrying value. Accordingly, the ultimatevalues of the Company’s land held for future development are dependent uponfuture economic and market conditions, the availability of financing, and theresolution of political, environmental and other related issues. Thedevelopment of the Company’s Bolsa Chica Mesa project is dependent upon variousgovernmental approvals, results of litigation and economic factors.Accordingly, the amount ultimately realized from such project may differmaterially from current estimates, as well as the project’s carrying value.

**Note 5 - Project Debt**

             Followingthe full repayment in January 2001 of an earlier construction loan, in March2001, Signal Landmark entered into an additional construction loan agreementwith a commercial bank to finance construction of final phases and the modelhomes at the Company’s 112-home Rancho San Pasqual project in Escondido,California. This $6 million loan facility was repaid in full from proceeds uponthe sale of homes on July 24, 2001. The obligation was secured by a deed oftrust on the Rancho San Pasqual project and required principal repayments uponthe sale of homes. The loan carried an interest rate of prime plusthree-fourths percent (7.75% at June 30, 2001). As of June 30, 2001,approximately $5.7 million had been drawn on this facility and repayments uponthe sale of homes aggregated $3.4 million, resulting in a remaining balance ofapproximately $2.3 million. For the six months ended June 30, 2000 and 2001,approximately $.4 million and approximately $.1 million, respectively, ofconstruction period interest was capitalized to the project.

             Inconjunction with the July 20, 2001 acquisition of 83 single-family residentiallots in North Corona, California, the Company’s homebuilding subsidiary,Hearthside Homes, Inc., entered into a construction loan agreement with acommercial bank to finance the project. The $10.9 million loan facility issecured by a deed of trust on the North Corona project and requires principalrepayments upon the sale of homes. The loan bears an interest rate of primeplus three-fourths percent and matures on July 20, 2002.****Note 6 – Income Taxes**

             Thefollowing is a summary of the tax provision (benefit):
 Three  Months Ended Six  Months Ended  June  30, June  30,  2000 2001 2000 2001      Current$.1 $.1 $.1 $.2  Deferred – equivalent  amount creditedto capital in excess  of par value.7 .8 1.0 1.5 Reduction in  contingent tax liabilities— (3.2)— (3.2)      Provision (benefit)  for income taxes$.8 $(2.3)$1.1 $(1.5)     
             Thecurrent tax provision consists of federal and state taxes (primarilyalternative minimum taxes). A deferred income tax provision is reflected in thestatement of operations, while the offsetting realization of a tax benefit fromutilization of pre-Reorganization net operating losses ("NOLs") isreflected by increasing the Company’s capital in excess of par value, pursuantto Fresh-Start Reporting.

             In1995, the Internal Revenue Service ("IRS") proposed material auditadjustments with respect to the tax returns of the Company and its consolidatedsubsidiaries, including formerly affiliated entities, for the years endedDecember 31, 1989, 1990 and 1991. The adjustments proposed by the IRS, ifupheld, could have resulted in federal tax liability, before interest, ofapproximately $17 million and disallowance of up to $132 million of NOLcarryforwards. The Company disagreed with the positions taken by the IRS andfiled protests with the IRS to contest the proposed adjustments. In December1998, the Company executed a settlement agreement with the IRS with respect tothe proposed adjustments described above. As a result of this agreement, inFebruary 1999 the Company paid $759,000 (which included $280,000 of tax and$479,000 of interest through January 1999), net of the Company’s refund claimfor 1992 NOL carrybacks of approximately $1.6 million, in full settlement ofsuch claims. Under this settlement agreement approximately $10 million of theCompany’s NOL carryforwards was disallowed. The Company utilized $8.1 millionof NOL carryback from 1992 to 1991 in connection with its refund claim. In June2001, the Company received a refund of $28,000, including interest, indicatingacceptance by the IRS of the refund claim. Accordingly, pursuant to Fresh-StartReporting, the Company recorded utilization of approximately $1.6 million ofpre-Reorganization NOL, resulting in an equivalent amount credited to capitalin excess of par value.

             TheCompany has reviewed the extent of potential accompanying state tax liabilityadjustments and does not believe that any such adjustments would have anegative material impact on the Company’s financial statements. Certain of thestate jurisdictions in which the Company filed amended returns for 1989, 1990and 1991 have accepted such returns, thereby reducing the Company’s exposure topotential claims. During the three months ended June 30, 2001, the Companyre-evaluated its reserves for potential income tax exposure and reduced itsreserves by approximately $3.2 million.

             TheInternal Revenue Code (the "Code") generally limits the availabilityof NOLs if an ownership change occurs within any three-year period under Section382. If the Company were to experience an ownership change, the Company’sannual use of its NOLs would generally be limited to the value of the Company’sequity immediately before the ownership change multiplied by the long-termtax-exempt rate. The Company estimates that after giving effect to varioustransactions by stockholders who hold a 5% or greater interest in the Company,and the Company’s repurchase of an aggregate of approximately 1.9 millionshares in December 1998 and June 1999, it has experienced a cumulativeownership shift as computed in accordance with Section 382 of approximately30%. The federal NOLs available as of June 30, 2001 are approximately $188million, which expire beginning in 2005.

             Inresponse to an unsolicited written consent from a majority of its stockholders,the Company amended its certificate of incorporation on October 14, 1999 inorder to preserve the ability of the Company to utilize its $197 million of taxloss carryforwards as of that date. Since the Company’s use of its NOLs wouldbe severely restricted if it were to experience an ownership change of 50% ormore, the Company’s majority stockholders requested that the Board of Directorsenact the amendments, which have been determined to be in the best interest ofthe Company and its stockholders. The amendments prohibit future purchases ofthe Company’s common stock by persons who would become new 5% holders, and alsoprohibit current holders of over 5% from increasing their positions, except incertain permissible circumstances which would not jeopardize the Company’sability to use its NOLs. While these amendments reduced the Company’s risk ofan ownership change occurring due to the acquisition of shares by 5%stockholders, the risk remains that an ownership change could result from thesale of shares by existing 5% stockholders.
**Note 7 – Stock Plans**

             InMay 2001, options to purchase an aggregate of 754,996 shares of the Company’scommon stock were re-priced to $4.50 per share, which represented a premium ofapproximately 12.5% above the average closing price over the previous 30 days.The shares, which were granted to certain directors and officers, carriedprevious exercise prices of $9.25 per share on 484,996 options granted in 1997and 1998, and $7.00 per share on 270,000 options granted in 1999. In accordancewith Financial Accounting Standards Board Interpretation No. 44"Accounting for Certain Transactions Involving Stock Compensation"the modification of the options requires that they be accounted for as variableawards, which measures compensation expense as the difference between theoption price and the quoted market price of the Company shares. Accordingly,the Company has recorded compensation expense of approximately $128,000 basedupon the Company’s share price of $4.67 at June 30, 2001, with an equivalentincrease to capital in excess of par value.

**Note 8 – Commitments and Contingencies**

             TheCompany and its predecessors have, through a variety of transactions effectedsince 1986, disposed of several assets and businesses, many of which areunrelated to the Company’s current operations. By operation of law orcontractual indemnity provisions, the Company has retained liabilities relatingto certain of these assets and businesses. Many of such liabilities aresupported by insurance or by indemnities from certain of the Company’spredecessors and currently or previously affiliated companies. The Companybelieves its balance sheet reflects adequate reserves for these matters.
ITEM2 -           MANAGEMENT'S DISCUSSION ANDANALYSIS OF                           FINANCIALCONDITION AND RESULTS OF OPERATIONS

**General**

             TheCompany is a residential land development and homebuilding company withproperties located primarily in Southern California. The principal activitiesof the Company and its consolidated subsidiaries include: (i) obtainingzoning and other entitlements for land it owns and improving the land forresidential development; and (ii) single-family residential constructionin Southern California. Once the residential land owned by the Company isentitled, the Company may build homes, sell unimproved land to other developersor homebuilders, 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 2001 and 2002, theCompany will focus its immediate efforts to (i) obtain approval from theCounty of Orange and the California Coastal Commission ("CoastalCommission") for  developmentpermits for the upper bench of the Bolsa Chica Mesa ("Upper Mesa")project, as further described in Note 4 to the Company’s Financial Statements;(ii) vigorously pursue litigation (the “Coastal Commission Lawsuit”)challenging the Coastal Commission’s November 2000 suggested modifications tothe County’s Local Coastal Program ("LCP") which would prohibitdevelopment on the lower bench of the Bolsa Chica Mesa ("LowerMesa"); and (iii) prepare to commence infrastructure construction onthe Upper Mesa in the third quarter of 2002 provided that County and CoastalCommission approvals are obtained on a timely basis; however, the Company mayalso consider other strategic and joint venture opportunities. There can be noassurance that the Company will accomplish, in whole or in part, all or any ofthese strategic goals.

             During2000 and the first half of 2001, the Company generated significant grossoperating margins and cash flows from homebuilding activities on assets otherthan Bolsa Chica. The Company currently has on-going Southern Californiaprojects in Escondido, Yucaipa, and a significant venture interest in a projectin San Diego. These homebuilding projects are expected to generate significantcash flows, gross operating margins and income from unconsolidated jointventures during the balance of 2001. In addition, on July 20, 2001, theCompany’s homebuilding subsidiary acquired 83 single-family residential lots inRiverside County, California near North Corona. However, the Company currentlyhas a limited inventory of entitled land available for homebuilding projects,which the Company expects will be fully developed by third quarter 2002, exceptfor completion of the North Corona project. Due to delays in approvals forhomebuilding at Bolsa Chica, continuation of homebuilding operations beyond2002 is dependent upon entitlement of lots at Bolsa Chica and acquisition ofsuitable, entitled residential lots within the Southern California area.

             BolsaChica is the Company’s principal asset. It has required and continues torequire significant investments for entitlement and land developmentactivities. Due to the November 2000 Coastal Commission approval of suggestedmodifications to the LCP which would limit residential development to only theUpper Mesa, the Company is faced with further delays in implementing its plansfor residential development on the Bolsa Chica Mesa. While the Companyvigorously pursues its litigation to obtain entitlement for residentialconstruction on the Lower Mesa, it is also pursuing approval of developmentpermits on the Upper Mesa. After review of environmental, economic, marketing,construction and political considerations, the Company plans to apply to theCounty of Orange in August 2001 for permits to build approximately 400single-family homes on the Upper Mesa. A supplemental environmental impactreport is expected to be circulated for public comments during the Fall of thisyear. If a plan is approved by the County of Orange in early 2002, the Companycould then seek approval from the Coastal Commission in the second quarter of2002 and expect to commence infrastructure construction on the Upper Mesaduring the third quarter of 2002 provided that County and Coastal Commissionapprovals are obtained on a timely basis, followed by the start of home constructionduring the first quarter of 2003. The Company does not believe that the CoastalCommission process will ultimately prevent it from developing a plannedcommunity at Bolsa Chica, however, there can be no assurance in that regard, oras to the number of acres or homes the Company will be permitted to develop, orthat further litigation or administrative delay will not result.

             Inaddition to the Upper Mesa land, the Company holds several other Bolsa Chicaparcels aggregating approximately 245 acres which may be developed asresidential lots or sold as park lands to various governmental agencies,subject to the outcome of litigation against the Coastal Commission andnegotiations, if any, with potential purchasers of the various parcels. TheCompany believes that those additional parcels represent substantial value tobe realized upon resolution of litigation and/or through sales to thirdparties.
             Realestate held for current development or sale and land held for futuredevelopment (real estate properties) are carried at fair value as of September2, 1997, following adoption of Fresh-Start Reporting as discussed in Notes 1and 2, as adjusted by subsequent activity. The Company's real estate propertiesare subject to a number of uncertainties which can affect the values of thoseassets. These uncertainties include litigation or appeals of regulatoryapprovals (as discussed above) and availability of adequate capital, financingand cash flow. In addition, future values may be adversely affected by increasesin property taxes, increases in the costs of labor and materials and otherdevelopment risks, changes in general economic conditions, including highermortgage interest rates, and other real estate risks such as the general demandfor housing and the supply of competitive products. Real estate properties donot constitute liquid assets and, at any given time, it may be difficult tosell a particular property for an appropriate price. During the last threeyears, the robust economy of California has resulted in improvement in the realestate market, and the number of potential purchasers interested in SouthernCalifornia residential properties has increased, resulting in improvedprices.  However, there can be no assuranceregarding the continued health of the California economy and the strength andlongevity of current conditions affecting the residential real estate market.In particular, the recent slow-down in the national economy and electricityshortages in California could put recessionary pressures on the Californiaeconomy and have a negative impact on the Southern California housing market.

             TheCompany’s internal homebuilding operations focus primarily on the entry-leveland move-up single-family detached market. The Fairbanks Highlands joint venturehomebuilding activities reflect a large, luxury single-family product underconstruction by the Company’s partner. Major projects are described as follows:

             *Rancho SanPasqual.*  In the City ofEscondido in San Diego County, approximately 30 miles north of downtown SanDiego, the Company is in the final phases of developing an 850-acre, gatedcommunity consisting of 580 residential lots surrounding an 18-hole golfcourse. From 1996 through April 1998, the Company sold 468 Phase I residentiallots at Rancho San Pasqual to four homebuilders. The Company’s subsidiary beganconstructing infrastructure and homes on the 112-home Phase II of the projectin 1999, and opened for sales in October 1999. As of July 31, 2001, 101 homeshad been delivered and the remaining 11 homes were in escrow.

             *Sandover.*  The Company recently completed deliveries of16 homes on approximately five acres of the Bolsa Chica Mesa, which is in theCity of Huntington Beach (whereas the rest of the Company’s Bolsa Chica Mesaproperty is in an unincorporated area within the County of Orange). These homesaveraged 3,675 square feet and were sold at an average price of approximately$840,000.

             *FairbanksHighlands.*  The FairbanksHighlands property consists of approximately 380 acres near the communities ofFairbanks Ranch and Rancho Santa Fe in the northern part of the city of SanDiego. The project includes 93 luxury homes, averaging approximately 4,800square feet, on single-family residential lots averaging 1.34 acres eachsurrounded by approximately 215 acres of open space. In December 1996, theCompany formed a joint venture with a major homebuilder to develop thisproperty, retaining a continuing 35% partnership interest in the venture. TheCompany’s partner is managing the day-to-day operations of the venture,providing all construction financing and building all of the homes at the site.Closings on 71 homes were completed and 16 homes were in escrow as of July 31,2001.

             *ChapmanHeights.*  The Company hasacquired 58 finished lots which are part of a master-planned community known asChapman Heights, in the city of Yucaipa, California, and holds an option topurchase an additional 28 finished lots. The community surrounds an operating18-hole public golf course and is planned for a total of approximately 2,100homes, civic and commercial centers and two school sites. The Company openedfor sales at the project in January of 2001, and has released the first 44homes for sale. As of July 31, 2001, closings on 8 homes were completed and 14additional homes were in escrow.

             *ProvidenceRanch. *On July 20, 2001 theCompany acquired 83 finished lots in the master-planned community known asProvidence Ranch in Riverside County, California near North Corona. Thecommunities of Providence Ranch and the adjacent community of Corona Valley,are planned for a total of 2,600 homes, and are well-located to serve theemployment centers of the greater Los Angeles area, Orange County and theOntario international airport. The start of home construction and model homeopening are scheduled for September 2001 and January 2002, respectively.
**Liquidity and Capital Resources.**

             Theprincipal assets in the Company's portfolio are residential land which must beheld over an extended period of time in order to be developed to a conditionthat, in management's opinion, will ultimately maximize the return to theCompany. Consequently, the Company requires significant capital to finance itsreal estate development and homebuilding operations. Historically, sources ofcapital have included bank lines of credit, specific property financings, assetsales and available internal funds. The Company is utilizing project debt tofund construction on the newly acquired North Corona project, and following theJuly 2001 repayment of the Rancho San Pasqual loan, is utilizing internallygenerated cash to fund the Rancho San Pasqual, Yucaipa and Bolsa Chicaprojects. The Company’s cash on hand as of June 30, 2001 was approximately $6.9million. The Company believes that its cash on hand, future sales proceeds,joint venture receipts and funds available under its credit agreement for theNorth Corona project will be sufficient to meet anticipated cash and capitalrequirements, primarily project development costs for homebuilding projects andBolsa Chica, and general and administrative expenses, for the next 12 months.The Company’s homebuilding projects which are nearing completion (Sandover,Rancho San Pasqual and the Fairbanks Highlands joint venture) generatedpositive cash flows aggregating $9.4 million during the first six months of2001. The Company expects that these projects will generate approximately $10.0million of additional cash flow during the last six months of 2001, based onpresent economic conditions and market assumptions. Through June 30, 2001, theCompany had utilized approximately $6.4 million of the cash generated in thepast year by these mature homebuilding projects to fund acquisition andconstruction of the Yucaipa project and, subsequent to June 30, 2001, used $2.4million to fund a portion of the Company’s acquisition of the new North Coronaproject, with the balance being funded by a new construction loan. During July2001, 13 home deliveries at the Rancho San Pasqual project generatedapproximately $2.7 million after full repayment of that project’s constructionloan.

**Financial Condition**

*        June 30,2001 Compared with December 31, 2000*

             Thecash and cash equivalents balance of approximately $6.9 million as of June 30,2001 is comparable to the balance at the prior year end. Interim activityprimarily reflects net proceeds from 50 homes delivered during the period andcash distributions received from the Fairbanks Highlands joint venture, offsetby net repayments of construction loans on the Company’s 16-home Sandoverproject in Huntington Beach, California and Rancho San Pasqual projects,spending on project development costs, as well as other activity presented inthe Statements of Cash Flows.

             Restrictedcash as of June 30, 2001 reflects collateral for a letter of credit obtained bythe Company to secure certain indemnity obligations under a tax sharingagreement with a former affiliate.

             The$9.2 million decrease in real estate held for current development or salereflects $21.0 million charged to cost of sales for deliveries of an aggregateof 50 homes at all three homebuilding projects during the first six months ofthe year. These charges were partially offset by an aggregate of $11.8 millionof infrastructure and homebuilding costs for the Company’s 112-home Rancho SanPasqual project, the 16-home Sandover project and the 83-home Yucaipa project.

             The$2.2 million increase in land held for future development reflects investmentin the Bolsa Chica Mesa project during the first six months of the year.

             Otherassets decreased by $.9 million, primarily reflecting cash distributionsreceived in excess of investment income from the Fairbanks Highlands jointventure and amortization of prepaid insurance costs.

             Accountspayable and accrued liabilities decreased by $1.3 million, to a balance of $2.7million as of June 30, 2001, primarily reflecting decreased accounts payablefor construction activities at the Rancho San Pasqual project and a decrease inaccrued consulting costs for the Bolsa Chica project.

             The$6.7 million decrease in project debt reflects aggregate repayments of $13.2million made primarily in conjunction with home deliveries at the Rancho SanPasqual and Sandover projects, partially offset by $6.5 million borrowed underbank loans for infrastructure and home construction costs at the Rancho SanPasqual and Sandover projects.

             Thebalance of other liabilities decreased by $8.6 million primarily resulting from(i) reductions in the valuation allowance attributable to utilization ofpre-Reorganization NOLs of $1.6 million, (ii) reductions in reserves forpotential exposure for federal and state income taxes and interest aggregating$3.2 million (see Note 6) and (iii) the payment of a $3.75 millioncourt-approved litigation settlement regarding the Company’s former AVPartnership investment and related contribution notes payable to thepartnership.

             The$3.2 million increase in capital in excess of par value primarily reflectspre-Reorganization net operating loss ("NOL") utilized (i) insettlement of federal income taxes of approximately $1.6 million and (ii)reflected in the income tax benefit of $1.5 million (see Note 6).
**Results of Operations**

             Thenature of the Company's business is such that the number of homes sales closed,along with periodic settlements of liabilities, will cause significantfluctuations in operating results from year to year.

      *ThreeMonths Ended June 30, 2001 Compared with the Three Months Ended June 30, 2000*

             TheCompany reported revenues of $13.3 million and gross operating profit of $1.9million for the second quarter of 2001, compared with revenues of $7.5 millionand gross operating profit of $1.6 million for the second quarter of 2000.Revenues in the current period reflect deliveries of an aggregate of 30 homes,including 18 homes at the Company’s 112-home 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 period gross margin of 14% reflects the aggregate margin on all threeprojects, as compared to the gross margin of 21% in the prior period from onlythe Rancho San Pasqual project, which has a lower land basis.

             The$.3 million increase in income from unconsolidated joint ventures in the threemonths ended June 30, 2001 as compared to the second quarter of 2000 reflectsan increase in the Company’s share of venture profits from deliveries of 11homes at Fairbanks Highlands at higher prices during the current period, ascompared with deliveries of the same number of homes in the comparable periodof last year.

             Thedecrease in other income, net from $.4 million in the 2000 period to $0 in thethree months ended June 30, 2001 primarily reflects the absence of recognitionof deferred profit in 2000 from the 1997 sale of the Fairbanks property.

             Duringthe three months ended June 30, 2001, the Company recorded the reduction of areserve for contingent tax liabilities of $3.2 million, creating an equivalenttax benefit, partially offset by other tax provision items (see Note 6). Forthe three months ended June 30, 2000 and 2001, pursuant to Fresh-StartReporting, a deferred income tax provision of $.7 and $.8 million,respectively, is reflected in the statement of operations, while the offsettingrealization of a tax benefit from utilization of pre-Reorganization NOL isreflected by increasing the Company’s capital in excess of par value.

      *SixMonths Ended June 30, 2001 Compared with the Six Months Ended June 30, 2000*

             TheCompany reported revenues of $25.3 million and gross operating profit of $3.9million for the first six months of 2001, compared with revenues of $7.5million and gross operating profit of $1.6 million for the same period of 2000.Revenues in the current period reflect deliveries of an aggregate of 50 homesincluding 27 homes at the Company’s 112-home Rancho San Pasqual project inEscondido, California, 15 homes at the Sandover project on the Bolsa Chica Mesain Huntington Beach, California and eight homes at the Yucaipa project.Revenues in the prior period reflect deliveries of 21 homes at the Rancho SanPasqual project. The gross margin of 15% for the six months ended June 30, 2001reflects the aggregate margin on all three projects as compared to the grossmargin of 21% for the comparable prior year period from only the Rancho SanPasqual project, which has a lower land basis.

             The$.4 million increase in income from unconsolidated joint ventures in the sixmonths ended June 30, 2001 of $1.7 million as compared to $1.3 million in thesame period of 2000 reflects an increase in the Company’s share of ventureprofits from deliveries of 18 homes at Fairbanks Highlands at higher pricesduring the current period, as compared with deliveries of the same number ofhomes in the comparable period of last year.

             Thedecrease in other income, net from $1.6 million in the 2000 period to $.2million in the six months ended June 30, 2001 primarily reflects the absence ofrecognition in the 2001 period of $1.1 million of non-recurring other incomefrom a January 2000 transaction whereby the Company donated approximately 160acres of its land in Michigan, and certain other assets, in exchange for anassumption of certain liabilities and certain indemnities related to asuperfund site. In addition, the decrease reflects the absence of recognitionof deferred profit in 2000 from the 1997 sale of the Fairbanks property.

             Duringthe three months ended June 30, 2001, the Company recorded the reduction of areserve for contingent tax liabilities of $3.2 million, creating an equivalenttax benefit, partially offset by other tax provision items (see Note 6). Forthe six months ended June 30, 2000 and 2001, pursuant to Fresh-Start Reporting,a deferred income tax provision of $1.0 and $1.5 million, respectively, isreflected in the statement of operations, while the offsetting realization of atax benefit from utilization of pre-Reorganization NOL is reflected byincreasing the Company’s capital in excess of par value.
ITEM 3  -          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

             None.

**Safe Harbor Statement Under the Private Securities LitigationReform 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 thenegative of such terms or other comparable terminology.  These forward-looking statements include,but are not limited to, statements about the Company's plans, objectives,goals, expectations and intentions, the number and types of homes and number ofacres of land that the Company may develop and sell, outcomes of litigation,regulatory approval processes or administrative proceedings (including, but notlimited to ongoing litigation and administrative proceedings in the CoastalCommission Lawsuit related to the Company's principal asset, the Bolsa ChicaMesa), the Company's ability to continue relationships with current or futurepartners, the Company's ability to expend resources to comply withenvironmental regulations and local permitting requirements, the effect ofcertain costs, contractual obligations and tax liabilities, both known andunknown, on the Company's business, results of operations and financialcondition, the condition and adequacy of the Company's properties, theCompany's ability to estimate cash flow projections due to uncertainties invaluing real property, the Company's ability to acquire residential lots inorder to continue homebuilding operations, the adequacy of capital, financingand cash flow required to continue the Company's operations and landdevelopment activities, the future condition of the real estate market inSouthern California, and other statements contained herein that are nothistorical facts.

PARTII - OTHER INFORMATION
ITEM  1 -Legal Proceedings   See Note 4 above, "Item  1 - Business - Corporate Indemnification Matters" and "Item 3 - Legal  Proceedings" in the Company’s  Annual Report on Form 10-K for the year ended December 31, 2000.  ITEM  4 -Submission  of Matters to a Vote of Security Holders   The  Annual Meeting of the Company’s stockholders was held on May 15, 2001.  A quorum of common stock was present in  person or by proxy. The following proposals were approved by the requisite  vote of the Company’s stockholders entitled to vote, as follows:   Proposal  No. 1:    *The Director Proposal.*     The Company’s director 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, which constituted the affirmative votes for all nominees, by  the holders of approximately 99.1% of the outstanding Common Stock  represented in person or by proxy at the Annual Meeting.
 
Name Votes  Cast "For Nominee" Votes  "Withheld"    Phillip R. Burnaman II 8,640,501 76,980 Raymond J. Pacini 8,640,403 77,078 Thomas W. Sabin, Jr. 8,640,326 77,155 J. Thomas Talbot 8,640,340 77,141 
 
 Proposal  No. 2: *The Auditor Proposal.*    The holders of Common Stock cast  8,701,738 votes for and 11,942 votes against the Company’s proposal to ratify  the appointment of Deloitte & Touche, LLP as the Company’s independent  auditors for the fiscal year ending December 31, 2001. Such votes constituted  the affirmative vote for the Auditor Proposal by the holders of approximately  99.8% of the outstanding Common Stock represented in person or by proxy at  the Annual Meeting. There were 3,801 abstentions and no broker non-votes by  the holders of shares of Common Stock with respect to the Auditor Proposal.
 

ITEM5 -           Other Information
 Stockholders  wishing to bring a proposal before the Registrant’s 2002 Annual Meeting of  Stockholders (but not wishing to include such proposal in the Registrant’s  Proxy Statement) must cause written notice of such proposal to be received by  the Secretary of the Registrant at its principal executive offices no later  than December 10, 2001.
ITEM6 -           Exhibits and Reports onForm 8-K
 None.
 

SIGNATURE

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
  CALIFORNIA COASTAL COMMUNITIES, INC.   Date  August  10, 2001By*/s/*  Sandra G. Sciutto   **   SANDRA G. SCIUTTO  Senior Vice President and  Chief Financial Officer
 **