ThisForm 10-Q consists of 15 sequentially numbered pages.

 

**FORM 10-Q**

 

**SECURITIES AND EXCHANGECOMMISSION**

 

**WASHINGTON, D.C. 20549**

 

----

 

**QUARTERLY REPORTUNDER SECTION 13 OR 15 (d) OF THE**

**SECURITIES EXCHANGEACT OF 1934**

 

 

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

 

 

**Commission file number 0-17189**

 

 

**CALIFORNIA COASTALCOMMUNITIES, INC.**

(Exactname of registrant as specified in its charter)

 

 

| **Delaware**                    |   | **02-0426634**      |
|---------------------------------|--------|---------------------|
| (State or other jurisdiction of |   | (I.R.S. Employer    |
| incorporation or organization.) |   | Identification No.) |

 

 

| **6 Executive Circle, Suite 250**        |   |       |
|------------------------------------------|--------|------------|
| **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 filing requirementsfor the past 90 days:

 

 

Yesý                     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.

 

Yesý                     No o

 

The number of shares of Common Stock outstanding atOctober 31, 2001 was 10,058,589.

 

 

CALIFORNIACOASTAL COMMUNITIES, INC.

 

FORM10-Q

 

FORTHE QUARTER ENDED SEPTEMBER 30, 2001

 

                I N D E X                 

 

 

 
| Part I -   | Financial Information: |
|-----------------|------------------------|
|            |                   |   |
|            | Item 1 -               | Consolidated Financial Statements |
|            |                   |   |
|            |                   | Consolidated Balance Sheets  -December 31, 2000 and September 30,  2001 (unaudited) |
|            |                   |   |
|            |                   | Consolidated  Statements of Operations -Three and  Nine Months Ended September 30, 2000 and 2001 (unaudited) |
|            |                   |   |
|            |                   | Consolidated  Statements of Cash Flows -Nine  Months Ended September 30, 2000 and 2001 (unaudited) |
|            |                   |   |
|            |                   | Notes to  Consolidated Financial Statements |
|            |                   |   |
|            |                   |   |
|            | Item 2  -              | Management's  Discussion and Analysis of FinancialCondition  and Results of Operations |
|            |                   |   |
|            |                   |   |
|            | Item 3  -              | Quantitative  and Qualitative Disclosures AboutMarket  Risk |
|            |                   |   |
|            |                   |   |
| Part II  - | Other Information:     |
|            |                   |   |
|            |                   |   |
|            | Item 1  -              | Legal Proceedings |
|            |                   |   |
|            |                   |   |
|            | Item 6  -              | Exhibits and Reports  on Form 8-K |
|            |                   |   |
|            |                   |   |
| SIGNATURE       |
|                 |                        |  |  |

 

CALIFORNIA COASTAL COMMUNITIES, INC.

 

CONSOLIDATEDBALANCE SHEETS

 

(in millions)

 

 
|                                              |   | **December 31,  2000** |   | **September 30, 2001** |   |
|---------------------------------------------------|--------|-----------------------------|--------|------------------------|--------|
|                                              |   |                        |   | **(unaudited)**        |   |
| ASSETS                                            |   |                        |   |                   |   |
|                                              |   |                        |   |                   |   |
| Cash and cash  equivalents                        |   | $                           | 6.9    |                   | $      | 6.8 |   |
| Restricted cash                                   |   | 1.9                         |   | 2.0                    |   |
| Real estate held for  current development or sale |   | 21.4                        |   | 14.2                   |   |
| Land held for future  development                 |   | 142.0                       |   | 145.8                  |   |
| Other assets                                      |   | 6.5                         |   | 4.1                    |   |
|                                              |   |                        |   |                   |   |
|                                              |   | $                           | 178.7  |                   | $      | 172.9 |   |
|                                              |   |                        |   |                   |   |
| LIABILITIES AND  STOCKHOLDERS' EQUITY             |   |                        |   |                   |   |
|                                              |   |                        |   |                   |   |
| Liabilities:                                      |   |                        |   |                   |   |
| Accounts payable and  accrued liabilities         |   | $                           | 4.0    |                   | $      | 2.6 |   |
| Project debt                                      |   | 9.0                         |   | 3.1                    |   |
| Other liabilities                                 |   | 23.1                        |   | 14.4                   |   |
|                                              |   |                        |   |                   |   |
| Total liabilities                                 |   | 36.1                        |   | 20.1                   |   |
|                                              |   |                        |   |                   |   |
|                                              |   |                        |   |                   |   |
| Commitments and  contingencies                    |   |                        |   |                   |   |
|                                              |   |                        |   |                   |   |
| Stockholders' equity:                             |   |                        |   |                   |   |
| Common stock                                      |   | .5                          |   | .5                     |   |
| Capital in excess of par  value                   |   | 134.4                       |   | 138.1                  |   |
| Retained earnings                                 |   | 7.7                         |   | 14.2                   |   |
|                                              |   |                        |   |                   |   |
| Total stockholders'  equity                       |   | 142.6                       |   | 152.8                  |   |
|                                              |   |                        |   |                   |   |
|                                              |   | $                           | 178.7  |                   | $      | 172.9 |   |

 

 

 

 

 

 

 

 

 

See the accompanying notes to consolidated financialstatements.

 

CALIFORNIA COASTAL COMMUNITIES, INC.

 

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 

(inmillions, except per share amounts)

 

(unaudited)

 

 
|                                                |   | ** Three Months Ended** |   | **Nine Months Ended** |   |
|-----------------------------------------------------|--------|------------------------------|--------|-----------------------|--------|
|                                                |   | **September 30,**            |   | **September 30,**     |   |
|                                                |   | **2000**                     |   | **2001**              |   | **2000** |   | **2001** |   |
|                                                |   |                         |   |                  |   |   |   |   |   |
|                                                |   |                         |   |                  |   |   |   |   |   |
| Revenues                                            |   | $                            | 7.2    |                  | $      | 7.4 |   | $ | 14.7 |   | $ | 32.7 |   |
|                                                |   |                         |   |                  |   |   |   |   |   |
| Costs of sales                                      |   | 5.7                          |   | 5.9                   |   | 11.6 |   | 27.3 |   |
|                                                |   |                         |   |                  |   |   |   |   |   |
| Gross operating profit                              |   | 1.5                          |   | 1.5                   |   | 3.1 |   | 5.4 |   |
|                                                |   |                         |   |                  |   |   |   |   |   |
| Selling, general and  administrative expenses       |   | .8                           |   | .6                    |   | 2.6 |   | 2.3 |   |
| Interest expense                                    |   | .1                           |   | .1                    |   | .2 |   | .2 |   |
| Income from unconsolidated joint ventures           |   | (.5                          | )      | (1.0                  | )      | (1.8 | ) | (2.7 | ) |
| Other (income) expense,  net                        |   | (.6                          | )      | .1                    |   | (2.2 | ) | (.1 | ) |
|                                                |   |                         |   |                  |   |   |   |   |   |
| Income before income taxes                          |   | 1.7                          |   | 1.7                   |   | 4.3 |   | 5.7 |   |
|                                                |   |                         |   |                  |   |   |   |   |   |
| Provision (benefit) for  income taxes               |   | .7                           |   | .7                    |   | 1.8 |   | (.8 | ) |
|                                                |   |                         |   |                  |   |   |   |   |   |
| Net income                                          |   | $                            | 1.0    |                  | $      | 1.0 |   | $ | 2.5 |   | $ | 6.5 |   |
|                                                |   |                         |   |                  |   |   |   |   |   |
| Earnings per common  share – basic and diluted |   | $                            | .10    |                  | $      | .10 |   | $ | .25 |   | $ | .64 |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying notes toconsolidated financial statements.

 

CALIFORNIACOASTAL COMMUNITIES, INC.

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 

(inmillions)

 

(unaudited)

 
|                                                                         |   | **Nine Months Ended** |   |
|------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                         |   | **September 30,**     |   |
|                                                                         |   | **2000**              |   | **2001** |   |
|                                                                         |   |                  |   |   |   |
| Cash flows from operating activities:                                        |   |                  |   |   |   |
| Net income                                                                   |   | $                     | 2.5    |   | $ | 6.5 |   |
| Adjustments to reconcile  to cash provided by (used in)operating activities: |   |                  |   |   |   |
| Non-cash interest  expense                                                   |   | .2                    |   | .2 |   |
| Interest income on restricted cash                                           |   | (.1                   | )      | (.1 | ) |
| Deferred income taxes                                                        |   | 1.8                   |   | 2.1 |   |
| Utilization of  pre-Reorganization net operating loss                        |   | --                    |   | 1.6 |   |
| Gains on sales of real estate held for current  development or sale          |   | (3.1                  | )      | (5.4 | ) |
| Proceeds from asset  sales, net                                              |   | 14.3                  |   | 32.2 |   |
| Changes in assets and  liabilities:                                          |   |                  |   |   |   |
| Investments in real estate held for current  development or sale             |   | (17.6                 | )      | (19.6 | ) |
| Investments in land held for future development                              |   | (3.3                  | )      | (3.8 | ) |
| Decrease in other assets                                                     |   | 1.2                   |   | 2.4 |   |
| Decrease in accounts  payable, accrued and other liabilities, net            |   | (1.6                  | )      | (10.3 | ) |
|                                                                         |   |                  |   |   |   |
| Cash provided by (used  in) operating activities                             |   | (5.7                  | )      | 5.8 |   |
|                                                                         |   |                  |   |   |   |
| Cash flows from  investing activities:                                       |   |                  |   |   |   |
| Maturity of short-term  investments                                          |   | 3.0                   |   | -- |   |
| Cash provided by  investing activities                                       |   | 3.0                   |   | -- |   |
|                                                                         |   |                  |   |   |   |
| Cash flows from  financing activities:                                       |   |                  |   |   |   |
| Borrowings of project  debt                                                  |   | 14.3                  |   | 9.6 |   |
| Repayments of project debt                                                   |   | (10.9                 | )      | (15.5 | ) |
| Return of interest  income on restricted cash                                |   | .3                    |   | -- |   |
|                                                                         |   |                  |   |   |   |
| Cash provided by (used  in) financing activities                             |   | 3.7                   |   | (5.9 | ) |
|                                                                         |   |                  |   |   |   |
| Net increase (decrease) in cash and cash equivalents                         |   | 1.0                   |   | (.1 | ) |
|                                                                         |   |                  |   |   |   |
| Cash and cash  equivalents - beginning of period                             |   | 5.8                   |   | 6.9 |   |
|                                                                         |   |                  |   |   |   |
| Cash and cash  equivalents - end of period                                   |   | $                     | 6.8    |   | $ | 6.8 |   |
|                                                                         |   |                  |   |   |   |
|                                                                         |   |                  |   |   |   |
| 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**

 

                The accompanying financialstatements have been prepared by California Coastal Communities, Inc. and itsconsolidated subsidiaries (the "Company"), without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. The Companybelieves that these unaudited consolidated financial statements reflect allmaterial adjustments (consisting only of normal recurring adjustments) anddisclosures necessary for the fair presentation of the results of operationsand statements of financial position when read in conjunction with theFinancial Statements and Notes thereto included in the Company’s Annual Reporton Form 10–K for the year ended December 31, 2000, and the current year’spreviously issued Quarterly Reports on Form 10-Q. The results for interimperiods are not necessarily indicative of the results to be expected for thefull year. This report contains forward looking statements. Readers arecautioned that any such forward looking statements are not guarantees of futureperformance and involve risks and uncertainties that actual events or resultsmay differ materially from those described herein as a result of variousfactors, including without limitation, the factors discussed generally in thisreport.

 

The Company completed its recapitalization (the "Recapitalization") which became effective on September 2, 1997,pursuant to a prepackaged plan of reorganization which was confirmed by theU.S. Bankruptcy Court for the District of Delaware. The prepackaged plan wasfiled by the Company, excluding all of its subsidiaries and affiliates,contemporaneously with a voluntary petition for relief under Chapter 11 of thebankruptcy code. On the effective date of the Recapitalization, the Companyadopted the provisions of Statement of Position No. 90-7, "Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code" ("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 andnine months ended September 30, 2000 and 2001, the weighted average commonshares outstanding was 10.1 million. Earnings per share, assuming dilution, iscomputed using the weighted average number of common shares outstanding and thedilutive 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.

 

In July 2001, theFinancial Accounting Standards Board issued SFAS No. 141, "BusinessCombinations" and SFAS No. 142, "Goodwill and Other IntangibleAssets. " SFAS No. 141 is effective immediately and SFAS 142 will be effectiveJanuary 2002. The new standards are not expected to have a significant impacton the Company’s financial statements.

 

                InAugust 2001, the FASB issued SFAS No. 143 "Accounting for Asset RetirementObligations", which addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. SFAS No. 143 is required to be adopted for fiscal years beginning afterJune 15, 2002. The Company has not yet determined what effect this statementwill have on its financial statements.

 

                Also in August2001, the FASB issued SFAS No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets", which supersedes FASB Statement No. 121,"Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of". This new statement also supersedes certainaspects of APB 30, "Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions", with regard to reportingthe effects 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. The provisionsof this statement are required to be applied for fiscal years beginning afterDecember 15, 2001 and interim periods within those fiscal years. The Companyhas not yet determined what effect this statement will have on its financialstatements.

 

*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 the upper bench of the Company’s 208 acre Bolsa Chica Mesa(see Note 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 242 acres at Bolsa Chica exceed itscarrying value, there has been no impairment.

 

 

# **Note3 – Restricted Cash**

 

                Restricted cash as of September 30, 2001 reflects amortgage-backed security recorded at amortized cost, which approximates fairvalue, maturing in December 2001. The security is held as collateral for aletter 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 approximately350 acres located in OrangeCounty, California overlooking the Pacific Ocean and the Bolsa Chicawetlands (which were sold by the Company to the State of California in 1997),surrounded by the City of Huntington Beach and approximately 35 miles south ofdowntown Los Angeles. The Company’sholdings include 208 acres on a mesanorth of the Bolsa Chica wetlands ("Bolsa Chica Mesa"), approximately 100 acres on, or adjacent to, theHuntington Mesa and 42 acres of lowlands which were acquired by the Company inSeptember 1997.

 

                The planned communityat Bolsa Chica Mesa is expected to offer a broad mix of home choices, includingprimarily single-family homes. A Local Coastal Program ("LCP") fordevelopment of up to 2,500 homes on the Bolsa Chica Mesa was approved by theOrange County Board of Supervisors in December 1994 and by the CaliforniaCoastal Commission (the "Coastal Commission") in January 1996. InOctober 1997, in response to a trial court decision in connection with alawsuit which challenged the 1996 approvals of the Coastal Commission (the "CoastalAct 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.

 

                In response to the April 1999Court of Appeal’s decision in the Coastal Act Lawsuit which prohibitedrelocation of a 14-acre grove of dying eucalyptus trees which serves as raptorhabitat, on November 16, 2000, the Coastal Commission held another publichearing on the LCP and approved suggested modifications to the LCP which wouldlimit development to only the upper bench of the Bolsa Chica Mesa (the"Upper Mesa"). The Coastal Commission’s latest suggestedmodifications would prohibit the Company and other landowners from developmenton the approximately 100-acre lower bench of the Bolsa Chica Mesa (the"Lower Mesa"). On May 8, 2001, the County of Orange declined toconsider the Coastal Commission’s November 2000 suggested modifications. Intheir response to the Coastal Commission, the County stated that theCommission’s suggested modifications were infeasible and unacceptable. Inparticular, the County noted that the Commission’s suggested modificationswould remove 140 acres of viable residentially-zoned land from the County’splan.

 

                On January 12, 2001 the Companyfiled a complaint in Orange County Superior Court challenging the CoastalCommission’s November 2000 suggested modifications to the County’s Bolsa ChicaLCP. On February 28, 2001, the Orange County Superior Court ordered that thecase be reassigned to San Diego Superior Court based on the request of theCoastal 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.

 

                On August 31, 2001, the SanDiego Superior court ruled in the Company’s favor following a hearing on theCoastal Commission’s legal challenge to the Company’s complaint. The court’sruling allows the Company to continue its challenge to the Commission’sNovember 2000 decision as to how to protect certain raptor habitat on the BolsaChica Mesa, including the Commission’s recommendation that the Lower Mesa notbe developed. The court’s August 31, 2001 ruling allows this aspect of thelitigation to go forward, and further upholds the Company’s right to challengeother development preconditions which the Coastal Commission sought to imposein its November 2000 suggested modifications.

 

                The complaint also includescauses of action for violation of the Company’s constitutional rights of equalprotection and due process, and for a public taking of its private propertywithout compensation in contravention of the U.S. and California Constitutions.While the court’s August 31, 2001 ruling granted the Commission’s motion todismiss these other causes of action based on the court’s conclusion that suchmatters were not then ripe, the Company is permitted to, and has amended itscomplaint with respect to these causes of action to provide additional factsand arguments to address the court’s concerns as to ripeness. Due to theuncertainty of the litigation process, the Company cannot predict how long itwill take to pursue its claims, or the probability for success.

 

                While the Company vigorouslypursues its litigation to obtain entitlement for residential construction onthe Lower Mesa, it is also pursuing approval of permits for development of the UpperMesa. After review of environmental, economic, marketing, construction andpolitical considerations, the Company applied to the County of Orange in August2001 for permits to build approximately 400 single-family homes on the UpperMesa. A subsequent environmental impact report is expected to be released forpublic comments during November of this year. If a plan is approved by theCounty of Orange in early 2002, the Company could then seek approval from theCoastal Commission during the middle of 2002 and expect to commenceinfrastructure construction on the Upper Mesa during the fourth quarter of 2002provided that County and Coastal Commission approvals are obtained on a timelybasis, followed by the start of home construction during the first quarter of2003. 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.

 

                The estimation process involvedin the determination of value is inherently uncertain since it requiresestimates as to future events and market conditions. Such estimation processassumes the Company’s ability to complete development and dispose of its realestate properties in the ordinary course of business based on management’spresent plans and intentions. Economic, market, environmental and political conditionsmay affect management’s development and marketing plans. In addition, theimplementation of such development and marketing plans could be affected by theavailability of future financing for development and construction activities.At such time as the Company’s homebuilding activities at Bolsa Chica commence,the Company would be required to account for such property at the lower of costor market, which may necessitate a write-down of its carrying value.Accordingly, the ultimate values of the Company’s land held for futuredevelopment are dependent upon future economic and market conditions, theavailability of financing, and the resolution of political, environmental andother related issues. The development of the Company’s Bolsa Chica Mesa projectis dependent upon various governmental approvals, results of litigation andeconomic factors. Accordingly, the amount ultimately realized from such projectmay differ materially from current estimates, as well as the project’s carryingvalue.

 

**Note 5 - Project Debt**

 

                In January and April2001, Signal Landmark, a consolidated subsidiary, made final repayments onearlier construction loans on the Rancho San Pasqual and Sandover projects,respectively. In March 2001, Signal Landmark entered into a new constructionloan agreement with a commercial bank to finance construction of final phasesand the model homes at the Company’s 112-home Rancho San Pasqual project inEscondido, California. The Company borrowed and fully repaid approximately $5.7million on this $6 million loan facility. The final repayment was made fromproceeds upon the sale of homes in July 2001. The obligation was secured by adeed of trust on the Rancho San Pasqual project and required principalrepayments upon the sale of homes. The loan carried an interest rate of primeplus three-fourths percent (7.75% at June 30, 2001).

 

                In conjunction withthe July 20, 2001 acquisition of 83 single-family residential lots in NorthCorona, California, the Company’s homebuilding subsidiary, Hearthside Homes,Inc., entered into a construction loan agreement with a commercial bank tofinance the project. The $10.9 million loan facility is secured by a deed oftrust on the North Corona project and requires principal repayments upon thesale of homes. The loan bears an interest rate of prime plus three-fourthspercent (6.75% at September 30, 2001) and matures on July 20, 2002.  As of September 30, 2001, approximately $3.1million had been drawn on this facility.

 

                For the nine monthsended September 30, 2000 and 2001, approximately $.9 million and approximately$.4 million, respectively, of construction period interest was capitalized toprojects in the construction stage.

 

 

**Note 6 – Income Taxes**

 

                Thefollowing is a summary of the tax provision (benefit):

 
|                                                                                |   | **Three Months Ended** |   | **Nine Months Ended** |   |
|-------------------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
|                                                                                |   | **September 30,**      |   | **September 30,**     |   |
|                                                                                |   | **2000**               |   | **2001**              |   | **2000** |   | **2001** |   |
| Current taxes                                                                       |   | $                      | --     |                  | $      | .1 |   | $ | -- |   | $ | .3 |   |
| Deferred  taxes – equivalent amount credited to capital in excess of par value |   | .7                     |   | .6                    |   | 1.8 |   | 2.1 |   |
| Reduction  in contingent tax liabilities                                            |   | --                     |   | --                    |   | -- |   | (3.2 | ) |
| Provision  (benefit) for income taxes                                               |   | $                      | .7     |                  | $      | .7 |   | $ | 1.8 |   | $ | (.8 | ) |

 

                The current tax provisionconsists of federal and state taxes (primarily alternative minimum taxes). Adeferred income tax provision is reflected in the statement of operations,while an equivalent tax benefit from utilization of pre-Reorganization netoperating losses ("NOLs") is reflected by increasing the Company’scapital in excess of par value, pursuant to Fresh-Start Reporting.

 

                In 1995, the Internal RevenueService ("IRS") proposed material audit adjustments with respect tothe tax returns of the Company and its consolidated subsidiaries, includingformerly affiliated entities, for the years ended December 31, 1989, 1990 and 1991.The adjustments proposed by the IRS, if upheld, could have resulted in federaltax liability, before interest, of approximately $17 million and disallowanceof up to $132 million of NOL carryforwards. The Company disagreed with thepositions taken by the IRS and filed protests with the IRS to contest theproposed adjustments. In December 1998, the Company executed a settlementagreement with the IRS with respect to the proposed adjustments describedabove. As a result of this agreement, in February 1999 the Company paid$759,000 (which included $280,000 of tax and $479,000 of interest throughJanuary 1999), net of the Company’s refund claim for 1992 NOL carrybacks ofapproximately $1.6 million, in full settlement of such claims. Under thissettlement agreement approximately $10 million of the Company’s NOLcarryforwards were disallowed. The Company utilized $8.1 million of NOLcarryback from 1992 to 1991 in connection with its refund claim. In June 2001,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.

 

                The Company has reviewed theextent of potential accompanying state tax liability adjustments and does notbelieve that any such adjustments would have a negative material impact on theCompany’s financial statements. Certain of the state jurisdictions in which theCompany filed amended returns for 1989, 1990 and 1991 have accepted suchreturns, thereby reducing the Company’s exposure to potential claims. Duringthe three months ended June 30, 2001, the Company re-evaluated its reserves forestimated income tax exposure and reduced its reserves by approximately $3.2million.

 

                The Internal Revenue Code (the"Code") generally limits the availability of NOLs if an ownershipchange occurs within any three-year period under Section 382. If the Companywere to experience an ownership change, the Company’s annual use of its NOLswould generally be limited to the value of the Company’s equity immediatelybefore the ownership change multiplied by the long-term tax-exempt rate. TheCompany estimates that after giving effect to various transactions bystockholders who hold a 5% or greater interest in the Company, and theCompany’s repurchase of an aggregate of approximately 1.9 million shares inDecember 1998 and June 1999, it has experienced a cumulative ownership shift ascomputed in accordance with Section 382 of approximately 25%. The federal NOLsavailable as of September 30, 2001 are approximately $188 million, which expirebeginning in 2005.

 

                In response to an unsolicitedwritten consent from a majority of its stockholders, the Company amended itscertificate of incorporation on October 14, 1999 in order to preserve theability of the Company to utilize its $197 million of tax loss carryforwards asof that date. Since the Company’s use of its NOLs would be severely restrictedif it were to experience an ownership change of 50% or more, the Company’smajority stockholders requested that the Board of Directors enact theamendments, which have been determined to be in the best interest of the Companyand its stockholders. The amendments prohibit future purchases of the Company’scommon stock by persons who would become new 5% holders, and also prohibitcurrent holders of over 5% from increasing their positions, except in certainpermissible circumstances which would not jeopardize the Company’s ability touse its NOLs. While these amendments reduced the Company’s risk of an ownershipchange occurring due to the acquisition of shares by 5% stockholders, the riskremains that an ownership change could result from the sale of shares byexisting 5% stockholders.

 

 

# **Note 7 – Stock Plans**

 

                In May 2001, options to purchasean aggregate of 754,996 shares of the Company’s common stock were re-priced to$4.50 per share, which represented a premium of approximately 12.5% above theaverage closing price over the previous 30 days. The shares, which were grantedto certain directors and officers, carried previous exercise prices of $9.25per share on 484,996 options granted in 1997 and 1998, and $7.00 per share on270,000 options granted in 1999. In accordance with Financial AccountingStandards Board Interpretation No. 44 "Accounting for Certain TransactionsInvolving Stock Compensation" the modification of the options requiresthat they be accounted for as variable awards, which measures compensationexpense as the difference between the option price and the quoted market priceof the Company shares. Accordingly, based upon the Company’s share price of$4.20 at September 30, 2001 versus the share price of $4.67 as of June 30,2001, during the current quarter the Company has reversed compensation expenserecorded in the second quarter of approximately $128,000. Future increases inthe fair value of the Company’s common stock above $4.50 per share would resultin compensation expense.

 

 

##### **Note 8 – Commitments andContingencies**

 

                The Company and its predecessorshave, through a variety of transactions effected since 1986, disposed ofseveral assets and businesses, many of which are unrelated to the Company’scurrent operations. By operation of law or contractual indemnity provisions,the Company has retained liabilities relating to certain of these assets andbusinesses. Many of such liabilities are supported by insurance or byindemnities from certain of the Company’s predecessors and currently orpreviously affiliated companies. The Company believes its balance sheetreflects appropriate reserves for these matters.

 

                Also see Note 4 for a discussionof contingencies related to the Company’s Bolsa Chica property.

 

ITEM 2 -                MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION 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 fourth 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.

 

                During 2000 and the first threequarters of 2001, the Company generated significant gross operating margins andcash flows from homebuilding activities on assets other than Bolsa Chica. TheCompany currently has on-going Southern California projects in Escondido,Yucaipa and North Corona and a significant venture interest in a project in SanDiego. These homebuilding projects are expected to generate significant cashflows, gross operating margins and income from unconsolidated joint venturesduring the balance of 2001. However, the Company currently has a limitedinventory of entitled land available for homebuilding projects, which theCompany expects may be fully developed by the end of 2002, except forcompletion of the North Corona project. Given this limited inventory ofbuildable lots, the Company is striving to reach break-even operating resultsfor 2002. Due to delays in approvals for homebuilding at Bolsa Chica,continuation of homebuilding operations beyond 2002 is dependent uponentitlement of lots at Bolsa Chica and acquisition of suitable, entitledresidential lots within the Southern California area.

 

                Bolsa Chica is the Company’sprincipal asset. It has required and continues to require significantinvestments for entitlement and land development activities. Due to theNovember 2000 Coastal Commission approval of suggested modifications to the LCPwhich would limit residential development to only the Upper Mesa, the Companyis faced with further delays in implementing its plans for residentialdevelopment on the Bolsa Chica Mesa. While the Company vigorously pursues itslitigation to obtain entitlement for residential construction on the LowerMesa, it is also pursuing approval of development permits on the Upper Mesa.After review of environmental, economic, marketing, construction and politicalconsiderations, the Company applied to the County of Orange in August 2001 forpermits to build approximately 400 single-family homes on the Upper Mesa. Asubsequent environmental impact report is expected to be released for publiccomments during November of this year. If a plan is approved by the County ofOrange in early 2002, the Company could then seek approval from the CoastalCommission in the middle of 2002 and expect to commence infrastructureconstruction on the Upper Mesa during the fourth 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 will be permitted to develop, or that further litigationor administrative delay will not result.

 

                In addition to the Upper Mesa land, the Company holdsseveral other Bolsa Chica parcels aggregating approximately 242 acres which maybe developed as residential lots or sold as park lands to various governmentalagencies, subject to the outcome of litigation against the Coastal Commissionand negotiations, 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.

 

                Real estate held for currentdevelopment or sale and land held for future development (real estateproperties) are carried at fair value as of September 2, 1997, followingadoption of Fresh-Start Reporting as discussed in Notes 1 and 2, as adjusted bysubsequent activity. The Company's real estate properties are subject to anumber of uncertainties which can affect the values of those assets. Theseuncertainties include litigation or appeals of regulatory approvals (asdiscussed above) and availability of adequate capital, financing and cash flow.In addition, future values may be adversely affected by increases in propertytaxes, increases in the costs of labor and materials and other developmentrisks, changes in general economic conditions, including higher mortgageinterest rates, and other real estate risks such as the general demand forhousing and the supply of competitive products. Real estate properties do notconstitute liquid assets and, at any given time, it may be difficult to sell aparticular property for an appropriate price. During the last three years, therobust economy of California has resulted in improvement in the real estatemarket, and the number of potential purchasers interested in SouthernCalifornia residential properties has increased, resulting in improvedprices.  However, there can be noassurance regarding the continued health of the California economy and thestrength and longevity of current conditions affecting the residential realestate market. In particular, the recent terrorist attacks, a continuedslow-down in the national economy and potential electricity shortages inCalifornia appear to be putting recessionary pressures on the Californiaeconomy and may have a negative impact on the Southern California housingmarket.

 

                TheCompany’s internal homebuilding operations focus primarily on the entry-leveland move-up single-family detached market. The Fairbanks Highlands jointventure homebuilding activities reflect a large, luxury single-family productunder construction by the Company’s partner. Major projects are described asfollows:

 

*      Rancho SanPasqual.*  In the City of Escondido in San DiegoCounty, approximately 30 miles north of downtown San Diego, the Companyrecently completed the final phase of development of 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. During 1999, the Company’ssubsidiary began constructing infrastructure and homes on the 112-home Phase IIof the project, and as of November 5, 2001, all 112 homes had been delivered.

 

*      Sandover.*  In May 2001, The Company completeddeliveries of 16 homes on approximately five acres of the Bolsa Chica Mesa,which is in the City of Huntington Beach (whereas the rest of the Company’sBolsa Chica Mesa property is in an unincorporated area within the County ofOrange). These homes averaged 3,675 square feet and were sold at an averageprice of approximately $840,000.

 

      *Fairbanks Highlands.* The Fairbanks Highlands property consists of approximately 380 acresnear the communities of Fairbanks Ranch and Rancho Santa Fe in the northernpart of the city of San Diego. The project includes 93 luxury homes, averagingapproximately 4,800 square feet, on single-family residential lots averaging1.34 acres each surrounded by approximately 215 acres of open space. InDecember 1996, the Company formed a joint venture with a major homebuilder todevelop this property, retaining a continuing 35% partnership interest in theventure. The Company’s partner is managing the day-to-day operations of theventure, providing all construction financing and building all of the homes atthe site. Closings on 84 homes were completed and four of the remaining ninehomes were in escrow as of November 5, 2001.

 

      *Chapman Heights.*  TheCompany has acquired 58 finished lots which are part of a master-plannedcommunity known as Chapman Heights, in the city of Yucaipa, California, andholds an option to purchase an additional 28 finished lots in December 2001.The community surrounds an operating 18-hole public golf course and is plannedfor a total of approximately 2,100 homes, civic and commercial centers and twoschool sites. The Company opened for sales at the project in January of 2001,and has released the first 44 homes for sale. As of November 5, 2001, closingson 18 homes were completed and nine additional homes were in escrow.

 

*      ProvidenceRanch. *InJuly 2001, the Company acquired 83 finished lots in the master-plannedcommunity known as Providence Ranch in Riverside County, California near NorthCorona. The communities of Providence Ranch and the adjacent community ofCorona Valley, are planned for a total of 2,600 homes, and are well-located toserve the employment centers of the greater Los Angeles area, Orange County andthe Ontario international airport. The Company commenced home construction inOctober 2001 and the model home opening for the project is scheduled forFebruary 2002.

 

**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 recently acquired North Corona project, and followingthe July 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 September 30, 2001 was approximately$6.8 million. The Company believes that its cash on hand, future salesproceeds, joint venture receipts and funds available under its credit agreementfor the North Corona project will be sufficient to meet anticipated cash andcapital requirements, primarily project development costs for homebuildingprojects and Bolsa Chica, and general and administrative expenses, for the next12 months.

 

                TheCompany’s homebuilding projects which are complete or nearing completion(Sandover, Rancho San Pasqual and the Fairbanks Highlands joint venture)generated positive cash flows aggregating $13.3 million during the first ninemonths of 2001. Since September 30, 2001, delivery of the final 10 homes at theRancho San Pasqual project generated approximately $4.1 million in additionalcash flow. The Company expects that these projects will generate approximately$2.4 million of additional cash flow during the next six months, based onpresent economic conditions and market assumptions. Through September 30, 2001,the Company had utilized approximately $5.4 million of the cash generated bythese mature homebuilding projects to fund acquisition and construction of theYucaipa project, and used $2.5 million to fund a portion of the Company’sacquisition of the new North Corona project, with the balance being funded by anew construction loan.

## ** **

## **Financial Condition**

 

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

 

                Thedecrease in cash and cash equivalents from approximately $6.9 million at theprior year end to $6.8 million as of September 30, 2001 primarily reflects netproceeds from 72 homes delivered during the period and cash distributionsreceived from the Fairbanks Highlands joint venture, offset by net repaymentsof construction loans on the Company’s 16-home Sandover project in HuntingtonBeach, California and Rancho San Pasqual projects, spending on projectdevelopment and construction costs, as well as other activity presented in theStatements of Cash Flows.

 

                Restricted cash as of September 30, 2001 reflectscollateral for a letter of credit obtained by the Company to secure certainindemnity obligations under a tax sharing agreement with a former affiliate.

 

                The $7.2 million decrease in real estate held forcurrent development or sale reflects $26.8 million charged to cost of sales fordeliveries of an aggregate of 72 homes at all three homebuilding projectsduring the first nine months of the year. These charges were partially offsetby an aggregate of $19.6 million of infrastructure and homebuilding costsinvested in the Company’s 112-home Rancho San Pasqual project, the 16-homeSandover project, the 86-home Yucaipa project and the 83-home North Coronaproject.

 

                The$3.8 million increase in land held for future development reflects investmentin the Bolsa Chica Mesa project during the first nine months of the year.

 

                Otherassets decreased by $2.4 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 $1.4 million, to a balance of $2.6million as of September 30, 2001, primarily reflecting decreased accountspayable for construction activities at the Rancho San Pasqual and Sandoverprojects and a decrease in accrued consulting costs for the Bolsa Chicaproject.

 

                The$5.9 million decrease in project debt reflects aggregate repayments of $15.5million made primarily in conjunction with home deliveries at the Rancho SanPasqual and Sandover projects, partially offset by $9.6 million borrowed underbank loans for infrastructure and home construction costs at the Rancho SanPasqual, Sandover and North Corona projects.

 

                Thebalance of other liabilities decreased by $8.7 million primarily resulting from(i) reductions in the valuation allowance attributable to utilization ofpre-Reorganization NOLs of $1.6 million, (ii) reductions in reserves forestimated exposure for federal and state income taxes and interest aggregating$3.2 million (see Note 6 to the Financial Statements) and (iii) the payment ofa $3.75 million court-approved litigation settlement regarding the Company’sformer AV Partnership investment and related contribution notes payable to thepartnership.

 

                The$3.7 million increase in capital in excess of par value 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 $2.1 million (see Note 6).

 

**Resultsof Operations**

 

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

 

*      Three MonthsEnded September 30, 2001 Compared with the Three Months Ended September 30,2000*

 

                The Company reported revenues of$7.4 million and gross operating profit of $1.5 million for the third quarterof 2001, compared with revenues of $7.2 million and gross operating profit of$1.5 million for the third quarter of 2000. Revenues in the current periodreflect deliveries of an aggregate of 22 homes, including 14 homes at theCompany’s 112-home Rancho San Pasqual project in Escondido, California, andeight homes at the Yucaipa project. Deliveries of 20 homes at the Rancho SanPasqual project were completed in the three month period ended September 30,2000.

 

                The $.5 million increase inincome from unconsolidated joint ventures in the three months ended September30, 2001 as compared to the third quarter of 2000 reflects an increase in theCompany’s share of venture profits from deliveries of nine homes at FairbanksHighlands at higher prices during the current period, as compared withdeliveries of 11 homes in the comparable period of last year.

 

                Other expense, net of $.1million in the three months ended September 30, 2001 compared to $.6 million ofother income, net in the 2000 period primarily reflects the absence ofnon-recurring other income from the reversal of reserves for expiring homewarranties.

 

                For the three months endedSeptember 30, 2000 and 2001, pursuant to Fresh-Start Reporting, a deferredincome tax provision of $.7 and $.6 million, respectively, is reflected in thestatement of operations, while an equivalent tax benefit from utilization ofpre-Reorganization NOL is reflected by increasing the Company’s capital inexcess of par value.

 

*      Nine MonthsEnded September 30, 2001 Compared with the Nine Months Ended September 30, 2000*

 

                The Company reported revenues of$32.7 million and gross operating profit of $5.4 million for the first ninemonths of 2001, compared with revenues of $14.7 million and gross operatingprofit of $3.1 million for the same period of 2000. Revenues in the currentperiod reflect deliveries of an aggregate of 72 homes including 41 homes at theCompany’s 112-home Rancho San Pasqual project in Escondido, California, 15homes at the Sandover project on the Bolsa Chica Mesa in Huntington Beach,California and 16 homes at the Yucaipa project. Revenues in the prior periodreflect deliveries of 41 homes at the Rancho San Pasqual project. The grossmargin of 17% for the nine months ended September 30, 2001 reflects theaggregate margin on all three projects as compared to the gross margin of 21%for the comparable prior year period from only the Rancho San Pasqual project,which has a lower land basis.

 

                The $.9 million increase inincome from unconsolidated joint ventures in the nine months ended September30, 2001 of $2.7 million as compared to $1.8 million in the same period of 2000reflects the higher sales prices of the 27 homes delivered at FairbanksHighlands during the current period, as compared with prices on 29 homesdelivered in the comparable period of last year, resulting in higher venture profits.

 

                The decrease in other income,net from $2.2 million in the 2000 period to $.1 million in the nine monthsended September 30, 2001 primarily reflects the absence in the 2001 period of$1.1 million of non-recurring other income from a January 2000 transaction whereby the Companydonated approximately 160 acres of its land in Michigan, and certain otherassets, in exchange for an assumption of certain liabilities and certainindemnities related to a superfund site. In addition, the decrease reflects theabsence of expiring home warranties discussed above and recognition of deferredprofit in 2000 from the 1997 sale of the Fairbanks property.

 

                For the nine months endedSeptember 30, 2000 and 2001, pursuant to Fresh-Start Reporting, deferred incometax provisions of $1.8 and $2.1 million, respectively, are reflected in thestatement of operations, while equivalent tax benefits from utilization ofpre-Reorganization NOL are reflected by increasing the Company’s capital inexcess of par value. During the three months ended June 30, 2001, the Companyrecorded the reduction of a reserve for contingent tax liabilities of $3.2million, creating an equivalent tax benefit, partially offset by other taxprovision items (see Note 6).

 

 

ITEM3  -               QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

                None.

 

# **SafeHarbor Statement Under the Private Securities Litigation Reform Act of 1995**

 

                Certain of theforegoing information contains forward-looking statements that relate to futureevents or the Company's future financial performance.  These statements involve known and unknown risks, uncertaintiesand other factors which may cause the Company's actual results, performance orachievements to be materially different from any future results, performancesor achievements expressed or implied by the forward-looking statements.  In some cases, you can identifyforward-looking statements by terminology such as "may","will", "should", "expects", "plans","anticipates", "believes", "estimates","predicts", "potential", "continue", or 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 of acresof 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 Coastal CommissionLawsuit related to the Company's principal asset, the Bolsa Chica Mesa), theCompany's ability to continue relationships with current or future partners,the Company's ability to expend resources to comply with environmentalregulations and local permitting requirements, the effect of certain costs,contractual obligations and tax liabilities, both known and unknown, on theCompany's business, results of operations and financial condition, thecondition and adequacy of the Company's properties, the Company's ability toestimate cash flow projections due to uncertainties in valuing real property,the Company's ability to acquire residential lots in order to continuehomebuilding operations, the adequacy of capital, financing and cash flowrequired to continue the Company's operations and land development activities,the future condition of the real estate market in Southern California, andother statements contained herein that are not historical facts.

 

PART II - 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 6 -  | Exhibits  and Reports on Form 8-K                                                                                                                                                                                         |
|      |                                                                                                                                                                                                                      |
|      | None.                                                                                                                                                                                                                     |

 

SIGNATURE

 

 

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|       |             |   | CALIFORNIA  COASTAL COMMUNITIES, INC.                                 |
|------------|------------------|--------|-----------------------------------------------------------------------|
|       |             |   |                                                                  |
|       |             |   |                                                                  |
| Date  | November 8, 2001 |   | By                                                                    | */s/*  Sandra G. Sciutto |   |
|       |             |   | SANDRA G. SCIUTTO  Senior Vice President and  Chief Financial Officer |
|            |                  |        |                                                                       |  |  |