CALIFORNIA COASTAL COMMUNITIES INC, 10-Q, 1998-05-14

CALIFORNIA COASTAL COMMUNITIES INC
10-Q, 1998-05-14
LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES)

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<PAGE>

This Form 10-Q consists of 15 sequentially numbered pages.

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

---------------------

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 1998
--------------

Commission file number 0-17189
-------
CALIFORNIA COASTAL COMMUNITIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

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

4343 Von Karman Avenue
Newport Beach, California 92660
------------------------- -----
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (949) 833-3030

KOLL REAL ESTATE GROUP, INC.
----------------------------
(Former name, address and fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yes X No
--- ---

Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes X No
--- ---

The number of shares of Class A Common Stock outstanding at April 30, 1998,
including the shares being delivered to former debenture holders upon surrender
of their debenture certificates was 11,906,378.

<PAGE>

CALIFORNIA COASTAL COMMUNITIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 1998

I N D E X
-----------------------------------------

Page No.
--------
PART I - Financial Information:

<S> <C> <C>
Item 1 - Financial Statements

Introduction to the Financial Statements . . . . . . .3

Balance Sheets -
December 31, 1997 and March 31, 1998 . . . . . . . . .4

Statements of Operations -
Three Months Ended March 31, 1997 and 1998 . . . . . .5

Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1998 . . . . . .6

Notes to Financial Statements. . . . . . . . . . . . .7

Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 12

PART II - Other Information:

Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . 15

Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . 15

SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>

<PAGE>

CALIFORNIA COASTAL COMMUNITIES, INC.

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

INTRODUCTION TO THE FINANCIAL STATEMENTS

The condensed financial statements included herein have been prepared by
California Coastal Communities, Inc. and its consolidated subsidiaries (the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading
when read in conjunction with the financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

The financial information presented herein reflects all adjustments,
consisting only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The results for interim periods are not necessarily
indicative of the results to be expected for the full year.

3
<PAGE>

CALIFORNIA COASTAL COMMUNITIES, INC.

BALANCE SHEETS

(in millions)

December 31, March 31,
1997 1998
---- ----
ASSETS

<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . $ 7.2 $ 6.2
Real estate held for development or sale . . . . . 4.0 4.0
Land held for development. . . . . . . . . . . . . 133.2 134.7
Reorganization value in excess of amounts
allocated to net assets. . . . . . . . . . . . . 3.1 3.1
Discontinued operations. . . . . . . . . . . . . . 19.3 20.8
Other assets . . . . . . . . . . . . . . . . . . . 6.5 6.5
------ ------

$173.3 $175.3
------ ------
------ ------

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Accounts payable and accrued liabilities. . . $ 3.5 $ 5.2
Other liabilities . . . . . . . . . . . . . . 29.7 30.0
------ ------

Total liabilities . . . . . . . . . . . . . . 33.2 35.2
------ ------

Stockholders' equity:

Common stock. . . . . . . . . . . . . . . . . .6 .6
Capital in excess of par value. . . . . . . . 140.0 140.0
Accumulated deficit . . . . . . . . . . . . . (.5) (.5)
------ ------

Total stockholders' equity. . . . . . . . . . 140.1 140.1
------ ------

$173.3 $175.3
------ ------
------ ------

</TABLE>

See the accompanying notes to financial statements.

<PAGE>

CALIFORNIA COASTAL COMMUNITIES, INC.

STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------- -----------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------

<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . $28.9 $ .4

Costs of Sales . . . . . . . . . . . . . . . . . . 28.7 .1
----- -----

Gross operating margin. . . . . . . . . . . . .2 .3

General and administrative expenses. . . . . . . . 1.4 1.1
Interest expense . . . . . . . . . . . . . . . . . 6.3 .3
Other expense (income), net. . . . . . . . . . . . (3.7) --
----- -----

Loss from continuing operations before
reorganization costs and income taxes . . . . (3.8) (1.1)

Reorganization costs . . . . . . . . . . . . . . . .2 --
----- -----

Loss from continuing operations before
income taxes. . . . . . . . . . . . . . . . . (4.0) (1.1)

Provision for income taxes . . . . . . . . . . . . .1 --
----- -----

Loss from continuing operations. . . . . . . . . . (4.1) (1.1)

Income (loss) from discontinued operations, net
of income tax benefit of $0 and $0,
respectively. . . . . . . . . . . . . . . . . (.8) 1.1
----- -----

Net (loss) income . . . . . . . . . . . . . . . . $(4.9) $ --
----- -----
----- -----

Net income per common share - basic and diluted:
Continuing operations. . . . . . . . . . . . . N/A $(.09)
Discontinued operations. . . . . . . . . . . . N/A .09
-----
$ --
-----
-----
</TABLE>

See the accompanying notes to financial statements.

5
<PAGE>

CALIFORNIA COASTAL COMMUNITIES, INC.

STATEMENTS OF CASH FLOWS

(in millions)

PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------- -----------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------- --------------

<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $(4.9) $ --
Adjustments to reconcile to cash (used) provided by
operating activities:
Non-cash interest expense. . . . . . . . . . . . . . . 6.2 .3
Gains on asset sales . . . . . . . . . . . . . . . . . (.2) (.3)
Proceeds from asset sales, net . . . . . . . . . . . . 28.8 .3
Investments in real estate held for development or
sale . . . . . . . . . . . . . . . . . . . . . . . . (1.6) --
Investments in land held for development . . . . . . . (.8) (1.5)
Decrease in other assets . . . . . . . . . . . . . . . .1 --
(Decrease) increase in accounts payable, accrued
and other liabilities. . . . . . . . . . . . . . . . (4.6) 1.7
----- -----

Cash provided by operating activities
of continuing operations. . . . . . . . . . . . 23.0 .5
----- -----

Cash used by operating activities of
discontinued operations. . . . . . . . . . . . . (19.3) (16.7)
----- -----

Cash flows from financing activities:
Borrowings of bank debt . . . . . . . . . . . . . . . . . . .9 --
Repayments of bank debt . . . . . . . . . . . . . . . . . . (9.1) --
Use of restricted cash. . . . . . . . . . . . . . . . . . . .2 --
----- -----

Cash used by financing activities of continuing
operations . . . . . . . . . . . . . . . . . . . . (8.0) --
----- -----

Cash provided by financing activities of
discontinued operations. . . . . . . . . . . . . . 18.6 15.2
----- -----

Net (decrease) increase in cash and cash equivalents . . . . . . 14.3 (1.0)

Cash and cash equivalents - beginning of period. . . . . . . . . 2.1 7.2
----- -----

Cash and cash equivalents - end of period. . . . . . . . . . . . $16.4 $ 6.2
----- -----
----- -----
</TABLE>

See the accompanying notes to financial statements.

6
<PAGE>

CALIFORNIA COASTAL COMMUNITIES, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

On May 1, 1998, following completion of the sale of the commercial
development business (see Note 4), Koll Real Estate Group, Inc. changed its
name to California Coastal Communities, Inc. (the "Company"). The Company
expects the corresponding change of its stock symbol from "KREG" to "CALC" to
become effective on May 29, 1998.

The accompanying financial statements should be read in conjunction with
the Financial Statements and Notes thereto included in the Annual Report on
Form 10-K of the Company for the year ended December 31, 1997.

NOTE 2 - RECAPITALIZATION

On September 2, 1997, the Company completed its recapitalization (the
"Recapitalization") which became effective pursuant to a prepackaged plan of
reorganization that was confirmed by the U.S. Bankruptcy Court for the
District of Delaware on August 19, 1997. The prepackaged plan was filed by
the Company, excluding all of its subsidiaries and affiliates,
contemporaneously with a voluntary petition for relief under Chapter 11 of
the bankruptcy code on July 14, 1997. The Recapitalization had previously
received over 95% approval of each class of stock and bondholders that voted
through a public solicitation process in June 1997. On September 2, 1997, the
effective date of the Recapitalization, the Company (referred to as
"Successor Company" for periods after September 2, 1997) adopted the
provisions of Statement of Position No. 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("Fresh-Start
Reporting") as promulgated by the American Institute of Certified Public
Accountants in November 1990. Accordingly, all assets and liabilities were
revalued to reflect their reorganization value, approximating their fair
value at the effective date of the Recapitalization. In addition, the
accumulated deficit of the Company was eliminated and its capital structure
recast in conformity with the Recapitalization, and as such, the Company has
recorded the effects of the Recapitalization and Fresh-Start Reporting as of
the effective date.

The Recapitalization provided for a restructuring of the Company's
capital structure. The only impaired parties under the Recapitalization were
the holders of (a) the Company's 12% Senior Subordinated Pay-In-Kind
Debentures due March 15, 2002 ("Senior Debentures"), (b) the Company's 12%
Subordinated Pay-In-Kind Debentures due March 15, 2002 ("Subordinated
Debentures") (collectively, the "Debentures"), (c) liquidated, non-contingent
claims, and (d) equity securities of the Company. The prepackaged plan did
not alter the Company's obligations to its other creditors, including its
trade creditors, customers, employees, holders of contingent and unliquidated
claims, holders of guaranty claims, and parties to contracts with the Company.

The results of operations and cash flows for three months ended March
31, 1997 include operations prior to completion of the Recapitalization
(referred to as "Predecessor Company"). The results of operations and cash
flows for the three months ended March 31, 1998 include operations subsequent
to the Company's Recapitalization and are not comparable with prior periods
for the reasons discussed above.

The reorganization value of the Company's common equity was determined
by the Company with the assistance of financial advisors after consideration
of several factors and by reliance on various valuation methods, including
discounted projected cash flows, and other economic and industry information
relevant to the operations of the Company. The reorganization value of the
Company was allocated to specific asset categories pursuant to Fresh-Start
Reporting. Reorganization Value in Excess of Amounts Allocated to Net Assets,
which represents the difference in the Company's estimated valuation and the
Company's net assets at fair value, of approximately $3.1 million is
amortized on a straight-line basis over 15 years. In addition, $13.6 million
of Reorganization Value in Excess of Amounts Allocated to Net Assets has been
allocated to the commercial development business, which was sold on April 30,
1998, and is reflected in discontinued operations as of December 31, 1997 and
March 31, 1998, net of related amortization.

Reorganization costs during the period ended March 31, 1997 consisted
primarily of legal, financial advisors and other professional fees and
expenditures directly related to the Company's Recapitalization and were
expensed as incurred.

7
<PAGE>

NOTE 3 - EARNINGS (LOSS) PER COMMON SHARE

The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share". Earnings per
share is computed using the weighted average number of outstanding shares of
the Successor Company's Common Stock, including the conversion rights of all
Debenture holders, which expire on September 2, 1998, for periods commencing
September 2, 1997. For the period ended March 31, 1998 the weighted average
common shares outstanding was 11.9 million shares. Earnings per share
assuming dilution is computed using the weighted average number of common
shares outstanding and the dilutive effect of potential common shares
outstanding. Per share data for periods prior to September 2, 1997 have been
omitted as these amounts do not reflect the Successor Company's current
capital structure.

NOTE 4 - DISPOSITION

On April 30, 1998 the Company completed the sale of its commercial
development business to Koll Development Company LLC ("KDC") and NorthStar
Capital Investment Corp. for (1) $33.4 million in cash, which included
approximately $3.4 million for 1998 activity and (2) the assumption by KDC of
all liabilities related to the business. KDC is a newly formed limited
liability company, whose members include the Company's former Chairman and
Chief Executive Officer, Donald M. Koll and its former President, Richard M.
Ortwein, along with an affiliate of NorthStar Capital Investment Corp. Upon
completion of the transaction Messrs. Koll and Ortwein resigned from their
positions with the Company and Raymond J. Pacini, the Company's Chief
Financial Officer since 1992, was appointed as the new President and Chief
Executive Officer. The Company expects to realize a gain of approximately
$9.5 million from this transaction during the second quarter.

The following pro forma financial data as of March 31, 1998 gives effect
to the sale of the commercial development business, including accruals for
estimated fees of the Company's investment bankers and legal counsel, and
estimated taxes payable, offset by deferred income related to a $1 million
deposit received from KDC, as if the transaction had occurred on March 31,
1998 (in millions):

<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Assets:
Cash . . . . . . . . . . . . . $ 6.2 $ 30.3 $ 36.5
Discontinued operations. . . . 20.8 (20.8) --
All other assets . . . . . . . 148.3 -- 148.3
------- ------ ------
$ 175.3 $ 9.5 $184.8
------- ------ ------
------- ------ ------

Total liabilities . . . . . . . . . $ 35.2 $ -- $ 35.2
Stockholders' equity. . . . . . . . 140.1 9.5 149.6
------- ------ ------
$ 175.3 $ 9.5 $184.8
------- ------ ------
------- ------ ------
</TABLE>

Discontinued operations is comprised of the following (in millions):

DECEMBER 31, MARCH 31,
1997 1998
---- ----
<S> <C> <C>
Restricted cash . . . . . . . . . . . . . $ .2 $ .2
Real estate held for development or sale. 87.9 101.2
Reorganization value in excess of amounts
allocated to net assets . . . . . . . . 13.3 13.0
Other assets. . . . . . . . . . . . . . . 8.5 9.3
Accounts payable and other liabilities. . (13.1) (9.5)
Bank debt . . . . . . . . . . . . . . . . (74.6) (89.8)
Minority interest . . . . . . . . . . . . (2.9) (3.6)
------ -------
Net assets. . . . . . . . . . . . . . . . $ 19.3 $ 20.8
------ -------
------ -------
</TABLE>

Revenues related to discontinued operations were $2.0 million and $27.2
million for the three months ended March 31, 1997 and 1998, respectively. The
net loss from discontinued operations for the three months ended March 31, 1997
was $.8 million. Net income from discontinued operations for the three months
ended March 31, 1998, was $1.1 million.

8
<PAGE>

NOTE 5 - LAND HELD FOR DEVELOPMENT

The Company owns approximately 340 acres located in Orange County,
California adjacent to the Pacific Ocean and the Bolsa Chica lowlands (which
were sold by the Company to the State of California as described below),
surrounded by the City of Huntington Beach and approximately 35 miles south of
downtown Los Angeles. The Company's holdings include approximately 200 acres to
be developed on a mesa north of the Bolsa Chica lowlands ("Warner Mesa"),
approximately 100 acres on, or adjacent to, the Huntington mesa and
approximately 40 acres of lowlands which were acquired in September 1997.

The planned community at Warner Mesa is expected to offer a broad mix of
home choices, including primarily single-family homes, as well as townhomes, at
a wide range of prices. A Local Coastal Program ("LCP") for development of up to
3,300 homes (up to 2,500 on Warner Mesa and up to 900 on the Bolsa Chica
lowlands, which were subsequently sold as discussed below) was approved by the
Orange County Board of Supervisors in December 1994 and by the California
Coastal Commission (the "Coastal Commission") in January 1996.

On February 14, 1997, the Company completed the sale of its
approximately 880-acre Bolsa Chica lowlands, which had previously been
planned for the development of up to 900 homes, to the California State Lands
Commission for $25 million. Under an interagency agreement among various
state and federal agencies, these agencies have agreed to restore the Bolsa
Chica wetlands habitat utilizing escrowed funds from the Ports of Los Angeles
and Long Beach.

A lawsuit (the "CEQA Lawsuit") challenging the approvals of the Board of
Supervisors was filed in January 1995. After remanding the matter to the Board
of Supervisors for additional processing and findings, in January 1997 the court
entered a judgment in favor of the Company. Plaintiffs in the CEQA Lawsuit have
appealed the court's decision and the appeal is pending. The California Court
of Appeal has notified the parties that a hearing will be held in June 1998,
and the Company currently anticipates that a decision on this appeal may be
rendered during the third quarter of 1998.

In March 1996, a lawsuit (the "Coastal Act Lawsuit") was filed challenging
the approvals of the Coastal Commission. The judgment in the Coastal Act Lawsuit
was entered by the court in August 1997, and required the Coastal Commission to
reconsider the filling of a 1.7 acre pond on the Warner Mesa ("Warner Pond") and
development of any homes in the Bolsa Chica lowlands. On October 9, 1997, in
response to the court's decision, the Coastal Commission approved modifications
to the LCP which eliminated the filling of Warner Pond and thereby reduced the
maximum density from 2,500 homes to no more than 1,235 homes on the mesa. On
November 18, 1997 and February 3, 1998, the Orange County Board of Supervisors
accepted the Coastal Commission's suggested modifications.

On February 20, 1998, the court ruled that the Coastal Commission should
not have narrowed the scope of public comments during the Coastal
Commission's October 1997 hearing, and ordered the Coastal Commission to hold
a third hearing on the LCP. There are numerous appeals now pending with
respect to the Coastal Act Lawsuit. In addition, the Company has appealed the
trial court's latest decision, and is pursuing all other available legal and
administrative options. In May 1998, the Court of Appeal ordered that all
pending appeals be consolidated and heard on an expedited basis. The Company
currently anticipates that a decision on these appeals may be rendered during
the fourth quarter of 1998. The litigation process will delay the previously
planned start of infrastructure construction beyond December 31, 1998;
however, the Company is unable to predict the length of such delay at this
time. The Company does not believe that the litigation process will
permanently prevent the Company from completing the Warner Mesa project;
however, there can be no assurance in that regard or that further delays will
not result.

Upon completion of the Company's Recapitalization as discussed in Note
2, the Company applied the principles required by Fresh-Start Reporting and
the carrying value of land held for development (Warner Mesa) was adjusted to
fair value as of September 2, 1997, after consideration of the October 9,
1997 Coastal Commission action discussed above. The estimation process
involved in the determination of fair value is inherently uncertain since it
requires estimates as to future events and market conditions. Such estimation
process assumes the Company's ability to complete development and dispose of
its real estate properties in the ordinary course of business based on
management's present plans and intentions. Economic, market, environmental
and political conditions may affect management's development and marketing
plans. In addition, the implementation of such development and marketing
plans could be affected by the availability of future financing for
development and construction activities. Accordingly, the ultimate fair
values of the Company's real estate properties are dependent upon future
economic and market conditions, the availability of financing, and the
resolution of political, environmental and other related issues.

9
<PAGE>

NOTE 6 - BANK DEBT

During the first quarter of 1997, the Company fully repaid the outstanding
loan balance of approximately $7.1 million under a letter of credit and
reimbursement agreement with Nomura Asset Capital Corporation. A prepayment of
$.6 million was made in January in connection with a sale of Rancho San Pasqual
lots, and the remaining balance was repaid upon the sale of the Bolsa Chica
lowlands.

Cash payments for interest on bank debt were approximately $.1 million for
the three months ended March 31, 1997.

NOTE 7 - INCOME TAXES

Upon completion of the Recapitalization, the Company experienced an
"ownership change" under Section 382 of the Internal Revenue Code (the "Code")
as a result of the increase in the percentage of the Company's stock by value
held by certain persons (including creditors who exchanged debt for stock) of
more than 50 percentage points at any time during a three-year period.
Subsequent to an ownership change, the Company's annual use of its net operating
losses ("NOLs") is generally limited to the value of the Company's equity
immediately before the ownership change multiplied by the long-term tax-exempt
rate, which for September 1997 was 5.45%.

Section 382(l)(5) of the Code, the "bankruptcy exception", provides that
if the ownership change occurs through a bankruptcy, such as the Company's
Recapitalization which utilized a prepackaged plan, and if the continuing
shareholders and "qualifying creditors" before the ownership change own at
least 50% of the Company's stock after the ownership change, the general
limitations of Section 382 will not apply. "Qualifying creditors" generally
must have held their debt at least 18 months before the prepackaged plan was
filed on July 14, 1997, or the debt must have arisen in the ordinary course
of the Company's business. The Company believes that it qualifies for the
"bankruptcy exception" of Section 382(l)(5). Under this exception, the
Company is required to reduce its NOLs by (i) the amount of interest accrued
on any debt exchanged for stock in the bankruptcy proceeding during the year
of the proceeding and the three prior taxable years and (ii) an additional
amount required to make the total reduction equal to the amount of
cancellation of indebtedness income realized. Accordingly, the Company's NOLs
of approximately $286 million as of September 2, 1997 have been reduced by
approximately $81 million, resulting in remaining NOLs available of
approximately $205 million as of September 2, 1997. As reduced, and subject
to any disallowance resulting from the proposed IRS adjustments discussed
below, the Company's NOL carryovers will be fully deductible against
post-reorganization income provided there is not a second ownership change as
discussed below, and subject to the general rules regarding expiration of
NOLs. Assuming that Section 382(1)(5) applies, the NOLs available as of March
31, 1998 are approximately $223 million.

If the Company were to experience another ownership change within two years
of the September 2, 1997 effective date of the Recapitalization, as the result
of a 50 percentage point change in ownership, the second ownership change would
not qualify for Section 382(l)(5) treatment and the use of all remaining NOLs
would be disallowed. Pursuant to Section 382(l)(5)(D), the Section 382
Limitation from and after the second ownership change would be zero, and thus
would eliminate the availability of any remaining unused portion of the $205
million of NOLs which existed as of September 2, 1997.

If the Company experiences or expects a successive ownership change prior
to the filing of its 1997 tax return, a determination could be made to elect out
of Section 382(l)(5), which would preserve some of the NOL carryovers. The
election out of Section 382(l)(5) would be irrevocable and must be made by the
due date (including any extensions of time) of the Company's 1997 tax return and
would bind the Company without regard to whether or not subsequent ownership
changes (expected or not) occur. If the Company elects out of Section 382(l)(5)
or if the requirements of such section are not met, the general rules of Section
382 would apply. However, in determining the limitation placed on the Company's
annual use of its net operating losses under those general rules, Section
382(l)(6) provides that the value of the equity of the Company immediately
before the ownership change would be deemed to include the increase in the value
of the Company's equity resulting from any surrender or cancellation of
creditors' claims due to implementation of the Recapitalization. Accordingly,
assuming the Company's post-Recapitalization equity market value of
approximately $140 million, and the long-term tax exempt rate for September 1997
of 5.45%, Section 382(l)(6) would limit the Company's utilization of its NOLs to
approximately $7.6 million per year, plus any built-in gains recognized during
the five year period following the ownership change. In summary, under Section
382(l)(5), the Company would have approximately $205 million of NOLs available
as of September 2, 1997, which the Company has estimated could be fully utilized
over the next ten years (1998-2007), whereas

10
<PAGE>

under Section 382(l)(6) only approximately $76 million of NOLs would be
available to the Company during that time frame, due to the annual limitation
described above.

The Internal Revenue Service ("IRS") has completed its examinations of the
tax returns of the Company and its consolidated subsidiaries, including formerly
affiliated entities, for the years ended December 31, 1989, 1990 and 1991. With
respect to each examination, the IRS has proposed material audit adjustments.
The Company disagrees with the positions taken by the IRS and has filed a
protest with the IRS to vigorously contest the proposed adjustments. After
review of the IRS's proposed adjustments, the Company estimates that, if upheld,
the adjustments could result in Federal tax liability, before interest, of
approximately $17 million (net of amounts which may be payable by former
affiliates pursuant to tax sharing agreements). The IRS proposed adjustments, if
upheld, could result in a disallowance of up to $132 million of available NOL
carryforwards, of which none are recognized after consideration of the valuation
allowance, as of March 31, 1998. The Company has not determined the extent of
potential accompanying state tax liability adjustments should the proposed IRS
adjustments be upheld. The Company's protest was filed in August 1995 and is
still being considered by the IRS Appeals Division. Management currently
believes that the IRS's positions will not ultimately result in any material
adjustments to the Company's financial statements. The Company is prepared to
pursue all available administrative and judicial appeal procedures with regard
to this matter and the Company is advised that its dispute with the IRS could
take up to five years to resolve.

Cash payments for federal, state and local income taxes were approximately
$.1 million for the periods ended March 31, 1997 and 1998.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

GUARANTEES OF COMMERCIAL PROJECT DEBT

As of March 31, 1998, the Company had guaranteed approximately $286.8
million of the commercial development business' project loans from various
banks for construction of commercial projects. On April 30, 1998, upon
completion of sale of the commercial development business, all of these
guarantees were assumed by KDC and the Company was released from most of its
guarantee obligations by the respective banks. The Company has not been
released by certain banks from the remaining guarantees aggregating
approximately $22.7 million. KDC has fully indemnified the Company against
any and all liability with respect to these guarantees, and has obtained a
letter of credit in favor of the Company in the amount of $1.1 million to
secure any such obligation.

11
<PAGE>

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

GENERAL

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The Company is a residential land development and homebuilding company
with properties located primarily in Southern California. The principal
activities of the Company and its consolidated subsidiaries include: (i)
obtaining zoning and other entitlements for land it owns and improving the
land for residential development; (ii) single-family residential construction
in Southern California; and (iii) providing residential real estate
development services to third parties. Once the residential land owned by the
Company is entitled, the Company may sell unimproved land to other developers
or homebuilders; sell improved land to homebuilders; or participate in joint
ventures with other developers, investors or homebuilders to finance and
construct infrastructure and homes. On April 30, 1998, the Company sold its
commercial development business as further described in Note 4 to the
Company's Financial Statements, and accordingly the financial statements have
been reclassified to present the commercial development business as
discontinued operations. The Company's immediate strategic goals are to (i)
successfully appeal the February 20, 1998 court decision which ordered a
third hearing before the California Coastal Commission (the "Coastal
Commission") to approve the Warner Mesa (formerly known as Bolsa Chica mesa)
project; (ii) complete the permitting for development of Warner Mesa; and
(iii) commence infrastructure construction on Warner Mesa as soon as
possible; however, the Company may also consider other strategic and joint
venture opportunities. There can be no assurance that the Company will
accomplish, in whole or in part, all or any of these strategic goals.

Historically, the Company has not been able to generate significant
gross operating margins or cash flows from operating activities due to the
nature of its principal assets. The substantial majority of the Company's
assets is residential land which has required significant investments before
the land could be sold to homebuilders or developed in joint ventures. In
addition, the relatively high book value of these assets has resulted in
sales approximating break-even. Pursuant to Fresh Start Reporting,
implementation of the Recapitalization through the prepackaged plan resulted
in a write-down of Warner Mesa to fair value (which will reduce future costs
of sales) and therefore, once the litigation delays are overcome and the
entitlement process is completed, the Company expects to begin generating
profits from the Warner Mesa project. However, with the February 1998 court
decision which ordered a third hearing before the Coastal Commission to
approve the LCP, the Company is faced with further delays in implementing its
plans for residential development on Warner Mesa. Furthermore, due
to the uncertainties associated with the appeals process, the Company is
unable to predict the length of such delays at this time.

Real estate held for development or sale and land held for development
(real estate properties) are carried at fair value as of September 2, 1997,
following adoption of Fresh-Start Reporting as discussed in Note 3, as
adjusted by subsequent activity. The Company's real estate properties are
subject to a number of uncertainties which can affect the fair values of
those assets. These uncertainties include litigation or appeals of regulatory
approvals (as discussed above) and availability of adequate capital,
financing and cash flow. In addition, future values may be adversely affected
by increases in property taxes, increases in the costs of labor and materials
and other development risks, changes in general economic conditions,
including higher mortgage interest rates, and other real estate risks such as
the demand for housing generally and the supply of competitive products. Real
estate properties do not constitute liquid assets and, at any given time, it
may be difficult to sell a particular property for an appropriate price.
Recently, the strengthened economy of California has resulted in improvement
in the real estate market, and the number of potential purchasers and capital
sources interested in Southern California residential properties appears to
have increased, resulting in improving prices. However, there can be no
assurance regarding the continued health of the California economy and the
strength and longevity of current conditions affecting the residential real
estate market.

LIQUIDITY AND CAPITAL RESOURCES.

The principal assets in the Company's portfolio are residential land which
must be held over an extended period of time in order to be developed to a
condition that, in management's opinion, will ultimately maximize the return to
the Company. Consequently, the Company requires significant capital to finance
its real estate development operations.

Historically, sources of capital have included bank lines of credit,
specific property financings, asset sales and available internal funds. The
Company has reported losses since 1991, with the exception of 1993 results
which included gains on dispositions and extinguishment of debt, and 1997
results which included an extraordinary gain on extinguishment of debt, and
except for the projected gain on disposition of the commercial development
business in 1998, expects to report losses until such time as sales can
commence at Warner Mesa. In

12
<PAGE>

addition, the Company's capital expenditures for project development and
infrastructure are significant. The Company completed the sale of its
commercial development business on April 30, 1998 as further described in
Note 4 to the Company's Financial Statements, which provided substantial
liquidity to fund project development costs for Warner Mesa and general and
administrative expenses. The following pro forma financial data as of March
31, 1998 gives effect to the sale of the commercial development business,
including accruals for estimated fees of the Company's investment bankers and
legal counsel, and estimated taxes payable, offset by deferred income related
to a $1 million deposit received from KDC, as if the transaction had occurred
on March 31, 1998 (in millions):

HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Assets:
Cash . . . . . . . . . . . . . $ 6.2 $ 30.3 $ 36.5
Discontinued operations. . . . 20.8 (20.8) --
All other assets . . . . . . . 148.3 -- 148.3
-------- ------ --------
$ 175.3 $ 9.5 $ 184.8
-------- ------ --------
-------- ------ --------

Total liabilities . . . . . . . . . $ 35.2 $ -- $ 35.2
Stockholders' equity. . . . . . . 140.1 9.5 149.6
-------- ------ --------
$ 175.3 $ 9.5 $ 184.8
-------- ------ --------
-------- ------ --------
</TABLE>

FINANCIAL CONDITION

MARCH 31, 1998 COMPARED WITH DECEMBER 31, 1997

The $1.0 million decrease in cash and cash equivalents primarily reflects
spending for project development costs for Warner Mesa, and general and
administrative expenses, offset by net proceeds from the sale of two commercial
development projects and an industrial building in Naples, Florida during the
first quarter of 1998, and the receipt of a $1.0 million deposit in connection
with the sale of the commercial development business which was completed on
April 30, 1998, as well as other activity presented in the Statements of Cash
Flows.

The $1.5 million increase in land held for development reflects investment
in the Warner Mesa project during the first quarter.

The $1.7 million increase in accounts payable and accrued liabilities
primarily reflects the deposit received in connection with the sale of the
commercial development business.

RESULTS OF OPERATIONS

The nature of the Company's business is such that individual transactions
often cause significant fluctuations in operating results from year to year.
In addition, the Company's completion of the Recapitalization has
significantly deleveraged its capital structure. Furthermore, the restatement
of assets and liabilities to reflect fair value as of September 2, 1997 under
Fresh-Start Reporting will reduce future costs of sales for Warner Mesa, while
increasing interest and amortization expense related to discounted
liabilities and Reorganization Value in Excess of Amounts Allocated to Net
Assets.

THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
1997

The decrease in revenues from $28.9 million in the 1997 period to $.4
million in the 1998 period and the decrease in the related costs of sales
from $28.7 million in the 1997 period to $.1 million in the 1998 period
reflect the first quarter 1997 sale of the Bolsa Chica lowlands to the State
of California for $25 million and the $3.1 million sale of a build-to-suit
project in Signal Hill, California, compared with the sale of an industrial
building in Naples, Florida in the first quarter of 1998.

Except for the remaining 35 phase I residential lots at Rancho San
Pasqual in Escondido, California which were sold on April 3, 1998 to a
homebuilder for approximately $1.6 million, the Company does not currently
expect to report any further revenues during the remainder of 1998, primarily
due to the litigation delays with respect to the Warner Mesa project. The
Company is completing plans to build homes on the 112 lots remaining in phase
II at Rancho San Pasqual which are expected to open for sales in 1999.

13
<PAGE>

General and administrative expenses in the first quarter of 1997 include
approximately $.2 million of non-recurring costs incurred in connection with the
exchange offer for the Company's subordinated debentures.

The decrease in interest expense reflects the absence in the first
quarter of 1998 of (i) interest on the subordinated debentures after they
were cancelled on September 2, 1997, the effective date of the
Recapitalization, and (ii) interest on bank debt which was repaid in February
1997. The $.3 million of noncash interest expense in the first quarter of
1998 reflects interest expense on (i) discounted liabilities under
Fresh-Start Reporting and (ii) capital contribution notes due to a
partnership.

The absence of other expense, net for the three months ended March 31,
1998 primarily reflects amortization of Reorganization Value in Excess of Net
Assets offset by interest income. The $3.7 million in other income, net for
the three months ended March 31, 1997 primarily reflects nonrecurring income
from (i) the sale of a minority interest in a privately held company, and
(ii) gains recognized in connection with the settlement of certain claims.

The benefits for income taxes for the three months ended March 31, 1997 and
1998 have been offset by corresponding valuation allowances.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

NONE.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain of the foregoing information as well as certain information set
forth in Part II of this report under the heading "Legal Proceedings" is forward
looking in nature and involves risks and uncertainties that could significantly
impact the ability of the Company to achieve its currently anticipated goals and
objectives. These risks and uncertainties include, but are not limited to
litigation or appeals of regulatory approvals (including appeals of the trial
court decisions in the CEQA Lawsuit and the Coastal Act Lawsuit related to the
Company's principal asset, Warner Mesa), injunctions prohibiting implementation
of approved development plans pending the outcome of litigation, and
availability of adequate capital, financing and cash flow. In addition, future
values may be adversely affected by increases in property taxes, increases in
the costs of labor and materials and other development risks, changes in general
economic conditions, including higher mortgage interest rates, and other real
estate risks such as the demand for housing generally and the supply of
competitive products. Real estate properties do not constitute liquid assets
and, at any given time, it may be difficult to sell a particular property for an
appropriate price. Other significant risks and uncertainties are discussed in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.

14
<PAGE>

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

See Note 5 of "Notes to Financial Statements" included herein and
"Item 1 - Business - Corporate Idemnification Matters" and "Item 3 -
Legal Proceedings" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.1 Employment Agreement dated as of May 1, 1998 between the
Registrant and Mr. Raymond J. Pacini.

10.2 Employment Agreement dated as of May 1, 1998 between the
Registrant and Ms. Sandra G. Sciutto.

27.1 Financial Data Schedule.

(b) Reports on Form 8-K:

Current Report on Form 8-K dated February 20, 1998 attaching a
press release announcing the Registrant's plans to appeal the San
Diego Superior Court's ruling that the California Coastal
Commission did not fully comply with the requirements of the
Coastal Act when it reconsidered the Bolsa Chica Local Coastal
Program Amendment during a hearing in October 1997.

SIGNATURE

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

CALIFORNIA COASTAL COMMUNITIES, INC.

Date May 14, 1998 By: /s/ Sandra G. Sciutto
--------------- ------------------------------------
SANDRA G. SCIUTTO
Senior Vice President and
Chief Financial Officer

<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is entered into as of May 1, 1998 by and between
California Coastal Communities, Inc., a Delaware corporation (formerly known as
Koll Real Estate Group, Inc.) ("Employer"), and RAYMOND J. PACINI ("Executive").

WITNESSETH:

WHEREAS, Executive has served Employer in various executive capacities
and Employer desires to obtain the benefit of continued service by Executive,
and Executive desires to render continued services to Employer;

WHEREAS, the Board of Directors of Employer (the "Board") has
determined that because of Executive's substantial experience and business
relationships in connection with the business of Employer, it is in the
Employer's best interest and that of its stockholders to secure services of
Executive and to provide Executive certain additional benefits; and

WHEREAS, Employer and Executive desire to set forth in this Agreement
the terms and conditions of Executive's employment with Employer.

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

SECTION 1. TERM. Employer agrees to employ Executive and Executive
agrees to serve Employer, in accordance with the terms of this Agreement, for a
term of two (2) years, commencing on the date hereof.

SECTION 2. SERVICES. So long as this Agreement shall continue in
effect, Executive shall use his commercially reasonably efforts and abilities to
promote Employer's business, affairs and interests, and shall perform the
services contemplated by this Agreement in accordance with policies established
by and under the direction of the Board.

SECTION 3. SPECIFIC POSITION; DUTIES AND RESPONSIBILITIES. Employer
and Executive agree that, subject to the provisions of this Agreement, Employer
will employ Executive and Executive will serve Employer as a senior officer for
the duration of this Agreement. The specific job position in which Executive
shall serve shall be President and Chief Executive Officer. Executive agrees to
observe and comply with the rules and regulations of Employer as adopted by the
Board respecting the performance of Executive's duties and agrees to carry out
and perform directions and policies of Employer and its Board as they may be,
from time to time, stated either orally or in writing. Employer agrees that the
duties which may be assigned to Executive shall be usual and customary duties of
the job position set forth in this Section 3, and shall not be inconsistent with
the provisions of the charter documents of Employer or applicable law.
Executive

<PAGE>

shall have such corporate power and authority as shall reasonably be required to
enable the discharge of duties in any office that may be held.

SECTION 4. COMPENSATION.

(a) BASE SALARY AND TAX EQUALIZATION.

(i) BASE SALARY. During the term of this Agreement, Employer
agrees to pay Executive a base salary of at least Two Hundred Seventy Five
Thousand Dollars ($275,000) per year in semi-monthly installments on the same
dates the other senior officers of Employer are paid ("Base Salary").

(ii) TAX EQUALIZATION. Executive shall also be entitled to receive
a tax equalization payment of One Million Fifty Eight Thousand Four Hundred
Forty Six Dollars ($1,058,446), which is intended to reimburse Executive for
the amount of federal and state income taxes payable in connection with this
amount and the grant of the restricted shares provided in Section 4(d) below,
and which amount shall be paid on the date the restricted shares are issued to
Executive.

(b) ADDITIONAL BENEFITS. Executive shall also be entitled to all rights
and benefits under any bonus plan, incentive, participation or extra
compensation plan, pension plan, profit-sharing plan, life, medical, dental,
disability, or insurance plan or policy or other plan or benefit that Employer
or its subsidiaries may provide for Executive (provided Executive is eligible to
participate therein) or employees of Employer generally as from time to time in
effect during the term of this Agreement (the "Plans"). In any event, Employer
shall provide Executive with term life insurance, health insurance and long-term
disability insurance provided for Employer's executive employees generally.
Executive shall also be entitled to fringe benefits in accordance with the
plans, practices, programs and policies as in effect generally with respect to
other peer executives of Employer.

(c) STOCK OPTIONS. The stock options ("Stock Options") previously granted
to Executive as of April 28, 1997 shall remain in full force and effect with
respect to the purchase of 189,996 shares of Employer's common stock ("Option
Shares"), at the exercise price per share equal to $11.99. The Stock Options
will continue to vest, subject to Employer's Amended and Restated 1993 Stock
Option/Stock Issuance Plan, over the three year period that commenced on April
28, 1997 with 40%, 30% and 30% vesting on each of the first, second and third
anniversaries of the effective date of the grant of the Stock Options. The
vesting of the Stock Options shall continue to be subject to acceleration as
provided in Section 5(d) below upon a termination without cause or upon the
occurrence of a Change in Control, as defined below in Section 5(d). The more
specific terms and conditions of such Stock Options shall continue to be
governed by the Stock Option Agreement entered into by and between Employer and
Executive ("Stock Option Agreement").

(d) RESTRICTED STOCK. Executive shall immediately be granted 100,000
shares of common stock of Employer 50% of which shall vest on each anniversary
of the effective date of this Agreement, and which shall be subject to the
following restrictions (the "Restricted Stock"):

2.
<PAGE>

(i) the number of unvested shares of the Restricted Stock, shall be
subject to forfeiture and return to the Employer in the event that Employee is
terminated "for cause" pursuant to the provisions of Section 5(c), or
voluntarily terminates his employment prior to the expiration of the term of
this Agreement;

(ii) during the term of this Agreement, without the prior consent of
the Board of Directors of Employer, none of the shares of Restricted Stock shall
be subject to sale, transfer, hypothecation or encumbrance; and

(iii) during the term of this Agreement, the stock certificate(s)
representing the Restricted Stock shall bear a legend with respect to the
foregoing restrictions.

(e) PERQUISITES.

(i) VACATION. Executive shall be entitled to four (4) weeks of
paid vacation each twelve-month period, which shall accrue on a monthly basis.
Such vacation shall be taken at such time or times as shall not unduly disrupt
the orderly conduct of the business of Employer and the duties of Executive. At
the time of any termination of employment, Executive shall be paid for all
accrued but unused vacation.

(ii) AUTO ALLOWANCE. During the term of this agreement, Employer
shall provide Executive a monthly automobile allowance in the amount of $800
plus reimbursement of operating costs as is currently covered under Employer's
Auto Allowance Policy.

(f) OVERALL QUALIFICATION. Employer reserves the right to modify, suspend
or discontinue any and all practices, policies and programs generally applicable
to executives and other similarly situated executives at any time (whether
before or after termination of employment) without notice to or recourse by
Executive; however, Employer shall not amend the perquisites set forth in
Section 4(e) to reduce Executive's benefits thereunder during the term of this
Agreement.

SECTION 5. TERMINATION. The compensation and other benefits provided
to Executive pursuant to this Agreement, and the employment of Executive by
Employer, shall be terminated prior to expiration of the term of this Agreement
only as provided in this Section 5:

(a) DISABILITY. In the event that Executive shall fail, because of
illness, incapacity or injury which is determined to be total ("Disability") by
a physician selected by Employer or its insurers and acceptable to Executive or
Executive's legal representative (such agreement as to acceptability not to be
withheld unreasonably), to render, for three consecutive months or for shorter
periods aggregating ninety (90) or more business days in any twelve (12)-month
period, the services contemplated by this Agreement, Executive's employment
hereunder may be terminated by sixty (60) days' prior written notice of
termination from Employer to Executive. Thereafter, Employer shall continue to
(i) pay the Base Salary to Executive for a period of six (6) months after the
date of termination, subject to adjustments referenced in the following
paragraph, and (ii) provide medical insurance as in effect prior to such
termination for a period of six (6) months following the date of termination.
Thereafter, no further salary shall be paid or medical insurance be provided.
Executive's rights under the Plans subsequent to termination of employment

3.
<PAGE>

pursuant to this paragraph shall be determined under the applicable provisions
of the respective Plans, unless otherwise expressly stated herein. This
Agreement in all other respects will terminate upon the termination of
employment pursuant to this paragraph.

The amount of compensation to be paid to Executive pursuant to the
preceding paragraph shall be adjusted in the event Executive becomes entitled to
and receives disability benefits under any disability payment plan, including
disability insurance. The amount of Executive's compensation otherwise payable
by Employer pursuant to the preceding paragraph shall be reduced, on a
dollar-for-dollar basis, but not to less than zero, by the amount of any such
disability benefits received by Executive, but only to the extent such benefits
are attributable to payments made by Employer.

(b) DEATH. In the event of Executive's death during the term of this
Agreement, Executive's Base Salary shall immediately terminate and Employer
shall pay to the estate of Executive the Base Salary accrued to the date of
Executive's death to the extent not theretofore paid. If Executive's death
occurs while receiving payments under Section 5(a) above, such payments shall
cease. Executive's rights under the Plans subsequent to his death shall be
determined under the applicable provisions of the respective Plans; PROVIDED
that, notwithstanding any provisions to the contrary therein, (i) Employer shall
continue to provide medical insurance to the dependents of Executive for a
period of six (6) months following the death of Executive, (ii) Stock Options
shall be exercisable only to the extent the rights had vested at the time of
death of Executive. This Agreement in all other respects will terminate upon
the death of Executive; and (iii) all restrictions applicable to the Restricted
Stock shall be removed.

(c) FOR CAUSE. The employment of Executive hereunder shall be terminable
by Employer in the event that Executive (i) is or has been engaging in willful
or grossly negligent conduct which has resulted in a failure to perform
Executive's duties hereunder or, (ii) has committed an act of dishonesty, gross
negligence or misconduct, which has a direct, substantial and adverse effect on
Employer, its business or reputation.

Notwithstanding the foregoing, Executive shall not be terminated for
cause pursuant to the first paragraph of this subsection 5(c) unless and until
Executive has received written notice of a proposed termination for cause and
Executive has had an opportunity to be heard before at least a majority of the
number of members of the Board authorized to take such action. Executive shall
be deemed to have had such opportunity if given written or telephonic notice by
any director at least 72 hours in advance of a meeting.

In the event of Executive's termination pursuant to this subsection
5(c), Executive's rights to receive Base Salary shall immediately terminate and
Employer shall pay to Executive his Base Salary and vacation accrued to the date
of such termination to the extent not theretofore paid. Executive's rights
under the Plans subsequent to termination shall be determined under the
applicable provisions of the respective plans; provided, however, that Stock
Options shall be exercisable only to the extent the rights had vested at the
time of such termination, and only the shares of Restricted Stock determined in
accordance with the provisions of Section 4(d) shall be retained by Executive
with all other shares of Restricted Stock shall be returned to Employer for
cancellation. This Agreement in all other respects will terminate upon such
termination.

4.
<PAGE>

(d) WITHOUT CAUSE. Notwithstanding any other provision of this Section 5,
the Board shall have the right to terminate Executive's employment with Employer
without cause at any time upon at least thirty (30) days' prior written notice
to Executive. The following conditions shall thereupon become applicable:

(i) SEVERANCE PAY. Employer shall continue to pay Executive the
Base Salary on a semi-monthly basis for the remainder of the two (2) year term
of this Agreement.

(ii) MEDICAL INSURANCE CONTINUATION. Employer shall continue to
provide (under COBRA) medical insurance as in effect prior to such termination
for twelve (12) months following such termination, and Employer shall bear all
costs for such insurance.

(iii) ACCELERATED VESTING; REMOVAL OF STOCK RESTRICTIONS. Despite
the vesting requirements set forth in the Stock Option Agreement and the
restrictions applicable to the Restricted Stock as set forth in Section 4(d),
termination of employment pursuant to this subsection 5(d) or the occurrence of
a Change in Control (as defined below) shall result in an immediate vesting of
the right to exercise the Stock Options with respect to one hundred percent
(100%) of the Option Shares and the immediate removal of all restrictions
applicable to then Restricted Stock.

For purposes of the foregoing paragraph, a "Change of Control" means,
and shall be deemed to have taken place upon, the occurrence of: (i) a
transaction requiring stockholder approval involving the sale of all or
substantially all of the assets of Employer or the merger of Employer with or
into another corporation or business entity, other than a transaction in which
stockholders of Employer immediately prior to the closing of such transaction
own a majority of the acquiring corporation or entity immediately after giving
effect to such transaction, or (ii) the acquisition by any Person as Beneficial
Owner (as such terms are defined in the Securities Exchange Act of 1934, as
amended), directly or indirectly, of securities of Employer representing fifty
percent (50%) or more of the total voting power represented by Employer's then
outstanding voting securities.

(e) VOLUNTARY TERMINATION. At any time during the term of this Agreement,
Executive shall have the right, upon thirty (30) days' prior written notice to
Employer, to terminate his employment with Employer. Upon termination of
Executive's employment pursuant to this subsection 5(e), (i) Executive's right
to receive Base Salary shall immediately terminate and Employer shall pay to
Executive his Base Salary accrued to the date of such termination to the extent
not theretofore paid, (ii) Executive's rights under the Plans subsequent to such
termination shall be determined under the applicable provisions of the
respective Plans, and (iii) Stock Options held by Executive shall be exercisable
only to the extent the rights had vested at the time of such termination, and
only the shares of Restricted Stock determined in accordance with the provisions
of Section 4(d) shall be retained by Executive and all other shares of
Restricted Stock shall be returned to Employer for cancellation. This Agreement
in all other respects will terminate upon such termination.

5.
<PAGE>

(f) TERMINATION BY EXECUTIVE FOR "GOOD REASON". Notwithstanding any other
provisions of this Agreement, Employer shall provide Executive with the payments
and benefits set forth in Section 5(d) in the event Executive terminates
employment for "Good Reason." For purposes of this Agreement, "Good Reason" for
Executive to terminate employment shall mean voluntary termination as a result
of (i) the assignment to Executive of duties inconsistent with the position and
status of Executive as set forth in this Agreement without Executive's prior
written consent, (ii) a substantial alteration in the nature, status or prestige
of Executive's responsibilities as set forth in this Agreement or a change in
Executive's title or reporting level from that set forth in this Agreement,
(iii) the relocation of Employer's executive offices or principal business
location to a point more than twenty-five (25) miles from the location of such
offices or business as of the date of this Agreement, (iv) reduction by Employer
of Executive's Base Salary in effect on the date hereof or as the same may be
increased from time to time, (v) any action by Employer (including the
elimination of benefit plans without providing substitutes therefor or the
reduction of Executive's benefits thereunder) that would substantially diminish
the aggregate value of Executive's incentive awards and other fringe benefits,
or (vi) a failure by Employer to obtain from any successor, before the
succession takes place, an agreement to assume and perform this Agreement.

SECTION 6. BUSINESS EXPENSES. During the term of this Agreement,
Employer shall reimburse Executive promptly for reasonable business
expenditures, including travel, entertainment, parking, business meetings,
Pacific Club dues, and professional dues made and substantiated in accordance
with policies, practices and procedures established from time to time by the
Board and incurred in pursuit and furtherance of Employer's business and
goodwill.

SECTION 7. MISCELLANEOUS.

(a) SUCCESSION; SURVIVAL. This Agreement shall inure to the benefit of
and shall be binding upon Employer, its successors and assigns. Absent the
prior written consent of Executive, this Agreement may not be assigned by
Employer other than in connection with a merger or sale of all or substantially
all the assets of Employer or a similar transaction in which the successor or
assignee assumes (whether by operation of law or express assumption) all
obligations of Employer hereunder. The obligations and duties of Executive
hereunder are personal and otherwise not assignable. Executive's obligations
and representations under this Agreement will survive the termination of
Executive's employment, regardless of the manner of such termination.

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

California Coastal Communities, Inc.
4343 Von Karman Avenue
Newport Beach, California 92660
Attention: Secretary

6.
<PAGE>

notice or other communication shall be effective (i) if given by
telecommunication, when transmitted to the applicable number so specified in (or
pursuant to) this Section 7 and an appropriate answer back is received, (ii) if
given by mail, three days after such communication is deposited in the mails
with first class postage prepaid, addressed as aforesaid or (iii) if given by
any other means, when actually delivered at such address.

(c) ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and it supersedes
any prior agreements, undertakings, commitments and practices relating to
Executive's employment by Employer including, without limitation, the Employment
Agreement between Employer and Executive dated as of April 28, 1997. No
amendment or modification of the terms of this Agreement shall be valid unless
made in writing and signed by Executive and, on behalf of Employer, by an
officer expressly so authorized by the Board.

(d) WAIVER. No failure on the part of any party to exercise or delay in
exercising any right hereunder shall be deemed a waiver thereof or of any other
right, nor shall any single or partial exercise preclude any further or other
exercise of such right or any other right.

(e) CHOICE OF LAW. This Agreement, the legal relations between the
parties and any action, whether contractual or non-contractual, instituted by
any party with respect to matters arising under or growing out of or in
connection with or in respect of this Agreement, the relationship of the parties
or the subject matter hereof shall be governed by and construed in accordance
with the laws of the State of California, applicable to contracts made and
performed in such State and without regard to conflicts of law doctrines, to the
extent permitted by law.

(f) ATTORNEY'S FEES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to recover reasonable attorney's fees, costs and necessary
disbursements from the non-prevailing party in addition to any other relief to
which such party may be entitled.

(g) CONFIDENTIALITY; PROPRIETARY INFORMATION. Executive agrees to not
make use of, divulge or otherwise disclose, directly or indirectly, any trade
secret or other confidential or proprietary information concerning the business
(including but not limited to its products, employees, services, practices or
policies) of Employer or any of its affiliates of which Executive may learn or
be aware as a result of Executive's employment during the term of the Agreement
or prior thereto as stockholder, employee, officer or director of, or consultant
to, Employer, except to the extent such use or disclosure is (i) necessary to
the performance of this Agreement and in furtherance of Employer's best
interests, (ii) required by applicable law, (iii) lawfully obtainable from other
public sources, or (iv) authorized in writing by or pursuant to a written
agreement with Employer. The provisions of this subsection (g) shall survive
the expiration, suspension or termination, for any reason, of this Agreement.

7.
<PAGE>

circumstances, it shall nevertheless remain in full force and effect in all
other circumstances, to the fullest extent permitted by law.

(i) WITHHOLDING; DEDUCTIONS. All compensation payable hereunder,
including salary and other benefits, shall be subject to applicable taxes,
withholding and other required, normal or elected employee deductions.

(j) SECTION HEADINGS. Section and other headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.

(k) COUNTERPARTS. This Agreement and any amendment hereto may be executed
in one or more counterparts. All of such counterparts shall constitute one and
the same agreement and shall become effective when a copy signed by each party
has been delivered to the other party.

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

"EMPLOYER"

CALIFORNIA COASTAL COMMUNITIES, INC.

By /s/ SANDRA G. SCIUTTO
---------------------------------
Sandra G. Sciutto
Chief Financial Officer

"EXECUTIVE"

/s/ RAYMOND J. PACINI
------------------------------------
RAYMOND J. PACINI

<PAGE>

EMPLOYMENT AGREEMENT

WITNESSETH:

WHEREAS, Employer and Executive desire to set forth in this Agreement
the terms and conditions of Executive's employment with Employer.

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

SECTION 2. SERVICES. So long as this Agreement shall continue in
effect, Executive shall use her commercially reasonably efforts and abilities to
promote Employer's business, affairs and interests, and shall perform the
services contemplated by this Agreement in accordance with policies established
by the Company.

SECTION 3. SPECIFIC POSITION; DUTIES AND RESPONSIBILITIES. Employer
and Executive agree that, subject to the provisions of this Agreement, Employer
will employ Executive and Executive will serve Employer as a senior officer for
the duration of this Agreement. The specific job position in which Executive
shall serve shall be Senior Vice President, Chief Financial Officer, Treasurer
and Secretary. Executive agrees to observe and comply with the rules and
regulations of Employer as adopted by the Board respecting the performance of
Executive's duties and agrees to carry out and perform directions and policies
of Employer and its Board as they may be, from time to time, stated either
orally or in writing. Employer agrees that the duties which may be assigned to
Executive shall be usual and customary duties of the job position set forth in
this Section 3, and shall not be inconsistent with the provisions of the charter
documents of Employer or

1.
<PAGE>

applicable law. Executive shall have such corporate power and authority as
shall reasonably be required to enable the discharge of duties in any office
that may be held.

SECTION 4. COMPENSATION.

(a) BASE SALARY AND TARGET BONUS.

(i) BASE SALARY. During the term of this Agreement, Employer
agrees to pay Executive a base salary of at least One Hundred Fifty Thousand
Dollars ($150,000) per year in semi-monthly installments on the same dates the
other senior officers of Employer are paid ("Base Salary").

(ii) BONUS. Employer agrees to provide Executive with an incentive
bonus of up to One Hundred Fifty Thousand Dollars ($150,000), based upon the
amounts for each performance target which will be mutually agreed upon and set
forth on SCHEDULE A to be attached hereto.

(ii) AUTO ALLOWANCE. During the term of this agreement, Employer
shall provide Executive a monthly automobile allowance in the amount of $550
plus reimbursement of operating costs as is currently covered under Employer's
Auto Allowance Policy.

(d) OVERALL QUALIFICATION. Employer reserves the right to modify, suspend
or discontinue any and all practices, policies and programs generally applicable
to executives and other similarly situated executives at any time (whether
before or after termination of employment) without notice to or recourse by
Executive; however, Employer shall not amend the perquisites set forth in
Section 4(c) to reduce Executive's benefits thereunder during the term of this
Agreement.

2.
<PAGE>

SECTION 5. TERMINATION. The compensation and other benefits provided to
Executive pursuant to this Agreement, and the employment of Executive by
Employer, shall be terminated prior to expiration of the term of this Agreement
only as provided in this Section 5:

(b) DEATH. In the event of Executive's death during the term of this
Agreement, Executive's Base Salary shall immediately terminate and Employer
shall pay to the estate of Executive the Base Salary accrued to the date of
Executive's death to the extent not theretofore paid. If Executive's death
occurs while receiving payments under Section 5(a) above, such payments shall
cease. Executive's rights under the Plans subsequent to her death shall be
determined under the applicable provisions of the respective Plans; PROVIDED
that, notwithstanding any provisions to the contrary therein, Employer shall
continue to provide medical insurance to the dependents of Executive for a
period of six (6) months following the death of Executive. This Agreement in
all other respects will terminate upon the death of Executive.

Notwithstanding the foregoing, Executive shall not be terminated for
cause pursuant to the first paragraph of this subsection 5(c) unless and until
Executive has

3.
<PAGE>

received written notice of a proposed termination for cause and Executive has
had an opportunity to be heard before at least a majority of the number of
members of the Board authorized to take such action. Executive shall be deemed
to have had such opportunity if given written or telephonic notice by any
director at least 72 hours in advance of a meeting.

(i) SEVERANCE PAY. Employer shall continue to pay Executive the
Base Salary on a semi-monthly basis for the remainder of the two (2) year term
of this Agreement.

(iii) BONUS PAYMENT. If Executive is terminated without cause,
Executive shall also be paid for any potential bonuses under this Agreement (the
"Bonus Severance"). The amount of any such Bonus Severance shall be equal to
the full amount of any unpaid target bonus payment(s) set forth on SCHEDULE A.

(e) VOLUNTARY TERMINATION. At any time during the term of this Agreement,
Executive shall have the right, upon thirty (30) days' prior written notice to
Employer, to terminate her employment with Employer. Upon termination of
Executive's employment pursuant to this subsection 5(e), (i) Executive's right
to receive Base Salary shall immediately terminate and Employer shall pay to
Executive her Base Salary accrued to the date of such termination to the extent
not theretofore paid and (ii) Executive's rights under the Plans subsequent to
such termination shall be determined under the applicable provisions of the
respective Plans. This Agreement in all other respects will terminate upon such
termination.

4.
<PAGE>

nature, status or prestige of Executive's responsibilities as set forth in this
Agreement or a change in Executive's title or reporting level from that set
forth in this Agreement, (iii) the relocation of Employer's executive offices or
principal business location to a point more than twenty-five (25) miles from the
location of such offices or business as of the date of this Agreement, (iv)
reduction by Employer of Executive's Base Salary in effect on the date hereof or
as the same may be increased from time to time, (v) any action by Employer
(including the elimination of benefit plans without providing substitutes
therefor or the reduction of Executive's benefits thereunder) that would
substantially diminish the aggregate value of Executive's incentive awards and
other fringe benefits, or (vi) a failure by Employer to obtain from any
successor, before the succession takes place, an agreement to assume and perform
this Agreement.

SECTION 6. BUSINESS EXPENSES. During the term of this Agreement,
Employer shall reimburse Executive promptly for reasonable business
expenditures, including travel, entertainment, parking, business meetings and
professional dues made and substantiated in accordance with policies, practices
and procedures established from time to time by the Board and incurred in
pursuit and furtherance of Employer's business and goodwill.

SECTION 7. MISCELLANEOUS.

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

California Coastal Communities, Inc.
4343 Von Karman Avenue
Newport Beach, California 92660
Attention: Chief Executive Officer

or at such other address as Employer may from time to time in writing designate,
and if to Executive at such address as Executive may from time to time in
writing designate (or Executive's business address of record in the absence of
such designation). Each such notice or other communication shall be effective
(i) if given by telecommunication, when transmitted to the applicable number so
specified in (or pursuant to) this Section 7 and an appropriate answer back is
received, (ii) if given by mail, three days after such communication is
deposited in the mails with first class postage prepaid, addressed as aforesaid
or (iii) if given by any other means, when actually delivered at such address.

5.
<PAGE>

(c) ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and it supersedes
any prior agreements, undertakings, commitments and practices relating to
Executive's employment by Employer. No amendment or modification of the terms
of this Agreement shall be valid unless made in writing and signed by Executive
and, on behalf of Employer, by an officer expressly so authorized by the Board.

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

6.
<PAGE>

(j) SECTION HEADINGS. Section and other headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.

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

"EMPLOYER"

CALIFORNIA COASTAL COMMUNITIES, INC.

By /s/ RAYMOND J. PACINI
--------------------------------
Raymond J. Pacini
Chief Executive Officer

"EXECUTIVE"

/s/ SANDRA G. SCIUTTO
------------------------------------
SANDRA G. SCIUTTO

<PAGE>
<ARTICLE> 5
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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</TABLE>