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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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 Identification
incorporation or organization) No.)
6 EXECUTIVE CIRCLE, SUITE 250 92614
IRVINE, CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 250-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.05 PER SHARE
(TITLE OF CLASS)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES /X/ NO / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1999 was $45,751,723.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 Common Stock outstanding as of March 1, 1999 was
11,477,610.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-K.
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PART I
ITEM 1. BUSINESS
California Coastal Communities, Inc. (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. In April
1998, the Company sold its commercial development business as further described
in Note 4 to the Company's Financial Statements included in this Annual Report.
During 1999, the Company will focus its immediate efforts to (i) successfully
appeal the trial court's decisions which reversed the California Coastal
Commission's (the "Coastal Commission") approvals of the Warner Mesa project, as
further discussed in Note 5 to the Company's Financial Statements included in
this Annual Report; (ii) complete the secondary 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.
The Company's executive offices are located at 6 Executive Circle, Suite
250, Irvine, California 92614 (telephone: (949) 250-7700).
PRINCIPAL PROPERTIES
The following sections describe the Company's principal properties.
WARNER MESA. The Warner Mesa property is the principal property in the
Company's portfolio, located within the land area collectively known as Bolsa
Chica. Warner Mesa is one of the last large undeveloped coastal properties in
Southern California, and is located in Orange County, approximately 35 miles
south of downtown Los Angeles. Warner Mesa is bordered on the north and east by
residential development, to the south by open space and the Bolsa Chica
wetlands, and to the west by the Pacific Coast Highway, the Bolsa Chica State
Beach, and the Pacific Ocean. Following the Company's February 1997 sale of the
approximately 880-acre Bolsa Chica wetlands property to the State of California,
as described below, and the September 1997 acquisition of 40 acres of lowlands,
the Company owns approximately 340 acres of the 1,600 acres of undeveloped land
at Bolsa Chica. The Company's holdings include approximately 200 acres to be
developed on the Warner Mesa, approximately 100 acres on, or adjacent to, the
Huntington mesa and the approximately 40 acres of lowlands 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. 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 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 and wetlands restoration, 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 California Environmental Quality Act lawsuit, the "CEQA
Lawsuit") challenging the approvals of the Board of Supervisors was filed in
January 1995. The Superior Court decided certain issues
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against the Company, and the majority of issues in favor of the Company. Both
the Company and the plaintiffs appealed. On appeal, the Court of Appeal reversed
the trial court, deciding all issues in favor of the Company, and thereby
affirming the validity of the project approvals and the project environmental
impact report ("EIR"). The Court of Appeal also reversed the trial court's award
of attorneys' fees to the plaintiffs.
In March 1996, a lawsuit (the "Coastal Act Lawsuit") was filed challenging
the January 1996 approvals of the Coastal Commission. The judgment in the
Coastal Act Lawsuit was entered by the trial 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. The August 1997 judgment was appealed by both the project opponents
and the Company as discussed below. In October 1997, in response to the trial
court's decisions, the Coastal Commission approved modifications to the LCP
which eliminated the filling of Warner Pond and thereby reduced the maximum
number of homes to be built from 2,500 to no more than 1,235 homes on Warner
Mesa. The Orange County Board of Supervisors subsequently accepted the Coastal
Commission's suggested modifications. However, in February 1998, the trial court
ruled that the Coastal Commission should not have narrowed the scope of public
comments during the Coastal Commission's October 1997 hearing, and in March 1998
the trial court ordered the Coastal Commission to hold a third hearing on the
LCP. In May 1998, the Company appealed the trial court's March 1998 decision on
the LCP (the "Second Appeal"). A hearing date for the Second Appeal has not yet
been scheduled by the Court of Appeal.
In October 1997, opponents of the Warner Mesa project appealed the trial
court's August 1997 decision on the basis that the trial court should have
reversed the Coastal Commission's January 1996 approval allowing relocation of
certain raptor habitat. The Company also appealed the trial court's decisions
which reversed the Coastal Commission's January 1996 approval (a) allowing
Warner Pond to be filled and (b) allowing residential development in lowlands.
On October 14, 1998, the Court of Appeal completed its hearing on this first set
of appeals. The Court of Appeal normally renders its decision within the 90 day
period following such a hearing. However, on January 21, 1999 the court ordered
the matter to be resubmitted for further consideration due to the complexity of
the issues. The court could render a decision at any time within 90 days of the
January 21, 1999 order.
In the event that the Company prevails on all of the relevant issues raised
in the first set of appeals, it would not be necessary for the Company to pursue
its Second Appeal and, upon obtaining various secondary permits, construction
could commence under the January 1996 LCP approved by the Coastal Commission for
development of up to 2,500 homes on Warner Mesa. Alternatively, if the Company
pursues and is successful in the Second Appeal, it would then be allowed to
complete the processing of secondary permits and commence infrastructure
construction under the modified LCP approved by the Coastal Commission in
October 1997 for development of up to 1,235 homes on Warner Mesa. If the Company
does not prevail in the first set of appeals with respect to affirmation of the
trial court's decision allowing relocation of raptor habitat, then the Coastal
Commission would be required to hold a third public hearing on the LCP.
While litigation delays may continue, the Company believes that if an early
resolution were to occur, it would allow the start of infrastructure
construction later in 1999. The Company does not believe that the litigation
process will ultimately prevent it from developing the planned community at
Warner Mesa; however, there can be no assurance in that regard or that further
delays will not result.
The Company is processing a site plan in the City of Huntington Beach, in
compliance with existing zoning, for a 16-unit project on approximately five
acres of Warner Mesa. The project, known as Sandover, is adjacent to the
Company's land in Orange County, and requires no approvals outside the City of
Huntington Beach. A tentative tract map for the Sandover project was approved by
the City's Subdivision Review Committee in February 1999 and is scheduled for a
public hearing before the City's Planning Commission in April 1999. Upon
approval by the Planning Commission, and subject to any appeal to the
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City Council, the Company expects to begin construction of this 16-unit project
in the third quarter of 1999.
Upon completion of the Company's Recapitalization as discussed in Note 3,
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 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.
RANCHO SAN PASQUAL (FORMERLY EAGLE CREST). In the City of Escondido in San
Diego County, approximately 30 miles north of downtown San Diego, the Company is
developing an 850-acre, gated community consisting of 580 residential lots
surrounding an 18-hole championship golf course which the Company operated from
May 1993 to June 1996. The Company sold its Eagle Crest Golf Course at Rancho
San Pasqual in June 1996, to a nationally recognized owner/operator of high-end
daily fee golf courses and private country clubs for $6.1 million.
Infrastructure construction was partially financed in 1995 and 1996 by a major
financial institution which provided a total of $10 million in construction
loans for the project. During the years ended 1996, 1997 and 1998 the Company
sold 218, 215, and 35 residential lots, respectively, at Rancho San Pasqual to
four homebuilders for gross proceeds aggregating approximately $10.1 million,
$9.8 million and $1.6 million, respectively. In January 1999 the Company began
constructing infrastructure for the 112 lots remaining in phase II of the
project and expects to commence delivering new homes in the fourth quarter of
1999.
FAIRBANKS HIGHLANDS. This property consists of approximately 390 acres near
the communities of Fairbanks Ranch and Rancho Santa Fe in the northern part of
the City of San Diego. The approved vesting tentative map includes 93
single-family residential lots averaging 1.34 acres each and approximately 215
acres of open space. In December 1996, the Company formed a joint venture with a
major homebuilder to develop this property. Under the terms of the joint venture
agreement, the Company contributed its land to the venture at market value of
$7.6 million in exchange for an initial cash payment of $4 million, a preferred
return on its $3.6 million capital contribution and a continuing partnership
interest in the venture. The Company's partner is managing the day-to-day
operations of the venture, providing all construction financing and plans to
build all of the homes at the site. Infrastructure construction began in the
fourth quarter of 1998, homebuilding in March 1999 and home sale closings are
expected to commence in the first quarter of 2000.
ALISO VIEJO. Through a subsidiary, the Company owns a 49% general
partnership interest in a 230-acre project, planned for approximately 1,200
single-family residential units in southern Orange County. The property is well
located, within close proximity to transportation infrastructure, employment
centers and other attractions, including the Orange County (John Wayne) Airport
(approximately 15 miles), the San Joaquin Hills Transportation Corridor (a
quarter mile) and Laguna Beach (approximately five miles). A total of 991 homes
were delivered and 33 homes were in escrow as of March 1, 1999. However, due to
a significant shortfall in sales during 1995 (following the Orange County
bankruptcy) versus forecast, the highly leveraged capital structure of the
partnership and the significant amount of participating mortgages with
preference to the Company's equity interest, the Company does not expect to
receive a financial return from this partnership and established a reserve in
1995 as discussed in Note 4 to the Company's Financial Statements included in
this Annual Report.
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OTHER PROPERTIES. The Company owns approximately two acres of land zoned
for commercial/ industrial use in Signal Hill, California, and approximately 337
acres of resort/residential property in Michigan. These properties are currently
held for sale, subject to market conditions.
PROPERTY DISPOSITIONS. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of the
Company's property dispositions during 1996, 1997 and 1998.
ENVIRONMENTAL AND REGULATORY MATTERS. Before the Company can develop a
property, it must obtain a variety of discretionary approvals from local and
state governments, as well as the federal government in certain circumstances,
with respect to such matters as zoning, subdivision, grading, architecture and
environmental matters. The entitlement approval process is often a lengthy and
complex procedure requiring, among other things, the submission of development
plans and reports and presentations at public hearings. Because of the
provisional nature of these approvals and the concerns of various environmental
and public interest groups, the approval process can be delayed by withdrawals
or modifications of preliminary approvals and by litigation and appeals
challenging development rights. Accordingly, the ability of the Company to
develop properties and realize income from such projects could be delayed or
prevented due to litigation challenging previously obtained governmental
approvals.
As more fully described above, in October 1997, the Coastal Commission
approved suggested modifications to Orange County's residential development plan
for Warner Mesa, in response to an August 1997 trial court order in connection
with the Coastal Act Lawsuit. However, in February 1998, the trial court decided
that the Coastal Commission should hold a third hearing on the LCP, as further
described above. The Company has appealed the trial court's decision and expects
a hearing before the Court of Appeal during the second quarter of 1999 as
discussed above. Therefore, the approval process for the Warner Mesa property
remains subject to the litigation described above, and there can be no assurance
that further delays will not result.
The Company has expended and will continue to expend significant financial
and managerial resources to comply with environmental regulations and local
permitting requirements. Although the Company believes that its operations are
in general compliance with applicable environmental regulations, certain risks
of unknown costs and liabilities are inherent in developing and owning real
estate. However, the Company does not believe that such costs will have a
material adverse effect on its business, financial condition or results of
operations, including the potential remediation expenditures proposed in
connection with certain indemnity obligations discussed below in "Corporate
Indemnification Matters."
CORPORATE INDEMNIFICATION MATTERS. The Company and its predecessors have,
through a variety of transactions effected since 1986, disposed of several
assets and businesses, many of which are unrelated to the Company's current
operations. By operation of law or contractual indemnity provisions, the Company
may have retained liabilities relating to certain of these assets and
businesses, including certain tax liabilities. (See Notes to the Company's
Financial Statements included in this Annual Report.) Many of such liabilities
are supported by insurance or by indemnities from certain of the Company's
predecessors and currently or previously affiliated companies. The Company
believes its balance sheet reflects adequate reserves for these matters.
The United States Environmental Protection Agency ("EPA") has designated
Universal Oil Products ("UOP"), among others, as a Potentially Responsible Party
("PRP") with respect to an area of the Upper Peninsula of Michigan (the "Torch
Lake Site") under the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"). UOP is allegedly the successor
in interest to one of the companies that conducted mining operations in the
Torch Lake area and an affiliate of AlliedSignal Inc., a predecessor of the
Company. The Company has not been named as a PRP at the site. However,
AlliedSignal has, through UOP, asserted a contractual indemnification claim
against the Company for all claims that may be asserted against UOP by the EPA
or other parties with
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respect to the site. In October 1998, the EPA announced that it has received
funding for and will commence implementation of a clean-up plan in the summer of
1999 which will involve covering certain real property both contiguous and
non-contiguous to Torch Lake with soil and vegetation in order to address
alleged risks posed by copper tailings and slag at an estimated cost of $15
million. Under CERCLA, the EPA could assert claims against the Torch Lake PRPs,
including UOP, to recover the cost of all remedial action required at the site,
and natural resources damages. If the EPA pursues such claims against UOP, the
Company, without admission of any obligation to UOP, would vigorously defend
UOP's position that the EPA's proposed cleanup plan is unnecessary and
inconsistent with the requirements of CERCLA given that the EPA's own Site
Assessment and Record of Decision found no immediate threat to human health. In
the Company's view the proposed remediation costs would be in excess of any
resulting benefits.
EMPLOYEES. As of March 1, 1999 the Company and its subsidiaries had
approximately 65 employees.
YEAR 2000 COMPLIANCE. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
The Company has completed its accounting software conversion to programs
that are Year 2000 compliant at a cost of less than $50,000. The Company is
conducting formal communications with all of its significant suppliers to
determine the extent to which those third parties' failure to remediate their
own Year 2000 issue may pose problems for the Company. Responses have been
received from approximately 75% of the Company's significant suppliers. All
responses received indicate that the supplier is currently Year 2000 compliant
or that their testing is ongoing and they will be completing modifications by
June 30, 1999. Management believes that no remedial action regarding suppliers
will be required, however, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems. The Company anticipates
completing its third party inquiries regarding Year 2000 compliance and
executing any actions required, including changing suppliers if necessary, by
June 30, 1999, which is prior to any anticipated impact on its operating
systems. The total cost of the Year 2000 project is less than $50,000 and is
being expensed as incurred and is not expected to have a material adverse effect
on the Company's results of operations.
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 "Legal Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" 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
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.
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EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
- ------------------------------------------------ ----- --------------------------------------------------------
<S> <C> <C>
Raymond J. Pacini 43 President, Chief Executive Officer and a director of the
President and Chief Executive Officer Company since May 1998. Chief Financial Officer and
Treasurer of the Company from prior to 1993 to May 1998.
Executive Vice President and Secretary from November
1993 to May 1998.
Sandra G. Sciutto 39 Chief Financial Officer, Secretary and Treasurer of the
Senior Vice President and Company since May 1998. Senior Vice President of the
Chief Financial Officer Company since February 1996 and Vice President and
Controller of the Company from March 1993 to April 1998.
</TABLE>
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Irvine, California.
The Company and each of its subsidiaries believe that their properties are
generally well maintained, in good condition and adequate for their present and
proposed uses. The inability to renew any short-term real property lease would
not be expected to have a material adverse effect on the Company's results of
operations.
The principal properties of the Company and its subsidiaries, which are
owned in fee unless otherwise indicated, are as follows:
<TABLE>
<CAPTION>
PROPERTY LOCATION ACRES PRESENT OR PLANNED USE
- --------------------------------- -------------------------- ----------- --------------------------------------
<S> <C> <C> <C>
Irvine* Irvine, CA -- Headquarters
Orange County, CA 340 Oceanfront residential community
Warner Mesa
Rancho San Pasqual Escondido, CA 475 Residential community
Fairbanks Highlands** San Diego, CA 390 Residential community
Aliso Viejo** Aliso Viejo, CA 18 Residential community
Michigan Land Upper Peninsula, MI 337 Resort/residential lots
Signal Hill Signal Hill, CA 2 Industrial land
</TABLE>
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* Leased
** Minority interest in partnership or limited liability company
ITEM 3. LEGAL PROCEEDINGS
In January 1995, the CEQA Lawsuit challenging the December 1994 approvals of
the Orange County Board of Supervisors was filed in the Orange County Superior
Court by the Bolsa Chica Land Trust, et al. After remanding the matter to the
Board of Supervisors for additional processing and findings, in January 1997 the
Superior Court entered a judgment in favor of the Company. Plaintiffs appealed
the Superior Court decision and on June 16, 1998 the Court of Appeal ruled in
the Company's favor by affirming the Superior Court's earlier decision that the
Board of Supervisors' December 1994 approvals were in compliance with CEQA.
In March 1996, the Coastal Act Lawsuit was filed in the San Francisco County
Superior Court (and later removed to San Diego Superior Court) by the Bolsa
Chica Land Trust, et al. against the Coastal Commission, the Company and other
Bolsa Chica landowners as real parties in interest, alleging that the Coastal
Commission's approval of the LCP in January 1996 was not in compliance with the
Coastal Act and other statutory requirements. The Coastal Act Lawsuit sought to
set aside the approval of the Bolsa
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Chica project. In August 1997, the San Diego Superior Court rendered a judgment
that returned the LCP to the Coastal Commission for further consideration in the
context of two issues. The court's decision that the Coastal Commission
reconsider the LCP was based on the court's determination (i) that development
of homes in the lowlands is not in compliance with the Coastal Act, and (ii)
that the Commission's findings regarding the filling of a 1.7 acre pond on the
Warner Mesa ("Warner Pond") were not in compliance with the Coastal Act. With
respect to Warner Pond, the court determined in August 1997 that the Coastal
Commission failed to weigh and resolve a conflict in Coastal Act policies
related to the proposed filling of Warner Pond. The court's August 1997 decision
required the Coastal Commission to reconsider its treatment of Warner Pond. In
every other respect, the court denied challenges to the Coastal Commission's
approval of the LCP for development of Warner Mesa. The court specifically
approved the Coastal Commission's findings with regard to (i) the relocation of
raptor habitat, (ii) the adequacy of a buffer between the new residential
development and the wetlands, and (iii) treatment of archeological resources.
The August 1997 judgment was appealed by both the project opponents and the
Company as discussed below.
On October 9, 1997, in response to the trial court's decisions, the Coastal
Commission approved modifications to the LCP which eliminated the filling of
Warner Pond and thereby reduced the maximum number of homes to be built from
2,500 to no more than 1,235 homes on Warner Mesa. On November 18, 1997 and
February 3, 1998, the Orange County Board of Supervisors accepted the Coastal
Commission's suggested modifications. However, in February 1998, the trial court
ruled that the Coastal Commission should not have narrowed the scope of public
comments during the Coastal Commission's October 1997 hearing, and in March 1998
the trial court ordered the Coastal Commission to hold a third hearing on the
LCP. In May 1998, the Company appealed the trial court's March 1998 decision on
the LCP (the "Second Appeal"). A hearing date for the Second Appeal has not yet
been scheduled by the Court of Appeal.
In October 1997, opponents of the Warner Mesa project appealed the trial
court's August 1997 decision on the basis that the trial court should have
reversed the Coastal Commission's January 1996 approval allowing relocation of
certain raptor habitat. The Company also appealed the trial court's decisions
which reversed the Coastal Commission's January 1996 approval (a) allowing
Warner Pond to be filled and (b) allowing residential development in lowlands.
On October 14, 1998, the Court of Appeal completed its hearing on this first set
of appeals. The Court of Appeal normally renders its decision within the 90 day
period following such a hearing. However, on January 21, 1999 the court ordered
the matter to be resubmitted for further consideration due to the complexity of
the issues. The court could render a decision at any time within 90 days of the
January 21, 1999 order.
In the event that the Company prevails on all of the relevant issues raised
in the first set of appeals, it would not be necessary for the Company to pursue
its Second Appeal and, upon obtaining various secondary permits, construction
could commence under the January 1996 LCP approved by the Coastal Commission for
development of up to 2,500 homes on Warner Mesa. Alternatively, if the Company
pursues and is successful in the Second Appeal, it would then be allowed to
complete the processing of secondary permits and commence infrastructure
construction under the modified LCP approved by the Coastal Commission in
October 1997 for development of up to 1,235 homes on Warner Mesa. If the Company
does not prevail in the first set of appeals with respect to affirmation of the
trial court's decision allowing relocation of raptor habitat, then the Coastal
Commission would be required to hold a third public hearing on the LCP.
While litigation delays may continue, the Company believes that if an early
resolution were to occur, it would allow the start of infrastructure
construction later in 1999. The Company does not believe that the litigation
process will ultimately prevent it from developing the planned community at
Warner Mesa; however, there can be no assurance in that regard or that further
delays will not result.
On December 24, 1998, a New Jersey court approved an October 1997 mutual
settlement and release agreement between the Company and Svedala Industries,
Inc. ("Svedala") settling litigation in which
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Svedala filed a lawsuit naming as defendants the Company and Nichols Engineering
& Research Corporation ("Nichols"), an indirect wholly-owned subsidiary of the
Company, as well as several other unrelated companies. The lawsuit was filed in
March 1994, in New Jersey Superior Court in Morris County, New Jersey and
amended in August 1994 and October 1995. The lawsuit sought recovery of costs of
clean-up of a property in Mt. Olive, New Jersey and asserted that the clean-up
costs totaled approximately $10 million. The lawsuit alleged that Nichols, which
is a wholly-owned subsidiary of New Henley Holdings Inc., which is a direct
wholly-owned subsidiary of the Company, was responsible, in whole or in part,
for contaminating the property with hazardous substances during Nichols'
operations there from the 1940s to the 1970s. The settlement agreement provides
the Company and its subsidiaries with a complete release of Svedala's claims for
any liability arising from the facts of the lawsuit in consideration for the
December 1998 payment of $200,000 to Svedala by the Company.
On March 25, 1997, Whiting Corporation, a Delaware corporation, commenced a
lawsuit in the Circuit Court of Cook County, Illinois, Chancery Division,
naming, among others, the Company and WT/ HRC Corporation, a direct subsidiary
of the Company, as defendants in a complaint for declaratory relief and breach
of contract and indemnification. The complaint alleges that WT/HRC owes Whiting
a defense and indemnity for several hundred asbestos cases pending in several
states, as well as for similar asbestos claims which may be filed in the future.
The complaint states no specified amount of damages. The lawsuit is based on a
1983 Asset Purchase Agreement in which the seller, Whiting-Illinois (now named
WT/HRC), sold assets and the business of its "Whiting Engineered Products Group"
to plaintiff's predecessor in interest. Whiting contends that the seller agreed
in the Asset Purchase Agreement to indemnify Whiting for personal injury,
sickness, death or property damages claims which arise from occurrences
predating the closing date (December 30, 1983). The Company denied the
allegations in the complaint and vigorously defended the action. All claims
against the Company were dismissed in early 1998, and the WT/HRC subsidiary is
now the only named defendant.
On July 14, 1995, the Grandview/Crest Homeowners Association, representing
owners of 341 condominium units, filed a lawsuit in Orange County Superior Court
naming as defendants Lake Forest Properties, Signal Landmark, Inc., now known as
Signal Landmark ("Signal"), and Onyx Land Company, as well as various
unaffiliated defendants (the "Grandview Lawsuit"). Lake Forest Properties was a
California joint venture which was the developer of the subject 341-unit
condominium project. Lake Forest Properties had two joint venture partners,
Signal, an indirect subsidiary of the Company, and Onyx Land Company which was a
wholly-owned subsidiary of Signal, which was dissolved and its assets
transferred to Signal on December 31, 1988. Lake Forest Properties also was
dissolved effective December 31, 1988. The original complaint for construction
defects alleged warranty, liability, negligence and breaches of covenants,
conditions and restrictions, and of fiduciary duties. On June 25, 1996, the
Plaintiff filed a First Amended Complaint alleging that structural distress,
life-safety hazards, and extensive water intrusion had resulted from the alleged
defects in construction estimated in September 1997 at a preliminary cost of
approximately $20.4 million. On March 23, 1998 the Company entered into a mutual
settlement agreement with the plaintiff as well as with the Company's insurance
carriers which had responsibility for the claims. Pursuant to the settlement
agreement, the Company's insurance carriers paid the $4.6 million settlement and
related legal and other costs of defense, with a contribution from the Company
of approximately $.6 million for deductibles, which did not exceed previously
established reserves in the Company's balance sheet.
On September 12, 1996, plaintiffs Edward and Helen Law, et al. filed a class
action complaint in San Diego Superior Court for breach of warranties, strict
liability, negligence, breach of contract, products liability, intentional
misrepresentation, fraud and deceit, and negligent representation against
Signal, and a former subsidiary of Signal, for damages allegedly arising out of
construction deficiencies at the plaintiffs' homes in Coronado, California (the
"Coronado Lawsuit"). On May 7, 1997, plaintiffs Edward and Helen Law, et al.,
filed a first amended complaint against Signal and its former subsidiary for the
same causes of action. On September 17, 1997, plaintiffs filed a second amended
complaint for construction deficiencies in
9
<PAGE>
the names of 126 of the homeowners in Coronado, California, as well as the
Homeowners Association. On March 3, 1998 the plaintiffs asserted a claim of
$13.0 million. On October 30, 1998 the Company's motion was granted in San Diego
Superior Court settling the lawsuit for an aggregate of $4.1 million. The
Company's insurance carriers have paid Signal Landmark's $1.7 million share of
the settlement and the remaining $2.4 million of settlement payments which have
been reimbursed to the carriers by subcontractors. Additional contributions from
subcontractors and the insurance carriers are expected to reimburse the
Company's share of attorney's fees, resulting in a cost to the Company of no
more than $.1 million upon resolution of insurance claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following tables set forth information with respect to bid quotations
for the Common Stock of the Company for the periods indicated as reported by
NASDAQ. These quotations are interdealer prices without retail markup, markdown
or commission and may not necessarily represent actual transactions. The new
Common Stock began trading on September 2, 1997 concurrent with the
Recapitalization and the one for one hundred (1:100) reverse stock split.
Accordingly, prices for the old common shares have been restated to reflect the
1:100 reverse stock split.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1998
First Quarter.............................................................. $ 12.94 $ 11.88
Second Quarter............................................................. $ 12.63 $ 8.38
Third Quarter.............................................................. $ 9.50 $ 6.88
Fourth Quarter............................................................. $ 7.25 $ 6.13
1997
First Quarter.............................................................. $ 18.75 $ 12.50
Second Quarter............................................................. $ 18.75 $ 9.38
Third Quarter.............................................................. $ 14.00 $ 9.38
Fourth Quarter............................................................. $ 12.50 $ 11.50
1996
First Quarter.............................................................. $ 53.13 $ 25.00
Second Quarter............................................................. $ 31.25 $ 15.63
Third Quarter.............................................................. $ 25.00 $ 15.63
Fourth Quarter............................................................. $ 25.06 $ 12.50
</TABLE>
The number of holders of record of the Company's Common Stock as of December
31, 1998 was approximately 12,600. The Company has not paid any cash dividends
on its Common Stock to date, nor does the Company currently intend to pay
regular cash dividends on the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data with respect to the Company and its subsidiaries
are set forth on pages F-1 to F-2 of this Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth beginning on page F-3 of this Annual Report.
10
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements, schedules and supplementary data of the Company and
its subsidiaries, listed under Item 14, are submitted as a separate section of
this Annual Report, commencing on page F-9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. The information appearing under the caption "Election of
Directors" of the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders is incorporated herein by reference in this Annual Report.
EXECUTIVE OFFICERS. Information with respect to executive officers appears
under the caption "Executive Officers of the Company" in Item 1 of this Annual
Report.
ITEM 11. EXECUTIVE COMPENSATION
Information in answer to this Item appears under the caption "Compensation
of Directors and Executive Officers" of the Company's Proxy Statement for its
1999 Annual Meeting of Stockholders and is incorporated herein by reference in
this Annual Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in answer to this Item appears under the captions "Voting
Securities and Principal Holders Thereof" and "Election of Directors" of the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference in this Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in answer to this Item appears under the captions "Certain
Transactions" and "Compensation of Directors and Executive Officers" of the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference in this Annual Report on Form 10-K.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
The following financial statements and supplementary data of the Company are
included in a separate section of this Annual Report on Form 10-K commencing on
the page numbers specified below:
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Selected Financial Data.......................................................................... F-1
Management's Discussion and Analysis of Financial Condition and Results of Operations............ F-3
Independent Auditors' Report..................................................................... F-8
Balance Sheets as of December 31, 1997 and 1998.................................................. F-9
Statements of Operations for the Year Ended December 31, 1996, the Eight-Month Period Ended
September 2, 1997, the Four-Month Period ended December 31, 1997 and the Year Ended December 31,
1998............................................................................................ F-10
Statements of Cash Flows for the Year Ended December 31, 1996, the Eight-Month Period Ended
September 2, 1997, the Four-Month Period ended December 31, 1997 and the Year Ended December 31,
1998............................................................................................ F-11
Statements of Changes in Stockholders' Equity for the Three Years Ended
December 31, 1998............................................................................... F-12
Notes to Financial Statements.................................................................... F-13
</TABLE>
(2) Financial Statement Schedules:
All schedules have been omitted since they are not applicable, not required,
or the information is included in the financial statements or notes thereto.
(3) Listing of Exhibits:
<TABLE>
<C> <S>
3.01 Restated Certificate of Incorporation of the Registrant, incorporated by reference to
Exhibit 4.02 to the Registrants Post-Effective Amendment No. 4 to Form S-4, Registration
Statement No. 333-29883, filed August 28, 1997.
3.02 Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the
Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No.
333-29883, filed August 28, 1997.
4.01 Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit
4.02 to the Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement
No. 333-29883, filed August 28, 1997.
4.02 Amended By-Laws of the Registrant, incorporated by reference to Exhibit 4.03 to the
Registrant's Post-Effective Amendment No. 4 to Form S-4, Registration Statement No.
333-29883, filed August 28, 1997.
10.01 Tax Sharing Agreement dated as of December 18, 1989, between the Registrant and The Henley
Group, Inc. ("Henley Group"), incorporated by reference to Exhibit 10.03 to the Registrant's
Annual Report on Form 10-K for 1989.
10.02 Tax Sharing Agreement dated as of December 15, 1988, between Wheelabrator Technologies, Inc.
(formerly The Wheelabrator Group, Inc.) ("WTI") and the Registrant ("WTI Tax Sharing
Agreement"), incorporated by reference to Exhibit 10.02 to Amendment No. 3 on Form 8 to the
Registrant's Registration Statement on Form 10.
10.02A Amendment No. 1 to WTI Tax Sharing Agreement dated February 14, 1994, incorporated by
reference to Exhibit 10.02A to the Registrant's Annual Report on Form 10-K for 1993.
10.03 Tax Sharing Agreement dated as of June 10, 1992, between Henley Group and Abex Inc.,
incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K
for 1992.
</TABLE>
12
<PAGE>
<TABLE>
<C> <S>
10.04 Amendment to Tax Sharing Agreement dated January 25, 1999 between the Registrant and Fisher
Scientific International Inc.*
10.05 1993 Stock Option/Stock Issuance Plan, incorporated by reference to Exhibit 10.03A to the
Registrant's Annual Report on Form 10-K for 1993.
10.06 Deferred Compensation Plan for Non-Employee Directors of the Registrant, incorporated by
reference to Exhibit 10.14 to the Registrant's Registration Statement on Form 10.
10.07 Retirement Plan for Non-Employee Directors of the Registrant, incorporated by reference to
Exhibit 10.15 to the Registrant's Registration Statement on Form 10.
10.08 Retirement Plan of the Registrant, incorporated by reference to Exhibit 10.16 to Amendment
No. 3 on Form 8 to the Registrant's Registration Statement on Form 10.
10.08A Amendment to Retirement Plan of the Registrant dated December 8, 1993, incorporated by
reference to Exhibit 10.07A to the Registrant's Annual Report on Form 10-K for 1993.
10.09 The Koll Company 401(k) Plus Plan and Trust Agreement dated July 1, 1989 under which the
Registrant elected to participate as an employer effective as of October 1, 1993,
incorporated by reference to Exhibit 10.08 to the Registrant's Annual Report on Form 10-K
for 1993.
10.10 Bargain Purchase and Sale Agreement and Escrow Instructions dated as of February 14, 1997
between a subsidiary of the Registrant and the State of California, acting by and through
the State Lands Commission, incorporated by reference to Exhibit 10.26 to Registrant's
Annual Report on Form 10-K for 1996.
10.11 Employment Agreement between the Registrant and Mr. Donald M. Koll, incorporated by
reference to Exhibit 10.28 Amendment No. 2 to the Form S-4 Registration Statement,
Registration No. 333-22121, filed April 29, 1997.
10.12 Employment Agreement between the Registrant and Mr. Richard M. Ortwein, incorporated by
reference to Exhibit 10.29 to Form S-4 Registration Statement, Registration No. 333-22121,
filed April 29, 1997.
10.13 Employment Agreement between the Registrant and Mr. Raymond J. Pacini, incorporated by
reference to Exhibit 10.30 to Form S-4 Registration Statement, Registration No. 333-22121,
filed April 29, 1997.
10.13A Employment Agreement between the Registrant and Mr. Raymond J. Pacini, dated as of May 1,
1998, incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998.
10.14 Employment Agreement between the Registrant and Ms. Sandra G. Sciutto, dated as of May 1,
1998, incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998.
10.15 Independent Contractor Consulting Agreement among the Registrant, GSSW-REO, L.C., a Texas
limited liability company and Thomas W. Sabin, Jr. dated as of May 20, 1998, incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
10.16 Consulting Agreement between the Registrant and Mr. Ray Wirta, incorporated by reference to
Form S-4 Registration Statement, Registration No. 333-22121, filed April 29, 1997.
10.17 KREG Operating Co. Stock Purchase Agreement dated as of March 30, 1998 between the
Registrant and Koll Development Company, LLC and certain affiliates, incorporated by
reference to Exhibit 10.25 to Registrant's Annual Report on Form 10-K for 1997.
21.01 Subsidiaries of the Registrant.*
27.01 Financial Data Schedule.*
</TABLE>
- ------------------------
* Filed herewith.
(b) Reports on Form 8-K:
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
Date: March 23, 1999
CALIFORNIA COASTAL COMMUNITIES, INC.
By: /s/ SANDRA G. SCIUTTO
----------------------------------------
Sandra G. Sciutto
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
NAME TITLE DATE
- ------------------------------ ------------------------------ ---------------
/s/ PHILLIP R. BURNAMAN II
- ------------------------------ Director March 23, 1999
Phillip R. Burnaman II
/s/ DAVID J. MATLIN
- ------------------------------ Director March 23, 1999
David J. Matlin
/s/ RAYMOND J. PACINI
- ------------------------------ President, Chief Executive March 23, 1999
Raymond J. Pacini Officer and Director
/s/ THOMAS W. SABIN, JR.
- ------------------------------ Director and Chairman of the March 23, 1999
Thomas W. Sabin, Jr. Board
/s/ SANDRA G. SCIUTTO
- ------------------------------ Senior Vice President and March 23, 1999
Sandra G. Sciutto Chief Financial Officer
/s/ J. THOMAS TALBOT
- ------------------------------ Director March 23, 1999
J. Thomas Talbot
14
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Company and its
consolidated subsidiaries, which has been reclassified for prior periods to
present the commercial development business as discontinued operations (see Note
4 to the Company's Financial Statements). On September 2, 1997, the Company
completed a recapitalization under chapter 11 of the bankruptcy code (the
"Recapitalization", see Note 3 to the Company's Financial Statements). The
following information should be read in conjunction with the financial
statements beginning on page F-9 of this Form 10-K.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
---------------------------------------------- ----------------------------
EIGHT-MONTH FOUR-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED PERIOD ENDED YEAR ENDED
------------------------------- SEPTEMBER 2, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997 1997 1998
--------- --------- --------- ------------- ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments (a).................... $ 13.0 $ 4.8 $ 2.1 $ 7.2 $ 26.6
Total assets (a)..................... 413.3 276.1 256.6 173.3 174.2
Bank debt (b)........................ -- 16.6 8.2 -- --
Subordinated debentures and other
liabilities subject to compromise
(b)................................ 157.3 177.6 200.3 -- --
Total stockholders' equity (c)....... $ 145.5 $ 29.6 $ 1.1 $ 140.1 $ 142.7
Shares outstanding at end of period
(g)................................ N/A N/A N/A N/A 11.9 11.5
Book value per common share -- basic
(g)................................ N/A N/A N/A N/A $ 11.77 $ 12.41
STATEMENT OF OPERATIONS DATA:
Revenues (d),(e)..................... $ 15.5 $ 26.5 $ 34.5 $ 33.9 $ 4.3 $ 2.1
Loss from continuing operations
(e),(f)............................ (17.5) (116.0) (29.3) (85.3) (1.3) (2.3)
Net income (loss) (f)................ (18.0) (116.9) (28.9) 9.6 (.5) 4.2
PER COMMON SHARE -- BASIC AND DILUTED:
Loss from continuing operations
(g)................................ N/A N/A N/A N/A $ (.11) $ (.19)
Earnings (loss) (g).................. N/A N/A N/A N/A $ (.04) $ .35
WEIGHTED AVERAGE SHARES OUTSTANDING
(g).................................. N/A N/A N/A N/A 11.9 11.9
</TABLE>
- ------------------------
(a) The decreases in cash, cash equivalents and short-term investments at
December 31, 1995 and 1996 are primarily attributable to the funding of
project development and infrastructure costs and general and administrative
expenses, partially offset by sales of real estate held for development or
sale. The decrease in total assets at December 31, 1995 is primarily due to
the asset revaluation of Bolsa Chica and the decrease in cash described
above. The increase in cash, cash equivalents and short-term investments at
December 31, 1997 primarily reflects the February 1997 sale of the Bolsa
Chica lowlands partially offset by repayments of bank debt and other 1997
costs. The decrease in total assets at December 31, 1997 primarily reflects
Fresh-Start Reporting adjustments recorded in connection with the
Recapitalization on September 2, 1997 (see Notes 3 and 5 to the Company's
Financial Statements). The increase in cash, cash equivalents and short-term
investments at December 31, 1998
F-1
<PAGE>
primarily reflects the April 1998 sale of the commercial development
business, partially offset by project development costs, stock repurchases
and general and administrative expenses.
(b) The increase in bank debt at December 31, 1995 reflects borrowings under
credit agreements to settle litigation with former affiliates regarding tax
sharing agreements and to construct infrastructure improvements at Rancho
San Pasqual. The decrease in bank debt at December 31, 1996 reflects
principal repayments in excess of borrowings for construction of
infrastructure improvements at Rancho San Pasqual partially offset by
borrowings for a Signal Landmark build-to-suit project. The decrease in bank
debt at December 31, 1997 reflects the repayment of the outstanding loan
balances in the first quarter of 1997. The decrease in subordinated
debentures and other liabilities subject to compromise reflects the
Recapitalization on September 2, 1997.
(c) The decrease in equity at December 31, 1995 reflects the net loss for the
year then ended, including the asset revaluation of the Bolsa Chica lowlands
and Warner Mesa properties. The decrease in equity at December 31, 1996
reflects the net loss for the year then ended, primarily due to interest
expense on the subordinated debentures. The increase in equity at December
31, 1997 reflects the issuance of new Common Stock in exchange for the
subordinated debentures and other liabilities subject to compromise upon
completion of the recapitalization, partially offset by Fresh-Start
Reporting adjustments. The increase in equity at December 31, 1998 reflects
net income for the year then ended, along with the issuance of restricted
stock to the Company's Chief Executive Officer, partially offset by $2.9
million of stock repurchases in December 1998 (see Note 12 to the Company's
Financial Statements).
(d) The increase in 1995 revenues is due to an increase in land sales and
residential and marina sales at the Company's Wentworth By The Sea project
in New Hampshire. The increase in 1996 revenues reflects the sale of
residential lots and the Eagle Crest Golf Course at Rancho San Pasqual, the
formation of the Fairbanks Highlands joint venture and the sale of
resort/residential lots in Michigan. The increase in 1997 revenues primarily
reflects the sale of the Bolsa Chica lowlands, partially offset by the
absence of the Eagle Crest Golf Course sale and the formation of the
Fairbanks Highlands joint venture. The decrease in revenues in 1998 reflects
the absence of the 1997 sale of the Bolsa Chica lowlands and the completion
of Rancho San Pasqual phase I lot sales in May 1998.
(e) Amounts have been reclassified to present the commercial development
business as a discontinued operation (see Note 4 to the Company's Financial
Statements).
(f) The loss from continuing operations and net loss for the year ended December
31, 1995 reflect approximately $121.1 million of charges related to
write-downs of real estate properties, including the Bolsa Chica lowlands
and Warner Mesa properties. The loss from continuing operations and net loss
for the year ended December 31, 1996 are primarily the result of non-cash
interest charged on the subordinated debentures. The net income for the
eight-month period ended September 2, 1997 reflects the extraordinary gain
on extinguishment of debt as a result of the Recapitalization, partially
offset by Fresh-Start Reporting adjustments, reorganization costs and
non-cash interest charged on the subordinated debentures. The net income for
1998 reflects the after-tax gain on sale of the commercial development
business of $6.1 million, partially offset by general and administrative
expenses.
(g) The new Common Stock began trading on September 2, 1997 concurrent with the
Recapitalization and the one-for-one hundred (1:100) reverse stock split.
Accordingly, per share information for the old common shares is not shown,
as it would not be comparable.
F-2
<PAGE>
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. In
April 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. During 1999, the Company will
focus its immediate efforts to (i) successfully appeal the trial court's
decisions which reversed the California Coastal Commission's (the "Coastal
Commission") approvals of the Warner Mesa project, as further discussed in Note
5 to the Company's Financial Statements; (ii) complete the secondary 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.
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. Prior to the adoption of
Fresh-Start Reporting, the relatively high book value of these assets 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 in September 1997 (which will reduce
future costs of sales) and therefore, upon favorable completion of the
litigation and entitlement processes, the Company expects to begin generating
profits from the Warner Mesa project. However, with the March 1998 court
decision which ordered a third hearing before the Coastal Commission to approve
the LCP and various appeals pending in the Coastal Act Lawsuit (see Note 5), 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 litigation 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 interested in Southern California residential
properties have increased, resulting in improved 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.
F-3
<PAGE>
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. Except for the effect of the gain on
disposition of the commercial development business in 1998, the Company expects
to report losses or insignificant income until such time as sales can commence
at Warner Mesa. Historically, sources of capital have included bank lines of
credit, specific property financings, asset sales and available internal funds.
The Company completed the sale of its commercial development business for
$33.3 million 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, stock repurchases and general and
administrative expenses.
FINANCIAL CONDITION
DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997.
The $19.4 million increase in cash and cash equivalents primarily reflects
the $33.3 million in proceeds from the sale of the commercial development
business which was completed on April 30, 1998, along with net proceeds from the
sales of 35 lots at Rancho San Pasqual, and an industrial building in Naples,
Florida, partially offset by spending for project development costs for Warner
Mesa, stock repurchases and general and administrative expenses, as well as
other activity presented in the Statements of Cash Flows.
The $4.1 million increase in land held for development reflects investment
in the Warner Mesa project during 1998.
The $3.1 million decrease in reorganization value in excess of amounts
allocated to net assets primarily reflects a credit resulting from the income
tax provision recorded for the gain on sale of the commercial development
business, pursuant to Fresh-Start Reporting, as discussed in Note 3.
The $19.3 million decrease in discontinued operations reflects completion of
the sale of the commercial development business on April 30, 1998.
The $1.8 million decrease in accounts payable and accrued liabilities
primarily reflects the payment of accrued expenses.
The $2.6 million increase in stockholders' equity reflects net income for
the year, along with the issuance of restricted stock to the Company's Chief
Executive Officer, partially offset by $2.9 million of stock repurchases in
December 1998.
DECEMBER 31, 1997 COMPARED WITH DECEMBER 31, 1996.
The $5.1 million increase in cash and cash equivalents primarily reflects
the sale of the Bolsa Chica lowlands in February 1997 for $25.0 million,
partially offset by repayments of $7.1 million to Nomura Asset Capital
Corporation, payments of certain liabilities, spending for project development
costs primarily at Bolsa Chica, general and administrative expenses, and
reorganization costs during the year ended December 31, 1997, as well as other
activity presented in the Statements of Cash Flows.
The $9.8 million decrease in real estate held for development or sale
primarily reflects the sales of residential lots at Rancho San Pasqual.
The $90.3 million decrease in land held for development (Warner Mesa)
reflects the February 1997 sale of the Bolsa Chica lowlands for $25.0 million
and a write-down under Fresh-Start Reporting of $72.7 million to reflect the
fair value of Warner Mesa of $130 million as of September 2, 1997. These
F-4
<PAGE>
decreases were partially offset by investments in the Warner Mesa project during
the year ended December 31, 1997, including the acquisition of an adjacent
40-acre parcel.
The $3.1 million of reorganization value in excess of amounts allocated to
net assets of continuing operations arose from the adoption of Fresh-Start
Reporting upon completion of the Company's Recapitalization on September 2,
1997, as discussed in Note 3.
The $9.7 million increase in discontinued operations primarily reflects the
effects of Fresh-Start Reporting adjustments recorded as of September 2, 1997,
with an increase in reorganization value in excess of amounts allocated to net
assets, partially offset by the write-off of remaining goodwill recorded upon
the Company's acquisition of the commercial development business in 1993.
The $2.8 million decrease in accounts payable and accrued liabilities
primarily reflects payments of accrued expenses during 1997 related to the sale
of the Bolsa Chica lowlands and reorganization costs incurred during 1996.
The $8.2 million decrease in bank debt primarily reflects the repayment of
the outstanding loan balance due to Nomura Asset Capital Corporation, as well as
repayment of a $2.0 million construction loan upon the sale of Signal Landmark's
build-to-suit project in Signal Hill, California, partially offset by borrowings
prior to the sale.
The $200.3 million decrease in subordinated debentures and other liabilities
subject to compromise reflects cancellation of such obligations and the issuance
of common stock to the holders of such claims in accordance with the
Recapitalization as further discussed in Note 3.
The $11.0 million decrease in other liabilities primarily reflects a $5.8
million Fresh-Start adjustment to discount the carrying value of such
liabilities to fair value upon completion of the Recapitalization, and payments
of $3.4 million in connection with the settlement of certain claims during the
second quarter of 1997.
The $139.0 million increase in stockholders' equity primarily reflects the
exchange of equity for subordinated debentures and other liabilities subject to
compromise upon completion of the Recapitalization discussed above, partially
offset by the $57.1 million net write-down of assets and liabilities to fair
value under Fresh-Start Reporting as discussed in Note 3, as well as other
activity presented in the Statements of Operations.
RESULTS OF OPERATIONS
The nature of the Company's business is such that individual transactions
often cause significant fluctuations in operating results from quarter to
quarter and 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 cost of
sales for Warner Mesa, while increasing interest expense related to discounted
liabilities.
1998 COMPARED WITH 1997
The decrease in revenues from $38.2 million in 1997 to $2.1 million in 1998
and the decrease in the related costs of sales from $37.7 million in 1997 to
$1.8 million in 1998 reflect the 1997 sales of the Bolsa Chica wetlands to the
State of California for $25 million, lots at Rancho San Pasqual for $7.1 million
and the $3.1 million sale of a build-to-suit project in Signal Hill, California,
compared with the $1.7 million sale of the remaining 35 phase I residential lots
at Rancho San Pasqual and the $.4 million sale of an industrial building in
Naples, Florida in 1998. As a result of litigation delays with respect to the
Warner Mesa project (see Note 5), the Company does not currently expect to
report any revenues until the fourth quarter of
F-5
<PAGE>
1999, when delivery of new homes is expected to commence at the Company's
112-home project in phase II at Rancho San Pasqual.
General and administrative expenses in the eight-month period ended
September 2, 1997 include approximately $2.8 million of non-recurring costs
incurred in connection with the exchange offer for the Company's subordinated
debentures. General and administrative expenses after excluding such non-
recurring costs were $4.1 million in 1997, compared with $3.7 million in 1998.
The decrease in interest expense primarily reflects the absence in 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 $1.4 million of noncash
interest expense in 1998 reflects interest expense on (i) discounted liabilities
under Fresh-Start Reporting and (ii) capital contribution notes due to a
partnership.
Other income, net of $1.5 million for the year ended December 31, 1998
primarily reflects interest income. The $4.2 million in other income, net for
the year ended December 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 benefit for income taxes for the year ended December 31, 1997 has been
offset by a corresponding valuation allowance. For the year ended December 31,
1998, pursuant to Fresh-Start Reporting, a reduction in the income tax valuation
allowances established at the Reorganization date resulted in a credit to
reorganization value in excess of amounts allocated to net assets of
approximately $3.0 million and an increase in capital in excess of par value of
approximately $.2 million.
1997 COMPARED WITH 1996
The increase in revenues from asset sales of $33.6 million in 1996 to $38.2
million in 1997 and the increase in the related costs of sales from $30.2
million to $37.7 million primarily reflect the 1997 sale of the Bolsa Chica
lowlands for $25.0 million, partially offset by the absence in 1997 of 1996
sales of the Fairbanks Highlands residential land for $7.6 million, the Eagle
Crest Golf Course at Rancho San Pasqual for $6.1 million, and homes at Oceanside
Hills for $4.9 million, as well as a $3.3 million decrease in sales of Michigan
residential land.
The $.9 million decrease in revenues from operations during the year ended
December 31, 1997 as compared with the same period of 1996 reflects the absence
in 1997 of 1996 revenues from golf course operations at Eagle Crest.
The $2.8 million decrease in gross operating margins from 1996 to 1997
primarily reflects a $2.7 million decrease in margins on sales of Michigan
residential land.
The $1.5 million decrease in general and administrative expenses from 1996
to 1997 primarily reflects reduced costs of liability insurance premiums,
reduced overhead expense related to residential operations, and the absence in
1997 of bonus amounts charged in 1996 related to the sale of the Bolsa Chica
lowlands, partially offset by a $2.0 million increase in costs incurred in
connection with the exchange offer for the Company's subordinated debentures.
The $7.8 million decrease in interest expense reflects the absence of
interest on the subordinated debentures after they were cancelled on September
2, 1997, the effective date of the Recapitalization, and lower interest on
senior bank debt which was repaid in February 1997.
The $4.2 million in other income, net for the year ended December 31, 1997
primarily reflects an aggregate of $3.1 million of 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 deferred income taxes for the eight-month period ended
September 2, 1997 and the four-month period ended December 31, 1997 have been
offset by corresponding valuation allowances.
F-6
<PAGE>
The Company adopted Fresh-Start Reporting upon completion of its
Recapitalization on September 2, 1997 resulting in $(57.1) million of net
Fresh-Start adjustments. Approximately $(63.8) million, resulting primarily from
a write-down in the value of Warner Mesa partially offset by the discount on
liabilities, is reflected in continuing operations. In addition, $13.6 million
of Reorganization Value in Excess of Amounts Allocated to Net Assets, partially
offset by the write-off of Goodwill, resulted in $6.7 million of net Fresh-Start
adjustments included in discontinued operations.
The $89.5 million extraordinary gain on extinguishment of debt represents
the difference between the book value of subordinated debentures and other
liabilities subject to compromise, which were cancelled in the Recapitalization,
and the fair market value of the Company's Common Stock which was issued to the
holders of such claims.
1996 COMPARED WITH 1995
The $10.1 million increase in asset sales revenues from $23.5 million in
1995 to $33.6 million in 1996 and the related $8.6 million increase in costs of
asset sales from $21.6 million in 1995 to $30.2 million in 1996 primarily
reflect the sale of residential lots and the Eagle Crest Golf Course at Rancho
San Pasqual, formation of the Fairbanks Highlands joint venture and sales of
resort/residential lots in Michigan during the year ended December 31, 1996.
These increases were partially offset by the absence in 1996 of Wentworth
residential sales as a result of the sale of the entire Wentworth project in the
fourth quarter of 1995. The $1.5 million improvement in gross margin on asset
sales primarily reflects gains on sales of Michigan lots, partially offset by
the absence in 1996 of the gains on sales of the Coronado wharfage rights and a
leasehold interest in 1995.
The $2.1 million and $1.7 million decreases in revenues and gross margin,
respectively, from operations primarily reflect the absence of Wentworth marina
revenues throughout 1996 and the sale of the Eagle Crest Golf Course in June
1996.
The $1.4 million increase in general and administrative expenses in 1996
primarily reflects costs incurred in connection with the sale of the Bolsa Chica
lowlands and the exchange offer for the Company's subordinated debentures.
The $2.3 million increase in interest expense from $22.6 million in 1995 to
$24.9 million in 1996 principally reflects compounded non-cash interest on the
Company's subordinated debentures.
The $4.0 million decrease in other expense, net primarily reflects the
absence in 1996 of a $3.0 million reserve recorded in 1995 related to the
Company's investment in AV Partnership (see Note 4), and a decrease in accrued
pensions and benefits approximating $4.3 million, primarily due to termination
of certain group annuity contracts for the pension plan of a discontinued
operation, partially offset by a $1.5 million reserve for environmental clean up
costs for the Bolsa Chica wetlands (see Note 5).
The benefit for income taxes for the year ended December 31, 1996 has been
offset by a corresponding valuation allowance.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Certain of the foregoing information 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 pending appeals of the trial court decisions
in 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.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
of California Coastal Communities, Inc.:
We have audited the accompanying balance sheets of California Coastal
Communities, Inc. (the "Company") as of December 31, 1998 and 1997, and the
related statements of operations, cash flows, and changes in stockholders'
equity for the year ended December 31, 1998 and the four-month period ended
December 31, 1997 ("Successor Company"), and for the eight-month period ended
September 2, 1997 and the year ended December 31, 1996 ("Predecessor Company").
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the financial statements, on August 19, 1997, the
Bankruptcy Court confirmed the Plan of Reorganization which became effective on
September 2, 1997. Accordingly, the accompanying financial statements have been
prepared in conformity with AICPA Statement of Position 90-7, "Financial
Reporting for Entities in Reorganization Under the Bankruptcy Code," for the
Successor Company as a new entity with assets, liabilities, and a capital
structure having carrying values not comparable with prior periods as described
in Note 3.
In our opinion, the Successor Company financial statements present fairly,
in all material respects, the financial position of California Coastal
Communities, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the year ended December 31, 1998 and the
four-month period ended December 31, 1997, in conformity with generally accepted
accounting principles. Further, in our opinion, the Predecessor Company
financial statements referred to above present fairly, in all material respects,
the results of its operations and its cash flows for the eight-month period
ended September 2, 1997 and the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
The Company carries its real estate properties at cost, net of impairment
losses. As discussed in Note 2, the estimation process is inherently uncertain
and relies to a considerable extent on future events and market conditions. As
discussed in Note 5, the development of the Company's Warner Mesa project is
dependent upon various governmental approvals and various economic factors.
Accordingly, the amount ultimately realized from such project may differ
materially from the current estimate of fair value.
Deloitte & Touche LLP
Costa Mesa, California
March 5, 1999
F-8
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents...................................................................... $ 7.2 $ 26.6
Real estate held for development or sale....................................................... 4.0 3.2
Land held for development...................................................................... 133.2 137.3
Reorganization value in excess of amounts allocated to net assets.............................. 3.1 --
Discontinued operations........................................................................ 19.3 --
Other assets................................................................................... 6.5 7.1
--------- ---------
$ 173.3 $ 174.2
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities..................................................... $ 3.5 $ 1.7
Other liabilities............................................................................ 29.7 29.8
--------- ---------
Total liabilities.......................................................................... 33.2 31.5
--------- ---------
Commitments and Contingencies
Stockholders' equity:
Common Stock--$.05 par value; 18,000,000 shares authorized; 11,906,378 and 11,477,610 shares
outstanding, respectively.................................................................... .6 .6
Capital in excess of par value................................................................. 140.0 138.4
Retained earnings (deficit).................................................................... (.5) 3.7
--------- ---------
Total stockholders' equity................................................................. 140.1 142.7
--------- ---------
$ 173.3 $ 174.2
--------- ---------
--------- ---------
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-9
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
---------------------------- --------------------------------
FOR THE EIGHT-MONTH FOUR-MONTH FOR THE
YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 2, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------- ------------- --------------- ---------------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Asset sales.......................................... $ 33.6 $ 33.9 $ 4.3 $ 2.1
Operations........................................... .9 -- -- --
------ ------ ----- -----
34.5 33.9 4.3 2.1
------ ------ ----- -----
Costs of:
Asset sales.......................................... 30.2 33.4 4.3 1.8
Operations........................................... 1.0 -- -- --
------ ------ ----- -----
31.2 33.4 4.3 1.8
------ ------ ----- -----
Gross operating margin................................. 3.3 .5 -- .3
General and administrative expenses.................... 8.4 5.5 1.4 3.7
Interest expense....................................... 24.9 17.1 .4 1.4
Other income........................................... (1.4) (3.7) (.5) (1.5)
------ ------ ----- -----
Loss from continuing operations before reorganization
items and income taxes................................ (28.6) (18.4) (1.3) (3.3)
Reorganization items:
Fresh-start adjustments.............................. -- 63.8 -- --
Reorganization costs................................. .6 2.8 -- --
------ ------ ----- -----
Loss from continuing operations before
income taxes.......................................... (29.2) (85.0) (1.3) (3.3)
Provision (benefit) for income taxes................... .1 .3 -- (1.0)
------ ------ ----- -----
Loss from continuing operations........................ (29.3) (85.3) (1.3) (2.3)
Discontinued operations:
Income from operations, net of income taxes of $0,
$0, $0 and $.3 respectively........................ .4 5.4 .8 .4
Gain on disposition, net of income taxes of $4.4..... -- -- -- 6.1
------ ------ ----- -----
Income (loss) before extraordinary gain................ (28.9) (79.9) (.5) 4.2
Extraordinary gain on extinguishment of debt, net of
income taxes of $0.................................... -- 89.5 -- --
------ ------ ----- -----
Net income (loss)...................................... $ (28.9) $ 9.6 $ (.5) $ 4.2
------ ------ ----- -----
------ ------ ----- -----
Earnings (loss) per common share -- basic and diluted:
Continuing operations................................ N/A N/A $ (.11) $ (.19)
Discontinued operations.............................. N/A N/A .07 .54
Extraordinary gain................................... N/A N/A -- --
----- -----
Net earnings (loss) per common share -- basic and
diluted............................................... N/A N/A $ (.04) $ .35
----- -----
----- -----
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-10
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
---------------------------- ----------------------------
FOR THE YEAR EIGHT-MONTH FOUR-MONTH FOR THE
ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 2, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------- ------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (28.9) $ 9.6 $ (.5) $ 4.2
Adjustments to reconcile to cash provided (used) by
operating activities:
Fresh-start adjustments........................... -- 63.8 -- --
Extraordinary gain on extinguishment of debt...... -- (89.5) -- --
Non-cash reorganization costs..................... -- 1.9 -- --
Depreciation and amortization..................... .2 -- .1 --
Non-cash interest expense......................... 23.2 17.1 .4 1.4
Deferred income taxes............................. -- -- -- (1.4)
Gain on sale of discontinued operation............ -- -- -- (6.1)
Gains on asset sales.............................. (3.3) (.4) -- (.3)
Proceeds from asset sales, net.................... 31.5 33.5 4.2 2.0
Investments in real estate held for development or
sale............................................ (9.0) (2.3) (.2) (.9)
Investment in land held for development........... (3.6) (4.2) (3.2) (4.1)
Decrease (increase) in other assets............... (2.8) 1.0 (.2) (.6)
Decrease in accounts payable, accrued and other
liabilities..................................... (5.3) (6.8) (2.1) (3.1)
Other, net........................................ .4 -- .6 --
------ ------ ------ ------
Cash provided (used) by operating activities of
continuing operations......................... 2.4 23.7 (.9) (8.9)
------ ------ ------ ------
Cash used by operating activities of
discontinued operations....................... (10.5) (37.6) (35.4) (27.8)
------ ------ ------ ------
Cash flows from investing activities:
Proceeds from sale of discontinued operation........ -- -- -- 33.3
------ ------ ------ ------
Cash flows from financing activities:
Borrowings of bank debt............................. 9.8 .9 -- --
Repayments of bank debt............................. (18.2) (9.1) -- --
Use of restricted cash.............................. 2.3 .2 -- --
Issuance of restricted stock........................ -- -- -- 1.1
Repurchases of common stock......................... -- -- -- (2.9)
------ ------ ------ ------
Cash used by financing activities of continuing
operations...................................... (6.1) (8.0) -- (1.8)
------ ------ ------ ------
Cash provided by financing activities of
discontinued operations......................... 11.4 27.1 36.2 24.6
------ ------ ------ ------
Net increase (decrease) in cash and cash
equivalents......................................... (2.8) 5.2 (.1) 19.4
Cash and cash equivalents -- beginning of period...... 4.9 2.1 7.3 7.2
------ ------ ------ ------
Cash and cash equivalents -- end of period............ $ 2.1 $ 7.3 $ 7.2 $ 26.6
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-11
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEFERRED
SERIES A CLASS A CAPITAL IN PROCEEDS FROM MINIMUM RETAINED
PREFERRED COMMON EXCESS OF STOCK PENSION EARNINGS
STOCK STOCK COMMON STOCK PAR VALUE ISSUANCE LIABILITY (DEFICIT)
------------- ----------- ------------- ----------- ------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995.... $ .4 $ 2.4 $ -- $ 229.9 $ (1.1) $ (1.0) $ (201.0)
Net loss................... -- -- -- -- -- -- (28.9)
Minimum pension
liability................ -- -- -- -- -- .4 --
Valuation adjustment to
deferred proceeds from
stock issuance........... -- -- -- (.7) .7 -- --
--- ----- --- ----------- ----- ----- -------------
Balance December 31, 1996.... .4 2.4 -- 229.2 (.4) (.6) (229.9)
Net income (Eight-month
period -- Predecessor
Company)................. -- -- -- -- -- -- 9.6
--- ----- --- ----------- ----- ----- -------------
Predecessor Company Balance
at September 2, 1997........ .4 2.4 -- 229.2 (.4) (.6) (220.3)
Recapitalization and
Fresh-Start Adjustments:
Cancel Class A Common and
Series A Preferred
Shares................... (.4) (2.4) -- -- -- -- --
Issue New Common Shares.... -- -- .6 -- .4 -- --
Fresh-Start Adjustments.... -- -- -- (89.2) -- -- 220.3
--- ----- --- ----------- ----- ----- -------------
Successor Company Balance at
September 3, 1997........... -- -- .6 140.0 -- (.6) --
Net loss (Four-month
period -- Successor
Company)................. -- -- -- -- -- -- (.5)
Minimum pension
liability................ -- -- -- -- -- .6 --
--- ----- --- ----------- ----- ----- -------------
Successor Company Balance at
December 31, 1997........... -- -- .6 140.0 -- -- (.5)
Net income................. -- -- -- -- -- -- 4.2
Pre-Reorganization net
operating loss........... -- -- -- .2 -- -- --
Restricted stock grant..... -- -- -- 1.1 -- -- --
Stock repurchases.......... -- -- -- (2.9) -- -- --
--- ----- --- ----------- ----- ----- -------------
Balance December 31, 1998.... $ -- $ -- $ .6 $ 138.4 $ -- $ -- $ 3.7
--- ----- --- ----------- ----- ----- -------------
--- ----- --- ----------- ----- ----- -------------
<CAPTION>
TOTAL
---------
<S> <C>
Balance December 31, 1995.... $ 29.6
Net loss................... (28.9)
Minimum pension
liability................ .4
Valuation adjustment to
deferred proceeds from
stock issuance........... --
---------
Balance December 31, 1996.... 1.1
Net income (Eight-month
period -- Predecessor
Company)................. 9.6
---------
Predecessor Company Balance
at September 2, 1997........ 10.7
Recapitalization and
Fresh-Start Adjustments:
Cancel Class A Common and
Series A Preferred
Shares................... (2.8)
Issue New Common Shares.... 1.0
Fresh-Start Adjustments.... 131.1
---------
Successor Company Balance at
September 3, 1997........... 140.0
Net loss (Four-month
period -- Successor
Company)................. (.5)
Minimum pension
liability................ .6
---------
Successor Company Balance at
December 31, 1997........... 140.1
Net income................. 4.2
Pre-Reorganization net
operating loss........... .2
Restricted stock grant..... 1.1
Stock repurchases.......... (2.9)
---------
Balance December 31, 1998.... $ 142.7
---------
---------
</TABLE>
See independent auditors' report and accompanying notes to financial statements.
F-12
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- FORMATION AND BASIS OF PRESENTATION
The principal activities of California Coastal Communities, Inc. and its
consolidated subsidiaries (the "Company", formerly known as Koll Real Estate
Group, Inc., The Bolsa Chica Company and Henley Properties Inc.) 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 December 31, 1989, The Henley Group, Inc. separated its business into two
public companies through a distribution to its Class A and Class B common
stockholders of all of the common stock of a newly formed Delaware corporation
to which The Henley Group, Inc. had contributed its non-real estate development
operations, assets and related liabilities. The new company was named The Henley
Group, Inc. ("Henley Group") immediately following the distribution. The
remaining company was renamed Henley Properties Inc. ("Henley Properties") and
consisted of the real estate development business and assets of Henley Group,
including its principal subsidiary Signal Landmark.
On July 16, 1992, a subsidiary of Henley Properties merged with and into
Henley Group (the "Merger") and Henley Group became a wholly owned subsidiary of
Henley Properties. In the Merger, Henley Properties, through its Henley Group
subsidiary, received net assets having a book value as of July 16, 1992 of
approximately $45.3 million, consisting of approximately $103.6 million of
assets, including $58.3 million of cash and a 44% interest in Deltec Panamerica
S.A. ("Deltec"), and $58.3 million of liabilities. In connection with the
Merger, Henley Properties was renamed The Bolsa Chica Company.
On September 30, 1993, a subsidiary of The Bolsa Chica Company acquired the
domestic real estate development business and related assets of The Koll
Company. In connection with this acquisition, The Bolsa Chica Company was
renamed Koll Real Estate Group, Inc.
On September 2, 1997, the Company completed a recapitalization which
resulted in the exchange of all the then existing Debentures, Series A Preferred
Stock and Class A Common Stock into new Common Stock. In addition, upon the
recapitalization, the Company adopted the provisions of Statement of Position
No. 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("Fresh-Start Reporting"). The recapitalization is further described in
Note 3.
On April 30, 1998, the Company sold its commercial development business as
further described in Note 4. Accordingly, the financial results of the
commercial development business have been treated as discontinued operations in
the accompanying financial statements. Immediately following the sale, Koll Real
Estate Group, Inc. was renamed California Coastal Communities, Inc.
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts have been reclassified to
conform with the current year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
F-13
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REAL ESTATE
Real estate held for development and land held for development (real estate
properties) are carried at cost net of impairment losses based on undiscounted
cash flows. Real estate held for sale is carried at cost, net of impairment
losses and selling costs based on undiscounted cash flows. 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.
The cost of sales of multi-unit projects is generally computed using the
relative sales value method, with direct construction costs and property taxes
accumulated by phase, using the specific identification method. Interest cost is
capitalized to real estate projects during their development and construction
period.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" ("SFAS
121"), which requires an impaired asset (real property or intangible) to be
written down to fair value. If an impairment occurs, the fair value of an asset
for purposes of SFAS 121 is deemed to be the amount a willing buyer would pay a
willing seller for such asset in a current transaction. On September 2, 1997,
the Company completed its recapitalization pursuant to court confirmation of a
Prepackaged Plan of Reorganization, and the Company applied the principles
required by the American Institute of Certified Public Accountant's Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("Fresh-Start Reporting") and the carrying value of real estate
properties was adjusted to fair value (Note 3). During the year ended December
31, 1998, no provision for impairment was considered necessary.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCATED TO NET ASSETS
Reorganization Value in Excess of Amounts Allocated to Net Assets arose from
the adoption of Fresh-Start Reporting upon completion of the Company's
recapitalization on September 2, 1997 (Note 3) and is being amortized on a
straight-line basis over 15 years. The Company evaluates the recoverability of
this intangible asset at each balance sheet date. The recoverability of this
intangible is determined by comparing the carrying value of the intangible to
the estimated income of the Company on an undiscounted cash flow basis. Any
impairment is recorded at the date of determination. Approximately $13.6 million
of such value was allocated to the commercial development business, which has
been reflected in discontinued operations as of December 31, 1997 (Note 4).
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company accounted for the cost of post-retirement benefits other than
pensions, which are primarily health care related, during each employee's active
working career under a plan which was frozen
F-14
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
in 1993. As of December 31, 1997 and 1998 the accrued unfunded costs totaled $.4
million and $.2 million, respectively.
INCOME TAXES
The Company accounts for income taxes on the liability method. Deferred
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect in the years in which these differences are expected to reverse.
RECOGNITION OF REVENUES
Sales are recorded using the full accrual method when title to the real
estate sold is passed to the buyer and the buyer has made an adequate financial
commitment. When it is determined that the earning process is not complete,
income is deferred using the installment, cost recovery or percentage of
completion methods of accounting.
EARNINGS PER COMMON SHARE
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share". For periods commencing September 2, 1997, earnings per
share is computed using the weighted average number of outstanding shares of the
Successor Company's Common Stock. The weighted average common shares outstanding
were 11.9 million for the four-month period ended December 31, 1997 and the year
ended December 31, 1998. The weighted average common shares outstanding reflect
the issuance, effective May 6, 1998, of 100,000 shares to the Company's Chief
Executive Officer under a restricted stock grant, and the repurchase and
cancellation of 490,000 shares in December 1998. 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on
January 1, 1998. SFAS No. 130 requires that all items required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. There is no difference between net income (loss) and
comprehensive income (loss) for the year ended December 31, 1998. Adjustments to
minimum pension liabilities are included in comprehensive income (loss).
The Company also adopted SFAS No. 131, "Disclosures about Segments and
Enterprise and Related Information." The adoption of this standard did not have
any effect on the financial statement disclosures.
In February 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" ("SFAS 132") which standardizes the disclosure requirements for
pensions and other postretirement benefit plans. This new statement does not
change the measurement or recognition of those plans.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
F-15
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SFAS 132 and 133 will be adopted in 1999 as required. Management believes
the adoption of these standards will not have a material effect on the Company's
financial position, results of operations or cash flows, and any effect will
generally be limited to the form and content of its disclosures.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3 -- 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. Under the Recapitalization, Senior
Debenture holders and Subordinated Debenture holders received 56 shares and 28
shares, respectively, for each $1,000 of principal amount of their Debentures
outstanding as of March 15, 1997, and holders of liquidated, non-contingent
claims received 56 shares for each $1,000 of their claims (all after
consolidation of all outstanding shares of preferred and common stock into a
single class of newly issued common stock and the reverse split described
below).
Upon implementation of the Recapitalization, $216.9 million book value of
Debentures and other liabilities subject to compromise were cancelled in
exchange for equity, resulting in an $89.5 million extraordinary gain on
extinguishment of debt. This gain was partially offset by $57.1 million of net
adjustments to revalue all assets and liabilities to reflect fair value as of
September 2, 1997 as required by Fresh-Start Reporting. The results of
operations and cash flows for the year ended December 31, 1996 and
F-16
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the eight-month period ended September 2, 1997 include operations prior to
completion of the Recapitalization (referred to as "Predecessor Company"). The
results of operations and cash flows for the four-month period ended December
31, 1997 and the year ended December 31, 1998 include operations subsequent to
the Company's Recapitalization and reflect the effects of Fresh-Start Reporting.
Operations for the four-month period ended December 31, 1997 and the year ended
December 31, 1998 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 $3.1 million is amortized on a
straight-line basis over 15 years. Such amount was reduced in 1998 by the amount
of the income tax provision recorded for the gain on the sale of the commercial
development business, pursuant to Fresh-Start Reporting. In addition, $13.6
million of Reorganization Value in Excess of Amounts Allocated to Net Assets was
originally allocated to such business, and is reflected in discontinued
operations net of related amortization as of December 31, 1997.
Professional fees and expenditures directly related to the Company's
Recapitalization are classified as reorganization costs and were expensed as
incurred. Reorganization costs during the period ended September 2, 1997
consisted primarily of legal, financial advisors and other professional fees,
incentive compensation to directors and officers of the Company and costs
related to the solicitation of security holder acceptances of the
Recapitalization.
NOTE 4 -- ACQUISITIONS AND DISPOSITIONS
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) $33.3 million in cash, which included
approximately $3.3 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,
became the Company's new President and Chief Executive Officer. The Company
realized an after-tax gain of approximately $6.1 million ($10.5 million pretax)
from this transaction.
Discontinued operations as of December 31, 1997 was comprised of the
following (in millions):
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Restricted cash................................................................................ $ .2
Real estate held for development or sale....................................................... 82.1
Reorganization value in excess of amounts allocated to net assets.............................. 13.3
Other assets................................................................................... 7.4
Accounts payable and other liabilities......................................................... (6.2)
Bank debt...................................................................................... (74.6)
Minority interest.............................................................................. (2.9)
---------
Net assets..................................................................................... $ 19.3
---------
---------
</TABLE>
F-17
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenues related to discontinued operations were $10.3 million, $26.9
million, $17.3 million and $28.1 million for the year ended December 31, 1996,
the eight-month period ended September 2, 1997, the four-month period ended
December 31, 1997 and the year ended December 31, 1998 through the date of sale,
respectively. Net income from discontinued operations for the year ended
December 31, 1996, the eight-month period ended September 2, 1997, the
four-month period ended December 31, 1997 and the year ended December 31, 1998
through the date of sale was $.4 million, $5.4 million, $.8 million and $.4
million, respectively. Net income for the eight-month period ended September 2,
1997 reflects the recording of $13.6 million in Reorganization Value in Excess
of Amounts Allocated to Net Assets, partially offset by a $6.9 million write-off
of goodwill as required by Fresh-Start Reporting.
In November 1994, the Company acquired the stock of Kathryn G. Thompson
Company ("KGTC") and related assets. The principal activities of the acquired
business, now known as Hearthside Homes, Inc., are residential land development
and homebuilding, focusing on the entry-level and first time move-up market
segments. The principal project of the acquired business is a 49% general
partnership interest in a 230-acre project planned for approximately 1,200
residential units in Aliso Viejo in southern Orange County ("AV Partnership").
In connection with the acquisition, the Company paid $1.2 million in cash and a
$.5 million note, issued 2 million shares (pre-reverse split) of Class A Common
Stock and warrants to purchase an additional 2 million shares (pre-reverse
split) which were cancelled in November 1996. The Company guaranteed
approximately $4.8 million of capital contribution notes due to AV Partnership,
which notes are primarily payable out of positive net cash flow to be generated
by the partnership interest and are due in April 1999. Due to a significant
shortfall in sales during 1995 (following the Orange County bankruptcy) versus
forecast, the highly leveraged capital structure of the partnership and the
significant amount of participating mortgages with preference to the Company's
equity interest, the Company does not expect to receive a financial return from
this partnership and in 1995 reserved for its contingent obligation on $4.8
million of capital contribution notes. In 1996, certain information came to the
Company's attention concerning the enforceability of the Company's guarantee of
$4.8 million of capital contribution notes. While the Company has reserved for
this contingent obligation, the Company intends to dispute the enforceability of
the guaranty. Nevertheless, a reserve relating to the contingent obligation on
the capital contribution notes, including accrued interest thereon, of $6.5
million and $6.9 million at December 31, 1997 and 1998, respectively, for this
partnership is included in other liabilities.
Summarized financial information of AV Partnership is presented below at
December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and
1998 (in millions, except home closings):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets................................................... $ 84.9 $ 47.7
Total project debt and other liabilities....................... 101.8 60.4
--------- ---------
Partners' capital (deficit).................................... $ (16.9) $ (12.7)
--------- ---------
--------- ---------
Statement of Operations Data:
Revenues....................................................... $ 44.3 $ 85.3 $ 101.0
Expenses....................................................... (55.5) (94.0) (96.8)
--------- --------- ---------
Net income (loss).............................................. $ (11.2) $ (8.7) $ 4.2
--------- --------- ---------
--------- --------- ---------
Home Closings.................................................... 158 357 378
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company uses the equity method to account for its investment in AV
Partnership and accordingly, the statement of operations includes a loss of $1.2
million for the year ended December 31, 1996.
F-18
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The losses recorded in 1996, 1997 and 1998 reflect accrued interest on the
capital contribution notes due to the partnership discussed above, as the
Company's net investment is $0.
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 wetlands (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 wetlands ("Warner Mesa"),
approximately 100 acres on, or adjacent to, the Huntington mesa and
approximately 40 acres of wetlands which were acquired by the Company 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. 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 and wetlands restoration, 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 California Environmental Quality Act lawsuit, the "CEQA
Lawsuit") challenging the approvals of the Board of Supervisors was filed in
January 1995. The Superior Court decided certain issues against the Company, and
the majority of issues in favor of the Company. Both the Company and the
plaintiffs appealed. On appeal, the Court of Appeal reversed the trial court,
deciding all issues in favor of the Company, and thereby affirming the validity
of the project approvals and the project environmental impact report ("EIR").
The Court of Appeal also reversed the trial court's award of attorneys' fees to
the plaintiffs.
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 trial 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. The
August 1997 judgment was appealed by both the project opponents and the Company
as discussed below. In October 1997, in response to the trial court's decisions,
the Coastal Commission approved modifications to the LCP which eliminated the
filling of Warner Pond and thereby reduced the maximum number of homes to be
built from 2,500 to no more than 1,235 homes on Warner Mesa. The Orange County
Board of Supervisors subsequently accepted the Coastal Commission's suggested
modifications. However, in February 1998, the trial court ruled that the Coastal
Commission should not have narrowed the scope of public comments during the
Coastal Commission's October 1997 hearing, and in March 1998 the trial court
ordered the Coastal Commission to hold a third hearing on the LCP. In May 1998,
the Company appealed the trial court's March 1998 decision on the LCP (the
"Second Appeal"). A hearing date for the Second Appeal has not yet been
scheduled by the Court of Appeal.
In October 1997, opponents of the Warner Mesa project appealed the trial
court's August 1997 decision on the basis that the trial court should have
reversed the Coastal Commission's January 1996
F-19
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
approval allowing relocation of certain raptor habitat. The Company also
appealed the trial court's decisions which reversed the Coastal Commission's
January 1996 approval (a) allowing Warner Pond to be filled and (b) allowing
residential development in lowlands. On October 14, 1998, the Court of Appeal
completed its hearing on this first set of appeals. The Court of Appeal normally
renders its decision within the 90 day period following such a hearing. However,
on January 21, 1999 the court ordered the matter to be resubmitted for further
consideration due to the complexity of the issues. The court could render a
decision at any time within 90 days of the January 21 order.
In the event that the Company prevails on all of the relevant issues raised
in the first set of appeals, it would not be necessary for the Company to pursue
its Second Appeal and, upon obtaining various secondary permits, construction
could commence under the January 1996 LCP approved by the Coastal Commission for
development of up to 2,500 homes on Warner Mesa. Alternatively, if the Company
pursues and is successful in the Second Appeal, it would then be allowed to
complete the processing of secondary permits and commence infrastructure
construction under the modified LCP approved by the Coastal Commission in
October 1997 for development of up to 1,235 homes on Warner Mesa. If the Company
does not prevail in the first set of appeals with respect to affirmation of the
trial court's decision allowing relocation of raptor habitat, then the Coastal
Commission would be required to hold a third public hearing on the LCP.
While litigation delays may continue, the Company believes that if an early
resolution were to occur, it would allow the start of infrastructure
construction later in 1999. The Company does not believe that the litigation
process will ultimately prevent it from developing the planned community at
Warner Mesa; however, there can be no assurance in that regard or that further
delays will not result.
The Company is processing a site plan in the City of Huntington Beach, in
compliance with existing zoning, for a 16-unit project on approximately five
acres of Warner Mesa. The project, known as Sandover, is adjacent to the
Company's land in the County of Orange, and requires no approvals outside the
City of Huntington Beach. A tentative tract map for the Sandover project was
approved by the City's Subdivision Review Committee in February 1999 and is
scheduled for a public hearing before the City's Planning Commission in April
1999. Upon approval by the Planning Commission, and subject to any appeal to the
City Council, the Company expects to begin construction of this 16-unit project
in the third quarter of 1999.
Upon completion of the Company's Recapitalization as discussed in Note 3,
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.
F-20
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- BANK DEBT
In January 1999, Signal Landmark, a subsidiary of the Company, entered into
a construction loan agreement with a commercial bank to finance construction of
infrastructure and the first 45 homes at phase II of the Company's 112-home
Rancho San Pasqual project. The loan is secured by a deed of trust on the Rancho
San Pasqual project and requires principle repayments upon sale of homes, with
any remaining amount due in January 2000. The original maturity date may be
extended at Signal Landmark's option for up to two additional six month periods.
The loan provides a facility of $14.3 million at an interest rate of prime plus
three-fourths percent.
In August 1996, Signal Landmark entered into a construction loan agreement,
guaranteed by the parent, to fund $2.0 million for construction of a
build-to-suit project in Signal Hill, California. During 1996 and 1997, $1.1
million and $.9 million was drawn, respectively, and the loan was repaid in
March 1997 upon sale of the project.
In December 1994, the Company entered into a letter of credit and
reimbursement agreement with Nomura Asset Capital Corporation ("Nomura") to fund
payment of the settlement of litigation with former affiliates regarding tax
sharing agreements in excess of $7.5 million to be funded by the Company. In
February 1995, the Company paid an aggregate of $22 million to settle the
litigation, of which $15.5 million was funded by borrowings under the letter of
credit and reimbursement agreement and the balance of $6.5 million from
restricted cash. The Company repaid $8.4 million and $7.1 million of such
borrowings during 1996 and 1997, respectively. In December 1994, the Company
also entered into a construction loan agreement with Nomura to partially fund
infrastructure construction at Rancho San Pasqual, the Company's
golf/residential property in San Diego County. The Company borrowed and repaid
an aggregate of $10.0 million during 1995 and 1996, under this loan agreement.
In February 1997, the outstanding Nomura loan balance was fully repaid with a
portion of the proceeds from a sale of Rancho San Pasqual lots and the sale of
the Bolsa Chica wetlands, and the loan agreements were terminated.
The Company made cash payments for interest on bank debt of $1.5 million and
$.2 million for the year ended December 31, 1996 and the eight-month period
ended September 2, 1997, respectively.
NOTE 7 -- OTHER LIABILITIES
Other liabilities were comprised of the following as of December 31 (in
millions):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Net deferred taxes and other tax liabilities................................. $ 14.5 $ 14.5
Accrued pensions and benefits................................................ 3.0 2.7
Contingent obligation on capital contribution notes.......................... 6.5 6.9
Accrued indemnity obligations................................................ 11.3 10.4
Unamortized discount......................................................... (5.6) (4.7)
--------- ---------
$ 29.7 $ 29.8
--------- ---------
--------- ---------
</TABLE>
NOTE 8 -- 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 exchange debt for stock) of
more than 50 percentage points at any time during a three-year period.
Subsequent to an ownership
F-21
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. However, 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 was 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 $271 million as of September 2,
1997 have been reduced by approximately $79 million, resulting in remaining NOLs
available of approximately $192 million after reflecting the settlement with the
IRS discussed below. As reduced, 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. The NOLs available as of December 31, 1998 are approximately
$189 million after reflecting activity subsequent to September 2, 1997 and the
settlement with the IRS discussed below.
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 $192
million of NOLs which existed as of September 2, 1997. The Company estimates
that since September 2, 1997 it has experienced a cumulative ownership shift as
computed in accordance with Section 382 of approximately 25% as of December 31,
1998.
F-22
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The tax effects of items that gave rise to significant portions of the
deferred tax accounts are as follows for the years ended December 31 (in
millions):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Real estate held for development or sale and operating properties (due to
asset revaluations and interest capitalized for tax purposes).......... $ 7.5 $ 6.2
Accruals/reserves not deductible until paid.............................. 5.7 4.1
Net operating loss carryforwards......................................... 78.8 66.5
Other.................................................................... 3.8 1.3
Valuation allowance...................................................... (71.2) (61.0)
--------- ---------
$ 24.6 $ 17.1
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Land held for development (principally due to accounting for a prior
business combination, partially offset by the asset revaluations in
1995 and 1997)......................................................... $ 19.2 $ 19.1
Other.................................................................... 9.4 2.0
--------- ---------
$ 28.6 $ 21.1
--------- ---------
--------- ---------
</TABLE>
Net deferred tax liabilities at December 31, 1998 are comprised entirely of
state net deferred tax liabilities.
The following is a summary of the income tax provision (benefit) applicable
to losses from continuing operations for the years ended December 31 (in
millions):
<TABLE>
<CAPTION>
FOR THE EIGHT-MONTH FOUR-MONTH FOR THE
YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
DEC. 31, 1996 SEP. 2, 1997 DEC. 31, 1997 DEC. 31, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income Tax Provision (Benefit):
Current.............................................. $ .1 $ 6.3 $ -- $ .1
Deferred............................................. -- (6.0) -- (1.1)
--- ----- ----- -----
$ .1 $ .3 $ -- $ (1.0)
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
Cash payments for federal, state and local income taxes were approximately
$.3 million, $.2 million, $.2 million and $.1 million for the years ended
December 31, 1996, the eight-month period ended September 2, 1997, the
four-month period ended December 31, 1997 and the year ended December 31, 1998,
respectively. Tax refunds received for the year ended December 31, 1996, the
eight-month period ended September 2, 1997, the four-month period ended December
31, 1997 and the year ended December 31, 1998 were approximately $.2 million,
$0, $.1 million and $0, respectively.
F-23
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The principal items accounting for the difference in taxes on income
computed at the statutory rate and as recorded are as follows (in millions):
<TABLE>
<CAPTION>
FOR THE EIGHT-MONTH FOUR-MONTH FOR THE
YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED
DEC. 31, 1996 SEPT. 2, 1997 DEC. 31, 1997 DEC. 31, 1998
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(Provision) benefit for income taxes at statutory
rate................................................. $ (10.1) $ 3.4 $ (.2) $ (1.2)
State income taxes, net................................ (.1) (5.7) -- (.2)
Increase (decrease) in valuation allowance............. 12.1 (.3) .1
Increase in other tax liabilities...................... -- 6.0 -- --
Non-deductible executive compensation.................. -- -- -- .5
All other items, net................................... (1.8) (3.1) .1 (.1)
------ ----- ----- -----
$ .1 $ .3 $ -- $ (1.0)
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
TAX SHARING AGREEMENTS
Henley Group and MAFCO Consolidated Group Inc. ("MAFCO"; formerly known as
Abex Inc.), a former subsidiary of Henley Group whose stock was distributed to
stockholders of Henley Group in July 1992, entered into a tax sharing agreement
in 1992 prior to the Distribution to provide for the payment of taxes for
periods during which Henley Group and MAFCO were included in the same
consolidated group for federal income tax purposes, the allocation of
responsibility for the filing of tax returns, the cooperation of the parties in
realizing certain tax benefits, the conduct of tax audits and various related
matters.
1989-1992 INCOME TAXES. The Company is generally charged with
responsibility for all of its federal, state, local or foreign income taxes for
this period and, pursuant to the tax sharing agreement with MAFCO, all such
taxes attributable to Henley Group and their consolidated subsidiaries,
including any additional liability resulting from adjustments on audit (and any
interest or penalties payable with respect thereto), except that MAFCO is
generally charged with responsibility for all such taxes attributable to it and
its subsidiaries for 1990-1992. In addition, under a separate tax sharing
agreement between Henley Group and a former subsidiary of Henley Group, Fisher
Scientific International Inc. ("Fisher"), Fisher is generally charged with
responsibility for its own income tax liabilities for this period.
The Internal Revenue Service ("IRS") proposed material audit adjustments
with respect to the tax returns of the Company and its consolidated
subsidiaries, including formerly affiliated entities, for the years ended
December 31, 1989, 1990 and 1991. The IRS proposed adjustments, if upheld, could
have resulted in Federal tax liability, before interest, of approximately $17
million and disallowance of up to $132 million of NOL carryforwards. The Company
disagreed with the positions taken by the IRS and filed protests with the IRS to
contest the proposed adjustments. In December 1998, the Company executed a
settlement agreement with the IRS with respect to the proposed adjustments
described above. As a result of this agreement, the Company paid $759,000 (which
includes $280,000 of tax and $479,000 of interest through January 1999), net of
the Company's refund claim for 1992 NOL carrybacks of approximately $1.6
million, in full settlement of such claims in February 1999. Under this
settlement agreement approximately $10 million of the Company's NOL
carryforwards will be disallowed. The Company expects to carry back NOLs of $8.1
million from 1992 to 1991 in connection with its refund claim. There can be no
assurance that the refund will be received. The Company has reviewed the extent
of potential accompanying state tax liability adjustments and does not believe
that any such adjustments would have a material impact on the Company's
financial statements.
F-24
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
See Note 5 for a discussion of certain litigation relating to the California
Coastal Commission's approvals of the LCP.
There are various other lawsuits and claims pending against the Company and
certain subsidiaries. In the opinion of the Company's management, ultimate
liability, if any, will not have a material adverse effect on the Company's
financial condition or results of operations.
On December 24, 1998, a New Jersey court approved an October 1997 mutual
settlement and release agreement between the Company and Svedala Industries,
Inc. ("Svedala") settling litigation in which Svedala filed a lawsuit naming as
defendants the Company and Nichols Engineering & Research Corporation
("Nichols"), an indirect wholly-owned subsidiary of the Company, as well as
several other unrelated companies. The lawsuit was filed in March 1994, in New
Jersey Superior Court in Morris County, New Jersey and amended in August 1994
and October 1995. The lawsuit sought recovery of costs of clean-up of a property
in Mt. Olive, New Jersey and asserted that the clean-up costs totaled
approximately $10 million. The lawsuit alleged that Nichols, which is a
wholly-owned subsidiary of New Henley Holdings Inc., which is a direct
wholly-owned subsidiary of the Company, was responsible, in whole or in part,
for contaminating the property with hazardous substances during Nichols'
operations there from the 1940s to the 1970s. The settlement agreement provides
the Company and its subsidiaries with a complete release of Svedala's claims for
any liability arising from the facts of the lawsuit in consideration for the
December 1998 payment of $200,000 to Svedala by the Company.
On March 25, 1997, Whiting Corporation, a Delaware corporation, commenced a
lawsuit in the circuit Court of Cook County, Illinois, Chancery division,
naming, among others, the Company and WT/HRC Corporation, a direct subsidiary of
the Company, as defendants in a complaint for declaratory relief and breach of
contract and indemnification. The complaint alleges that WT/HRC owes Whiting a
defense and indemnity for several hundred asbestos cases pending in several
states, as well as for similar asbestos claims which may be filed in the future.
The complaint states no specified amount of damages. The lawsuit is based on a
1983 Asset Purchase Agreement in which the seller, Whiting-Illinois (now named
WT/HRC), sold assets and the business of its "Whiting Engineered Products Group"
to plaintiff's predecessor in interest. Whiting contends that the seller agreed
in the Asset Purchase Agreement to indemnify Whiting for personal injury,
sickness, death or property damages claims which arise from occurrences
predating the closing date (December 30, 1993). The Company denied the
allegations in the complaint and vigorously defended the action. All claims
against the Company were dismissed in early 1998, and the WT/HRC subsidiary is
now the only named defendant.
On July 14, 1995, the Grandview/Crest Homeowners Association, representing
owners of 341 condominium units, filed a lawsuit in Orange County Superior Court
naming as defendants Lake Forest Properties, Signal Landmark, Inc. now known as
Signal Landmark ("Signal") and Onyx Land Company, as well as various
unaffiliated defendants (the "Grandview Lawsuit"). Lake Forest Properties was a
California joint venture which was the developer of the subject 341-unit
condominium project. Lake Forest Properties had two joint venture partners,
Signal, an indirect subsidiary of the Company, and Onyx Land Company which was a
wholly-owned subsidiary of Signal, which was dissolved and its assets
transferred to Signal on December 31, 1988. Lake Forest Properties also was
dissolved effective December 31, 1988. The original complaint for construction
defects alleged warranty, liability, negligence and breaches of covenants,
conditions and restrictions, and of fiduciary duties. On June 25, 1996, the
Plaintiff filed a First Amended Complaint alleging that structural distress,
life-safety hazards, and extensive water intrusion had resulted from the alleged
defects in construction estimated in September 1997 at a preliminary cost of
F-25
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
approximately $20.4 million. On March 23, 1998 the Company entered into a mutual
settlement agreement with the plaintiff as well as with the Company's insurance
carriers which had responsibility for the claims. Pursuant to the settlement
agreement, the Company's insurance carriers paid the $4.6 million settlement and
related legal and other costs of defense, with a contribution from the Company
of approximately $.6 million for deductibles, which did not exceed previously
established reserves in the Company's balance sheet.
On September 12, 1996, plaintiffs Edward and Helen Law, et al. filed a class
action complaint in San Diego Superior Court for breach of warranties, strict
liability, negligence, breach of contract, projects liability, intentional
misrepresentation, fraud and deceit, and negligent representation against
Signal, and a former subsidiary of Signal, for damages allegedly arising out of
construction deficiencies at the plaintiffs' homes in Coronado, California (the
"Coronado Lawsuit"). On May 7, 1997, plaintiffs Edward and Helen Law, et al.,
filed a first amended complaint against Signal and its former subsidiary for the
same causes of action. On September 17, 1997, plaintiffs filed a second amended
complaint for construction deficiencies in the names of 126 of the homeowners in
Coronado, California, as well as the Homeowners Association. On March 3, 1998,
the plaintiffs asserted a claim of $13.0 million. On October 30, 1998 the
Company's motion was granted in San Diego Superior Court settling the lawsuit
for an aggregate of $4.1 million. The Company's insurance carriers have paid
Signal Landmark's $1.7 million share of the settlement and the remaining $2.4
million of settlement payments which have been reimbursed to the carriers by
subcontractors. Additional contributions from subcontractors and the insurance
carriers are expected to reimburse the Company's share of attorney's fees,
resulting in a cost to the Company of no more than $.1 million upon resolution
of insurance claims.
GUARANTEES OF COMMERCIAL PROJECT DEBT
As of April 30, 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 the
sale of the commercial development business, all of these guarantees were
assumed by KDC, which fully indemnified the Company against any and all
liability with respect to these guarantees. In addition, the Company was
released from the substantial majority of these guarantees by the various banks,
although the Company has not been released by one bank from a remaining
guarantee of approximately $22.7 million. KDC has fully indemnified the Company
against any and all liability with respect to such guarantee, and has obtained a
letter of credit in favor of the Company in the amount of $1.1 million to secure
any related obligation.
LEASE OBLIGATIONS
For each of the year ended December 31, 1996, the four-month period ended
December 31, 1997, the eight-month period ended September 2, 1997, and the year
ended December 31, 1998 the Company incurred rents of approximately $177
thousand, $107 thousand, $53 thousand and $143 thousand, respectively, including
rents discussed in Note 10 below. Future minimum noncancelable operating lease
payments, net of minimum rentals receivable relating to the Company's operations
for the years ending December 31, 1999, 2000 and 2001 are approximately $100
thousand, $250 thousand and $250 thousand, respectively, and thereafter such
amounts are zero.
CORPORATE INDEMNIFICATION MATTERS
The Company and its predecessors have, through a variety of transactions
effected since 1986, disposed of several assets and businesses, many of which
are unrelated to the Company's current operations. By operation of law or
contractual indemnity provisions, the Company has retained liabilities
F-26
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
relating to certain of these assets and businesses. Many of such liabilities are
supported by insurance or by indemnities from certain of the Company's
predecessors and currently or previously affiliated companies. The Company
believes its balance sheet reflects adequate reserves for these matters.
The United States Environmental Protection Agency ("EPA") has designated
Universal Oil Products ("UOP"), among others, as a Potentially Responsible Party
("PRP") with respect to an area of the Upper Peninsula of Michigan (the "Torch
Lake Site") under the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"). UOP is allegedly the successor
in interest to one of the companies that conducted mining operations in the
Torch Lake area and an affiliate of AlliedSignal Inc., ("Allied") a predecessor
of the Company. The Company has not been named as a PRP at the site. However,
Allied has, through UOP, asserted a contractual indemnification claim against
the Company for all claims that may be asserted against UOP by the EPA or other
parties with respect to the site. In October 1998, the EPA announced that it has
received funding for and will commence implementation of a clean-up plan in the
summer of 1999 which will involve covering certain real property both contiguous
and non-contiguous to Torch Lake with soil and vegetation in order to address
alleged risks posed by copper tailings and slag at an estimated cost of $15
million. Under CERCLA, the EPA could assert claims against the Torch Lake PRPs,
including UOP, to recover the cost of all remedial action required at the site,
and natural resources damages. If the EPA pursues such claims against UOP, the
Company, without admission of any obligation to UOP, would vigorously defend
UOP's position that the EPA's proposed cleanup plan is unnecessary and
inconsistent with the requirements of CERCLA given that the EPA's own Site
Assessment and Record of Decision found no immediate threat to human health. In
the Company's view the proposed remediation costs would be in excess of any
resulting benefits.
NOTE 10 -- RELATED PARTY TRANSACTIONS
Related party transactions reflected in continuing operations are as
follows:
CONSTRUCTION MANAGEMENT AGREEMENTS
The Company entered into construction management agreements with Koll
Construction, a wholly owned subsidiary of The Koll Company, for demolition of
bunkers at Warner Mesa, and for infrastructure construction at Rancho San
Pasqual during 1993 and 1995, respectively. During 1996 and the eight-month
period ended September 2, 1997 the Company incurred fees aggregating
approximately $400 thousand and $100 thousand, respectively, to Koll
Construction for these services and related reimbursements.
SERVICE AGREEMENT
The Company also entered into a Management Information Systems and Human
Resources Services Agreement in September 1993 with Koll Management Services,
Inc., also known as Koll Real Estate Services ("KRES"), a company formerly owned
by a subsidiary of The Koll Company, and acquired by CB Commercial Real Estate
Services Group Inc. ("CB") in August 1997. Under this agreement, KRES provided
computer programming, data processing organization and retention and other
related services through August 31, 1998, and payroll, human resources and other
related services through August 31, 1997. Aggregate fees and related
reimbursements incurred were approximately $100 thousand for each of the year
ended December 31, 1996 and the eight-month period ended September 2, 1997,
after which KRES was no longer a related party.
F-27
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SUBLEASE AGREEMENT
In September 1993, the Company entered into an annual Sublease Agreement
with The Koll Company to sublease a portion of The Koll Company affiliate's
office building located in Newport Beach, California. The lease was terminated
September 5, 1998. Costs under this lease were approximately $128 thousand, $65
thousand, $64 thousand and $28 thousand for the year ended December 31, 1996,
the eight-month period ended September 2, 1997, the four-month period ended
December 31, 1997, and the four months ended April 30, 1998, respectively, after
which The Koll Company was no longer a related party.
Related party transactions reflected in discontinued operations are as
follows:
SALE OF COMMERCIAL DEVELOPMENT BUSINESS
See Note 4 for a description of this related party transaction.
GENERAL CONTRACTOR AGREEMENTS
In 1996 the Company entered into a general contractor agreement with Koll
Construction in conjunction with a build-to-suit project for a third-party
corporate office building in Nevada. In 1997 and 1998 the Company entered into
general contractor agreements with Koll Construction in conjunction with four
build-to-suit projects in California and one build-to-suit project in Kansas
owned by the Company. During 1996, the eight-month period ended September 2,
1997, the four-month period ended December 31, 1997 and the four months ended
April 30, 1998 (after which Koll Construction was no longer a related party),
the Company incurred fees aggregating approximately $1.7 million, $9.6 million,
$5.1 million and $5.4 million, respectively, to Koll Construction in
consideration for these services and related reimbursements.
SUBLEASE AGREEMENTS
Under the Sublease Agreement with The Koll Company described above, as well
as under month-to-month lease agreements with KRES which were terminated in
1996, for office space in Northern California and San Diego, California,
combined lease costs were approximately $247 thousand, $140 thousand, $78
thousand, and less than $119 thousand for the year ended December 31, 1996, the
eight-month period ended September 2, 1997, the four-month period ended December
31, 1997 and the four months ended April 30, 1998.
DEVELOPMENT FEES
For the year ended December 31, 1996, the eight-month period ended September
2, 1997, the four-month period ended December 31, 1997 and the four months ended
April 30, 1998, the Company earned fees of approximately $1.9 million, $2.3
million, $3.1 million and $1.7 million, respectively, for real estate
development and disposition services provided to partnerships in which The Koll
Company and certain former directors and officers of the Company have an
ownership interest.
NOTE 11 -- RETIREMENT PLANS
The Company participates in a retirement savings plan pursuant to Section
401(k) of the Code, whereby participants may contribute a portion of their
compensation to their respective retirement accounts, in an amount not to exceed
the maximum allowed under the Code. The plan provides for
F-28
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
voluntary matching contributions by the Company; however, no contributions have
been made by the Company. Plan participants are immediately vested in their
contributions.
The Company has a noncontributory defined benefit retirement plan covering
substantially all employees of the Company prior to September 30, 1993 who had
completed one year of continuous employment. The benefit accrual for all
participants was terminated on December 31, 1993. In November 1996, the assets
held in trust under the Company's supplemental executive retirement plan were
paid to participants in exchange for each participant's release of any future
benefit claims under this plan, resulting in termination of the supplemental
executive plan and the curtailment gain recorded in 1996. Net periodic pension
cost was as follows (in millions):
<TABLE>
<CAPTION>
FOR THE YEAR EIGHT-MONTH FOUR-MONTH FOR THE YEAR
ENDED DEC. 31, PERIOD ENDED PERIOD ENDED ENDED DEC. 31,
1996 SEP. 2, 1997 DEC. 31, 1997 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Service cost........................................... $ -- $ -- $ -- $ --
Interest cost.......................................... .5 .2 .1 .3
Actual return on assets................................ (.8) (.8) (.4) (1.2)
Net amortization and deferral.......................... .4 .5 .3 .8
Gain on curtailment.................................... (.3) -- -- --
--- ----- --- ---
Net periodic pension cost (income)..................... $ (.2) $ (.1) $ -- $ (.1)
--- ----- --- ---
--- ----- --- ---
</TABLE>
The funded status and accrued pension cost at December 31, 1997 and 1998 for
the defined benefit plan were as follows (in millions):
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested............................................... $ (5.4) $ (5.6)
Nonvested............................................ -- --
----- -----
Accumulated benefit obligation......................... $ (5.4) $ (5.6)
----- -----
----- -----
Projected benefit obligation........................... $ (5.4) $ (5.6)
Plan assets at fair value.............................. 5.7 6.5
----- -----
Projected benefit obligation less than plan assets..... .3 .9
Unrecognized net gain.................................. -- (.5)
----- -----
Prepaid pension cost................................... $ .3 $ .4
----- -----
----- -----
</TABLE>
The development of the projected benefit obligation for the plan at December
31, 1997 and 1998 is based on the following assumptions: discount rates of 7%
and 6.75%, respectively, and an expected long-term rate of return on assets of
9% for both years. Assets of the plan are invested primarily in stocks, bonds,
short-term securities and cash equivalents.
NOTE 12 -- CAPITAL STOCK
COMMON STOCK
In December 1998, the Company repurchased an aggregate of 490,000 of its
shares at an average cost of $5.96 per share (representing a discount to market
prices), or approximately $2.9 million, in unsolicited
F-29
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
private transactions. In May 1998, the Company issued 100,000 shares to its
Chief Executive Officer under a restricted stock grant.
Upon completion of the Recapitalization in September 1997, approximately
90.1% of the Company's equity, in the form of newly issued shares of common
stock, excluding shares of common stock underlying certain options and warrants,
was owned by former holders of the Debentures and liquidated, non-contingent
claims (approximately 80.3% by former holders of Senior Debentures and
liquidated, non-contingent claims and 9.8% by former holders of Subordinated
Debentures). The remaining 9.9% of the Company's equity was owned, in the
aggregate, by former holders of the Company's Class A Common Stock (the "Class A
Common Stock" ) and Series A Preferred Stock (the "Preferred Stock")
(approximately 5.8% by former holders of Preferred Stock and 4.1% by former
holders of Class A Common Stock). Pursuant to approvals received at its 1997
Annual Meeting of Stockholders, the Company consolidated its Class A Common
Stock and Preferred Stock into a single class of stock, through the issuance of
1.75 shares of new common stock (the "Common Stock" ) for each outstanding share
of Preferred Stock and one share of Common Stock for each outstanding share of
Class A Common Stock and effected a one for one hundred (1:100) reverse stock
split of each outstanding share of the Company's capital stock on September 2,
1997, the effective date of the Recapitalization.
NOTE 13 -- STOCK PLANS
1993 STOCK OPTION/STOCK ISSUANCE PLAN
The 1993 Stock Option/Stock Issuance Plan ("1993 Plan") was approved at the
1994 Annual Meeting of Stockholders as the successor equity incentive program to
the Company's 1988 Stock Plan. Outstanding options under the 1988 Stock Plan
were incorporated into the 1993 Plan upon its approval. Under the 1993 Plan, 7.5
million shares each (including 3 million shares each originally authorized under
the 1988 Stock Plan) of Series A Preferred Stock and Class A Common Stock were
reserved for issuance to officers, key employees and consultants of the Company
and its subsidiaries and the non-employee members of the Board. No options were
exercised, and all options outstanding at December 31, 1996 were cancelled
during 1997 in connection with the Recapitalization.
On April 28, 1997, in connection with the Recapitalization, the Compensation
Committee of the Company's Board of Directors approved the grant of stock
options equivalent to 6% of the Company's fully diluted equity for certain
directors and officers which options were issued upon completion of the
Recapitalization. The options have a term of ten years and vest 40% after one
year, an additional 30% after two years and the final 30% after three years.
Stock option grants of 759,984 shares were issued at a price of $11.99 per share
based on the 20-day average closing price following completion of the
Recapitalization in 1997. In connection with the sale of the commercial
development business described in Note 4, options for an aggregate of 569,988
shares were terminated. During 1998 an additional 295,000 options were issued to
certain officers and directors of the Company. These options have a term of ten
years and vest 50% after one year and the remaining 50% after two years.
F-30
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Successor Company's stock option plan for the
four-month period ended December 31, 1997 and the year ended December 31, 1998,
follows:
<TABLE>
<CAPTION>
EXERCISE
PRICE PER
OPTIONS OUTSTANDING NUMBER OF SHARES SHARE
- ----------------------------------------------------------- ----------------- --------------
<S> <C> <C>
September 2, 1997.......................................... -- --
Granted.................................................. 759,984 $11.99
Exercised................................................ -- --
Cancelled................................................ -- --
--------
December 31, 1997.......................................... 759,984 11.99
Granted.................................................. 295,000 9.25 - 9.875
Exercised................................................ -- --
Cancelled................................................ (569,988) (11.99)
--------
December 31, 1998.......................................... 484,996 $9.25 - 11.99
--------
--------
Options exercisable at December 31, 1998................... 75,998 $11.99
Options available for future grants at December 31, 1998... 274,988
</TABLE>
The Company applies Accounting Principles Board opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
its plan. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for performance-based awards. The fair
value of the options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility ranging from 17% to 38%, risk-free interest rate ranging from
5.00% to 5.75% and an expected life of 3 to 4 years. Had compensation cost for
the Company's stock option plan been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Successor Company's 1998 and 1997 net income (loss) would have been as follows
(in millions):
<TABLE>
<CAPTION>
1997 1998
-------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net income (loss) from
Continuing Operations........................................ $ (1.3) $ (1.5) $ (2.3) $ (2.8)
Discontinued Operations...................................... .8 .4 6.5 6.3
----- ----- ----- -----
Net income (loss).......................................... $ (.5) $ (1.1) $ 4.2 $ 3.5
----- ----- ----- -----
----- ----- ----- -----
Earnings (loss) per share--basic:
Continuing Operations........................................ $ (.11) $ (.12) $ (.19) $ (.24)
Discontinued Operations...................................... .07 .03 .54 .53
----- ----- ----- -----
Net earnings (loss) per common share....................... $ (.04) $ (.09) $ .35 $ .29
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
F-31
<PAGE>
CALIFORNIA COASTAL COMMUNITIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of quarterly financial information for 1997 and
1998 (in millions, except per share amounts):
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
-------------------------------------------------------------
FULL
FIRST SECOND THIRD FOURTH YEAR
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Revenues(a)................................... $ .4 $ 1.7 $ -- $ -- $ 2.1
Cost of sales(a).............................. .1 1.7 -- -- 1.8
Income (loss) from continuing operations...... (1.1) (.3) (1.0) .1 (2.3)
Net income (loss)(b).......................... -- 6.3 (1.0) (1.1) 4.2
Earnings (loss) per common share.............. -- $ .53 $ (.08) $ (.09) $ .35
Weighted average common shares outstanding.... 11.9 11.9 12.0 11.9 11.9
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------------------------------ ---------------------------------
FULL FULL
FIRST SECOND THIRD PERIOD THIRD FOURTH PERIOD
--------- ----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(JULY 1 - (SEPT. 3 -
SEPT. 2) SEPT. 30)
1997
Revenues(c),(d)............................... $ 28.9 $ 4.5 $ .5 $ 33.9 $ 1.6 $ 2.7 $ 4.3
Cost of sales(c),(d).......................... 28.4 4.5 .5 33.4 1.6 2.7 4.3
Loss from continuing operations(c),(d)........ (3.9) (9.5) (71.9) (85.3) (.3) (1.0) (1.3)
Net income (loss)(d).......................... (4.9) (9.5) 24.0 9.6 .2 (.7) (.5)
Income (loss) per common share(e)............. N/A N/A N/A N/A $ .02 $ (.06) $ (.04)
Weighted average common shares
outstanding(e).............................. N/A N/A N/A N/A 11.9 11.9 11.9
</TABLE>
- ------------------------
(a) The Company recorded revenues of approximately $.4 million from the sale of
an industrial building in Naples, Florida during the first quarter, and
sales of approximately $1.7 million during the second quarter from
residential lot sales at Rancho San Pasqual.
(b) Net income for the second quarter of 1998 primarily reflects a $6.1 million
after-tax gain on sale of the commercial development business.
(c) The Company recorded revenues and cost of sales of $25.0 million from the
sale of approximately 880 wetland acres at Bolsa Chica during the first
quarter. Revenues and cost of sales of approximately $9.8 million were
recorded from residential lot sales at Rancho San Pasqual, primarily in the
last three quarters of the year.
(d) Amounts have been reclassified to present the commercial development
business as a discontinued operation.
(e) Per share and weighted average common shares outstanding data for periods
prior to September 2, 1997 have been omitted as these amounts do not reflect
the Successor Company's current capital structure.
F-32
<PAGE>
January 25, 1999
Mr. Paul M. Meister
Fisher Scientific International, Inc.
Liberty Lane
Hampton, NH 03842
Re: Tax Sharing Agreements
Dear Paul:
In connection with the examination of the 1990 and 1991 consolidated
federal income tax returns of The Henley Group, Inc. ("Henley"), numerous
adjustments to taxable income were proposed by the examination team in their
30-day letter dated May 16, 1995. A protest was filed with the Appeals Division
on August 9, 1995, and during the last 28 months numerous discussions were held
with the Appeals Officers assigned on the case. On October 14, 1998, Robert
Donovan, the Appeals Team Chief, sent a proposed closing agreement which would
settle the issues in the case.
When we indicated a tentative willingness to settle the case, Mr. Donovan
prepared calculations showing the tax effect of the proposal. A copy of these
calculations is attached as Exhibit A. The calculations have been reviewed by
Dean Adams, as well as by Hank Adler of Deloitte & Touche. These calculations
show a tax due, before giving effect to carry back of 1992 net operating losses,
of $1,916,184. After giving effect to payments made with the tax return, the
payment made by Abex with respect to the tax shown as being due for "agreed"
issues and the reduction in tax resulting from the carry back of the 1992 net
operating losses, there is additional tax due in the amount of $280,223, plus
interest of approximately $464,000.
As we finalize the appeals settlement with the Internal Revenue Service, we
believe it is everyone's interest to agree as to the responsibilities of
California Coastal Communities, Inc. (formerly known as Koll Real Estate Group,
Inc.) ("CCC"), Henley and Fisher Scientific International, Inc. ("Fisher") under
all tax sharing agreements between them, including (but not limited to) the
following agreements: (i) the Tax Sharing Agreement, dated December 17, 1991,
between The Henley Group, Inc. and Fisher Scientific International, Inc.; (ii)
the Tax Sharing Agreement dated as of December 18, 1989, between The Henley
Group, Inc. and New Henley, Inc.; and (iii) the Tax Sharing Agreement dated as
of December 15, 1988, between The Henley Group, Inc. and Henley Newco, Inc. (all
such tax sharing agreements being referred to collectively hereinafter as the
"Tax Sharing Agreements"). Among other things, the Tax Sharing Agreements
provide for indemnification for taxes in periods ending on or before the
disaffiliation date.
<PAGE>
Mr. Paul M. Meister
January 25, 1999
Page 2
We understand and agree that:
(1) Henley and/or CCC will be obligated to pay any tax due, including any
federal and/or state income tax and/or franchise tax liability together
with interest and any penalties thereon, resulting from the final
settlement of the 1990 and 1991 Henley Group, Inc. federal income tax
audit;
(2) There are no current or future payments required to be made by Henley
or CCC (or any of their affiliates) to Fisher (or any of its
affiliates) under the Tax Sharing Agreements for tax matters other than
those referred to in Item 1 above;
(3) There are no current or future payments required to be made by Fisher
(or any of its affiliates) to Henley or CCC (or any of their
affiliates) under the Tax Sharing Agreements;
(4) CCC intends to take the position for state income tax and/or franchise
tax purposes that the sale of the IL Division by Fisher Scientific
Company was a "busted Section 351" transaction as per the position
taken on the consolidated federal and state returns as originally filed
for 1991. Fisher agrees, on behalf of itself and its affiliates, to
provide CCC, Deloitte & Touche and outside counsel with powers of
attorney (and any necessary authorization) in order to allow CCC,
Deloitte & Touche and outside counsel to act on behalf of Fisher (and
its affiliates) with regard to this position in each pertinent
jurisdiction. No such power may be revoked by Fisher, unless mutually
agreed by Fisher and CCC. Fisher agrees that (i) Fisher shall
immediately notify CCC of any proposed audit, adjustment or assessment
by any state taxing authority with respect to state income and/or
franchise taxes for the 1990 or 1991 taxable years; (ii) CCC shall have
the full authority and discretion regarding the handling of all
administrative proceedings and litigation on Fisher's (and its
affiliates') behalf with respect to state income and/or franchise taxes
for the 1990 and 1991 taxable years, which shall be at CCC's expense;
(iii) CCC shall immediately notify Fisher of any proposed audit,
adjustment or assessment by any state taxing authority with respect to
Fisher state income and/or franchise taxes for the 1990 or 1991 taxable
years; (iv) CCC shall notify Fisher within 10 business days of receipt
of any proposed audit, adjustment or assessment notice by any state
taxing authority with respect to Fisher and whether or not CCC will
appeal or agree to such notice; (v) CCC shall provide Fisher notice of
and an opportunity to attend any meeting with the relevant tax
authorities regarding any claim, audit or proceeding under CCC's
indemnity to Fisher; (vi) CCC will not agree to any adjustments that
affect taxable income, or taxes due for these years, without the prior
written consent of Fisher, which consent shall not be unreasonably
withheld; and that (vii) neither Fisher nor any affiliate of Fisher
shall take any position inconsistent with its reporting position for
the 1990 and 1991 taxable years in any filing or communication with any
state taxing authority or agree to any settlement of any state income
and/or
<PAGE>
Mr. Paul M. Meister
January 25, 1999
Page 3
franchise taxes due for these years without CCC's written consent,
which consent shall not be unreasonably withheld. CCC agrees to have
prepared on Fisher's (and its affiliates') behalf and at CCC's expense,
a notification of federal audit adjustments with respect to 1990 and
1991 in each state where Fisher is required to file such notification.
Fisher shall assist CCC in preparing or drafting the required filings
and provide CCC with any information required on a timely basis in
order to make such filings; the required filings shall be signed by an
officer of Fisher and will be filed by Fisher with the appropriate
state jurisdictions after approval by CCC, but in no event later than
required to be filed with the respective jurisdiction. It is understood
and agreed that Deloitte & Touche will sign the notices or returns as
preparers;
(5) CCC shall pay the amount of any state tax liability (including interest
and any penalties) promptly upon receipt by Fisher (or CCC) of a notice
that the tax is due from the pertinent state taxing authority; provided
that in the event CCC duly protests the amount due the payment shall
not be due until there is a Final Determination, as defined below, of
the amount of tax due (after all administrative procedures and
litigation are exhausted, CCC has elected not to pursue any remaining
administrative procedures or litigation, or payment is required to be
made (in any state(s) where payment is a condition precedent to
pursuing any appeals), whichever is first to occur (a "Final
Determination"). If CCC elects under 4 (iv) above to appeal or litigate
any proposed audit, adjustment or assessment notice issued by any state
taxing authority, then CCC must provide Fisher with the appropriate
appeal or litigation documentation signed by Deloitte & Touche or CCC's
outside counsel, for Fisher's signature and filing five (5) days prior
to the appropriate filing date for such appeal or litigation deadline.
Fisher shall be obligated to file the appeal documentation by the due
date for such filing. If CCC does not provide Fisher with the appeal
documentation 5 days prior to the due date, then CCC is deemed to have
a Final Determination of the amount of tax due.
(6) CCC shall provide Fisher with a letter of credit in favor of Fisher in
the amount of $3.0 million substantially in the form set forth in the
attached Exhibit B as partial security for payment of CCC's obligations
under the Tax Sharing Agreements as modified by this letter. Fisher
shall reimburse CCC for any letter of credit fee actually incurred in
providing such letter of credit up to a maximum amount of $30,000 per
year, payable (i) upon receipt by Fisher of the executed letter of
credit and (ii) 10 business days prior to the anniversary date of the
letter of credit. Fisher shall only be entitled to draw on the letter
of credit to the extent of any state tax liability (including interest
and any penalties) due as the result of a Final Determination or upon
receipt of notice of CCC's filing of a petition for relief under the
United States Bankruptcy Code. Fisher shall promptly apply all
<PAGE>
Mr. Paul M. Meister
January 25, 1999
Page 4
amounts drawn under the letter of credit towards payment of such state
tax liability (including interest and any penalties). Notwithstanding
the foregoing, however, CCC's obligations under the Tax Sharing
Agreements shall not be limited or reduced in any way as a result of
its providing said letter of credit, or as the result of any provision
of such letter of credit (including any provision relating to
extensions of the letter of credit); and
(7) This Agreement shall be governed by the laws of the state of Delaware,
without regard to the principals of conflict of laws thereof.
If you are in agreement with the above statements regarding Fisher's,
Henley's and CCC's liabilities pursuant to the Tax Sharing Agreements, please
sign and date the copy of this letter and return it via overnight delivery to
the undersigned.
Very truly yours,
/s/ Raymond J. Pacini
------------------------------
Raymond J. Pacini
President and
Chief Executive Officer
- -------------------------------------------------------------------------------
We have reviewed the attachments to this letter, together with the Tax
Sharing Agreements, and agree that, if the audit is settled in the
manner proposed by the Internal Revenue Service, Henley and CCC (and
their affiliates) have no further liability for payments to Fisher (or
any of its affiliates) with respect to taxes other than those referred
to in Items 1,5 and 6 above, and further that Fisher and any of its
affiliates have no claims against Henley or CCC for tax payments other
than those referred to in Items 1,5 and 6 above. We further agree with
the other matters set forth in Items 2,3,4 and 7 above.
January 27, 1999 /s/ Paul M. Meister
--------------------------- ------------------------------
Dated Paul M. Meister
Chief Financial Officer
------------------------------
Title
<PAGE>
EXHIBIT A
Income Tax Changes
Schedule 1
<TABLE>
<CAPTION>
12/31/90 12/31/91
<S> <C> <C>
Consolidated taxable income per return
(Before NOL carrybacks/carryforwards) ($64,621,292) $177,275,330
Previous adjustments:
Partial Agreement - Exam RAR
Schedule 1-A $ 5,575,126 $7,774,963
Separate deductions/adjustments:
Environmental Tax Deduction ($240,747)
------------ ------------
Consolidated taxable income as
previously adjusted ($59,046,166) $184,809,546
(Before NOL carrybacks/carryforwards)
RAR unagreed adjustments
(Before NOL carrybacks/carryforwards)
Schedule 1-B $98,776,164 $14,162,863
Separate deductions/adjustments:
Environmental Tax Deduction ($91,771) ($26,406)
Environmental Tax Deduction $9,411
------------ ------------
Consolidated taxable income per
unagreed RAR $39,638,227 $198,955,214
(Before NOL carrybacks/carryforwards)
Appeals settlement
(Before NOL carrybacks/carryforwards)
Schedule 1-C ($84,081,675) ($929,881)
Separate deductions/adjustments:
Environmental Tax Deduction $91,771 $1,116
------------ ------------
Consolidated TI per Appeals ($44,351,677) $198,026,449
(Before NOL carrybacks/carryforwards)
Net operating loss deduction
Carryforward - Schedule 2 ($108,499,914)
------------ ------------
Consolidated TI per Appeals
(after NOL C/B, C/F) ($44,351,677) $89,526,535
------------ ------------
------------ ------------
</TABLE>
<PAGE>
Income Tax Changes
Schedule 1
<TABLE>
<CAPTION>
12/31/90 12/31/91
<S> <C> <C>
Consolidated taxable income per Appeals ($44,351,677) $89,526,535
------------ ------------
------------ ------------
Tax on above $0 $30,439,022
Less credits:
Foreign tax credit - Schedule 13 $30,439,022
------------ ------------
Tax less credits $0 $0
Plus:
Alternative minimum tax - Schedule 10 $5,947,928
Environmental Tax - Schedule 11 $256,626
------------ ------------
Total corrected tax liability $0 $6,204,552
Total tax as previously adjusted
- Schedule 3 $0 $4,288,368
------------ ------------
Deficiency (overassessment) $0 $1,916,184
------------ ------------
------------ ------------
</TABLE>
<PAGE>
EXHIBIT B
Irrevocable Standby
Letter of Credit
No.
Issuance Date: ________________
Expiration Date: _______________
Beneficiary:
Fisher Scientific International, Inc.
Liberty Lane
Hampton, NH 03842
Ladies and Gentlemen:
We hereby establish our Irrevocable Standby Letter of Credit No. ______
in your favor for the account of California Coastal Communities, Inc.
effective immediately for a maximum amount of USD 3,000,000.00 (US Dollars
three million) available for payment at sight by your draft(s) drawn on us
when accompanied by the following document:
Beneficiary's dated statement purportedly signed by one of its officers
worded as follows: "This certifies that Fisher Scientific International
Inc., or any of its affiliates, is entitled to draw upon this Letter of
Credit in the amount of [$dollars] pursuant to paragraph 6 of the Letter
Agreement between California Coastal Communities, Inc. and Fisher Scientific
International, Inc. dated January 25, 1999."
The amount of this Letter of Credit shall be reduced by
a. the amount of any drawings under this Letter of Credit
b. the amount of any reductions acceptable to the Beneficiary
by amendment.
Partial drawings are permitted.
It is a condition of this Letter of Credit that it will be automatically
renewed for a one year period upon the expiration date set forth above and
upon each anniversary of such date, (however in no event will this Letter of
Credit be extended beyond the final expiration date of December 31, 2000
except to the
Continued on Page Two
<PAGE>
Page Two
L/C No. __________
extent of the lesser of (1) any amount of tax and interest potentially due
with respect to matters then being appealed, or (2) the then remaining
balance of the Letter of Credit) unless 60 days prior to the expiration date,
or prior to any anniversary of such date, we notify you in writing by
certified mail, return receipt requested mail, or by courier, that we elect
not to so renew this Letter of Credit.
Upon receipt of our notice of election not to renew this Letter of
Credit you may draw on us for up to the balance remaining and within the then
applicable expiration date by your sight draft drawn on us when accompanied
by the following document:
Beneficiary's dated statement purportedly signed by one of its officers
worded as follows: "The amount of this drawing USD _________ under
PaineWebber Incorporated Letter of Credit No. ___________ represents funds
due us as we have received notice from PaineWebber Incorporated of their
election not to renew this Letter of Credit, the obligations to Fisher
Scientific International, Inc. remain outstanding, and we have not received
an acceptable replacement Letter of Credit."
Drafts and Documents must be presented for payment at our office located
at 1200 Harbor Blvd., 4th Floor, Weehawken, NJ 07087 to the attention of the
Letter of Credit Dept. on or before the expiration date specified herein.
This credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 revision) International Chamber of Commerce
Publication No. 500, and to the extent not inconsistent therewith, the law of
the State of New York, including Article 5 of the New York Uniform Commercial
Code.
We hereby engage with you to honor drafts and documents drawn under and
in compliance with the terms of this credit.
All communications to us with respect to this L/C must be addressed to
our office located at 1200 Harbor Blvd., 4th Floor, Weehawken, N.J. 07087 to
the attention of the Letter of Credit Dept.
Very Truly Yours,
Authorized Signature
<PAGE>
EXHIBIT 21.01
CALIFORNIA COASTAL COMMUNITIES, INC.
WORLDWIDE SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage State/Country of
Ownership Incorporation
---------- ----------------
<S> <C> <C>
Hengro Fifteen Inc. 100 Delaware
Henley Disc Media, Inc. 100 Delaware
Henley Facilities, Inc. 100 Delaware
New Henley Holdings Inc. 100 Delaware
Air Correction International, Inc. 100 Delaware
GCC Patents Holding Company Inc. 100 Delaware
Hengro Fourteen Inc. 100 Delaware
Hengro Ten Inc. 100 Delaware
Hengro Thirteen Inc. 100 Delaware
Henley Deltec Holdings Inc. 100 Delaware
Henley Deltec Corporation 100 Delaware
Henley Investments, Inc. Two 100 Delaware
IRE Corporation 100 Indiana
LJC Investments, Inc. 100 Delaware
Moore International Inc. 80 Delaware
Newco A.C. Corporation 100 Delaware
Procon International Inc. 100 Delaware
Procon Incorporated 100 Delaware
Procofrance, S.A. 100 France
Procon (Great Britain) Limited 100 United Kingdom
Pullman Environmental Services Inc. 100 Delaware
Pullman Passenger Car Company Inc. 100 Delaware
Pullman Swindell Ltd. 100 United Kingdom
Trailmobile International Ltd. 100 Delaware
Pullman Trailmobile de Mexico S.A. de C.V. 100 Mexico
Trailmobile Leasing Corp. 100 Delaware
W.O.L. Corporation 100 Delaware
W.W.C. Corporation 100 Delaware
Wheelabrator Export Corporation 100 Delaware
Henley Holdings Two Inc. 100 Delaware
Signal Landmark Holdings Inc. 100 Delaware
Signal Landmark 100 California
Calumet Real Estate Inc. 100 Delaware
Newport Realty Corp. 100 California
Signal Hawaii, Inc. 100 Hawaii
Signal Puako Corporation 100 Hawaii
KREG Residential Corp. 100 Delaware
</TABLE>
<PAGE>
WORLDWIDE SUBSIDIARIES
(continued)
<TABLE>
<CAPTION>
Percentage State/Country of
Ownership Incorporation
---------- ----------------
<S> <C> <C>
Henley/KNO Holding Inc. 100 Delaware
Hearthside Holdings, Inc. 100 Delaware
Hearthside Homes, Inc. 100 California
AV Partnership 49 California
AV Partners Corp. 49 California
KREG Holdings Inc. 100 Delaware
NC Holding Company 100 Delaware
Wentworth By The Sea, Inc. *50 Delaware
Newco A. D. Corporation 100 South Carolina
Twenty Newco Inc. 100 Delaware
Wentworth Holdings Inc. 100 Delaware
Wentworth By The Sea, Inc. *50 Delaware
WESI Maryland Inc. 100 Delaware
WT/HRC Corporation 100 Illinois
Heat Research Corporation 100 Delaware
</TABLE>
(*) Together NC Holding Company and Wentworth Holdings Inc. own 100% of
Wentworth By The Sea, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 27
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 140
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 174
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 142
<TOTAL-LIABILITY-AND-EQUITY> 174
<SALES> 2
<TOTAL-REVENUES> 2
<CGS> 2
<TOTAL-COSTS> 2
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (3)
<INCOME-TAX> 1
<INCOME-CONTINUING> (2)
<DISCONTINUED> 6
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
