Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
OR
o
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
incorporation or organization)
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|
(I.R.S. Employer Identification No.)
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6 Executive Circle, Suite 250
Irvine, California
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92614
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(Address of principal executive offices)
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(Zip Code)
|
Registrants telephone
number, including area code:
(949) 250-7700
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
o
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
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|
Accelerated filer
¨
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|
Non-accelerated filer
o
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|
Smaller reporting
company
x
|
(Do not check if a
smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES
o
NO
x
Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date.
As of May 13, 2010 there were 10,995,902 shares of Common Stock,
par value $.05 outstanding
Table of Contents
CALIFORNIA COASTAL COMMUNITIES, INC.
(DEBTOR-IN-POSSESSION)
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
INDEX
2
Table of Contents
CAUTIONARY
STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that relate to future events or our
future financial performance. In addition, other statements we may make from
time to time, such as press releases, oral statements made by our officials and
other reports that we file with the Securities and Exchange Commission may also
contain such forward-looking statements. Undue reliance should not be placed on
these statements which involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as may, will, should,
expects, plans, anticipates, believes, estimates, predicts, potential,
continue, or the negative of such terms or other comparable terminology.
These forward-looking statements include, but are not limited to:
·
the impact, effect and eventual result of the
Chapter 11 Cases in restructuring our debt obligations under the Revolving Loan
and Term Loan;
·
our and the other Debtors
ability to remain as a debtors-in-possession during the pendency of the Chapter
11 Cases;
·
our ability to create
stockholder value;
·
our compliance with future
debt covenants and actions we may take with respect thereto;
·
economic changes nationally
or in local markets, including changes in consumer confidence, volatility of
mortgage interest rates and inflation;
·
continued or increased
downturn in the homebuilding industry;
·
statements about our
strategies, plans, objectives, goals, expectations and intentions;
·
information relating to
anticipated operating results, financial resources, changes in revenues,
changes in profitability, interest expense, growth and expansion;
·
the impact of demographic
trends and supply constraints on the demand for and supply of housing;
·
housing market conditions in
the geographic markets in which we operate;
·
the number and types of
homes and number of acres of land that we may develop and sell;
·
our ability to deliver homes
from backlog;
·
the timing and outcomes of
regulatory approval processes or administrative proceedings, which may result
in delays in land entitlement, development, construction, or the opening of new
communities;
·
our ability to secure
materials and subcontractors;
·
our ability to produce the
liquidity and capital necessary to service our debt, fund operations, expand
and take advantage of future opportunities if current market conditions
persist;
·
our cost of and ability to
access additional capital;
·
our ability to realize the
value of our net operating loss carry forwards;
·
our ability to continue
relationships with current or future partners;
·
the effectiveness and
adequacy of our disclosure and internal controls;
3
Table
of Contents
·
the impact of recent
accounting pronouncements; and
·
stock market valuations.
Any or all of the forward-looking statements included in this report
and in any other reports or public statements made by us may turn out to be
inaccurate. This can occur as a result of incorrect assumptions or as a
consequence of known or unknown risks and uncertainties. These risks and
uncertainties include the unpredictability of the Chapter 11 bankruptcy
process; competitive environment in which we operate; local, regional and
national economic conditions; the effects of the current national credit market
crisis, inflation and the recession; our ability to comply with the covenants
and amortization schedules contained in our Revolving and Term Loan agreements;
the demand for homes; adverse market conditions that could result in additional
inventory impairments, including an oversupply of unsold homes, declining home
prices, and increased foreclosure and short sale activity; declines in consumer
confidence; increases in competition; fluctuations in interest rates and the
availability of mortgage financing; mortgage foreclosure rates; the
availability and cost of land for future growth; the availability of capital,
including access under our existing credit facilities; uncertainties and
fluctuations in capital and securities markets; changes in tax laws and their
interpretation; legal proceedings; the ability of customers to finance the
purchase of homes or sell existing homes; the availability and cost of labor
and materials; the amount of our debt and the impact of restrictive covenants
in our loan agreements; adverse weather conditions; domestic and international
political events; geopolitical risks and the uncertainties created by terrorist
attacks; the effects of governmental regulation, including regulations
concerning development of land, the home building industry, sales and customer
financing processes, and the environment; and other risks discussed in our
filings with the Securities and Exchange Commission. Many factors mentioned in
this report or in other reports or public statements made by us, such as
government regulation and the competitive environment, will be important in
determining our future performance. Consequently, actual results may differ
materially from those that might be anticipated from our forward-looking
statements. You should not place undue reliance on any of these forward-looking
statements because they are based on current expectations or beliefs regarding
future events or circumstances, which involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results,
performances or achievements expressed or implied by these forward-looking
statements.
Although
we believe that our strategies, plans, objectives, goals, expectations and
intentions reflected in, or suggested by these forward-looking statements are
reasonable given current information available to us, we can give no assurance
that any of them will be achieved. Forward-looking statements speak only as of
the date they are made. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, any further disclosures made on related subjects
in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.
These
forward-looking statements should be considered in light of the information
included in this report and our other filings with the Securities and Exchange
Commission, including, without limitation, the Risk Factors and the
description of trends and other factors in Managements Discussion and
Analysis of Financial Condition and Results of Operations, set forth in this Form 10-Q
and in our Form 10-K for the year ended December 31, 2009. You should
also read the following Consolidated Financial Statements and the related
notes.
We
assume no, and hereby disclaim any, obligation to update any of the foregoing
or any other forward-looking statements, whether as a result of new
information, future events, changed circumstances or any other reason after the
date of this Form 10-Q. We nonetheless reserve the right to make such
updates from time to time by press release, periodic report or other method of
public disclosure without the need for specific reference to this Form 10-Q
or any other report filed by us. No such update shall be deemed to indicate
that other statements not addressed by such update remain correct or create an
obligation to provide any other updates.
4
Table of Contents
PART I - FINANCIAL INFORMATION
Item
1. Financial Statements.
CALIFORNIA COASTAL COMMUNITIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions)
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March 31,
2010
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December 31,
2009
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ASSETS
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Cash and cash equivalents
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$
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4.7
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$
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8.9
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Restricted cash
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0.8
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0.8
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Real estate inventories
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239.2
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235.4
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Other assets, net
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4.3
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4.8
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$
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249.0
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$
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249.9
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LIABILITIES AND STOCKHOLDERS EQUITY
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Liabilities not subject to compromise:
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Accounts payable and accrued liabilities
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$
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4.3
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$
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2.9
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Model home financing
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22.5
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22.5
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Other liabilities
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0.4
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0.4
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Total liabilities not subject to compromise
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27.2
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25.8
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Liabilities subject to compromise:
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Accounts payable and accrued liabilities
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1.0
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0.9
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Revolving loan
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81.7
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81.7
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Term loan
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99.8
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99.8
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Other liabilities
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8.3
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8.3
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Total liabilities subject to compromise
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190.8
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190.7
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Commitments and contingencies
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Stockholders equity:
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Common Stock$.05 par value; 13,500,000 shares
authorized; 10,995,902 and 10,995,902 shares issued and outstanding,
respectively
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0.5
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0.5
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|
Excess Stock$.05 par value; 13,500,000 shares
authorized; no shares outstanding
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Additional paid-in capital
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59.5
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59.5
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Accumulated deficit
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(26.4
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)
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(24.0
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)
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Accumulated other comprehensive loss, net
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(2.6
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)
|
(2.6
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)
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Total stockholders equity
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31.0
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33.4
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$
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249.0
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$
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249.9
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See the accompanying notes to Consolidated Financial Statements.
5
Table of
Contents
CALIFORNIA COASTAL COMMUNITIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
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Three Months Ended
March 31,
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2010
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2009
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Revenues:
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Homebuilding
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$
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3.0
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$
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12.8
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Costs of sales:
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Homebuilding
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2.6
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8.8
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Loss on impairment of real estate inventories
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3.2
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2.6
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12.0
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Gross operating profit
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0.4
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0.8
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Selling, general and administrative expenses
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1.4
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1.5
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Reorganization costs
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1.3
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Interest expense
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0.7
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Gain on debt restructuring
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(20.7
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)
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Other expense, net
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0.1
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0.4
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(Loss) income before income taxes
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(2.4
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)
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18.9
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Income tax expense
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7.7
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Net (loss) income
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$
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(2.4
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)
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$
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11.2
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Net (loss) earnings per common share:
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Basic and diluted
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$
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(0.22
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)
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$
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1.02
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Common equivalent shares:
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Basic and diluted
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11.0
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11.0
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See the
accompanying notes to Consolidated Financial Statements.
6
Table of
Contents
CALIFORNIA COASTAL COMMUNITIES, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
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Three Months Ended
March 31,
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2010
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2009
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Cash flows from operating activities:
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Net (loss) income
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$
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(2.4
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)
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$
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11.2
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Adjustments to reconcile net loss to cash used in
operating activities:
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Gain on debt restructuring
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(20.7
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)
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Model homes depreciation
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0.1
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0.1
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Deferred taxes
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(1.0
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)
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7.7
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Deferred tax asset valuation allowance
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1.0
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Gains on sales of real estate inventories
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(0.4
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)
|
(4.0
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)
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Loss on impairment of real estate inventories
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3.2
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Proceeds from sale of real estate inventories, net
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2.8
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12.5
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Investments in real estate inventories
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(5.8
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)
|
(7.6
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)
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Non-cash reorganization items
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0.6
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Changes in assets and liabilities:
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|
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Decrease in other assets
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0.1
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1.2
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Increase in accounts payable, accrued and other
liabilities
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0.8
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1.9
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Cash (used in) provided by operating activities
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(4.2
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)
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5.5
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Cash flows from financing activities:
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Borrowings of revolving loan
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13.2
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Repayments of revolving loan
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(10.1
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)
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Repayments of term loan
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(1.8
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)
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Repayments of other project debt
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(0.5
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)
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Deferred financing costs
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(0.2
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)
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Cash provided by financing activities
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0.6
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Net (decrease) increase in cash and cash
equivalents
|
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(4.2
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)
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6.1
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Cash and cash equivalents - beginning of period
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8.9
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2.3
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Cash and cash equivalents - end of period
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$
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4.7
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$
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8.4
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|
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Supplemental disclosures of cash flow information:
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Cash paid during the period for income taxes
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$
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$
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0.1
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Cash paid during the period for reorganization
items
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0.7
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|
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Supplemental disclosures of non-cash investing and
financing activities:
|
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|
|
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Amortization of deferred financing costs
capitalized in real estate inventories
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$
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0.5
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$
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0.6
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|
Decrease in project debt and accrued liabilities
due to debt restructuring
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$
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$
|
28.7
|
|
See the accompanying notes to Consolidated Financial Statements.
7
Table of
Contents
CALIFORNIA COASTAL COMMUNITIES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 -
Basis of Presentation
The accompanying Consolidated Financial Statements
have been prepared by California Coastal Communities, Inc. and its
consolidated subsidiaries (the Company), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes that
these unaudited Consolidated Financial Statements reflect all material
adjustments (consisting only of normal recurring adjustments) and disclosures
necessary for the fair presentation of the results of operations and statements
of financial position when read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009. Intercompany accounts and
transactions have been eliminated.
The results for interim periods are not necessarily indicative of the
results to be expected for the full year. This report contains forward-looking
statements. Readers are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties that
actual events or results may differ materially from those described herein as a
result of various factors, including without limitation, the factors discussed
generally in this report.
Going
Concern and Financial Reporting in Reorganization
While
the Company is striving to restructure its senior secured revolving credit
agreement (Revolving Loan) and senior secured term loan agreement (Term Loan)
debt through the Chapter 11 reorganization process described below in Note 2,
there can be no assurance that the Company will be able to successfully execute
such plan. In the event that the Company is not successful in that regard,
substantial doubt would exist as to its ability to continue as a going concern.
The accompanying Consolidated Financial Statements have been prepared assuming
that the Company will continue as a going concern and contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the Chapter 11 reorganization process described
below, the realization of assets and the satisfaction of liabilities are
subject to uncertainty. While operating as debtors-in-possession under
Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or
settle liabilities, subject to the approval of the Bankruptcy Court or as
otherwise permitted in the ordinary course of business, in amounts other than
those reflected in the accompanying Consolidated Financial Statements. Further,
a plan of reorganization could materially change the amounts and
classifications of assets and liabilities in the historical consolidated
financial statements. The accompanying Consolidated Financial Statements do not
include any direct adjustments related to the recoverability and classification
of assets or the amounts and classification of liabilities or any other
adjustments that might be necessary should the Company be unable to continue as
a going concern or as a consequence of the Chapter 11 Cases.
Note 2 Chapter 11 Proceedings
and Plans of Management
On October 27, 2009,
the Company and certain of its direct and indirect wholly-owned subsidiaries
(collectively with the Company, the Debtors) filed voluntary petitions (the Chapter
11 Petitions) for relief under chapter 11 of title 11 (Chapter 11) of the
United States Code (the Bankruptcy Code) in the United States Bankruptcy
Court for the Central District of California (the Bankruptcy Court). The
Chapter 11 Petitions are being jointly administered under the caption
In re California Coastal Communities, Inc.
, Case No. 09-21712-TA
(the Chapter 11 Cases). The Debtors continue to operate their businesses and
manage their properties as debtors-in-possession under the jurisdiction of
the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. The Debtors have obtained
the Bankruptcy Courts approval to, among other things, continue to pay
critical vendors with lien rights, sell homes free and clear of all liens on an
interim basis, use cash collateral on an interim basis, honor homeowner
warranties, meet payroll obligations and provide employee benefits. There can
be no assurance that the Company and the other Debtors will be able to
successfully develop, execute, confirm and consummate one or more plans of
reorganization with respect to the Chapter 11 Cases that are acceptable to the
Bankruptcy Court and the creditors and other parties in interest, or continue
to operate as debtors-in-possession until the Chapter 11 Cases have been fully
adjudicated.
8
Table of
Contents
The Company has 13 direct
or indirect consolidated subsidiaries which are not guarantors of the
$81.7 million
Revolving Loan
or the
$99.8 million
Term Loan
and are not Debtors in the Chapter 11 Cases. These
subsidiaries are former owners of businesses unrelated to the Companys current
operations and have no current material operations.
Plans
of Management
On March 26, 2010,
the Company filed a proposed disclosure statement and proposed joint plan of
reorganization with the Bankruptcy Court, neither of which has been approved by
the Bankruptcy Court. The proposed joint plan provides for the extension of the
Revolving Loan and the Term Loan to enable the Company to complete construction
and sale of the homes at its Brightwater project. Throughout the Chapter 11
reorganization process the Company has tried and will continue to try to work
with the various members of its lending syndicate to determine whether a
consensual restructuring of the Revolving Loan and the Term Loan can be
accomplished. However, a majority of the Companys lenders are opposed to the
plan as filed, and there can be no assurance that the Company and the other
Debtors will be able to successfully confirm, consummate and execute a plan of
reorganization with respect to the Chapter 11 Cases that is acceptable to the
Bankruptcy Court and the creditors and other parties in interest. A court
hearing on the adequacy of the disclosure statement was held on May 12,
2010. The Company expects the Court to enter an order approving the disclosure
statement containing certain revisions. The Court scheduled a valuation hearing
for July 15, 2010 and a plan confirmation hearing for July 28, 2010.
The Company and the other
Debtors continue to operate their business as debtors-in-possession. The
Company has incurred and will continue to incur significant costs associated
with the reorganization which are expected to significantly affect the Companys
results of operations. During the three months ended March 31, 2010, the
Company incurred reorganization costs aggregating approximately $1.3 million
and has incurred total reorganization costs of $2.6 million through such date.
The Company has
maintained business operations through the reorganization process. The Companys
liquidity and capital resources, however, are significantly affected by the
Chapter 11 Cases, which have resulted in various restrictions on its
activities, limitations on financing and a need to obtain Bankruptcy Court
approval for various matters. In particular, the Debtors are not permitted to
make any payments on pre-petition liabilities without prior Bankruptcy Court
approval. However, the Debtors have been granted relief in order to continue
wage and salary payments and other employment benefits to employees as well as
other related pre-petition obligations; to continue to construct and sell
homes; and to pay certain pre-petition trade claims held by critical vendors
with lien rights. The Companys authorization to continue to use cash
collateral and to sell homes free and clear of liens with the consent of the
lending syndicate is currently scheduled to terminate on June 30, 2010.
Under the priority
schedule established by the Bankruptcy Code, certain post-petition and
pre-petition liabilities need to be satisfied before general unsecured
creditors and equity holders are entitled to receive any distribution. At this
time, it is not possible to predict with certainty the effect of the Chapter 11
Cases on the Companys business or various creditors, or when the Company will
emerge from these proceedings. Future results will depend upon the confirmation
and successful implementation of a plan of reorganization. The continuation of
the Chapter 11 Cases, particularly if a plan of reorganization is not timely
confirmed, could further adversely affect the Companys operations.
The Company depends on cash flows generated from operations and
available borrowing capacity to fund its Brightwater development, and to meet
its debt service and working capital requirements. However, the Companys
ability to continue to generate sufficient cash flows has been and will
continue to be adversely affected by continued difficulties in the homebuilding
industry, continued weakness in the California economy, and negative publicity
and prospective homebuyer concerns related to the bankruptcy. While the Company
generated 31 net sales orders in the first nine months of 2009, it generated
only two net sales orders at Brightwater during the fourth quarter of 2009,
which the Company believes reflects the negative impact of the Chapter 11
Cases, as well as the seasonal slowdown in sales. Thus far in 2010, the pace of
sales has continued to be slow, with only six net sales generated through May 10,
2010 compared with seven net sales during the comparable period of 2009.
Due to cash requirements for on-going home construction and scheduled
debt amortization, the Companys ability to meet future loan repayment
requirements will depend on the confirmation of a plan of reorganization by the
Bankruptcy Court. Based on Brightwater sales in 2009 and the first quarter of
2010, the current pace of home sales is not expected to generate sufficient
cash flow to meet the Companys currently scheduled loan repayments for the
Revolving Loan and Term Loan as described in greater detail in Notes 5 and
6.
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Continuing negative conditions in the housing and credit markets give
rise to uncertainty as to the Companys present and future ability to meet its
projected home sale closings and whether modified or new financings can be
obtained in order for the Company to meet its debt obligations. There can be no
assurance that the Company will be successful in any of these endeavors. While
the national credit markets appear to be improving, there is limited
availability of financing for small businesses which presents significant
uncertainty as to the ability of the Company to secure replacement financing,
if needed, and the terms of such financing if it is available. The current housing
and mortgage markets also present significant uncertainty as to the Companys
ability to achieve sufficient positive cash flow from operations required to
satisfy its debt obligations and meet financial covenant requirements. See
Notes 5 and 6 for further discussion.
While
the Company is striving to restructure its Revolving Loan and Term Loan debt
through the Chapter 11 Cases, unless the Company is successful in amending and
extending the terms of the Revolving Loan and Term Loan agreements, the Company
does not believe that its cash, cash equivalents and future real estate sales
proceeds will be sufficient to meet its debt obligations or to meet anticipated
operating and project development costs for Brightwater, and general and
administrative expenses during the next 12 months. These factors raise
substantial doubt about the Companys ability to continue as a going concern.
The Consolidated Financial Statements herein do not include any adjustments
that might result from the outcome of this uncertainty.
Liabilities
Subject to Compromise
Liabilities subject to
compromise refers to pre-petition obligations which may be impacted by the
Chapter 11 Cases. These amounts represent the Companys current estimate of
known or potential pre-petition obligations to be resolved in connection with
the Chapter 11 Cases. Differences between estimated liabilities and the claims
filed or to be filed will be investigated and resolved in connection with the
claims resolution process. The Company continues to evaluate these liabilities
throughout the continuation of the Chapter 11 Cases and adjusts amounts as
necessary. Such adjustments may be material. Due to the expected number of
creditors, the claims resolution process may take considerable time to
complete. Accordingly, the ultimate number and amount of allowed claims is not
presently known.
Reorganization
Costs
Reorganization costs
include legal and professional fees incurred in connection with the Chapter 11
Cases. During the three months ended March 31, 2010, the Company incurred
$1.3 million of reorganization costs and paid approximately $700,000 of such
costs. The Company has incurred total reorganization costs of $2.6 million from
October 2009 through March 31, 2010.
Nasdaq
Delisting
The
Companys common stock is currently trading over-the-counter in the recently
created OTCQB marketplace under the trading symbol CALCQ. The trading of the
Companys common stock in the over-the-counter market rather than on Nasdaq may
negatively impact the trading price and the levels of liquidity available to
its stockholders. In addition, securities that trade over-the-counter are not
eligible for margin loans and will make the Companys common stock subject to
the provisions of Rule 15g-9 of the Securities Exchange Act of 1934, as
amended, commonly referred to as the penny stock rule.
On October 28,
2009, the Company received a letter from Nasdaq notifying it that it had
determined to delist the Companys common stock from trading as a result of the
commencement of the Chapter 11 Cases.
The Company appealed the Nasdaq determination on December 3, 2009
and, on December 29, 2009, the Nasdaq Hearings Panel granted the Companys
request to remain listed, subject to certain conditions, including (1) providing
periodic updates as to the status of the Brightwater credit facilities
restructuring efforts; and (2) emerging from the Chapter 11 process no
later than April 26, 2010. On April 9, 2010, the Company received a
delisting determination notice from the Nasdaq Hearings Panel informing the
Company that its common stock would be delisted from the Nasdaq Stock Market as
a result of the Companys inability to emerge from the Chapter 11 process by
the April 26 deadline. The Nasdaq Listings and Hearings Review Council
subsequently denied the Companys request to review the Nasdaq Hearings Panels
determination and its common stock was delisted at the open of trading on April 27,
2010 when it commenced trading in the OTCQB marketplace.
The Company has filed an
application with Nasdaq seeking the relisting of its securities on The Nasdaq
Stock Market following the Companys emergence from the Chapter 11
process. In that regard, all companies,
whether listed on Nasdaq or not, are required to satisfy the initial listing
requirements upon emergence from a Chapter 11 process to qualify for
listing. While the Company presently
plans to take all necessary steps to ensure its compliance with the applicable
requirements, there can be no assurance as to whether or when the Companys
common stock will be relisted on Nasdaq.
10
Table of Contents
Note 3 -
Significant Accounting Policies
Basis of Consolidation
The accompanying Consolidated Financial Statements include the accounts
of the Company and all majority-owned and controlled subsidiaries and joint
ventures. Certain of the Companys wholly-owned subsidiaries are members in
joint ventures which were involved in the development and sale of a residential
project and residential loan production. The financial statements of joint
ventures in which the Company has a controlling or majority economic interest
(and thus are controlled by the Company) are consolidated with the Companys
financial statements. The Companys investments in unconsolidated joint
ventures are accounted for using the equity method when the Company does not
have voting or economic control of the venture operations, as further described
in Note 5 to the Consolidated Financial Statements included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Consequences
of Chapter 11 Cases
Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 852-10-45,
Reorganizations Other
Presentation Matters
, which is applicable to companies in Chapter
11, generally does not change the manner in which financial statements are
prepared. However, it does require that the financial statements for periods
subsequent to the filing of the Chapter 11 Cases distinguish transactions and
events that are directly associated with the reorganization from the ongoing
operations of the business. Amounts that can be directly associated with the
reorganization and restructuring of the business must be reported separately as
reorganization items in the statements of operations beginning in the quarter
ending December 31, 2009. The balance sheet must distinguish pre-petition
liabilities subject to compromise from both those pre-petition liabilities that
are not subject to compromise and from post-petition liabilities. Liabilities
that may be affected by a plan of reorganization must be reported at the
amounts expected to be allowed, even if they may be settled for lesser amounts.
In addition, cash provided or used by reorganization items must be disclosed
separately in the statement of cash flows. The Company applied ASC 852-10-45
effective on October 27, 2009 and is segregating those items as outlined
above for all reporting periods subsequent to such date.
Subsequent Events
In the preparation of this Quarterly Report on Form 10-Q, the
Company evaluated events for accounting treatment and disclosure that occurred
after the balance sheet date but before the financial statements were issued or
were available to be issued.
Reinstatement of 5% Ownership Limitation
On May 13, 2010, the Company reinstated a ban on acquisitions of
additional shares of its common stock, under certain circumstances, in order to
preserve the tax benefits of the Companys $164 million of net operating loss (NOL)
carryovers. See Note 9 for additional discussion.
Cash Flows and Debt Compliance
Negative conditions in the current housing and credit markets give rise
to uncertainty as to the Companys present and future ability to meet its
projected home sale closings and whether new or modified financings can be
obtained, if needed. The Company, like many other homebuilders, is constantly
evaluating potential alternatives regarding its capital structure including,
but not limited to, various strategies for restructuring its debt and raising
additional capital. There can be no assurance that the Company will be successful
in any of these endeavors. The limited credit availability for small businesses
presents uncertainty as to the ability of the Company to secure additional
financing, if needed, and the terms of such financing if it is available, and
as to the ability of the Company to achieve positive cash flow from operations
required to satisfy its obligations. See Notes 5 and 6 below for further
discussion.
11
Table of Contents
Real Estate
Real estate inventories primarily consist of homes available for sale,
homes under construction and lots under development and are carried at the
lower of cost or fair value less costs to sell. The estimation process involved
in the determination of fair value is inherently uncertain because it requires
estimates as to future events and market conditions. Such estimation process
assumes the Companys ability to complete development and dispose of its real
estate properties in the ordinary course of business based on managements
present plans and intentions. Economic, market, and environmental conditions
will affect managements 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 values of the Companys real estate properties depend
upon future economic and market conditions, and the availability of financing.
The cost of sales of multi-unit projects is computed using the relative
sales value method. Interest and other carrying costs are capitalized to real
estate projects during their development and construction period.
Impairment of Long-Lived Assets
The Company assesses the impairment of real estate inventories and
other long-lived assets in accordance with ASC 360-10-35,
Impairment or Disposal of Long-Lived Assets,
which requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Impairment is evaluated by comparing an assets
carrying value to the undiscounted estimated cash flows expected from the assets
operations and eventual disposition. If the sum of the undiscounted estimated
future cash flows is less than the carrying value of the asset, an impairment
loss is recognized based on the fair value of the asset. If impairment occurs,
the fair value of an asset is deemed to be the amount a willing buyer would pay
a willing seller for such asset in a current transaction. Additionally, as
appropriate, the Company identifies alternative courses of action to recover
the carrying value of its long-lived assets and evaluates all likely
alternatives under a probability-weighted approach as described in ASC
360-10-35.
During the three months ended March 31, 2010 and 2009, the Company
recorded inland project impairment charges totaling zero and $3.2 million,
respectively. See Note 4 Real Estate Inventories.
In accordance with ASC 360-10-35, in developing estimated future cash
flows for impairment testing for its real estate inventories, the Company has
incorporated its own market assumptions including those regarding home prices,
sales pace, sales and marketing costs, infrastructure and home-building costs,
and financing costs regarding real estate inventories. The Companys
assumptions are based, in part, on general economic conditions, the current
state of the homebuilding industry, expectations about the short- and long-term
outlook for the housing market, and competition from other homebuilders in the
areas in which the Company builds and sells homes. These assumptions can
significantly affect the Companys estimates of future cash flows. For those
communities deemed to be impaired, the Company determines fair value based on
discounted estimated future cash flows using estimated absorption rates for
each community.
The estimation process involved in the determination of value is
inherently uncertain since it requires estimates as to future events and market
conditions. Such estimation process assumes the Companys ability to complete
development and disposition of its real estate properties in the ordinary
course of business based on managements present plans and intentions. Economic
and market conditions may affect managements 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 amount ultimately realized from such
project may differ materially from current estimates and the projects carrying
value.
Fair Value of Financial Instruments
The Company adopted ASC 820-10
Fair
Value Measurements and Disclosures,
as it applies to financial
assets and liabilities measured at fair value on a recurring basis on January 1,
2008 and as it applies to non-financial assets and liabilities on January 1,
2009. The carrying amounts of the Companys financial instruments including
cash and cash equivalents, restricted cash, accounts payable and accrued
liabilities, model home financing, and other liabilities approximate their
respective fair values because of the relatively short period of time between
origination of the instruments and their expected realization. Due to the
Chapter 11 Cases and current default status of the Companys Revolving Loan and
Term Loan, the carrying amounts of the debt may not approximate fair value as
of March 31, 2010. Accordingly, the fair value of debt that is included in
liabilities subject to compromise in the Companys consolidated balance sheets
cannot be reasonably determined as of March 31, 2010, as the timing and
amounts to be paid are subject to confirmation by the Bankruptcy Court. The
Company has been notified that purchase/sale transactions involving the
Revolving Loan and Term Loan have occurred between certain members of the loan
syndicates and other financial or investment institutions. However, it is not
practicable for the Company to determine the fair value of the Revolving Loan
and Term Loan as the transactions are occurring in a private market.
12
Table
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Income Taxes
The Company accounts for income taxes on the liability method, in
accordance with ASC 740-10,
Income Taxes.
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. The liability method requires an evaluation of the probability of
being able to realize the future benefits indicated by deferred tax assets. A
valuation allowance is established against a deferred tax asset if, based on
the available evidence, it is more likely than not that such asset will not
be realized. The realization of a deferred tax asset ultimately depends on the
existence of sufficient taxable income in either the carryback or carryforward
periods under tax law. The Company evaluates on a quarterly basis, whether a
valuation allowance should be established based on its determination of whether
it is more likely than not that some portion or all of the deferred tax
assets will be realized. In the Companys assessment, appropriate consideration
is given to all positive and negative evidence related to the realization of
the deferred tax assets. This assessment considers, among other matters, the
nature, frequency and magnitude of current and cumulative income and losses,
forecasts of future profitability, the duration of statutory carryback or
carryforward periods, the Companys experience with operating loss and tax
credit carryforwards not expiring unused, and tax planning alternatives.
The Companys assessment of the need for a valuation allowance on its
deferred tax assets includes assessing the likely future tax consequences of
events that have been recognized in the Companys Consolidated Financial
Statements or tax returns. The Company bases its estimate of deferred tax
assets and liabilities on current tax laws and rates and, in certain cases, on
business plans and other expectations about future outcomes. Changes in
existing tax laws or rates could affect the Companys actual tax results and
its future business results may affect the amount of the Companys deferred tax
liabilities or the valuation of its deferred tax assets over time.
During the three months ended March 31, 2010 and 2009, the Company
recorded valuation allowances on deferred tax assets totaling $1.0 million and
zero, respectively. See Note 9Income Taxes.
Due to uncertainties in the estimation process, particularly with
respect to changes in facts and circumstances in future reporting periods
(carryforward period assumptions), it is reasonably possible that actual
results could differ from the estimates used in the Companys historical
analyses. The Companys assumptions require significant judgment because the
residential homebuilding industry is cyclical and is highly sensitive to
changes in economic conditions. The Companys current assessment of the need
for a valuation allowance is primarily dependent upon utilization of tax net
operating losses in the carryforward period and its future projected taxable
income. The Chapter 11 filing constitutes significant negative evidence under
ASC 740-10 as it represents uncertainties related to future projected taxable
income. Additionally, there are critical uncertainties as to whether the
Company will be able to continue selling homes at its Brightwater project using
currently projected sales prices and absorption rates in light of the
continuing deterioration in the housing and credit markets. If certainty
increases regarding the Companys projected results of operations and there is
objectively verifiable evidence to support the realization of a portion of its
deferred tax assets, an adjustment to the Companys valuation allowance may be
recorded to reflect greater expected utilization.
Homebuilding Revenues and Cost of Sales
The Companys homebuilding operation generates revenues from the sale
of homes to homebuyers. The majority of these homes are designed to appeal to
move-up homebuyers and are generally offered for sale in advance of their
construction. Sales contracts are usually subject to certain contingencies such
as the buyers ability to qualify for financing. Revenue from the sale of homes
is recognized at the close of escrow when title passes to the buyer and the
earnings process is complete. As a result, the Companys revenue recognition
process does not involve significant judgments or estimates. However, the
Company does rely on certain estimates to determine the related construction
costs and resulting gross margins associated with revenues recognized. The cost
of sales is recorded based upon total estimated costs within a subdivision and
allocated using the relative sales value method. The Companys construction
costs are comprised of direct and allocated costs, including estimated costs
for future warranties and indemnities. The Companys estimates are based on
historical results, adjusted for current factors.
13
Table
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Earnings Per Common Share
Earnings per common share is accounted for in accordance with ASC
260-10,
Earnings Per Share
.
Basic earnings per common share is computed using the weighted-average number
of common shares outstanding for the period. Diluted earnings per common share
is computed using the weighted-average number of common shares outstanding and
the dilutive effect of potential common shares outstanding.
New Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU)
No. 2010-06 (ASU 2010-06),
Fair Value Measurements
and Disclosures (Topic 820) Improving Disclosures about Fair Value
Measurements
, which requires new disclosures and clarifications of
existing disclosures for recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual periods beginning after December 15,
2009. The adoption of ASU 2010-06 during the first quarter of 2010 did not have
a material effect on our Consolidated Financial Statements.
Note 4 Real Estate Inventories
Real estate inventories primarily consist of homes under construction
and lots under development at Brightwater along with a five-acre project being
planned for 22 homes, in Huntington Beach in coastal Orange County and one
inland community in Lancaster in Los Angeles county planned for 73 homes. As of
March 31, 2010, real estate inventories aggregated 364 lots and homes,
including 17 model homes, six standing inventory homes completed and unsold,
three homes completed and in escrow, and nine homes under construction and in
escrow. Real estate inventories at March 31, 2010 included
$238.6 million recorded for 274 lots and homes under development and 17
model homes held under a financing lease at the Brightwater community as well
as a five-acre project outside the Brightwater community, which are located on
a mesa north of the Bolsa Chica wetlands in Huntington Beach, California. The
additional recorded value in real estate inventories reflects the fair value of
73 lots at the Companys subsidiarys inland project in Lancaster, California.
The Company capitalizes carrying costs including interest and property taxes,
as well as direct construction costs, to real estate inventories during the
development and construction period.
The Brightwater planned community offers a broad mix of home choices,
averaging 2,860 square feet and ranging in size from 1,710 square feet to 4,339
square feet. The community also has 37 acres of open space and conservation
area. With 356 homes permitted on 68 acres, the resulting low-density plan
equates to approximately five homes per acre, consistent and compatible with
the neighboring Huntington Beach communities. The Company began selling and
delivering homes at The Trails and The Sands in 2007. Sales of the larger two
products, The Cliffs and The Breakers, began in February 2008 and the
Company began delivering homes at The Cliffs and The Breakers neighborhoods
during the third quarter of 2008.
The Company recorded impairment charges totaling zero and $3.2 million
during the three months ended March 31, 2010 and 2009, respectively.
As required by ASC 360-10-35, should market conditions deteriorate in
the future or other events occur that indicate the carrying amount of the
Companys real estate inventories may not be recoverable, the Company will
reevaluate the expected cash flows from each project to determine whether any
additional impairment exists at any point in time.
Capitalized interest is allocated to real estate
inventories when incurred and charged to cost of sales when the related
property is delivered. Changes in capitalized interest follow (in millions):
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Capitalized interest, beginning of period
|
|
$
|
36.8
|
|
$
|
37.3
|
|
Interest incurred and capitalized
|
|
3.0
|
|
4.0
|
|
Charged to cost of sales
|
|
(0.6
|
)
|
(1.4
|
)
|
Charged to gain on debt restructuring
|
|
|
|
(4.2
|
)
|
Capitalized interest, end of period
|
|
$
|
39.2
|
|
$
|
35.7
|
|
14
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Note 5 Revolving Loan
See Note 2 for a detailed discussion of the status of the Chapter 11
Cases which commenced October 27, 2009.
As of March 31, 2010 and December 31, 2009, $81.7 million was
outstanding for both periods under the Revolving Loan. The Company did not pay
$1.7 million of principal due on September 30, 2009, and received a notice
of event of default from the agent for the lending syndicate on October 1,
2009. In addition, the Company did not pay an additional $10.0 million due on December 31,
2009 and $10.0 million due on March 31, 2010, resulting in an aggregate of
$21.7 million of principal due and unpaid as of March 31, 2010. A major
stockholder of the Company currently holds approximately 16% of the Revolving
Loan.
Interest on the facility is calculated on the average outstanding daily
balance and is paid monthly. Interest incurred on the Revolving Loan for the
three months ended March 31, 2010 and 2009 was $900,000 and
$1.2 million, respectively, at weighted-average interest rates of 3.50%
and 3.80%, respectively. Following the Companys $1.7 million principal payment
default, effective October 1, 2009, interest began to accrue at the
default rate specified in the loan; however, under the terms of the Bankruptcy
Courts cash collateral order, the Company continued paying interest at the
non-default rate of 3.50% and was current on such interest payments as of March 31,
2010.
As of March 31, 2010, the Company has delivered 82 homes at
Brightwater since inception of the project, including the 17 model homes
included in the sale-leaseback transaction completed on December 31, 2008
and two homes (one Cliffs and one Breakers) delivered during the three months
ended March 31, 2010. Due to the Chapter 11 Cases, no principal payments
were made on the 12 homes delivered during the fourth quarter of 2009 and the
first quarter of 2010.
As of March 31, 2010 and December 31, 2009, approximately
$300,000 and $500,000, respectively, of deferred loan fees and closing
costs related to the Revolving Loan are included in other assets and amortized
over the life of the loan. Amortization of these costs is included in the
capitalization of interest allocated to real estate inventories and charged to
cost of sales when the related homes are delivered.
Under the Revolving Loan, the Company is required to comply with a
number of covenants, including the following financial covenants which the
Company considers to be the most restrictive of all of the debt covenants:
·
A leverage covenant that
prohibits the Companys ratio of consolidated total liabilities to consolidated
tangible net worth from exceeding a maximum ratio of 2.5 to 1.0. The
calculation of the covenant excludes impairment charges related to inland
projects and valuation allowances on deferred tax assets.
·
A loan-to-value ratio, which
prohibits the Companys ratio of Revolving Loan debt outstanding to borrowing
base value from exceeding a maximum ratio, regarding which the Company has been
notified it is in default:
Reporting Period
|
|
Maximum
Loan-to-Value
Ratio
|
|
September 30, 2009 through March 30,
2010
|
|
35
|
%
|
March 31, 2010 and thereafter
|
|
30
|
%
|
·
A minimum consolidated
tangible net worth covenant of $80 million, excluding impairment charges for
the Hearthside Lane and Las Colinas projects and valuation allowances on
deferred tax assets.
·
A prohibition on dividends.
As of March 31, 2010, the Companys consolidated total liabilities
are $218.0 million, tangible net worth after excluding the 2009 and 2008
inland impairment charges and valuation allowances on deferred tax assets is
$105.4 million and the leverage ratio is 2.07. The Company is in
compliance with the leverage and net worth covenants. However, the Company was
notified on September 28, 2009 that it is not in compliance with the
loan-to-value ratio covenant of the Revolving Loan based on an appraisal
obtained in August 2009 by the agent for the Revolving Loan and Term
Loan. In addition, the Company is not in
compliance with the minimum sales covenant which requires that the sum of the
cumulative number of homes delivered as of March 31, 2010 plus 50% of the
number of homes in escrow at March 31, 2010 equal or exceed 96. As of March 31,
2010, the Company had delivered 82 homes and had 12 homes in escrow for minimum
sales of 88. Under the proposed Chapter 11 plan of reorganization, these
covenants would be eliminated.
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While the sales pace at Brightwater was close to expectations at the
beginning of 2009, the mix of sales was heavily weighted towards smaller homes
which are generating less liquidity than the larger homes. The Company did not meet its mandatory
principal repayments due on September 30, 2009, December 31, 2009, or
March 31, 2010 and does not expect to be able to fully re-pay the
Revolving Loan by its current maturity date on June 30, 2010 from cash
flow from operations. The Company is
striving to restructure the Revolving Loan and Term Loan through the Chapter 11
reorganization process to extend the maturity dates of the loans and defer scheduled
amortization payments in order to accommodate the expected sales pace of the
Brightwater project and provide sufficient liquidity to fund continued home
construction. There can be no assurance
that the Company will be successful in any of these endeavors. While the national
credit markets appear to be improving, there is limited availability of
financing for small businesses, which presents significant uncertainty as to
the ability of the Company to secure additional financing, and the terms of
such financing if available. The current housing and jumbo mortgage markets
also present uncertainty as to the ability of the Company to achieve sufficient
positive cash flow from operations required to satisfy its debt obligations.
Note 6 Term Loan
See
Note 2 for detailed discussion of the status of the Chapter 11 Cases
which commenced October 27, 2009.
As of March 31, 2010 and December 31, 2009,
$99.8 million was outstanding for both periods under the Term Loan. The Company did not pay $9.8 million due on December 31,
2009 and $15.0 million due on March 31, 2010, resulting in an aggregate of
$24.8 million of principal due and unpaid as of March 31, 2010. A major stockholder of the Company currently
holds approximately 19% of the Term Loan.
Interest on the facility is calculated on the average outstanding daily
balance and is paid monthly. Interest incurred on the Term Loan for the three
months ended March 31, 2010 and 2009 was $1.3 million and
$1.7 million, respectively, at weighted-average interest rates of 4.25%
and 5.07%, respectively. Following the Companys $1.7 million principal payment
default on the Revolving Loan, effective October 1, 2009, interest under
the Term Loan began to accrue at the default rate specified in the loan;
however, under the terms of the Bankruptcy Courts cash collateral order, the
Company continued paying interest at the non-default rate of 4.25% and was
current on such interest payments as of March 31, 2010.
The Term Loan is subject to mandatory repayments and commitment
reductions based on 60% of the $600,000 release price on the first 70 units
closed at the Brightwater project, and 60% of the $1 million release price
per unit thereafter. As of September 30, 2009, the Company had delivered
70 homes. These mandatory repayments are applicable to the commitment
reductions. However, due to the Chapter
11 Cases, no principal payments were made on the additional 12 homes delivered
during the fourth quarter of 2009 and first quarter of 2010.
As of March 31, 2010, the Company has delivered 82 homes at Brightwater
since inception of the project, including the 17 model homes included in the
sale-leaseback transaction completed on December 31, 2008 and two homes
(one Cliffs and one Breakers) delivered during the three months ended March 31,
2010, and made cumulative mandatory repayments for the Term Loan of
$25.2 million.
As of March 31, 2010 and December 31, 2009, approximately
$1.6 million and $1.9 million, respectively, of deferred loan fees and
closing costs related to the Term Loan are included in other assets and
amortized over the life of the loan. Amortization of these costs is included in
the capitalization of interest allocated to real estate inventories, and
charged to cost of sales when the related homes are delivered.
Under the Term Loan, the Company is required to comply with a number of
covenants, including the following financial covenants which the Company
considers to be the most restrictive of all of the debt covenants:
·
A leverage covenant that
prohibits the Companys ratio of consolidated total liabilities to consolidated
tangible net worth from exceeding a maximum ratio of 2.50 to 1.0. The
calculation of the covenant excludes impairment charges related to inland
projects and valuation allowances on deferred tax assets.
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·
A loan-to-value ratio, which
prohibits the Companys ratio of Term Loan debt outstanding to borrowing base
value from exceeding a maximum ratio, regarding which the Company has been
notified it is in default:
Reporting Period
|
|
Maximum
Loan-to-Value
Ratio
|
|
March 31, 2010 through September 29,
2010
|
|
60
|
%
|
September 30, 2010 and thereafter
|
|
45
|
%
|
·
An interest coverage
covenant which prohibits the Companys ratio of EBITDA to interest incurred
from being less than 2.00 to 1.00.
·
A minimum consolidated tangible
not worth covenant of $80 million, excluding impairment charges for inland
projects and valuation allowances on deferred tax assets.
·
A prohibition on dividends.
As of March 31, 2010, the Companys consolidated total liabilities
are $218.0 million, tangible net worth after excluding the 2009 and 2008
inland impairment charges and valuation allowances on deferred tax assets is
$105.4 million and the leverage ratio is 2.07. The Company is in compliance
with the aforementioned covenants except for the loan-to-value and interest
coverage covenants. The Company was notified on September 28, 2009 that it
is not in compliance with the loan-to-value ratio covenant of the Term Loan
based on an August 2009 appraisal obtained by the agent for the Revolving
Loan and Term Loan. In addition, the
Company is not in compliance with the minimum sales covenant which requires
that the sum of the cumulative number of homes delivered as of March 31,
2010 plus 50% of the number of homes in escrow at March 31, 2010 equal or
exceed 96. As of March 31, 2010, the Company had delivered 82 homes and
had 12 homes in escrow for minimum sales of 88. Under the proposed Chapter 11
plan of reorganization, these covenants would be eliminated.
While the sales pace at Brightwater was close to expectations at the
beginning of 2009, the mix of sales was heavily weighted towards smaller homes
which are generating less liquidity than the larger homes. Therefore, the Company did not make the
mandatory repayments due on December 31, 2009 or March 31, 2010. The Company is striving to restructure the
Revolving Loan and Term Loan through the Chapter 11 reorganization process to
extend the maturity dates of the loans and defer scheduled amortization
payments in order to accommodate the expected sales pace of the Brightwater
project and provide sufficient liquidity to fund continued home
construction. There can be no assurance
that the Company will be successful in any of these endeavors. While the
national credit markets appear to be improving, there is limited availability
of financing for small business, which presents uncertainty as to the ability
of the Company to secure additional financing, and the terms of such financing,
if available. The current housing and mortgage markets also present uncertainty
as to the ability of the Company to achieve sufficient positive cash flow from
operations required to satisfy its debt obligations.
Note 7Model Home Financing
On December 31, 2008, the Company entered into a sale-leaseback
transaction for 17 model homes at its Brightwater project with an unrelated
third party investor for $25.0 million, consisting of $22.5 million
cash, $2.0 million deferred and payable in two years provided there has
not been a significant decrease in the value of the model homes, and $500,000
payable for conversion of the model homes for sale to homebuyers upon
termination of the lease agreement. The Company has an option to repurchase the
model homes after at least 90% of the homes of the respective model type have
sold, but no earlier than January 1, 2011. If the Company does not
repurchase the models, after the lessor receives a 16% internal rate of return,
the Company is entitled to receive 75% of any profit resulting from the sale of
the models at the end of the lease. Due to the Companys repurchase option and
profit participation which constitute continuing interest, and in accordance
with ASC 840-40,
Sale-Leaseback Transactions
, the
Company accounted for the transaction as a financing transaction rather than as
a sale and recorded model home financing debt of $22.5 million.
The Company utilized $10.2 million of the model home financing
proceeds to make mandatory repayments under the Revolving Loan and Term Loan,
thereby reducing the payments that would have been due in 2009. The Company
used an additional $10.7 million of the proceeds to reduce the balance
outstanding under the revolving credit agreement. See Notes 5 and 6 for
additional discussion.
17
Table of
Contents
In connection with the sale-leaseback transaction, the Company agreed
to assign the first $500,000 of proceeds from sales commissions resulting from
the eventual resale of the model homes, or additional purchase price received,
to its partner in the Oxnard joint venture, which is an affiliate of the
investor who purchased the model homes. The $500,000 payment represents
additional capital contributions that become payable upon the dissolution of
the joint venture.
The model home lease allowed the Company to utilize the 17 model homes
for continued customer display for a term of three years expiring December 31,
2011, with two renewal options for one year each. As required by the lease
agreement, the Company prepaid six months of rent totaling $1.6 million on
December 31, 2008. During the three months ended March 31, 2010, the
Company made model home lease payments totaling $788,000. Monthly lease
payments of $262,500 per month are due through December 2010, and $279,167
per month in 2011. The future minimum lease payments under the terms of the
related lease agreement are as follows (in millions):
Year
|
|
Amount
|
|
2010
|
|
$
|
2.4
|
|
2011
|
|
3.3
|
|
Total
|
|
$
|
5.7
|
|
Note 8 - Other Liabilities (Not
Subject to Compromise and Subject to Compromise)
As of March 31, 2010
and December 31, 2009, other liabilities not subject to compromise
included contingent indemnity and environmental obligations totaling $400,000.
As of March 31, 2010
and December 31, 2009, other liabilities subject to compromise were
comprised of the following (in millions):
|
|
Subject to Compromise
|
|
|
|
March 31,
2010
|
|
December 31,
2009
|
|
Accrued pensions and benefits
|
|
$
|
5.5
|
|
$
|
5.5
|
|
Home warranty reserves
|
|
1.9
|
|
1.9
|
|
Contingent indemnity and environmental obligations
|
|
0.7
|
|
0.7
|
|
Capital contribution due to joint venture
|
|
0.5
|
|
0.5
|
|
Unamortized discount
|
|
(0.3
|
)
|
(0.3
|
)
|
|
|
$
|
8.3
|
|
$
|
8.3
|
|
Contingent indemnity and environmental obligations primarily reflect
reserves before related discount (recorded pursuant to Fresh-Start Reporting in
1997) for contingent indemnity obligations for businesses disposed of by former
affiliates and unrelated to the Companys current operations.
Home
Warranty Reserve
The
Company provides a home warranty reserve to reflect its contingent obligation
for product liability. The Company generally records a provision as homes are
delivered, based upon historical and industry experience, for the items listed
in the homeowner warranty manual, which does not include items that are covered
by manufacturers warranties or items that are not installed by the Companys
employees or contractors.
The home warranty reserve activity is presented below (in millions):
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Balance at beginning of period
|
|
$
|
1.9
|
|
$
|
1.7
|
|
Provision
|
|
|
|
|
|
Adjustment due to change in estimate
|
|
|
|
|
|
Payments
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1.9
|
|
$
|
1.7
|
|
18
Table of Contents
Note 9 - Income Taxes
The
following is a summary of the tax expense (benefit):
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Current taxes
|
|
$
|
|
|
$
|
|
|
Deferred taxes
|
|
1.0
|
|
7.7
|
|
Valuation allowances on deferred tax assets
|
|
(1.0
|
)
|
|
|
Income tax expense (benefit)
|
|
$
|
|
|
$
|
7.7
|
|
During 2009 and the first quarter of 2010, the
Company recorded valuation allowances for the entire amount of its net deferred
tax assets due to uncertainties regarding the resolution of the Chapter 11
Cases filed October 27, 2009. The Chapter 11 filing constitutes
significant negative evidence under ASC 740-10 as it represents uncertainties
related to future projected taxable income. At this time, the Company is unable
to conclude that it is more likely than not that the Company would be able to
generate sufficient projected taxable income in future years in order to
utilize its NOLs except to offset existing net deferred tax liabilities. The
Company monitors the availability of real estate for development at
economically viable prices, market conditions and other objectively verifiable
economic factors affecting the Companys operations, as well as other positive
and negative factors, as it assesses valuation allowances against its deferred
tax assets.
During the fourth quarter of 2009, the Company recorded a $950,000 tax
receivable related to the November 6, 2009 passage of the Worker,
Homeownership and Business Assistance Act of 2009 which allows businesses with
NOLs for 2008 and 2009 to carry back losses for up to five years and suspends
the 90% limitation on the use of any alternative tax NOL deduction attributable
to carrybacks of the applicable NOL. The Company expects to file a refund claim
for federal alternative minimum tax paid for years prior to 2009 and
anticipates receiving the refund during 2010.
The federal NOLs available as of March 31, 2010 were approximately
$164 million. The amount of federal NOLs which expire if not utilized is
$49 million in 2010, $42 million in 2011, zero in 2012, 2013 and
2014, and $73 million thereafter.
The Internal Revenue Code (the Code) generally limits the
availability of NOLs if an ownership change occurs within any three-year period
under Section 382. If the Company were to experience an ownership change
of more than 50%, the use of all remaining NOLs would generally be subject to
an annual limitation equal to the value of the Companys equity before the
ownership change, multiplied by the long-term tax-exempt rate (4.03% as of May 2010)
plus (ii) recognized built-in-gains, defined as those gains recognized
within five years of the ownership change subject to an overall limitation of
the net unrealized built-in gains existing as of the ownership change date. The
Company estimates that after giving effect to various transactions by
stockholders who hold a 5% or greater interest in the Company, it has
experienced a three-year cumulative ownership shift of approximately 29% as of May 10,
2010, as computed in accordance with Section 382. While the Companys net
deferred tax assets are currently fully reserved due to the uncertainty of the
timing and amount of future taxable income, if the Company generates taxable
income in future periods, reversal of all or a portion of the valuation allowance
could have a significant positive impact on net income in the period that it
becomes more likely than not that the deferred tax assets will be utilized. In
the event of an ownership change, the Companys use of the NOLs may be limited
and not fully available for realization.
On May 13,
2010, the Company reinstated a ban on acquisitions of additional shares of its
common stock, under certain circumstances, in order to preserve the tax
benefits of the Companys $164 million of NOLs.
In accordance with provisions of the Companys charter documents, unless
the Company has previously consented in writing (i) no stockholder may
acquire shares in an amount that would cause the stockholder to own 5% or more
of the common stock; and (ii) no current 5% or greater stockholder may
acquire any additional shares of common stock.
In
September 2006, the Companys Board of Directors suspended enforcement of
the Companys charter documents that restrict stockholders from acquiring more
than 5% of the outstanding shares of common stock. At that time, the Board
determined that such restrictions were not required to preserve the tax
benefits of the Companys NOLs. However, transactions by holders of over 5% of
the Companys common stock during the past three years necessitates the
reinstatement of this control in order to ensure that the 50% change in
ownership threshold is not exceeded which, under IRS rules, would severely
limit the Companys use of its NOLs.
19
Table of Contents
All
acquisitions of the Companys common stock in violation of its charter
prohibitions are null and void, and the Company is empowered to effectively
reverse the effect of any such acquisitions.
The Companys Board of Directors may, but is not required to, entertain
requests for permission to exceed the limitations on stock acquisitions under
circumstances it determines are not likely to jeopardize the Companys ability
to preserve and use its NOLs.
Uncertain Tax Positions
The Company adopted the provisions of ASC 740-10 as it applies to
uncertain tax positions on January 1, 2007. As a result of the
implementation, during the first quarter of 2007, the Company recorded a $5.1 million
decrease in deferred tax assets for unrecognized tax benefits, which was offset
by an increase in deferred tax assets of $1.8 million for assets
re-evaluated as recognizable. The net change in deferred tax assets of
$3.3 million was recorded as a cumulative effect of a change in accounting
principle and resulted in a decrease to the January 1, 2007 retained
earnings balance of $200,000 and a decrease to the additional paid in capital
balance of $3.1 million related to fresh-start accounting pursuant to a
1997 pre-packaged bankruptcy.
Of the Companys unrecognized tax benefits of $4.9 million at March 31,
2010, $100,000 would decrease the Companys effective tax rate if recognized.
The Company expects that its unrecognized tax benefits will decrease by
approximately $1.5 million within twelve months of the reporting date due to
statute of limitations lapses.
The Company recognizes interest expense and penalties related to
uncertain tax positions as interest or other expense. As of March 31,
2010, the Company has not recorded any interest or penalties related to
unrecognized tax benefits, due to the substantial NOLs available.
Certain tax year filings remain open to Federal and California
examination, which are the Companys only tax jurisdictions. The years 2006
through 2009 and the years 2005 through 2009 remain open for Federal and
California purposes, respectively, for which the Company utilized NOLs
generated between 1990 and 1993 to offset taxable income. If uncertainties
resulting in valuation allowances can be favorably resolved, the Company
expects to utilize Federal NOLs generated in 1995 through 1997 and in 1999,
2006, 2007 and 2009 in future years. In addition, the Company would expect to
utilize California NOL generated in 2007 and 2009 in future years.
Pursuant to ASC 718-740,
Stock Compensation
Income Taxes
, the Company has elected to recognize stock option
deductions on the tax law ordering method, which maximizes the realization of
the stock option deductions in the current year. While the Company realized the
majority of its 2006 stock option deductions, approximately $400,000 of
unrealized tax benefits related to stock option deductions are not reflected in
the Consolidated Financial Statements. Upon realization of the tax benefits,
the Company would increase its additional paid-in capital.
Note 10 - Commitments and
Contingencies
Real Estate Matters
The Company has outstanding performance and surety bonds, for the
benefit of city and county jurisdictions, related principally to its
obligations for site improvements and fees at various projects as of March 31,
2010. At this time, the Company does not believe that a material amount of any
currently outstanding performance or surety bonds will be called. The Company
believes that all work required to be completed at this time under the bonding
agreements has been completed and, therefore, draws upon these bonds, if any,
will not have a material effect on the Companys financial position, results of
operations or cash flows.
Legal Proceedings
Other Litigation
There are various lawsuits and claims pending against the Company and
certain subsidiaries. In the opinion of the Companys management, ultimate
liability, if any, will not have a material adverse effect on the Companys financial
condition or results of operations.
20
Table of Contents
California Department of Toxic Substances Control
In October 2006, the California Department of Toxic Substances
Control (DTSC) filed a civil complaint against the Companys Hearthside
Residential Corp. subsidiary (HRC) in the Federal District Court for the
Southern Division of the Central District of California The DTSCs complaint
requests that HRC pay for approximately $1.0 million of costs incurred by
the DTSC, together with interest on that amount, primarily in connection with
the oversight and remediation of PCB contamination found on residential
properties never owned by HRC adjacent to a 43-acre site where HRC completed
the removal of PCB contaminated soil during September 2005. HRCs
remediation process was approved by the DTSC in December 2005 when it
issued a final acceptance of the remediation work. The complaint also seeks an
order for HRC to pay any future costs which may be incurred in connection with
further remediation, together with court costs and attorneys fees.
Since May 2004, HRC has received invoices from DTSC seeking
reimbursement for these costs; however, HRC contends, based upon advice of
counsel, that it is not responsible for such costs because neither HRC nor any
affiliate ever developed or built the neighboring residential properties,
neither HRC nor any affiliate generated the contamination, the contamination
did not emanate from the 43-acre site that HRC remediated, and, even if the
contamination did emanate from the 43-acre site, it did not do so while HRC
owned the site. Furthermore, HRC has also disputed such charges due to the fact
that DTSC improperly submitted its bill. The Companys subsidiary is vigorously
defending itself in this matter. Therefore, the Company has not accrued for any
of DTSCs approximately $1.0 million of claims related to these
residential properties.
Prior to the commencement of the trial that was scheduled for December 2,
2008, the District Court ruled that HRC can be held liable as a current owner
of the site under applicable law. HRC applied to have that ruling certified for
appeal. In March 2009, the District Court granted permission to hear HRCs
appeal and the appellate process commenced. Oral arguments are currently
scheduled to be heard on June 9, 2010. HRC currently expects that it could
take two to four months to complete the appellate process. There can be no
assurance that HRC will receive a favorable ruling that it is not deemed to be
a current owner of the site. Once the
appellate process is complete, the parties will return to the District Court
within 30 to 60 days to commence a trial.
Corporate Indemnification Matters
The Company and its former affiliates have, through a variety of
transactions effected since 1986, disposed of several assets and businesses,
many of which are unrelated to the Companys current operations. By operation
of law or contractual indemnity provisions, the Company may have retained
liabilities relating to certain of these assets and businesses. There is
generally no maximum obligation or amount of indemnity provided for such
liabilities. A portion of such liabilities is supported by insurance or by
indemnities from certain of the Companys previously affiliated companies. The
Company believes its consolidated balance sheet reflects adequate reserves for
these matters.
Note 11 Stockholders Equity
As of March 31, 2010,
total stockholders equity is $31.0 million, reflecting beginning stockholders
equity of $33.4 million and net loss of $2.4 million during the three months
ended March 31, 2010.
Note 12 Stock Plan
1993 Stock Option/Stock Issuance Plan
The 1993 Stock Option/Stock Issuance Plan (1993 Plan) was approved at
the 1994 Annual Meeting of Stockholders, reserving 7.5 million shares each
of Series A Preferred Stock and Class A Common Stock for issuance to
officers, key employees and consultants of the Company and its subsidiaries and
the non-employee members of the Board of Directors (the Board). On April 28,
1997, in connection with the Recapitalization, a new class of Common Stock
replaced the Series A Preferred Stock and Class A Common Stock, and
the Compensation Committee of the Board authorized the grant of stock options
for 759,984 shares, equivalent at that time to 6% of the Companys fully
diluted equity, for certain directors and officers. At the May 2004 and June 2006
stockholder meetings, the stockholders of the Company authorized an additional
150,000 and 250,000 stock options, respectively, for the 1993 Plan, resulting
in total authorized grants of 1,159,984.
21
Table of
Contents
During the three months ended March 31, 2010 and 2009, the Company
issued a total of zero and 125,000 shares, respectively, of its common stock to
three independent directors under the Director Fee Program, which is a
component of the 1993 Plan. The Company is currently prohibited from issuing
shares due to its bankruptcy proceedings. The 2009 restricted shares vested at
a rate of 25% per quarter during 2009.
The Company did not grant any options during the three months ended March 31,
2010 and 2009. Pursuant to ASC 718-10,
Compensation Stock
Compensation
, the Company recorded zero and $18,000 of compensation
expense during the three months ended March 31, 2010 and 2009,
respectively, which is reflected in additional paid-in capital.
A summary of the status of the Companys 1993 plan for the three months
ended March 31, 2010 follows:
|
|
Number of
Options
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Life
|
|
Outstanding, January 1
|
|
17,500
|
|
$
|
21.58
|
(a)
|
|
|
Granted
|
|
|
|
$
|
|
|
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
Outstanding, March 31
|
|
17,500
|
|
$
|
21.58
|
(a)
|
5.85 years
|
|
|
|
|
|
|
|
|
|
Fully vested and exercisable at March 31
|
|
17,500
|
|
$
|
21.58
|
(a)
|
5.85 years
|
|
|
|
|
|
|
|
|
|
Available for future grants at March 31
|
|
221,794
|
|
|
|
|
|
(a) Adjusted for special
dividend of $12.50
As of March 31, 2010, there were 17,500 options outstanding with a
weighted-average exercise price of $21.58 (ranging from $13.35 to $25.99) and a
weighted-average remaining life of 5.85 years. All outstanding stock
options are fully vested. The aggregate intrinsic value of all outstanding,
fully-vested and exercisable stock options at March 31, 2010 was zero.
The Company estimates the fair value of its stock options using the
Black-Scholes option pricing model (the Option Model). The Option Model
requires the use of subjective and complex assumptions, including the options
expected term and the estimated future price volatility of the underlying
stock, which determine the fair value of the share-based awards. The Companys
estimate of expected term is determined based on the weighted-average period of
time that options granted are expected to be outstanding considering current
vesting schedules and the historical exercise patterns of the existing option
plan. The expected volatility assumption used in the Option Model is based on
historical volatility on traded options on the Companys stock in accordance
with guidance provided in SFAS 123(R) and SAB 107. The risk-free
interest rate used in the Option Model is based on the yield of U.S. Treasuries
with a maturity closest to the expected term of the Companys stock options.
22
Table of Contents
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
This item contains forward-looking statements that involve risks and
uncertainties as set forth in Cautionary Statements About Forward-Looking
Statements at the beginning of this Quarterly Report on Form 10-Q. Actual
results may differ materially from those indicated in the forward-looking
statements set forth below. Factors that may cause such a difference include,
but are not limited to, those discussed in Item 1A. Risk Factors of our
Annual Report on Form 10-K for the year ended December 31, 2009.
Status of Chapter 11 Cases
On October 27, 2009,
California Coastal Communities, Inc. (we) and certain of our direct and
indirect wholly-owned subsidiaries (collectively with us, the Debtors) filed
voluntary petitions (the Chapter 11 Petitions) for relief under chapter 11 of
title 11 (Chapter 11) of the United States Code (the Bankruptcy Code) in
the United States Bankruptcy Court for the Central District of California (the Bankruptcy
Court). The Chapter 11 Petitions are being jointly administered under the
caption
In re California Coastal Communities, Inc.
,
Case No. 09-21712-TA (the Chapter 11 Cases). The sole purpose of the Chapter
11 Cases is to restructure the debt obligations under our
senior secured
revolving credit agreement (Revolving Loan)
and our
senior secured term loan (Term
Loan)
for which
KeyBank National Association (KeyBank) originally served as the agent to the
lending syndicates. On February 26, 2010, KeyBank notified us and the
lenders of their resignation as agent. Effective April 6, 2010, Wilmington
Trust, FSB agreed to serve as agent for the syndicates. As of March 31,
2010, $81.7 million in principal amount was outstanding on the Revolving Loan
and $99.8 million in principal amount was outstanding on the Term Loan.
A major
stockholder of the Company currently holds approximately 16% of the Revolving
Loan and 19% of the Term Loan.
We and the other Debtors
continue to operate our businesses and manage our properties as debtors-in-possession
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the Bankruptcy
Court. We have obtained the Bankruptcy Courts approval to, among other things,
continue to pay critical vendors with lien rights, sell homes free and clear of
all liens on an interim basis, use cash collateral on an interim basis, honor
homeowner warranties, meet payroll obligations and provide employee benefits.
If the value of the Debtors assets and operations become materially impaired,
our ability to continue as debtors-in-possession and to operate our business in
the present mode could be jeopardized. During the three months ended March 31,
2010, we incurred costs totaling $1.3 million associated with the
reorganization and have incurred total reorganization costs of $2.6 million
through such date. We will continue to incur significant costs associated with
the reorganization which are expected to adversely affect the results of our
business operations.
On March 26, 2010,
we filed a proposed disclosure statement and proposed joint plan of
reorganization with the Bankruptcy Court, neither of which has been approved by
the Bankruptcy Court. The proposed joint plan provides for the extension of the
Revolving Loan and the Term Loan to enable us to complete construction and sale
of the homes at our Brightwater project. Throughout the Chapter 11
reorganization process we have tried to work with the various members of our
lending syndicate to determine whether a consensual restructuring of the
Revolving Loan and the Term Loan can be accomplished. However, a majority of
our lenders are opposed to our plan and there can be no assurance that we and
the other Debtors will be able to successfully confirm, consummate and execute
a plan of reorganization with respect to the Chapter 11 Cases that is
acceptable to the Bankruptcy Court and the creditors and other parties in
interest. A court hearing on the
adequacy of the disclosure statement was held on May 12, 2010. We expect
the Court to enter an order approving the disclosure statement containing
certain revisions. The Court has scheduled a valuation hearing for July 15,
2010 and a plan confirmation hearing for July 28, 2010
We have maintained
business operations through the reorganization process. Our liquidity and
capital resources, however, are significantly affected by the Chapter 11 Cases,
which have resulted in various restrictions on our activities, limitations on
financing and a need to obtain Bankruptcy Court approval for various matters.
In particular, we and the other Debtors are not permitted to make any payments
on pre-petition liabilities without prior Bankruptcy Court approval. While the
Bankruptcy Court has consistently approved all of our requests to continue wage
and salary payments and other employment benefits to employees, as well as
other related pre-petition obligations, to continue to construct and sell
homes, and to pay certain pre-petition trade claims held by critical vendors
with lien rights; there can be no assurance that our future requests will be
approved. Our authorization to continue to use cash collateral and sell homes
free and clear of liens with the consent of our lending syndicate is currently
scheduled to terminate on June 30, 2010.
Under the priority
schedule established by the Bankruptcy Code, certain post-petition and
pre-petition liabilities need to be satisfied before general unsecured creditors
and equity holders are entitled to receive any distribution. At this time, it
is not possible to predict with certainty the effect of the Chapter 11 Cases on
our business or various creditors, or when we and the other Debtors will emerge
from these proceedings. Future results will depend upon the confirmation and
successful implementation of a plan of reorganization. The continuation of the
Chapter 11 Cases, particularly if a plan of reorganization is not timely
confirmed, could further adversely affect our operations.
23
Table of Contents
We depend on cash flows generated from operations and available
borrowing capacity to fund our Brightwater development, and to meet our debt
service and working capital requirements. However, our ability to continue to
generate sufficient cash flows has been and will continue to be adversely
affected by continued difficulties in the homebuilding industry, continued
weakness in the California economy and negative publicity and prospective
homebuyer concerns related to the bankruptcy. During the first three months of
2010, we generated five net sales orders at Brightwater, which is equal to net
sales orders generated in the comparable period of 2009, and started
construction of a limited number of speculative homes which are in greater
demand in todays market than contract homes that are constructed over a five
to seven month period.
Due to cash requirements for ongoing home construction and debt
amortization, our ability to meet future loan repayment requirements will
depend on the results of the Chapter 11 Cases, as well as continued home sales
at our Brightwater project. Our goal is
to restructure debt payments based on our current expectations for future sales
over the next four years. The
inventories of resale homes in the Huntington Beach coastal zip codes have been
declining, which reduces the supply of resale homes with which Brightwater may compete.
Continuing negative conditions in the housing and credit markets give
rise to uncertainty as to our present and future ability to meet our projected
home sale closings and whether modified financings can be obtained in order for
us to meet our debt obligations. There can be no assurance that we will be
successful in any of these endeavors. While the national credit markets appear
to be improving, there is limited availability of financing for small
businesses which presents significant uncertainty as to our ability to secure
replacement financing and the terms of such financing if it is available. The
current housing and jumbo mortgage markets also present significant uncertainty
as to our ability to achieve sufficient positive cash flow from operations
required to satisfy our debt obligations and meet financial covenant
requirements.
While
we are striving to restructure our debt through the Chapter 11 Cases, unless we
are successful in amending and extending the terms of the Revolving Loan and
Term Loan agreements, we do not believe that our cash, cash equivalents and
future real estate sales proceeds will be sufficient to meet our debt
obligations as currently structured or to meet anticipated operating and
project development costs for Brightwater, and general and administrative
expenses during the next 12 months. These factors raise substantial doubt
about our ability to continue as a going concern. Our Consolidated Financial
Statements set forth above do not include any adjustments that might result
from the outcome of this uncertainty.
Nasdaq
Delisting
Our
common stock is currently trading over-the-counter in the recently created
OTCQB marketplace under the trading symbol CALCQ. The trading of our common
stock in the over-the-counter market rather than on Nasdaq may negatively
impact the trading price and the levels of liquidity available to our
stockholders. In addition, securities that trade over-the-counter are not
eligible for margin loans and will make our common stock subject to the provisions
of Rule 15g-9 of the Securities Exchange Act of 1934, as amended, commonly
referred to as the penny stock rule.
On October 28,
2009, we received a letter from Nasdaq notifying us that it had determined to
delist our common stock from trading as a result of our commencement of the
Chapter 11 Cases. We appealed the Nasdaq
determination on December 3, 2009 and, on December 29, 2009, the
Nasdaq Hearings Panel granted our request to remain listed, subject to certain
conditions, including (1) providing periodic updates as to the status of
the Brightwater credit facilities restructuring efforts; and (2) emerging
from the Chapter 11 process no later than April 26, 2010. On April 9,
2010, we received a delisting determination notice from the Nasdaq Hearings
Panel informing us that our common stock would be delisted from the Nasdaq
Stock Market as a result of our inability to emerge from the Chapter 11 process
by the April 26 deadline. The Nasdaq Listings and Hearings Review Council
subsequently denied our request to review the Nasdaq Hearings Panels
determination and our common stock was delisted at the open of trading on April 27,
2010 when it commenced trading in the OTCQB marketplace.
We have filed an
application with Nasdaq seeking the relisting of our securities on The Nasdaq
Stock Market following our emergence from the Chapter 11 process. In that regard, all companies, whether listed
on Nasdaq or not, are required to satisfy the initial listing requirements upon
emergence from a Chapter 11 process to qualify for listing. While we presently plan to take all necessary
steps to ensure our compliance with the applicable requirements, there can be
no assurance as to whether or when our common stock will be relisted on Nasdaq.
24
Table of
Contents
Overview of
California Coastal Communities, Inc. and Recent Industry Events.
We are a residential land development and homebuilding company with
properties owned or controlled primarily in Orange County, California and also
in Lancaster in Los Angeles county. Our primary asset is a 356-home luxury
coastal community known as Brightwater in Huntington Beach, California. Our
principal activities include:
·
obtaining zoning and other
entitlements for land we own or for third parties under consulting agreements;
·
improving the land for
residential development; and
·
designing, constructing and
selling single-family homes in Southern California.
Once our residential land is entitled, we may build homes, 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. The majority
of our homes are designed to appeal to move-up homebuyers and are generally
offered for sale in advance of their construction.
In view of the continuing significant economic downturn in the housing
market, during the remaining nine months of 2010 our new home construction will
be limited to our 356-home Brightwater project located on the Bolsa Chica mesa
in Huntington Beach, California.
During the remaining nine months of 2010, our primary goals will be to:
·
have our plan of
reorganization to restructure our obligations under the Term Loan and the
Revolving Loan confirmed by the Bankruptcy Court as soon as possible, which
would enable us to emerge from Chapter 11 bankruptcy during 2010; and
·
continue constructing, selling
and delivering homes at Brightwater.
There can be no assurance that we will accomplish, in whole or in part,
all or any of these strategic goals or any other strategic goals or
opportunities that we may pursue.
Our total revenues for the three months ended March 31, 2010 and
2009 were $3.0 million and $12.8 million, respectively. For the three
months ended March 31, 2010 and 2009, we delivered two and seven homes,
respectively. Our total assets as of March 31, 2010 and December 31,
2009 were $249.0 million and $249.9 million, respectively, with Brightwater and
other nearby properties constituting $238.6 million (96% of total assets) and
$234.8 million (94% of total assets), respectively. Our homebuilding
subsidiary, Hearthside Homes, Inc., has delivered over 2,300 homes to
families throughout Southern California since its formation in 1994.
Prior to obtaining the Coastal Development Permit for our Brightwater
project in December 2005, we historically maintained a minimal amount of
leverage. In September 2006, we obtained $225 million of debt
financing, as described in Notes 5 and 6 to the Consolidated Financial
Statements, which provided $100 million for Brightwater construction and
$125 million to fund a $12.50 per share special dividend paid to our stockholders
in September 2006. As of March 31, 2010, we had $204.0 million
of debt against $31.0 million of book equity.
We were formed in 1988 and our executive offices are located at 6
Executive Circle, Suite 250, Irvine, California 92614. Our website address
is http://www.californiacoastalcommunities.com and our telephone number is
(949) 250-7700. Through our website we make available our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to these reports filed or furnished pursuant to Section 13(d) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after they are filed with, or furnished to, the Securities and
Exchange Commission. Copies of our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to
these reports are available free of charge upon request. In addition, at our
website: http://www.californiacoastalcommunities.com, we post copies of our
Securities and Exchange Commission filings and press releases, as well as
current versions of our code of ethics, audit committee charter and nominating
committee charter.
25
Table of Contents
Homebuilding
Outlook and Operating Strategy
The financial crisis and economic recession that worsened in 2008 and
exacerbated the existing downturn in the homebuilding market persisted
throughout 2009 and has continued through the first quarter of 2010.
Specifically, the credit markets and the mortgage industry experienced a period
of unparalleled turmoil and disruption characterized by bankruptcy, financial
institution failure, consolidation and an unprecedented level of intervention
by the United States federal government. This disruption on the credit markets
has made it more difficult for homebuyers to obtain acceptable financing,
particularly for jumbo-mortgages. In addition, the supply of new and resale homes
in the marketplace remained excessive for the levels of consumer demand,
particularly given the supply of foreclosed homes offered at substantially
reduced prices. These pressures in the marketplace resulted in the use of
increased sales incentives and price reductions in an effort to generate sales
and reduce inventory levels by us and our competitors throughout 2009 and the
first quarter of 2010. While there have been signs of improvement in the
economy and financial markets during the first quarter of 2010, weakness in the
homebuilding environment continued as unemployment remains at very high rates,
and is expected to continue throughout the year.
Concern about the state of the economy and the job market continues to
negatively affect consumer confidence, as unemployment rates continued to rise
throughout 2009 in almost all of the metropolitan areas tracked by the U.S.
Department of Labor. The unemployment rate in California was 13.0% at the end
of the first quarter of 2010 compared with 11.2% at the end of the first
quarter of 2009, while the unemployment rate in Orange County was 10.1% in March 2010
compared with 8.5% in March 2009. These adverse conditions have now
persisted to varying degrees since the beginning of 2006 and their impact is
reflected in our results for the first quarters of 2010 and 2009. We believe that the weak demand we are
experiencing, particularly for homes over $1.5 million, reflects the excess
supply of higher end homes in the Huntington Beach market as well as homebuyers
reluctance to make a purchasing decision until they are comfortable that home
price declines are near bottom, that economic conditions have stabilized and
that our company will successfully emerge from Chapter 11. However, the
inventories of resale homes in the Huntington Beach coastal zip codes have been
declining, which reduces the supply of resale homes with which Brightwater may
compete, and the jumbo-mortgage market is showing signs of gradual improvement.
There can be no assurance that these trends will continue.
During 2009, the California home-buyer tax credit enacted early in the
year (which did not contain income or first-time buyer restrictions and was
limited to new homes) appears to have boosted demand somewhat; however, the
federal stimulus plan has not had much impact on sales at our Brightwater
project due to its income and first-time buyer restrictions. As of August 31,
2009, all of the $100 million in California tax credits had been issued. On March 25,
2010, an additional $200 million of funding was approved by the State of
California which will provide up to a $10,000 credit to first-time homebuyers
or those purchasing a newly built home starting May 1, 2010.
While we have begun to see some positive signs that these negative
trends in the overall economy are moderating, such as rising stock markets and
fewer new unemployment claims, it remains uncertain when the housing market or
the broader economy will experience a meaningful recovery. We anticipate that
the overhang of bank-owned homes will continue to bloat the market throughout
2010 as lenders seek to unload their inventory of foreclosed homes. We believe
the current conditions may improve during 2010; however there can be no
assurance in that regard. In addition,
we expect that market conditions will remain challenging and we expect that our
operations may sustain periodic losses until the homebuilding industry and
economy, as a whole, demonstrate a sustained rebound. Further, until we are
able to restructure our Revolving Loan and Term Loan debt through the Chapter
11 Cases, prospective buyers may be reluctant to purchase a home and we may
continue to experience slower sales.
We maintain relationships with various mortgage providers and, with few
exceptions, the mortgage providers that furnish our customers with mortgages
continue to issue new commitments. Our buyers generally have been able to
obtain adequate financing but the number of potential home buyers that can
qualify under the tightened lending standards has diminished. The availability
of certain mortgage financing products continues to be constrained due to
increased scrutiny of once commonly-used mortgage products such as sub-prime,
Alt-A, and other non-prime mortgage products. Further, throughout 2009, the
interest rates on jumbo mortgages were significantly greater than interest
rates on conforming mortgages, with spreads approximating 1% compared with
historical spreads in the range of only .25% to .35%. As of April 2010,
the spread has narrowed to approximately .50% to .80%. Mortgage market
liquidity issues and more stringent underwriting criteria have impeded some of
our home buyers from closing escrow, while others have found it more difficult
to sell their existing homes as their buyers face the problem of obtaining a mortgage.
Because we cannot predict the short-and long-term liquidity of the credit
markets, we continue to caution that, with the uncertainties in these markets,
the pace of home sales could remain depressed or slow further until these
markets improve.
26
Table of Contents
In response to the ongoing crisis in the housing market and national
credit markets, during the first three months of 2010 we:
·
continued offering
incentives for all of our homes in order to reduce inventory at Brightwater;
and
·
filed a proposed disclosure
statement and proposed joint plan of reorganization for relief under Chapter 11
in the Bankruptcy Court in order to restructure approximately $182 million of
indebtedness related to our Brightwater project.
We expect to continue operations at only the four Brightwater
communities until we see reasonable signs of a housing market recovery. If market conditions decline further, we may
need to take additional charges for inventory impairments in future
quarters. In addition, we expect that
our results for 2010 will be adversely affected by the costs of restructuring
our debt through the Chapter 11 Cases.
Our results could also be adversely affected if general economic
conditions do not improve further or deteriorate, if consumer confidence
remains weak or declines further, if job losses continue or accelerate, if
foreclosures or distressed sales increase, or if consumer mortgage lending
becomes less available or more expensive, any or all of which would further
diminish the prospects for a recovery in housing markets.
We believe that stability in the credit and capital markets and an
eventual renewal of confidence in the national economy will play a major role
in any turnaround in the homebuilding and mortgage lending industries. We also
believe that a meaningful improvement in housing market conditions will require
the restoration of consumer and credit market confidence that will support a
decision to buy a home, which will in turn require a sustained decrease in
inventory levels, price stabilization and reduced foreclosure rates.
As the housing market downturn persists, we will continue to adjust and
reevaluate our operating strategy in an effort to reduce standing inventories
while monitoring our margins and liquidity. Recognizing the challenges
presented by the downturn in the homebuilding market, our current operating
strategy includes:
·
continuing to adjust our
cost structure to todays market conditions by controlling our headcount and
overhead and rebidding subcontracts and materials in line with reduced demand;
·
exercising tight control
over cash flows;
·
changing sales and marketing
efforts to generate additional traffic;
·
offering incentives and
price reductions to reduce standing inventories and achieve acceptable levels
of sales volume and cash flow;
·
continuing to limit
construction starts to align product available for sale with sales activity;
and
·
seeking to balance our
short-term goal of selling homes in a depressed market and our long-term goal
of maximizing the value of our communities.
During the first three months of 2010 and 2009, we delivered two and
seven homes, respectively. As of May 10, 2010, six additional homes have
been delivered, bringing year-to-date deliveries to eight homes, and seven
additional homes are in escrow, as discussed further under Item 1Business--Our
Current and Future Homesites above.
Despite the challenges of the current California homebuilding market,
we believe the potential for our Brightwater project remains high. Brightwater
has not been immune to the effects of the unstable mortgage and housing
markets; however, that impact appears less severe than the weakness we have
seen in our inland markets. We believe that the reduced impact is a result of
Brightwaters superior coastal location, the extremely limited supply of new
homes on the coast of Southern California and the absence of significant
competition from other homebuilders in the Huntington Beach market due to the
lack of available land for the development of new single family detached homes.
We believe that Brightwater is in a location that is difficult to replace and
in a market where approvals are increasingly difficult to achieve. We also
believe that Brightwater has substantial embedded value that should not be
sacrificed under current depressed market conditions but, rather, should be
realized over time. Finally, we believe that Brightwaters demographics remain
strong due to the continuing regulation-induced constraints on lot supplies and
the significant number of affluent households along the coast of Southern
California. Therefore, we remain optimistic about continuing sales at
Brightwater.
27
Table of
Contents
While we generated 31 net sales orders in the first nine months of
2009, we generated only two net sales orders at Brightwater during the fourth
quarter of 2009. We believe the deceleration in sales pace for the fourth
quarter of 2009 primarily reflects the negative impact of the Chapter 11
announcement in October 2009. Our pace of sales since December 31,
2009 remained slow, with only five net sales generated through March 31,
2010. We anticipate that sales pace will continue to be negatively impacted
until we successfully implement a Chapter 11 plan of reorganization.
We expect that market conditions may continue to be challenging
throughout 2010, as unemployment rates remain elevated, foreclosure activity
continues to be significant and consumer confidence continues to be eroded.
Although substantially reduced home prices and relatively low consumer mortgage
interest rates have improved housing affordability, many potential homebuyers
remain tepid about purchasing a home in this unstable economic environment.
This demand-side dynamic, in conjunction with a high level of foreclosures, is
sustaining the oversupply of unsold new and existing homes and competitive
pricing pressures that have generated the extremely challenging conditions our
industry has experienced since the beginning of 2006.
While it is difficult to predict when a housing market and economic
recovery will occur, we believe we have responded with the right strategies to
the current and expected near-term housing market environment. We continue to
evaluate additional operating and financing strategies to position ourselves
for future opportunities. Longer term, we believe favorable demographics and
population growth in southern California and a continuing desire for home
ownership will drive demand for new homes in our markets, which will allow us
to capitalize on the recovery in those markets when it occurs.
In the ordinary course of doing business, we must make estimates and
judgments that affect decisions on how we operate and on the reported amounts
of assets, liabilities, revenues and expenses. These estimates include, but are
not limited to, those related to impairment of assets; capitalization of costs
to inventory; cost of sales including estimates for financing, warranty, and
other costs; and income taxes. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. On an ongoing basis, we evaluate and adjust our estimates based
on the information then currently available. Actual results may differ from
these estimates, assumptions and conditions.
Finally, our operating results during 2010 could be adversely affected
if housing, credit market, or general economic conditions deteriorate, if job
losses accelerate, if consumer mortgage lending becomes less available or more
expensive, or if consumer confidence continues to fall, any or all of which
would further diminish the prospects for a recovery in the housing market. We
believe that there will not be a meaningful improvement in the housing market
until there is a sustained decrease in inventory levels, price stabilization,
reduced foreclosure rates, greater availability of jumbo-mortgage financing,
and the restoration of consumer confidence that can support a decision to buy a
home.
Our Current and Future Homesites
Our homebuilding operations include active projects in the Huntington
Beach area of Southern California. We
delivered two homes (one Cliffs and one Breakers) during the three months ended
March 31, 2010, compared with seven deliveries (one Sands, one Cliffs,
three Breakers and two inland projects homes) during the comparable period in
2009. We acquired no single-family residential lots during the three months
ended March 31, 2010 and 2009 and we have no contracts to acquire land or
lots.
28
Table of Contents
The following chart describes our current projects, their location and
our lot and standing home inventories as of March 31, 2010:
Project
|
|
Location
|
|
Commenced
Sales
|
|
Models
(b)
|
|
Backlog
|
|
Standing
Inventory
|
|
Specs
Under Construction
|
|
Remaining
Lots
|
|
Total
Lot
Inventory
|
|
Brightwater
in Orange County (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Trails
|
|
Huntington Beach
|
|
2007
|
|
4
|
|
5
|
|
1
|
|
3
|
|
20
|
|
33
|
|
The
Sands
|
|
Huntington Beach
|
|
2007
|
|
4
|
|
1
|
|
2
|
|
3
|
|
53
|
|
63
|
|
The
Cliffs
|
|
Huntington Beach
|
|
2008
|
|
4
|
|
5
|
|
1
|
|
|
|
89
|
|
99
|
|
The
Breakers
|
|
Huntington Beach
|
|
2008
|
|
5
|
|
1
|
|
2
|
|
1
|
|
87
|
|
96
|
|
SubtotalOrange County
|
|
|
|
|
|
17
|
|
12
|
|
6
|
|
7
|
|
249
|
|
291
|
|
Lancaster:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unimproved
lots
|
|
Lancaster
|
|
(c)
|
|
|
|
|
|
|
|
|
|
73
|
|
73
|
|
TotalAll Projects
|
|
|
|
|
|
17
|
|
12
|
|
6
|
|
7
|
|
322
|
|
364
|
|
(a)
Land acquired in 1970;
commenced construction in 2006.
(b)
We sold our 17 Brightwater
models to an independent third-party investor on December 31, 2008;
however, the transaction is accounted for as a financing and therefore those
homes are included in our home inventories.
(c)
To be determined subject to
market conditions.
As of March 31, 2010, we had standing inventory of six Brightwater
homes. During the three months ended March 31, 2010, net new orders
decreased to five homes compared with seven homes during the comparable period
in 2009 due to the absence of sales activity at our inland projects compared
with the first quarter 2009. Cancellations as a percentage of new orders were
38% during the three months ended March 31, 2010, compared with
approximately 30% during the comparable period in 2009. Backlog as of March 31,
2010 increased to 12 homes compared with eight homes as of March 31, 2009,
reflecting five more Brightwater homes in escrow as of March 31, 2010,
including four more of the larger Cliffs and Breakers homes.
Brightwater at Bolsa Chica
Brightwater is our coastal Orange County residential community, located
on 105 acres of the Bolsa Chica mesa in the City of Huntington Beach, approximately
35 miles south of downtown Los Angeles. Brightwater was annexed into the City
of Huntington Beach in 2008. Brightwater offers a broad mix of home choices
averaging 2,860 square feet and ranging in size from 1,710 square feet to 4,339
square feet. Located near Pacific Coast Highway and overlooking the Pacific
Ocean, Huntington Harbor and the restored 1,300-acre Bolsa Chica Wetlands, 63
of the 356 homes at Brightwater will have unobstructed ocean and/or wetlands
views.
Brightwater is the largest property in our portfolio and, along with
other nearby properties (including a five-acre parcel in the process of
entitlement), comprises substantially all of our real estate inventories as of March 31,
2010. This project is located on one of the last large undeveloped coastal
properties in Southern California. Brightwater is bordered on the north and
east by residential development in the City of Huntington Beach and Huntington
Harbor, to the south by open space and the 1,300-acre Bolsa Chica wetlands, and
to the west by 120 acres of publicly-owned conservation land and open space on
the lower bench of the Bolsa Chica mesa, Pacific Coast Highway, Bolsa Chica
State Beach, and the Pacific Ocean. Brightwater also has 37 acres of open space
and conservation area.
We completed construction of eight model homes at The Trails and The
Sands neighborhoods in July 2007, held a grand opening in August 2007
and delivered the first nine homes in December 2007. During January 2008,
we completed construction of nine additional model homes for The Cliffs and The
Breakers and in February 2008 began selling homes to buyers who previously
registered on our priority list. We held a grand opening for these
neighborhoods in March 2008. These homes are larger than The Trails and
The Sands, ranging from 2,724 to 4,339 square feet. We began delivering homes
at The Cliffs and The Breakers during the third quarter of 2008. As of March 31,
2010, we have delivered an aggregate of 65 homes (excluding the 17 model homes)
at Brightwater, including 29, 16, 10, and 10 homes at The Trails, The Sands,
The Cliffs, and The Breakers, respectively.
Key facts and assumptions regarding the Brightwater development project
include the following:
·
Brightwater is expected to
consist of 356 homes, including 106 homes at The Breakers, 109 homes at The
Cliffs, 79 homes at The Sands and 62 homes at The Trails.
29
Table of Contents
·
There are 63 homes at
Brightwater which will have unobstructed views of the Pacific Ocean and/or the
Bolsa Chica wetlands, including 36 homes at The Breakers (five delivered to
date), 25 homes at The Cliffs and two homes at The Sands.
·
Build-out of production
homes, which is subject to market conditions, is currently expected to take
approximately five years and be completed in 2014.
·
Costs to improve the lots
from their raw condition to finished lots, including County permits, City
annexation fees and school fees, approximate $200,000 per lot. As of March 31,
2010, approximately 76% of these lot improvement costs have already been
incurred.
·
The direct costs (excluding
indirect costs such as supervision, overhead, sales and marketing, warranty,
insurance, etc.) of building homes at Brightwater are currently expected to
range from approximately $125 to $140 per square foot.
·
Indirect costs are expected
to approximate 3% of sales revenues.
·
Based on current sales price
and cost projections, the various Brightwater products are currently expected
to generate gross margins of approximately 5% to 22% due to our low carrying
value in Brightwater. Gross margins for the larger homes at The Cliffs and The
Breakers are currently expected to approximate 12% to 22%, while gross margins
at The Trails and The Sands are currently expected to approximate 5% to 14%.
The decrease in expected margins reflects expected increases in interest rates
in connection with restructuring our debt, price reductions required to be competitive
under current market conditions, additional incentives to sell standing
inventory and greater use of third-party real estate brokers.
The estimation process involved in the determination of value is
inherently uncertain because it requires estimates as to future events and
market conditions. This estimation process assumes our ability to complete
development and disposition of our real estate inventories in the ordinary
course of business based on managements present plans and intentions. Economic,
market, and environmental conditions may affect our development and marketing
plans. The development of Brightwater depends upon various factors.
Accordingly, the amount ultimately realized from the Brightwater project may
differ materially from our current estimates and the projects carrying value.
Deliveries for the three months ended March 31, 2010 and 2009 were
as follows:
|
|
|
|
Deliveries
|
|
|
|
|
|
March 31,
|
|
|
|
Location
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Brightwater
|
|
|
|
|
|
|
|
The Sands
|
|
Huntington
Beach
|
|
|
|
1
|
|
The Cliffs
|
|
Huntington
Beach
|
|
1
|
|
1
|
|
The Breakers
|
|
Huntington
Beach
|
|
1
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
5
|
|
|
|
|
|
|
|
|
|
Inland Empire/Lancaster
|
|
|
|
|
|
|
|
Completed Projects
|
|
Various
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
7
|
|
Huntington Beach.
We completed construction of the first eight
model homes for The Trails and The Sands products which range from 1,710 to
2,160 square feet during July 2007 and opened for sales in August 2007.
We completed construction of nine model homes for The Cliffs and The Breakers
in January 2008 and began selling homes in February 2008. We
delivered nine homes at an average price of $1.2 million, or $609 per
square foot during 2007 and 23 homes during 2008, at an average price of
$1.4 million, or approximately $564 per square foot. We delivered 31 homes
at an average price of $1.2 million (including three Breakers view homes
averaging $3.2 million), or approximately $539 per square foot, during the year
ended December 31, 2009. During the three months ended March 31,
2010, we delivered two homes at an average price of $1.5 million, or
approximately $430 per square foot. As of May 10, 2010, seven Brightwater
homes (including two homes with wetland and ocean views) are in escrow at an
average price of $1.5 million, or approximately $542 per square foot, and 15
additional homes are completed or under construction and have been released for
sale.
30
Table of Contents
The Trails and The Sands
We did not deliver any homes at The Trails and The Sands during the
three months ended March 31, 2010. During the comparable period of 2009 we
delivered one Sands home and generated $1.1 million in revenue and gross
operating margins of 26.4%. We delivered an additional four Trails homes during
May 2010 at an average price of $853,000. Homes at The Trails and The
Sands are presently being offered at prices ranging from $810,000 to $1.0
million. As of May 10, 2010, three homes are in escrow at The Trails and
The Sands, six homes are completed and unsold, and five homes are under
construction and unsold.
The Cliffs and The Breakers
We delivered two and four homes at The Cliffs and The Breakers during
the three months ended March 31, 2010 and 2009, respectively, and generated
revenue of $3.0 million and $11.1 million, respectively, and gross operating
margins of 12.1% and 33.0%, respectively. Three of the four homes delivered
during the first quarter of 2009 were view homes with an average sales price of
$3.2 million. The decrease in margins reflects the absence of view premiums for
the two homes delivered during the first quarter of 2010, expected increases in
interest rates in connection with restructuring our debt, price reductions
required to be competitive under current market conditions, and greater use of
third-party real estate brokers. We delivered an additional two Cliffs homes
during April and May 2010 at an average price of $1.3 million. Homes
at The Cliffs and The Breakers are presently being offered at prices ranging
from $1.3 million to $3.2 million for 2,724 to 4,339 square foot homes. As
of May 10, 2010, four homes are in escrow at The Cliffs and The Breakers,
three homes are completed and unsold, and one home is under construction and
unsold.
The Ridge
We are pursuing entitlement for 22 homes averaging 3,500 square feet in
the City of Huntington Beach near our existing Brightwater project. Entitlement
of these lots is subject to approval by the City of Huntington Beach and the
California Coastal Commission, and is currently expected to take two to three
years. On April 27, 2010 the City
of Huntington Beach Planning Commission approved The Ridge project and it is
currently expected to be presented to the City Council for their approval in July 2010.
Lancaster.
In April 2005, we acquired 73 unentitled
lots in the City of Lancaster in northern Los Angeles County through a
subsidiary of Hearthside Homes, Inc. We have deferred the construction
start for this 73-unit project, which has no recorded loan, until sales
activity in this market improves significantly. The tentative map for this
project is prepared, but we have delayed filing for approval in order to defer
the entitlement fees required to be paid at the time of filing.
Critical Accounting Policies and
Estimates
In the preparation of the Consolidated Financial Statements, we applied
accounting principles generally accepted in the United States of America. The
application of generally accepted accounting principles may require management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying results. Listed below are those policies
and estimates that we believe are critical and require the use of complex
judgment in their application. In particular, our critical accounting policies
and estimates include the evaluation of the impairment of long-lived assets and
the evaluation of the probability of being able to realize the future benefits
indicated by our significant federal tax net operating losses, as discussed
further in Notes 3, 4 and 9 to the Consolidated Financial Statements.
Basis of
Consolidation
Our Consolidated Financial Statements include our accounts and all of
our majority-owned and controlled subsidiaries and joint ventures. Certain of
our wholly-owned subsidiaries are members in joint ventures involved in the
development and sale of residential projects and residential loan production.
The financial statements of joint ventures in which we generally have a
controlling or majority economic interest (and thus are controlled by us) are
consolidated with our financial statements. Our investments in unconsolidated
joint ventures are accounted for using the equity method when we do not have
voting or economic control of the venture operations. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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Impairment of Long-Lived Assets
We recorded inland project impairment charges totaling zero and $3.2
million during the three months ended March 31, 2010 and 2009,
respectively.
We assess the impairment of real estate inventories and other
long-lived assets in accordance with ASC 360-10-35 which requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is evaluated by comparing an assets carrying value to
the undiscounted estimated cash flows expected from the assets operations and
eventual disposition. If the sum of the undiscounted estimated future cash
flows is less than the carrying value of the asset, an impairment loss is
recognized based on the fair value of the asset. If impairment occurs, the fair
value of an asset is deemed to be the amount a willing buyer would pay a
willing seller for such asset in a current transaction. Additionally, as
appropriate, we identify alternative courses of action to recover the carrying
value of our long-lived assets and evaluate all likely alternatives under a
probability-weighted approach as described in ASC 360-10-35.
In accordance with ASC 360-10-35, in developing estimated future cash
flows for impairment testing for our real estate inventories, we incorporated
our own market assumptions including those regarding home prices, sales pace,
sales and marketing costs, infrastructure and home-building costs, and
financing costs regarding real estate inventories. Our assumptions are based,
in part, on general economic conditions, the current state of the homebuilding
industry, expectations about the short- and long-term outlook for the housing
market, and competition from other homebuilders in the areas in which we build
and sell homes. These assumptions can significantly affect our estimates of
future cash flows. As required by ASC 360-10-35, should market conditions
deteriorate in the future or other events occur that indicate the carrying
amount of our real estate inventories may not be recoverable, we will
reevaluate the expected cash flows from each project to determine whether any
additional impairment exists at any point in time. For those communities deemed
to be impaired, we determine fair value based on discounted estimated future
cash flows using estimated absorption rates for each community.
We evaluated our Brightwater project for impairment as of December 31,
2009, and determined that no impairment was indicated based on our projection
of the projects future cash flows, including projected revenues, costs and
gross margin. We based our assumptions
on our evaluation of projected prices while reflecting current marketing
efforts, review of competitive home sales, characteristics of the Huntington
Beach housing market, and current construction costs. Our relatively lower book basis in
Brightwater of $233.5 million as of March 31, 2010, is due in part to a
fair value adjustment recorded in September 1997 under Fresh Start
accounting. Since 1997, we have recorded
no impairment charges for Brightwater, primarily due to the long holding period
and significant increases in home prices since 1997, before the current
challenging conditions and price depreciation of the past two years.
The most critical factors in our Brightwater analysis are projected
home prices and direct construction costs, as they are affected by market
factors such as home sale competition, the availability of financing for home
purchases and competition for direct construction goods and services. Since opening for sales at Brightwater in August 2007,
we have reduced prices and offered sales incentives in response to the recent
difficult conditions in the housing market. We have reflected these price
reductions in our projections which reduced average future projected gross
margins for the project from approximately 30%-40% in 2007 to 6%-33% as of December 2009
and 5%-22% as of March 2010. The
decrease in expected margins also reflects greater expected use of third-party
real estate brokers, particularly in the near-term, and expected increases in
interest rates in connection with restructuring our debt.
Home prices and direct construction costs are the most critical factors
in our impairment analysis and we estimate that a 1% change in home prices or
direct construction costs would change gross margin by approximately .75% and
.25%, respectively. Due to their subjective and interrelated nature, we cannot
meaningfully quantify the impact of potential changes for all of the factors
considered in our impairment analysis. While there is risk that additional
price reductions may be necessary, it appears unlikely that any future price
reductions or direct construction cost increases would result in erosion of the
entire positive cash flow that we are currently projecting and result in an
impairment charge for this project. However, there can be no assurance in that
regard because economic and housing market conditions may continue to worsen or
other events beyond our control may occur which could result in a change in our
assumptions.
In our analysis, we noted that the Brightwater project in Huntington
Beach is in a mature housing market with very limited new home construction and
a low supply of comparable resale homes with views or competitive
features. Further, Huntington Beach has
consistently outperformed other coastal Orange County cities with average
market times of four months compared with seven to eight months in neighboring
coastal cities. Notably, since August 2009, supply at the $1.0 million to
$1.5 million level has declined from nine months to five months as of May 2010.
During the same time period, supply has declined from 21 months to 16 months at
the $2.0 million and above level. In January 2009, the City of
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Huntington
Beachs credit rating was raised, reflecting the citys built-out nature and
expected economic resilience of the citys households. Huntington Beach is in coastal Orange County
which is the subject of two widely respected annual economic forecasts which expect
an increase in median home prices in 2010 and an increase in demand due to
improved affordability. Therefore,
market data support our assumption that our Brightwater project in Huntington
Beach will fare better than most surrounding Orange County communities and
significantly better than projects in inland areas, resulting in reasonable
expectations of price increases in future years given the limited supply of new
homes along the coast of Southern California.
In our impairment analysis of the Brightwater project, we also consider
projected construction and related costs and the availability of mortgage
financing for our potential homebuyers.
While mortgage financing for our homes is still challenging, 30-year
jumbo mortgage rates have decreased from a national average high of 8.4% in October 2008
to approximately 5.75% currently and lenders are beginning to relax down
payment requirements which were as high as 30% for jumbo loans in the Fall of
2009. With the conforming loan maximum
in Orange County continuing at $729,750, a significant portion of our potential
homebuyers are able to finance a substantial portion of their home purchase at
historically low mortgage rates approximating 5.0%.
The estimation process involved in the determination of value is
inherently uncertain since it requires estimates as to future events and market
conditions. Such estimation process assumes the Companys ability to complete
development and disposition of its real estate properties in the ordinary
course of business based on managements present plans and intentions. Economic
and market conditions may affect managements 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 amount ultimately realized from such
project may differ materially from current estimates and the projects carrying
value.
We believe that the accounting for the impairment of long-lived assets
is a critical accounting policy because the valuation analysis involves a
number of assumptions that may differ from actual results and the impact of
recognizing impairment losses has been material to our Consolidated Financial
Statements. The critical assumptions in our evaluation of potential impairment
of real estate inventories included projected sales prices, anticipated sales
pace within each community, and applicable discount rates, any of which could
change materially as economic conditions change.
Income
Taxes
We account for income taxes on the liability method, in accordance with
ASC 740-10,
Income Taxes
.
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. The liability method requires an evaluation of the probability of
being able to realize the future benefits indicated by deferred tax assets. A valuation
allowance is established against a deferred tax asset if, based on the
available evidence, it is more likely than not that such asset will not be
realized. The realization of a deferred tax asset ultimately depends on the
existence of sufficient taxable income in either the carryback or carryforward
periods under tax law. We evaluate on a quarterly basis, whether a valuation
allowance should be established based on our determination of whether it is more
likely than not that some portion or all of the deferred tax assets will be
realized. In our assessment, appropriate consideration is given to all positive
and negative evidence related to the realization of the deferred tax assets.
This assessment considers, among other matters, the nature, frequency and
magnitude of current and cumulative income and losses, forecasts of future
profitability, the duration of statutory carryback or carryforward periods, our
experience with operating loss and tax credit carryforwards not expiring
unused, and tax planning alternatives.
Our assessment of the need for a valuation allowance on our deferred
tax assets includes assessing the likely future tax consequences of events that
have been recognized in our Consolidated Financial Statements or tax returns.
We base our estimate of deferred tax assets and liabilities on current tax laws
and rates and, in certain cases, on business plans and other expectations about
future outcomes. Changes in existing tax laws or rates could affect our actual
tax results and our future business results may affect the amount of our
deferred tax liabilities or the valuation of our deferred tax assets over time.
On October 27, 2009, we filed Chapter 11 Petitions in the
Bankruptcy Court. Due to uncertainties regarding the resolution of our Chapter
11 Cases and our ability to utilize our NOLs in the future, during 2009 we
recorded a valuation allowance for the remaining amount of our net deferred tax
assets. We recorded an additional valuation allowance of $1.0 million during
the first quarter of 2010 related to deferred tax assets generated during the
quarter.
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Table of Contents
Due to uncertainties in the estimation process, particularly with
respect to changes in facts and circumstances in future reporting periods
(carryforward period assumptions), it is reasonably possible that actual
results could differ from the estimates used in our historical analyses. Our assumptions
require significant judgment because the residential homebuilding industry is
cyclical and is highly sensitive to changes in economic conditions. Our current
assessment of the need for a valuation allowance is primarily dependent upon
utilization of tax net operating losses in the carryforward period and our
future projected income. If our results of operations are more or less than
projected and there is objectively verifiable evidence to support the
realization of a different amount of our deferred tax assets, an adjustment to
our valuation allowance may be required to reflect greater expected
utilization.
We remain subject to the general rules of Section 382 of the
Internal Revenue Code, which limit the availability of net operating losses if
an ownership change occurs. If we were to experience another ownership change,
the amount of net operating losses available would generally be limited to an
annual amount equal to (i) the value of our equity immediately before the
ownership change, multiplied by the long-term tax-exempt rate (4.03% as of May 2010)
plus (ii) recognized built-in-gains, defined as those gains recognized
within five years of the ownership change subject to an overall limitation of
the net unrealized built-in gains existing as of the ownership change date. We
estimate that after giving effect to various transactions by stockholders who
hold a 5% or greater interest in the company, we have experienced a three-year
cumulative ownership shift of approximately 29% as of May 10, 2010, as
computed in accordance with Section 382. In the event of an ownership
change, our use of our NOLs may be limited.
On May 13,
2010, we reinstated a ban on acquisitions of additional shares of our Common
Stock, under certain circumstances, in order to preserve the tax benefits of
our $164 million of NOLs. In accordance
with provisions of our charter documents, unless we have previously consented
in writing (i) no stockholder may acquire shares in an amount that would
cause the stockholder to own 5% or more of the common stock; and (ii) no
current 5% or greater stockholder may acquire any additional shares of common
stock.
All
acquisitions of our common stock in violation of our charter prohibitions are
null and void, and we are empowered to effectively reverse the effect of any
such acquisitions. Our Board of
Directors may, but is not required to, entertain requests for permission to
exceed the limitations on stock acquisitions under circumstances it determines
are not likely to jeopardize our ability to preserve and use our NOLs.
Homebuilding Revenues and Cost of Sales
Our homebuilding operation generates revenues from the sale of homes to
homebuyers. The majority of these homes are designed to appeal to move-up
homebuyers and are generally offered for sale in advance of their construction.
Sales contracts are usually subject to certain contingencies such as the buyers
ability to qualify for financing. Revenue from the sale of homes is recognized
at the close of escrow when title passes to the buyer and the earnings process
is complete. As a result, our revenue recognition process does not involve
significant judgments or estimates. However, we do rely on certain estimates to
determine the related construction costs and resulting gross margins associated
with revenues recognized. The cost of sales is recorded based upon total
estimated costs within a subdivision and allocated using the relative sales
value method. Our construction costs are comprised of direct and allocated
costs, including estimated costs for future warranties and indemnities. Our
estimates are based on historical results, adjusted for current factors.
Litigation Reserves
We and certain of our subsidiaries have been named as defendants in
various cases arising in the normal course of business and regarding assets and
businesses disposed of by us or our former affiliates. See Notes 8 and 10
to our Consolidated Financial Statements beginning on page 5. We have
reserved for costs expected to be incurred with respect to these cases based
upon information provided by our legal counsel. There can be no assurance that
total litigation costs actually incurred will not exceed the amount of such
reserve.
Recent Accounting Pronouncements
See discussion regarding
New Accounting Pronouncements in Note 3 to the Consolidated Financial
Statements.
Results of Operations
After filing the
Chapter 11 Cases, we are required to periodically file various documents
with, and provide certain information to the Bankruptcy Court, including
statements of financial affairs, schedules of assets and liabilities, and
monthly operating reports in forms prescribed by Chapter 11, as well as certain
financial information on an unconsolidated basis. Such materials will be
prepared according to requirements of Chapter 11. While we believe that these
documents and reports provide then-current information required under Chapter
11, they are prepared only for the Debtors and, therefore, certain
34
Table of Contents
operational entities are excluded. In addition, they
are prepared in a format different from that used in our Consolidated Financial
Statements filed under the securities laws and they are unaudited. Accordingly,
we believe that the substance and format do not allow meaningful comparison
with our regular publicly-disclosed Consolidated Financial Statements.
Moreover, the materials filed with the Bankruptcy Court are not prepared for
the purpose of providing a basis for an investment decision relating to our
securities, or for comparison with other financial information filed with the
SEC.
The following tables set
forth key operating and financial data for our homebuilding operations for the
three months ended March 31, 2010 and 2009.
Backlog
as of March 31
Homes in Backlog
|
|
Value ($ in millions)
|
|
Average Selling Price
($ in thousands)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
12
|
|
8
|
|
50.0
|
%
|
$
|
15.8
|
|
$
|
9.1
|
|
73.6
|
%
|
$
|
1,319
|
|
$
|
1,134
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes
Delivered
Three Months Ended March 31
Homes Delivered
|
|
Value ($ in millions)
|
|
Average Selling Price
($ in thousands)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
2
|
|
7
|
|
(71.4
|
)%
|
$
|
3.0
|
|
$
|
12.8
|
|
(76.6
|
)%
|
$
|
1,500
|
|
$
|
1,829
|
|
(18.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 Compared
with the Three Months Ended March 31, 2009
We reported revenues of $3.0 million and gross operating profit of
$400,000 for the first quarter of 2010, compared with $12.8 million in
revenues and gross operating profit of $800,000 for the first quarter of 2009.
Revenues in the current period reflect deliveries of two Brightwater homes. The
comparable period of the prior year reflects deliveries of seven homes,
including five homes at Brightwater and two inland homes. Gross operating
profit for the first quarter of 2009 includes a non-cash impairment charge of
$3.2 million, reflecting a fair value write-down for an inland project in
Beaumont which was disposed on September 30, 2009.
We generated $3.6 million less in gross operating profit before
impairment charges from home sales as a result of delivering only two homes at
Brightwater which generated a 12.1% gross margin, compared with five
Brightwater deliveries which generated a 32.2% gross margin during the
comparable period in 2009. The decrease in gross margin reflects the fact that
three of the five Brightwater homes delivered during the first quarter of 2009
included view premiums, compared with none in the first quarter of 2010. In
addition, the decrease in gross margin during the first quarter of 2010
reflects expected increases in interest rates in connection with restructuring
our debt as well as sales price reductions offered in response to the
continuing difficult conditions in the housing market and greater use of
third-party brokers.
Reorganization costs of $1.3 million during the first quarter of 2010
reflect legal and professional fees and other costs associated with the Chapter
11 bankruptcy proceedings.
The $700,000 decrease in interest expense compared with the first
quarter of 2009 primarily reflects the absence of various inland projects which
were sold or disposed in 2009 for which we are no longer incurring period
costs.
Payments Under Contractual
Obligations
Our purchase contracts which are made in the normal course of our
homebuilding business for land acquisition and construction subcontracts are
generally cancelable at will. Other contractual obligations including our tax
liabilities, accrued benefit liability for a frozen retirement plan and other
accrued pensions, home warranty reserves and contingent indemnity and
environmental obligations are estimated based on various factors. Payments are
not due as of a given date, but rather are dependent upon the incurrence of
professional services, the lives of annuitants and other factors. The
estimation process involved in the determination of carrying values of these
obligations is inherently uncertain since it requires estimates as to future
events and contingencies. We have provided additional disclosure below in Part II
Item 1 Legal Proceedings, and in Note 10 to our Consolidated
Financial Statements above.
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Table of Contents
Liquidity and Capital Resources
On September 28,
2009, we received a notice of an event of default from the agent to the lending
syndicate with respect to the loan-to-value covenant of the R
evolving Loan
that would give rise to the right to
accelerate the indebtedness under the Revolving Loan and
Term Loan
. In addition, on October 1, 2009,
we received a notice of an event of default with respect to our nonpayment of
approximately $1.7 million of principal that was due on September 30, 2009
under the terms of the Revolving Loan that would also give rise to the right to
accelerate the indebtedness under the Revolving Loan and Term Loan. As of March 31,
2010, $81.7 million and $99.8 million of principal was outstanding under the
Revolving Loan and Term Loan, respectively.
The filing of the Chapter
11 Petitions on October 27, 2009, also constituted events of default under
the Revolving Loan and the Term Loan that can trigger acceleration of the
indebtedness. However, the filing of the
Chapter 11 Petitions automatically stayed those actions against us and the
other Debtors. Under the terms of
Bankruptcy Court orders, we have continued to pay interest on the outstanding
principal balance at pre-default interest rates.
While we are striving to restructure our debt through the Chapter 11
Cases, unless we are successful in amending and extending the terms of the
Revolving Loan and Term Loan agreements, we do not believe that our cash, cash
equivalents and future real estate sales proceeds will be sufficient to meet
our debt obligations or to meet anticipated operating and project development
costs for Brightwater, and general and administrative expenses during the next
12 months. These factors raise substantial doubt about our ability to
continue as a going concern. The Consolidated Financial Statements herein do
not include any adjustments that might result from the outcome of this
uncertainty.
Year-over-year
changes in the principal components of our liquidity and capital resources are
as follows (in millions, except percentages):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
|
Cash and cash equivalents
|
|
$
|
4.7
|
|
$
|
8.4
|
|
Cash (used in) provided by operating activities
|
|
(4.2
|
)
|
5.5
|
|
Cash provided by financing activities
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
The principal assets in our portfolio are residential lots which must
be held over an extended period of time in order to be developed to a condition
that, in managements opinion, will ultimately maximize our return.
Consequently, we require significant capital to finance our real estate
development and homebuilding operations. Historically, sources of capital have
included loan facilities secured by specific projects and available internal
funds. Our unrestricted cash and cash equivalents as of March 31, 2010
aggregated $4.7 million, the use of which is subject to the Bankruptcy
Courts interim cash collateral order.
Since the filing of the Chapter 11 Cases we have only been paying
interest under the Term and Revolving Loans as we continue to seek approval of
our plan of reorganization to change principal payment schedules and to extend
maturities.
March 31, 2010 Compared with
December 31, 2009
Cash used in operating activities of $4.2 million for the first
quarter of 2010 primarily reflects investments in Brightwater of
$5.8 million, general and administrative costs of $1.4 million and
restructuring costs of $1.3 million, which were partially offset by net
proceeds from sales of $2.8 million and the increase in accounts payable and
accrued liabilities discussed below.
The $1.5 million increase in accounts payable and accrued liabilities
primarily reflects an increase of $700,000 for accrued reorganization costs,
and increases in accrued amounts for other professional fees and Brightwater
project construction.
Off Balance Sheet Financing
In the ordinary course of business, we may enter into land option
contracts in order to procure land for the construction of homes. The use of
such option agreements allows us to reduce the risks associated with land
ownership and development; reduce our financial commitments, including interest
and other carrying costs; and minimize land inventories. Under such land option
contracts, we will fund a specified option deposit or earnest money deposit in
consideration for the right to purchase land in the future, usually at a
predetermined price. Our liability is generally limited to forfeiture of the
nonrefundable deposits, letters of credit and other nonrefundable amounts
incurred. As of March 31, 2010, we have no land option deposits and no
third party guarantees.
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Table of Contents
We also may acquire land and conduct residential construction
activities through participation in joint ventures in which we hold less than a
controlling interest. Through joint ventures, we reduce and share our risk and
also reduce the amount invested in land, while increasing our access to
potential future home sites. The use of joint ventures also, in some instances,
enables us to acquire land which we might not otherwise obtain or access on as
favorable terms, without the participation of a strategic partner. While we
view the use of unconsolidated joint ventures as beneficial to our homebuilding
activities, we do not view them as essential to those activities.
Under the requirements of ASC 810,
Consolidation
(ASC 810), certain of our land option contracts may create a variable
interest for us, with the land seller being identified as a VIE. In compliance
with ASC 810, we analyze our land option contracts and other contractual
arrangements and consider whether we should consolidate the fair value of
certain VIEs from which we are purchasing land under option contracts. As of March 31,
2010, we had no deposits with VIEs.
Impact
of Inflation, Changing Prices and Economic Conditions
Real
estate and residential housing prices are affected by a number of factors,
including but not limited to uncertainty by potential homebuyers in the
stability of the United States and global economy, inflation or deflation,
interest rate changes, competition and the supply of new and existing homes to
be purchased. Uncertainty in the stability of the national economy and
significant volatility in the banking system and financial markets can, and
has, caused potential homebuyers to refrain from committing to make significant
purchases, including the purchase of new homes. In the event the volatility in
the banking system and financial markets continues to remain high and the
national economy does not stabilize in the near term, our ability to sell new
homes to potential homebuyers can be impacted negatively.
The long-term impact of inflation may affect us through increased costs
for land, land development, construction and overhead, as well as in increased
sales prices of our homes. Our land acquisition costs are generally fixed,
therefore, increases or decreases in the sales prices of homes will affect our
profits. The sales price of each of our homes is fixed at the time a buyer
enters into a contract to acquire a home. Therefore, if we sell our homes
before we begin construction, any inflation of costs in excess of those
anticipated may result in lower gross margins, unless these increased costs are
recovered through higher sales prices.
Also, deflation can cause the market value of our land and constructed
homes to decline which could negatively impact our results of operations. If
interest rates increase, construction and financing costs, as well as the cost
of borrowings, could also increase, which can result in lower gross margins on
home sales. Increases in home mortgage interest rates make it more difficult
for our customers to qualify for home mortgage loans, potentially decreasing
home sales revenue. Increases in interest rates also may affect adversely the
volume of mortgage loan originations. Increases in competition and the supply
of unsold new and existing homes have had an adverse effect on our ability to
generate new home orders and maintain home orders in backlog, and have had a
significant negative impact on our results of operations and gross margins on
home sales in our inland markets.
Interest rates, the length of time that land remains in inventory and
the proportion of inventory that is financed affect our interest costs. If we
are unable to raise sales prices enough to compensate for higher costs, or if
mortgage interest rates increase significantly, affecting prospective buyers
ability to adequately finance home purchases, our revenues, gross margins and
net income would be adversely affected. Increases in sales prices, whether the
result of inflation or demand, may affect the ability of prospective buyers to
afford new homes.
Item
3. Quantitative and Qualitative
Disclosures About Market Risk
We utilize variable rate debt financing for acquisition, development
and construction of homes. The interest rates on our debt approximate the
current rates available for secured real estate financing with similar terms
and maturities, and as a result, their carrying amounts approximate fair value.
While changes in interest rates generally may not impact the fair market value
of the debt instrument, they do affect our earnings and cash flows. Holding our
variable rate debt balance constant as of March 31, 2010, each one point
percentage increase in interest rates would result in an increase in variable
rate interest incurred for the next 12 months of approximately
$1.8 million.
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Table of Contents
We are exposed to market risks related to fluctuations in interest
rates on our outstanding variable rate debt. We do not utilize swaps, forward
or option contracts on interest rates, or other types of derivative financial
instruments. We do not enter into or hold derivatives for trading or
speculative purposes.
You should be aware that many of the statements contained in this
section are forward looking and should be read in conjunction with our
disclosures under the heading Forward-Looking Statements.
Item
4. Controls and Procedures
Conclusion Regarding the
Effectiveness of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer, with the
assistance of management, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this report (the Evaluation Date). Based on that evaluation, our
chief executive officer and chief financial officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in our reports under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
However, no matter how well a control system is conceived and operated,
it can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. In addition, the design of a control system must
reflect the fact that there are resource constraints and the benefits of
controls must be considered relative to costs. Therefore, no cost-effective
control system and no evaluation of controls can provide absolute assurance
that all control issues and instances of misstatements due to error or fraud,
if any, within our company have been detected.
Changes in Internal Controls
There have been no
changes in our internal control over financial reporting during the three
months ended March 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Notes 8 and 10 to the
Consolidated Financial Statements above, and Item 1 - Business - Corporate
Indemnification Matters and Item 3 - Legal Proceedings in our Annual Report on Form 10-K
for the year ended December 31, 2009.
Item 6.
Exhibits.
10.05
|
|
California
Coastal Communities, Inc. 401(k) Plan and Trust Agreement dated
effective April 30, 2010.
|
31.1
|
|
Section 302
Certificate of Raymond J. Pacini, Chief Executive Officer of California
Coastal Communities, Inc.
|
31.2
|
|
Section 302
Certificate of Sandra G. Sciutto, Chief Financial Officer of California
Coastal Communities, Inc.
|
32.1
|
|
Section 906
Certificate of Raymond J. Pacini, Chief Executive Officer and Sandra G.
Sciutto, Chief Financial Officer of California Coastal
Communities, Inc.*
|
*
These certifications are being furnished solely to
accompany this report pursuant to 18 U.S.C. Section 1350, and are not
being filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, and are not to be incorporated by reference into any filing
of the Company, whether made before or after the date hereof, regardless of any
general incorporation language in such filing.
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Table of Contents
SIGNATURE
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 13, 2010
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CALIFORNIA COASTAL
COMMUNITIES, INC.
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|
|
|
|
|
|
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By:
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/s/ Sandra G. Sciutto
|
|
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SANDRA G. SCIUTTO
|
|
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Senior Vice President and
|
|
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Chief Financial Officer
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39
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