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 June 30, 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)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
6 Executive Circle, Suite 250
Irvine, California
|
|
92614
|
(Address of principal executive offices)
|
|
(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
|
|
Accelerated
filer
¨
|
|
|
|
Non-accelerated
filer
o
|
|
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 August 2, 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 JUNE 30, 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 refinancing or
restructuring our debt obligations under the Revolving Loan and Term Loan and
raising additional capital;
·
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;
·
the impact of recent
accounting pronouncements; and
·
stock market valuations.
3
Table of Contents
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; the 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 debt facilities after we emerge
from bankruptcy; 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 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 together with the Risk Factors set
forth therein. 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)
|
|
June 30,
2010
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|
December 31,
2009
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|
|
|
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|
ASSETS
|
|
|
|
|
|
|
|
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Cash and cash equivalents
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$
|
6.3
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|
$
|
8.9
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|
Restricted cash
|
|
0.8
|
|
0.8
|
|
Real estate inventories
|
|
232.7
|
|
235.4
|
|
Other assets, net
|
|
3.2
|
|
4.8
|
|
|
|
|
|
|
|
|
|
$
|
243.0
|
|
$
|
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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|
$
|
5.9
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|
$
|
2.9
|
|
Model home financing
|
|
22.5
|
|
22.5
|
|
Other liabilities
|
|
0.5
|
|
0.4
|
|
|
|
|
|
|
|
Total liabilities not subject to compromise
|
|
28.9
|
|
25.8
|
|
|
|
|
|
|
|
Liabilities subject to compromise:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
1.0
|
|
0.9
|
|
Revolving loan
|
|
81.7
|
|
81.7
|
|
Term loan
|
|
99.8
|
|
99.8
|
|
Other liabilities
|
|
8.3
|
|
8.3
|
|
|
|
|
|
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|
Total liabilities subject to compromise
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|
190.8
|
|
190.7
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Common Stock$.05 par value; 13,500,000 shares
authorized; 10,995,902 shares issued and outstanding
|
|
0.5
|
|
0.5
|
|
Excess Stock$.05 par value; 13,500,000 shares
authorized; no shares outstanding
|
|
|
|
|
|
Additional paid-in capital
|
|
59.5
|
|
59.5
|
|
Accumulated deficit
|
|
(34.1
|
)
|
(24.0
|
)
|
Accumulated other comprehensive loss, net
|
|
(2.6
|
)
|
(2.6
|
)
|
Total stockholders equity
|
|
23.3
|
|
33.4
|
|
|
|
|
|
|
|
|
|
$
|
243.0
|
|
$
|
249.9
|
|
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)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
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Revenues:
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
7.7
|
|
$
|
10.5
|
|
$
|
10.7
|
|
$
|
23.3
|
|
Land sales
|
|
1.4
|
|
|
|
1.4
|
|
|
|
|
|
9.1
|
|
10.5
|
|
12.1
|
|
23.3
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales:
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
7.4
|
|
8.6
|
|
10.0
|
|
17.4
|
|
Land sales
|
|
|
|
|
|
|
|
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Loss on impairment of real estate inventories
|
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6.0
|
|
|
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6.0
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3.2
|
|
|
|
13.4
|
|
8.6
|
|
16.0
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
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Gross operating (loss) profit
|
|
(4.3
|
)
|
1.9
|
|
(3.9
|
)
|
2.7
|
|
|
|
|
|
|
|
|
|
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Selling, general and administrative expenses
|
|
0.8
|
|
1.0
|
|
2.2
|
|
2.5
|
|
Reorganization costs
|
|
2.4
|
|
|
|
3.7
|
|
|
|
Interest expense
|
|
|
|
0.1
|
|
|
|
0.8
|
|
Gain on debt restructuring
|
|
|
|
|
|
|
|
(20.7
|
)
|
Other expense, net
|
|
0.2
|
|
0.3
|
|
0.3
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
(7.7
|
)
|
0.5
|
|
(10.1
|
)
|
19.4
|
|
|
|
|
|
|
|
|
|
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Income tax expense (benefit)
|
|
|
|
7.8
|
|
|
|
15.5
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7.7
|
)
|
$
|
(7.3
|
)
|
$
|
(10.1
|
)
|
$
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.70
|
)
|
$
|
(0.66
|
)
|
$
|
(0.92
|
)
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
Common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
11.0
|
|
11.0
|
|
11.0
|
|
11.0
|
|
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)
|
|
Six Months Ended
June 30,
|
|
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|
2010
|
|
2009
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(10.1
|
)
|
$
|
3.9
|
|
Adjustments to reconcile net loss to cash used in
operating activities:
|
|
|
|
|
|
Gain on debt restructuring
|
|
|
|
(20.7
|
)
|
Model homes depreciation
|
|
0.1
|
|
0.2
|
|
Deferred taxes
|
|
(3.4
|
)
|
7.9
|
|
Deferred tax asset valuation allowance
|
|
3.4
|
|
7.6
|
|
Gains on sales of real estate inventories and land
|
|
(2.1
|
)
|
(5.9
|
)
|
Loss on impairment of real estate inventories
|
|
6.0
|
|
3.2
|
|
Proceeds from sale of real estate inventories and
land, net
|
|
11.6
|
|
22.6
|
|
Increase in real estate inventories
|
|
(11.9
|
)
|
(16.1
|
)
|
Accrued reorganization costs
|
|
1.8
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Decrease in other assets
|
|
0.7
|
|
2.0
|
|
Increase in accounts payable, accrued and other
liabilities
|
|
1.3
|
|
3.0
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities
|
|
(2.6
|
)
|
7.7
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Change in restricted cash
|
|
|
|
0.4
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
|
0.4
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Borrowings of revolving loan
|
|
|
|
22.1
|
|
Repayments of revolving loan
|
|
|
|
(16.1
|
)
|
Repayments of term loan
|
|
|
|
(5.1
|
)
|
Repayments of other project debt
|
|
|
|
(1.1
|
)
|
Deferred financing costs
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
(2.6
|
)
|
7.7
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of period
|
|
8.9
|
|
2.3
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$
|
6.3
|
|
$
|
10.0
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the period for income taxes
|
|
$
|
|
|
$
|
0.1
|
|
Cash paid during the period for reorganization
items
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and
financing activities:
|
|
|
|
|
|
Amortization of deferred financing costs
capitalized in real estate inventories
|
|
$
|
1.0
|
|
$
|
1.2
|
|
Decrease in project debt and accrued liabilities
due to debt restructuring
|
|
$
|
|
|
$
|
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 and the current years previously issued Quarterly
Report on Form 10-Q. 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 replace its senior secured revolving credit
agreement (Revolving Loan) and senior secured term loan agreement (Term Loan)
debt with the new financing commitment (see Note 2 below) through the Chapter
11 reorganization process (also described below in Note 2), there can be no
assurance that the Company will be able to successfully execute such plan.
Unless the Company is successful in executing such plan, or otherwise 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 provide sufficient liquidity to meet its current debt
obligations under the current terms of the existing Revolving Loan agreement
and Term Loan agreement as described in Notes 5 and 6, in addition to meeting
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 unless the Company is successful in replacing or restructuring
its Revolving Loan and Term Loan debt through confirmation of a plan of
reorganization in the Chapter 11 Cases, including a plan that implements the
New Financing and Additional Capital. 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 Company and the other Debtors described below 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
8
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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.
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 and a hearing on the
adequacy of the disclosure statement was held on May 12, 2010. Subsequently, on
June 18, 2010, the Company obtained a financing commitment from Luxor Capital
Group, LP (Luxor) to provide $184 million of new debt financing (the New
Financing) that, if funded, will be used to repay the $81.7 million
outstanding on the Revolving Loan, the $99.8 million outstanding on the Term
Loan, and to fund operations. In light of the New Financing, the Company filed
a revised disclosure statement and proposed joint plan of reorganization with
the Bankruptcy Court on July 2, 2010. On
July 28, 2010, the Company filed a further amended disclosure statement,
disclosing that the Company has agreed that the definitive documentation for
the New Financing will require, as a condition to closing, that the Company
obtains an additional $15 million of financing in the form of (i) indebtedness
that would be subordinated to the New Financing; (ii) equity; or (iii) a
combination of debt and equity (the Additional Capital). Prior to the
amendment of the disclosure statement and plan, the Court had scheduled a plan
confirmation hearing for August 12, 2010, which will be rescheduled. The outside closing date for the New
Financing is August 31, 2010. There can be no assurance that the Company will
be able to complete the New Financing or raise the Additional Capital, or that
the Company and the other Debtors will be able to successfully confirm,
consummate and execute their plan of reorganization with respect to the Chapter
11 Cases in a manner that is acceptable to the Bankruptcy Court and the
creditors and other parties in interest.
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 six months
ended June 30, 2010, the Company incurred reorganization costs aggregating
approximately $3.7 million and has incurred total reorganization costs of $5.0
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 the
requirement of obtaining 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 is currently scheduled to terminate on September 8,
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 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 Chapter 11 Cases. 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
adversely impacted by the Chapter 11 Cases, with only eight net sales orders
generated through August 2, 2010 compared with 20 net sales orders during the
comparable period of 2009.
9
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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 the Additional Capital or modified or
new financings can be obtained in order for the Company to meet its debt
obligations before and after it emerges from bankruptcy. 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 obtain the Additional Capital
which is a condition of the New Financing, secure other additional financing
and the terms of such Additional Capital or additional 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.
Based
on Brightwater sales in 2009 and the first half of 2010, the Company does not
believe that its cash, cash equivalents and future real estate sales proceeds
will provide sufficient liquidity to meet its current debt obligations under
the current terms of the existing Revolving Loan Agreement and Term Loan
Agreement as described in Notes 5 and 6, in addition to its 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
unless the Company is successful in replacing or restructuring its Revolving
Loan and Term Loan debt through confirmation of a plan of reorganization in the
Chapter 11 Cases, including a plan that implements the New Financing and
Additional Capital. 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 and six months ended June 30, 2010, the
Company incurred $2.4 million and $3.7 million, respectively, of reorganization
costs and paid approximately $1.2 million and $1.9 million, respectively, of
such costs. The Company has incurred total reorganization costs of $5.0 million
from October 2009 through June 30, 2010.
Nasdaq
Delisting
The
Companys common stock was delisted from the Nasdaq Stock Market at the open of
trading on April 27, 2010 as a result of the Companys inability to emerge from
the Chapter 11 process by April 26.
Since that time, the Companys common stock has been trading
over-the-counter in the 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.
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. Given the substantially lower
costs associated with trading on the OTCQB and that the trading, volume and
liquidity of the Companys common stock does not appear to have been impaired
since it commenced trading in the OTCQB marketplace, the Company is considering
whether to remain on the OTCQB following emergence from the Chapter 11 process.
10
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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 Company currently has an interest
in one inactive joint venture in which the Company has a controlling or
majority economic interest, and thus is controlled by the Company and is
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. See Note 2 for discussion regarding the Chapter 11
Cases.
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 the New Financing described above can
be completed. 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
the Additional Capital and other 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 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.
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.
11
Table of Contents
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 June 30, 2010, the Company recorded
an impairment charge of $6.0 million with respect to its Brightwater project.
See Note 4 Real Estate Inventories. During the comparable periods in 2009,
the Company recorded zero Brightwater project impairment charges and inland
project impairment charges totaling zero and $3.2 million, respectively.
In making its determination to record a Brightwater project impairment,
the Company has incorporated various 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
in accordance with ASC 360-10-35, in developing estimated future cash flows for
impairment testing for its 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 June 30, 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 June 30,
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.
The following table summarizes the Companys fair value measurements at
June 30, 2010 (in millions):
Description
|
|
Fair Value
Hierarchy
|
|
Fair Value
|
|
Impairment Charges for
the Six Months Ended
June 30, 2010
|
|
Real estate inventories
|
|
Level 3
|
|
$
|
227.0
|
|
$
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with ASC 360, real estate inventories with a carrying
value of $233.0 million were determined to be impaired during the three months
ended June 30, 2010, and were written down to their estimated fair value
of $227.0 million, resulting in an impairment charge of $6.0 million. See
Impairment of Real Estate Inventories
above and Note 4
Real Estate Inventories.
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
12
Table of
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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 and six months ended June 30, 2010, the Company
recorded valuation allowance adjustments on deferred tax assets totaling $2.4
million and $3.4 million, respectively. During the comparable periods in 2009,
the Company recorded valuation allowance adjustments on deferred tax assets
totaling $7.6 million and $7.6 million, 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 the Company
utilizes a portion of its NOLs or certainty increases regarding the Companys
use of its NOLs due to projected results of operations and there is objectively
verifiable evidence to support the expected realization of a portion of its
deferred tax assets, an adjustment to the Companys valuation allowance may be
recorded to reflect greater expected utilization. In addition, in the event of
an ownership change which could result from the Companys emergence from Chapter
11 under the proposed plan of reorganization, the utilization of tax net
operating losses in the carryforward period is likely to be materially
jeopardized.
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
of Contents
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
June 30, 2010, real estate inventories aggregated 283 lots and homes,
including 17 model homes, nine standing inventory homes completed and unsold,
one home completed and in escrow, and five homes under construction and in
escrow. Real estate inventories at June 30, 2010 included $232.1 million
recorded for 266 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 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.
During the second quarter of 2010, a non-Debtor subsidiary of the
Company sold a 60-acre parcel of land in Huntington Beach, California which was
encumbered by an oil lease and a conservation easement for $1.4 million.
During the three months ended June 30, 2010, the Company recorded
an impairment charge of $6.0 million with respect to its Brightwater project.
During the three and six months ended June 30, 2009, the Company recorded
inland project impairment charges totaling zero and $3.2 million, 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Capitalized interest, beginning of period
|
|
$
|
39.2
|
|
$
|
35.7
|
|
$
|
36.8
|
|
$
|
37.3
|
|
Interest incurred and capitalized
|
|
3.1
|
|
3.2
|
|
6.1
|
|
7.2
|
|
Charged to cost of sales
|
|
(1.6
|
)
|
(1.4
|
)
|
(2.2
|
)
|
(2.8
|
)
|
Charged to gain on debt restructuring
|
|
|
|
|
|
|
|
(4.2
|
)
|
Capitalized interest, end of period
|
|
$
|
40.7
|
|
$
|
37.5
|
|
$
|
40.7
|
|
$
|
37.5
|
|
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.
Since that date, the Company has not made any payments of principal on
the Revolving Loan or the Term Loan described below in Note 6; however the
Company continues to pay interest on the outstanding principal balances at
agreed upon non-default interest rates.
As of June 30, 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, and did not repay the loan
in full on the June 30, 2010 maturity date resulting in an aggregate of
$81.7 million of principal due and unpaid as of June 30, 2010.
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 and six months ended June 30, 2010 was $1.0 million and $1.9
million, respectively, at a weighted-average interest rate of 3.54% and 3.52%,
respectively. Interest incurred on the Revolving Loan for the three and six months
ended June 30, 2009 was $1.0 million and $2.2 million, respectively, at
weighted-average interest rates of 3.67% and 3.74%, 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 LIBOR + 3.25% and was current on such interest
payments as of June 30, 2010. On July 28, 2010, the Bankruptcy Court
approved a settlement agreement between the Debtors, the agent and the existing
lenders that provided, among other things, that no default interest will be due
and reduced the amount of legal and professional fees payable by the Debtors to
the agent.
As of June 30, 2010, the Company has delivered 90 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 ten homes (five Trails, one Sands, three Cliffs and one Breakers) delivered
during the six months ended June 30, 2010. Due to the Chapter 11 Cases, no
principal payments were made on the 20 homes delivered during the fourth
quarter of 2009 and the first half of 2010.
As of June 30, 2010 and December 31, 2009, approximately zero
and $500,000, respectively, of deferred loan fees and closing costs related to
the Revolving Loan are included in other assets and were amortized over the
expected 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 30%, regarding which the Company has been notified it
is in default.
·
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 June 30, 2010, the Companys consolidated total liabilities
are $219.7 million, tangible net worth after excluding the 2009 and 2008 inland
impairment charges and valuation allowances on deferred tax assets is $97.6 million
and the leverage ratio is 2.25. 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 June 30,
2010 plus 50% of the number of homes in escrow at June 30, 2010 equal or
exceed 96. As of June 30, 2010, the Company had delivered 90 homes and had
six homes in escrow for minimum sales of 93. Under the proposed Chapter 11 plan
of reorganization, these covenants would be eliminated.
15
Table of Contents
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 was unable to fully repay the Revolving Loan by its current
maturity date on June 30, 2010 from cash flow from operations. Through the Chapter 11 reorganization
process, the Company is striving to replace the Revolving Loan and Term Loan
with the New Financing which would have scheduled amortization payments that
will accommodate the expected sales pace of the Brightwater project and,
together with the Additional Capital, would 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 current 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. Since that date, the Company has not made any payments of
principal on the Term Loan or the Revolving Loan described above in Note 5;
however the Company continues to pay interest on the outstanding principal
balances at agreed upon non-default interest rates.
As of June 30, 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, $15.0
million, and $10.0 million due on December 31, 2009, March 31, 2010,
and June 30, 2010, respectively, resulting in an aggregate of $34.8
million of principal due and unpaid as of June 30, 2010.
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
and six months ended June 30, 2010 was $1.3 million and $2.6 million,
respectively, at weighted-average interest rates of 4.29% and 4.27%,
respectively. Interest incurred on the Term Loan for the three and six months
ended June 30, 2009 was $1.5 million and $3.2 million, respectively, at
weighted-average interest rates of 4.41% and 4.74%, 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 LIBOR +4.00% and
was current on such interest payments as of June 30, 2010. On July 28,
2010, the Bankruptcy Court approved a settlement agreement between the Debtors,
the agent and the existing lenders that provided, among other things, that no
default interest will be due and reduced the amount of legal and professional
fees payable by the Debtors to the agent.
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 $1.0 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 20 homes delivered
during the fourth quarter of 2009 and first half of 2010.
As of June 30, 2010, the Company has delivered 90 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 10 homes (five Trails, one Sands, three Cliffs and one Breakers) delivered
during the six months ended June 30, 2010, and made cumulative mandatory
repayments for the Term Loan of $25.2 million.
As of June 30, 2010 and December 31, 2009, approximately $1.3
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:
16
Table
of Contents
·
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.
·
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 June 30, 2010, the Companys consolidated total liabilities
are $219.7 million, tangible net worth after excluding the 2009 and 2008
inland impairment charges and valuation allowances on deferred tax assets is $97.6
million and the leverage ratio is 2.25. 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 June 30, 2010 plus 50%
of the number of homes in escrow at June 30, 2010 equal or exceed 96. As
of June 30, 2010, the Company had delivered 90 homes and had six homes in
escrow for minimum sales of 93. 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, March 31,
2010 or June 30, 2010. Through the Chapter 11 reorganization process, the
Company is striving to replace the Revolving Loan and Term Loan with the New
Financing which would 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, together with the Additional Capital, would
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 current 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. During the
three and six months ended June 30, 2010, the Company made model home
lease payments totaling $788,000 and $1.6 million, respectively. 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
|
|
$
|
1.6
|
|
2011
|
|
3.3
|
|
Total
|
|
$
|
4.9
|
|
Note 8
- Other Liabilities (Not Subject to Compromise and Subject to Compromise)
As
of June 30, 2010 and December 31, 2009, other liabilities not subject
to compromise included contingent indemnity and environmental obligations
totaling $400,000.
As
of June 30, 2010 and December 31, 2009, other liabilities subject to
compromise were comprised of the following (in millions):
|
|
Subject to Compromise
|
|
|
|
June 30,
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Balance at beginning of period
|
|
$
|
1.9
|
|
$
|
1.7
|
|
$
|
1.9
|
|
$
|
1.7
|
|
Provision
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Adjustment due to change in estimate
|
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1.9
|
|
$
|
1.8
|
|
$
|
1.9
|
|
$
|
1.8
|
|
18
Table
of Contents
Note 9
- Income Taxes
The
following is a summary of the tax expense (benefit):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Current taxes
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Deferred taxes
|
|
(2.4
|
)
|
0.2
|
|
(3.4
|
)
|
7.9
|
|
Valuation allowances on deferred tax assets
|
|
2.4
|
|
7.6
|
|
3.4
|
|
7.6
|
|
Income tax expense (benefit)
|
|
$
|
|
|
$
|
7.8
|
|
$
|
|
|
$
|
15.5
|
|
During 2009 and the first half 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 carry backs of the applicable NOL. In June 2010 the Company filed 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 June 30, 2010 were approximately
$163 million. The amount of federal NOLs which expire if not utilized is
$48 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 (i) the value of the Companys equity before the
ownership change, multiplied by the long-term tax-exempt rate (4.01% as of August 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 subject to a $10 million minimum existing as
of the ownership change date, if applicable. 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 44% as of August 2, 2010, as computed in accordance
with Section 382. The cumulative shift includes the effect of an
approximate 15% ownership shift which occurred in the second quarter of 2010
upon the sale of a large stockholders position. The Companys net deferred tax assets are
currently fully reserved due to the uncertainty of the timing and amount of
future taxable income. If certainty
increases regarding the Companys use of its NOLs or projected results of
operations and there is objectively verifiable evidence to support the expected
realization of a portion of its deferred tax assets, an adjustment to the
Companys valuation allowance may be recorded to reflect greater expected
utilization. In the event of an
ownership change, which could result from the Companys emergence from Chapter
11 under the proposed plan of reorganization, the utilization of tax net
operating losses in the carryforward period would be materially jeopardized.
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 necessitated 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.
Therefore, 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 $163
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.
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 June 30,
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 12 months of the reporting date due to
statutes of limitation lapses.
The Company recognizes interest expense and penalties related to
uncertain tax positions as interest or other expense. As of June 30, 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 remain open for Federal purposes for which the Company utilized
NOLs generated between 1990 and 1993 to offset taxable income. The years 2005
through 2009 remain open for California purposes during which time the Company
utilized NOLs generated in 2008. If
uncertainties resulting in valuation allowances can be favorably resolved, the
Company expects to utilize a portion of 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 primarily for the Brightwater
project. 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.
20
Table
of Contents
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.
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 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 Ninth Circuit Court of Appeal
granted permission to hear HRCs appeal. Oral arguments were heard by the court
on June 9, 2010. In July 2010, the Ninth Circuit Court of Appeal ruled against
HRC, establishing a new precedent in the Ninth Circuit that HRC is considering
petitioning the United States Supreme Court for review. A status conference has been set for August
23, 2010 before the United States District Court to discuss the Ninth Circuit
ruling and set a trial date within 30 to 60 days.
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 June 30, 2010, total stockholders equity is $23.3 million, reflecting beginning
stockholders equity of $33.4 million and net loss of $10.1 million during the
six months ended June 30, 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 six months ended June 30, 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
the Chapter 11 Cases. The 2009 restricted shares vested at a rate of 25% per
quarter during 2009.
The Company did not grant any options during the six months ended June
30, 2010 and 2009. Pursuant to ASC 718-10,
Compensation Stock
Compensation
, the Company recorded zero and $35,000 of compensation
expense during the six months ended June 30, 2010 and 2009, respectively, which
is reflected in additional paid-in capital.
A summary of the status of the Companys 1993 plan for the six months
ended June 30, 2010 follows:
|
|
Number of
Options
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Life
|
|
Outstanding, January 1
|
|
17,500
|
|
$
|
21.58
|
(a)
|
|
|
Granted
|
|
|
|
$
|
|
|
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
Outstanding, June 30
|
|
17,500
|
|
$
|
21.58
|
(a)
|
5.60 years
|
|
|
|
|
|
|
|
|
|
Fully vested and exercisable at June 30
|
|
17,500
|
|
$
|
21.58
|
(a)
|
5.60 years
|
|
|
|
|
|
|
|
|
|
Available for future grants at June 30
|
|
221,794
|
|
|
|
|
|
(a) Adjusted for special
dividend of $12.50
As of June 30, 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 5.60 years. All outstanding stock
options are fully vested. The aggregate intrinsic value of all outstanding,
fully-vested and exercisable stock options at June 30, 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 ASC 718-10. 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 primary purpose of the Chapter 11 Cases is to restructure the
debt obligations under our senior secured revolving loan (Revolving Loan) and
our senior secured term loan (Term Loan) for which Wilmington Trust, FSB
currently serves as agent for both loan syndicates. As of June 30, 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. Since the filing of the Chapter 11 Cases, we
ceased to make any payments of principal under both the Revolving Loan and the
Term Loan; however we continue to pay interest on the outstanding principal
balances at agreed upon non-default interest rates.
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 and six months ended June 30, 2010, we incurred
costs totaling $2.4 million and $3.7 million, respectively, associated with the
reorganization and have incurred total reorganization costs of $5.0 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 and a court hearing on the
adequacy of the disclosure statement was held on May 12, 2010. Subsequently, on
June 18, 2010, the Company obtained a financing commitment from Luxor Capital
Group, LP (Luxor) to provide $184 million of new debt financing (the New
Financing) to replace, if funded, our $81.7 million Revolving Loan and $99.8
million Term Loan and to fund operations. In light of the New Financing, we
filed a revised disclosure statement and proposed joint plan of reorganization
with the Bankruptcy Court on July 2, 2010. On July 28, 2010, we filed a further
amended disclosure statement disclosing that we have agreed that the definitive
documentation for the New Financing will require, as a condition to closing,
that we obtain an additional $15 million of financing in the form of (i)
indebtedness that would be subordinated to the New Financing; (ii) equity; or
(iii) a combination of debt and equity (the Additional Capital). Prior to the
amendment of the disclosure statement and plan, the Court had scheduled a plan
confirmation hearing for August 12, 2010, which will be rescheduled. The outside closing date for the New
Financing is August 31, 2010. There can be no assurance that we and the other
Debtors will be able to successfully complete the New Financing and 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.
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 is currently scheduled to terminate on
September 8, 2010.
23
Table of
Contents
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.
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 Chapter 11 Cases. During the first six months
of 2010, we generated seven net sales orders at Brightwater compared with 16
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.
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 the Additional Capital, or modified or new
financings, can be obtained in order for us to meet our debt obligations before
and after we emerge from bankruptcy. 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
additional 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.
Based
on Brightwater sales in 2009 and the first half of 2010, we do not believe that
our cash, cash equivalents and future real estate sales proceeds will provide sufficient
liquidity to meet our current debt obligations under the current terms of the
existing Revolving Loan Agreement and Term Loan Agreement as described in Notes
5 and 6, in addition to our 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 unless we are successful in replacing or
restructuring our Revolving Loan and Term Loan debt through confirmation of a
plan of reorganization in the Chapter 11 Cases, including a plan that
implements the New Financing and Additional Capital. Our Consolidated Financial
Statements set forth above do not include any adjustments that might result from
the outcome of this uncertainty.
Nasdaq
Delisting
On
April 27, 2010 our common stock was suspended from trading on the Nasdaq Stock
Market because we had not emerged from the Chapter 11 process by April 26 and,
on April 27, 2010 our common stock commenced trading in the OTCQB marketplace
under the symbol CALCQ. Our common
stock was officially delisted on June 21, 2010. 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.
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. Given that the cost of trading
on the OTCQB is substantially less than trading on Nasdaq and the trading,
volume and liquidity of our common stock does not appear to have been impaired
since it commenced trading in the OTCQB marketplace, we are considering whether
to remain on the OTCQB following emergence from the Chapter 11 process.
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;
24
Table
of Contents
·
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 six 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 six months of 2010, our primary goals will be to:
·
have our plan of
reorganization to refinance our debt obligations 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 June 30, 2010 and 2009 were
$9.1 million and $10.5 million, respectively and $12.1 million and $23.3
million for the six months ended June 30, 2010 and 2009 respectively. For the three months ended June 30, 2010 and
2009, we delivered eight and 12 homes, respectively. Our total assets as of
June 30, 2010 and December 31, 2009 were $243.0 million and $249.9
million, respectively, with Brightwater and other nearby properties
constituting $232.1 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 June 30, 2010, we had
$204.0 million of debt against $23.3 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 and business
conduct, audit committee charter and nominating committee charter.
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 second quarter of 2010.
Specifically, the credit markets and the mortgage industry experienced a period
of unparalleled turmoil and disruption characterized by bankruptcy, declining
home prices and restrained demand, low consumer confidence, high unemployment,
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 created by record numbers of foreclosed
homes which are being offered at
25
Table of
Contents
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 half of 2010. While there have been signs of improvement in the economy
and financial markets during the first half of 2010, weakness in the
homebuilding environment continued as unemployment remains at very high rates,
and is expected to continue throughout the year, and could intensify,
particularly as government programs supportive of housing markets are
terminated or reduced or expire.
The entire homebuilding industry has experienced larger than
anticipated declines in sales, which we believe were further exacerbated by a
general hesitation in the national and global markets due to the oil spill in
the Gulf of Mexico, the uncertainty of the European financial system and the
declines in the stock market. 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 12.2% at the end of the second quarter of 2010 compared with 11.2% at the
end of the second quarter of 2009, while the unemployment rate in Orange County
was 9.5% in June 2010 compared with 9.2% in June 2009. We believe that as long
as these high unemployment rates continue, they will be one of the key barriers
to commitment to a home-buying decision for our potential customers and will
continue to impact the sales pace of the industry as a whole.
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 halves 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 coastal
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) boosted demand somewhat; however, the federal stimulus
plan did not significantly impact 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. As of August 2, 2010, the
Franchise Tax Board is still accepting applications for the first-time
homebuyer credit and the new home credit. However, applications will no longer
be accepted when all of the funds have been allocated.
Our overall outlook is cautious given the significant negative factors
and trends noted above and the uncertainty as to when our served markets may
experience a sustained recovery, and we believe a meaningful improvement in
housing market conditions will require a sustained decrease in unsold homes,
price stabilization, reduced mortgage delinquency and foreclosure rates, and
the restoration of both consumer and credit market confidence that support a
decision to buy a home. We cannot predict when these events may occur. While we have begun to see some positive
signs that these negative trends in the overall economy are moderating, 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 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 refinance or restructure our Revolving
Loan and Term Loan debt through the Chapter 11 Cases, prospective buyers may
remain reluctant to purchase a Brightwater 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 July 2010, the
spread has narrowed to approximately .50% to .90%. 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 six months of 2010 we:
·
continued offering
incentives for all of our homes in order to reduce inventory at Brightwater;
and
·
filed an amended disclosure
statement and proposed joint plan of reorganization for relief under Chapter 11
in the Bankruptcy Court in order to complete the New Financing to replace the
approximately $182 million of Brightwater indebtedness under the Revolving Loan
and the Term Loan and to pay certain costs of exiting the Chapter 11 process.
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 six months of 2010 and 2009, we delivered 10 and 19
(including 14 Brightwater) homes, respectively. As of August 2, 2010, one
additional home has been delivered, bringing year-to-date deliveries to 11
homes, and six additional homes are in escrow, as discussed further under Item
1BusinessOur 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, prior to our bankruptcy filing that impact appeared 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
27
Table of
Contents
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.
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 and seven net sales orders during the first half of 2010. We
believe the deceleration in sales pace for the fourth quarter of 2009 and the
first half of 2010 primarily reflects the negative impact of the Chapter 11
announcement in October 2009. 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 ten homes (five Trails, one Sands, three Cliffs and one Breakers)
during the six months ended June 30, 2010, compared with nineteen deliveries
(four Trails, four Sands, two Cliffs, four Breakers and five inland projects
homes) during the comparable period in 2009. We acquired no single-family
residential lots during the six months ended June 30, 2010 and 2009 and we have
no contracts to acquire land or lots.
The following chart describes our current projects, their location and
our lot and standing home inventories as of June 30, 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
|
|
2
|
|
2
|
|
3
|
|
17
|
|
28
|
|
The
Sands
|
|
Huntington Beach
|
|
2007
|
|
4
|
|
1
|
|
3
|
|
2
|
|
52
|
|
62
|
|
The
Cliffs
|
|
Huntington Beach
|
|
2008
|
|
4
|
|
3
|
|
1
|
|
|
|
89
|
|
97
|
|
The
Breakers
|
|
Huntington Beach
|
|
2008
|
|
5
|
|
|
|
3
|
|
1
|
|
87
|
|
96
|
|
SubtotalOrange County
|
|
|
|
|
|
17
|
|
6
|
|
9
|
|
6
|
|
245
|
|
283
|
|
Lancaster:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unimproved
lots
|
|
Lancaster
|
|
(c)
|
|
|
|
|
|
|
|
|
|
73
|
|
73
|
|
TotalAll Projects
|
|
|
|
|
|
17
|
|
6
|
|
9
|
|
6
|
|
318
|
|
356
|
|
(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 and
leased them back; however, the lease 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.
28
Table of Contents
As of June 30, 2010, we had standing inventory of nine Brightwater
homes. During the six months ended June 30, 2010, net new orders at Brightwater
decreased to seven homes compared with 16 homes during the comparable period in
2009 due to the negative impact of our Chapter 11 bankruptcy on buyer
confidence, a weak economic environment, and the absence of sales activity at
our inland projects compared with the first half 2009. Due to the close out of
all inland projects during 2009, backlog of inland homes as of June 30, 2010
was zero compared with eight homes as of June 30, 2009. During the first half
of 2010 we had no sales of inland homes compared with 10 during the first half
of 2009. Cancellations as a percentage of new orders were 42% during the six
months ended June 30, 2010, compared with approximately 16% during the
comparable period in 2009 with the higher cancellation rate in the first half
of 2010 reflecting the negative impacts of the general economy and our
continuing Chapter 11 bankruptcy process. Backlog for Brightwater as of June
30, 2010 decreased to six homes compared with eight homes as of June 30, 2009.
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
June 30, 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 June 30,
2010, we have delivered an aggregate of 73 homes (excluding the 17 model homes)
at Brightwater, including 34, 17, 12, 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.
·
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.
29
Table
of Contents
·
Build-out of production
homes, which is subject to market conditions, is currently expected to take
approximately five years and be completed in 2014 or 2015.
·
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 June 30,
2010, approximately 77% 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 4% to 21%. Gross margins for the
larger homes at The Cliffs and The Breakers are currently expected to
approximate 12% to 21%, while gross margins at The Trails and The Sands are
currently expected to approximate 4% to 13%. The decrease in expected margins
reflects expected increases in interest rates in connection with refinancing or
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 and six months ended June 30, 2010 and 2009
were as follows:
|
|
|
|
Deliveries
|
|
|
|
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
|
Location
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brightwater
|
|
|
|
|
|
|
|
|
|
|
|
The Trails
|
|
Huntington Beach
|
|
5
|
|
4
|
|
5
|
|
4
|
|
The Sands
|
|
Huntington Beach
|
|
1
|
|
3
|
|
1
|
|
4
|
|
The Cliffs
|
|
Huntington Beach
|
|
2
|
|
1
|
|
3
|
|
2
|
|
The Breakers
|
|
Huntington Beach
|
|
|
|
1
|
|
1
|
|
4
|
|
|
|
|
|
8
|
|
9
|
|
10
|
|
14
|
|
Inland Empire/Lancaster
|
|
|
|
|
|
|
|
|
|
|
|
Completed Projects
|
|
Various
|
|
|
|
3
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
12
|
|
10
|
|
19
|
|
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 six months ended June 30, 2010, we
delivered ten homes at an average price of $1.1 million, or approximately $464
per square foot. As of August 2, 2010, six Brightwater homes (including two
homes with wetland and ocean views) are in escrow at an average price of $1.5
million, or approximately $561 per square foot, and 14 additional homes are
completed or under construction and have been released for sale.
30
Table
of Contents
The Trails and The Sands
We delivered six homes at The Trails and The Sands during the six
months ended June 30, 2010 and generated $5.1 million in revenue and gross
operating margins of 1.3%. During the comparable period of 2009 we delivered
four Trails and four Sands homes and generated $7.3 million in revenue and
gross operating margins of 16.5%. We delivered one additional Trails home
during July 2010 at a price of $850,000. Homes at The Trails and The Sands are
presently being offered at prices ranging from $798,000 to $1.0 million. As of
August 2, 2010, three homes are in escrow at The Trails and The Sands, five
homes are completed and unsold, and four homes are under construction and
unsold.
The Cliffs and The Breakers
We delivered four and six homes at The Cliffs and The Breakers during
the six months ended June 30, 2010 and 2009, respectively, and generated
revenue of $5.6 million and $14.5 million, respectively, and gross operating
margins of 11.8% and 31.2%, respectively. Three of the six homes delivered
during the first half 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 four homes delivered during the first half of 2010, expected increases in
interest rates in connection with restructuring our debt, price reductions and
incentives required to be competitive under current market conditions, and
greater use of third-party real estate brokers. Homes at The Cliffs and The
Breakers are presently being offered at prices ranging from $1.3 million to
$3.0 million for 2,724 to 4,339 square foot homes. As of August 2, 2010,
three homes are in escrow at The Cliffs and The Breakers, four 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. The City of
Huntington Beach City Council approved the project on July 6, 2010. Entitlement
of these lots is subject to approval by the California Coastal Commission, and
is currently expected to take two to three years. We currently expect that an application to
revise the Local Coastal Program will be submitted to the California Coastal
Commission during 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.
We currently have an interest in one inactive joint venture in which we have a
controlling or majority economic interest, and thus is controlled by us and is
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.
Impairment of Long-Lived Assets
During the three months ended June 30, 2010, we recorded an
impairment charge of $6.0 million with respect to our Brightwater project. This
determination was made based upon recent home sales activity in the marketplace
and other economic data which may or may not be representative of actual trends
in the economy. Our analysis also considered less conservative assumptions
which were supported by historical analysis of significant factors in the
evaluation. Although an impairment of the Brightwater project has been recorded,
we believe that it is difficult to determine due to our extended period of time
in Chapter 11, which has a negative impact on potential buyers of Brightwater
homes. During the comparable periods in 2009, we recorded zero Brightwater
project impairment charges and inland project impairment charges totaling zero
and $3.2 million, respectively.
31
Table of
Contents
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 making our determination to record a Brightwater project impairment,
we have incorporated various 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 in accordance with
ASC 360-10-35, in developing estimated future cash flows for impairment testing
for our 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. 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 June 30, 2010,
and determined that a $6.0 million 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 book basis in Brightwater of $227.0
million as of June 30, 2010 reflects the $6.0 million impairment charge recorded
during the three months ended June 30, 2010 and a fair value adjustment
recorded in September 1997 under Fresh Start accounting as well as
development and construction costs incurred and reductions for costs of sales
in conjunction with real estate sales since then. Since 1997, we have recorded no other 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 4%-21% as of June 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 to six 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 six months as of
July 2010. During the same time period, supply has declined from 21 months to
19 months at the $2.0 million and above level. In January 2009, the City of
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.
32
Table
of Contents
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 current rates ranging from 4.875% to 5.125% 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
below 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 $3.4 million during the first
half of 2010 related to deferred tax assets generated during the first six
months of the year.
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.
33
Table of
Contents
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 (4.01% as of
August 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 subject to a $10 million
minimum existing as of the ownership change date, if applicable. 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 44% as of August 2, 2010, as computed in
accordance with Section 382. In the event of an ownership change, our use
of our NOLs would be materially jeopardized.
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 $163 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.
In connection with completing the New Financing, the utilization of
NOLs would be materially jeopardized.
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
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 Securities and Exchange
Commission (the SEC).
34
Table of
Contents
The
following tables set forth key operating and financial data for our
homebuilding operations for the three and six months ended June 30, 2010 and
2009.
Backlog as of June 30
Homes in Backlog
|
|
Value ($ in millions)
|
|
Average Selling Price
($ in thousands)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
6
|
|
16
|
|
(63
|
)%
|
$
|
8.7
|
|
$
|
13.0
|
|
(33
|
)%
|
$
|
1,442
|
|
$
|
812
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Delivered
Three Months Ended June 30
Homes Delivered
|
|
Value ($ in millions)
|
|
Average Selling Price
($ in thousands)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
8
|
|
12
|
|
(33
|
)%
|
$
|
7.7
|
|
$
|
10.5
|
|
(27
|
)%
|
$
|
963
|
|
$
|
872
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes Delivered
Six Months Ended June 30
Homes Delivered
|
|
Value ($ in millions)
|
|
Average Selling Price
($ in thousands)
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
10
|
|
19
|
|
(47
|
)%
|
$
|
10.7
|
|
$
|
23.3
|
|
(54
|
)%
|
$
|
1,070
|
|
$
|
1,224
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2010 Compared with the Three Months Ended June 30, 2009
We reported revenues of $9.1 million and gross operating loss of $4.3
million for the second quarter of 2010, compared with $10.5 million in
revenues and gross operating profit of $1.9 million for the second quarter of
2009. Revenues of $9.1 million for the 2010 period include land sale revenues
of $1.4 million generated from the sale of land encumbered by an oil lease and
a conservation easement. Revenues in the current period reflect deliveries of
eight Brightwater homes. The comparable period of the prior year reflects
deliveries of 12 homes, including nine homes at Brightwater and three inland
homes.
Homebuilding gross operating profit before impairment charges decreased
$1.6 million from $1.9 million for the second quarter of 2009 to $300,000 for
the second quarter of 2010 as a result of delivering only eight homes at
Brightwater which generated a 3.9% gross margin, compared with nine Brightwater
deliveries and three inland deliveries which generated a 18.1% gross margin
during the comparable period in 2009. The decrease in gross margin reflects
expected increases in interest rates in connection with refinancing or
restructuring our debt, as well as sales price reductions and incentives
offered in response to the continuing difficult conditions in the housing
market and greater use of third-party brokers.
Gross operating loss for the second quarter of 2010 includes a $6.0
million impairment charge related to our Brightwater project and land sale
profit of $1.4 million generated from the sale of land encumbered by an oil
lease and a conservation easement.
Reorganization costs of $2.4 million during the second quarter of 2010
reflect legal and professional fees and other costs associated with the Chapter
11 bankruptcy proceedings.
35
Table of Contents
Six
Months Ended June 30, 2010 Compared with the Six Months Ended June 30, 2009
We reported revenues of $12.1 million and gross operating loss of $3.9
million for the first half of 2010, compared with $23.3 million in revenues and
gross operating profit of $2.7 million for the first half of 2009. Revenues of
$12.1 million in 2010 include land sale revenues of $1.4 million generated from
the sale of land encumbered by an oil lease and a conservation easement.
Revenues in the current period reflect deliveries of 10 Brightwater homes. The
comparable period of the prior year reflects deliveries of 19 homes, including
fourteen homes at Brightwater (three of which were view homes) and five inland
homes.
Homebuilding gross operating profit before impairment charges decreased
$5.2 million from $5.9 million for the first half of 2009 to $700,000 for the
first half of 2010 as a result of delivering only 10 homes at Brightwater which
generated a 6.5% gross margin, compared with 14 Brightwater deliveries and five
inland homes which generated a 25.3% gross margin. Gross operating loss for the first half of
2010 includes a non-cash impairment charge of $6.0 million related to our
Brightwater project. Gross operating
profit for the first half 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 of on September 30, 2009. The decrease in gross margin
reflects a change in the mix of homes delivered, including four Cliffs and
Breakers homes and no view homes among the 10 homes delivered in the 2010
period compared with six Cliffs and Breakers homes, including three view homes
among the 14 Brightwater homes delivered during the first half of 2009. In
addition, the decrease in gross margin during the first half of 2010 reflects
expected increases in interest rates in connection with refinancing or
restructuring our debt, as well as sales price reductions and incentives
offered in response to the continuing difficult conditions in the housing
market and greater use of third-party brokers.
Gross operating profit for the first half of 2010 includes land sale
profit of $1.4 million generated from the sale of land encumbered by an oil
lease and a conservation easement.
Reorganization costs of $3.7 million during the first half of 2010
reflect legal and professional fees and other costs associated with the Chapter
11 bankruptcy proceedings.
The $800,000 decrease in interest expense compared with the first half
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.
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
Revolving 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 June
30, 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 subsidiary Debtors. Under the terms of Bankruptcy Court orders,
we have continued to pay interest on the outstanding principal balances of the
Revolving Loan and the Term Loan at agreed upon non-default interest rates. On
July 28, 2010, the Bankruptcy Court approved a settlement agreement between the
Debtors, the agent and the existing lenders that provided, among other things,
that no default interest will be due and reduced the amount of legal and
professional fees payable by the Debtors to the agent.
36
Table of Contents
While we are striving to repay the Revolving Loan and the Term Loan
through the Chapter 11 Cases, unless we are successful in completing the New
Financing or otherwise refinancing or 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 provide sufficient liquidity
to meet our current debt obligations under the current terms of the existing
Revolving Loan and Term Loan Agreements, in addition to meeting anticipated
operating and project development costs for Brightwater, and general and
administrative expenses during the next 12 months. There can also be no
assurance that the New Financing will be completed or that we will emerge from
the Chapter 11 bankruptcy process as presently contemplated. These factors, and
others, 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):
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
Cash and cash equivalents
|
|
$
|
6.3
|
|
$
|
10.0
|
|
Cash (used in) provided by operating activities
|
|
(2.6
|
)
|
7.7
|
|
Cash provided by investing activities
|
|
|
|
0.4
|
|
Cash used in financing activities
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
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 June 30, 2010
aggregated $6.3 million. Of this amount, the use of $5.0 million 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 to obtain
the Additional Capital required to complete the New Financing and obtain
approval of our plan of reorganization to replace or restructure our debt.
June
30, 2010 Compared with December 31, 2009
Cash used in operating activities of $2.6 million for the first
half of 2010 primarily reflects investments in Brightwater of
$11.9 million, general and administrative costs of $2.2 million and
restructuring costs of $3.7 million, which were partially offset by net
proceeds from sales of $11.6 million and the increase in accounts payable and
accrued liabilities discussed below.
The $3.1 million increase in accounts payable and accrued liabilities
reflects an increase of $1.8 million for accrued reorganization costs and
increases in accrued amounts for interest due on the Term and Revolving Loans,
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 June 30, 2010, we have no land option deposits and no third
party guarantees.
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.
37
Table of
Contents
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
June 30, 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 June 30, 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.
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.
38
Table of Contents
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 June 30, 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.
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.
39
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:
August 16, 2010
|
CALIFORNIA
COASTAL COMMUNITIES, INC.
|
|
|
|
|
|
By:
|
/s/
Sandra G. Sciutto
|
|
|
SANDRA
G. SCIUTTO
|
|
|
Senior
Vice President and
|
|
|
Chief
Financial Officer
|
40
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